Brookdale Reaches Late Innings of Portfolio Restructuring Efforts

To use a baseball analogy, Brookdale Senior Living’s (NYSE: BKD) portfolio restructuring strategy is now in the late innings, and President and CEO Cindy Baier is looking to her bullpen to hold a narrow lead.

“I would say we’re at the seventh inning of our strategy,” Baier said during the Brentwood, Tennessee-based company’s Q3 earnings call Tuesday morning.

The game started last February, when Brookdale announced the conclusion of a strategic review process and elevated Baier from CFO to CEO. Her mandate has been to turn around the senior housing giant, which has struggled since the mega-acquisition of Emeritus Corp. in 2015. That transaction created a company with more than 1,100 properties nationwide, and a key focus of Baier’s turnaround strategy is to shrink the company to a more manageable size.

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Early on, Baier expressed a willingness to sell both underperforming and high-performing properties, in the interest of monetizing some of the company’s valuable real estate. Three quarters into her tenure as CEO, it appears that the company is making good on this plan, including through some high-profile dispositions of owned real estate, as well as through restructured leases with its landlords.

In terms of its quarterly financials, Brookdale posted $1.12 billion in revenue in the quarter, a 4.9% drop from the same time frame last year. The decline reflected the sale of communities, lease terminations and the lower occupancy rates affecting the senior housing industry, in general, CFO Steven Swain said.

Brookdale reported a $37.1 million net loss for the quarter, versus a net loss of $413.9 million for the third quarter of 2017. The net loss for Q3 2017 included $368.6 million of goodwill and asset impairment. Brookdale has topped revenue estimates three times over the last four quarters. Shares were up 0.67% in late-afternoon trading on Tuesday, at $9.26.

A mixed bag with dispositions

Brookdale’s $194 million August sale of its Battery Park senior housing community in Manhattan to Ventas (NYSE: VTR) highlighted the success of its disposition strategy. In addition to that sale-leaseback transaction, Brookdale on Tuesday announced agreements to sell 18 more properties, with another seven being marketed.

In the past 12 months, Brookdale has disposed of 104 communities through sales and lease terminations, totaling 10,743 units, and is well on its way to cutting 20% from its overall portfolio by 2021. The company expects to generate net proceeds in excess of $250 million from these sales; $144 million is coming from the Battery Park transaction.

“These real estate activities resulted in $91.9 million less residential fee revenue and $11.7 million less adjusted EBITDA, but increased adjusted free cash flow by $1.4 million,” Swain said.

Additionally, Brookdale cut its leased community portfolio by 22% since Q3 2017. The loss of these assets contributed to a 9% decrease in resident fees.

With these assets off the books, Brookdale saw improvement in other metrics. Facility operating expense decreased 6.7% year-to-year, to $607.1 million. General and administrative expenses realized a 10.1% decrease to $57.3 million primarily due to a decrease in corporate headcount as a result of organizational restructuring. Brookdale’s goal is to reduce G&A by 3% to 4% of the revenues of communities that are disposed of, within six months of those sales taking place. 

Brookdale reported 1.3% growth in same-community revenue per occupied unit (RevPOR). Same-community revenue per available room (RevPAR), meanwhile, increased 0.2%, year-to-year. These numbers bode well for future resident rent growth, Swain said.

“The use of incentives to manage occupancy in a very competitive environment was especially high in the third quarter of 2017. Last year, our mark-to-market was approximately minus 6%,” Swain said. “We have improved our pricing discipline and for the third quarter 2018, the mark-to-market was within 1% of our existing residence rate which is an indication that we do not view price incentives as a long term viable strategy to increase occupancy.”

Brookdale’s senior housing weighted occupancy rate was 84.4%, which is indicative of the vacancy struggles facing the industry at large. Those occupancy struggles are likely to continue well into 2019, Baier said.

That did not go over well with some investors, Dana Hambly, CFA, a research analyst at Little Rock, Arkansas-based financial services firm Stephens, told Senior Housing News. 

Brookdale’s view that occupancy would be down again is not surprising with new inventory,” he said. “In coming quarters, despite occupancy being down, can they increase their margins through rates and tighter expense control? They need to start showing growth in cash flow and EBITDA.”

Phase 2: driving rates and occupancy

Now that the dust is settling on Brookdale’s disposition strategy, the company’s focus turns to the next phase in its turnaround: building on Q3’s positive in-place rent growth. Brookdale has seen a 4% resident rate increase this year across its portfolio, and Baier believes that rate can be higher next year.

Our strategy is to make sure that our communities are appropriately positioned, and we’ve got the best people in the industry in place,” Baier said. “But we have to drive rate and we have to drive occupancy for that strategy to translate into higher facility operating income and better return for our shareholders.”

Brookdale’s top priority in its “winning locally” turnaround agenda is to improve operations through attracting and retaining the best talent in the industry. But that costs money. Brookdale saw a 4.5% increase in same-community operating expenses, and a 5.5% jump in same-community total compensation. This reflects wage pressures in a tight labor market, and more robust benefits and incentives to recruit and retain workers.

Having that talent in place will result in more and better referrals, Baier said. Brookdale’s resident leads increased 7% in Q3, while first visits showed similar year-over-year improvement. This was a result of having the plan in place to convert more leads into first visits, Baier said. Heading into 2019, Brookdale plans a similar plan for converting first visits to move-ins. While price discounts will remain a useful tool in the future, it will not be leaned on as heavily.

Mark-to-market was within 1% of our existing residents rate, controllable move outs improved 4% on a year-over-year basis,” Baier said. “This was the third consecutive quarter that we saw a significant improvement. Here’s an example of how our associates are making a positive difference in their community.”

Improving the existing portfolio

Even with the sales and lease terminations, Brookdale still has the largest senior housing portfolio in the country, and not all assets are equal. The company will take a thoughtful approach to capital expenditures and improvements moving forward, Baier said. Brookdale is allocating an additional $75 million for non-developmental capital expenditures in 2019.

“We have done a very comprehensive review of every single portfolio from a ground level up and we are balancing that against other capital allocation options we have,” she said.

Brookdale also negotiated agreements with its REIT partners this year and aligned capital investment interests. Notably, Brookdale and Welltower (NYSE: WELL) negotiated an eight-year renewal of the Sallie master lease, which comes with first dollar capital investments from Welltower, improving Brookdale’s near-term cash flow.

“That’s a well performing lease and we’re very excited about the continued partnership with Welltower on that,” Baier said.

Written by Chuck Sudo

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