Ventas Restructuring Gives Brookdale $500M Rent Savings Over 5 Years

Ventas (NYSE: VTR) and Brookdale Senior Living (NYSE: BKD) announced a revised master lease agreement Monday in which Brentwood, Tennessee-based operator Brookdale receives up to $500 million in rent reduction over the next five years. Ventas, a Chicago-based real estate investment trust (REIT), gains a potential equity stake in Brookdale.

This agreement is designed to alleviate certain pressures caused by Covid-19. It is just the latest move for the two companies, which have gone through other restructuring transactions since Brookdale named a new CEO and committed to an operational turnaround in 2018.

Some highlights of the deal:

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  • Brookdale’s cash rent to Ventas for the remainder of 2020 was slashed from $92 million to $50 million. The operator will pay $100 million in rent in 2021 — a 45% reduction. Starting on January 1, 2022, the master lease will include 3% rent increases through 2025, for an expected $500 million aggregate cash rent reduction.
  • Ventas receives $235 million in upfront considerations from Brookdale: $162 million in cash, a $45 million note at a 9% interest rate which matures at 50 basis points per year through December 31, 2025, and $28 million in warrants. The warrants may be exercised for 16.3 million shares of Brookdale common stock — representing 8% of Brookdale’s fully diluted shares on a post-exercised basis — at an exercise price of $3 per share.
  • Ventas is acquiring five Brookdale triple-net leased properties totaling 471 units, satisfying a loan the REIT made to the operator, and moving the properties to its senior housing operating portfolio (SHOP).

Brookdale, the nation’s largest senior housing operator, serves approximately 65,000 residents. It is Ventas’ third-largest tenant, with 121 communities, representing 9% of the REIT’s net operating income — approximately $184 million.

A buffer from Covid-19

The restructuring comes as the senior living industry struggles with tighter margins in the wake of the coronavirus pandemic. Operators across the country are faced with rising expenses, mainly from labor and procuring personal protective equipment (PPE), and declining occupancy rates. Brookdale spent $10 million responding to the pandemic in the first quarter of 2020, and is expected to spend another $50 million in the second quarter.

Ventas, meanwhile, anticipated 100 basis points of sequential average monthly occupancy loss for its SHOP portfolio, totaling between $2 million to $3 million in revenue loss each month. In May, the REIT eliminated 25% of its corporate positions in response to the crisis, and CEO Debra Cafaro reduced her base salary by 20% for the remainder of the year.

“The arrangements that we are announcing today benefit both companies, by providing Ventas shareholders with certainty, flexibility and the opportunity for upside, enhancing Brookdale’s stability and liquidity, and creating the most conducive environment for Brookdale to operate our communities safely and productively,” she said in a press release issued Monday.

The two companies were in periods of transition prior to the outbreak. Ventas, which spoke of a “pivot to growth” throughout 2019, was hit hard by what CFO Bob Probst called an “unprecedented” confluence of market dynamics which impacted its Q3 2019 earnings. As a result, the REIT hired industry veteran Justin Hutchens to head its senior housing division in February.

Brookdale, meanwhile, displayed momentum on its turnaround strategy in January and February before Covid-19 swept across the nation. Its consolidated senior housing occupancy decreased 220 basis points from March 31 to April 30, and move-ins plummeted 35% during the same period.

Analysts’ response to the announcement was mixed. BMO Capital Markets Analyst John Kim noted that this is the second time as many years in which Ventas and Brookdale restructured their master lease agreement, and highlighted that only five properties were converted to SHOP. While the triple-net lease structure creates certainty about rents, the hesitancy on SHOP conversion could be overly cautious, in Kim’s view, as it limits Ventas’ upside if senior housing goes through a robust recovery in the next few years.

“This will leave Brookdale as a top 8 tenant for Ventas with a 1.3x EBITDAR coverage — but likely to quickly deteriorate given current market conditions,” he said.

RBC Capital Markets Analyst Michael Carroll stated in an investor note that the deal resolves issues within Ventas’ portfolio, and better aligns its interests.

“This transaction removes an overhang on Ventas shares, and makes it easier for investors and analysts to understand the company’s earnings trajectory,” he said.

Green Street Advisors Analyst Lukas Hartwich called the deal a “win-win” for the companies.

“Brookdale gets much-needed flexibility to continue its attempted corporate turnaround – a task made even more difficult by the Covid-19 pandemic – while Ventas resets a large portion of its triple-net portfolio at sustainable rent coverage,” he said in a note to investors.
Ventas stock ended trading Monday down slightly, to $35.61 per share. Brookdale stock rose nearly 4% in trading, closing at $2.76 per share.

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