With Brookdale ‘In Teeth of the Storm,’ Takeout Chatter Continues

Following bleak fourth quarter earnings, executives at the largest senior living provider in the nation are predicting a gloomy 2017. A rumored takeout by a private equity buyer was the backdrop for the earnings, which likely increased pressure on Brookdale Senior Living (NYSE: BKD) to get a deal done.

Brookdale leaders on Tuesday cited a number of factors to explain why the end of 2016 was a bust, with the company’s net loss increasing more than 50% year-over-year, and they described how this year will be more about resetting and preparing for 2018.

Some of the challenges include heightened competition due to new supply, wage pressures and decreasing occupancy, executives shared during a call with analysts. In particular, the fourth quarter involved “another record of new openings” within 20 minutes of Brookdale properties, CEO Andy Smith said. New deliveries in 34 markets brought 54 same-product competitors into the fray, and new openings were up 15% year-over-year.

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Smith and other executives remained mostly mum on the potential sale of the whole company or its real estate, but said that options are being explored and some of the major stakeholders are receptive.

Pressure-Cooker for a Deal

In addition to immediate operational issues, there has been much chatter in the industry for the last month about a possible takeover by private equity company Blackstone Group or another buyer, but Smith was tight-lipped when confronted with questions.

“We are exploring all options that are on the table to increase shareholder value, and I think that we have to leave it at that,” he said during the earnings call.

Some Brookdale shareholders already are pushing for a deal to get done, and a few analysts believe that poor earnings results are ratcheting up the pressure on the company, which has struggled and seen its share price take a major hit after since its 2014 mega-acquisition of rival Emeritus Corp.

“If operational metrics continue to deteriorate, we see a greater likelihood of the board deciding to pursue rapid, non-operational methods to generate shareholder value,” Jefferies analyst Brian Tanquilut and his associates wrote in a note issued Monday.

Stifel analyst Chad Vanacore sounded a similar note.

“I’m certain that it probably did increase the urgency for the sale, but nothing’s a done deal yet,” Vanacore told Senior Housing News. “What I think they did is set themselves up for success in putting out earnings that they can hit, in a range that they can hit, despite an environment that’s getting more complicated on seniors housing.”

The Role of REITs

If Brookdale is to be taken wholly private or sell off its owned real estate, the transaction will need to be approved by the real estate investment trusts (REITs) that own the company’s leased properties. These players include the “big three” health care REITs HCP Inc. (NYSE: HCP), Ventas Inc. (NYSE: VTR), and Welltower (NYSE: HCN).

These players all are open to a transaction if it takes the right shape, Smith said Tuesday.

“We have a good relationship with our major lessors, all big health care REITs,” Smith said. “We are constantly assessing ways to modify our portfolio or contractual agreements for the good of both parties.”

Both Ventas and HCP were quiet on the topic during their recent earnings calls.

“In terms of their [Brookdale’s] strategic plans, we have no insights other than what we read in the newspaper,” HCP Executive Chairman Michael McKee said during the company’s earnings call on Monday. “And we are not talking to them about anything strategic. We’re talking about things that are operational.”

Still, Smith’s comments about REITs’ receptivity to getting a deal done could be a positive sign for the prospects of a transaction, Vanacore said. And the analysts generally agree that the REITs generally could look favorably on a private equity buyer.

“[Blackstone] would make sense as one of the buyers where the REITs would be most likely open to signing off on the consent, given the challenges Brookdale is facing operationally,” Tanquilut told Senior Housing News. “If you’re one of the REITs, having Blackstone as your tenant might be viewed as an incremental positive from an asset quality perspective. [If] they could turn the business around and do what private equity does, which is generally improve it, why wouldn’t [the REITs] want to sign off on getting Brookdale sold to private equity?”

Michael Knott, who covers the REITs as an analyst with Green Street Advisors, concurs that a private equity buyer is likelier than a REIT itself to have success in acquiring Brookdale or a significant proportion of its real estate. However, those hoping for a deal to get done quickly should think again, he said.

“In Brookdale’s case, there are so many assets and so many parties with a seat at the table that its complexity would likely blow the minds of a casual investor,” he said. “But it seems that Brookdale is motivated for a deal, and most participants would like to see the firm optimize its business model in privacy, outside the public market. A firm like Blackstone’s mantra is ‘buy it, fix it, sell it.’  Here’s a great opportunity to ‘fix it’ in all caps.”

While he did not increase the odds of a Brookdale takeout in light of the earnings, Knott believes there is still around a 1-in-3 chance—the same odds he gave when the Blackstone rumor first started circulating.

Occupancy and Labor Challenges

Brookdale’s share price initially began a slide during 2015 as the company struggled to integrate Emeritus. Now, there are issues plaguing the entire industry and hitting Brookdale hard.

Occupancy issues and labor challenges were the forefront of the issues brought up during the fourth quarter 2016 earnings call.

Occupancy during the fourth quarter of 2016 dropped 120 basis points year-over-year and is sitting at 86.3%. Additionally, Brookdale communities’ occupancy took a dive at the end of 2016 and into the new year as the flu hit many people in its communities, explained Smith.

Brookdale is bullish about long-term prospects in 2018 because even though new competition in the market will continue to affect its performance, data from the National Investment Center for Seniors Housing & Care (NIC) as well as Brookdale’s own tracking indicates that construction is slowing down in the industry, he added.

“We are very bullish about long-term prospects for the company including a more favorable environment as we go into 2018,” said Smith. “I think that will produce a rising occupancy level for Brookdale as we get out of the teeth of this competitive storm. I definitely think you could expect occupancy growth in a more accelerated way beginning in ’18.”

Labor challenges are also wrapped into Brookdale’s issues. Unemployment in the country is decreasing, but that is not necessarily good news for the company as it is resulting in wage pressures, Smith added.

“We are continuing to see states adjust minimum wage standards including 17 states that increased their minimum wages,” he said. “We are at the apex of the labor market in 2017.”

With these challenges in mind, Brookdale set expectations that appear attainable, said Vanacore.

“What I think they did is set themselves up for success in putting out earnings that they can hit, in a range that they can hit, despite an environment that’s getting more complicated on seniors housing,” he said.

The company’s full-year guidance for 2017 is at $670 million to $710 million in adjusted EBITDA. Its 2016 full-year guidance was for $818 million to $828 million in adjusted EBITDA, and it actually hit $825 million.

Investors may be taking a wait-and-see approach, given the continued prospect of a deal. Brookdale shares were down sharply in after-hours trading following the earnings release Monday, but were up 0.67% at the end of the trading day Tuesday.

Written by Alana Stramowski, with reporting by Tim Mullaney and Amy Baxter

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