Brookdale Senior Living (NYSE: BKD) has agreed to sell a majority stake in its home health, hospice and outpatient therapy service line.
The Brentwood, Tennessee-based operator on Wednesday announced it entered into a partnership to sell an 80% stake in Brookdale Health Care Services (BHS) to Nashville-based health system HCA Healthcare for $400 million. Brookdale is retaining a 20% stake in the business, which is valued at $500 million overall under the sale.
BHS operates 57 home health agencies and 22 hospice agencies in 26 states along with 84 outpatient therapy locations. Brookdale was the seventh-largest home health provider in the United States in 2020, according to recently released data from LexisNexis Risk Solutions.
The partnership between Brookdale and HCA also will include opportunities to improve health care service offerings within the senior living operator’s 726 communities in 43 states, and also result in new growth opportunities for BHS, according to Wednesday’s announcement.
“Today’s partnership with HCA Healthcare, a leading healthcare organization, will continue the high-quality services delivered to our residents and patients, strengthen our liquidity position and provide meaningful opportunities for growth through better integration of services across the entire care continuum,” Brookdale CEO Cindy Baier said in a press release about the sale.
Reached by Senior Housing News Wednesday, Brookdale Communications Manager Heather Hunter added that the agreement ensures continuity of care for the company’s residents and patients.
“Brookdale’s top priority is the health and well-being of those we serve,” Hunter said. “Part of this commitment is to offer many services in our communities with a keen focus on resident and patient needs.”
HCA emerged from 2020 in a stronger financial position than it had in the previous year, which provided it some financial flexibility for new transactions, according to Stephens Analyst Scott Fidel.
“In recent earnings calls, HCA has also signaled enthusiasm to deploy capital to acquire new capabilities in higher growth areas of [health care such as home health],” Fidel wrote in a Feb. 24 investor note.
The transaction is part of ongoing efforts at Brookdale to increase value for shareholders and bolster the company’s balance sheet amid the pandemic. Other moves have included a July, 2020 lease renegotiation with Ventas and the sale of 13 continuing care retirement communities (CCRCs) to Healthpeak Properties (NYSE: PEAK).
Such actions have been critical as Brookdale’s senior living occupancy has eroded and its expenses have risen during the pandemic. Its occupancy sat at 71.5% as of Dec. 31, 2020, and the company incurred $30.5 million of incremental direct costs related to Covid-19, including for the acquisition of needed equipment and supplies, and labor-related costs.
As of Q3 2020, the company estimated it had missed out on $161 million in revenue due to the pandemic, with an additional $95 million in costs to mitigate the Covid-19 pandemic since March.
Brookdale’s situation was buoyed by the lease agreements with its REIT partners and the fact that provider has no major debt maturities until 2022; but, the sale of the health services business emerged as a likely route toward shoring up liquidity and bolstering the company’s overall financial position. With demand for home-based services rising due to the pandemic, the home health and hospice M&A markets have been hot, with valuations hitting 29x in the first half of 2020.
Rumors of Brookdale’s potential health services sale were first reported in Dec. 2020. At that time, analysts noted that any deal would be complicated by the close ties between Brookdale’s senior living division and the home health, hospice and therapy division. The health services arm conducts a great deal of its business in Brookdale’s senior living communities.
That fact is reinforced by the company’s Q4 2020 earnings, which show that health services revenue declined mainly due to a 13.5% year-over-year drop in home health daily census, tied to the lower occupancy in Brookdale’s communities.
In announcing the deal with HCA, Brookdale emphasized that the company’s resident base will continue to be served by the health services division, which will be augmented by HCA’s other resources.
As for the $500 million valuation, that is roughly in line with numbers that Jefferies analysts floated in Dec. 2020. They put forward a sum-of-the-parts calculation that valued the home health and hospice business at about $453 million, representing a 20x multiple on 2021 adjusted EBITDA, with the outpatient therapy business valued at about $32 million, at an 18x multiple. These valuations assumed a discount to other publicly traded home health, hospice and therapy companies, due to Brookdale’s weaker growth profile.
The deal with HCA also appears to play into Brookdale’s larger strategic vision. In the past, Brookdale CEO Cindy Baier has spoken of the opportunity and need to better integrate senior living within the overall health care continuum, and said that the company is engaged in pilots with health systems.
“There’s a real opportunity to get upstream and increase [residents’] healthspan by giving them proper nutrition, proper purpose, exercise, all those things,” Baier said in Nov. 2019. “By partnering with payers, hospital systems, with other members of the health care ecosystem, we think we can actually improve penetration [rates].”
HCA operates more than 2,000 sites of care, including surgery centers, freestanding ERs, urgent care centers, diagnostic and imaging centers, walk-in clinics and physician clinics.
“Brookdale will join HCA Healthcare’s network of care through this venture,” the company noted in its announcement of the health services sale. “Expanding access to care and creating seamless transitions among types of care can help improve the overall quality and patient experience.”
Brookdale is scheduled to hold its fourth-quarter 2020 earnings call on Thursday morning.
Tim Mullaney contributed reporting to this article.