While not a surprise, since rumors had been floating around for a while, Brookdale Senior Living announced with its fourth quarter earnings that it has agreed to sell an 80% interest in its home health and hospice business (including its outpatient therapy business) to HCA Healthcare, the hospital giant. The sales price is $400 million, implying a $500 million valuation for 100% interest. This comes to about 1.36x revenues for the trailing four quarters ended December 30, 2020, and perhaps 18x to 20x 2021 normalized EBITDA. Last year, we wrote that it would be a home run if they could get any price north of $400 million, so maybe this is a grand slam since they got that price and get to keep a 20% share.
Revenues at this division, which has 57 home health agencies and 22 hospice agencies across 26 states, plus 84 outpatient therapy locations, have been declining sequentially nearly every quarter for a year and a half. After a near-term peak of $114.4 million in the second quarter of 2019, revenues have dropped 19% to $91.9 million in the fourth quarter of 2020. Likewise, average daily home health and hospice census has decreased from 17,506 in 2019’s second quarter to 14,812 in last year’s third quarter, representing a 15% drop. Historically, about 50% of the home health and hospice patients have come from within Brookdale communities, and 50% outside. Obviously, HCA wants to maintain the close relationship. Outpatient therapy revenues represent just 6% of the total in the health care services division.
This is a good move for Brookdale since it provides some much-needed cash, and by keeping a 20% interest the company can participate in any upside, which most industry analysts believe will be accruing to home health and hospice providers. The other reason for selling was that the profitability of the division was extremely uneven, and for three quarters in 2020 it operated at a loss. All of the trends had been negative for Brookdale, so this lets management focus on turning around its core seniors housing business and start to get census back on track.
Consolidated weighted average occupancy has now dropped from 82.7% in March last year to 70.0% in January this year, a 1,270-basis point plunge. Occupancy at the end of January was 70.4%. If census continues to slide through the first quarter, there will be increased pressure on management to discount its rates, something that just does not help the industry and can even make matters worse for Brookdale long term. But metrics like revenue per occupied room (RevPOR) seem to have stabilized and are up year over year. Investors liked what they heard and pushed Brookdale’s share price up 18% at the close, nudging the market cap just above $1.0 billion.
BofA Securities was the exclusive financial advisor to Brookdale, and Bass, Berry & Sims provided legal advice.
