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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

December 17, 2013 - Investing into the Golden Years

People dream about being able to travel or maybe dive deep into their favorite hobby when they retire. Some people dream of buying an RV and traveling around the United States. Or maybe they will just move to Florida to be done with cold winters and shoveling snow for good!

After people have accomplished all the things on their wish list, there comes a point when they start to slow down. Maybe they have a fall and need some assistance as they recover or maybe they just want a smaller, maintenance-free location close to friends. Maybe family is a long ways away and they want to spend time with other active adults. Some realize that life is getting difficult, but although they know they need a little help, they are not ready for the nursing home yet.

Brookdale Senior Living (BKD) is one company which is catering to this older adult population. BKD has been acquiring lots of properties in what historically has been a more fragmented market.  As the largest manager of Assisted Living Facilities in the US, with about 650 communities and 66,000 residents they cover the spectrum for whatever the needs may be. Older adults can have a daily in-home visit, a specialist drop by on a regular basis, or a visiting nurse can ensure they are taking medication.

In recent years, 80% of the revenue at Brookdale comes from private sources, which is good as recent cuts in the Medicare reimbursement will affect the company less.  Within Brookdale, retirement centers make up 18% of revenues, assisted living facilities 36%, combined rental and entry fees 24% and management services make up the remaining 12%.   

The company has been losing money since 2004, but finally should turn a profit this year. Over the last four years the company has lost $0.41 to $0.59 a share. In 2008, in the middle of the subprime housing, the company lost $3.67 a share. Analysts expect the stock to earn $0.02 in 2013 and $0.54 in 2014.   With a turnaround taking place in a growing industry, the outlook at Brookdale is significantly improved.

 Brookdale (BKD) -which has a 4 STARS S&P buy rating- trades near $27.29. Given the stock is turning around its financial cash flow, it could be a buy for your portfolio. The April 27.50 covered call can be entered at a 25.83 net debit for a 6% assigned return, 19% annualized return rate (for comparison purposes only) and 8% of downside protection. The stock does not pay a dividend.

Chart courtesy of

When you sell a call on stock, you usually want to choose a strong stock, one you could hold over the long term. But in the short term, you want a stock that won't rise too sharply. Selling a call will bring in cash at the expense of short term appreciation.

Normally, we like to see a long history of steady earnings. Brookdale has been acquiring properties, and each acquisition affects the bottom line. This is the strategy they have been taking to become the largest supplier of Assisted Living Facilities. The company was in more of a growth mode than it was in an operational efficiency mode. Certainly, there has been a unique set of circumstances in this market over the last few years.

Real estate has been a challenging business in the past few years, but Brookdale has been buying and expanding services. Given the aging population of Baby Boomers retirement centers should be a growing business for years to come. While everyone usually wants to be as active as possible, and Brookdale provide options for people to live mostly independently yet still easily get quality care and check-ups as needed basis. The company brings hopes of semi-independence to aging adults who may welcome a little help but are not quite ready to give up the independent lifestyle. Assisted living facilities may be one area of the market destined to see a lot more attention in the coming years.

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