BKD

Business Context and Reporting Period

Company: Brookdale Senior Living Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: Brookdale operates independent living, assisted living, continuing care retirement communities (CCRCs), and skilled nursing facilities across the United States. As of June 30, 2006, the company operated 453 facilities with a capacity of over 34,000 units/beds and an occupancy rate of 90.1%. The company is in an aggressive acquisition phase, having completed numerous portfolio purchases in the first half of 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 33.2% year-over-year, driven primarily by a 33.4% increase in resident fees due to significant acquisitions (including the AEW, SALI, Wellington, and Liberty portfolios) and rate increases at existing facilities.
• Net Loss Expansion: Net loss widened significantly to $39.6 million from $7.6 million. This was primarily due to a 273.8% increase in depreciation and amortization ($39.0 million increase) and a 93.1% increase in interest expense ($18.9 million increase) resulting from new debt incurred to fund acquisitions.
• Operating Expenses: Facility operating expenses rose 27.9% and General and Administrative (G&A) expenses rose 92.4%. The G&A increase included $6.7 million in non-recurring merger/integration costs and $6.8 million in non-cash stock compensation.
• Balance Sheet: Total assets grew to $2.38 billion from $1.70 billion, reflecting the addition of property, plant, and equipment from acquisitions. Long-term debt increased by approximately $483 million.

Guidance, Outlook, and Risks

• Major Subsequent Event (ARC Merger): On July 25, 2006, Brookdale completed the merger with American Retirement Corporation (ARC). This transaction made Brookdale the largest operator of senior living facilities in the U.S. with over 530 facilities and 50,000+ units. The company expects significant increases in depreciation, amortization, and integration costs post-merger, leading to expected GAAP net losses in the near term.
• Financing Activity: Concurrent with the ARC merger, the company raised approximately $650 million via a private placement to an affiliate of Fortress and $673.5 million via a follow-on public equity offering. The company also repaid its $195 million term loan on July 25, 2006.
• Outlook: Management expects to maintain or increase occupancy levels and resident fees. Growth strategies include organic growth, acquisitions, and realizing economies of scale from the ARC merger.
• Risks and Contingencies:
  • Litigation: Two legal actions are pending regarding the 2004 sale of facilities to Ventas Realty. Plaintiffs seek damages in excess of $100 million per count. The company intends to vigorously defend these actions but cannot estimate potential losses.
  • Stockholder Risk: Fortress Investment Group, the largest stockholder, pledged approximately 61% of the company's outstanding shares as collateral for its own credit agreements. A default by Fortress could lead to a forced sale of these shares, potentially negatively impacting the stock price.
  • Interest Rate Risk: While the company has hedged 100% of its debt and lease payments against floating rates using swaps and caps, it remains exposed to the cost of capital and refinancing risks.

Investor Verification Checklist

• ARC Merger Integration: Verify the timeline and cost of integrating ARC's 83 facilities and the impact on future GAAP earnings due to increased depreciation and amortization.
• Debt Covenants: Confirm continued compliance with debt and lease covenants, specifically those measuring Facility Operating Income, given the significant increase in debt load.
• Litigation Exposure: Monitor the status of the Ventas-related lawsuits and any potential settlements or judgments that could impact financial results.
• Fortress Stockholder Position: Track the stock price relative to the collateral thresholds in Fortress's credit agreements to assess the risk of a forced sale of pledged shares.
• Occupancy and Rate Trends: Validate the sustainability of the 90.1% occupancy rate and the ability to pass on cost increases (labor, utilities) to residents through fee adjustments.