Omega Healthcare Investors (NYSE: OHI) sees long-term upside in its $510 million acquisition of 24 senior housing communities from Healthpeak Properties (NYSE: PEAK), operated by Brookdale Senior Living (NYSE: BKD).
The Hunt Valley, Maryland-based health care real estate investment trust (REIT) believes the operator is poised to capitalize on pent-up demand for senior housing as Covid-19 abates. Although Brookdale’s total portfolio occupancy fell to 71.5% in December 2020, it has worked to improve its balance sheet by refinancing long-term debt, and CEO Taylor Pickett believes the operator is positioned to capitalize on pent-up demand for senior housing once the pandemic recedes.
“We believe that Brookdale is exceptionally well-equipped to address the current environment and to prosper as we emerge from the pandemic,” he said. “We look forward to working with the Brookdale team and possibly identifying new opportunities where we might partner in the future.”
Omega reported Q4 2020 revenue of $263.8 million — a 6.5% increase over the previous year. Funds from operations of $0.81 per share marked a four-cent increase from a year ago. Fourth quarter expenses, meanwhile, rose 6.6% over the past 12 months, to $192.5 million.
Omega had similar hopes for the performance of its senior housing properties operated by Maplewood Senior Living, which weathered an early drop in occupancy across the Northeast to rebound well by November.
Brookdale’s long-term upside
The portfolio totals 2,552 units in 10 states and is a mix of assisted living, independent living and memory care. The Brentwood, Tennessee-based company, the largest operator of senior housing in the country, spent the past three years re-shaping its portfolio mix to capitalize on positive demographic trends over the next several years, particularly with seniors in need of assisted living, CEO Cindy Baier told Senior Housing News last year.
Omega’s acquisition included the assumption of an in-place, triple-net master lease with a contractual rent of $43.5 million due in 2021, as well as a 2.4% annual escalator. Brookdale also has two 10-year renewal options, Chief Operating Officer Daniel Booth said.
In addition, the deal comes with $30 million in place for capital improvements through 2025, which Omega plans to tap into as soon as it can.
Pickett noted Brookdale’s efforts to improve its balance sheet during the pandemic as an attractive component to the deal. Last July, the operator restructured its master lease with Chicago-based health care REIT Ventas (NYSE: VTR) which granted Brookdale $500 million in rent relief over the next five years and gives Ventas a possible equity stake in the operator.
“They have an excellent leadership team, substantial liquidity to sustain and grow their operations, low-rate, long-dated secured debt tied to their owned assets, and valuable integrated home health and hospice companies,” he said.
Brookdale is reportedly entertaining a sale of its home health and hospice segments in order to shore up its liquidity, and receiving sell-side advice from Bank of America.
Omega’s total blended portfolio is weighted toward skilled nursing, but it has gradually grown its senior housing cohort over the past seven years, and senior housing now accounts for slightly over 20% of the REIT’s asset makeup.
Moving forward, Omega will continue to seek opportunities to add to its senior housing mix, but the total blended portfolio will never be balanced between it and skilled nursing, Booth said.
“That comes down to the model of finding the right folks to partner with and finding opportunities where our cost of capital doesn’t make a deal dilutive,” he said. “It’s a continuation of working at that segment of the business and growing it with partners that we want to grow with in the future.”
Maplewood performance strong
Omega provided an update on the performance of its communities operated by Maplewood Senior Living, which operates 15 communities for the REIT, primarily in the New York and Boston markets.
The Northeast was one of the earliest epicenters of Covid-19 in the U.S., and that led to an erosion of occupancy in Maplewood’s communities there, bottoming out at 80.4% in early June, Pickett said.
Since then, occupancy trended upward to 84.5% in August, and 85.6% in November, which he credited to the quality of the communities, deep waiting lists, considerable demand for needs-based moves, and Maplewood’s strength marketing the communities throughout the pandemic.
“We find this resiliency and occupancy to be encouraging, but still have a way to go before the pandemic driven top and bottom line risk to our operators is behind us,” he said.
Omega also indicated that Inspir Carnegie Hill, the upscale highrise senior housing community it co-developed with Maplewood in Manhattan, will soon open pending licensure approval from the state of New York. Pickett did not offer a set date, but noted that accepting first move-ins was “imminent.”