Business Context and Reporting Period
Company: Brookdale Senior Living Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Brookdale is the largest operator of senior living communities in the United States by total capacity. As of December 31, 2007, the company operated 550 communities across 35 states with a capacity to serve over 52,000 residents. Operations are divided into four segments: Retirement Centers, Assisted Living, Continuing Care Retirement Communities (CCRCs), and Management Services. The company generates over 89% of its revenue from private pay customers.
Key Financial Metrics
| Metric (in millions) | 2007 | 2006 |
|---|---|---|
| Total Revenues | $1,839.3 | $1,309.9 |
| Net Loss | $(162.0) | $(108.1) |
| Adjusted EBITDA (Non-GAAP) | $306.4 | $200.6 |
| Facility Operating Income (Non-GAAP) | $642.3 | $476.3 |
| Cash From Facility Operations (Non-GAAP) | $148.8 | $90.9 |
| Dividends Declared per Share | $1.95 | $1.55 |
| Total Debt (Year End) | $2,335.2 | $1,874.9 |
| Cash and Cash Equivalents (Year End) | $100.9 | $68.0 |
Note: The Net Loss for 2007 includes a significant non-cash charge of approximately $73.2 million related to the change in fair value of interest rate derivatives.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 40.4% to $1.84 billion, driven primarily by acquisitions completed in late 2006 (notably American Retirement Corporation) and a 10.2% increase in average monthly revenue per unit ($3,577 vs. $3,247).
- Operating Performance: Despite a GAAP net loss, core operating metrics improved significantly. Adjusted EBITDA rose 52.7%, and Facility Operating Income increased 34.9% year-over-year.
- Occupancy: Overall occupancy remained stable at 90.0% at period end, though the company noted that deteriorating housing markets hindered the ability to increase occupancy further.
- Acquisitions: The company acquired 15 communities in 2007, increasing total unit capacity by 1.6% to 52,086 units.
- Interest Expense: Interest expense increased 118.2% to $144.0 million, largely due to new debt from acquisitions and the $73.2 million mark-to-market loss on interest rate swaps.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management expects to continue growing revenues and Adjusted EBITDA through organic growth (occupancy improvements and rate increases) and the expansion of ancillary services (therapy and home health). The company anticipates a reduced level of acquisition activity in the near term to focus on integrating previous acquisitions. They project annual same-store Facility Operating Income growth of approximately 7.5% to 8.0% assuming flat occupancy.
Key Risks and Contingencies:
- Liquidity and Debt: The company is highly leveraged with significant debt and lease obligations. A $400 million credit facility matures in November 2008. Failure to generate sufficient cash flow to cover interest and lease payments could lead to defaults.
- Interest Rate Swaps: Volatility in credit markets caused a significant increase in the fair value liability of interest rate swaps, requiring the company to post substantial cash collateral (increasing from $5.0 million in Dec 2007 to over $40 million in Jan 2008).
- Housing Market: Deteriorating housing markets have caused potential customers to delay moving, impacting entrance fee sales and occupancy growth.
- Regulatory Environment: The company faces intensifying regulation regarding licensure, Medicare/Medicaid reimbursement, and environmental compliance. Changes in reimbursement policies could adversely affect results.
- Legal Proceedings: Two significant legal actions remain pending related to the 2004 sale of facilities to Ventas Realty, alleging fraud and breach of fiduciary duty. The company cannot estimate the potential loss.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the $73.2 million non-cash loss on interest rate swaps and the current cash collateral requirements for these hedges.
- Debt Maturity: Confirm the status of the $400 million credit facility maturing in November 2008 and the company's refinancing plans.
- Occupancy Trends: Monitor same-store occupancy rates to assess the impact of the housing market downturn on future revenue growth.
- Legal Exposure: Track the status of the pending litigation regarding the Ventas Realty sale for potential material liabilities.
- Dividend Sustainability: Review the ratio of dividends paid to Cash From Facility Operations, as the company historically pays dividends exceeding its net income and operating cash flow.