‘Unprecedented’ Competition Takes a Bite Out of Brookdale’s Earnings

Things aren’t looking great for Brookdale Senior Living (NYSE: BKD).

Brookdale, the largest senior living provider in the nation, is struggling with increased competition in several markets, lower-than-anticipated revenue and rate increases, and the aftermath of “an aggressive and egregious corporate raid” Florida, executives explained on the company’s third-quarter 2016 earnings call on Tuesday. All of this, in turn, resulted in a quarter that disappointed the company’s executive leadership and investors, with shares down more than 18% at market close.

“We’re disappointed with our results for the quarter and with the fact that we have revised our guidance for the year,” Brookdale President and CEO Andy Smith said during the earnings call.

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Brookdale’s third-quarter 2016 revenue of $1.25 billion missed analysts’ expectations by $10 million. Similarly, the company’s third-quarter 2016 earnings per share of 28 cents missed analysts’ expectations by 17 cents.

Additionally, the Brentwood, Tennessee-based senior living provider now expects its full-year adjusted EBITDA to be between $818 million and $828 million, as opposed to between $870 million and $890 million.

The company’s disappointing quarter can be attributed, in part, to a trend that Smith believes is impacting the senior housing industry as a whole: oversupply.

“We do, as an industry, have a heightened competitive environment which I think is going to persist for the next two or three quarters,” Smith said.

Misjudging the competition

The amount and success of new competition in several of Brookdale’s markets caught the company by surprise, slowing its progress, according to Smith.

“During the third quarter, we experienced the highest number of new competitors opening within 20 minutes of our communities that we have seen in many years,” Smith explained.

New competitors popped up in mid-size markets in especially great numbers. In fact, “unprecedented” new openings in these markets reached their highest levels in over a decade, Smith said, acknowledging that it caught Brookdale off guard. The company did attempt to use discounts and incentives to maintain occupancy, and as a result did not achieve planned levels of rate growth for the quarter.

Brookdale’s local sales and marketing teams adjust their prices and have incentive toolboxes that enable them to respond to their individual markets, Smith said.

“We are trying to maximize revenue,” Smith said. “We are not trying to maximize a rate at the expense of the occupancy.”

Smith “fully expects” that Brookdale’s mid-size markets will regain strength, possibly in 12 months or so, he said.

“Due to the competitive landscape we described, our progress, while still positive, is slower than expected,” he concluded.

Though oversupply has been a concern among senior housing owners and operators for several quarters, the latest data from the National Investment Center for Seniors Housing & Care (NIC) suggested that supply and demand remain basically in balance.

Corporate raid in Florida

Brookdale’s ancillary services business, which which includes home health, hospice and outpatient therapy, also took a hit this quarter. Operating income, for instance, fell 16.1% from the third quarter of 2015 to $14.6 million in the third quarter of 2016.

Brookdale is blaming “an aggressive and egregious corporate raid in southern Florida,” for the outcome, Brookdale CFO Cindy Baier explained during the earnings call.

Specifically, more than 20 associates from Brookdale’s community-based home health business in Florida, Nurse on Call, joined a new company that competes directly with Nurse on Call earlier this year.

“We believe that several of these former associates, on behalf of their new employer, are or have been directly soliciting our patients, referral sources, and associates in violation of non-solicitation agreements, and are engaging in other behaviors that violate Florida state law to our financial detriment,” Baier said.

Brookdale has filed legal action against a number of its former associates and their new employer, she added. The revenue decline that has resulted from this corporate raid has impacted Brookdale’s ancillary services operating margin, knocking it down from 15.4% in the second quarter of 2016 to 12.5% in the third quarter of 2016.

“We are aggressively pursuing all availabile legal remedies in connection with the situation while [we] replace staff and recover our lost business,” Baier said.

Portfolio adjustments 

In Brookdale’s ongoing efforts to turn things around, the senior living provider continues to reconfigure its portfolio.

“As we move forward into 2017, we intend to aggressively pursue opportunities to optimize our portfolio,” Smith said.

On Tuesday, for instance, Brookdale announced it has entered into a definitive agreement with affiliates of Blackstone Real Estate Partners VIII L.P. to purchase a 15% ownership interest in a joint venture that plans to acquire a portfolio of 64 communities that Irvine, California-based real estate investment trust (REIT) HCP Inc. (NYSE: HCP) currently leases to Brookdale.

Additionally, Brookdale entered into a definitive agreement with HCP to terminate leases for 29 communities, finance specific communities owned by the entry-fee continuing care retirement community (CCRC) venture between HCP and Brookdale, and add four communities HCP currently leases to Brookdale into an existing RIDEA joint venture with HCP.

With the liquidity offered by its portfolio optimization, Brookdale has an opportunity to provide capital to shareholders using a share repurchase program, he explained.

“Our board of directors has authorized a $100 million share repurchase program,” Smith said. “We see the opportunity to create high returns from a share repurchase program.”

Decker steps up

Daniel Decker, Brookdale’s non-executive board chairman, has assumed the role of executive chairman, the company also announced Tuesday. In this new role, Decker will maintain a special focus on portfolio optimization, capital allocation, strategic growth and shareholder engagement, Smith said during the call.

On the call, Decker acknowledged that Brookdale is in a rough patch.

“I and the rest of the board share the disappointment expressed by Andy with respect to the results,” Decker said. Still, he “continue[s] to be optimistic about Brookdale,” he added.

Though undoubtedly a rough quarter overall, Brookdale did make some noteworthy progress over the past three months, according to Smith.

“While we made progress in occupancy, rate, cash generation and on a number of fronts, we misjudged the effect of new competition in certain of our markets, and our results were lower than we expected,” Smith said.

Brookdale is committed to righting the ship, he concluded.

“Our management team and our board are laser-focused on and acting with urgency to improve our operating results and to optimize our portfolio,” Smith said.

Written by Mary Kate Nelson

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