New Brookdale CEO: Short-Term Pain Needed For Long-Term Gain

Cindy Baier knows that she has her work cut out for her as the new CEO of Brookdale Senior Living (NYSE: BKD), and she is frank that success will only come after she makes some hard decisions.

Not only has Brookdale—the nation’s largest senior living provider— been underperforming, the industry as a whole is facing a “perfect storm” of challenges in 2018, Baier said Thursday on a call with investors and analysts. She believes that her intimate knowledge of these challenges is one reason Brookdale’s board chose to elevate her from CFO to CEO, in a decision announced Thursday and effective Feb. 28.

“I [believe the board tapped me] because I know the business and how to get things done in Brookdale’s culture,” she told Senior Housing News, in a followup interview after the call with investors. “I know what issues need to be resolved and we’re starting to execute on that.”

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She also said that her strong sense of mission, rooted in personal experience, most likely helped her stand out from other candidates—including eight to 10 external candidates—who the board considered. As a teenager and through her college years, she helped care for her blind grandfather. Just last year, her mother received home health services and skilled nursing facility care and was in hospice before passing away.

Living in a small town in central Illinois that Brookdale does not serve, her mother opted to be in a senior care community where she had personal ties, Baier said.

“As I went through that journey with her, I became even more sensitive to the issues in senior living,” she told SHN. “It was the best of times and the worst of times, but that incredibly difficult situation gave me a very strong appreciation of caregivers in our communities.”

With this recent experience motivating her, Baier has outlined a roadmap for a Brookdale turnaround. The Brentwood, Tennessee-based company has been contending with operational challenges and eroding market value since its mega-merger with rival Emeritus Corp. in 2014.

A key aspect of the turnaround plan is a more local focus, giving communities more autonomy and resources. To accomplish this, Baier has already begun the difficult process of overseeing layoffs in an effort to streamline the corporate structure. In addition, she’s prepared to sell not only struggling but also high-performing communities to more effectively create value from Brookdale’s owned real estate.

Some of the changes will be “painful, but necessary,” she said on Thursday’s investor call, which was held to review the company’s fourth-quarter and full-year 2017 earnings as well as the leadership changes.

Best of both worlds

There are three tenets of Brookdale’s plan to improve its operations, which Baier laid out on the earnings call. These are: attracting and retaining top-flight associates; earning resident and family trust through exceptional care; and driving long-term shareholder returns.

This might not sound like a meaningful shift from where Brookdale has been focused all along, she noted. But the big, overarching change will be that decisions are going to be made “closer to our customers.”

“Senior living is a local business and local relationships are really crucial for quality of care,” she told SHN. “We want executive directors to be CEOs of their communities, to have entrepreneurial spirit, but we want them to be able to leverage the signifcant scale of Brookdale. We want the best of both worlds.”

For example, executive directors and other community-level leaders are being given more freedom in how they hire and pay associates. Marketing is also being rebalanced, in terms of how much is invested nationally versus locally, and the company is doing away with certain initiatives and burdensome requirements, such as a 600-item questionnaire that all communities previously had to fill out. The scale-related advantages come through technology systems and other back-office efficiencies, as well as signature resident programming supported by the company’s robust infrastructure.

Shifting decision-making and spending from the national to the local level has already meant some jobs have been cut, though. Overall, Brookdale is aiming for a $25 million reduction in general and administrative expenses for the year, largely related to reduced labor costs. This week, the company has already taken action on this front, Baier said.

“Part of it is in realigning our corporate and field teams to match the footprint we have,” she told SHN. “That’s a decision that’s been made, and it [was] not an easy decision to make, but we’re trying to invest closer to the community and resident.”

The company’s org chart is not the only thing being streamlined—the portfolio of owned real estate is another target for more aggressive right-sizing.

Since 2016, Brookdale has sold or terminated 165 leases, but these have typically been challenged assets, and the impact of these sales has not been significant to shareholders, Baier stated on the earnings call. Now, the company will start looking to take advantage of market conditions, where premium assets are commanding high multiples.

Sales “might include some of our highest performing communities where we don’t see the same future growth potential as we see in other parts of our portfolio,” Baier said on the earnings call.

In 2018, Brookdale is planning to market and sell 30 more communities in addition to asset dispositions previously announced, and is expecting to generate proceeds of $250 million from the sales. Still, the company is committed to being a real estate owner—noteworthy, considering that shareholders in the past have pressed the company to spin off or sell off its owned properties.

“We absolutely prefer owning to leasing real estate, that’s important to us,” Baier told SHN.

Looking to 2019

The fourth quarter of 2017 did provide some promising indications for Brookdale. Average occupancy increased 40 basis points from the third quarter, hitting 85.2%, despite severe weather and an early flu season. And at the community level, turnover among key leaders declined 19% year-over-year.

Still, all signs suggest that 2018 will be a tough year. Rising wages and tight labor markets, new supply continuing to suppress occupancy, the “constant pressure” of lease escalators being exacerbated by the “recent pressure” of rising interest rates, and the harsh winter weather and devastating flu season are forming a “perfect storm,” Baier said.

As a result, she expects Brookdale will not start to show year-over-year growth until 2019. In the meantime, she plans to further study the business and consider future plans before issuing financial guidance for 2018. Still, she’s bullish on long-term prospects, especially considering the huge boost that the aging population should bring to senior housing providers.

It’s a bet that Brookdale’s board is making, as well, that the company can drive shareholder value over time under Baier’s leadership. After a year-long review process, it rejected a $9-per-share acquisition offer and determined that the best course of action would be to proceed under the new chief executive.

Investors are less than enthusiastic at the moment—Brookdale’s share price ended regular trading down more than 19% on Thursday, at $7.18.

But while Brookdale will remain open to evaluating opportunities for enhancing shareholder value, Baier is unequivocal about where her efforts are focused.

“Our top priority is to turn around our company performance,” she said.

Written by Tim Mullaney

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