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Sandell gives Brookdale a cap rate justification for spin-off

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Sandell’s suggested spin-off plan for Brookdale

Sandell Asset Management has proposed that Brookdale Senior Living Inc. (BKD) spin off its real estate assets into an REIT. An REIT is a liquid investment. REITs have to distribute 90% of their earnings as dividends. For dividend yield, investors buy REITs.

Sandell believes that since it’s a low interest rate environment globally, more capital will be sent to US REITs.

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Sandell explains cap rate justification

As discussed in the previous article, the property company (or PropCo), or a subsidiary of Brookdale that will operate as the REIT, is expected to achieve capitalization rate (or cap rate) of 5.5%. Cap rate is a rate of return on real estate investments.

According to Sandell, private-pay independent living facilities have a cash cap rate of 5.5%. Sabra Health Care REIT (SBRA) purchased the Holiday portfolio at 5.5% cash cap rate.

Independent living, assisted living, and memory care units are 95% of Brookdale Senior Living’s total units. According to Sandell’s estimates, all these units trade at implied 5% to 5.5% cap rate.

Sandell looks at three healthcare REITs

Sandell considered three big healthcare REITs for studies. According to Sandell’s study, the estimated cap rate is 5.8% for HCP, Inc., 5.7% for Health Care REIT (HCN), and 5.5% for Ventas Inc. (VTR). Sandell further noted that the PropCo has the ability to consolidate fragmented senior living assets. It can further acquire new assets for diversification.

You can gain exposure to Brookdale Senior Living (BKD) by investing in the iShares Russell 1000 Growth ETF (IWF). BKD accounts for 0.06% of IWF.

In the next part of this series, we’ll find out why Sandell Asset Management wants Brookdale Senior Living to revamp its board.

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