Brookdale Senior Living (NYSE: BKD) now has two major investors calling for the company to sell its real estate assets.
Macquarie Investment Management, an affiliate of Sydney, Australia-based financial services firm Macquarie Group (ASX: MCQ) wrote an open letter to Brookdale shareholders on Friday, calling for them to pressure the U.S.’ largest senior housing provider to consider selling its owned assets. The letter comes on the heels of an earnings call earlier this week in which Brookdale President and CEO Cindy Baier discussed the company’s Q3 results and said its portfolio restructuring strategy was in the late innings.
Macquarie is one of Brookdale’s top 10 shareholders, and currently holds a 3.71% stake in the Brentwood, Tennessee-based company. That represents over 6.9 million shares, valued at $68.4 million. The firm believes, based on its own calculations, that Brookdale stock is trading at a 50% discount to the estimated value of its real estate, and that it should leverage the current strong credit markets and investor appetite for senior housing real estate to stabilize the company and unlock what it says is the “embedded value” of Brookdale’s real estate.
Brookdale stock closed Thursday trading at $8.87/share, a 77% drop from its high of $38.74/share in December 2015.
“With Brookdale trading at a fraction of its liquidation value, we are concerned that management has not identified the clear opportunity to aggressively sell real estate holdings in an effort to stabilize the business,” Macquarie told Senior Housing News in a statement.
Until recently, Brookdale was limited in its ability to sell off its brick-and-mortar holdings, in part because of lease restrictions such as “change of control” covenants. Now, as a result of lease re-structuring with its real estate investment trust landlords, Brookdale has flexibility.
“We believe the path to closing Brookdale’s ‘valuation gap’ is simple: Brookdale should use its new flexibility to sell its owned real estate or sell the entire company,” Macquarie’s open letter read.
Since Baier took over as CEO in February, after a strategic review process that gave rise to multiple rumors over the course of 2017 that Brookdale was close to being acquired and taken private, or perhaps would sell most or all of its owned real estate. Since Baier took the helm, the focus has been on improving operations and unlocking value through targeted real estate moves. Brookdale has been aggressive in pursuing dispositions and lease terminations, and pruned its portfolio to 961 properties at the end of Q3, according to supplemental information the company released with its earnings report.
In the past 12 months, Brookdale has disposed of 104 communities through sales and lease terminations, totaling 10,743 units, and is well on its way to cutting 20% from its overall portfolio by 2021. The company expects to generate net proceeds in excess of $250 million from these sales; $144 million is coming from its August sale of Brookdale Battery Park to Ventas.
Brookdale is turning its focus to improving value through operations, driving rates and occupancy, and improving the quality of its existing portfolio. Baier indicated during the earnings call the company would consider selling other assets on a case-by-case basis, to fund non-developmental capital expenditures in 2019. Speaking at the Stephens NY Investment Conference in New York on Wednesday, Baier said Brookdale has a $100 million cash flow opportunity it can realize by turning around operations.
In its statement to SHN, Macquarie noted that Brookdale’s Q3 earnings were in line to slightly below consensus, and that occupancy improved sequentially, and better than the industry as a whole, but move-ins were slightly worse than in Q2.
“We agree with Cindy Baier’s comments that operations are a key to a turnaround,” Macquarie said.
Macquarie joins Stamford, Connecticut-based Land & Buildings Investment Management in calling for Brookdale shareholders to pressure the company to sell its real estate holdings. In a statement to SHN, Brookdale reiterated it welcomes feedback from all shareholders but does not comment on individual interactions.
The statement continues:
“In a short period of time, Brookdale’s leadership team has made significant business and operational improvements at the Company to deliver long-term value to stockholders. We are executing our turnaround strategy to drive operational improvements and position Brookdale for long-term success, and we will continue to carefully evaluate options for increasing shareholder value.”
Written by Chuck Sudo