Welltower in Restructuring Mood, Pares Brookdale Portfolio

Welltower Inc. WELL has entered into a definitive agreement with its lessee and joint-venture (JV) partner — Brookdale Senior Living Inc. BKD — for the comprehensive restructuring of the triple-net lease obligations on 63 communities of the latter. This move will significantly cut short Welltower’s association with Brookdale, as well as offer the former higher flexibility to form new JVs with preeminent senior housing operators. 

Importantly, Brookdale will pay $58 million in termination fees for the early suspension of its triple-net lease obligations on 37 communities. Nonetheless, it will continue to operate the properties until these are handed over to new operators. The firm will also sell 20% of its equity stake in the existing RIDEA JV with the senior housing operator, for a gross amount of $74.2 million. This indicates a per unit value of $189,000 and a cap rate of 7.2%.

The lease discontinuance has enabled Welltower to enter into a separate RIDEA JV with Pegasus Senior Living, led by industry aces Steven Vick and Chris Hollister. Notably, the 37 properties will be managed by Pegasus through this alliance.

Further, extending its relationship with Cogir, Welltower has transitioned the management of 12 properties through a JV with the operator. Cogir’s investment of $68.2 million represents a 15% stake in the venture.

Moreover, 11 properties will be distributed amongst Welltower’s existing six operators. The remaining three non-core assets are slated to be sold in the tertiary markets.

The companies have also entered into an agreement to improve the quality of the remaining Brookdale portfolio. The agreement will enable Brookdale to identify and sell numerous communities that have annual base rent of up to $5 million. Welltower will receive 6.25% in rent credit equating to sale proceeds of nearly $80 million. This will also enable Brookdale to increase the lease coverage of tis remaining portfolio.  

All in all, the downscaling will effectively bring down Welltower's Brookdale concentration from 7.6% of in-place net operating income (NOI) to approximately 2.9%, on a pro-forma basis. Nonetheless, pro-forma lease coverage is expected to improve.  At present, the portfolio to be restructured is 83.6% occupied.

Notably, management anticipates loss of income due to the operator restructuring to be nearly $5 million in the first year. This is expected to be recovered by the third year post the transition. In addition, this deal is projected to provide higher cash-flow growth opportunities.

The above-mentioned transition will result in nominal volatility in Welltower’s income performance, courtesy the high-quality Brookdale portfolio, as well as some other reliable operators in its portfolio. Additionally, amid the heightening competition with national and local healthcare operators, such efforts will enable the company to improve property leasing and result in better management of its properties.

Shares of this Zacks Rank #3 (Hold) company have outperformed the industry it belongs to in the past three months. Welltower has gained 10.1%, while the industry recorded growth of 6.4%. Also, the Zacks Consensus Estimate for 2018 FFO per share remained unchanged in a month’s time.

 

Stocks Worth a Look

A few better-ranked stocks from the same space are Arbor Realty Trust ABR, Columbia Property Trust, Inc. CXP and Extra Space Storage EXR. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arbor Realty Trust’s Zacks Consensus Estimate for 2018 funds from operations (FFO) per share remained unchanged at $1.03 over the past month. Its shares have returned 14.2% in the past three months.

Columbia Property Trust’s FFO per share estimates for 2018 remained unchanged at $1.46 in the past month. The stock has gained 9.4% during the past three months.

Extra Space Storage’s Zacks Consensus Estimate for 2018 FFO per share remained unchanged at $4.62 over the past month. Its shares have returned 14.1% in three months’ time.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs

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