Post-Merger, Brookdale Sees Potential in Home Health, Entrance Fees

As the now-largest senior living provider in the nation, Brookdale Senior Living Inc. (NYSE:BKD) is looking at future opportunities across its growing business. 

With growing ancillary business units and record move-ins over the last three months, Brookdale saw positive performance during the second quarter of this year. But looking toward the future of the senior living giant, there is more growth ahead in several areas, its executives said this week.

“The home health part of our business is growing, even in our same-store locations,” said Brookdale CEO and Director T. Andrew Smith during a conference call to discuss quarterly earnings. Further, he added, the nationwide closings of many home health agencies is contributing to that growth. 

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The company’s ancillary services produced growing margins and strong results in the second quarter, up nearly 12% based on an increase in home health census and the maturation of Brookdale’s hospice programs in a number of markets.

Ancillary service business produced $65.5 million of revenue during the second quarter—an 11.7% increase from the second quarter of 2013.

The company expects continued growth of its ancillary businesses next year.

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“Heading into 2015, we expect volume growth from continued expansion and neutral to positive rate increases in all of our ancillary service business lines,” said President and Chief Financial Officer Mark W. Ohlendorf.

Brookdale also sees opportunity through a forthcoming joint venture with real estate investment trust HCP Inc. (NYSE:HCP), announced earlier this year. The partnership positions Brookdale not only to share the ownership and operations of 14 entry-fee CCRCs, but will allow for significant consolidation potential in the entry fee CCRC industry.

“The strength that we have seen so far in the entry fee sales continues to confirm our belief that what is needed to support this product is a moderately stable and liquid housing market,” Smith said. “This is one reason why we and HCP are so excited about the prospects for our entry fee joint venture.”

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Brookdale’s entry-fee communities produced $25.9 million of growth sales, setting a record for the second quarter.

Brookdale, having recently completed its $2.8 billion merger deal with Emeritus Senior Living Corp. (NYSE: ESC), had a historical high number of gross move-ins and for net move-ins in June.

“Based on the June activity, we are estimating that July ‘s average occupancy is approximately 50 basis points higher,” Smith said. “What we’re trying to do is to hit that sweet spot between growing rate and also growing occupancy.”
Brookdale plans to heavily invest in Emeritus’ assets, projecting it will spend $100 million more than Emeritus itself on a standalone basis expected to invest in those assets over the next three years. And, as part of the merger, the 1,146 Emeritus communities will be reflagged under the Brookdale name.

Addressing the Emeritus and HCP transactions, Ohlendorf said, “We’re very excited to have begun the implementation of our integration plans, and we continue to see potential upside of being the largest senior living solutions provider.”

Labor costs continued to grow at 2%, 2.5% a year and Brookdale observed low cost pressure in food.

“One of the good things about the size and scale of Brookdale [is] we have the expertise to forward purchase and hedge a number of commodity cost, including certain food segments,”  Ohlendorf said. “So while we’ve seen a little bit of pressure there, I think we’ve adjusted to it quite well.”

Overall, Brookdale grew revenue by 5.1%, excluding reimbursed and managed community costs. Cost growth remained moderate. As a result, the company’s operating margin increased by 40 basis points quarter-over-quarter.

The year-over-year senior housing rate growth, excluding skilled nursing, was 3.8% for the second quarter.

“We continue to see the positive impact of the investments we have made in our refurbishment program for our current portfolio,” Smith said. “In addition, we are seeing an improvement in the market environment that is supporting street rates as evidenced by our rate growth in our Retirement Centers of over 4% for the past four quarters.”

Written by Cassandra Dowell

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