Repositioning Projects Grabbing More Senior Living Capital Than Development

Despite chatter about development, many senior living industry giants seem to be focusing more on repositioning, renovating, and rebranding their communities than on building new ones.

Brookdale Senior Living spent $7.9 million of net cash in the third quarter as part of its multi-million Program Max initiative to expand, redevelop, and reposition many of its existing locations.

Completed projects in the program have historically showed the highest returns among Brookdale’s capital deployment options, said Andy Smith, executive vice president, general counsel, and secretary of the largest national senior living provider during its third quarter earnings call. Brookdale completed 13 Program Max projects throughout 2011 and 2012, and they’ve yielded returns in excess of 15%.


Those completed projects have been a mix of repositionings, unit conversions, and expansions that have resulted in a net gain of 56 new units. Brookdale has reduced its independent living units by 83 and its assisted living units by 26, focusing instead on the addition of 165 memory care units.

Looking ahead, Brookdale has 19 more Program Max projects in the pipeline, 14 of which are currently under construction. The projects will add 400 new units primarily in memory care over roughly to next year with project cost of $121 million requiring Brookdale equity of approximately $55 million. 

HCP Inc. (NYSE:HCP) officially closed on its $1.73 billion acquisition of 129 senior housing properties from a 133-property joint venture between Emeritus and the Blackstone Group, but the work’s not over yet as the communities will now receive a significant amount capex for rebranding and repositioning. 


As part of the agreement, Emeritus, who will continue to function as the portfolio management, is obligated to spend $30 million for capital improvements.

The expenditures will partly be for rebranding, and partly for repositioning, along with some expansion, said HCP CEO Jay Flaherty during the REIT’s third quarter earnings call.

“We’re very fortunate, we have perfect information because we’ve seen the Blackstone JV invest $42 million and get phenomenal returns on that investment,” he said, referencing steps the joint venture took after acquiring the portfolio out of bankruptcy from Sunwest in 2010.

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“We ourselves have seen what has happened when we’ve transitioned properties to Granger Cobb and his team,” Flaherty continued. “With respect to not one, not two, but three portfolio transitions we moved from Sunrise that included initial CapEx spending that we funded, and we’ve been able to monitor the very strong results that Granger and his team have effected. So we’ve got proven commodity here.”

Although much of the portfolio is not located in the top 31 industry markets (or, more specifically, NIC MAP31), they are still Class A or A- properties, said Flaherty, that are located in secondary markets.

That fits well into Emeritus’ strategic plan, he said, referencing the provider’s annual report, as it “specifically target[s] this middle market.” This market segment, generally comprised of smaller cities and suburbs with populations of 50,000 to 150,000 people, is the one that’s attractive to Emeritus.

On the skilled nursing side, HCP’s HCR ManorCare portfolio has morphed its business model from institutional skilled nursing into a higher acuity, more complex shorter-stay business model, says Flaherty.

“Now what you’re seeing is real health care reform start to play out in the post-acute setting, which involves payers, providers, very large acute care hospital operators,” he said during a third quarter earnings call. “You will see cost shift here. You will see capitation. You may see some bundling going on. And you’ve got a management team here that has consistently taken advantage of changes in the marketplace.”

Right now, HCR’s management is “playing offense” in their business model, he said, as what he called the early stages of “HCR 3.0.”

Written by Alyssa Gerace

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