LTC Properties announced that Brookdale Senior Living finally decided not to renew leases on 35 assisted living communities with 1,471 units in eight states. Most, if not all, of these properties came to Brookdale as part of its 2005 acquisition of Alterra Healthcare Corporation. Eight years before, Alterra had merged with Sterling House, a company founded by Steven Vick in 1991, and we believe these are some of the original Sterling House communities, which tended to be on the small side.
This group of properties is one of the largest in LTC Properties’ portfolio, representing about 8.4% of cash rent. Brookdale has been current on all lease payments, and the leases actually do not expire until the end of this year, and Brookdale is expected to continue paying rent until the properties are sold or new operators take over.
In the past two years, LTC has funded approximately $7 million in capex on the portfolio, which comes to about $4,750 per unit if evenly distributed. Apparently, most of the properties cover all operating expenses and lease payments, and the annual lease payments came to about $14.9 million, or about $844 per unit per month. Occupancy for this 35-property portfolio is higher than the 77% occupancy for Brookdale’s overall portfolio.
Although financial details have not been provided, if EBITDAR is somewhere between $13 million and $15 million, there is certainly enough cash flow to get some buyers interested. Capping that cash flow at 8% to 9% would yield a value close to $100,000 per unit, but this excludes a management fee.
To put it into perspective, in 2019 this portfolio produced EBITDA of $10.6 million, which is after rent and after a 5% management fee. EBITDAM was a cozy $14.2 million (again after rent). Consequently, Brookdale was doing pretty well. And then the pandemic hit, and we assume occupancy and cash flow dropped quite a bit. The point is that just four years ago these communities were able to make a very good profit. While we know things have changed, regional operators taking a look have got to keep that in mind when they negotiate with LTC.
LTC’s gross investment value for the portfolio is just $106 million, or $72,000 per unit, which even in this market is less than 50% of the average price per unit nationally. Consequently, there should be a fair amount of wiggle room for LTC to transition some properties to other operators, or selectively sell some of them, which would lower the average age of LTC’s portfolio. We would think they will transition most of them to regional operators, enhancing LTC’s diversification. The average size of the communities is small, however, which may limit the market for them.
While no one is predicting a BK for BKD, it has not been a stellar performer and we suspect smaller regional operators would be able to work these communities better than Brookdale could. And, not to sound like a broken record, but we continue to believe it is in Brookdale’s interest to continue to downsize, and this lease termination will reduce their property count by about 5%. Brookdale has been a good tenant for LTC, but it was just time to move on.
