Here’s How the Brookdale Real Estate Saga Could Play Out

While a deal remains to be seen, it’s clear Brookdale Senior Living (NYSE: BKD) shareholders and investors are “stirring the pot” when it comes to the company’s massive real estate portfolio — and senior management isn’t ruling out any possibilities.

After months of lead shareholder Sandell Asset Management Corp. prodding Brookdale to spin off its owned real estate assets into a real estate investment trust (REIT), reports surfaced this week that Brookdale is considering selling its real estate to health care real estate giants HCP Inc. (NYSE: HCP) and Ventas Inc. (NYSE: VTR).

Any major news from the nation’s largest senior living provider is sure to shake up the senior housing industry, but there are a number of ways the saga could play out.


Whatever the case — whether the Tennessee-based owner and operator of senior housing transitions to an OpCo-PropCo, sells its real estate portfolio, sells the entire company or makes no moves at all — analysts say the decision comes down to one question.

“What is the most tax-efficient way of [unlocking value]?” says Frank Morgan, research analyst and a managing director with RBC Capital Markets. “At the end of the day, what really matters is that they’re just trying to unlock the value of the real estate.”

Doing so could play out in a number of ways. In fact, following recent meetings with Brookdale, investment banking firm Jefferies released a note detailing the four different scenarios that could unfold:


Scenario 1: Create REIT Spin-Off

In February, activist shareholder Sandell began prodding Brookdale to spin off its owned real estate portfolio.

A letter and white paper released by the New York-based firm requested the separation of Brookdale’s owned real estate portfolio into a REIT, and the distribution of this entity via a tax-free spin-off to shareholders. Doing so, the firm said, could unlock an “intrinsic value” of $49 per share for Brookdale.

Currently, the net value of Brookdale’s owned real estate assets — which comprise 32% of its overall portfolio — is approximately $4.9 billion, with an implied net asset value per share of $26.76, according to an analysis conducted in February by RBC Capital Markets. Current share price is around $38.74.

Unlocking this value through a REIT spin-off is one strategy that Brookdale CEO Andy Smith has previously acknowledged, stating that the management team “constantly assesses whether there’s a better way to organize our company around our real estate.”

In a research note released Wednesday, Jefferies echoed this sentiment, writing, “While such a process is complex and tedious — due to valuation uncertainties for the two parts and the requirement to gain consents from BKD’s REIT landlords respectively — this option is certainly under consideration by management given its tax advantages.”

However, HCP, Ventas and Health Care REIT, Inc. (NYSE: HCN) could block this strategy, given that they hold consent rights as the provider’s landlords, according to a recent Barclays report.

“If Brookdale were to create its own REIT, the Big 3 [health care REITs] would similarly have the right to block that,” the report states. “With the separation of the Operating Company there would be an obvious coverage issue and in many ways New Brookdale REIT would be a significant competitor to the big 3.”

Cue: the second scenario.

Scenario 2: Sell Certain Assets

The recent reports have indicated Brookdale is in talks with HCP and Ventas as potential buyers of its real estate assets.

While analysts declined to weigh in on the reasons Brookdale might choose these two REITs in particular, they did note that HCP and Ventas are the provider’s biggest landlords, leasing 255 properties and 167 properties, respectively, to Brookdale, according to the REITs’ fourth quarter investor filings.

Though Health Care REIT is also one of Brookdale’s landlords — leasing 146 properties to the provider, according to its fourth quarter tally — the REIT has not been mentioned in any reports and has not weighed in on its involvement in negotiations.

Regardless of the buyers involved, selling its owned real estate assets in a stock-for-stock transaction could provide Brookdale with a significant tax advantage, says RBC’s Morgan.

“In a traditional sale-leaseback deal, that would create an immediate tax liability, whereas doing it in a stock [transaction] would defer that immediate tax liability,” he says. “That’s what’s going on here.”

Certain actions in this scenario could also be blocked by REIT landlords, Barclays says, given their consent rights and depending on the structures of their lease agreements.

Previously, Brookdale management had suggested that the sale of either its real estate or operations was a possibility, according to the Jefferies note.

“There’s nothing here that’s not consistent at all with what the company has said in the past,” Morgan says.

Scenario 3: Sell Entire Company

An outright sale of the company is also a possibility, analysts say.

“Given the interest expressed by the large REITs and a post-acute provider [Kindred] in Emeritus last year, the … sale of the whole company remains a possibility for Brookdale, particularly if it generates the highest value and the least complex structure among Brookdale’s options,” the Jefferies report states.

And with roughly 1,150 properties under its belt, Brookdale’s total equity value is approximately $41.98 per share, according to RBC Capital Markets estimates.

Whether it’s sold in its entirety or sold off in pieces, some analysts suggest Brookdale may ultimately end up being separated into different entities.

“If a REIT ends up buying Brookdale as a whole, there’s a high likelihood that they’re going to spin out or sell the OpCo because they’re not in the business of running the operations,” says Brian Tanquilut, equity analyst at Jefferies and one of the authors of the recent report. “If it’s an operator type, like a post-acute provider, that buys Brookdale, then they’re going to need to do something with the real estate. No matter what happens, the company is going to end up getting split.”

Scenario 4: Make No Moves

Alas, Brookdale could decide to make no major moves at all, and continue on its five-year growth plan.

“BKD just completed the Emeritus acquisition (with integration on track) and accretion from the deal should be realized gradually over the next two to three years, with gains in pricing power and community-level margins emerging over that period,” Jefferies analysts write.

Brookdale management has also indicated that, “all else equal,” the company would prefer to own its real estate assets.

Barclays’ report notes that at a recent conference Mark Ohlendorf, Brookdale co-president and CFO, said, “Yes. All else equal, we would rather own it. The problem is, all else is never equal. Cost of capital is never equal. [The] tax situation can be different over time.”

But investors and shareholders aren’t letting up on the potential to unlock value in Brookdale’s real estate, Morgan says.

“The investors and those with an interest keep stirring the pot here — things are not quieting down,” he says.

Written by Emily Study

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