LONG BEACH, CA - HCP announced that it has entered into a definitive agreement to acquire 133 senior housing communities for $1.73 billion, from a joint venture between Emeritus Corporation and Blackstone Real Estate Partners VI, an affiliate of The Blackstone Group . As part of this transaction, Emeritus, the nation’s largest assisted living and memory care operator, will enter into a new triple-net, master lease and continue to operate these communities. In addition, Emeritus has committed to investing an additional $30 million, representing $2,900 per unit, to continue improving the real estate and operating performance of the portfolio. Located in 29 states, the portfolio encompasses 10,350 units representing a diversified care mix of 61% assisted living, 25% independent living, 13% memory care and 1% skilled nursing. Concurrent with HCP’s acquisition, Emeritus will purchase nine remaining properties from the Blackstone JV, for which HCP has agreed to provide secured debt financing of $52 million.
The Blackstone JV initially acquired the portfolio out of bankruptcy in 2010 and transitioned the operations to Emeritus. The joint venture subsequently invested $42 million in capital improvements representing $4,100 per unit, and these efforts have increased occupancy from 80% to 88%.
HCP expects to acquire these properties substantially unencumbered by prepaying almost all of the in-place secured debt. The transaction is expected to be $0.08 and $0.05 per share accretive to HCP’s FFO and FAD per share, respectively, on an annualized basis. HCP plans to finance this transaction consistent with its long-term leverage target of 60% equity and 40% debt.
“We are pleased to further expand our strategic relationship with Emeritus, one of our key, best-in-class operating partners. The transaction further demonstrates our thesis of unlocking significant value for our operating partners through real estate driven transactions while providing our shareholders with attractive risk adjusted returns. This transaction is immediately accretive, significantly expands our senior housing portfolio and is structured through the safety of a guaranteed triple-net lease with meaningful upside through contractual rent escalators,” said Jay Flaherty, HCP’s Chairman and Chief Executive Officer.
“Partnering with HCP on this exciting transaction will allow us to monetize our economic and promoted interests in the joint venture, immediately resulting in excess of $140 million of proceeds to Emeritus,” said Granger Cobb, Emeritus' Chief Executive Officer. “In addition, it secures our continued management of these communities on a long-term basis and positions us to capture future upside in the operations as we continue to deploy capital expenditures to maximize local strategic market opportunities.”
In connection with the transaction, Emeritus will enter into a new triple-net, master lease for 129 properties (the “Master Lease”) and four individual leases, all guaranteed by the credit of Emeritus (together, the “Leases”). The Leases provide total contractual rent in the first year of $105.5 million, representing a 6.1% lease yield. The contractual rent will increase annually by the greater of 3.7% on average or CPI over the initial five years, and thereafter by the greater of 3.0% or CPI for the remaining initial term. At the beginning of the sixth lease year, rent on the 34 lease–up properties will be increased to the greater of the percentage increase in CPI or fair market, subject to a floor of 103% and a cap of 130% of the prior year’s rent, allowing HCP to capture potential upside from these non–stabilized assets.
The properties will be grouped into three comparable pools with initial terms of 14 to 16 years. Emeritus has two extension options, which, if exercised, bring total available lease terms to 30 to 35 years.
The closing of this transaction is subject to obtaining regulatory approvals and third party consents, and other customary closing conditions. HCP expects the acquisition of real estate to close in phases beginning mid to late November 2012, although there can be no assurance that the transaction will close or, if it does, when the closing will occur.
In conjunction with Emeritus’ acquisition of nine senior housing communities from the Blackstone JV, HCP has agreed to provide debt financing to Emeritus of $52 million (the “Loan”) with a four–year term. The Loan is secured by the underlying real estate and prepayable at Emeritus’ option. The interest rate on the Loan will mirror the 6.1% lease yield, including the annual increases through maturity.