Rumors were afloat this week that Brookdale Senior Living might be running a sales process for its home health and hospice business. Quietly, it became one of the largest home health providers in the country, with revenues of $447 million in 2019, inclusive of hospice and a very small therapy business.
We happen to think home health and hospice is a natural for large senior living providers with a built-in customer base off of which to leverage growth outside their communities. It is also a nice lead-in for full time residence into some of their communities. Today, about 50% of the home health and hospice revenues are “in-house,” while 50% are outside of Brookdale’s communities. They are geographically able to provide home health to 65% of their communities, and hospice to 25%. For Brookdale, they had been touting this “integrated healthcare strategy,” with the overlapping services a big benefit. Times have changed, but not because of COVID. Well, maybe as a result of what COVID has done to the rest of their business.
If they are going to sell, now is a pretty good time because multiples are close to their highest levels, probably too high. Demand for home health services has been increasing in general, and the pandemic only heightened that demand. But we think a sale does not reflect a change in management’s strategy, but more the need to raise cash for the next two years when its seniors housing operations will still be under pressure from occupancy woes (now 73% and declining) and its cash burn.
Unfortunately, they would be selling from a bit of a weak position, given recent operating results. Home health revenues have declined by 23.6% year over year, while hospice has seen a much smaller decline of 9%. The home health and hospice segment, which for operating income reporting purposes also includes the small outpatient therapy business (third quarter revenues of $5.3 million) posted a 69.4% decline in operating income year over year in the third quarter, and for the full nine months 2020, operating income declined 90.8%, inclusive of an operating loss of $9.1 million in the first quarter 2020.
The operating margin (including the therapy business) has been all over the place in the past year, with a high of 9.0% in the second quarter but a low of 1.5% in the third quarter, not including that first quarter with an operating loss. In 2019, the quarterly margins all fell within this range, and jumped all over quarter to quarter with zero consistency. So, buyers will have to wonder what problems exist. Obviously, as Brookdale divested communities, they would, or could, lose their pro rata share of those revenues from those sold properties, which explains some of the drop in revenues as well as the gyrations in margin. Still, it is not an easy analysis, especially when thinking of the high multiples that are expected.
If Brookdale could get anything north of $400 million in a sale, that would be a home run. That would imply an 18x to 20x multiple of 2021 EBITDA of $20 to $22 million. The proceeds could be used to pay down debt, for capex in communities and to shore up operations in general. We would assume any buyer would insist on some non-cancelation language with services provided within Brookdale’s communities, at least for a few years. The senior living industry needs Brookdale to get healthy again, and if the cash from this potential sale does the job, so be it.