[Update] Brookdale’s Occupancy Woes, Integration Troubles Continue

Brookdale Senior Living (NYSE: BKD) has experienced its share of growing pains after acquiring Emeritus last year. And now, three full quarters since, the nation’s largest senior housing provider continues to see some near-term shortfalls due to integration challenges—namely, turnover of communities’ management staff and ineffective marketing campaigns.

In the second quarter ended June 30, 2015, Brookdale saw cash from facility operations (CFFO) drop to $0.60 per share, down from $0.63 per share that the company reported in the first quarter.

“Our second quarter experience underscored our belief in the long-term growth potential of our company; however, our near-term operating performance was below our expectations,” said Brookdale CEO Andy Smith in a written statement.

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Meanwhile, average occupancy for all consolidated Brookdale communities in the second quarter of 2015 fell to 86.5%, a drop of 90 basis points from the first quarter of 2015. This after the provider saw a 70 basis point drop in the immediate aftermath of the merger.

In a call with analysts Tuesday, Smith attributed much of the near-term shortfalls to integration challenges, adding that the integration process has been “disrupted.”

“The Emeritus merger has been more challenging than we originally anticipated,” Smith said, noting that high turnover of management staff at the community level was driving some of the short-term losses. “We continue to see high turnover in our communities, and this is most pronounced in the Emeritus communities. [We’re requiring them to adapt to] a fast-paced environment that requires a more sophisticated skill set. Our lowest occupancies were experienced in communities with high turnover.”

In addition, the company’s initial marketing efforts around the Emeritus rebranding may have been too quick out of the gate, Smith said about some of the company’s occupancy woes.

Brookdale’s decision to place 1,100 billboards nationwide “created some short-term confusion, which affected lead flow in smaller communities,” Smith said.

The company’s rapid rebranding pace may also have been too much for its call centers to handle.

“With the benefit of hindsight, we moved too far too fast with the result that call centers did not adequately keep up with increased volume,” he said.

But Smith stressed that growth is on the horizon, adding that Brookdale has improved the effectiveness of its call centers and has made the necessary “marketing and sales adjustments.”

“We are confident this is a near-term situation, and that ultimately we will achieve our expectations in respect to the Emeritus merger,” he said. “We are turning the ship around. We saw positive net move-ins in June and saw positive net move-ins roughly commensurate with June in July.”

Despite the lower occupancy in this year’s second quarter, compared to the second quarter of 2014, the company’s same community average monthly revenue per unit grew 2.8% in the second quarter of 2015, an increase led by 3.8% growth in the legacy Brookdale portfolio.

“Our typical seasonal increase in occupancy occurred late in the quarter and was more muted than usual,” Smith said in a written statement. “This lower than expected occupancy was only partly offset by solid rate performance, effective expense management and growing cost synergies.”

The second quarter of 2015 represents the third full quarter of financial results that include the operations of Emeritus, which Brookdale acquired on July 31, 2014.

The quarter also reflects the impacts from the company’s transactions with real estate investment trust HCP, Inc. (NYSE: HCP), which included last September’s closing of the $1.2 billion joint-venture to own and operate continuing care retirement communities.

Brookdale’s total revenue of $1.2 billion for the second quarter grew 65.4% from the comparable period a year ago, primarily due to the acquisition of Emeritus and new units added to its existing communities, partially offset by the company’s contribution of entry-fee CCRCs to the joint-venture with HCP, Brookdale stated in its earnings release Monday afternoon.

Given Brookdale’s lower than expected occupancy entering the third quarter of 2015, the company is revising its 2015 CFFO guidance to a range of $2.35 to $2.45 per share, a range that excludes costs associated with integration, transaction and electronic medical record roll out.

As the company’s results have faltered in the wake of the blockbuster Emeritus transaction, it has taken some steps to right the ship—including a recent shakeup of the C-Suite. The provider also has come under pressure from activist shareholders to spin off its real estate, which some believe would unlock significant shareholder value.

—Additional reporting by Cassandra Dowell

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