BKD

Brookdale Senior Living Inc. - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Brookdale Senior Living Inc. is a leading owner and operator of senior living communities in the United States, including retirement centers, assisted living, dementia-care communities, and continuing care retirement centers (CCRCs). As of the period end, the company operated 548 communities with a capacity of 51,888 units/beds.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 3.6% year-over-year, driven by a 5.4% increase in average monthly revenue per unit/bed and growth in ancillary services (therapy and home health). This growth partially offset a 1.3% decline in occupancy rates.
• Profitability Improvement: The company reported a net loss of $13.6 million, a significant improvement from the $55.1 million loss in Q1 2008. Operating income turned positive ($10.3 million) compared to a loss of $0.6 million in the prior year.
• Interest Expense Reduction: Total interest expense decreased by approximately $44.4 million (53.5%) compared to Q1 2008. This was primarily due to a reduction in the mark-to-market loss on interest rate derivatives (swaps and caps), which dropped from $45.6 million in 2008 to $4.3 million in 2009.
• Dividend Suspension: The board suspended the quarterly cash dividend indefinitely in December 2008; no dividends were declared in Q1 2009.

Guidance, Outlook, and Risks

Management Commentary: Management notes that while organic growth objectives are being met through expense control and ancillary service expansion, the company is negatively impacted by the global economic crisis, housing market deterioration, and credit market volatility. These factors have led to lower occupancy and delayed resident moves.

Liquidity and Capital Actions:

• Credit Facility Refinancing: In February 2009, the company entered into a new $230 million revolving credit facility maturing in August 2010. This agreement includes mandatory prepayment provisions and scheduled commitment reductions.
• Share Repurchase: The $150 million share repurchase program was terminated in February 2009.
• Debt Maturities: The company has extended maturities on several mortgage loans, leaving virtually no mortgage debt maturities until 2011.

Risks and Contingencies:

• Liquidity Risk: The company faces significant debt obligations and relies on cash flows from operations and refinancing. The amended credit facility restricts dividends, acquisitions, and capital expenditures.
• Derivative Collateral: The company is required to post cash collateral for interest rate swaps if fair value liabilities exceed thresholds. Approximately $21.5 million was pledged as of March 31, 2009.
• Legal Proceedings: Two significant legal actions regarding the 2004 sale of communities to Ventas were settled during the quarter, with formal dismissals pending or completed.

Investor Verification Checklist

• Debt Covenant Compliance: Verify continued compliance with the new credit facility's financial covenants (leverage, fixed charge coverage, tangible net worth) given the mandatory prepayment requirements.
• Occupancy Trends: Monitor the trajectory of the 88.7% occupancy rate against the 90.0% prior year rate, specifically in Retirement Centers and CCRCs where declines were noted.
• Derivative Exposure: Assess the potential for increased cash collateral requirements on interest rate swaps if market volatility returns or LIBOR rates shift significantly.
• Entrance Fee Volatility: Review the net entrance fee cash flow ($2.7 million for the quarter) and the company's ability to offset refundable entrance fee liabilities with new sales.
• Capital Expenditures: Confirm that the planned $60 million capital expenditure budget for 2009 can be funded given the restrictions on the credit facility and reduced acquisition activity.