Have you ever listened to the quarterly earnings conference calls, with management at one end and equity analysts and a few investors at the other? There are the usual congratulatory remarks from some analysts, even when the quarter doesn’t really merit congratulations (meaning, please return my calls in the future), the droning on by management, from the script, telling the listeners nothing that isn’t in the earnings press release anyway, the soft questions from a few analysts, usually to help them fill in some numbers in their earnings forecast models, and the usual request to provide some “color” on a recent acquisition or industry trend. What the questioner wants is more of a black and white answer, but all we get is a rose tint. I guess you can blame it on the SEC, as well as those law firms which make a living on shareholder lawsuits, in keeping management script-lipped during these conference calls, but it has been a long time since we have heard a tough line of questioning.
The most memorable call of all, at least that I can remember, was in the late 1990s when Bob Elkins, then the CEO of Integrated Health Services, was getting grilled on a number of issues and, most likely thinking he had the mute button on, must have turned to one of his colleagues and muttered something like, “this is a disaster,” meaning the way the conference call was going. And the only thing that was more disastrous was where the stock price headed that day, even during the conference call. That was an example of great intuition, to say the least.
Take the recent Sunrise Senior Living conference call. Analysts obviously have a focus on earnings per share, and whether the company beats the “street estimate,” which is a good thing, unless they didn’t beat it by enough, because in today’s world management has to be conservative about forecasts and matching estimates is no longer good enough. They have learned, and they know how to play the game (we are not just talking about Sunrise here). But there sometimes is a missed opportunity in these conference calls to find out some company trends that just may extend beyond one company to the industry as a whole.
As an example, Sunrise reported same-community revenues (170 communities) for the fourth quarter 2005 of $211.5 million, or 6.7% above the fourth quarter in 2004. But expenses (excluding hurricane related expenses) also increased by 6.7%. While you always would like to see revenues increasing at a higher percentage rate than expenses, a big chunk of the revenue increase in this case came from the 310 basis point increase in occupancy from the year-ago quarter, perhaps as much as 50% of the $13.3 million revenue increase. The average daily rate increased by only 3.6% over a year’s time in these facilities, which means that if not for the occupancy increase, the same 170 communities would have produced the same or a lower operating income in this year’s fourth quarter than last year’s, depending on your assumptions for any incremental expense associated with a 3% increase in occupancy. We are not picking on Sunrise, as the company is in great financial shape. But if our analysis is correct, this tells us that if expenses are increasing faster than rate increases for one of the leaders of the industry, this does not bode well for the rest of the pack. Perhaps I am blowing this out of proportion, but I would think this might impact some forecasting models, especially with regard to where costs are going.
And then there is Brookdale Senior Living, where we hear that investor inquiries are directed to Fortress Investments, the company that controls more than 60% of the stock. During the fourth quarter conference call, headed up by the vice chairman (basically, someone from Fortress), no one questioned the wisdom of increasing the quarterly dividend rate by 40% when the cash flow in the fourth quarter, after adding in interest income, could barely cover that quarter’s lower dividend. The fourth quarter’s “adjusted” EBITDA was about $27 million, but after deducting $12.8 million of interest expense, you are left with $14.2 million, compared with a dividend payment of about $16 million.
We understand that the increased cash flow will come, in part, from the $743 million of recent acquisitions, but isn’t that a little like putting the cart before the horse? Why not deliver on what you expect the acquisitions to produce and then increase the dividend rate once the money is in the bank, so to speak? And, isn’t the 40% increase in the dividend rate really just a bonus for senior management and Fortress with their large positions in the stock? Wouldn’t the money be put to better use paying down debt or funding profitable acquisitions? Why the rush to increase the dividend - to keep the yield in line with what it was at the time of the IPO?
Unfortunately, we will never know the answers to these questions. Perhaps the company wants to act like a REIT and pay out all of its earnings, but it is an operating company, not a REIT. Although no one will speak on the record, there is a lot of industry concern about Brookdale’s direction, regarding both the assimilation of the recent acquisitions as well as the stock performance, which just a few people think has gotten a head of itself. Brookdale’s IPO was eagerly anticipated by an industry thirsty for recognition in the public markets, and a healthy Brookdale is good for the seniors housing industry, very good. That is why there is a level of concern, because as the largest market cap company in the assisted/independent living sector, there is a lot riding on its success. No one, and I mean no one (well, except those nasty short-sellers), wants to see a repeat of what happened on the eve of the NIC annual conference in 1999 with another company. Perhaps some tough questions today will prevent some of the problems of tomorrow. But don’t hold your breath.
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