Perhaps it is because of the new Omicron variant spreading like wildfire, perhaps occupancy growth has stalled, or perhaps investors are just losing patience for a recovery that would boost the share price. Whatever the reasons, Brookdale Senior Living’s share price has dropped by 30% since mid-November, and it is now below $5.00 per share for the first time since last February. And, the 52-week high was $8.95 per share.
Many investors do not like stocks that are below $10 per share, with some funds even prohibited from owning them. A $4 stock, or lower, implies current weakness or poor future performance expectations. To remedy this perception, some companies complete a reverse stock split. The size depends on what the current price is: the lower the price, the larger the reverse split.
There have been seven reverse stock splits in the senior care sector, but most of them go back 20 years or more. For a little walk down memory lane, The Standish Care Company did a 1-5 reverse split in 1996, Karrington Health (a Sunrise Senior Living wannabe at the time) a 1-3 split in 1998, and Greenbriar Corporation a 1-25 in 2001 when its shares were at 21 cents. More recently, the former Assisted Living Concepts (now Enlivant) did a 1-5 reverse split in 2009, and this was after a regular 2-1 split in 1997.
In almost every case, the reverse split accomplished little. But the reason was that many of these companies were about to go under and most were quite small. A reverse split was the last hope, and often done to avoid a de-listing of their shares, but hope is never a business plan. There were at least 10 regular stock splits over the past 25 years, in case you were interested, and all of these were 2-1 or 3-2 when the price had increased nicely. The most recent was The Ensign Group, which completed a 2-1 split in late 2015.
More recently, two larger companies completed reverse splits when their share prices had remained stubbornly low. The first was Five Star Senior Living in late 2019 when it completed a 1-10 reverse split at a time when its share price had traded between $0.31 and $1.05 per share. Any longer below $1.00 and they would have lost their listing, which was the stated reason for the reverse split. It sort of worked for a while, and then the pandemic hit. However, the share price post-split did hit $9.25 in February 2021, but its current price of $2.85 equates to just 28 cents a share on a pre-split basis. One of the problems is that the outstanding shares went from 50.8 million to just 5.1 million, so liquidity dropped significantly.
Capital Senior Living (now Sonida Senior Living) was the most recent reverse split, and they did a 1-15 split in December 2020 when the shares were around $1.30 each. The company was going through a lot of problems, including shareholder fights, a “going concern” opinion, census issues (of course) and a size reduction of 50%. But with such a large reverse split, the shares outstanding went from 21.2 million to just 2.1 million. While the price obviously rose, the liquidity was minimal with so few shares outstanding. At a current price of about $27 per share, that equates to $1.80 pre-split. But at least they kept their listing.
This brings us to Brookdale, which we have to say is a very different situation. It is the largest senior living company, and while it is in a weakened state, it is not nearly as much as Five Star and Sonida were at the time of their reverse splits. In addition, Brookdale has more than 185 million shares outstanding. So, even with a more modest reverse split of 1-4 or 1-5, that would still leave about 40 million shares outstanding, more than Sonida pre-split and just below Five Star pre-split. That would be plenty of liquidity, and a higher price could give a little boost of confidence in the stock. But what would really give it a boost would be improved census and cash flow. Those will be much harder to come by.
The bottom line is that the country’s leading senior living company, at least by size, should not be a $4 stock, or lower, and they have the size and flexibility to do something about it. Many of us believe 2022 will not be an easy year, so Brookdale’s operating performance may not be enough to push the share price higher anytime soon. A higher price does not solve all your problems, as we saw with Five Star and Sonida, but at least it gets you out of the penny stock territory.
