Brookdale Senior Living (NYSE: BKD) and HCP, Inc. (NYSE: HCP) both finished 2015 with some positive notes, but set more modest outlooks for investors on Tuesday in the face of challenges ahead. Share prices of the two companies and their peer companies slid in the aftermath of the earnings releases, with Welltower (NYSE: HCN) approaching a 52-week low.
For the full year 2016, Brookdale predicted its CFFO per share would be between $2.45 and $2.55, compared with analysts’ consensus of $2.62. HCP, meanwhile, said it expected its CFFO per share would be between $2.74 and $2.80, versus a consensus of $3.16.
Both HCP and Brookdale anticipate being impacted by ongoing challenges facing the companies, with major tenant HCR ManorCare continuing to trouble HCP leadership and occupancy issues still plaguing Brookdale as the company enters year three of its Emeritus integration.
Brookdale’s Uphill Occupancy Battle
Brookdale is struggling with reduced occupancy levels and shareholders disappointed in the massive company’s current stock value. The largest provider of senior living in the country, the Brentwood, Tennessee-based company operates more than 1,100 communities.
Fourth-quarter 2015 revenue for Brookdale’s consolidated senior housing portfolio was $921 million, a decline of 0.8% from the year-ago quarter. The revenue decrease reflects a 150-basis-point decline in occupancy and a 1.9% increase in rate over the fourth quarter of 2014.
Average occupancy for all of Brookdale Senior Living’s consolidated communities during the fourth quarter of 2015 came in at 86.8%, an increase of 10 basis points from the third quarter of 2015, but still below the 88.3% average occupancy for the fourth quarter of 2014, the company announced.
Brookdale’s occupancy rate in January 2016 was also lower than its occupancy rate in January 2015, Brookdale CEO Andy Smith said in a quarterly earnings call on Tuesday.
So despite its quarterly occupancy gains in the second half of 2015, growing these numbers still is proving slow-going. In the next year, the company expects more revenue growth from rate side of the equation than from the occupancy side of the equation, Smith said.
Part of this strategy has to do with its discounting practices.
Brookdale anticipates reducing long-term concessions made to encourage move-ins, Smith noted. Over the past quarter or so, Brookdale has had success with increases in short-term, time-bound incentives, while decreasing longer-term, permanent discounts.
“This is a positive, because short-term concessions have a smaller impact on our long-term revenue growth while still stimulating demand for our units,” Smith explained. “The net result will be a powerful driver of revenue growth in 2016 and beyond.”
Disappointing share values also tainted Brookdale’s most recent quarterly results. The share price plunged about 20% after the earnings were announced, sliding from $15.57 to hit $11.48 mid-morning on the 9th, before bouncing back slightly in the afternoon.
The company’s board of directors and management team is “extremely frustrated” with where the company’s share price is, Smith said, acknowledging that shareholders themselves are frustrated too.
There will not be any dramatic moves, such as a spin-off of the real estate or a move to take the company private, Smith signaled.
“The Investment Committee and the Board have unanimously determined that at this time the best path for Brookdale to enhance shareholder value is to continue to focus on pursuing our long-term growth strategy and executing our existing business plan,” he said.
One option that the company is currently reviewing is whether to authorize a share repurchase program. Although Brookdale is considering the situation “with urgency,” exact plans have not yet been finalized.
“We have to balance, as a board, the obviously attractive investment opportunity that buying our shares back represents, but we’ve got to make sure that we are careful in that,” Smith said. “We’ve just got to be mindful of the situation and where we are leverage-wise.”
If the buyback were to occur, Brookdale has access to capital through its line of credit and underlevered assets its portfolio, Cindy Baier, Brookdale’s chief financial officer, said during the call.
“It sounded like the first quarter was not going well,” Dana Hambly, a research analyst at Stephens, said during the call, referring to the occupancy trend. Despite how things may sound, Brookdale is not sending a negative signal with respect to the first quarter of 2016, Smith countered.
“Again, there’s a reality here that our starting point, compared to the first quarter of 2015, in terms of absolute occupancy, is lower,” Smith said. Brookdale does anticipate normal seasonal occupancy patterns to occur in the first quarter of 2016, as well as throughout the year, he added.
And as for whether the company is off-track, Smith had an answer for critics.
“The January performance of the platform was completely consistent with our plan,” Smith said.
HCP’s Skilled Nursing Woes
While industry data point to skilled nursing as an increasingly popular asset class, HCP’s SNF portfolio was its Achilles heel in 2015. HCR ManorCare’s performance declined in the second half of the year, after the first six months were on target.
“We were disappointed with HCR ManorCare’s performance,” HCP CEO Lauralee Martin said during a quarterly earnings call with analysts Tuesday.
There have been ongoing challenges with changes in reimbursement models, which reduce rates and lower census as a result of shorter lengths of stay, HCP executives said. Lower reimbursements, shorter lengths of stay and increased regulation and risk management requirements created headwinds specific to the second half of the year, Martin explained.
“The results were impacted by core operating performance weakness and unfavorable non-routine items…” HCP’s earnings statement reads. “The level of performance was below expectations and uncharacteristic for the fourth quarter, which has historically been strong due in large part to increased census and the annual Medicare rate increases on October 1.”
The performance of ManorCare, one the nation’s largest skilled nursing companies, played a major role in the REIT adjusting its FFO guidance, which appeared to have an immediate effect on share price. By mid-Tuesday, the stock price was down at least 17%.
The REIT is currently in the process of selling 50 HCR ManorCare non-strategic assets and expects the proceeds to reach $350 million. As of February 9, 33 assets had been sold, while 17 were still in the process. Beyond these asset sales, the company is not looking into a greater sale at the moment, though the REIT is exploring all options to reduce its HCR ManorCare concentration and improve its credit lease, executives said.
They also cited one-time costs in the range of $10 million to $15 million for ManorCare, including an expensive defense against the Department of Justice’s (DOJ) civil complaint that was previously disclosed in April 2015. Defense costs for the full year reached $9 million, and the DOJ case is ongoing and the outcome uncertain. The company is expected to continue incurring expenses for its legal defense.
Despite these challenges, HCP’s quarterly results were generally positive. For the fourth quarter, FFO as adjusted and FAD per share increased year-over-year by 1% to $0.80 and 2% to $0.67, respectively. FFO per share and EPS were $0.99 and $1.29 respectively.
The REIT repeated its solid performance on its RIDEA lease structure with Brookdale, saying it had overcome integration challenges.
“The integration is in our rearview mirror,” said Justin Hutchens, chief investment officer of senior housing & care, during the call. “Our same-store RIDEA platform reported very strong fourth quarter results with year-over-year same-store growth. …We are encouraged by this performance.”
In 2015, HCP completed $2.1 billion of accretive investments, including $1.1 billion in private pay senior housing, the majority of which stems from its $847 million acquisition of Chartwell’s portfolio, which will be operated by Brookdale.
“These investments are performing at or above our underwriting,” Martin said Tuesday.