Private equity giant Apollo Global Management plans to invest further in senior living after acquiring a portfolio of 22 properties currently managed by Brookdale Senior Living (NYSE: BKD), a person with knowledge of the deal told Senior Housing News.
New York City-based Apollo is an alternative investment management firm that currently has about $247 billion worth of assets under management globally. It reportedly is acquiring the Brookdale portfolio from HCP Inc. (NYSE: HCP), a real estate investment trust (REIT) based in Irvine, California.
In June, HCP publicly announced that the portfolio is being acquired, but did not disclose the identity of the buyer. Bloomberg subsequently reported that Apollo is the acquiring party, citing an unnamed source. HCP confirmed that Apollo is the buyer in the company’s Q2 2018 earnings announcement.*
The two parties are indeed in the process of completing the deal, according to the source who spoke with SHN. The person—who requested anonymity because the matter is confidential—shared several other details, including:
—The portfolio consists mainly of independent living units, along with a smaller proportion of assisted living and memory care
—It is a geographically diversified portfolio, which Apollo hopes will serve as a platform for further investment in the private-pay senior living sector over the next two to three years
—Apollo plans to bring in a new operator or operators to replace Brookdale, and the firm has already identified a likely operator that is managed by principals who have experience in driving occupancy and net operating income
Private equity on the rise
HCP has been reducing its exposure to Brookdale through a series of transactions over the last several months. This is part of a portfolio diversification effort that HCP undertook after spinning out a large portfolio of HCR ManorCare-managed properties into a separate REIT in 2016. That spin-off left Brookdale as HCP’s largest single tenant.
Brentwood, Tennessee-based Brookdale—which is the largest senior housing operator in the nation—has been in the midst of its own turnaround efforts, after years of share-price erosion and operational challenges. Several other REITs have also been reducing their exposure to Brookdale of late.
But it’s not only Brookdale properties that the REITs have been offloading. Following years in which they acquired voraciously, including through large portfolio transactions, REITs became net sellers in 2016. This was due to a confluence of factors, including a rising interest rate environment that has compromised their cost of capital advantage, as well as the need to prune some assets following their period of major acquisitions.
Private equity has seized this opportunity to invest in senior living. However, PE firms have in some cases paid steeply, ponying up large sums to enter the sector and partner with quality operators, CBRE National Senior Housing Executive Vice President Lisa Widmeier told SHN in June 2016.
Indeed, senior housing M&A prices have risen as private equity firms have become more active buyers. Assisted living price-per-unit hit a record high of $221,250 last year, and the average purchase price for an independent living unit hit $230,100.
The valuations and expectations that private equity brings to deals are often not “realistic,” warned Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), during his company’s Q2 2018 earnings call last week.
“I don’t think, even if all things were equal, that you would see the REITs paying up the way some of these guys are paying up, and not just on assets that are leasing up, [but] around stabilized assets that, you look at them, and there is no reason to believe that that hockey-stick revenue improvement is ever going to occur,” he said.
The Brookdale portfolio reportedly consists of 2,781 units, putting the price-per-unit at about $154,000, well under the average price points of 2017.
Apollo is not a total stranger to the senior housing and care space. About 20 years ago, the firm acquired a number of skilled nursing facility (SNF) companies that subsequently went bankrupt. However, the private-pay senior living sector poses less risk than skilled nursing from a government reimbursement and regulation perspective, and despite rising acuity in independent living and assisted living, the health care needs of residents are less intensive than in SNFs.
Furthermore, Apollo has had a window into the senior housing industry through MidCap Financial. In 2013, Apollo acquired MidCap, which provides revolving and term debt facilities to middle-market health care companies, with senior living being one area of focus.
*Editor’s Note: This story has been corrected to reflect that HCP has named Apollo as the buyer. An earlier version stated that HCP had not publicly confirmed that information.
Written by Tim Mullaney