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Brookdale Senior Living - Thoughts on Providence

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October 24, 2010 – Comments (0) | RELATED TICKERS: BKD , ESC , VTR

It was the industry with a gain of more than 10% in a single day, the industry with 13 publicly traded companies, the industry each of us has the potential to become apart of someday, the industry that seemed to ignite based on a single news event. It was the Long-Term Care Facilities Industry.

So why all the hubbub? It seems that Ventas, Inc. (NYSE: VTR) announced that is was going buy assisted living company Atria Senior Living Group, for $1.5 billion in cash and stock, as well as the assumption of $1.6 billion in debt.

At the end of the day companies that owned five clean bandages and six rolls of medical tape had become fair game for a takeover.

Yep, once again, investors that owned shares of stock in that industry or could spell Long-Term, or that simply knew somebody that lived next to a road that lead to a road that lead to a long-term facility, were all gonna be on easy street.

The company in that industry with the largest daily gain, gaining almost 19% on the day, was Brookdale Senior Living, Inc. (NYSE: BKD), followed by Emeritus Corporation (NYSE: ESC) with a one day gain of slightly more than 13.5%.

While both of these companies are on our watch list, we decided that since Brookdale had won the day by virtue of having the largest gain, we would look under a few of their beds, just to see what was what. 

Basis 

Financial information presented in this report for Brookdale Senior Living, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 26, 2010. 

What They Do 

The company claims to be the largest operator of senior living communities in the United States based on total capacity as of December 31, 2009. Operating 565 communities in 35 states, the company has the ability to serve approximately 53,600 residents.

The company operates in four business segments: retirement centers, assisted living, continuing care retirement communities, and management services.

The company operates 80 retirement center communities with 14,867 units/beds, 430 assisted living communities with 22,954 units/beds, 36 continuing care retirement communities with 12,017 units/beds, and 19 communities with 3,788 units/beds where they provide management services for third parties.

The majority of the company's units/beds are located in campus settings or communities containing multiple services, including continuing care retirement communities, and as of December 31, 2009, the company's owned/leased communities were 88.9% occupied.

The company generates approximately 83.0% of its revenues from private pay customers, with 40.0% of revenues generated from owned communities, 59.7% from leased communities, and 0.3% from management fees from communities operated on behalf of third parties. 

Short-Term Investment 

The stock closed recently at $19.77 with resistance at $22.21, a 12% increase from a recent close, and support at $17.28, a 13% decline from a recent close.

The stock has been in an uptrend since the middle of September, and it appears to our untrained short-term eye, that the stock price will continue in that general direction, after a brief sell off.

Since the stock price was up over $3.00 on Friday for no definitive reason, a pullback to more modest levels is probably in the offing as investors realize that Friday’s rumors are now Monday’s news and dump the stock in search of fresher prey. 

Long-Term (5 Year Hold) Investment 

The company has several financial metrics that are simply worse than terrible. Their Current Ratio at 0.46, Quick Ratio at 0.22, and Cash Ratio at 0.10, makes us wonder if the company can stay in business.

Add to these abysmal numbers, the company’s debt at almost nine times EBITDA, and Return on Invested Capital at less than 5%, and we have to wonder why anyone other than an institutional investor, would think this company was a viable long-term investment.

The one metric we did find that renewed our hope for the company was its Free Cash Flow at $1.90 per share.

Other than that, we found nothing in the company’s financials that would be considered investment quality. 

Valuations 

Based on our review of the company’s latest annual financial information, our Reasonable Value Estimate for the stock assuming a 5-Year hold is $21, with a Buy Target of $13, a First Sell Target of $25, and a Close Target of $26.

The stock is currently trading at 22 times FY09 earnings, and 3 times Tangible Book Value. At current levels the price has an Enterprise Value of $41 per share, but when the debt is backed out the Equity Value drops to ($1.00) per share.

With EBITDA at 2.4% of sales, and Enterprise Value at $41 per share, the Merger and Acquisition return period works out to roughly 17 years, assuming EBITDA stays at current levels.

And given the uncertainty of the real estate market in general, along with learning that yes Elizabeth there really is such a thing as negative appreciation, waiting 17 years for an M&A opportunity to pay for itself, may not seem very attractive to a potential suitor.

Final Thoughts 

As we said, the idea was to look under a few beds to see if we could determine why the stock price for this particular company increased almost 19% in a single day.

To say that we were not impressed is an understatement. The company simply has too much debt, and at the moment, it takes about $0.46 out of every EBITDA dollar to pay the interest on that debt.

Where are investors going to be when interest rates start to increase, or the company simply cannot return to the hog trough for more money? Then what? Certainly investors cannot think that the value of the property will make them whole, can they?

The company may one day, be the greatest investment in the history of moth resistant wool, or eatable wallpaper paste, we have no idea.

But we do know, based on what we saw, investors would be better served sending their investment dollars to Reverend Ike instead of spending it on Brookdale stock.

At least that way divine providence would be on their side, which we believe is the only way an investment in this company is every going to pay off. 

Wax

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