The largest senior living provider in the nation made a sound move in offloading 44 underperforming assets in 12 states this week, and it’s one that’s likely to be repeated. That’s because Brookdale Senior Living (NYSE: BKD) still has a ways to go in right-sizing its massive portfolio, analysts said following this week’s portfolio sale.
When Brentwood, Tennessee-based Brookdale acquired competitor Emeritus Corp. in a massive transaction in 2014, it created a behemoth with more than 1,100 properties in 46 states. As part of the complex and oftentimes rocky integration of the two companies—Brookdale’s share price has slid since the merger, as it has encountered occupancy problems and other issues—leaders have faced the task of culling assets that would be more of a drag than a benefit to the combined company.
Honing in on the right size
In total, about 10% of properties owned by Brookdale could be classified as “non-core” and good candidates for disposition, in the view of analysts at St. Louis-based brokerage, investment banking, and advisory services firm Stifel.
In combination with previous dispositions, the portfolio sale announced this week brings Brookdale about two-thirds of the way toward that 10% marker, Stifel stated in a note issued Thursday.
Brookdale intends to use proceeds of the $252.5 million transaction to repay debt, but considering the overall scale of the company, even a sale of this magnitude likely will not materially move the needle on leverage, Stifel stated. Still, the disposition is a step in the right direction. It will only help get the company to the leverage goal announced in May by executives, of bringing adjusted net debt to EBITDAR down from 6.8x to 6.5x by the end of this year, and to the 6.0x-6.3x range by 2018. And getting less desirable assets off the company’s books will reduce the need for capital expenditures and help with leadership’s focus.
“It really demonstrates management’s commitment to delevering and hopefully focusing on the core portfolio,” Stifel analyst Chad Vanacore told Senior Housing News. “From that subjective view, it’s a positive.”
Specifically, the portfolio’s occupancy of 79% was below Brookdale’s average of 85.6%, and average monthly revenue per unit of about $3,000 was below the average of $4,493 for Brookdale’s assisted living units in the first quarter of this year. The portfolio fetched a price-per-unit of $103,000, which was below industry-standard $189,000 for assisted living.
Completing the task
On the flip side for Brookdale, the transaction could be slightly dilutive to adjusted CFFO for calendar year 2017, in the estimation of equity analysts at global investment banking firm Jefferies.
Still, the transaction is indeed a smart strategic move for Brookdale, Jefferies analyst Brian Tanquilut stated in a note issued Thursday. By getting rid of communities dragging down the company’s numbers, occupancy should increase by about 20 basis points, while monthly rates should go up 40 basis points, according to Jefferies’ estimates. The deal also has free cash flow benefits, analysts pointed out, as these properties will no longer pose a CapEx drain.
Agreeing that Brookdale still has more work to do in divesting assets, there are a few factors the company likely is weighing in deciding what to offload in the next 12 to 18 months, according to Jefferies.
“…We believe BKD continues to evaluate incremental portfolio sales based on key factors such as a facility’s CapEx requirements, occupancy outlook, and the competitive dynamics of specific markets, including BKD’s density in that geography,” the Jefferies note stated.
While Brookdale released scant details about the latest sale—withholding information such as the buyer’s identity, as well as the names and locations of the 44 properties—investors still seemed encouraged by the deal. Brookdale shares were up 0.84% as of market close on Thursday.
Written by Tim Mullaney