Benzinga | Jul 27, 2020 07:32AM EDT

Ventas Enters Into Revised Master Lease Agreement And Other With Brookdale Senior Living

Companies work together to address financial impact of unprecedented COVID-19 pandemic on senior living operations

Ventas receives consideration approximating $235 million including equity position in Brookdale

CHICAGO--(BUSINESS WIRE)-- Ventas, Inc. (NYSE:VTR) today announced that it has entered into a revised master lease agreement (the "Brookdale Lease") and other agreements (together with the Brookdale Lease, the "Agreements") with Brookdale Senior Living Inc. ("Brookdale") (NYSE:BKD) in response to the unprecedented challenges to the senior living industry caused by the COVID-19 pandemic.

"We are pleased to reach mutually beneficial agreements with Brookdale that address the financial impact of the unprecedented COVID-19 pandemic on our senior living communities," said Debra A. Cafaro, Ventas Chairman and Chief Executive Officer. "The arrangements that we are announcing today benefit both companies, by providing Ventas shareholders with certainty, flexibility and the opportunity for upside, enhancing Brookdale's stability and liquidity, and creating the most conducive environment for Brookdale to operate our communities safely and productively," she added.

J. Justin Hutchens, Ventas's EVP of Senior Housing, also commented, "I look forward to working with the Brookdale management team to optimize the performance of the Ventas portfolio operated by Brookdale. Brookdale has devoted itself fully to protecting residents and front-line care providers during the COVID-19 pandemic. We are grateful for their strong commitment to health and safety."

Terms and Benefits of Agreements

The Agreements provide substantial financial benefits and certainty for both companies by modifying their current arrangements as follows:

* Ventas received up-front consideration approximating $235 million dollars, which replaces over two and a half years of the cash rent reduction effectuated under the Brookdale Lease, consisting of: $162 million in cash including $47 million from the release of deposits that Ventas held under the Brookdale Lease. $45 million cash pay note (the "Note") from Brookdale. The Note has an initial interest rate of nine percent, increasing 50 basis points per annum, and matures on December 31, 2025. Warrants exercisable for 16.3 million shares of Brookdale common stock (the "Warrants"), representing eight percent of Brookdale's fully diluted shares on a post-exercised basis. The Warrants, which are exercisable at any time prior to December 31, 2025, have an exercise price of $3.00 per share.

* Base cash rent, under the Brookdale Lease, which covers 121 senior living communities (the "Ventas-Brookdale Portfolio"), is now set at $100 million per annum starting in July 2020, with three percent annual escalators commencing on January 1, 2022, compared to $182 million annualized cash rent paid in the first quarter of 2020.

* The Brookdale Lease is guaranteed by, and the Note is a direct obligation of, Brookdale.

* The base term of the Brookdale Lease remains unchanged through December 31, 2025. Brookdale continues to have two 10-year extension options at the greater of escalated rent and fair market rent. In order to provide Brookdale with stability due to COVID-19, Ventas removed the financial covenants in the Brookdale Lease. It also modified certain of the change of control provisions previously contained in the Brookdale Lease. To enhance Ventas's operational and portfolio flexibility, under certain conditions, Ventas has the right to convert some or all of the assets in the Ventas-Brookdale Portfolio to a management contract, change operators and/or dispose of assets.

* In addition, Brookdale is transferring full ownership of five senior living properties to Ventas, in full satisfaction and repayment of a $78 million loan (the "$78 Million Loan") to Brookdale from Ventas that were secured by the five communities. Brookdale will now manage those communities for Ventas under a terminable management agreement. The communities contain 471 units and generated first quarter 2020 annualized EBITDAR (after a five percent management fee) exceeding $5 million. Annual interest income on the $78 Million Loan, which was scheduled to mature on September 30, 2021, was $7 million.

Background and Other Information

The Ventas Board of Directors considered the potential for revised arrangements with Brookdale in setting its second quarter 2020 dividend.

Brookdale paid all contractual rent at the previous rate through June 2020 and at the revised rate in July 2020. Annualized property-level EBITDAR (after a five percent management fee) in the first quarter 2020 for the Ventas-Brookdale Portfolio under the Brookdale Lease was $136 million.

Adjusted for the Agreements, trailing twelve-month EBITDAR (after a five percent management fee) and EBITDARM cash rent coverage under the Brookdale Lease through March 31, 2020 improves to over 1.3x and 1.6x respectively. Previously reported (on June 19, 2020) trailing twelve-month EBITDARM coverage on the Brookdale Lease was reported at between 0.90x and 0.99x and the implied EBITDAR coverage after a five percent management fee would have been approximately 0.8x.

Ventas expects to recognize the full value of the up-front consideration received from Brookdale ratably over the remaining base term of the Brookdale Lease.

The property performance information given above and in the below table does not fully reflect the impact of the COVID-19 pandemic, which began to significantly impact the senior living industry, including the Ventas-Brookdale Portfolio, in mid-March. The ultimate extent of the impact of the COVID-19 pandemic on the financial and operating performance of the Portfolio is uncertain.