[UPDATED] HCP to Sell 64-Property Brookdale Portfolio for $1.125 Billion

HCP Inc. (NYSE: HCP) is selling a portfolio of 64 properties leased to Brookdale Senior Living (NYSE: BKD) to affiliates of Blackstone Real Estate Partners VIII L.P. and Columbia Pacific Advisors for $1.125 billion. This was the headline deal among several transactions announced Tuesday by Irvine, California-based real estate investment trust (REIT) HCP and its major tenant, Brentwood, Tennessee-based Brookdale.

The 64-property portfolio currently is triple-net leased to Brookdale, the largest senior living operator in the nation. It is comprised of 5,967 units, representing a purchase price of $189,000 per unit. Occupancy for the portfolio was 85.2% during the third quarter of 2016, according to HCP.

HCP intends to use the estimated gain of $160 million from the sale mainly to pay down debt and for general corporate purposes.

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At the closing of the purchase from HCP, Brookdale will contribute an estimated $170 million to purchase a 15% equity interest, forming a joint venture with Blackstone. Brookdale will continue to manage the communities on behalf of the JV.

Blackstone describes itself as the largest real estate private equity firm in the world, with $102 billion of assets under management.

“We are … extremely pleased to create a relationship with Blackstone, one of the country’s largest capital partners, in a structure that better aligns the interests of the owner and operator and provides us with the opportunity to share in value creation as we improve the performance of those communities,” said Brookdale CEO Andy Smith in a press release.

The transaction is expected to close by the end of the first quarter of 2017.

Portfolio Makeover

Pursuant to the Blackstone transaction, HCP and Brookdale also will be undertaking other changes.

The REIT will terminate leases on 25 Brookdale-operated properties within the next year. Properties that are deemed non-strategic will be sold, while other properties will be transitioned to other operators, HCP announced Tuesday. Occupancy on these properties was 79.9% during the third quarter of 2016.

HCP also will transfer eight expiring Brookdale leases to RIDEA structures. Four of these leases are for Texas communities, and will go into a 90/10 RIDEA with Brookdale, which will acquire its stake for $11.7 million. The other four communities, in Florida, will transition to a regional operator.

These transactions are expected to close in the fourth quarter of this year.

The deals come on the heels of HCP completing the planned spin-off of its troubled HCR ManorCare skilled nursing assets into a separate REIT, Quality Care Properties (NYSE: QCP), which is set to begin regular trading today on the New York Stock Exchange.

After the spin-off, Brookdale accounted for 35% of HCP’s cash net operating income (NOI), and it widely was expected that the REIT would move to limit its exposure to this single tenant, which has been in the midst of an often rocky integration following the acquisition of its major rival Emeritus Corp. in 2014.

The problems for Brookdale only mounted on Tuesday, when the company announced poor quarterly results. Its earnings per share of -$0.28 missed expectations by $0.17, and its revenue of $1.25 billion missed by $10 million.

“Unprecedented” new competition in some its markets and rising labor costs were two of the issues cited for the results; BKD shares tanked and were down more than 20% as of mid-afternoon.

Following the transactions announced today, Brookdale will be down to 27% of HCP’s cash NOI, operating 204 communities for HCP. The deals also will improve lease coverage on the BKD portfolio by 19 basis points to 1.21x on a trailing 12-month basis, according to HCP.

Improving the coverage was the major priority in packaging this portfolio, HCP Executive Vice President and CIO Justin Hutchens said Tuesday on a call with analysts.

“We had an idea of what we wanted the remaining portfolio to look like from a credit perspective,” he said.

Other considerations included the location and operational performance of the Brookdale assets, he added.

From Brookdale’s perspective, it was all about divesting underperforming assets as part of an ongoing effort to right-size the massive portfolio of more than 1,100 communities that was created through its Emeritus merger, executives said Tuesday on Brookdale’s earnings call.

While these may not be sterling assets in terms of their current performance, they did attract interest in the marketplace, with at least half-a-dozen potential buyers involved in the process, said Mike McKee, chairman of the board, and acting president and CEO of HCP.

The fact that the buyers are Blackstone and Columbia Pacifica firm co-founded by former Emeritus and Holiday Retirement Chairman Dan Baty—shows that seasoned professionals see the potential in the portfolio, he added.

“I think it shows a confidence over time in the senior housing space,” McKee said.

Overall, all these Brookdale transactions are part of the larger vision for HCP as it enters the post-spin period and seeks to create a portfolio of premium private-pay senior housing assets with diverse operator partners.

“We are pleased to announce these transactions related to our Brookdale portfolio, as a key component of our plan to launch HCP 3.0 as outlined earlier in the year,” McKee stated in a press release.

Investors seemed to like the Brookdale moves, as well as the REIT’s quarterly financial results. HCP’s revenue of $654.3 million beat analyst expectations, but it fell short with an FFO per share of $0.65. HCP shares were trading up about 1.6% mid-afternoon on Tuesday.

Written by Tim Mullaney

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