Thursday, December 22, 2005

Brookdale Senior Living: Ka-Choo!

Brookdale Senior Living, Inc. (BKD - $31.00) is the third largest operator of senior living facilities in the United States, based on total capacity with over 380 facilities in 32 states and the ability to serve over 30,000 residents. Housing alternatives for seniors include a broad spectrum of senior living service and care options, including independent living, assisted living, memory care and skilled nursing care. However, facilities are predominantly concentrated in the independent and assisted living portion of the senior housing market(s). As of June 30, 2005, facilities were on average 88.1% occupied.

Brookdale is a recent IPO. On November 22, the stock first started trading, and closed at $25.43 on the New York Stock Exchange, up 34 percent from its IPO price of $19 a share.

The Bulls behind Brookdale give lip-service to the demographic trends that the Company has going for it: The U.S. population is aging and living longer, providing demand for independent and assisted living communities; coupled with the decreasing ability of relatives to, or choice by relatives not to, provide care for the elderly in the home. And, according to the Company's prospectus, construction of new senior citizen-focused units has slowed since a surge in the late 1990s, reducing capacity.

Nonetheless, despite a 1.5% increase in occupancy rates and an increase of $68 in average monthly revenue per unit/bed for the six-month period ended June 30, 2005, Brookdale hasn't had an easy time translating these positive industry metrics into profits: The Company has incurred losses of approximately $13.2 million for the six months ended June 30, 2005, and approximately $21.9 million for the year-ended December 31, 2004, as its lease and facilities operating expenses [and debt-service expenses] outpaced revenue gains.

Management has outlined a growth strategy predicated on organic growth in its existing operations coupled with the strategic acquisitions of other senior living companies within its geographic footprint. Facilities located in California, Illinois, and Florida accounted for approximately 9%, 9%, and 13% of corporate revenue, respectively.

In the Company's S-1 Registration Filing, management believes that leveraging geographic acquisitions and centralizing its infrastructure will provide the Company with a significant cost advantage over local and regional operators of senior living facilities. Ergot, management expects to be able to achieve economies of scale with respect to the goods and services it purchases. Contrary to management's cheerleading attititude, the Company has a history of losses and one of its operating subsidiaries, Alterra Healthcare Corporation, emerged from Chapter 11 bankruptcy reorganization in December 2003.

Brookdale's profit strategy also contemplates improving operating efficiencies. As Alterra Healthcare [in its former life] could testify to: competition for or a shortage of skilled personnel [such as nurses] will likely increase staffing and labor costs, which would have an adverse effect on Brookdale's profitability.

Management might want to consider a plan to dispose of selected under-performing assets. For example, the Company operates 7 living centers in Pennsylvania with 541 aggregate beds/unit running at only 76.0% of capacity.

Finally, despite all this talk about growth through acquisitions, Brookdale is a company seriously in need of assisted living itself. At June 30, 2005, Brooksdale had approximately $639.6 million of outstanding indebtedness, and total debt-to-equity stood at 97 percent! And talking about liquidity concerns, the most recent quarterly numbers reflect a times-interest earned ratio of about 0.17. In other words, there is very little earned income available even to cover interest expenses. If Brookdale becomes unable to generate sufficient cash flow to cover required interest and long-term operating lease payments, this would result in defaults of its related debt or operating leases and cross-defaults under other debt or operating leases, which would adversely affect the Company's ability to continue as a going concern.

Anyone looking to invest in Brookdale might want to read the young-readers' "Because a Little Bug Went Ka-Choo."
One fine summer morning...
a little bug sneezed: Ka-Choo!
Because of that sneeze, a little seed dropped....
Because that seed dropped,
a worm got mad.
Because he got mad, he kicked a tree....
...the bucket came hit Farmer Brown....
Because...just because...
a small bug went Ka-Choo!

The meteoric rise in Brookdale's stock price leaves management with little 'wiggle-room.' One bad quarter and Ka-Choo!

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