Business Context and Reporting Period
Company: Brookdale Senior Living Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: April 13, 2006 (Earliest event reported: April 7, 2006)
Primary Event: Completion of the acquisition of Southern Assisted Living, Inc. ("SALI") and the execution of amended and restated lease agreements with Health Care REIT Inc. ("HCR").
Key Financial Metrics and Transaction Details
- Acquisition Consideration: Approximately $82.9 million in cash paid to previous SALI shareholders.
- Assets Acquired: 41 senior living facilities containing 2,887 assisted living beds located in North Carolina, South Carolina, and Virginia. Additionally, SALI manages one third-party property with 155 units.
- Lease Accounting: The leases associated with the acquired facilities will be accounted for as capital leases.
- Lease Advance: SALI Tenant previously received approximately $118.8 million from HCR as a lease advance.
- Rent Obligations (as of April 1, 2006):
- SALI Master Lease: $199,372,378.
- SALI Stand-Alone Leases (17 facilities): $130,329,264.
- Financial Covenants:
- Company Net Worth: Must maintain not less than $400,000,000.
- Portfolio Coverage Ratio: 1.20 to 1.00 for fiscal 2006; 1.25 to 1.00 thereafter.
- Working Capital: Minimum $100,000 available for each Master Lease Facility.
Material Changes and Agreements
The filing details the entry into material definitive agreements and the completion of an asset acquisition:
- Alterra Master Lease Amendment: Amended to include SALI affiliates, remove the requirement for letters of credit as security deposits (unless the portfolio coverage ratio is not met), and establish cross-default provisions with SALI leases.
- SALI Master Lease: An absolute net lease with an initial term expiring December 31, 2018, plus two five-year renewal options. Includes a percentage rent clause (23.375% of gross revenues exceeding base rent).
- Guarantees: Brookdale, SALI, and sub-tenants entered into unconditional and continuing lease guaranties for both the Alterra and SALI lease structures.
Outlook, Risks, and Contingencies
- Default Triggers: An event of default under the SALI Master Lease, SALI Stand-Alone Leases, or Alterra Master Lease constitutes a cross-default across all agreements. Specific defaults include loss of licensure or bed reductions exceeding 3% at any facility.
- Cure Periods: Failure to meet financial covenants is not an immediate default unless it negatively affects 5% or more of total beds. If less than 5% is affected, a 90-day cure period applies. If uncured, the company must provide a substitute property or acquire the non-compliant facility within 12 months.
- Financial Statements: Financial statements of the acquired business and pro forma financial information are not included in this filing but will be submitted via amendment no later than June 23, 2006.
Investor Verification Checklist
- Verify the final adjusted purchase price of $82.9 million and any subsequent prorations.
- Confirm the integration of SALI's 2,887 beds into Brookdale's existing portfolio and operational metrics.
- Monitor the company's ability to maintain the $400 million net worth covenant and the 1.20/1.25 portfolio coverage ratios.
- Review the upcoming pro forma financial information (due by June 23, 2006) to assess the impact of the capital lease accounting treatment on debt levels and liquidity.
- Assess the risk exposure related to the cross-default provisions linking the Alterra and SALI lease structures.