Brookdale Talks $100M Cash Flow Opportunity, Capital Senior Living Needs ‘Fortitude’

One day after their Q3 2018 earnings calls, leaders with Brookdale Senior Living (NYSE: BKD) and Capital Senior Living (NYSE: CSU) elaborated further on how the companies plan to weather current senior housing headwinds and execute on operational improvement strategies.

From Brookdale’s opportunity to gain cash flow to Capital’s willingness to walk away from certain properties, executives with the two providers touched on a broad range of topics while speaking at the Stephens NY Investment Conference in New York City.

Brookdale’s occupancy calculus

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Brentwood, Tennessee-based Brookdale — the nation’s largest senior housing owner and operator — is in the “seventh inning” of its plan to strategically sell real estate and restructure leases to optimize its huge portfolio, CEO Cindy Baier said on Tuesday’s earnings call. At Stephens, she touched on how the company takes a conservative approach to calculating occupancy:

“Senior living is an industry where not everyone calculates metrics the same way. In many industries, one and one equals two. But in senior living, not always. So let me give you an example: if you have a shared unit in your portfolio where the unit is shared by two residents who are independent of each other and not related. If we had one of those units where one of those two units was occupied and one was vacant, we would count that as 50% occupied. If you look at our competitors, some of them would count that as 200% occupied. You can have a situation where the math of you think about share units affects (occupancy).

That can be as much as two points overall in terms of the occupancy. It’s fair to say that we calculate occupancy in the most conservative terms possible. If there is a unit designed for to people, you need two people occupying it to be fully occupied.”

Baier also discussed how increasing occupancy translates to EBITDA and cash flow:

“I’ll say that this industry is one where fixed costs are pretty large. If you think about you operate a community, you staff it 24 hours a day, you have to have nursing on call in some communities. You operate a dining room that serves three meals a day, every day of the year. You’ve got housekeeping. So there’s a lot of fixed costs you have to overcome.

For us, one point of occupancy is a $20 million opportunity in EBITDA and cash flow, and our business is currently 500 basis points below our historical norms. We think there is a $100 million cash flow opportunity by the operational turnaround of actually improving the business.”

Capital Senior Living’s ‘best card’

Dallas-based Capital Senior Living is focused on more centralized operations and cutting expenses, as it also prepares to transition to a new CEO. At the Stephens conference, COO Brett Lee discussed how the company wants to increase its organic lead generation as part of this effort:

“There’s a real opportunity for us to become more progressive in terms of using a digital platform to get our name out there and do more lead generation on our own. You’ll see the two biggest expense increases that we’ve had this year have been in people, that we’ve talked about, and the second has been in marketing. So, we’ve invested in expanding digital platform, doing more social media marketing, targeted ad generation. And we’ve really seen a nice uptick in our web leads as a result of that.

This industry has become relatively dependent on third-party aggregators as a source of leads and we’re hoping not to alienate those folks who want to continue to have a good relationship with them, but also to diversify our lead sources going forward … [Lead aggregators] have established a really good footprint across the entire country. They’ve also established a great marketing presence in markets where it wouldn’t make sense for us to duplicate those efforts from a cost perspective. So, they’ll always be part of our equation going forward, I believe. But the percentage of move-ins they represent for us hasn’t necessarily changed on an overall basis. It has gone up slightly but not materially. But what has changed is the amount of leads we’re generating on our own and we want that to continue.

A Place For Mom represents about 70% of our leads today, and about 30% of our move ins. We want to balance that out a little bit so that we’re generating more of our own.”

On the real estate side, Capital Senior Living prefers owning to leasing and is also looking to divest certain assets, CFO Carey Hendrickson said at Stephens:

“We own about two-thirds of our assets. We lease about a third. We really prefer the ownership side of it. On those we own, most of those have mortgage-backed debt. They’re just like on an individual’s home. There’s no corporate debt. There are no cross defaults.

We’re also looking to… divest a limited number of assets. The value of our assets on the private marketplace are still very strong. And there’s much more value that would be realized there than the public market is giving us there. We are actively marketing a few of those. The point being, we are going to take that money and strengthen our balance sheet and have cash to invest in our communities to help grow the top-line as well as into our people … We’re going to be selling some assets that are performing very well and they may be in markets that are core to us, but we may feel like they have reached a peak. We can’t create additional value, so let’s take the value we have today and monetize that. It could be there are assets that are underperforming, but we believe are in a good strong market that could generate interest and get a good cap rate. It’s really a mix.

But it is probably more of a focus today on those assets that can generate some value and cash proceeds for us.”

Hendrickson went on to describe the company’s mindset as some leases come up for renewal:

“With one of our REIT partners, of the 15 assets we have with that REIT partner, we have nine of them coming up in October 2020. By this time next year we will have had to determine whether … we’re going to just walk away from them or whether we’d restructure something else with that REIT partner. But that’s something we’ll be actively working on in the next several months.

We definitely like the ownership model. There are definitely some things we can do. We think it’s within the interest of both parties. We’re not incented to put a lot of capital into the communities that we don’t think are long-term holds. It’s not good for them or us. So, can we come together and come up with something that’s meaningful for both of us?

There’s some of those assets that we like, but it could be that if they’d be willing to sell some of those other assets or have someone else operate them, maybe a more regional or local operator that may operate them differently then we do.”

If part of a leased portfolio is performing well but some communities in it are not, Hendrickson also noted that the company’s “best card” might be to walk away from the whole group:

“Our best card is that we have to be willing to walk away from those assets. Just say, we’ll give you back the assets. If nine of the 15, like with this one coming up, they have to look at the whole portfolio and say … does that really make sense? It begins the whole discussion. So, it could be, we’d be willing to continue to operate a certain number of the assets that are good assets and you all either sell the other assets or have someone else operate them. I don’t want to talk too much about it.

That’s what creates our greatest leverage. There are things that are in the best interest of both parties for those communities to be operated well and for them to be cash flowing well … You have to have the fortitude to be able to walk away from it. and I think today we absolutely have that fortitude. We like the ownership structure much more than the lease structure. We would definitely be willing to do that.”

Written by Tim Mullaney with reporting by Tim Regan and Chuck Sudo 

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