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Senior Health Care Operators and Property Owners Pursue Property Sell-Offs, Lease Restructurings in Unstable Healthcare Environment

Welltower, Sabra Health Care, HCP Selling Multiple Facilities Leased and Operated by Genesis Healthcare, Brookdale Senior Living

As senior care facility operators Genesis Healthcare Inc. (NYSE:GEN) and Brookdale Senior Living Inc. (NYSE: BKD) grapple with the fallout from the ongoing changes in the healthcare economy, they continue to press for lease restructurings with the health care REITs that have come to own their facilities.

Welltower Inc. (NYSE:HCN) and Sabra Health Care REIT (NASDAQ:SBRA) are in that process with Genesis Healthcare and HCP Inc. (NYSE: HCP) is restructuring its Brookdale holdings.

Last week, Genesis Healthcare revealed in a regulatory filing that if it is unsuccessful in renegotiating leases with Welltower, Sabra and its lenders, the company may have to file for Chapter 11 bankruptcy reorganization.

“Our results of operations have been negatively impacted by the persistent pressure of health care reforms enacted in recent years,” Genesis said in its filing. “This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers.”

Genesis claims its has implemented a number of cost-mitigation strategies to offset the negative financial implications of the new healthcare operating environment. However, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments, have combined to create something of a perfect storm for the operator in the third quarter of 2017, which have put the company into noncompliance with certain loan and lease covenants.

“In the event of a failure to obtain necessary and timely waivers or otherwise achieve the fixed charge reductions contained in the restructuring plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code,” the company said.

The ongoing restructuring plans Genesis was referring to include the proposed sale by Sabra and Welltower of certain facilities currently leased to the company, which Genesis then intends to re-lease from new third-party landlords at reduced rents.

Genesis also said it will make commercially reasonable efforts to refinance or repay through asset sales, certain of its debt obligations with Welltower which, upon completion, is expected to result in a reduction in interest costs. Through these efforts Genesis hopes to save $80 million and $100 million annually.

Shankh Mitra, senior vice president finance and investments for Welltower, said: “It is no secret that skill mix and occupancy have been materially impacted by the evolution of reimbursement model over last few years. However, we are really encouraged by the sequential stabilization of EBITDAR in a majority of our Genesis portfolio. We are confident that Genesis will be a winner in the new value-driven landscape because of its superior clinical abilities. We and other Genesis-graded parties understand the current capital structure is suboptimal.”

Welltower’s disposition program will provide substantial deleveraging for Genesis, Mitra said, adding that Welltower has identified a buyer but could not comment further.

Meanwhile, Brookdale Senior Living Inc. announced that it has entered into a definitive agreement with HCP for a multi-part transaction involving lease terminations and property sales.

The lease terminations include triple-net leases on 34 communities (3,170 units). Brookdale will acquire two of those communities (208 units). Brookdale’s remaining triple-net lease portfolio with HCP will be consolidated into one master lease.

HCP will also acquire Brookdale’s 10% equity ownership in two existing joint ventures for which Brookdale provides management services to 59 communities (9,585 units). Brookdale will acquire four of the communities (787 units), will retain management of 18 of such communities (3,276 units) with extension of the term to 2030, and will terminate management of 37 of such communities (5,522 units).

“As a result of these transactions, we will have increased flexibility and certainty when evaluating and engaging in transactions to realize the value of our portfolio,” said Andy Smith, Brookdale’s president and CEO. “This announcement is a by-product of both our ongoing strategic review process and our portfolio optimization initiative. We continue to explore actively the full range of options and alternatives to simplify our business, optimize our portfolio and create and enhance shareholder value.”

For the third quarter ended Sept. 30, Brookdale reported a GAAP net loss of $413.9 million for the third quarter of 2017 compared to $51.7 million for the third quarter of 2016

For its part, HCP said it intends to either transition to other operators or sell its 68 other Brookdale properties during 2018. The anticipated sales are expected to generate $600 million to $900 million of net proceeds to HCP depending on the mix of asset sales versus transitions to new operators.

“This is a win-win for Brookdale and HCP, and we appreciate very much the collaborative way this agreement has come together,” said Tom Herzog, president and CEO of HCP. “Reducing our Brookdale concentration has been one of our highest priorities in 2017, and these agreements allow us to do that in a structured and cooperative manner.”

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