We are officially in unchartered territory. It is now quite embarrassing that we stated two years ago, as Brookdale Senior Living’s share price dropped below $10, that it had reached a floor. Yes, hindsight is 20/20, but we don’t know anyone who really predicted how drastic it has actually become for senior living stocks. The question is, what to do now? The second question is, will it get worse?
The day-to-day volatility in the stock markets is unprecedented. The day-to-day declines in values in our sector are even more unprecedented. It seems that when the major indices drop by 10%, our sector, including the REITs, drops by 20%. It is a magnification of the worries brought on by the coronavirus outbreak, and what it means for the elderly and the communities that take care of them.
Brookdale Senior Living
It is hard to imagine that yesterday the market cap of Brookdale was a mere $367 million. It dropped another 12% yesterday, hitting a low of $1.86 per share, when the overall market was up 5% to 6%. During last Thursday’s trashing, it plunged 17%. Not too long ago, the market cap was over $2 billion. At some point, someone with a long-term view will be very tempted to step in. But not today.
Investors, especially private equity investors, don’t like to invest in uncertainty. And today, uncertainty rules. Yesterday, Brookdale filed an 8-K which would shake any investor’s confidence, or any buyer. They stated that they had already limited some community tours and some admissions, and that both would most likely be expanded and extended for a period of time. Second, they reported that there will be significant cost increases in dealing with the coronavirus, which today encompass supplies and soon will involve increased labor costs. Third, they have delayed, canceled, or modified all capital expenditures. And finally, management has withdrawn the previous full-year earnings guidance.
Perhaps the most disconcerting thing, and Brookdale is not alone in this, is that the company has drawn down the full balance of its corporate line of credit as a “precaution.” But a precaution against it not being available at some time in the future, pulled by the banks? The fear of a looming credit crisis despite all the promises from the White House and Federal Reserve? The fear of not being able to meet its operating costs? Maybe all of the above, but no one knows. They just want to be conservative and brace for the worst to come.
Capital Senior Living
If you thought Brookdale’s situation was dire, Capital Senior Living has plunged by 70% since March 1, with a market cap today of just $22 million. It was supposed to announce fourth quarter earnings this past Monday, and has asked the SEC for an extension to March 31. This is never a good sign.
The good news is that they have reached an agreement with Welltower and Ventas for temporary rent reductions, with leases converted to management agreements or transitioned to other operators. This will increase cash flow by $22 million, not chump change for a company in trouble. Together with the previously negotiated lease amendments and cancelations with Healthpeak, the company may finally be more attractive as an acquisition target. But there is still that uncertainty thing.
The expensive leases always seemed to be a roadblock to buyers in the past, so it becomes a “less-complicated” acquisition. That is, if it can fill some more units and increase cash flow. Given what is happening to the industry with the coronavirus, and we are just at the tip of the iceberg right now, filling units seems an unlikely, and unrealistic, prospect. If only iy was that easy. It has just become more difficult.
We will have to wait and see what is reported at the end of the month. Hopefully, on top of fourth quarter results, they will be in a position to shed light on the first quarter, which will come to an end the day they release last year’s earnings. A real two-for for investors. The cycle never ends.
