How do you reduce the value of your company by 40% in 24 hours? Tell investors you are going to raise more capital after you told them in your third quarter earnings call that your liquidity was okay and you had no debt maturities until September 2024. That is what confronted investors this week.
Brookdale Senior Living announced, and then priced one day later, a $125 million capital raise that left people wondering. It consists of 2.5 million units, priced at $50 per unit, with each unit including equity and debt (more on that later), and the proceeds will be used for general corporate purposes, the ubiquitous catch-all from the legal team.
Our first guess was that investors pummeled the shares because of the dilution from the new equity. But it does not dilute their equity enough to warrant a 40% plunge. Trading volume was more than 10 times the average daily volume, so it obviously got investors’ knickers in a knot.
This is not where the largest senior living provider in the country wants to be on its road to recovery. Unless it makes it easier to accept an offer for the company, at a decent premium, when the price is now 40% lower. That is very cynical, yes, but so is raising just $125 million, with no explanation, when you just said you are fine from a liquidity perspective.
If that is not the reason, then maybe investors are upset because raising new capital today is an admission that the ill-thought-out plan for a sale of the company is not going to happen (thank you, Captain Obvious). If no sale is forthcoming, why continue to wait and keep their shares? They waited for Capital Senior Living to be sold, and look what that got them.
Third, is this offering telling investors that Brookdale really does need cash, even though interest rates are at a high and their share price is low? This was definitely not a good time to raise capital, unless you are really desperate. CEO Cindy Baier needs to be more transparent as to how this came about, and why, but we are not holding our breath.
Fourth, the fact that the timing of the repayment of the debt portion is over three years tells us their recovery is going to be slower than perhaps thought six months ago (here we go again, Captain Obvious). Let us explain.
Each $50 unit will have a three-year amortizing note with an initial principal amount of $8.8996 and an interest rate of 10.25% (ouch). Other than the first quarterly payment, which will be a little smaller, this note will be paid off in quarterly payments of $0.8750, which includes interest and a partial repayment of principal. By November 15, 2025, the debt will be fully paid off.
The equity is a bit more complicated. It is a pre-paid purchase contract that will settle on November 15, 2025 (just like the debt final payment). At that time, Brookdale will deliver to holders no less than 12.9341 shares (with an implied value of $3.178 per share, based on the $50 unit price, after deducting the debt), but no more than 15.1975 shares (with an implied value of $2.704 per share), if we are reading it correctly. This means that if the higher share count is used, and the market share price has increased to $5.00, then the investor has made out well. These
values are so low, and probably based on what happened to the share price (or what they thought would happen with the announcement), on the surface it looks like a good investment. But it just does not make sense.
Just over a year ago, Brookdale sold $230 million of convertible notes with a 2% coupon and a conversion price of $8.10 per share, which at the time was a 35% premium to the then existing share price (known as 2, up 35). Investors did not fare well with that one. Great deal for Brookdale at 2%, especially compared with the 10.25% interest rate for the debt in the current capital raise, but not so much for investors since the current value is way below the strike price of $8.10. At least they collected the 2% coupon. The maturity date is October 15, 2026, or one
year after the new unit structure matures.
So, over two days, 49.75 million shares have traded, and the price closed down 37% from pre-announcement price of $4.92. What’s next?
