Activists Eye Senior Living Sector

06/29/2016 9:00 am EST


George Putnam

Editor, The Turnaround Letter

The senior living sector has a lot going for it right now; first and foremost are demographic trends, with the number of seniors in the US expected to rise dramatically in the coming decades, suggests George Putnam, editor The Turnaround Letter.

In addition, the industry remains quite fragmented with many senior living units run by small local operators. This means that public companies in the sector can continue to grow by acquisition, and eventually even these may become acquisition targets.

Yet in spite of these favorable factors, most of the more focused senior living stocks have performed relatively poorly over the last year and half or so as investors worry over rising interest rates and changes in Medicare and Medicaid rules. 

We believe that the positive forces affecting the senior living sector stocks outweigh the negatives, and the weakness in the stocks presents a buying opportunity.  And we do not appear to be alone, as the sector has attracted activist shareholders.

Brookdale Senior Living (BKD) is far and away the largest provider of senior living services, and the only one with a truly national presence with 1,123 communities in 47 states.  They are in each of the top 31 markets with a #1 share in 18.

A $2.8 billion acquisition in 2014 helped achieve that status, but it also brought about integration challenges that management is still working through.  The company also has activist shareholders pushing for REIT status.

Brookdale’s size will provide competitive cost and management systems advantages, and their properties are geographically well positioned.  Balance sheet debt is largely non-recourse property-level mortgage financings.

The company’s Program Max initiative, which includes renovating and repositioning certain assets, should enhance financial results.

Capital Senior Living (CSU) operated 121 senior living communities in 23 states at the end of 2015.  Selective acquisitions –- 57 over the last four years –- have been funded with long-term mortgages, but the balance sheet remains solid.

The company has a conservative 2.7x interest expense coverage ratio, and fully 98% of its debt matures beyond 2020.  Management is enhancing returns by, among other things, converting some units to facilitate higher-care occupants with better margins. 

An activist group with about 8% of the shares has suggested the company has strategic alternatives to explore. 

With directors and executive officers owning over 7% of the company, we suspect that they’ll do what is necessary to create long-term value.

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By George Putnam, Editor of The Turnaround Letter

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