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Brookdale Lease Amendments | 9 Months Ended
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Sep. 30, 2014
Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures ("Brookdale Transaction") |
Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures ("Brookdale Transaction") | (3)Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures (“Brookdale Transaction”) On July 31, 2014, Brookdale Senior Living (“Brookdale”) completed its acquisition of Emeritus Corporation (“Emeritus”). Brookdale, as the acquiring entity, became the Company’s largest senior housing lessee and operator. On August 29, 2014, the Company and Brookdale completed a multiple-element transaction that has three major components:
| · |  | amended existing lease agreements on 153 HCP-owned senior housing communities previously leased and operated by Emeritus that includ ed the termination of embedded purchase options in leases relating to 30 properties and future rent reductions;
| · |  | terminated existing lease agreements on 49 HCP-owned senior housing properties previously leased and operated by Emeritus (including the termination of embedded purchase options in these leases relating to 19 properties). At closing, the Company contributed 48 of these properties to a newly formed consolidated RIDEA partnership structure (“RIDEA Subsidiaries”); the 49th property is expected to be contributed in December 2014. Brookdale owns a 20% noncontrolling equity interest in the RIDEA Subsidiaries and manages the facilities on behalf of the partnership; and
| · |  | entered into new unconsolidated joint venture s that own 14 campuses of continuing care retirement communities (“CCRC”) in a RIDEA structure (collectively, the “CCRC JV”) with the Company owning a 49% equity interest and Brookdale owning a 51% equity interest. Brookdale manages these communities on behalf of the CCRC JV.
Leases Amended on 153 Properties (“NNN Lease Restructuring”) The Company and Brookdale entered into amended and restated triple-net master leases for 153 properties formerly leased to Emeritus. As part of the lease amendments, Brookdale forfeited purchase option rights related to 30 of these properties. The master leases have weighted average terms of 15 years, with two extension options that average 10 years each. Total base rent for 2014 will remain unchanged from the existing 2014 rent. However, these leases provide for reduced escalators beginning 2015 compared to those which were in-place; beginning in 2016, the leases contain reduced rent payments of $6.5 million in 2016 and $7.5 million each subsequent year thereafter. All obligations under the amended and restated leases are guaranteed by Brookdale. In addition, the new leases include a purchase option in favor of Brookdale for up to 10 communities at an aggregate purchase price not to exceed $60 million. Effectively, the Company paid consideration of $129 million to terminate the existing purchase options and received consideration of: (i) $76 million for lower rent payments and escalators discussed above, which take effect beginning 2015 and 2016 and (ii) $53 million to settle the amount that the Company ow ed to Brookdale for the RIDEA Subsidiaries transaction discussed below. See the Fair Value Measurement Techniques and Quantitative Information section below for additional information. The Company will amortize the $53 million of net consideration paid to Brookdale for the NNN Lease Restructuring as a reduction in rental income on a straight-line basis over the term of the new leases. Additionally, the lease-related intangibles, initial direct costs and straight-line rent receivables associated with the previous leases will be amortized prospectively over the new (or amended) lease terms. Lease Terminations of 49 Properties that were contributed to a RIDEA Structure (“RIDEA Subsidiaries”) The Company and Brookdale terminated leases for a 49 property portfolio, which resulted in Brookdale forfeiting its purchase option rights to 19 of these properties; the net value of the terminated leases and forfeited purchase options was $108 million ($131 million for the value of the terminated leases, less $23 million for the value of the forfeited purchase options). At closing, the Company contributed the properties into partnerships, with Brookdale owning a 20% noncontrolling equity interest in each of the RIDEA Subsidiaries (“SH PropCo” and “SH OpCo”). Brookdale’s 20% interest in the RIDEA Subsidiaries was valued at $47 million. Brookdale also manages the properties on behalf of the RIDEA Subsidiaries under long-term management contracts. See the Fair Value Measurement Techniques and Quantitative Information section below for additional information. As consideration for the net value of $108 million for of the terminated leases and the $47 million sale to Brookdale of the 20% noncontrolling interest in the RIDEA Subsidiaries, the Company received the following: (i) a $34 million short-term receivable recorded in other assets; (ii) a $68 million note from Brookdale (the “Brookdale Receivable”) recorded in loans receivable (see Note 7 for additional information); and (iii) an effective offset for the $53 million associated with the additional consideration owed by the Company to Brookdale for the NNN Lease Restructuring transaction discussed above. The fair values of the short-term receivable and Brookdale Receivable were estimated based on similar instruments available in the marketplace and are considered to be Level 2 measurements within the fair value hierarchy. As a result of terminating these leases, the Company recognized a net gain of $38 million consisting of: (i) $108 million gain based on the fair value of the net consideration received; less (ii) $70 million to write-off the direct leasing costs and straight-line rent receivables related to the former in-place leases. The Company has identified the SH PropCo and SH OpCo entities as VIEs (see Note 17 for additional information). Continuing Care Retirement Communities Joint Venture HCP and Brookdale formed new unconsolidated joint ventures that own 14 CCRC campuses in a RIDEA structure (“CCRC PropCo” and “CCRC OpCo”). HCP and Brookdale own 49% and 51%, respectively, of CCRC PropCo and CCRC OpCo, based on each company’s respective contributions. CCRC PropCo owns eight campuses that are leased to CCRC OpCo; CCRC OpCo owns six campuses and the operations of the campuses leased from CCRC PropCo. Brookdale manages the campuses of the CCRC JV under long-term management contracts. At closing, Brookdale contributed eight of its owned campuses; the Company contributed two campuses previously leased to Brookdale valued at $162 million (carrying value of $92 million) and $370 million of cash (includes amounts used to fund the purchase of properties and working captital), which was primarily used to acquire four additional campuses from third parties. At closing, the CCRC JV campuses were encumbered by $569 million of mortgage and entrance fee obligations. The Company has identified the CCRC OpCo entity as a VIE (see Note 17 for additional information). Fair Value Measurement Techniques and Quantitative Information The fair values of the forfeited rental payments and purchase option rights related to the NNN Lease Restructuring and the RIDEA Subsidiaries were based on the income approach and are considered Level 3 measurements within the fair value hierarchy. The Company utilized discounted cash flow models with observable and unobservable valuation inputs. These fair value measurements, or valuation techniques, were based on current market participant expectations and information available as of the close of the transaction on August 29, 2014. A summary of the quantitative information about fair value measurements for the NNN Lease Restructuring and RIDEA Subsidiaries transactions follows (dollars in thousands):
|  | Fair Value |  | Valuation Technique |  | Valuation Inputs |  | Input Average or Range |
NNN Lease Restructuring |  |  |  |  |  |  |  |  |  |
Rental payment concessions by HCP |  | $ | 76,000 |  | Discounted Cash Flow |  | NNN Rent Coverage Ratio |  | 1.20x |
(benefiting Brookdale) |  |  |  |  |  |  | NNN Rent Growth Rate |  | 3.0 | %
|  |  |  |  |  |  | Discount Rate |  | 8.00%-8.50 | %
Forfeited purchase options by |  | $ | (129,000) |  | Discounted Cash Flow |  | Capitalization Rates |  | 7.50%-9.25 | %
Brookdale (benefiting HCP) |  |  |  |  |  |  | Discount Rate |  | 10.50%-11.00 | %
|  |  |  |  |  |  | Exercise Probability |  | 100.00 | %
RIDEA Subsidiaries |  |  |  |  |  |  |  |  |  |
Forfeited rental payments by HCP |  | $ | 131,000 |  | Discounted Cash Flow |  | NNN Rent Coverage Ratio |  | 1.20x |
(benefiting Brookdale) |  |  |  |  |  |  | NNN Rent Growth Rate |  | 3.0 | %
|  |  |  |  |  |  | EBITDAR Growth Rate |  | 5.5 | %
|  |  |  |  |  |  | Discount Rate |  | 8.00%-11.00 | %
Forfeited purchase options by |  | $ | (23,000) |  | Discounted Cash Flow |  | Capitalization Rates |  | 7.50%-9.25 | %
Brookdale (benefiting HCP) |  |  |  |  |  |  | Discount Rate |  | 10.50%-11.00 | %
|  |  |  |  |  |  | Exercise Probability |  | 100.00 | %
In determining which valuation technique the Company would utilize to calculate fair value for the multiple elements of this transaction, the Company considered the market approach and obtained published investor survey and sales transaction data, where available. The information obtained was consistent with the valuation inputs and assumptions used by the Company in the discounted cash flow models that were applied to this transaction. Investor survey and sales transaction data reviewed for similar transactions in similar marketplaces, included, but w ere not limited to, sales price per unit, rent coverage ratios, rental rate growth as well as capitalization and discount rates. Rental Payment Concessions and Forfeitures. The fair value of the rental payment concessions related to the NNN Lease Restructuring Transaction was determined to be the present value of the difference between (i) the remaining contractual rental payments of the in-place leases, limited to first purchase option date, where available; thereafter market rents to complete the initial lease term of the amended Brookdale leases and (ii) the contractual rental payments under the amended Brookdale leases. The fair value of the forfeited rental payments related to the RIDEA Subsidiaries transaction was calculated as the present value of the difference between (i) the remaining contractual rental payments of the terminated in-place leases, limited to first purchase option date, where available and (ii) the forecasted cash flows of the facility-level operating results of the RIDEA Subsidiaries. Forfeited Purchase Option Rights. The fair value of the forfeited purchase option rights was determined to be the present value of the difference between (i) the fair value of the underlying property as of the initial exercise date and (ii) the exercise price for purchase option rights as defined in the lease agreement. To determine the fair value of the underlying property as of the initial exercise date, the Company utilized a cash flow model that incorporated growth rates to forecast the underlying property’s operating results and applied capitalization rates to establish the expected fair value. The Company utilized an appropriate risk-adjusted discount rate to estimate the present value as of the transaction close date.

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- Definition The entire disclosure pertaining to lease amendments, lease terminations, and the formation of joint ventures. + References No definition available. + Details
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