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Why Brookdale Senior Living, Inc. Shares Are Tumbling

By Sean Williams - Feb 9, 2016 at 3:46PM

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Brookdale Senior Living's 2016 guidance sends investors running for cover. Is this a buying opportunity or a reason to keep your distance?

What: Shares of Brookdale Senior Living (BKD -0.21%), an operator of more than 1,100 senior living communities across the United States, plunged as much as 25% after the company reported worse-than-expected fourth-quarter results.

So what: For the quarter, Brookdale announced cash from facility operations, or CFFO, of $0.58 per share, which was a 9% increase from the $0.53 in CFFO reported in Q4 2014. EBITDA also increased 4% from the year-ago quarter. On the other side of the equation, average occupancy across its communities improved 10 basis points to 86.8% from the sequential third quarter, but was down 150 basis points from the 88.3% reported in the year-ago quarter. The company's net loss also widened to $0.94 per share.

Now here's the thing with real estate-based companies like Brookdale: It can be difficult for the novice investor to understand the dynamics behind all of these numbers. The widened loss, for instance, likely has to do with integration costs associated with its Emeritus acquisition. The CFFO, though, is the number most investors want to focus on, since cash flow is what real estate companies like Brookdale use to further expansion and acquisitions.

Now, based on EPS, Brookdale missed the mark by $0.75 per share. Wall Street's consensus called for a narrower $0.19-per-share loss. In terms of CFFO, however, Brookdale topped the mark by a mile.

Looking at its 2016 guidance could very well be where Brookdale shares slipped on the banana peel. The company is forecasting $2.45 to $2.55 in full-year CFFO, which excludes the aforementioned costs associated with Emeritus, as well as other related transactions. However, the consensus on Wall Street was that Brookdale would deliver CFFO closer to $2.62 in 2016, so this was a decisive miss. Combine this miss with a lower year-over-year occupancy rate and you have all the reasons for today's tumble.

Image source: Brookdale Senior Living.

Now what: Looking ahead, the big question is whether you should be considering Brookdale Senior Living shares for your portfolio after today's tumble. In my opinion, the answer is maybe, but it really depends on your investment time frame and level of patience.

Let's keep a few things in mind here. On one hand, Brookdale has the long-term trend on its side. People are living longer, and baby boomers are beginning to retire, meaning demand within its senior living communities should be on an upward trajectory over the next three decades. This should help with its pricing.

Brookdale also has access to exceptionally low lending rates at the moment, courtesy of the Federal Reserve. Cheap cash incentivizes Brookdale to expand, which in turn can lead to greater CFFO.

On the flip side, Brookdale has to be careful not to overlever itself (it's already carrying well over $6 billion in debt on its balance sheet), and it may find its growth constrained by Medicare. The federal government is actively looking for ways to wean private companies off their reliance on Medicare, and ongoing cuts to reimbursements may hurt all senior living facility operators.

If you're considering an investment in Brookdale, you better be looking far into the horizon for that pot of gold.

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