IRVINE, CA—HCP's latest initiative to further reduce its Brookdale Senior Living exposure poses “execution risk associated with a multi-phased transaction,” Mizuho Securities analysts Haendel St. Juste and Richard Anderson wrote Friday. That risk stems from “pressure of staying on a satisfactory time schedule, and not allow the effort to lose the limelight.” HCP's announcement of the transaction notes that it's expected to be completed “in various stages throughout 2017 and 2018, but the closings may not occur on the anticipated timeline, or at all.”

Nonetheless, St. Juste and Anderson also felt that the transaction's cap rate range of 6.5% to 7.5% “will resonate well with the Street.” They also raised their price target on HCP's stock from $29 to $31.

The multi-phased transaction in question—the second this year involving HCP and Brookdale—involves three buyers, including Columbia Pacific Advisors LLC as well as HCP and Brookdale. HCP will sell six Brookdale-operated properties to Brentwood, TN-based Brookdale for $275 million, and will buy Brookdale's 10% equity stake in two RIDEA joint ventures for $99 million. HCP is also selling its remaining investment in the RIDEA II JV for $332 million to a group led by Columbia Pacific. Forty-six of the 49 properties in RIDEA II are managed by Brookdale.

Additionally, HCP and Brookdale have agreed to terminate management agreements on 36 seniors housing operating properties and leases on 32 triple-net communities. HCP intends to either transition the 68 properties to other operators or sell them during 2018.

The healthcare REIT anticipates net proceeds of $600 million to $900 million from the sales, depending on the mix of asset sales versus transitions to new operators. On an earnings call Thursday, HCP senior managing director Kendall Young said the company had identified “a handful of operators that we would transition the properties to.”

Calling the multi-pronged transaction “a win-win” for both HCP and Brookdale, HCP president and CEO Tom Herzog says, “Reducing our Brookdale concentration has been one of our highest priorities in 2017, and these agreements allow us to do that in a structured and cooperative manner.” On a pro forma basis, the transaction reduces HCP's Brookdale exposure to approximately 15.7% following anticipated future sales and transitions. It also diversifies HCP's operator portfolio and improves lease coverage for HCP's Brookdale triple-net portfolio on a pro forma basis to approximately 1.28x for the twelve months that ended Sept. 30.

Herzog also charted the benefits for Brookdale on this past Thursday's earnings call. “For Brookdale, the transaction reduces lease leverage and exposure to underwater triple-net leases,” he said. “It will increase their pool of owned assets, shrinks their portfolio of managed assets and is a step towards simplification of the company.”

The agreements follow by a year HCP's sale of a portfolio of 64 communities triple-net leased to Brookdale Senior Living Inc. to affiliates of Blackstone Real Estate Partners VIII for $1.125 billion, a deal that also saw Blackstone and Brookdale form a joint venture. Earlier in the cycle, though, HCP and Brookdale were expanding their relationship rather than contracting it.

In April 2014, the two companies announced a $1.2-billion strategic JV, in which 14 entry-fee continuing care retirement communities were acquired and amendments made to the triple-net leases on 202 HCP-owned seniors housing communities. The following March, HCP and Brookdale struck a deal to acquire 35 private pay senior housing communities from Chartwell Retirement Residences for $849 million.

Instant Insights /

Parsing the 'Multi-Phased' HCP/Brookdale Transaction

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