The SeniorCare Investor: Disappointing Second Quarter--
Census, Medicare Cut May Slow Seniors M&A Market
Just when we think the market is gaining some momentum—the acquisition market, the financing market, the stock market and yes, valuations—we get hit with the perfect storm of the CMS announcement, the debt ceiling fiasco and a weakening economy. Did we mention Irene? The odd thing is that in many ways, business just goes on, with multi-billion dollar acquisitions (outside of seniors housing) coming as frequently as ever, and in the overall health care sector, 2011 will most likely end up having a record year in terms of dollar value of announced transactions. There are reasons for this, of course, just like there are reasons health care REITs so dominated the acquisition market in seniors housing and care for several quarters.
Although we would not characterize the first two quarters of 2011 as “giddy,” the environment certainly was buoyant, especially compared with the depressing 2008 to early 2010 period. Most everyone began thinking that the worst was behind us, and with interest rates being kept unnaturally low, the ability to buy, sell, refinance or recapitalize was the best it had been since the end of the last bull market and the beginning of the Great Recession. But beneath the surface, and never for public disclosure, there were some industry people who just did not feel the giddiness, who did not click their heels and think they were back in Kansas (or 2006). They still had concerns that we were not close to coming out of the census doldrums, primarily because their census was not increasing by much and it was still hard, and expensive, to get the new resident to move in, with or without discounts. While we all agree that assisted living is need-driven, we all know someone without a job (for two years) who will take mom in because it just makes economic sense today. Unfortunately, it may make economic sense tomorrow as well, and that is what is keeping seniors housing executives up at night.
The second quarter earnings season really began on June 1, when Brookdale Senior Living (NYSE: BKD) announced its acquisition of Horizon Bay Retirement Living and, almost as a footnote at the end of the release, disclosed that the company was “feeling the impact of declining consumer confidence and the continuing deterioration of the housing market” and that occupancy was likely to decrease sequentially from the first quarter of 2011 to the second quarter. Combined with the increase in G&A expense to deal with the recent acquisitions, the earnings forecast for the full year was reduced. We are not sure whether it was supposed to be one of those good news/bad news things, with the increased earnings potential of the Horizon Bay acquisition to balance the weak census and economic environment so investors would call it a draw, but BKD’s share price hit $25.88 on May 31 and it hasn’t seen that level since. In fact, it dropped by nearly 50% in the next 12 weeks, most of it caused by some additional factors.
When the company did report its second quarter earnings, the actual results were overshadowed a bit by the impact of the 11.1% Medicare reimbursement rate cut, which seemed to distract investors. At least investors were somewhat prepared for the 60 basis point drop in consolidated community occupancy (to 86.6%) from the second quarter of 2010 and the more mild 20 basis point decline from the first quarter. But back-to-back sequential declines in quarterly occupancy is not what management, or investors, had expected. The average second quarter 2011 occupancy rate is where occupancy was in the fourth quarter of 2009, and that has to be frustrating for management. The worst hit was Brookdale’s CCRC business, which saw a 90 basis point drop in occupancy from the first quarter, back down to third quarter 2010 levels. Even though year-over-year entrance fee sales had solid growth, management said that there were a number of entrance fee cancellations towards the end of the quarter, but we don’t know why. The good news is that there was a 30 basis point increase in company-wide occupancy in June followed by a 40 basis point pick-up in July, so average occupancy in July of 87.1% is now almost where it was in the first quarter. Small comfort, but an improvement nonetheless.
It was not all bad news. Brookdale’s average monthly revenue per unit increased by 4.6% from the second quarter of 2010 and now stands at $4,620 per month. The number of units served by the company’s home health care business increased by 16% year over year, while the growth rate of its in-house therapy business is slowing. This should change as the Horizon Bay units are brought on stream and should provide a nice jump-start to that very successful program. Although there are some holes in the Horizon Bay portfolio, we still think it represents a great opportunity for Brookdale and BKD has the management team to do it...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today