As recently as two years ago, there were a lot of investors and analysts who were very positive on the prospects for Brookdale Senior Living. Rarely have so many people been so wrong. And these are smart people. Perhaps the most egregious analysis came from Glenview Capital Management just two years ago.
How wrong can wrong be? In August of 2015, they listed six reasonsthat would drive Brookdale’s growth. One was that new demand is exceeding supply across the industry. Whoops. A second reason was “private negotiated rates,” not being aware that what was negotiated was discounts. Whoops again. And the one that made us scratch our heads was, “Senior living facilities are considered to be more comfortable than nursing facilities.” Wow, who would have thought?
At the time (2015), Glenview derived a price target of $56 to $65 per share based on their earnings estimates for 2017. At the time, Brookdale was trading between $27 and $33 per share. Yesterday it closed at $9.55. Hmmm. Most of that value came from the supposed value of the real estate. Using a range of cap rates from 5.5% to 6.0%, Brookdale’s owned real estate was valued at a range between $37 and $42 per share. Why would Glenview use the most aggressive cap rate range at the time for a portfolio of assets that were average in quality? Apparently, they were not alone.
Nearly every analyst and hedge fund who followed Brookdale also did a sum of the parts analysis over the past few years, and most of them derived real estate value floors for the share price between $20 and $25 per share. And then the real estate floors went down to $15 to $20 per share as the share price plummeted through $20 and through $15 and now through $10 per share. The problem is that no one quite understood or realized that the census issues facing the industry were growing from 2015 through today, and the labor supply issue and cost was largely ignored until recently.
As far as those real estate values are concerned, cap rates have not deteriorated much at all to cause a decline in value like that, and while cash flow per unit has decreased, it is more the realization that perhaps no one really wants to buy the Brookdale real estate anymore, and certainly not at a 5.5% to 6% cap rate in today’s market. It hasn’t helped that other healthcare companies have not been performing too well, not to mention that hospital chain Tenet Healthcare has called off plans to sell itself. Perhaps investors fear that will be the news they hear on the next Brookdale earnings call. If that happens, we may breeze through $9.00. What a shame.
