How many activists does it take to find a deal for Brookdale Senior Living Inc.? Several, apparently, but Land & Buildings Investment Management may have the best shot of the bunch.
Brookdale is reportedly in talks with suitors including Blackstone Group after Land & Buildings urged the company to sell its owned real estate. This should sound familiar. Another activist, Sandell Asset Management Corp., pushed Brookdale to spin off its properties into a real estate investment trust in 2015. A Sandell-backed candidate got a board seat and the company conducted a strategic review, but neither yielded any action on the real estate. The fund later sold its position, which looks smart in retrospect considering this is what Brookdale's stock has done :
With the shares touching their lowest point since 2009 in December, it was as good a time as any for an activist investor to give it another go. Brookdale shares have climbed 20 percent since Land & Buildings disclosed its stake later that month, including a 15 percent gain on Tuesday after the sale reports.
As for Sandell's earlier spinoff proposal, it's now a moot point after the IRS closed a loophole that had allowed companies including Olive Garden operator Darden Restaurants Inc. to move their real estate into an entity with a much lower tax burden. Continuing to "focus on pursuing our long-term growth strategy," as CEO Andy Smith put it when Brookdale concluded its strategic review in February, hasn't worked out so well, either.
Brookdale's troubles seemed to start when it acquired Emeritus Corp. for $1.4 billion in 2014. Emeritus had underinvested in its facilities, which couldn't command the same type of rates as legacy Brookdale spaces. It took a lot of time and heavy spending ($100 million annually for three years) to get them up to snuff. While it was distracted with these integration challenges, a surge of new competition -- particularly in the assisted-living and memory-care businesses that Emeritus specialized in -- was attacking its market share, hurting results.
That leaves a sale -- whether of the real estate assets or Brookdale as a whole -- as the quickest and most straightforward way of creating value. To that end, the steep tumble in Brookdale shares works in Land & Buildings' favor. The activist investor, led by Jonathan Litt, says the company's net asset value is at least $25 a share. Analysts have valued the sum of Brookdale's parts at closer to $21, on average. That's still a more than 60 percent premium to the unaffected stock price, but it's a far cry from the $49 that Sandell had targeted not all that long ago. Glenview Capital Management pegged Brookdale's upside value at a whopping $56 to $65 back in May 2015. Dare to dream.
A $25 bid equates to an equity value of about $4.7 billion. That's not small, particularly when you add on Brookdale's $6.2 billion in debt and lease obligations, but it's certainly a lot more digestible than what might have been. Alternatively, Litt's firm says Brookdale's real estate alone is worth about $21 a share.
Perhaps that cheaper price will make buyers more willing to negotiate with and potentially pay fees to the landlords of properties that Brookdale rents, such as Ventas Inc. and Welltower Inc. Those health-care REITS are entitled to an opportunity to protect their interests should their properties pass into the hands of a new tenant in the event of a full-on takeover. They may be able to exact that same right even if Brookdale only sold its real estate assets and tried to become a fee-based operator, as Land & Buildings has suggested. It might be easier for a private equity firm to negotiate those agreements than a fellow health-care REIT.
Baby boomers -- those born in the U.S. from 1946 to 1964 -- are aging and that should eventually support enough demand to soak up the supply glut in senior living. A buyout firm willing to do the work on the leasing arrangements with Brookdale's landlords and help the company overcome its current challenges would have that growth opportunity to look forward to.
Blackstone has already shown an interest in Brookdale. The private equity firm agreed in November to acquire a portfolio of 64 U.S. senior-living communities leased to Brookdale from HCP Inc. for $1.1 billion. The timing is right -- why stop there?
Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Sandell sold out of Brookdale in 2015 and then added back a much smaller position in 2016, according to data compiled by Bloomberg.
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