Brookdale Senior Living made a series of announcements as the third quarter ended, most of which appear to be setting the stage for better times ahead and an improved capital structure. But, and there is always a but, there is still more work to be done and one large lease to be decided on.
The company continues to pare down its leased portfolio, which in some cases represented a tightening noose around its neck. In the first transaction, Brookdale agreed to acquire 11 senior living communities with 1,228 units for $300 million, or about $244,300 per unit, a relatively high price point for Brookdale. It had been leasing them from a Welltower joint venture for annual cash rent of $22 million with a lease maturity date of August 31, 2028. The portfolio occupancy rate was 80%, or about 800 basis points below where it was in 2019.
This begs the question as to why it has taken Brookdale so long to even get where the properties are today. They are mostly IL and AL with a smattering of MC all on the west coast. Keep in mind that 80% is just about where Brookdale’s overall portfolio ended in August. As part of the transaction, Brookdale is assuming $195 million of 4.92% fixed rate agency debt that matures in 2027, a rate they could not get today, so not a bad deal for them.
In the second transaction, Brookdale has agreed to purchase five communities with 686 units for a price of $175 million, or $255,100 per unit, an even higher price point. Welltower was the landlord collecting $13 million annually in cash rent that has a maturity at the end of this year. These are mostly located in affluent markets including Nashville, Overland Park, Kansas and Denver. They have a combination of IL units (270), AL (170), MC (152) and 94 skilled nursing units. The portfolio has an average occupancy higher than 90%, which we are sure helped drive the price, even though there was a favorable purchase option.
It makes sense to remove these lease payments, but the third deal was a bit more curious. Brookdale has agreed to purchase 25 senior living communities from Diversified Healthcare Trust for $135 million, or $154,300 per unit. While that may look like a bargain compared with the other two acquisitions, there are only 875 units of assisted living (556 units) and memory care (319 units) for an average of 35 units each and a range of 19 units to 92 units. Occupancy was just 80% for the portfolio.
We believe these are most likely the former Alterra communities, and with a lease maturity of December 31, 2032, Brookdale was better off buying them to avoid the lease payments of $10 million annually and escalators, assuming they plan to sell off most of them. We doubt, however, that they will get close to $150,000 per unit, so they will have to cover the differential. Since most of these are probably bow-wows, Brookdale will be better off in the future without them. It is interesting to note that in all three of these transactions, the current lease amount represented 7.3% to 7.4% of the purchase price.
The company is also executing a few balance sheet transactions that include exchanging, extending and increasing their convertible notes outstanding that will put them in a better financial position moving forward. The conversion premium will be about 37% and the net proceeds from the new converts will be about $150 million, purchased by Deerfield Management Company and Flat Footed, LLC. In addition, the company obtained $182.5 million of debt secured by 16 communities at an interest rate of 5.67% with a maturity of October 2029. The funds were used to repay $197.1 million of mortgage debt that was maturing in September 2025, thus addressing all near-term debt maturities.
All of these transactions are financial in nature, but the real problem that Brookdale still suffers from is in operations. Occupancy gains are below the industry average, and without significant census gains it may be all for naught. The good news is that the company will soon own about two-thirds of its communities, but it still needs to get smaller so it can focus its attention on operations, census and margin. But the smaller it gets, the less revenue it will have to cover overhead.
The next big decision comes at the end of November when Brookdale must decide whether to renew or walk away from its lease with Ventas for 121 properties that expires at the end of next year. We understand that these communities are covering the current lease payments, but that may not be enough for Brookdale. Our guess is that if Brookdale walks, Ventas may turn most of the properties into RIDEA agreements with several operators. But if Brookdale walks, it will also lose a lot of revenue that covers a lot of overhead. On the other hand, by dropping the Ventas leases, Brookdale would become almost 20% smaller and be in a better position to focus on its other communities. There is a chance, however, that Brookdale may try to renew for a portion of the 121 properties and give the others back. And of course, they would want the best performers. Ventas may be open to discussions mostly because it is such a large portfolio, but we would hope they would demand a premium on any new lease if it is just for the best of the group.
We are glad to see that two investors are backing the future of Brookdale, but we still remain unconvinced that management can turn operations around fast enough. If the share price stumbles, there may be more activists at the gate who will begin to see the company as more of a real estate play as it grows its owned portfolio. Be careful what you wish for.
