Subsequent Event

9 Months Ended

Sep. 30, 2019

Subsequent Events

CCRC Venture and HCP Master Lease Transactions

On October 1, 2019, the Company entered into definitive agreements, including a Master Transactions and Cooperation Agreement (the “MTCA”) and an Equity Interest Purchase Agreement (the “Purchase Agreement”), providing for a multi-part transaction with HCP. The parties subsequently amended the agreements to include one additional entry fee CCRC community as part of the sale of the Company's interest in the CCRC Venture (rather than removing the CCRC from the CCRC Venture for joint marketing and sale). The components of the multi-part transaction include:

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CCRC Venture Transaction. Pursuant to the Purchase Agreement, HCP has agreed to acquire the Company's 51% ownership interest in its unconsolidated entry fee CCRC venture with HCP (the “CCRC Venture”), which will hold 14 entry fee CCRCs after giving effect to the internal restructuring described below, for a total purchase price equal to 51% of the equity value of the CCRC Venture, which is measured as $1.06 billion less portfolio debt, subject to a net working capital adjustment. Pursuant to the Purchase Agreement, the parties have agreed to use commercially reasonable efforts to obtain certain governmental approvals and consummate an internal restructuring for the purposes of moving two entry fee CCRCs into a new unconsolidated venture on substantially the same terms as the CCRC Venture and to accommodate the sale of such two communities at a future date. Pursuant to the MTCA, the parties have agreed to terminate the Company’s existing management agreements with 14 entry fee CCRCs, and HCP has agreed to pay the Company a $100 million management agreement termination fee, immediately following the closing of the sale of the Company’s ownership interest in the CCRC Venture. Upon termination of the management agreements, the Company will transition operations of the entry fee CCRCs to a new operator in accordance with the terms of the MTCA. The Company expects its cash proceeds from the sale of its ownership interest to be approximately $291 million net of portfolio debt, subject to the net working capital adjustment. The disposition of the ownership interest in the CCRC Venture is anticipated to also result in the Company recording a gain on sale of assets for accounting purposes.

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Master Lease Transactions. Pursuant to the MTCA, the parties have agreed to amend and restate the Company’s existing master lease with HCP pursuant to which the Company will continue to lease 25 communities from HCP, and the Company has agreed to pay $405.5 million to acquire 18 communities that it currently leases from HCP and to reduce its annual rent under the amended and restated master lease, upon which time the 18 communities will be removed from the master lease. In addition, HCP has agreed to transition one leased community to a successor operator. With respect to the continuing 24 communities, the Company’s amended and restated master lease with HCP will have an initial term to expire on December 31, 2027, subject to two extension options at the Company's election for ten years each, which must be exercised with respect to the entire pool of leased communities. Pursuant to the amended and restated master lease, the initial base rent for the 24 communities will be approximately $41.8 million and is subject to an escalator of 2.4% per annum on April 1st of each year. Under the terms of the master lease, HCP has agreed to make available up to $35 million for capital expenditures for a five-year period related to the 24 communities at an initial lease rate of 7.0%.

The MTCA and Purchase Agreement contain certain customary representations and warranties made by each party. The Company and HCP have also agreed to certain customary covenants, including that the parties will use commercially reasonable efforts to obtain certain required lender consents and governmental approvals, subject to certain limitations. The parties’ obligations to consummate the transactions contemplated by the MTCA and Purchase Agreement are subject to the satisfaction or waiver of certain conditions, including completion of the internal restructuring, the prior or concurrent closing of the transactions contemplated by the Purchase Agreement, which shall occur no later than December 31, 2020, and the receipt of governmental approvals. The Purchase Agreement may be terminated by either party under certain circumstances, including a material breach by the other party of its obligations under the Purchase Agreement that is not cured within the applicable period or the failure of the closing of the Purchase Agreement to occur on or prior to December 31, 2020.

The Company expects to fund its acquisition of the 18 communities with the proceeds from the sale of its interest in the CCRC Venture and non-recourse mortgage financing on the acquired communities. The Company expects the sale of its 51% ownership interest in the CCRC Venture, the terminations of its management agreements on 14 entry fee CCRCs, and its acquisition of the 18 currently leased communities to occur in the first quarter of 2020, and the sales of the two entry fee CCRCs to occur over the next 12 to 18 months; however, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.