The Case For and Against a Brookdale Sale

Last week ended with the news that Brookdale reportedly is considering a sale of the company.

A Brookdale sale would radically change the senior living industry. But such a transaction would not be a shock, considering how many times in the past the Brentwood, Tennessee-based company has appeared ready to change hands.

And those past instances are instructive now, in considering the likelihood of a Brookdale sale, what type of buyers might be interested, and what the current rumors indicate about where the senior living giant stands today.

In this week’s exclusive, members-only SHN+ Update, I offer my analysis of the Brookdale sale rumors and reactions and offer takeaways, including:

• The case for and against a Brookdale sale
• The role of REITs in potential deals
• How a sale could validate the turnaround strategy of CEO Cindy Baier

The case for a sale

In terms of the case for a Brookdale sale, in many ways the company appears to be in a better position for such a transaction compared with past years when deals were rumored.

Brookdale has spent the last few years unwinding and modifying leases with major landlords, including Ventas (NYSE: VTR). Doing so has alleviated some barriers to a sale that existed in the past.

“Recent lease restructurings with the big three [REITs] have also modified certain change-of-control provisions, making it easier for Brookdale to strike a deal,” Stifel Analyst Tao Qiu observed in an investor note last week.

The company spent years pruning hundreds of communities from its portfolio, including many underperformers. Brookdale has also in recent years prioritized ownership of communities over leases. As of June 30, the company owned 364 of its 674 communities.

Then there is the HCA deal. At the beginning of 2021, Brookdale sold an 80% stake in its home health and hospice segment to Nashville-based health system HCA Healthcare. A leaner Brookdale in terms of services and communities with fewer strings attached in the form of leases would make for an easier acquisition target, should it happen.

Brookdale’s current debt profile also could help propel a sale. With $3.8 billion in debt outstanding, $3.6 billion is property-level mortgages with a weighted cost around 4%.

“The secured debt at relatively cheap rate is appealing to leveraged buyers,” Qiu wrote.

Of course, there’s the company’s share price to consider. Just one day before Bloomberg reported on the sale rumors, Brookdale’s stock hit a 52-week low of $3.88. So, the time might seem right to pursue transactions that would boost shareholder value.

The case against a sale

While Brookdale’s sliding share price might seem to indicate a company in trouble, I don’t think that’s the right read on the situation. Analysts generally are bullish on how Baier and her team have managed the company, and I think the decline in the share price is more a reflection of the fact that inflation and other headwinds have prolonged the occupancy and margin recovery from pandemic depths.

If this is the case, a sale of Brookdale would have to come in at a price that reflects the operational and financial turnaround work that already has been accomplished and the significant upside that can be realized in the future as market conditions stabilize and demographics shift — upside that current investors believe in and are willing to wait for.

“Based on our conversations with several of the large active investors in BKD, we think most have been long term holders and are on board with the long term growth potential of the company,” Qiu wrote. “With the stock trading below the cost basis, it is unlikely they would view a low-ball offer favorably.”

Brookdale’s owned real estate alone should set a floor, with Stifel estimating the value of these communities at $4.8 billion to $5.5 billion on a gross basis, or $4.60 to $8.60 per share on a net basis. As of today at noon Eastern, Brookdale was trading at $4.44 a share.

In 2018, the company as part of a strategic review considered a conditional indication of interest from a buyer offering $9 per share in cash, or $11 per share in cash if certain conditions were met, but that deal was not consummated.

Given the value of the real estate, a spinoff of the owned communities into an independent REIT, or the sale of the real estate to a REIT in an OpCo/PropCo split, have been floated in the past. But it’s hard to see either of these options coming to pass.

Baier in 2019 firmly rejected calls to create a REIT spinoff after a strategic review of the option. She cited several objections that I think would still stand, including that the creation of the REIT would leave a separate OpCo in a more tenuous financial position, and the new REIT might struggle to diversify its tenant base.

A REIT acquiring Brookdale’s real estate also has been floated in the past, with Ventas rumored to be a potential buyer. And Ventas does hold warrants to buy about 16 million shares at about $3 per share. But a big move from Ventas seems unlikely. From a real estate perspective, Brookdale’s “asset quality [is] ok but not great,” and “the OpCo represents an issue and necessitates a partner in a capital starved environment,” analysts with BMO Capital Markets wrote in an investor note.

Last year’s Holiday takeout, with Welltower acquiring 80+ properties and Atria acquiring the management company, is one template to consider. In that case, the real estate was seen as a highly desirable, homogenous platform that would provide access to the middle market. I don’t see a similar strategic play in Brookdale’s more diversified portfolio.

Welltower and Ventas also have been reducing their exposure to Brookdale in recent years, while Healthpeak exited senior living almost entirely. There was speculation last week that Healthpeak might be vying for Brookdale, which precipitated CEO Tom Herzog’s sudden departure and the elevation of Scott Brinker to lead the company — but Healthpeak vociferously denied this is the case, we heard from various sources.

If a REIT deal is off the table, Brookdale might conceivably find a strategic buyer, and there are some tantalizing possibilities. For instance, HCA might see the value in owning not just home health and hospice but the entire continuum, positioning Brookdale within a value-based framework. But the timing seems premature for such a move.

Baier has indicated that Brookdale is piloting initiatives meant to reduce hospitalizations and prove out senior living’s value proposition within population health models; at the very least, it seems that Brookdale and would want robust data from such efforts to inform a valuation.

Turnaround validation

I can remember having discussions in the Senior Housing News office in 2018 about whether Brookdale would pull off its turnaround and stick the landing.

At the time, the company had a much loftier hill to climb, and there were real questions about its future. And if you had told me then that a global pandemic would bring the world to a halt only a couple years later, I’m sure I would have been even more pessimistic about the future outcome.

But since then, I think Baier has put the operator on a path to occupancy and margin growth. She also ferried the company through its toughest operational period to date.

I’ve seen some arguments that Brookdale is struggling and that investors want a change in direction. I think that this was the case in the wake of the Emeritus merger, and Brookdale was negotiating from a weak position in the deals that were being floated in those pre-pandemic years.

But we should not overlook the fact that Brookdale shares were trading as high as $7.48 in April 2022, nearly back to the pre-pandemic mark of $7.99 from February 2020, despite occupancy and margin very much still in recovery mode. With analysts and existing investors feeling good about longer-term prospects, I think that if a sale occurs soon, Brookdale is coming from a much stronger position and the price would need to reflect this.

Should the company change hands at a favorable price, it would cap off a period of operational uncertainty for Brookdale, potentially remove the provider from the public markets — which have historically not been kind to senior living providers — and I think would validate the turnaround strategy Baier initiated when she became CEO.