Goldman Sachs: Brookdale a Top Acquisition Target

Goldman Sachs has listed Brookdale Senior Living (NYSE: BKD) as one of six companies deemed likely acquisition targets in the health care sector, in a report dated Monday.

Brookdale was the lone senior housing provider named by Goldman analysts in their report. All have at least a “medium” probability of being involved in an M&A transaction, according to the report. This means the analysts see at least a 15% to 30% chance of such a transaction transaction occurring. The report did not speculate on potential Brookdale buyers.

Brookdale does not comment on speculation, a spokesperson told SHN.

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Brookdale, which acquired rival Emeritus senior living in a blockbuster deal last year, is by far the largest senior housing provider in the United States. Its resident capacity of about 113,000 more than doubles the capacity of No. 2 Holiday Retirement.

Yet, the behemoth has experienced quite the bumpy road due to integration challenges, which CEO Andy Smith recently attributed in part to management staff turnover at the community level and ineffective marketing campaigns. The glitches in that integration have contributed to significantly low occupancy rates, which fell by 90 basis points to 86.5% in the second quarter of 2015. In the report, Goldman also attributes the dip in occupancy to the most recent flu season, which “drove higher mortality, hospitalization and facility quarantines across the industry.”

Also in the second quarter that ended June 30, Brookdale saw cash from facility operations drop to $0.60 per share, down from $0.63 per share reported in the first quarter.

“In our view, the recent pullback provides a very attractive entry point as we continue to forecast favorable long-term senior housing demand, and view short-term integration setbacks as transient,” the report states.

Still, the company may be finding firmer footing. Brookdale already has adjusted sales and marketing missteps, according to the Goldman report, and occupancy reached a positive inflection point in July, increasing by 20 basis points from June—the first monthly increase in nearly a year. Occupancy in August is also expected to increase by 10 to 20 basis points, according to the report, based on sales performance in July.

But analysts with Stifel believe Brookdale’s use of rate discounts to drive occupancy could be detrimental to 2016 rate growth, according to a report published Aug. 5 in which the firm downgraded the company’s rating to a hold. The discounts could mean an uptick in occupancy might not relieve constrained operating margins.

In addition, Brookdale has faced pressure from activist investors to spin off its owned real estate, a move other analysts see as increasingly probable.

In issuing the downgrade, Stifel analysts cited poor post merger performance and increasing capital liquidity in the private markets as reason that a strategic transaction looks more likely.

Other acquisition targets named in the Goldman report include: Anacor Pharmaceuticals Inc., Clovis Oncology Inc., Pacira Pharmaceuticals Inc., Sage Therapeutics Inc. and Evolent Health, Inc.

Written by Kourtney Liepelt

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