Brookdale Senior Living Inc. (BKD, Financial), the $2.2 billion Tennessee-based long-term care facilities operator, reported revenue of $2.4 billion in the second quarter, a (-)4.7% decline compared to a year earlier, and a far wider loss of $172.6 million compared to $84.2 million in losses in the same period last year.
Overall expenses actually declined by (-)4% year over year to $2.3 billion. Meanwhile, overall interest expenses (including debt, capital/finance lease obligations, amortization and fair value derivatives changes) declined by (-)12.4% to $169.5 million leading to losses in the period.
Brookdale Senior Living also reiterated its full-year 2017 guidance for Adjusted EBITDA to be in the range of $670 million to $710 million (vs. $770.8 million for 2016) and Adjusted Free Cash Flow to be in the range of $110 million to $140 million (vs. $153.8 million for 2016).
"During the second quarter we continued to be challenged by a difficult macro-environment with a large number of new competitive openings across our markets. We are focused on defending our market position while putting the company in a better position for 2018. While our performance for the quarter was generally in line with the industry, we are pleased with the progress that we are making to improve our market positioning through our segmentation initiative, maximize our RevPAR through more sophisticated pricing tools and build the best workforce in the industry through improved training and development. We also continue to improve our financial position with increased liquidity and by executing on our plan to refinance our near-term debt maturities."Â – Andy Smith, Brookdale's president and CEO
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Valuations
Brookdale Senior Living has not generated any profits in the past 10 quarters including the last decade – leading to no trailing price-earnings (P/E) ratio. According to GuruFocus data, the company had a price-book (P/B) ratio of 1.2 times vs. the industry median of 2.5 times and a price-sales (P/S) ratio of 0.45 times vs. 1.7 times.
The company did not have a trailing dividend yield.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 0.47 times and 6.7 times.
Total returns
Brookdale generated (-)5.3% total losses for its shareholders so far this year compared to the Standard & Poor's 500 index’s 10.99% gains.
Brookdale Senior Living
Brookdale Senior Living was formed as a corporation in June 2005 for the purpose of combining two leading senior living operating companies, Brookdale Living Communities Inc. and Alterra Healthcare Corp. BLC and Alterra had been operating independently since 1986 and 1981.
As of December 2016, Brookdale was the largest operator of senior living communities in the U.S. based on total capacity, with 1,055 communities in 47 states and the ability to serve approximately 103,000 residents.
The company offers its residents access to a full continuum of services across the most attractive sectors of the senior living industry. Brookdale operates independent living, assisted living and dementia-care communities and continuing care retirement centers. Through its ancillary services programs, Brookdale also offers a range of outpatient therapy, home health and hospice services to residents of many of its communities and to seniors living outside of its communities.
As of December 2016, Brookdale owned or leased 902 communities (77,284 units) and provided management services with respect to 153 communities (26,090 units) for third parties or unconsolidated ventures in which the company has an ownership interest.
As of December 2016, Brookdale operated 129 retirement center communities (24,339 units), 851 assisted living communities (58,477 units) and 75 CCRCs (20,558 units). (1)
For the year ended Dec. 31, 2016, Brookdale generated approximately 82.1% of its resident fee revenues from private pay customers.
Further, 37.9% of Brookdale’s resident and management fee revenues were generated from owned communities, 49.1% from leased communities, 11.3% from its ancillary services business and 1.7% from management fees from communities the company operates on behalf of third parties or unconsolidated ventures.
Mergers and acquisitions
In July 2006, Brookdale acquired American Retirement Corp., another leading senior living provider that had been operating independently since 1978.
In September 2011, Brookdale completed the acquisition of Horizon Bay, the then-ninth largest operator of senior living communities in the U.S.
In July 2014, the company completed the merger between Seattle-based Emeritus Corp., Brookdale Senior Living Inc. and Broadway Merger Sub Corp. with Emeritus continuing as the surviving corporation and a wholly owned subsidiary of Brookdale. At the time of the merger, Emeritus was the second-largest operator of senior living communities in the U.S.
The senior living industry
The senior living industry has undergone dramatic growth in the last 20 years, marked by the emergence of the assisted living segment in the mid-1990s, and it remains highly fragmented and characterized by numerous local and regional operators.
Brookdale is one of a limited number of large operators that provide a broad range of community locations and service level offerings at varying price level.
Beginning in 2007, the industry was affected negatively by the downturn in the general economy, which resulted in a near halt in construction of new units. The industry experienced a slow recovery in occupancy and rate growth beginning in 2010 according to the National Investment Center for the Seniors Housing & Care Industry.
In more recent years, as the economy and senior living industry have improved, the industry has attracted increased investment resulting in increased development of new senior housing supply. According to NIC data, industry occupancy increased modestly through 2015, as the pace of absorption outpaced inventory growth slightly.
During the year ended Dec. 31, 2016, NIC data show that industry occupancy began to decrease as a result of new openings, and based on projections of NIC, industry occupancy is expected to be flat through 2017.
During 2016, Brookdale experienced an adverse change in the competitive environment for its consolidated senior housing portfolio, with significant new competition opening in a number of its markets.
The company has addressed such competition through its increased use of discounts and incentives (which has impacted rate growth in certain markets), additional local marketing efforts, additional associate retention efforts and, where appropriate, capital projects.
Brookdale expects this elevated rate of new openings to continue through most of fiscal 2017.
Brookdale believes that a number of trends will contribute to the continued growth of the senior living industry in coming years. The primary market for senior living services is individuals age 75 and older. According to U.S. Census data, that group is projected to be the fastest-growing age cohort over the next 20 years. As a result of scientific and medical breakthroughs over the past 30 years, seniors are living longer. Due to demographic trends, and continuing advances in science, nutrition and health care, the senior population will continue to grow, and the company expects the demand for senior living services to continue to increase in the future.
Brookdale believes the senior living industry has been and will continue to be impacted by several other trends from regulatory environment, Congress’ reimbursement policies on the Medicare program and future rule changes from the Centers for Medicare & Medicaid Services. These trends could impact Brookdale’s operations and certainly its cash flow.
Operating results
Resident and management fees
Resident fees for the six months ended June 30 decreased $164.7 million, or (-)7.8%, from the six months ended June 30, 2016. Management fees increased $3.4 million, or 9.6% year over year.
The decrease in resident fees was primarily due to disposition activity, through sales and lease terminations.
Reimbursed costs
Reimbursed costs incurred on behalf of managed communities increased $42.6 million, or 11.5%.
Weighted average occupancy
Weighted average occupancy at the 812 communities Brookdale owned or leased decreased 130 basis points.
The decrease in resident fees at the 812 communities Brookdale owned or leased during both full six-month periods was partially offset by a 2% increase in senior housing average monthly revenue per occupied unit (RevPOR) compared to the prior year six-month period.
Adjusted EBITDA
In the six months that ended June 2017, Brookdale’s adjusted EBITDA fell (-)6.7% year over year to $358.6 million brought by possible increased transaction and strategic project costs and lower overall revenue as mentioned earlier.
Adjusted Free Cash Flow
In the first half, adjusted free cash flow increased by 42% year over year to $103.4 million.
Sales and profits
In the past three years, Brookdale registered revenue growth average of 19.8% and continuous losses as mentioned earlier.
Cash, debt and book value
As of June, Brookdale had $151.5 million in cash and cash equivalents and $5.19 billion in debt including lease obligations resulting in a debt-equity ratio of 2.71 times compared to 2.67 times a year earlier. Overall equity declined by $477.5 million while debt fell $1.2 billion year over year.
Of Brookdale’s $8.19 billion assets 9.6%Â were identified as goodwill and intangibles while book value declined (-)20% year over year to $1.92 billion.
Cash flow
Despite higher losses in the period, Brookdale’s cash flow from operations increased by 12.4% year over year to $199.9 million in the first half brought by higher cash flow from its deferred income tax provision, facility lease termination loss, accounts receivables, prepaid expenses and other assets and deferred revenue.
Capital expenditures were $89.6 million leaving Brookdale with $110.3 million in free cash flow compared to (-)$12.2 million free cash outflow a year earlier. The company also raised $3.9 million in debt and from credit lines (net repayments).
The cash flow summary
In the past three years, Brookdale allocated $1.05 billion in capital expenditures, reduced its debt by $356 million net any issuances and $330 million in share issuances, performed a $10 million share buyback, and generated $149 million in free cash outflows.
Conclusion
Reviewing Brookdale’s recent first-half operations indicated overall slowdown. The company continuous to highlight that there is an increasing competition happening in its industry despite its own business expansion(s) leading to its status of becoming the largest operator of senior living communities in the country.
Brookdale also carried a highly leveraged balance sheet with minimal shareholder payouts in recent years.
Despite the company’s chronic losses year in and year out, analysts had an average estimate that Brookdale Senior Living would generate profits for its shareholders this fiscal year ending in December. Analysts have an average overweight recommendation on Brookdale with a target price of $17.25 per share vs. $11.78 at the time of writing.
Being susceptible to government whims in terms of caring for its elders, highly leveraged balance sheet, continuous losses as of record and minimal to missing shareholder payouts, Brookdale is a pass.
Notes
(1) Company filings
As of Dec. 31, 2016, Brookdale ancillary services platform included networks in 28 states with the ability to provide home health services to approximately 61.7% of its units, outpatient therapy to approximately 18.0% of its units and hospice services to approximately 18.3% of its units.
Disclosure: I do not have shares in any of the companies mentioned.
