Brookdale, HCP Create $1.2B JV on Retirement Communities

By Gail Kalinoski, Contributing Editor

Brookdale Senior Living and HCP are building on their existing relationship by creating a $1.2 billion strategic joint venture to own and operate entry fee continuing care retirement communities starting with 14 campuses.

The joint venture, with Brookdale owning 51 percent and HCP 49 percent, is beginning with about 7,000 units primarily in Florida. Brookdale, which will continue to manage all the properties, is contributing eight of its owned campuses and the leasehold rights, including purchase options, on three HCP-owned properties. HCP will include those three properties, located on two campuses, and $334 million in cash, which will be used to buy four CCCRs currently managed by Brookdale.

The portfolio has a mix of 67 percent independent living, 18 percent skilled nursing, 11 percent assisted living and four percent memory care. In a summary of the deal on its website, Brookdale, a Nashville-based owner and operator of senior living communities through the United States, noted there is “significant consolidation potential in entry fee CCCR industry.” The outline stated there are 1,860 entry fee CCRC communities in the market, with 81 percent of those owned by “typically highly levered non-profits” and little new supply being added.

“We are very excited about strengthening our relationship with HCP as we partner to create an industry leading entry fee CCRC joint venture,” Andy Smith, Brookdale’s president & CEO, said in a news release. “Combining the capital strengths of HCP with Brookdale’s operating platform forms a compelling investment vehicle for our existing entry free CCRCs and provides for growth in this fragmented asset class.”

Lauralee Martin, president & CEO of Long Beach, Calif.-based HCP, said, “We are pleased to partner with Brookdale and create the largest CCRC platform in the healthcare REIT sector providing attractive future growth opportunities.”

The two companies also announced an agreement to amend leases on 202 HCP-owned senior housing communities currently operated by Emeritus Corp., which is being merged with Brookdale in a $2.8 billion deal expected to close in the third quarter. After the merger, Brookdale will become the nation’s largest senior living operator with approximately 1,161 communities in 46 states serving about 113,000 residents.

The closing of both deals with HCP is contingent on the merger of Brookdale and Emeritus being completed.

All existing Emeritus purchase options encompassing 49 HCP properties will be cancelled at closing. Under the amendment, all triple-net leases between HCP and Emeritus for the 202 senior housing properties will be split into two portfolios – 49 will be converted to a RIDEA joint venture with Brookdale managing and acquiring 20 percent ownership. The remaining 153 properties will be in the triple-net leased portfolio with average terms of 15 years each plus two 10-year extension options.

“The modifications to the Emeritus leases should improve upon the previously announced projected benefits of our pending merger,” Smith said in the release. “They bring forward the future value of the imbedded purchase options through lower rent and escalators and reduced lease leverage in a 153-community triple-net portfolio, while creating a 49-community RIDEA joint venture.”

Martin said the amendment “allows us to fully retain the real estate value on a portfolio of 52 properties, by eliminating the reinvestment risk related to all existing Emeritus and Brookdale purchase options with HCP.”

The RIDEA portfolio has 5,400 units with 80 percent occupancy while the triple-net leased portfolio has 12,800 units with 91 percent occupancy. HCP will make available $100 million in capital improvements through 2017 for the triple-net portfolio. Both companies will “begin investing significant capital improvements intended to occupancy and performance” of the RIDEA portfolio, according to the release.