Over the last few days, there have been a bunch of rumors flying around about who — if anyone — is going to buy Brookdale.
By Steve Moran
I wasn’t going to write about the most recent Brookdale earnings report because it was more of the same old discouragement. With the possible exception being that the guidance offered by Brookdale is that “It isn’t really going to get any better”.
Then, over the last few days, there have been a bunch of rumors flying around, including these:
Ventas might buy all or part of Brookdale
Fortress might buy all or part of Brookdale
Blackstone is no longer all that interested in buying Brookdale
On Earnings Performance . . . One Sentence
I continue to believe this is not a sales problem but rather an operational, culture problem likely caused by impossible expectations and administrative burden . . . a problem that is very fixable.
Who Is Going to Buy Brookdale?
The bottom line is likely no one!
In some sense there are really two Brookdale’s: the one we all talk about has poor occupancy and is struggling with competition, while the second Brookdale is a group of maybe a third or half of the portfolio that is performing very well.
A buyer would love to have the second portfolio, yet would hate to have the first portfolio. The problem is that if Brookdale were to sell the good portfolio to someone, the bad portfolio would soon be in big trouble. This could possibly lead to bankruptcy or having the carcass fall into the hands of the creditor or REITs that own the underlying real estate.
Big is Bad, Bigger is Better . . . HUH?
The suggestion that someone like Fortress might purchase Brookdale leaves me baffled. There is a sense that a big part of the Brookdale problem is that the organization is already too large. So adding Brookdale to the Fortress family — specifically to the Holiday Retirement family — which would make it even bigger, leaves me scratching my head.
From the time the Emeritus merger was first announced the proposition has always been that being bigger will make their communities more cost efficient and market dominating. Unfortunately, that has never materialized.
Maybe that was the impossible dream. Maybe Brookdale just didn’t execute well.
Nothing Will Change
At the end of the day I think nothing will really change. The balancing act between the good portfolio and the bad portfolio is such that they can continue to trundle along in more or less the same way for the foreseeable future. If I had to bet money on where Brookdale will be a year from now, this would be the spot I would wager on.
On the other hand, it seems that something has to give. I can envision two scenarios.
1) Prune the Bushes: The conventional outcome – portfolio pruning – seems most likely. I find myself wondering if Brookdale might take their weakest assets and just hand them back to the REITs or debt holders. It would cause horrible disruptions for residents and team members, but the remaining company could be a serious competitor and investment returns (shareholder value) could improve.
The threat of course is that it would likely violate covenants on all the other properties and put the control of those properties by Brookdale at risk. But I am betting this would be so disruptive that Brookdale could get away with it.
Brookdale grew by expedient acquisitions. Pruning the portfolio would be selective de-acquisitioning. It would likely improve returns; however, opportunity would fall victim to short term thinking.
2) Reinvent Aging: The less likely outcome would involve entrepreneurial vision. An entity with imagination and deep pockets could use the Brookdale portfolio to reinvent senior living as we know it. Brookdale is not only a real estate entity (repurposing senior housing real estate to improve returns is fraught with challenges). Brookdale is also an operating company. The operating entity involves financial potentialities (prospects who prepay while still earning to anticipate eldercare services later (an insurance capital accumulation play); service potentialities (use of technology to reduce paperwork, deliver services, and improve operating margins); and customer service potentialities (improving the experience of residents and their families to make congregate living as attractive as Age 55+ Adult Community living).
Of course, optimizing the real estate play would still be part of an entrepreneurial repositioning. More and more eldercare is gravitating toward center of town locations, etc. This reduces the commodity view of senior housing (the customer view that there’s not much difference from one entity to the next) and could enable a better return from the real estate portfolio. But the entrepreneurial vision would integrate the whole into a new concept to try to capture the popular imagination and to make Brookdale all that anyone could wish for in their senior years.
The Air Has Gone Out of the Balloon
What is clear though is that Brookdale has disappointed. A wise sage once told me, “Don’t fight the ticker; the stock market never lies.” By that measure, Brookdale has fallen short from the promise of size. That measure, alone illustrates that there is value to be unlocked from within the Brookdale complex. New management with entrepreneurial imagination just might unlock it.
Otherwise, all that remains is to prune the portfolio. That will result in a smaller, more profitable Brookdale. But this will come at the cost of considerable dislocation and without the profit potential that a visionary might bring to the company and the industry.
. . . Maybe the smoking crack option will happen and someone new will take on all of the Brookdale challenges. The opportunity is there for someone with the imagination and the capital to tap the opportunity.