BKD - Brookdale Senior Living: Upside Remains Limited Due To Balance-Sheet Concerns

2023-11-16 21:18:30 ET

Summary

• Brookdale has reported seven consecutive top-line beats, with 9-10% growth in RevPAR expected for Q4.
• The company's profitability metrics have been trending in the right direction, but its high debt and capex spending limit its profitability.
• Brookdale's balance sheet shows concerns with high current liabilities and a debt-to-equity ratio of 7.7, limiting its upside potential.

We wrote about Brookdale Senior Living Inc. ( BKD ) back in June of this year after the company's first-quarter earnings report. RevPAR growth was once more to the fore in Q1 (13% year-over-year growth) with momentum following on into both the second and third quarters of this present fiscal year. In fact, with RevPAR growth surpassing 10% in Q3 , Brookdale has now reported seven consecutive top-line beats with a further 9 to 10% growth in RevPAR expected for the fourth quarter.

Suffice it to say, with shares having returned approximately 10% over the past five months, we continue to believe that Brookdale has every opportunity to at least test the upper trendline depicted below ($5 to $5.50 a share) in the not-too-distant future. The speed at which it can do this remains unknown at this stage. Management continues to double down on securing the best rate, keeping the best associates at the company, and adding as much value on the front end concerning patient care to ensure that momentum can continue in earnest.

Given the level of debt however, Brookdale continues to hold on to its books, it will be interesting to see if the company can continue to raise fees on the front end for its 'customers' while also raising wages for associates (which comes in at 36,000 strong) on the back-end. In an inflationary environment, management knows it will most likely need to continue undergoing initiatives to keep the associate retention rate as low as possible. This 'need' as mentioned has ramifications for rates Brookdale charges on the front end in that if rates increase too swiftly, demand may be adversely affected as a result.

Brookdale Remains Unprofitable (Ignore EBITDA Numbers)

Although RevPAR growth has remained in double-digit territory, operating profit came in at $0.2 million in Q3 which is Brookdale's quarterly profit minus tax obligations and its sizable interest expense. Now, although Brookdale's profitability metrics have been trending in the right direction (BKD has now reported three consecutive quarters of positive operating profit), management prefers to use the 'adjusted EBITDA' model to report the company's improving profitability. Management guided Q4 adjusted EBITDA of between $77 & $82 million on its Q3 earnings call which if met would be in line with what the company reported in the third quarter.

The problem with viewing Brookdale's profitability under the lens of its 'EBITDA' numbers or its adjusted counterparts is the following. At the end of Q3, Brookdale reported $5.82 billion in total assets of which net 'property, plant & equipment' totaled $5.08 billion (87%). Now, whereas these assets have not been increasing in value, Brookdale still needs to shell out over $60 million per quarter ($220+ million over the past year) in capex spending to essentially maintain these assets. Therefore, because Brookdale's 'property, plant & equipment' makes up the lion's share of the company's assets, EBITDA (due to depreciation and amortization not being taken into account) is not an accurate picture of the company's profitability here.

Balance Sheet Concerns

At the end of Q3, Brookdale's current assets amounted to $593 million whereas the company's current liabilities totaled $898.3 million. The higher current liabilities print boils down to the $257 million of agency debt (being classified as a short-term debt) which is due for payment within 12 months. Suffice it to say, given Brookdale's cash balance ($397+ million) has been dwindling in recent quarters, management will need to roll over this debt with new debt to protect the company's already depleted working capital position.

On the solvency front, even though Brookdale continues to report RevPAR growth practically every quarter now, shareholder equity ($493 million) has failed to gain any type of traction. Given total debt presently comes in at almost $3.8 billion, Brookdale's debt-to-equity ratio comes in at a very lofty 7.7 demonstrating that the company is funded primarily through debt as opposed to equity. Furthermore, concerning the company's peers, most outfits currently report a debt-to-equity ratio of less than 1 apart from The Oncology Institute, Inc. ( TOI ) whose own debt-to-equity ratio comes in at 1.64.

Remember, although Brookdale's GAAP earnings may continue in the red, investors who are eyeing this play are doing so because of the low valuation of the company's growing sales as well as the company's assets. Given the liquidity & solvency issues Brookdale is currently wrestling with, investors need to consider how solid the company's trailing book multiple (1.68) is. Brookdale's book/value per share for example ($2.61) continues in a downward trend which means if interest rates remain elevated for a significant amount of time, book value most likely will come under increasing pressure.

Conclusion

To sum up, given current trends, Brookdale has every likelihood of maintaining its upward trajectory most likely past the $5 level. However, given the state of the company's balance sheet as well as the fact that bottom-line earnings remain in negative territory, we believe the upside remains limited in this play. Maintaining our 'Hold' rating. We look forward to continued coverage.

For further details see: