Brookdale Senior Living (BKD) is the largest provider of senior living facilities in the US. With an aging US population and an increasing life expectancy for the general population, few stocks are as well positioned for success over the next two decades as BKD. While the company does have some risks, most notably regulatory risks related to reimbursement rates as well as pressure from volatility in housing markets, it's hard to argue with the attractiveness of BKD's addressable market.
I view Brookdale as an attractive buy at today's level based on the firm's positive long term occupancy and sales opportunities. BKD is well capitalized and generating very solid cash flows which should enable the firm to keep expanding. As a result of the Recession, many senior living facilities firms are hobbled due to financial distress and/or poor balance sheets. Brookdale does not face these issues, and in fact the financial stresses of its competitors (which persist to this day due to the weak economic recovery), leave BKD with an opportunity to pick up numerous small competitors at rock-bottom prices.
Brookdale operates roughly 650 different communities across 36 states with a capacity of nearly 70,000 residents. The majority (~430) of these facilities are assisted living centers for nearly 22,000 residents (though the roughly 100 facilities that BKD manages on behalf of others are larger on average and serve roughly 18,000 residents). Brookdale also operates retirement community centers, rental continuing care retirement communities, and entry fee continuing care retirement communities (or CCRC's). The point is that while senior living preferences do change somewhat over time both individually and for society as a whole, BKD is well positioned across the space to meet whatever needs an individual has. This broad range of options is probably a contributing factor to the firms nearly 90% occupancy rate.
In addition to getting senior citizens in the door, Brookdale also needs to collect money from them for the housing services. In some cases this means that insurance (mainly long-term care insurance) or a government entitlement program (mainly Medicare) will pay, but these revenue streams are only a small part of Brookdale's overall revenue as about 80% of sales come from private pay sources. As a result, while BKD does face some reimbursement rate risk and the firm must take such negotiations seriously, for the most part, they are free to set their own prices based on market demand. While senior housing options in the future will inevitably expand, I think it's likely that the demand for such options and the operational hurdles in running a successful senior living center will enable Brookdale to raise their prices slowly but consistently for many years to come.
Retirement centers at Brookdale provide a significant personal touch to residents and are basically what one thinks of when one thinks of a nursing home; 24-hour emergency response care, meal service, housekeeping, recreational activities, etc. These facilities generate a little under 20% of revenue for BKD, and based on my casual observation from long-term care insurance expenditures, they are "going out of style" to some extent. The trend today is more towards independent living than traditional nursing home accommodations. Brookdale's assisted living facilities provide similar personal touch services and account for around 35% of revenues. The main difference here is that the facilities are designed to be a residential-type setting rather than an institutional environment, and they appeal to those who need specialized care for issues like Alzheimer's or dementia. Brookdale's CCRC's (~25% of revenues) are larger communities that appeal to a broader cross section of the population and are essentially designed to accommodate individuals for long-periods during old-age including as more acute assisted care is needed.
Unlike most real estate-based investments, BKD does not pay out a dividend. I believe this is mainly because the firm has significant growth opportunities in front of it and prefers to use its free cash to pursue those opportunities. In particular, the firm has been a very active acquirer of other properties including buying 12 communities in January 2013 for $161 million, 9 communities in February 2012 for $121 million, and a massive 19-state, 90 community acquisition in the form of Hudson Bay Retirement Living in late 2011. These acquisitions are just the most recent though, and the firm has been buying other communities essentially ever since it went public in late 2005. The company does have a fair amount of leverage (5.3X total debt/consensus 2014 EBITDA, but that's not unusual for a company like BKD which has a tremendous amount of real estate assets. For similar reasons, BKD also has had negative earnings for several years now despite throwing off significant amounts of free cash flow.
Despite the relatively low-risk pressures from insurance companies and various governments, I do think in the near-term that BKD's results could be hurt by Medicare rate cuts. However, on the whole, I still expect 4-5% revenue growth for 2014, and over the longer term, I think Brookdale will benefit from expanding its ancillary community services as well as additional bolt-on acquisitions (like its most recent $81 million acquisition of seven facilities from Chartwell in 3Q2013). With occupancy levels across its communities remaining strong (and even growing marginally in recently including a 1% bump from 3Q2012 to 3Q2013), I think BKD remains in good shape overall. There has been some concern among analysts over near-term margin pressure as the company invests in upgrading underperforming facilities (including a fair number of the acquired properties), but over time I expect these upgrades will more than pay for themselves. Consensus estimates seem to be for roughly 15-16% EBITDA margins in 2014 and I think that's probably reasonable. If Brookdale hits these numbers, there is no reason why the firm shouldn't trade for $35-$40 a share in the next year or so as the housing market continues to recover and any Medicare rate cuts get put in the rearview.
One cautionary note that I do see with Brookdale concerns its share ownership though. Currently hedge funds have an enormous stake in the firm holding about 15% of shares outstanding as well as several board seats. While in theory hedge funds are good for investors in that they keep management acting in shareholders (i.e. their own) best interests, in practice the interests of large shareholders (particularly short-term investors) and small ones (especially long-term shareholders) can often diverge. Hedge funds frequently urge firms to engage in share buybacks using borrowed money, or to spin off different parts of the company that provide important stabilizing effects during economically volatile periods. These kind of actions while helpful in the short-run, can be harmful over the long-term. Given that, I think it's worth watching the actions of Fortress, Wellington, GW Capital, and other major holders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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