The SeniorCare Investor: Brookdale Snags Horizon Bay--

16,000 Additional Units Increases Size By 30%

Every once in a while, there is news that is surprising and at the same time somewhat expected. We don’t usually say that about a large transaction, especially one that we were not even thinking about (as opposed to some other potential large ones that many people have been talking about).  But when Brookdale Senior Living (NYSE: BKD) made its announcement that it will be adding 16,165 units to its management fold, we were excited by the news but realized that in many ways it made sense. 

Yes, there had been rumors late last year that something might happen with 90 communities managed or leased by Tampa, Florida-based Horizon Bay Retirement Living. This was mostly precipitated by the announcement from HCP, Inc. (NYSE: HCP) that its 25 communities leased to Horizon Bay were “impaired,” resulting in a non-cash charge of $72 million in last year’s third quarter, mostly because the lease coverage had dropped to 0.87x despite a 91.4% average occupancy at June 30, 2010, and not all lease payments were being made.  In our November issue, we surmised that it was likely that HCP was talking with Brookdale, among others, about possibly taking over management of these communities.  But with the market excitement over the surge in REIT activity at the end of 2010 and spilling into this year, we forgot about Horizon Bay, as did most others.  Not, apparently, the folks at Brookdale.

This transaction is very complicated and involves many moving parts.  In addition to the companies and communities mentioned above, Horizon Bay manages 45 communities with 6,420 units on behalf of Chartwell Seniors Housing REIT (TSX: CSH.UN) and three communities with 1,690 units for AEW Capital Management, among others. 

Since Brookdale is basically buying out Horizon Bay (technically, 100% of the equity interests of the entity called Horizon Bay Realty, L.L.C.), we assume all the landlords had to sign off on the change in management.  And we assume there were also some negotiations on changes in those management contracts as well.  We don’t believe, however, that anyone had a problem with Brookdale as the new manager, especially HCP, given the lease coverage and payment problems last year. 

The 90 communities that will now be managed by Brookdale have 10,285 independent living units, 4,325 assisted living units, 874 memory care units and 681 skilled nursing beds.  There are basically three components of the transaction, at least as far as Brookdale is concerned.  Of the total, 21 communities with 5,070 units will be going into a RIDEA-structured joint venture, with HCP owning 90% and BKD owning 10%.  This portfolio has an average occupancy rate of 88.5%, and we assume that HCP wanted it structured this way so it could reap the benefits of Brookdale (hopefully) taking that occupancy higher, as opposed to simply receiving a fixed lease payment (with escalators) and having Brookdale keep the growing cash flow.  The remaining 12 HCP owned properties with 1,547 units/beds will be leased to Brookdale, most likely because the average occupancy is already at 92.6% and it will benefit HCP to receive the steady lease cash flow...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today