Brookdale Senior Living (NYSE: BKD) is still feeling the heat from new competition—but its outlook isn’t all bad.
The Brentwood, Tennessee-based senior living provider held its second-quarter 2017 earnings call the day after a report surfaced that its potential acquisition by Beijing-based real estate and leisure firm Zhonghong Zhuoye Group Co Ltd had been put on hold.
The company addressed the prospect of a buyout in Tuesday’s call—notably, it acknowledged that the review process continues to be active and ongoing, but it’s not ready to openly discuss the situation publicly.
“While we are not in a position to answer any questions… rest assured that we remain committed to transparency,” Brookdale Executive Chairman Dan Decker explained during the call.
Meanwhile, although the nation’s largest senior housing provider was challenged by “intense” new competition in several of its markets last quarter, the company remains dedicated to its ancillary service offerings, which President and CEO Andy Smith believes can help set Brookdale apart in the future.
The company’s share price had risen 7.5% to $12.90 as of market close on Tuesday.
‘Intense’ competition
As in quarters past, Brookdale felt pressure last quarter from heightened competition in some of its markets.
“Our results reflect that competition is intense, and has been for the last year,” Brookdale CFO Cindy Baier said during Tuesday’s earnings call.
Specifically, the provider saw 68 new same-product competitors opening within a 20 minute drive of a Brookdale community in second quarter of 2017.
“The better news is that we saw only 41 new products get started this quarter that will open sometime in the future,” Smith said.
Additionally, though 384 Brookdale communities are facing the prospect of new competition opening within a 20 minute drive from their location, that number is notably lower than the 464 Brookdale communities that were in a similar situation in the third quarter of 2016.
Brookdale is employing a number of strategies to combat all of this new competition, beginning with protecting its workers.
“The competition for many of our key employees is intense,” Smith said. “People like to hire from Brookdale.”
In response, Brookdale has taken to re-evaluating its employees’ compensation in markets where competitors are building new communities. Brookdale’s efforts may be working, as key community leadership turnover improved by 15% last quarter when compared with the second quarter of 2016, according to Smith.
Additionally, Brokdale “very often” adjusts its capital expenditure programs in markets where there’s new competition, refreshing buildings that need refreshing. The provider also puts more marketing dollars to work in areas where there’s new competition.
“We are working diligently to be the most effective we can be in the face of these near-term competitive pressures,” Smith said.
‘Integrated, robust’ ancillary services
Amongst all of this new competition, Brookdale still has plenty of ways to stand out, Smith implied—including with its ancillary service offerings.
“We are the only provider in the senior living industry with an integrated, robust ancillary services platform,” Smith said.
The company’s home health margins were depressed in the second quarter of 2017, but that’s not expected to last, according to Baier.
“We would expect some recovery in the second half of the year,” she said. “There are a couple of things going on in that business. The Medicare rate reduction will affect us on a full-year basis… [and] one of the things that did affect us is the competitive intrusion that we’re overlapping.”
Brookdale’s second-quarter 2017 ancillary services operating income totaled $13.1 million, a 31.2% drop from the second quarter of 2016. The operating margin fell to 11.9% in the second quarter of 2017 from a 15.4% margin the previous year.
The Centers for Medicare & Medicaid Services’ (CMS) proposed home health small groupings model for 2019 also doesn’t change the way Brookdale plans to run its home health business. That’s because Brookdale doesn’t expect the final rule to resemble the proposed one.
“We like the balance of the home health industry,” Smith said. “We expect there to be significant dialogue with CMS before that rule is finalized.”
Plus, Baier noted, CMS’ guidance indicates a cut in Medicare rates for rural home health providers and flat Medicare rates for urban home health providers.
“All of our agencies, with the exception of one, are urban providers, so that’s an important consideration,” she said.
Overall, Brookdale’s scale and diversity in service offerings gives the provider hope for the future.
“We are also focused on the bigger picture, the longer term,” Smith said. “…No one else offers the array of senior living services that we offer.”
Written by Mary Kate Nelson
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