Second Quarter Performance Better Than Expected
The earnings season is upon us, and while everyone probably puts too much emphasis on short-term results and trends, in this environment everyone is waiting for good news, or at least news that things are better than expected or maybe have not gotten any worse. In the case of Brookdale Senior Living (NYSE: BKD), investors breathed a big sigh of relief as the largest seniors housing operator was the first company to report second quarter earnings.
While we would like to report that occupancy increased by 50 basis points sequentially as well as over last year’s second quarter, the market and the economy are just not there yet and we don’t think investors were expecting that kind of performance. The good news was that occupancy declined by only 20 basis points from the first quarter of this year and only 40 basis points from the second quarter in 2008. The even better news was that occupancy at the end of June was 88.8%, compared with 88.6% at the end of March. Obviously, one quarter does not tell it all, but this is as close to indicating a market bottom as we have seen. The rest of the seniors housing companies will be reporting second results in the next two weeks, so we will see whether they also are beginning to turn things around or not.
Getting back to Brookdale, the second quarter results also beat just about everyone’s estimates as well, whether it was occupancy, cash flow from operations (a record level) or operating margin. Revenue per unit increased by 5.2%, compared with the year-ago quarter, to $3,990, which took quarterly revenues to $500.8 million, also a record. Part of what has helped increase cash flow has been a better control over expenses, which actually declined slightly on a sequential basis from the first quarter this year, even though they increased 3.3% from the year-ago quarter. The second quarter’s EBITDAR margin jumped by 250 basis points from a year ago, which is huge when considering the market we are in. What this should be telling investors is that management has been focusing on operations, driving organic revenues while keeping a lid on costs. When the economy turns the corner, even if slowly, the increases in Brookdale’s bottom line should be even more dramatic.
Regarding the balance sheet, with the common stock offering that was completed in the second quarter, the company was able to pay off its bank credit facility. In addition, it has no mortgage debt maturing prior to 2011 that can’t be extended, so it should be able to weather the brewing storm in the commercial mortgage market. Investors certainly liked what they saw with the second quarter, sending BKD’s shares up by 15% in the hours after the earnings release. If the other companies in the sector have similarly good news, we may see a nice rally with the group. Unfortunately, we don’t believe the good news will be spread evenly.