Ventas Restructures Brookdale Leases, Asset Sales Could Follow

Ventas, Inc. (NYSE: VTR) has officially renegotiated its leases with the nation’s largest senior housing provider, which recently turned to new leadership and is focused on a turnaround.

The deal could also facilitate additional asset sales.

Specifically, the Chicago-based real estate investment trust (REIT) on Friday announced it has entered into definitive agreements with Brookdale Senior Living (NYSE: BKD) to restructure a portfolio of 128 communities. The agreements combine substantially all of Ventas’ wholly owned Brookdale communities into one master lease and security agreement.

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Currently, the 128 communities operate under triple-net leases. Together, the properties represent 8% of Ventas’ yearly net operating income (NOI).

The new master lease agreement is mutually beneficial for both Ventas and Brentwood, Tennessee-based Brookdale, Ventas Chairman and CEO Debra Cafaro claimed Friday during a call with analysts.

“We killed a lot of brain cells coming up with an optimal solution,” she added.

Ventas’ first-quarter 2018 revenue of $943.7 million beat analysts’ expectations by approximately $72.6 million; its first-quarter 2018 FFO of $1.05, meanwhile, beat analysts’ expectations by 4 cents.

As of market close on Friday, the REIT’s share price had risen 8.7% to $51.59, while Brookdale’s share price had risen 13.6% to $7.42.

‘Really creative deal’ with Brookdale

Ventas is committed to supporting Brookdale’s new operational team, and the new master lease agreement reflects that, Cafaro suggested. The provider brought on a new president and CEO in February at the end of a strategic review process that involved exploring “multiple options and alternatives” for creating shareholder value.

“It’s a really creative deal that’s good for both parties—just the way we like to do our deals,” Cafaro said.

Specifically, the Brookdale portfolio was combined into a single master lease with an initial term through Dec. 31, 2025. The master lease provides for total rent of about $175 million for 2018, including the pro-rata portion of an $8 million rent credit for 2018, and estimated total rent in 2019 of about $177 million, including an $8 million rent credit for 2019.

Brookdale is set to receive a yearly rent credit of $7 million in 2020 and $5 million from then on.

“The purpose of the deal is to give [Ventas] a really good bridge to a much longer lease term with enhanced credit protection while we contribute to and support Brookdale’s operational turnaround,” Cafaro explained.

Additionally, Brookdale has the option to end its leasehold interests and remove specific communities with yearly base rent aggregating up to about $30 million upon sale by Ventas.

This means Ventas is free to sell up to 15% of its Brookdale assets, Cafaro said.

In that vein, Ventas and Brookdale have jointly identified a group of non-strategic Brookdale assets that would be “a good group” of assets to sell, Cafaro said.

On the whole, Ventas is confident that the master lease gives the REIT provides necessary visibility.

“This will be an excellent lease for us and one that we feel really great about,” Cafaro said. “It gives great visibility into our cash flows going forward, and we’re very happy about that.”

Brookdale President and CEO Cindy Baier echoed these sentiments in a Friday press release.

“We are delighted to announce this news so early into our turnaround strategy,” Baier said. “This agreement creates certainty in our long-term relationship with Ventas and moves us a step forward toward improving our financial position. The agreement allows us to improve our near-term cash flows, streamline our portfolio, improve our strategic flexibility, simplify our lease structure, and take advantage of the silver wave of a growing seniors’ population.

Before the new master lease, Ventas had approximately $100 million in rent with Brookdale that was up for renewal in 2020.

Stamford, Connecticut-based Land & Buildings Investment Management LLC, which has long voiced criticism of Brookdale, said in a public letter that it is “thrilled to see that Brookdale and Ventas have agreed to restructure their lease agreements” because it means the provider can monetize its real estate portfolio.

Additionally, Land & Buildings expressed appreciation that Ventas “pre-agreed to what is likely a de minimis ‘objective change of control standard.’” The shareholder believes that the value of Brookdale’s owned real estate is currently in the mid-teens per share.

SHOP performance

Ventas’ first-quarter 2018 seniors housing operating portfolio (SHOP) occupancy exceeded expectations at 87.4%, executive vice president and CFO Robert Probst noted on the call.

Additionally, the REIT saw the lowest level of new construction starts in its markets since 2014. In fact, the first quarter of 2018 saw a 50% drop in new construction starts from the first quarter of 2017.

Still, Ventas doesn’t expect this slowdown to last.

“We’ve seen this trend of delayed new openings, our outlook is assuming that those are going to open during the year,” Probst said.

All the while, one of Ventas’ newest operating partners*—Eclipse Senior Living (ESL)—has “hit the ground running,” Probst said.

The Lake Oswego, Oregon-based provider is jointly owned by Ventas, which has a 34% stake. The remaining 66% is owned by Eclipse management.

So far, Eclipse has grown occupancy 100 basis points, Probst noted. Still, the Eclipse portfolio is “very segmented,” which has caused Ventas to help create a “very targeted plan, asset by asset, that… will improve cash flows over time,” Cafaro said.

All the while, Ventas expressed a great deal of confidence in the Eclipse leadership team.

“High-quality management teams are the scarcest asset in our business,” Cafaro said.

*Editor’s note: A previous version of this article misstated Eclipse Senior Living’s relationship with Ventas. Eclipse is an operating partner of Ventas, not Ventas’ tenant.

Written by Mary Kate Nelson

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