Faced with ongoing financial pressures exacerbated by Covid-19, Brookdale Senior Living (NYSE: BKD) reportedly is considering divesting its home health and hospice segments in order to shore up its liquidity.
The Brentwood, Tennessee-based senior living provider is in early discussions about a possible sale, and is being provided with sell-side advice from Bank of America, PEHub reports, citing four unnamed sources “familiar with the process.”
Some of the scenarios being discussed include finding a private equity buyer, a pure-play strategic buyer, or a combination of the two, according to PEHub.
Brookdale declined to comment to SHN for this story.
Brookdale is not only the largest senior living provider in the United States, but is the sixth-largest home health provider, according to 2019 rankings from LexisNexis.
A sale of Brookdale’s home health and hospice line would be complicated, as the segment derives business from the company’s senior housing and care communities. A buyer would need to strike a revenue agreement with Brookdale, to ensure that the buyer keeps its top client, PEHub noted. Home health and hospice accounts for 95% of Brookdale’s health care services business, and produced around $450 million in revenue last year off of $25 million in operating income.
Proceeds from a potential sale would be used in part to pay down existing debt, sources told PEHub. Brookdale reported $491 million in cash and cash equivalents on hand at the end of the third quarter of 2020, and has no major debt maturities until 2022. But the company estimates it lost out on nearly $161 million in revenue, as occupancy across its portfolio plummeted from 83% in March to 73% in November.
Additionally, Brookdale estimates it has spent $95 million to mitigate the pandemic since March. This has been somewhat mitigated by $106 million in federal and state grants, including $67.5 million in funding from the U.S. Dept. of Health and Human Services (HHS) under the second phase of the CARES Act Provider Relief Fund.
Brookdale’s executive team has expressed optimism that these pressures will eventually alleviate. CEO Cindy Baier pointed to an uptick in calls and digital inquiries, a slight increase in visit-to-move-in conversions, and a majority of its senior housing communities resuming move-ins. Q3 2020 move-ins improved 38%, on a sequential basis, and 95% of its communities were accepting move-ins as of Oct. 31.
Should Brookdale pursue a sale of its home health and hospice line, it would likely attract substantial interest and healthy valuations, even as the segment has underperformed in 2020, Jefferies Equity Analyst Brian Tanquilut and Equity Associate Jack Slevin wrote in a note to investors.
The home health business could command a valuation of around 20x, they suggested, citing marketplace trends.
Birmingham, Alabama-based Encompass Health, is also reportedly considering strategic options for its large home health and hospice business, in a move to take advantage of high valuations and unlock shareholder value.
While the sale of the health care business would provide valuable cash, the Jefferies analysts do not foresee such a transaction having much impact on share price.
“Our [sum of the parts] shows that [Brookdale’s valuation] reflects sale-level multiples for its healthcare assets & peak value for its senior housing segment,” Tanquilut and Slevin wrote.