Oh, how times have changed. And the mighty have fallen. Taking a look at the June issue of The SeniorCare Investor from 2006, what headline appears? “Brookdale Becomes King: Changing the Face of Seniors Housing.” Hindsight is 20/20, but there were already warning signs of Brookdale Senior Living’s bust as it was in the middle of a meteoric rise.
Debuting on the New York Stock Exchange in November 2005 at $19.00 per share, Brookdale went on an acquisition spree in the months afterwards, culminating in its May 2006 acquisition of American Retirement Corporation for $33.00 per share, or $1.2 billion plus assumed debt and leases. Also coming along with the deal was ARC’s CEO Bill Sheriff, who brought the company’s share price up from $1.00 per share in 2002.
[from 2006] “So why is Brookdale buying one of the largest seniors housing providers in the country? Our first reaction was to think, here we go again, the serial buyer is unleashed for yet another big deal. The market cynics provided the rationale that Brookdale wanted ACR’s cash flow to pay for its increased dividend. While undoubtedly Brookdale is buying cash flow (who wouldn’t?), there is a lot more to it and it may be a more strategic acquisition than first meets the eye.”
Brookdale was acquiring a portfolio that was of higher quality than most of its other communities which would enhance its attractiveness in the market. In addition, Brookdale was also acquiring the expertise of much of the ARC management team, much of whom signed contracts to stay on for a least a few years. That especially helped with the large CCRC business being acquired, a market that Brookdale had limited experience in. Finally, Brookdale also hoped to integrate ACR’s lucrative ancillary services with its larger portfolio. To make this major transaction, it certainly helped that Brookdale had the backing of a cash-rich, 65% controlling shareholder in the form of Fortress Investment Group, which provided Brookdale with a $1.3 billion equity commitment to complete the transaction. That backing combined with Brookdale’s massive growth meant that even without the ACR acquisition, the company’s market cap was larger than the other four publicly traded seniors housing companies at the time, combined. Its market cap even rivaled that of SNF giant, Manor Care.
“There are some issues with the transaction, however. The most important is assimilation, because not only do we assume that there are some lingering cultural issues between Alterra and Brookdale, but the culture at ACR is quite different as well. Throw into the mix the personality of Fortress, and you have a hodge-podge of corporate cultures to deal with. Let’s face it, Brookdale is run by finance people (Fortress), and while that is not necessarily bad, it is a different operating environment.”
That point proved especially prescient, culminating with Brookdale’s ill-fated acquisition of Emeritus in 2014. Did we know something when we said, “Dan Baty has got to be thinking that a $25 per share offer for Emeritus Assisted Living would sound pretty nice now.” Its massive size simply became untenable, cultures clashed, and the “operational efficiencies” and boosted “ancillary service revenues” never really panned out.
“The transaction is obviously big news, but perhaps the more important news is what happened to Brookdale’s share price after the announcement. Usually, the buyer’s stock price dips a bit on the news of a large deal using stock, but in this case Brookdale’s shares jumped by 14% the first day and 11% the next, and then hit a high of $39.90 per share.” Now, it is hovering above $6.00 per share. So, Brookdale is no longer the “King” of seniors housing. Maybe “Queen” with Cindy Baier on the throne now?