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Brookdale Worth More on Sale

- By Holmes Osborne, CFA

Brookdale (BKD) is the country's largest operator of facilities for senior citizens. The company has faced quite a few problems over the years and has not been profitable. The stock does not pay a dividend and has copious amounts of debt. The plus is that the real estate is probably worth more, and the company could get sold.

The company has 185.65 million shares, the stock trades for $12.85, and the market cap is $2.385 billion. Diluted earnings per share are a loss of $2.18. The stock has not paid a dividend since 2008.

At the end of March, Brookdale completed a deal with Blackstone where Blackstone will acquire 15% ownership interest in a joint venture of 64 communities formerly leased to Brookdale by HCP. Blackstone contributed the housing and Brookdale paid $180 million to purchase a 15% equity interest.

Brookdale is by far the largest operator of old folks' homes in the U.S. with 1,055 communities in 47 states and the ability to serve approximately 103,000 residents. This is from the annual report and before the Blackstone acquisition. The company operates hospice services, rehab, nursing homes, dementia centers and other services for retirees. Of this, 363 were owned, 539 leased and 153 managed by outside third parties.

Last year, the company earned $4.977 billion in revenues. Adjusted EBITDA was $770 million. Brookdale hasn't turned a profit in a long time. Operating expenses were $5 billion. Interest alone was $385.6 million.

The balance sheet shows $216 million in cash and $141.7 million in receivables. The liability side shows $77 million in payables and $3.6 billion in debt. Quite a bit of debt. Cash flows from operations were $365 million, but most of that was spent in capital expenditures. What is interesting is that property, plant and equipment shows $7.4 billion. That's the book value, not the market value.

There is a convertible note that yields 2.75% and is convertible into 34.1006 shares after March 15, 2018. The cusip is 112463AA2, and the note trades for 98.75. Interesting.

I found out about the stock by looking at Third Avenue's holdings. You can bet that shares are trading at less than net asset value if Third Avenue is a holder. A Jefferies' analyst gives the odds of Brookdale being sold at over 50%.

In a recent shareholder report, it was stated that 82% of clients are private pay, 3% Medicaid, 12% Medicare, 2% insurance and 1% other. I was surprised to see such a high percentage as private pay. I wonder if a pullback in the economy would affect this? I'm sure it would.

Management is always wheeling and dealing. Last year, 51 communities were sold and $305 million in cash raised. A mortgage loan of $94.5 million in debt was paid off.

Brookdale is an interesting company but hard to evaluate. It pays no dividend which is strange for a property company. Its real estate is probably worth more than the stock reflects, but there's quite a bit of M&A. It could be a buy, but you'd really need to know that industry. What is it like to actually be a resident? We all know about the aging demographics but operating these facilities looks challenging.

Disclosure: We do not own shares.

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This article first appeared on GuruFocus.