Home Value Investing Sandell White Paper: Brookdale (BKD) – Unlocking Value

Sandell White Paper: Brookdale (BKD) – Unlocking Value

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Brookdale Senior Living, Inc. (BKD): Unlocking Shareholder Value via Sandell Asset Management

H/T Finalternatives  

Executive Summary: The Sandell Plan

Believe Brookdale Senior Living Inc. (“BKD” or the “Company”) trades at a material discount to its intrinsic value with significant embedded real estate value

  • Owns 42% of its senior living units with abundant capital deployment opportunities, “many located in major in-fill markets with high barriers to entry” (1)
  • Strong underlying industry fundamentals with the combination of an aging US population and increased housing and financial asset wealth
  • Believe dated corporate governance impedes shareholder franchise, contributing to discount valuation

Step 1: Commit to releasing value of owned real estate amid strong market demand for senior living real estate assets through PropCo/OpCo structure

  • Believe significant valuation arbitrage exists between owned and operated assets with major Healthcare REITs (“HC REIT”) trading at premium valuations
  • Valuation of Brookdale Senior Living’s senior living assets driven by 80%+ private-pay and favorable local market supply/demand dynamics
  • Enviable capital deployment opportunities provide ample pipeline to grow net operating income (“NOI”) of owned real estate assets
  • Timing is paramount given lengthy process to obtain Internal Revenue Service (“IRS”) private letter ruling (“PLR”)
  • Commit to separating owned real estate portfolio into REIT and distribute it to shareholders via tax free spin-off – immediately file request for PLR from IRS

Step 2: Due to integration missteps, upgrade corporate governance structure, improving management accountability and shareholder franchise

  • Current corporate governance structure is a holdover from Fortress Investments Funds (“Fortress”) ownership with limited shareholder rights
  • With Fortress Board resignation, believe corporate governance structure and Board composition deficient in quality and independence
  • Five of eight Board members not truly independent, in our view, with ties to Brookdale Senior Living and predecessor companies, all with limited real estate or REIT expertise
  • Executive compensation has no direct relationship (absolute or relative) to share price performance, no options plan to reward for share price growth
  • Multiple actions required in face of integration missteps to revamp Board and improve management accountability

Brookdale Senior Living Overview

BKD is the premier operator/provider of private-pay, senior living solutions to the wealthier, growing 75+ age cohort in the US

  • Company fundamentals driven by need for independent and assisted living options as population ages and requires increased companionship and help
  • Given 80%+ private-pay, increasing economic wealth (e.g., pensions, 401k) and housing wealth directly drives BKD occupancy and rent growth
  • With the Emeritus Senior Living (ESC) Transaction closed, Brookdale Senior Livingsolidified its place as the #1 US operator of senior living facilities in terms of size and quality
  • Integration of ESC should improve occupancy, growth, national branding and reach of ancillary business including home health, therapy and hospice services
  • Furthermore the HCP JV/Restructuring cleaned up BKD’s financial and operational picture while bolstering its relationship with a top-tier HC REIT

Brookdale Senior Living: Simplified Unit Mix Through ESC Transaction and HCP JV/Restructuring

With the closing of the ESC Transaction and HCP JV/Restructuring, the mix of Brookdale Senior Living’s units significantly improved, reducing volatility and increasing profitability

  • Outright ownership of units increased from 19k to 35k with many of the added ESC units having profitable capital deployment opportunities
  • Underperforming units leased from HCP were restructured in partnerships to improve profitability and future outperformance
  • Entry-fee continuing care retirement community (CCRC) HCP JV simplified BKD’s financial and operating picture

Sandell Brookdale Senior Living

Brookdale Senior Living: National Footprint With Unparalleled Scale

National footprint brings significant advantages in operating, resource allocation and marketing that can be levered by successful integration of ESC

  • Scale enhances ability to quickly respond to supply/demand changes in local market as resources can be immediately deployed to counter competition
  • Ability to profitably add ancillary services on top of existing network differentiates offering, taking advantage of fixed cost asset base
  • Despite reduction in 2015 CFFO guidance, believe that integration issues will subside and cost and revenue synergy opportunity will be significant

Sandell Brookdale Senior Living

See full PDF below.

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