Natnael, Thomas, Grace, Rebecca

Investment Thesis

• Buy: $46.77 Price Target• Senior living is a prudent industry to invest in

given the expansion of the elderly population given shifting demographics and the baby boomers entering into this age group. 

• Brookdale has by far the greatest number of properties, and services that position it to capitalize on the elderly demographic shift in the United States.

• Majority holder of senior living facilities in the US. 

• Given the recent dip due to the winter, it is a great time to invest as the stock price is low but will continue to go up.

Company Overview

• Largest owner of senior living communities through the US with over 570 senior living / retirement communities

• Involved in many M&A since 2005 (most recently with Emeritus in 2014) and has a monopoly on senior living facilities in the US

• Emeritus merger overall positive as it improved number of qualities properties managed

Ticker BKD

Market Cap $6.91B

Current Price $37.64

EPS -1.00

Debt/Equity 2.57

Stock Price

Pro-forma Geography Coverage

Management Team

• T. Andrew Smith - CEO Became CEO of BKD in February 2013. Before that Smith was Executive Vice President,

General Counsel, and Secretary since 2006. • Mark Ohlendorf - President and CFO

Became co-President in 2005 and then President in 2013.  

Joined BKD through its merger with Alterra in 2005 (where he was CEO). 

• Gregory Richard - COO Joined the company through their merger with

American Retirement Corporation and Brookdale.  Has been involved in operations of Retirement

Corporations since 1986.

Portfolio of Services

• 1,100+ Senior Living Facilities (both independent and assisted)

• Operating in 46 states• Currently serving 110,000+ senior citizens• Businesses include:

Management Services for Existing Communities Skilled Nursing Facility (SNF) Therapy (physical, occupational, speech) In-home Health and Memory Care Dementia / Alzheimer’s care

Accelerated top line growth in coming year

Recent News

2014 Q4 Earnings Call

Sandell Letter

• Sandell Asset Management Corporation, major shareholder in BKD, pressures BKD to spin off its real estates to shareholders through formation of real estate investment trust (REITs)

• BKD met with Sandell, and is considering suggestions

• Sandell valued stock at $49 if spin-off executed

• Friday 2/6 opening: stock price jumped 5% to $36.31

Q4 Loss

$106.5M

EPS $0.53 •Missed target by $0.03

Revenue

$1.3B•77.1% year-to-year increase•Beat target by $60M

Competitive Environment

Brookdale Senior Living

Price: $36.59Market cap: $6.69 billionRevenue: $1.3 billionUnits: 66,524

Capital Senior Living

Price: $24.56Market cap: $697 millionRevenue: $350.3 millionUnits: 14,600

• Only national public senior living company, 3x bigger than largest competitor

• Unique economies of scale - recent joint venture with HCP has decreased rent expenses by millions

• Most diverse collection of services: assisted living communities, in-home nursing, dementia care, therapy

• Stands to benefit from aging baby boomers (growing 3x faster than population avg.) and increasing lifespan

Annual increase in capacity is only half of that required by demographic growth

Strong customer retention

Market dominance yields edge in acquisitions and partnerships with healthplans

Long-term Growth Drivers

•Available venues for scalable growthAbout 40% of the population aged 85 years and above is expected to have Alzeimers, so they will experience heavy limitation as to what daily activities they can do

The population aged 75 and above with incomes of $50,000 and above is expected to grow at the rate of 39% from 2013 to 2018

Long-term Growth Drivers

• Emeritus resources allow expansion in growing market for hospice care, in-home services

• Major synergies with Emeritus: $0.95 per share• Elimination of biggest competitor decreases lease

concessions• Recently announced potential spinoff of real estate

refocuses attention on core capabilities, reduces REIT competition

Short-term Catalysts

Risks

• Acquisition Integration Integration with Emeritus will be a large, difficult

undertaking >> will yield more future synergies• Tech Integration

BKD recognizes the need for next-generation wireless LAN to reach its far-flung facilities >> Future increased efficiency and lowered operations cost

• DOJ Investigation Under investigation by Department of Justice for

undisclosed reasons• Bad Press

PBS conducted investigative report on Emeritus, seemingly unnecessary deaths

• Slowing Down Construction Construction of senior living facilities slowed down;

concentrated in certain major cities rather across the country

Risk - Recent News

On January 26th BKD shares fell 14% in a few hours based on the news that there would be poor stock performance as a backlash from 4th Quarter performance.  Due to the fact that there are lower occupancy rates because of the tough winter and poor flu vaccine performance, occupancy is expected to be low throughout the first quarter of 2015, but should re-bound by mid-2015. 

**The majority of the low-occupancy properties are in the newly acquired Emeritus senior living homes. **

DCF Analysis

• EV / EBITDA: 11.5x• Discount Rate: 10%• Enterprise Value: 12.7B• Share Price: $46.77

Conclusion

• Smart to invest now, BKD will continue to grow and expand its offerings while realizing synergies with Emeritus.  

• Focusing on senior living rather than real estate will improve company profits in the long term.  

• Investing in BKD is the best way to invest in the senior living sector, which should grow reliably in the foreseeable future.