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Brookdale Senior Living in final phase of strategic transactions

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Brookdale seeks ways to create shareholder value

Sandell Asset Management recently suggested that Brookdale Senior Living Inc. (BKD) spin off its real estate business into an REIT. The companies discussed the spin-off in Brookdale’s recent fourth-quarter call and its full-year 2014 call.

Brookdale’s chief executive officer, Andy Smith, said that Brookdale went through a “very rigorous process” to determine the best way to create value to its shareholders. The company came up with the Emeritus (ESC) acquisition.

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Brookdale’s Emeritus acquisition

On July 31, 2014, Brookdale completed its $3 billion acquisition of Emeritus Senior Living (ESC). With this merger, Brookdale became the first national senior living solutions company. It now covers 80% of the US market.

Andy Smith, Brookdale’s chief executive officer, noted, “Our newly combined company will have incredible size and scale in our industry.  We will begin to leverage this scale to build a national Brookdale brand.”

Brookdale partners with HCP

In August 2014, Brookdale Senior Living closed two joint ventures (or JV) with HCP, Inc. (HCP). It created a $1.2 billion strategic JV, owning a portfolio of 14 entry-fee continuing care retirement communities (or CCRCs), or multicare facilities. CCRCs provide independent care as long as possible.

Brookdale also amended triple-net leases on 202 HCP-owned senior housing communities. Emeritus formerly operated those communities. Brookdale will help reduce rent expenses on 153 properties by $8.0 million in 2016 and $9.0 million thereafter.

The Emeritus and HCP transactions are expected to generate $0.50 of cash from facility operations (or CFFO) to share accretion in the third year of transaction.

Brookdale’s diversified operating model

With the Emeritus and HCP transactions, Brookdale now operates 111,135 units. It has a diversified operating model. It owns 32% of these units, leases 43%, manages 18% through JV, and manages the remaining 7%.

Brookdale completed three out of four phases of transition of its business related to the Emeritus and HCP transactions. It expects the fourth and final phase of integration to be completed by the summer of 2015. After the completion of the final phase, Brookdale expects to manage its business with uniformity across its entire system.

Brookdale Senior Living accounts for 0.06% of the iShares Russell 1000 Growth ETF (IWF). IWF also holds positions in other healthcare companies such as Celgene Corporation (CELG), Biogen Idec, Inc. (BIIB), and Merck & Co., Inc. (MRK).

In the next part of this series, we’ll discuss the industry dynamics of Brookdale Senior Living.

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