Interesting Analysis from Bacchus6. I am sure it took quite some time for him to put it together. It probably took one hour just to type it.
I bought BKD around a year ago at $42, listened to a conference call and then later sold it at a loss of about $3 per share after it went down and then up some.
Since then I have followed BKD a little – I tend to look at BKD's Yahoo summary and messge board and also news highlights but have not yet bought any additional BKD stock.
Interestingly, Bacchus6's analysis fails to mention the problem that the stock analysts had on the conference call I listened to last year.
From what I gathered, BKD’s business plan was based on the sales of assisted living units and that wasn’t happening because the real estate market was starting to soften. BKD acquired/developed a number of facilities with the intent of creating “for sale” product. However, the sales dried up. As a result, BKD’s results were significantly down from where the market thought they should be. The CEO tried to paint a bright picture by instead focusing on the percentage increase of sales for “in house services” to their residents but the actual dollars generated from this were far short of the amounts that were anticipated by BKD’s business plan.
Fast forward to the present. Bacchus6 states that BKD is still not generating sufficient cash flow to cover their dividend after debt service payments. Obviously we are entering into a tougher economic environment – that tells me their dividend may not be that secure.
It also appears from Bacchus6 analysis that BKD does not have sufficient cash flow to reduce their debt. That isn’t good.
It appears to me that the stock price will start to climb once they produce significantly more cash flow/earnings.
btw, on anything i agree with, i won't mention it...and there's plenty that i agree with. so i'll just stick to the parts that i feel are being mischaracterized or are what i believe to be inaccurate.
on the cash flow shortfall (for paying dividends): I meant to illustrate that the cash flow shortfall was in Q3 2007, meaning it "may" not be a shortfall in Q4 2007 or in Q1 (especially since they raised prices by 5% for assisted living units Jan 1--45% of the residents). the shortfall of $5 million for a company with over $200 million in liquidity (money easily-obtained), is not a problem. in retrospect, they should have never raised the dividend to $0.50 per share, but having done that, they felt that reducing it would send a signal that they don't believe in the growth--and so kept it at $0.50.
cash flow for debt: Brookdale does actually have sufficient cash flow to pay down debt--i had mentioned that they averaged about $45 million in Q2 and Q3. This is cash flow available for debt--but they (and all Fortress public companies) pay out cash flow in dividends. Brookdale could instead pay down debt, but their debt is largely low-cost insured mortgage debt. It is not the best use for their cash. Expanding facilities that have waiting lists, or I believe, buying back stock, both have a much higher return (as long as 2008 doesn't blow up!) on cash than buying back 6% debt.
Thank you for your response "to my take". I am sorry you felt defensive - I didn't write "my take" in an effort to attack you. I merely was giving my views.
If you step back and read your response again along with your other recent messages, I think you may see why the stock has gone down.
BKD significantly ramped up their debt to acquire new locations based on a business plan. The acquisitions were to produce a certain amount of growth but the projected growth hasn't happened so the stock has suffered. Numbers can be manipulated. If BKD was really experiencing 20% earning increases from "same store sales", the market would not have taken this stock down from 45 to 22.
You indicate reading the written minutes of prior conference calls. Where can these be obtained? I would be interested in reading them. In the conference call I listened to in 2007, the failure of BKD to execute on the "for sale" aspect of their business plan was a big deal to the analysts - this issue was brought up by several different analysts in the conference call. I seem to recall that BKD had produced only a few sales and the analysts were very disappointed - the "for sale" program was going to produce the big earning increases that justified the higher stock price.
In the future, BKD's stock price will increase when the earnings increase. By "increase", I do not mean buying back shares - they need to increasing earnings through operations. Raising the rates by 5% probably produces a little profit above the op expense increases (i.e., labor costs, food inflation, maintenance exp, etc.)but doesn't come close to an increase that will double the stock price back to 45. The new program to increase in house services may look impressive from a sales percentage standpoint, but the actual dollars generated are insignificant when compared to the overall earnings picture.
BKD needs to revise/upgrade their business model - the stock will not come close to $45 per share based on the current business plan.
Based on the current volatility in the market place and the negatives that you write about, BKD is more likely to go down than up in the short term.
I'm sure that i missed a few reasons for the fall in BKD's valuation, but i want to clarify a few things in the recent post:
1. "BKD’s business plan was based on the sales of assisted living units and that wasn’t happening because the real estate market was starting to soften.
response: early last year, the analysts' questions involving the real estate market was only really about entrance fee facilities, which are located in Brookdale's continuing care retirements communities (CCRCs), not the standalone or combo (with IL) assisted living facilities. Looking in the transcripts, mgmt said that problem was generally confined to a very small part (CCRCs) of the overall pie. since they rent most of their properties to residents, the "sales" mentioned in the post could only be in CCRCs.
2. "BKD acquired/developed a number of facilities with the intent of creating “for sale” product. However, the sales dried up. As a result, BKD’s results were significantly down from where the market thought they should be."
response: occupancy in the first three quarters of 2007 was 90.8%, 90.7%, and 90.8%, respectively. This stable occupancy is either from residents staying longer to offset a smaller number coming in, or there was enough demand to keep it stable. In the Fall, BKD mgmt (or Doniger) did mention that the company expected to be at 93% occupancy by the end of 2007 (vs. ~91% at the beginning), but I don't believe analysts had expected that (it was more of an internal goal).
3. "The CEO tried to paint a bright picture by instead focusing on the percentage increase of sales for “in house services” to their residents but the actual dollars generated from this were far short of the amounts that were anticipated by BKD’s business plan."
response: in the Q3 call (Nov), BKD did say that they ramped up rehab and home health staff ahead of expected demand--so yes, some costs before they could get revenue. Backing up to the middle of the year, however, mgmt stated that the rehab and home health ("in house services") were being implemented ahead of plan, and even in Q3 they were still ahead of the original plan.
While i don't know the biggest reason for the decline in BKD's value--and i was trying to help a poster that had asked the question while also "sounding it out" for myself--my view is that the entrance fee turbulence did not affect the October-to-today ($40 to $23) fall, since entrance fees were fine in Q3, nor did the failure to increase occupancy from 91 to 93%, since no one was really expecting that outside of the company. I believe that lowering CFFO guidance from 30% to 20% growth (and causing a mgmt discount in the valuation), massive moves by investment funds out of real estate-related companies, and missing cash flow numbers in Q3 (by a few million dollars due to labor & energy costs)--those are what sent the shares down.
In the absence of any contrary data (juries hearing one side of a case tend to agree with it, on average), the valuation of BKD continued to decline--because no fund was willing to step in and buy ahead of the next quarter (or two)'s earnings results. I don't blame them--it is rational--but i do believe that it creates an inefficient market in the value of BKD.