After months of speculation surrounding who may or may not purchase Brookdale Senior Living (NYSE: BKD), the probability of a sale between now and year-end is greater than 50%, investment banking firm Jefferies predicted in a report Monday.
“We are upgrading BKD given our view that the stock’s recent pullback has significantly improved its risk-reward profile,” the report said. “Since our last note, BKD [management] has publicly announced a strategic review process, and contrary to investors’ fears fueled by media speculation, our recent conversations with BKD indicate that this review process is ongoing.”
Brentwood, Tennessee-based Brookdale is the largest senior living provider nationally, with more than 1,100 properties. However, the company has seen its share price erode drastically following its acquisition of rival Emeritus Corp. in 2014. With pressure mounting from shareholders, rumors have circulated this year that Brookdale as a whole or just its valuable owned real estate could be acquired.
What’s Changed Since 2016?
Many factors have played a role in the increase of Brookdale’s willingness to pursue a sale since February 2016, when the company revealed in its strategic review there were not significant changes in the works, according to the report.
There has been much frustration among shareholders and the company’s board due to its declining share price. The company has seen a decline of 20% in shares since February 8, 2016. Even more, Brookdale shares have declined 31% since October 1.
The company is also approaching multiple lease renewals, which gives it a potential leg up.
“[The] upcoming wave of lease renewal gives BKD the opening to gradually eliminate consent requirements from new lease arrangements, which make the asset more attractive to buyers with a long-term view,” the report said.
Another difference between this year and last comes in the form of increased challenges confronting the whole senior living sector. Struggles that the industry has been grappling with, such as flat to declining occupancy and oversupply, have been hitting Brookdale hard.
The company’s occupancy rate declined 80 basis points in 2016 and its operating income declined 3.3% year-over-year in the fourth quarter of 2016.
Stock Prices Should Rise
Brookdale’s stock was between $12 and $13 per share before the news broke of a potential sale. More recently, it has been hovering around $11-$12, after reports that potential suitors such as private equity firm Blackstone and real estate investment trust Ventas Inc. (NYSE: VTR) are not actively pursuing a transaction.
Serious talks of a sale are thought to be ongoing, with potential buyers different than those reported by the media so far, according to Jefferies analysts.
The company’s real estate could be worth as much as $13 per share, they estimated, which is slightly lower than where analysts predicted it to be early this year.
Brookdale’s home health business could also boost its overall share price and could be worth at least $2 per share. Regardless of what happens though, there is a $10 per share floor predicted, the report said.
In addition, there are multiple opportunities for the company to improve its cash flow in the next four years, even if they don’t make a sale, Jefferies analysts argued. BKD stock will gradually move higher, the report said.
“Bottomline, at $12, we figured there’s enough upside to the stock even if Brookdale doesn’t get sold,” analyst Brian Tanquilut told Senior Housing News.
As of market close Monday the company’s share price was $12.70.
Written by Alana Stramowski