TOLEDO, OHIO–In a series of moves, Welltower is restructuring its joint venture agreement with Brookdale Senior Living, transitioning a total of 63 assets to other operators, forming a new RIDEA (a structure allowed under the REIT Investment Diversification and Empowerment Act) joint venture with Pegasus Senior Living and expanding its relationship with Cogir Management Corp., a Canadian operator that is entering the US marketplace

Specifically the restructuring will transition 37 properties to be managed by Pegasus, which is a newly formed management group that will be headquartered in Dallas, Texas, and led by senior housing turnaround specialists Steven Vick and Chris Hollister. Another 12 properties will be managed by Cogir, which will invest $68.2 million for a 15% joint venture interest in the properties at a 5.75% cap rate. Eleven of the properties will be allocated among six existing Welltower operators. The remaining three properties, which are non-core asset in tertiary markets, will be sold.

The end result will be a reduction of Welltower's overall Brookdale concentration from 7.6% to 2.9% of In-Place NOI, while improving lease coverage on the remaining Brookdale portfolio to 1.31x EBITDAR.

Under the agreement, Brookdale will pay Welltower a $58 million termination fee. In turn, Welltower will buy Brookdale's 20% stake in their joint venture for $74.2 million, which represents a 7.2% cap rate and a per unit value of $189,000.

Post-closing Welltower and Brookdale will have a disposition agreement that will allow Brookdale to identify communities with up to $5 million in base rent for sale at a pre-determined 6.25% rent credit. For Welltower this will equate to up to $80 million in disposition proceeds at a 6.25% cap rate.

“We View This Deal Positively”

Matt Kopsky, Edward Jones analyst, writes that the firm views this deal positively overall, and it gives credit to management for reducing its exposure to the struggling senior-housing operator Brookdale.

He writes:

We like that Welltower was proactive in this restructuring, instead of waiting for its lease to expire and potentially receiving a larger rent cut. Plus, this deal opens up further growth opportunities for Welltower from improved operator relationships and from the additional ownership that Brookdale will sell to Welltower in its senior-housing operating portfolio. Finally, the lease terms with the remaining Brookdale facilities provide more protection for Welltower, which is positive.
Overall, we believe that the small rent cut, which will be recouped by 2021, is a small sacrifice for the many positive developments in this large restructuring.

Earlier this year another healthcare REIT, Ventas, and Brookdale entered into definitive agreements to restructure the leases of Brookdale's portfolio of 128 communities with Ventas. The agreements combined all of the Ventas leased communities into a single master lease and security agreement. Some 8% of the portfolio has been at or near underwater condition up until that point, Mizuho REIT analyst Richard Anderson noted in a research alert.

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Welltower Restructures Brookdale Senior Living JV

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