Business Context and Reporting Period
Company: Brookdale Senior Living Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2007
Business Overview: Brookdale is a leading owner and operator of senior living facilities in the United States, including independent living, assisted living, dementia-care facilities, and continuing care retirement centers (CCRCs). The company operates through four reportable segments: Independent Living, Assisted Living, Retirement Centers/CCRCs, and Management Services.
Key Financial Metrics
| Metric ($ in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenue | $446,834 | $222,183 |
| Net Loss | $(35,140) | $(19,326) |
| Loss Per Share (Basic & Diluted) | $(0.35) | $(0.30) |
| Cash Provided by Operating Activities | $28,828 | $12,119 |
| Cash Used in Investing Activities | $(75,551) | $(185,983) |
| Cash Provided by Financing Activities | $34,610 | $190,278 |
| Total Debt (including capital leases) | $1,843,795 | $1,711,439 |
| Cash and Cash Equivalents | $55,921 | $94,096 |
| Adjusted EBITDA (Non-GAAP) | $70,562 | $26,892 |
Liquidity: As of March 31, 2007, the company held $55.9 million in cash and cash equivalents, with an additional $122.0 million available under its credit facility and $50.9 million in unused letter of credit capacity. The company reported negative working capital of $227.5 million, largely due to the classification of refundable entrance fees and tenant deposits as current liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 101.1% year-over-year, driven primarily by significant acquisitions in 2006 (including American Retirement Corporation) and additional acquisitions in Q1 2007. Resident fees rose 101.5% to $445.3 million.
- Operating Expenses: Total operating expenses increased 104.8% to $462.9 million. Facility operating expenses rose 105.1%, and depreciation and amortization surged 227.3% due to the expanded asset base from acquisitions.
- Net Loss: The net loss widened to $35.1 million from $19.3 million. This was influenced by higher interest expense (up 174.9% due to increased debt and derivative fair value changes) and higher general and administrative expenses (up 92.8%, including $10.8 million in stock-based compensation).
- Acquisitions: In Q1 2007, the company acquired four facilities/assets for approximately $23.2 million, including a skilled nursing facility in Florida and a home health agency. A subsequent acquisition of three California communities (effective April 1, 2007) was recorded as an asset but not yet in operations.
- Dividends: The quarterly dividend increased to $0.45 per share from $0.35 per share in the prior year.
Guidance, Outlook, and Risks
Management Commentary:
- Operational Performance: Same-store operations were strong with higher revenue per unit, though occupancy rates remained relatively constant. The entrance fee portion of the business underperformed expectations due to softness in housing markets in Florida and Arizona.
- Capital Expenditures: The company expects to spend approximately $75.0 million on major capital projects and renovations and $25.0 million on corporate branding and infrastructure for the year ending December 31, 2007.
- Liquidity Outlook: Management believes existing cash flows, working capital, and credit facilities are sufficient to fund operations and growth for at least the next 12 months.
Risks and Contingencies:
- Legal Proceedings: Two significant legal actions remain pending related to the 2004 sale of facilities to Ventas Realty. Plaintiffs seek damages in excess of $100 million per count. The company cannot estimate the range of loss but intends to vigorously defend the actions.
- Market Risk: The company is exposed to interest rate fluctuations on variable-rate debt, though approximately 96% of debt is fixed or hedged via swaps.
- Financing Risk: Future growth depends on the availability of debt and equity financing. If resources are insufficient, the company may need to delay development activities or sell additional securities, potentially diluting shareholders.
Investor Verification Checklist
- Acquisition Integration: Verify the operational performance and accretive nature of the 2006 ARC acquisition and Q1 2007 acquisitions, which drove the majority of revenue growth.
- Entrance Fee Sales: Monitor trends in entrance fee sales and refunds, as this segment recently underperformed due to regional housing market softness.
- Legal Exposure: Track the status of the pending litigation regarding the Ventas facility sale, which involves significant potential damages.
- Debt Covenants: Confirm continued compliance with financial covenants, particularly regarding Facility Operating Income coverage ratios, given the high debt load ($1.84 billion).
- Non-GAAP Reconciliations: Review the reconciliation of Adjusted EBITDA and Cash From Facility Operations to GAAP measures to understand the impact of non-cash items and entrance fee flows on reported liquidity.