The aging of America has created huge market opportunities for
the retirement industry in recent years, but owners of long-term
care facilities haven't had an easy time translating the trend
Brookdale Senior Living (
), t he country's largest operator of senior housing, hasn't seen
one year of net income since going public in 2005. But a marquee
deal, a thriving new business segment and the housing recovery
are coming together to persuade investors that the company is
well poised to take advantage of the burgeoning market.
In February, the Brentwood, Tenn.-based company announced it
would acquire competitorEmeritus (
) in a deal valued at $2.8 billion, including $1.4 billion in
mortgage debt. The transaction is expected to close in the third
It is the latest in a string of acquisitions for Brookdale,
which has a history of successfully absorbing rivals. If the
merger goes through, 6.5 million people 80 years or older will
live within 10 miles of a Brookdale community, according to the
company, solidifying its position as the largest player in the
The purchase of Emeritus is expected to generate synergies and
earnings accretion for Brookdale, plus more real estate -- assets
that can be turned into cash. Management sees the merger as 50
cents per share accretive to cash from facility operations by the
"Emeritus looked like it had been trading below the fair value
of its real estate alone, so it was probably ripe for some
potential suitor," said Stephens analyst Dana Hambly. "In
retrospect, this makes a lot of sense, and probably no other
operator would be able pull it off."
The combined firm will operate more than 112,000 units and own
about a third of them. Roughly half are assisted-living
facilities. The rest are independent-living homes; Alzheimer's,
dementia and memory-care centers; and nursing homes.
Most such living arrangements tend to be paid for by the
residents or their families, as opposed to Medicare or private
insurance. In 2013, 80% of Brookdale's resident-fee revenues came
from private-pay customers. Its average monthly revenue per unit
rose 2.6% to $4,383 from $4,271 a year earlier.
Brookdale said in April that as part of the merger with
Emeritus, it will partner with health care real estate investment
) on a $1.2 billion joint venture that will own and operate 14
Brookdale's revenue grew 4.9% year over year in the first
quarter to $747.3 million, slightly above the consensus $746.8
million expected by analysts polled by Thomson Reuters. However,
the company incurred a loss of two cents per share, even though
analysts had forecast a six-cent profit. The loss followed
year-ago earnings per share of 3 cents.
On a conference call with analysts May 8 to discuss
first-quarter results, Brookdale CEO T. Andrew Smith cited an
impact from "extraordinary" weather-related costs.
"We believe that the prolonged, severe winter across much of
the country had a material impact on our first-quarter
occupancy," he said.
Regional Winter Woes
Occupancy at Brookdale's Florida communities increased
sequentially, California was flat, and Texas was down slightly.
"The Midwest and Northeast, however, fared much worse, with
certain regions experiencing sequential declines of 100 to 200
basis points quarter to quarter," Smith said.
Brookdale's first-quarter results were in line with the
company's internal expectations and its full-year guidance, he
Cash flow from operations (CFFO), ex items, came in at 64
cents a share for the quarter, up 13% from a year earlier and,
Smith said on the call, representing the third straight quarter
of double-digit CFFO growth.
Many trends influence the senior housing and care industries.
Americans are living longer even as they cope with multiple
chronic illnesses, driving demand for residential care. At the
same time, facilities are becoming more comfortable and
sophisticated, helping the industry gain credibility with
Meanwhile, independent or continuing-care living communities
have become a viable retirement-planning option for seniors
seeking a supportive environment where they can live in their own
homes but have ready access to upkeep, health care and meal
Brookdale faces competition from other operators of senior
housing -- many of which are also adding perks such as personal
fitness coaches and on-site culinary schools to attract wealthy
But while many of its rivals run their homes like hotel
portfolios, Brookdale has long viewed itself as a health care
Rather than outsource outpatient therapy, home health services
or "post-acute" care for patients recovering from surgery,
Brookdale has embraced the full spectrum of care, steadily
building its capabilities and even marketing those services
outside of its walls -- to other senior living communities and
"They have historically operated continuing-care retirement
communities, and a portion of their business has always been
skilled nursing care. It's in their DNA," said RBC Capital
Markets analyst Frank G. Morgan. "That's something most others
don't really get."
Such "ancillary" services currently represent less than 10% of
Brookdale's revenue, but they offer a better return on capital
and are growing faster than any other business segment at the
The model also presents other benefits. According to Morgan,
such services could have a positive effect on the length of
customer stay because they can improve the independence of
residents, allowing them to live in a Brookdale community longer
before requiring a higher level of care.
Brookdale is the largest company by market cap in IBD's
Medical-Long Term Care industry group, followed by
Emeritus,Kindred Healthcare (
) andEnsign Group (
). The group ranks No. 16 of the 197 that IBD tracks.
Bets on senior living facilities are not without risks.
Government subsidy cuts are real challenges for the nursing home
segment, and researchers predict little or no growth on that
front in the near future.
However, Brookdale's reliance on private-pay customers means
it faces minimal exposure to reimbursement from Medicare or
Medicaid. Also, with government health care reform aiming to
contain taxpayer costs partly by encouraging home care,
Brookdale's ancillary-services strategy bodes well for the
company's bottom line.
The economy is another risk factor. The recession and the
housing crisis hit retirement communities hard. Some potential
residents couldn't move in because of difficulties selling their
prior homes or getting enough money for them.
Some senior housing construction projects were canceled or
went bankrupt. Developments are now recovering, and occupancy
rates at Brookdale and elsewhere are approaching 90%.
People age 75 and over are expected to represent 12% of the
population by 2030, compared with just 6% in 2012, according to
the U.S. Census Bureau.
But Bruce Carlson, publisher of Kalorama Information, a market
research firm, notes that the number of people who will actually
need a group home is not as boundless as some predict. A recent
Census Bureau report put the number of people who need help with
one or more daily activities at 15 million.
"With about 4 million in institutional care, you've got 26% of
the potential, and then if you add the 3.5 million who get home
care, that's closer to 50% of the likely market served," Carlson
said in an email. "The true growth metric, of course, would be
the growth of the pool of the 65+ population and the growth of
the 80+ population, which will drive this market well into the