Brookdale Takeout Chatter Focuses on Valuation, Deal Structures

Many questions have been raised by the rumor that Brookdale Senior Living (NYSE: BKD) is negotiating with the Blackstone Group and other potential buyers over a sale of the company. Perhaps foremost among these questions: What is the value of Brookdale’s real estate, and what deal structures appear most likely?

The real estate piece is essential because a transaction, no matter what shape it takes, will be aiming to unlock the value of Brookdale’s owned properties, which has been hotly contested in a senior living saga that unfolded in recent weeks and months.

The company’s share price began collapsing following the mega-acquisition of Emeritus Corp. in 2014. Shares had dropped from about $40 in 2015 to $13 as of Tuesday morning, prior to a Wall Street Journal report on a potential takeover. That put Brookdale’s market cap at about $2.4 billion.

Throughout the slide in its shares, repeated calls came for the company to monetize its owned real estate; the company was by far the largest senior housing owner in the nation in 2016, with 945 properties, according to a ranking released in August by the American Seniors Housing Association (ASHA).

One of the most recent valuations for this real estate came from investment management company Land and Buildings, in a public letter that the activist investor sent to fellow Brookdale shareholders in December. The firm was pushing for Brookdale to sell the real estate and distribute the proceeds to shareholders.

It pegged BKD’s minimum net asset value (NAV) at $25 per share, with more than $21 per share attributed to the owned real estate. That equated to about $7.2 billion for the owned real estate, minus about $3 billion in liabilities, according to figures provided in the letter.

Since the Blackstone rumor began to spread, several analysts have crunched the numbers. None puts the real estate value quite as high as Land and Buildings, but they all do paint a picture of the significant value tied up in Brookdale’s real estate.

Valuable, But Not Premium

The Land and Buildings calculations assumed that Brookdale could command a 6.25% cap rate for its real estate. There is some evidence supporting this assumption—the letter cited three recent transactions in this range, including Blackstone’s $1.125 billion purchase of a Brookdale portfolio from real estate investment trust HCP Inc. (NYSE: HCP) in November.

However, most equity analysts have opted for higher cap rates in their calculations.

A 6.25% cap rate likely is too optimistic for several reasons, including a portfolio mix that makes it vulnerable to new supply, and the fact that it recently sold “dogs-and-cats” assets at nearly a 9% cap rate, Green Street Advisors wrote in a report following the takeout rumor.

“Whatever conclusion one reaches about the Brookdale portfolio, it is clear it is not a homogenous portfolio of strictly high-quality assets,” Green Street analysts Michael Knott and Andrew Suh wrote.

Using cap rates between 6.75% and and 7.25%, several sell-side analysts valued Brookdale’s owned real estate in the range of $14/share to $17/share in notes published since the Blackstone rumor began circulating. That equates to roughly $2 billion to $3 billion.

Total Takeout vs. Partial Sell-Off

While the owned real estate at this point makes up the lion’s share of Brookdale’s overall value, the remainder of the company—including its leased properties, ancillary services such as home health, and other component parts—would boost the overall NAV, which on average analysts put in the neighborhood of $21 per share.

The ultimate takeout price would have to account for multiple factors, including the arguably diminished worth of the company’s brand and financial liabilities on the one hand, and strong secular tailwinds created by an undeniable aging demographic among the positives. But even at the Land and Buildings’ NAV of $25 per share, a sale of the whole company appears “digestible,” especially considering Brookdale’s upside value had been put at $56 to $65 per share in May 2015, Bloomberg Gadfly columnist Brooke Sutherland wrote.

The analyst community appears to agree, with several saying that a wholesale acquisition of the company realistically could be in the cards. And a private equity player such as Blackstone might have a decent shot at a complete takeover compared with other possible buyers, due to the role of the real estate investment trusts (REITs).

The “Big Three” senior housing REITs would need to grant consent to a change in control of Brookdale, a major tenant for each of them. They’re likelier to consent to a private equity buyer than to, say, another REIT assuming more control of the company, several analysts noted.

In any case, the REITs will have a seat at the negotiating table and can be expected to extract some value in any deal, Stifel analyst Chad Vanacore told Senior Housing News.

Should Brookdale go private in its entirety, the impact to the senior housing industry at least in the short-term could be beneficial, Vanacore said. That’s because it would provide a useful and potentially positive data point, should the company command an attractive price.

“[A sale] would …  quantify what senior housing is worth even at the bottom of a cycle,” he said.

While a complete takeover could occur, Vanacore and other analysts believe that a likelier scenario is a partial sale of Brookdale’s owned assets.

“It’s a much lower bar and faster negotiation process and simpler valuation to transact in the owned real estate only, rather than whole company,” Vanacore said.

A sale of Brookdale’s owned assets and a restructuring of its leases into RIDEA relationships is one possibility, Wells Fargo analyst Ryan Halsted wrote in a note issued Thursday. Such a transaction might make sense from the standpoint of improving BKD’s rent coverage from its current 1.1x level, but getting all the REITs on board to change leases appears a tough ask.

More likely, in the estimation of Halsted and several other analysts, is for the REITs to go along with a sale of some portion of Brookdale’s owned properties.

“We believe a deal [of this type] could put a floor on the share price by tying the value closer to the NAV of its owned real estate,” Halsted wrote. “In addition, it addresses concerns about the commitment by management and the board to unlocking value not fully reflected in the stock while also helping reduce financial leverage and creating an opportunity to return value to shareholders through a stock buyback.”

The whiff of a deal in the works has been enough to bring the share price into closer alignment with the estimated real estate value, at least for the moment. After a dramatic jump of 15% on Tuesday, BKD shares continued to climb and were up about 4.3% to $16.10 as of Thursday afternoon.

Written by Tim Mullaney