They took it to the wire, but Brookdale Senior Living decided not to renew its leases with Ventas covering 120 communities in a Master Lease that expires December 31, 2025. The deadline was November 30, and they let it pass. Ventas will still collect $113.6 million in lease payments next year, and all parties have previously stated that the properties have been covering the lease payments in full.
Even though it was an all or nothing renewal option, we were hoping that the two sides would come to an agreement to perhaps split up the portfolio. The problem is that both sides would have wanted to keep the better performing properties. Now, Brookdale no longer has the right to extend the lease term for any of the properties. While we have been in favor of Brookdale shrinking its size, this will result in a nearly 20% reduction in one fell swoop.
The company will be losing a lot of management fee revenue in the process, which covers a lot of overhead. This should mean cuts in the home office if the decision stands. But a few years back Brookdale walked away from a much smaller portfolio leased from LTC Properties, and then came back later to re-sign a portion of them. We would not be surprised to see the same playbook. Brookdale stated that for the three years prior to the impact of the pandemic, after taking into account rent, capex and allocated G&A expense, the portfolio had a negative $50 million in annual cash flow on average with an average census of 85%; it was a negative $23 million for the 12 months ended September 30, 2024, even after the 2020 lease restructuring. That’s a lot of costs packed into those losses, but we don’t know if there are any excesses in the number.
For Ventas, it will mean converting a good portion of the communities into their SHOP structure, with new managers that should be better focused on improving operations. There are several out there, and then they could lease the other ones out to new operators as well, at lease rates near what Brookdale was paying. It seems to be more of a win for Ventas than for Brookdale, other than it will be a lot of work for the next 12 months to get new operators in there. Investors may have felt the same way, as Brookdale shares edged down by 1.2% and Ventas was up 0.9%.
