Brookdale Senior Living’s (NYSE: BKD) share price increased about 7.6% Thursday, following news that the company is pursuing a multi-faceted series of transactions with its longtime landlord, HCP Inc. (NYSE: HCP).
Brookdale’s shares rose as high as $11.05 as of mid-day before settling at $10.59 by the time the markets closed. HCP investors also were behind the move, as the share price of the Irvine, California-based real estate investment trust (REIT) rose nearly 3.6%.
The transactions, announced Thursday morning, involved HCP selling off some Brookdale properties, transitioning operators on others, and cutting Brookdale’s rent by $5 million. HCP also is waiving its consent rights if Brookdale wants to pursue a large change-in-ownership transaction. The deals are expected to reduce HCP’s Brookdale concentration from about 27% of cash NOI and interest income to about 15.7%, improve lease coverage, and diversify tenant mix for the REIT.
The deal cast HCP’s outlook in a better light, according to Mizuho Securities analyst Richard Anderson.
“Besides the bottom line reduction to its BKD exposure following the expected asset sales and/or transitions over course of the next year, we think the 6.5%-7.5% range of cap rates will resonate well with the Street,” Anderson wrote in a market forecast. “Meanwhile, assuming the company executes as planned…the BKD exposure will be further broken down to 6.2% NNN [triple-net lease], 4.7% SHOP [senior housing operating portfolio] and 4.8% CCRC [continuing care retirement communities].”
Meanwhile, both Anderson and Stifel analysts Chad Vanacore and Seth Canetto thought today’s transaction increased the possibility of a sale of part or all of Brookdale.
“[The transaction] removes one of the impediments to a value unlocking transaction at Brookdale, which previously needed landlord consent in change of control,” the Stifel analysts wrote. “BKD would still need consents from other major landlords like Welltower and Ventas, but a negotiation involving two parties is much simpler than one with three.”
The deal really does appear to be a “win-win” for both Brookdale and HCP, according to Michael Knott, a managing director at Green Street Advisors.
“HCP has conceded its consent rights in any type of Brookdale change-of-control scenario, which Brookdale investors find encouraging, although there are still some other hard-nosed Brookdale lessors out there,” Knott told Senior Housing News. “HCP gains a much-reduced concentration in Brookdale, which is beneficial. These deals again highlight the ability of these two organizations to work cooperatively in a constructive manner.”
HCP leadership provided more information about the transaction during the company’s third-quarter call. The call included remarks from Tom Herzog, HCP’s president and chief executive officer.
During the call, he shed more light on how the company arrived specifically at the $5 million rent reduction. The reduction was meant to “balance the scale” between the two companies as part of the transaction, according to Herzog.
“When all was said and done and we did the calculations, there was a $5 million per year difference and that was the balancing item,” Herzog said. “Fortunately, we had a couple of leases that we thought would make sense to reduce that rent, work that into our operations and improve coverages at the same time.”
HCP doesn’t expect to reduce Brookdale’s rent in the future, he added.
Executives also addressed why HCP waived its consent rights, should Brookdale want to pursue a large, change-in-ownership type of deal, which it has been rumored to be pursuing.
In a nutshell, HCP felt that both it and Brookdale gave an equal amount to make the deal work.
“One of the things that obviously benefited Brookdale was for us to relieve them of our unfettered consent,” Herzog said. “But at the same time, what they gave us in exchange has great value to us as well.”
He added: “And in a future change in control, we’re able to eliminate completely, without penalty, the rest of our SHOP assets and our CCRCs, leaving us with 6% concentration all-in triple-nets that also contain financial covenant, so a great place to be.”
HCP isn’t leaning away from the senior housing market despite reducing its exposure to Brookdale. Its remaining Brookdale-operated CCRCs in particular were singled out as likely to be on the HCP books for the long term, as the REIT likes the economic outlook on them.
And overall, HCP is continuing to work with Brookdale on previously announced initiatives to enhance BKD’s operations, including frequent evaluation and rapid adjustments of prices, turnover reduction efforts and specialized sales resources.
Still, HCP is beefing up its life sciences and medical office building (MOB) exposures as it pares down senior housing.
“We view ourselves as a bit underweight in life science and MOBs. And this transaction actually takes care of some of them,” Herzog said. “We are not leaning away from senior housing, but we still will identify life science and MOB transactions and probably give some additional influence toward those.”
The Brookdale transactions do transform the REIT’s portfolio substantially. HCP’s pro forma targets are 54% life sciences and MOB, 39% senior housing and 7% other kinds of properties.
Written by Tim Regan