Top REITs Weigh in on Brookdale Real Estate Spin-Off Potential

A month after Brookdale Senior Living was prodded by shareholders to spin off its real estate ownership, the company’s chief is making the case for a patient approach — and top health care real estate investment trusts (REITs) are expressing their interest.

Last month, Sandell Asset Management Corp., a shareholder of Brookdale (NYSE: BKD), pushed the industry’s largest senior housing provider to separate its owned real estate portfolio into a REIT, thereby “unlocking the significant value” in the portfolio.

In response, Brookdale said it would consider Sandell’s suggestions as it continues to execute its strategic plan. But the question remains: Is the timing right for a move on this scale?

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The provider is arguably off to a rocky start this year, posting a net loss of $106.5 million for the quarter ended Dec. 31, 2014, and previously citing significant challenges stemming from the integration of its newly acquired Emeritus Senior Living communities.

But these challenges aren’t over, and CEO Andy Smith hinted that they might hold back the company from committing to a spin-off — at least for now.

“Today, we have to think about the fact that while we do have a very attractive market for health care real estate, we’re in the midst of our integration with Emeritus,” he said last week during the RBC Capital Markets Global Healthcare Conference. “Some of the value of real estate is associated with the cash flows that you’re generating off those operations. … We’re just in the very beginning stages of trying to create the synergies that we see are there in the Emeritus assets.”

However, he noted that Brookdale would continue to analyze the best way to create value on a short-term, intermediate-term and long-term basis for its shareholders.

More recently, Smith echoed those thoughts at the Citi 2015 Global Property CEO Conference in Hollywood, Fla.

“We consider it our job … to constantly assess whether there’s a better way to organize our company around our real estate,” he said Wednesday. “I’m not foreshadowing, but it is our job to constantly assess market conditions in such a way as to create enduring value for our shareholders.”

REITs Weigh In

As for investors, two of the top health care REITs remained fairly tight-lipped about the spin-off, but did express their interest in the provider’s decision.

When asked if a large-cap REIT ever would own a majority of Brookdale’s real estate, HCP (NYSE: HCP) President and CEO Lauralee Martin said, “We’re proud that we think we have the preferred spot with Brookdale.”

HCP’s relationship with Brookdale was strengthened last year when the two joined forces to create a $1.2 billion joint venture that would own and operate a portfolio of 14 entry-fee continuing care retirement communities (CCRCs). This investment proved to be the main driver for HCP’s “outstanding” growth year in 2014, the company said in its fourth-quarter earnings call with analysts.

Perhaps it’s not surprising, then, that Martin says HCP would “love to own more real estate with Brookdale.”

“There’s probably more real estate value to be had there. I personally like an operator that owns some real estate, because it’s a better balance sheet. And that means long-term we have a better operator,” she said Tuesday at the Citi conference.

Ventas also has a “great relationship” with Brookdale, Chairman and CEO Debra Cafaro said at the conference.

Like Brookdale’s Smith, Cafaro emphasized the importance of focusing on the Emeritus integration. Concentrating on this effort and bringing operating performance to a high level is the provider’s biggest current opportunity for creating shareholder value, Cafaro said.

Health Care REIT (NYSE: HCN) also boasts strong ties with the senior living provider, having been one of its partners for nearly two decades.

When asked whether HCN would put itself in “an aggressor or activist role” with regard to the provider’s potential real estate spin-off, CEO Thomas DeRosa simply said, “We’re a friend of Brookdale.”

But DeRosa sees benefits in Brookdale having several such friends.

“We want Brookdale to be the strongest company it can be, because we have significant credit exposure with Brookdale,” he said Monday at the Citi conference. “Do I see it gravitating to one particular REIT? That’s really hard to say. I think they’re big enough that they probably are best served today by having a number of relationships and owning some of the real estate as well.”

Written by Emily Study