Brookdale as Takeover Target: Where Are the Buyers?

September 10, 2015, Kourtney Liepelt, Senior Housing News - Goldman Sachs naming Brookdale Senior Living (NYSE: BKD) as one of six top acquisition targets in the health care sector earlier this week has refueled conversation about the future of the major senior living provider. But the Goldman report left one big question unanswered—who might the buyer be?

No potential buyers stand out from the pack of senior housing providers, particularly given that Brookdale is by far the largest in the United States, Daniel Bernstein, a Stifel analyst who covers Brookdale, tells SHN. Having acquired rival Emeritus Senior Living Corp. in a blockbuster deal last year and boasting a resident capacity that more than doubles No. 2 Holiday Retirement’s, Brookdale has solidified its position on top.

Even the nation’s largest health care real estate investment trusts (REITs) aren’t currently in an ideal position for such an acquisition, Bernstein says, as both debt and equity costs are under pressure.

"If you look at the health care REITs, their cost of capital and rising spread cost over Treasuries has probably risen somewhere between 50 and 75 basis points in the last few months, certainly in the last three weeks in the market," Bernstein says. "That could hinder health care REITs’ ability to be a suitor for a company like Brookdale, unless the REITs wanted to increase their leverage, which we don’t think they want to do right now."

Brookdale was the lone senior housing provider named by Goldman analysts in their report. All companies listed have at least a “medium” probability of being involved in an M&A transaction, according to the report, meaning analysts see at least a 15% to 30% chance of such a transaction occurring. A Goldman spokeperson told SHN there would be no further comment forthcoming on the analysis.

If a REIT were to spearhead a Brookdale transaction, there are several ways it could play out, Bernstein says. Possibilities include a RIDEA joint venture structure, similar to that undertaken by Brookdale itself and HCP, Inc. (NYSE: HCP), or a sale and leaseback setup, which Health Care REIT (NYSE: HCN) completed with the $2.4 billion acquisitionof privately owned Genesis Healthcare in 2011.

Meanwhile, large-cap REITs have the capability of buying entire companies and selling off operations, as well, he says, as Ventas (NYSE: VTR) did recently with hospital operator Ardent Health Services.

One of the top candidates for an operator position in such a Brookdale deal appears to be post-acute giant Kindred Healthcare (NYSE: KND). The large-cap REITs and Kindred were rumored to be interested in acquiring Emeritus prior to its acquisition by Brookdale. Kindred has been pursuing a strategy of diversifying its services across the care continuum, shedding skilled nursing assets while increasing its inpatient rehabilitation facilities and—largely through its $1.8 billion acquisition of Gentiva last year—growing its home health business.

Yet, Kindred may be gun-shy on big transactions at the moment. The company is tied up in integrating Gentiva and also sees a less favorable market.

“When I think about M&A, and I look across some of the recently announced deals, it’s a bit of a sellers’ market out there right now,” Kindred CEO and President Benjamin Breier said during the company’s second quarter earnings call. “I mean, the multiples are pretty frothy, and I think that we’re going to be pretty focused and disciplined on managing what we have, and let others pay 22 times or whatever they do.”

Brookdale spinning off its real estate into its own REIT remains a possibility, but Bernstein says that prospect has been tainted somewhat by a drop in health care REIT stock prices resulting from potential interest rate hikes and recent market turmoil.

"It’s certainly a potential option still, but it’s not one that may create a lot of value," he says.

Of course, Brookdale still stands to make no major moves at all and continue on its five-year growth plan, smoothing out bumps from integration challenges that led to significantly low occupancy rates.

“That’s their decision to make as to whether they believe that there’s value to unlock via a strategic transaction, or whether they believe they could unlock additional value through successful integration and merger of the Emeritus assets,” Bernstein says.

When it comes to the timing of any potential transaction, though, Bernstein says it’s not likely to happen any time soon.

"We’ve seen in the space that people have been looking at Brookdale as an M&A potential target for many years, as well as some of their peers that have been bought out," he says. "It always seems to me that it takes longer to consummate a strategic transaction than maybe investors would like."