The SeniorCare Investor: Brookdale Express Rolls On--

 

Two Large Acquisitions

With its stock price hitting a new high in January, and up 13% so far this year, Brookdale Senior Living (NYSE: BKD) is on an acquisition spree that can only be described as aggressive.  With the company’s successful IPO last November and 57% run-up in price by year-end, and the commitment to pay a $0.25 quarterly dividend, we knew that growth would be crucial to meet its forecasts to investors and to generate sufficient cash flow to cover the dividend and other needs.  But we never expected so much activity in such a short period of time.  But then again, no one expected BKD’s shares to trade at their current levels so soon, and if management did not take advantage of their expensive currency now, they would be accused of missing an unusual opportunity.

After announcing the 41-facility deal for Southern Assisted Living in December, plus a few smaller ones reported on last month, Brookdale began 2006 with the news that it signed an agreement to buy all of the facilities operated by Tennessee-based The Wellington Group for $95 million, or just over $100,000 per unit.  Wellington owns 14 assisted living facilities and leases an additional four in Tennessee (11), Alabama (2), Florida (2) and one each in California, Georgia and Mississippi.  There are 944 units with a licensed bed capacity of 1,087.  The landlord for the leased facilities is Healthcare Realty Trust (NYSE: HR), and it will continue to own the properties.  The two founders of Wellington, Jerry Stout and Mark West, sold their skilled nursing facility business, Royal Care, in 2001.

Brookdale will fund the acquisition with approximately $62 million of new first mortgage debt and the remaining $33 million with cash.  These are relatively small facilities, with an average of 52 units each, and we assume are similar in style to the original Alterra assisted living facilities that are now in the Brookdale portfolio.  These are mostly new properties, with two built in 1997, two in 1998 and 10 in 1999 by Wellington, so they should be state-of-the-art facilities, and the overall occupancy is about 91%.  David Wood of Lattimore Black Morgan & Cain represented the seller, and the deal is expected to close in the first quarter.

The day after the Wellington announcement, Brookdale disclosed its agreement to purchase 18 facilities from American Senior Living L.P. (ASL) for $124 million, or just over $55,000 per unit/bed.  This portfolio is comprised of 18 independent living, assisted living and CCRC facilities containing a total of 2,239 units/beds.  Just seven are owned and 11 are leased, which accounts for the relatively low per-unit price, and they are located in Florida, Georgia,  Tennessee and Alabama, and one each in California, Delaware, Louisiana, Ohio, Virginia and Washington.  Nationwide Health Properties (NYSE: NHP) is the owner of 10 of the leased properties, while Newport Richey Capital owns the remaining leased facility.

Naples, Florida-based ASL was formed in 2000 by George Wagner and Alan Parrish of Liberty Health fame.  This transaction is expected to close in March, and Brookdale will use $68 million of mortgage debt and $56 million of its cash or acquisition lines to fund the acquisition.  No other financial details were available on either transaction.

Since Brookdale’s IPO, the company has purchased or has committed to purchase $533 million worth of seniors housing assets with 7,998 units/beds, using approximately $240 million of cash from existing cash balances or acquisition lines.  We hear that the company, to take advantage of its current share price, may be going to market soon with a follow-on common stock offering of as much as $400 million to replenish cash balances, pay down the acquisition lines and, of course, for future acquisitions.  Integrating all of these facilities will be the challenge moving forward, and it is a challenge not to be dismissed too lightly.