Brookdale Reports Earnings And Stock Plunges

November 6, 2008

November 6, 2008
The third quarter earnings period is upon us, and it is getting ugly. Brookdale Senior Living was the first of the seniors housing companies to report (three skilled nursing companies reported last week), and while it was what we expected, investors took exception to the results, driving the stock price down 15.5% yesterday and another 36% so far today, setting a new low of just $5.92 per share. What we are confused about is why the heavier hammer the next day, as nothing changed over night, other than the overall market dropping more today.

So, what happened in the quarter? As expected, occupancy was up from the second quarter, and this was expected because they told everyone in August that it had already begun to turn around by July. The problem was that costs went up much more than expected, and we suspect that rent discounts added to the significant margin compression as well. On a sequential basis (from Q:2), cash from facility operations dropped by 39%, adjusted EBITDA declined by 15%, same store operating income fell by 5% and the same store operating margin plunged by 270 basis points. All of this happened even though occupancy was up 60 basis points to 89.6% from the second quarter. 

While Brookdale was somewhat cash flow positive, after paying for routine capital expenditures it doesn't look like the quarter's operating net cash flow was enough to cover the $25 million dividend. Management indicated that it is quite possible the dividend will be cut again or eliminated, but that is something that should have been done months ago. Investors may be worried about covenants and some upcoming debt maturities, and the short-sellers are whispering the "B" word, but we think that is nonsense. At a minimum, if the company needs to raise capital, it can always sell some of its 171 owned facilities, and there must be a few of those that are not meeting performance expectations anyway. And individual deals are getting done, even in this market. We have no idea how long the market will stay in the tank, and we don't know when the seniors housing sector will rally, but 89.6% occupancy just isn't that bad in a very bad market, and $5.92 a share shouldn't last too long.

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