Following ongoing pressure from a major shareholder to spin off its real estate portfolio, Brookdale Senior Living (NYSE: BKD) is reportedly in talks with HCP Inc. (NYSE: HCP) and Ventas Inc. (NYSE: VTR) as potential buyers of the real estate.
Sandell Asset Management Corp., the lead shareholder, is said to be involved in discussions with Brookdale about the possible sale, according to DealReporter, which originally reported the story on Wednesday, citing two unnamed people familiar with the negotiations.
Brookdale, HCP and Ventas each declined to provide a comment to SHN on the rumored talks.
In February, Sandell released a letter and white paper pressing Tennessee-based Brookdale to spin off its real estate into a real estate investment trust (REIT).
“We are disappointed that the Board has not committed to unlocking the significant value we believe is embedded in the Company’s owned real estate portfolio, especially with senior living real estate valuations at all-time highs,” said Sandell CEO Tom Sandell in a written statement at the time. “By their own admission, management has classified its owned portfolio as having great ‘scarcity’ value given its scale and desirability.”
Sandell also declined to comment to SHN.
Investment banking firm Jefferies released a note Wednesday following recent meetings that the firm hosted with Brookdale management, which included discussions about the activist shareholders and the possibility of a real estate spin-off.
“Without acknowledging that a formal strategic review process is ongoing, management noted that high valuations in the health care real estate market, coupled with their significant ownership of real estate assets and their complex capital structure make it necessary to evaluate the company’s underlying value,” the note states.
Selling either real estate or operations was one of the strategies that the Brookdale leaders outlined. The other strategies were maintaining the status quo, splitting into an OpCo-PropCo and selling the company outright.
While all these options are possibilities in the analysts’ estimation, they noted that shareholders likely would like to see the company take some “strategic move,” and that “the underlying real estate value is hard to ignore.”
For their part, publicly traded REITs may be primed for the type of transaction that Sandell has been advocating.
“We believe that the public health care REITs own less than 20% of the total health care real estate in the U.S.,” says Todd Lukasik, senior analyst at Morningstar, Inc. “Occasionally current owners will want to monetize the value of their assets, and the public REITs will generally be ready with capital. This industry consolidation opportunity provides an attractive incremental external growth opportunity for health care REITs when compared with some of the other property sectors.”
Sandell’s activism came on the heels of Brookdale announcing a net loss of $106.5 million in its full-year and fourth-quarter earnings report. Leaders cited integration issues following Brookdale’s $2.3 billion merger with Emeritus Senior Living. Brookdale, already the largest senior housing operator in the nation, now has more than 1,100 properties.
Brookdale CEO Andy Smith was noncommittal about the spin-off, repeatedly stating that it would create additional complexities and making the case that synergies with Emeritus would begin to bear fruit once the integration gained steam.
Yet Smith did not dismiss the possibility that Brookdale would separate its real estate.
“We consider it our job … to constantly assess whether there’s a better way to organize our company around our real estate,” he said in early March, at the Citi 2015 Global Property CEO Conference in Hollywood, Fla. “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.”
At that same event, CEOs of the “big three” large-cap senior living REITs weighed in on the possible separation.
Both Ventas CEO and Chairman Debra A. Cafaro and HCP President and CEO Lauralee Martin emphasized the strong ties that their companies have with Brookdale.
While Cafaro echoed Smith’s sentiments about giving the operations more time to integrate post-merger, Martin simply said that HCP would “love to own more real estate with Brookdale.”
Both HCP and Brookdale made a power play last year when the two companies entered into a $1.2 billion joint venture to own and operate 14 entry-fee continuing care retirement communities (CCRCs).
Since then, they’ve furthered their relationship, most recently in mid-March when they entered into a definitive agreement to acquire 35 private-pay senior living communities from Chartwell Retirement Residences for $849 million—representing the Canadian-based company’s entire U.S. portfolio.
Written by Tim Mullaney