Rumors that private equity giant Blackstone Group is in talks to acquire Brookdale Senior Living (NYSE: BKD) circulated Tuesday afternoon. Shares of the nation’s largest senior living owner and operator surged, ending the trading day up nearly 15%.
The talks are at an early stage and involve other suitors in addition to Blackstone, according to unnamed sources cited by The Wall Street Journal, which first reported the news. The deal might involve a sale of Brookdale in its entirety or just its real estate, the WSJ reported.
Brookdale does not comment on market rumors or speculation, a company spokeswoman told Senior Housing News. Blackstone also declined to comment to SHN.
Blackstone is no stranger to senior housing. At one point, it owned 133 properties in a joint venture with Emeritus Corp. Real estate investment trust (REIT) HCP Inc. (NYSE: HCP) bought the portfolio for $1.73 billion in 2012, and Blackstone made 2.4 times its initial investment.
Blackstone and Brookdale also are not strangers to each other. The two companies forged a joint venture just two months ago.
That transaction involved a 64-property Brookdale portfolio sold by HCP to affiliates of Blackstone Real Estate Partners VIII and another investor group for $1.125 billion. Brookdale and Blackstone created a joint venture as part of the deal, in which Brookdale will own 15% of the equity in the properties and will continue to operate them.
“We are … extremely pleased to create a relationship with Blackstone, one of the country’s largest capital partners,” Brookdale President and CEO Andy Smith stated at the time.
Blackstone’s Growing Interest
Blackstone is not only one of the largest capital providers in the country, but by some rankings is the largest private equity firm worldwide. The New York-based company had $361 billion of assets under management as of Sept. 30, 2016; its real estate arm was managing $102 billion in assets.
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In addition to the Brookdale JV, there have been other signs that Blackstone’s interest in senior housing is on the upswing.
In August, the firm filed to create a $5 billion non-traded REIT to invest in income-oriented real estate, including senior living.
“Blackstone has been foreshadowing that they want to be more active in the senior housing space,” Green Street analyst Michael Knott told Senior Housing News on Tuesday. “I think they see opportunities on the horizon, once you get through this current period of supply challenges.”
It would take a company with Blackstone-like capabilities to buy Brookdale, which became the largest senior living company in the United States after acquiring rival Emeritus for $2.8 billion in 2014. Currently, Brookdale operates more than 1,100 communities nationwide. Its enterprise value as of September was about $8 billion, according to the WSJ. Its owned real estate has a net value of $4 billion, investor Land and Buildings Management calculated in December.
However, Brookdale’s market capitalization has taken a beating since the Emeritus acquisition, with shares tumbling from about $40 in 2015 to $13 on Tuesday morning. Going private through a Blackstone takeover would be one route for the company to stop the share price erosion and public investor scrutiny while making further attempts to right the ship.
“Given the immense challenges they’ve been facing from a self-inflicted wound standpoint and industry supply and wage growth, and given the tough time they’ve had with the share price, it stands to reason Brookdale would be more open to pursuing different sorts of transactions to try to boost shareholder value,” Knott said. “If Brookdale could optimize its business model in the private market, that might be the best all around solution assuming current shareholders get a fair deal.”
The Right Buyer?
Brookdale heralded its acquisition of Emeritus as a chance to create the first truly national senior living brand, but integrating the two companies quickly proved difficult.
In 2015, with occupancy falling and overall performance lackluster, the company’s share price started sliding and investors quickly called for dramatic action to be taken. A proposal that Brookdale sell or spin-off its owned real estate was pushed by activist investor Sandell Asset Management Corp. in February 2015.
Despite rumors that the company might indeed sell its real estate, Brookdale maintained ownership. Integration pains continued, and in September 2015, Goldman Sachs pegged Brookdale as one of the top takeover targets in the health care sector.
However, there appeared to be few likely buyers. Two of the possibilities—a large public REIT or another mega-operator—arguably are even less likely today.
One operator candidate, post-acute behemoth Kindred Healthcare (NYSE: KND), currently has its hands full exiting the skilled nursing industry.
Large-cap REITs were pursuing aggressive dispositions in 2016 to counter market headwinds, and the specter of rising interest rates might encourage more of the same this year.
Furthermore, all three of the major senior housing REITs are significant landlords for Brookdale on its leased properties, meaning that one of them might find it difficult to persuade its two competitors to grant necessary consents on an acquisition.
The ability of Blackstone to persuade the REITs to go along with a deal also is a major question, Knott said.
“I think the odds of success are better if the potential buyer is someone like a Blackstone rather than one of the REITs trying to get approval from one of the other REITs,” he said. “But it’s certainly no guarantee, and it’ll be complicated negotiations on multiple fronts.”
The CEO of one of those REITs, Chicago-based Ventas Inc. (NYSE: VTR), was asked about the Blackstone rumor during a presentation at the J.P. Morgan Healthcare Conference in San Francisco Tuesday.
She did not shed light on Ventas’ position, saying only, “There are from time to time various activists and stories, and we’ll have to see how it all plays out.”
While bright spots have appeared on occasion, Brookdale continued to struggle throughout 2016. Last year saw the departure of the company’s president and other senior executives, and about 100 workers at the regional level were laid off in December.
The personnel changes also ushered in some new faces, notably former Walmart executive Labeed Diab as COO. There were some familiar industry faces in the mix as well, with non-executive Brookdale Board Chairman Dan Decker stepping into the role of executive chairman. In addition to positions at a handful of public senior housing companies, Decker also has private equity experience, being owner and president of Coastwood Senior Housing Partners LLC. That firm joined with KKR and Beecken Petty O’Keefe & Company to acquire the operations of major national provider Sunrise Senior Living in 2013. The group sold its interest the next year.
But the leadership shuffles and other strategies did not lead to sustained improvement for Brookdale, and the company’s third-quarter 2016 performance threw cold water on hopes of a positive turning point. With integration efforts in the rear-view, another challenge is looming large, as an “unprecedented” amount of new competition is eating into the company’s occupancy and earnings.
Now, it appears to be a case of deja vu for Brookdale. In late December, another group of activist investors called for the company to sell its real estate, followed by the current chatter about an all-out takeover.
“This is not the first time this movie has been played,” Knott observed.
Should the movie have a different ending this time, with Blackstone taking Brookdale private in whole or in part, one question would be whether the vision of a large-scale publicly traded provider is simply not attainable.
“The [Brookdale] experience doesn’t suggest that it’s a no-brainer to pursue a very large national branded strategy,” Knott said. “In the right environment, with the right levers, it probably still could make sense. In this case, it’s not been a successful experiment.”
Written by Tim Mullaney