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Earlier this week, Brookdale Senior Dwelling (NYSE: BKD) declined to resume a grasp lease with landlord Ventas (NYSE: VTR) protecting 120 communities. That’s notable information, however the particulars actually caught my eye.
Hours after Ventas’ preliminary announcement, Brookdale launched its personal assertion noting that the portfolio generated adverse money flows “in extra of $50 million” between 2017 and 2020, when it carried a median occupancy price of 85%.
In 2020, Ventas and Brookdale restructured the portfolio’s grasp lease, partly in an effort to pare down the operator’s hire prices. However even after the restructuring, the portfolio had roughly $23 million of adverse money movement, in accordance with Brookdale.
I assume this might all be a part of a plan from Brookdale to shed underperforming properties and finally strike an settlement with Ventas to proceed managing a portion of the general portfolio. In 2023, Brookdale declined to resume its grasp lease protecting 35 communities with landlord LTC Properties (NYSE: LTC), solely to announce a brand new grasp lease for 17 of the communities months later in early 2024.
However I feel the portfolio and its pressures signify a bigger pattern that’s taking part in out in senior dwelling as operators steadiness scale and dimension with profitability and margins. In Brookdale’s case, CEO Cindy Baier has labored to extend the corporate’s share of owned communities, with a perception that unwieldy leases can result in “excessive and escalating” capital prices and will “lock” operators into preparations that restrict their flexibility on the neighborhood degree.
“Our largest alternative stays capturing the significant natural progress that we count on from the communities that we function right now,” Baier informed me in September.
Zooming out the lens, I’m certain different operators are trying over their managed portfolios and having related discussions, and I imagine that 2025 might be a 12 months when operators search extra management over their very own destinies as they develop and evolve for the essential years to come back. On the similar time, this case over Brookdale’s leases renews the query about scale in senior dwelling, and that perennial query for operators: How huge is simply too huge?
On this members-only SHN+ Replace, I look at Brookdale’s current transfer and provide the next takeaways:
- What the lease non-renewal means for Brookdale and Ventas
- How the operator’s historical past hints at what may come subsequent
- Why senior dwelling leases are in a interval of change
- The implications associated to how operators obtain scale
Extra on Brookdale’s choice
With the choice introduced this week, Brookdale stands to lose 120 communities, lowering its portfolio to as few as 528 communities, down from 648 right now.
Brookdale selected to not renew the lease after making an allowance for a possible 3% to 10% 2026 hire enhance system and the portfolio’s anticipated efficiency within the near- and long-term, “even in gentle of the anticipated good thing about provide/demand tailwinds.”
“We now have persistently stated that we view lease maturities as a chance to place the corporate for future success and to additional drive shareholder worth, relying on present and anticipated money movement efficiency of the leased portfolio,” Baier famous within the firm’s announcement. “On this case, given historic and anticipated future money movement efficiency of this portfolio, we count on that non-renewal will probably be extra constructive to Brookdale from a money movement standpoint starting in 2026.”
Given the influence on its portfolio, I imagine that Brookdale administration didn’t make its choice calmly.
My assumption is that the transfer is wrapped up in Baier’s quest to prioritize possession and trim as a lot fats from the corporate’s operations as potential. In September, Brookdale acquired 41 communities beforehand managed beneath triple-net leases for $610 million. The corporate additionally in a non-public transaction with Deerfield Administration and Flat Footed, LLC, agreed to promote $150 million of 2029 senior notes.
After I corresponded with Baier about it earlier this 12 months, she talked about to me that the corporate’s strikes to extend possession had “a myriad of advantages” for the operator looking forward to the approaching years.
“These transactions permit us to interchange a excessive and escalating value of capital with a decrease value curiosity,” Baier informed SHN. “By way of possession, we’ve got flexibility to change the portfolio based mostly upon what’s strategically the best choice for Brookdale and our shareholders. This flexibility doesn’t exist when communities are locked inside a leased construction.”
Brookdale declined to elaborate on its newest transfer with Ventas, however placing the items collectively, I imagine it undertook its newest choice with related motivations.
That flexibility could lengthen to a possible transformative transaction sooner or later. Rumors have usually surfaced that Brookdale is contemplating strategic alternate options, together with the outright sale of the corporate. Each time such rumors crop up, the management wielded by Brookdale’s REIT companions is one sticking level that analysts normally flag.
Brookdale has, over the course of years, engaged in varied strikes to regain extra management over the destiny of its portfolio, and this newest choice associated to its Ventas grasp lease furthers that pattern. This isn’t to say that Brookdale is poised to make a giant deal imminently, however merely to level out that declining to resume this grasp lease seems to be per previous selections that elevated Brookdale’s autonomy.
Brookdale’s historical past reveals bigger pattern
Regardless of the massive announcement, I don’t suppose Brookdale is essentially shedding all 120 communities from its portfolio. One solely wants to have a look at its choice to say no renewing its 35-property lease with LTC in 2023. On the time, Baier famous that the operator was “higher served” by not renewing the grasp lease. However in early 2024, Brookdale introduced it will proceed managing 17 communities from the portfolio beneath a brand new grasp lease for six years at an preliminary annual hire of $9.3 million.
Though LTC and Ventas are two totally different corporations, I can see some similarities between the 2 Brookdale portfolios. In each instances, Brookdale management sought to lighten the corporate’s administration load and assumedly preserve solely the highest-performing communities. As such, I might not be stunned to see Brookdale announce in a matter of months that it’s retaining a number of the 120-community portfolio beneath a brand new grasp lease with extra favorable phrases.
Alternatively, the non-renewal creates new alternatives for Ventas to develop with different working companions that it really works with and take extra management over how the communities are managed. The REIT famous earlier this week that it plans to transform some or all the communities into its senior housing working portfolio (SHOP) phase and use its knowledge platform, Ventas OI, to create higher outcomes.
For Ventas, Brookdale’s total 121-community footprint represents about 7% of its annualized NOI, or $149 million.
“Ventas’s plans are supposed to maximise the efficiency and worth of those communities and additional increase the corporate’s SHOP footprint to extend Ventas’s future progress price amid an unprecedented multiyear progress alternative as a result of secular demand from a big and rising getting older inhabitants,” the corporate stated in its announcement. “The corporate can also select to promote, lease or take different actions respecting a portion of the at present leased portfolio.”
On the finish of the day, I can see the deserves of each Brookdale strolling away from some or all the communities, and Ventas changing them to SHOP and bringing in new operators and plans. I do suppose the tip consequence will probably be someplace within the center, given Brookdale’s lengthy historical past as an in depth working companion for Ventas, and the advantages of sustaining operational consistency when that’s acceptable.
Past Brookdale and Ventas, I feel situations are proper for operators to weigh whether or not they need to keep in doubtlessly troublesome leases. The Covid-19 pandemic dramatically demonstrated the difficulties of being locked into ever-escalating rental agreements in occasions of operational and monetary strife, and even earlier than the pandemic, RIDEA was on the upswing.
On the REIT aspect, that shift to RIDEA is simply gaining steam, as might be seen within the plans of corporations like LTC Properties and Nationwide Well being Traders (NYSE: NHI), each of which have created burgeoning SHOP platforms to reap the benefits of the present actual property market. And each are headed up by leaders who have been beforehand skeptical of the administration construction.
In any case, whether or not Brookdale finally ends up exiting all 120 communities or solely a portion of them, it seems sure that the supplier’s portfolio is about to contract. That is one other constant pattern, with the corporate searching for to right-size ever because the blockbuster mixture with Emeritus a decade in the past. On the time of that deal, the mixed portfolio numbered 1,100 communities.
After we ask senior dwelling executives if there may be an higher restrict on how huge an working firm might be, we are inclined to get some model of the identical reply: There isn’t any restrict, so long as a supplier grows on the proper place and with the best technique.
However within the final 10 years, at the same time as its portfolio has shrunk, Brookdale has remained the biggest supplier within the sector. Even when the corporate loses 120 communities, Brookdale stays nicely forward of the next-largest suppliers, Discovery Senior Dwelling and Atria Senior Dwelling, which each have round 300 communities. And whereas Atria itself grew considerably by way of the 2021 acquisition of the Vacation Retirement administration firm, the ensuing Vacation by Atria portfolio shrank by 89 communities in 2024, with Welltower (NYSE: WELL) transitioning these properties to different operators.
That scenario with Atria and this one with Brookdale spotlight what appears to be one pure barrier to a supplier reaching actually large scale: To take action, they need to assemble a big portfolio, which necessitates buying a various mixture of communities and dealing with quite a lot of capital companions, normally together with REITs.
Over time, these eclectic portfolios show troublesome to handle and, irrespective of the general high quality of the working firm, virtually inevitably embody some troubled properties which are positioned in robust markets, have poor native management, or encounter different points. REITs or different possession teams then search to transition underperforming communities to new operators (typically regionals), creating attrition within the portfolios of the mega-operators with nationwide footprints.
There are working corporations pursuing totally different paths to scale, resembling Discovery Senior Dwelling, which is crafting a portfolio of largely autonomous manufacturers grouped by area and worth level. However Discovery, Atria and different massive suppliers have but to eclipse Brookdale. They might accomplish that within the coming years, however for the second, the trade behemoth is a shrinking big, and whether or not a supplier can efficiently develop larger than Brookdale could be very a lot an open query.
