Many of you may have seen Brookdale Senior Living’s proxy statement filed in response to activist shareholder Land & Buildings’ efforts to put former HCP CEO Jay Flaherty on the company’s Board of Directors, presumably to further its own demands to split Brookdale into an OpCo and PropCo in order to “maximize value for all Brookdale shareholders.” All we can say is, well done to Brookdale and CEO Cindy Baier for standing up to this pressure.
We can’t say that we have always supported the decisions made by Brookdale executives and the Board, starting with its acquisition of Emeritus Corp. in 2014. Many pages in The SeniorCare Investor over the years have been dedicated to this topic. We are also unconvinced that any senior living company approaching the size of Brookdale’s can thrive in this industry, particularly with the scourge of staff turnover that affects most in senior living but especially Brookdale (we’ve heard) in the last few years.
However, at the same time we have always rooted for Brookdale to find surer financial and operational footing. Their future success will help the industry as a whole, especially given its size. And this solution to maximizing shareholder value proposed by Land & Buildings just does not add up to us. L&B hired Green Street Advisors to value Brookdale and its real estate assets, and to provide an opinion as to the feasibility of the PropCo/OpCo split of the company.
Preliminarily, Green Street determined that Brookdale’s net asset value was substantially higher than the current share price (no surprise there), but we suspect the cap rates used are on the low side, even though Green Street has often taken a conservative approach to the industry in the past, and some of their assumptions were on the rosy side. Brookdale’s share price fell even further from when this study took place, which helps to strengthen the argument for selling all the real estate assets into a newly formed REIT.
That may benefit shareholders in the near-term. But Brookdale is looking to the long-term, and a PropCo/OpCo split would handcuff the new operating company, pressuring it to not only turn around the performance of its properties (which will take time and capital), but also force it to make lease payments. If something goes wrong and lease payments aren’t paid in full, that would be bad for the REIT too.
Brookdale has instead taken a (we think) more prudent approach, strengthening its capital structure and doing its best to weather the storm of low occupancy and higher labor costs in the sector. We hear discounting is still a problem but may be a necessary evil for the time being to fill units. Its second quarter 2019 earnings saw some positive results, with improving move-in, revenue and retention figures. And the company nominated two individuals from outside the industry to join the Board, Victoria Freed, SVP of Sales at Royal Caribbean International, and Guy Sansone, Managing Director and Chairman of the Healthcare Industry Group, Alvarez & Marsal. “Business as usual” won’t cut it in senior living to raise the penetration rate, attract dedicated and skilled labor, and further integrate senior living into the wider continuum of care, so looking outside the industry can’t hurt.
Jonathan Litt is no longer seeking a spot on the Board, but Mr. Flaherty (with the backing of L&B) is. Brookdale and the Board have countered with their own nominations. Let the chips fall where they may.