Brookdale Rules Out OpCo/PropCo Split as Turnaround Enters Second Year

Don’t expect another major lease restructuring or an “OpCo/PropCo” split for Brookdale Senior Living (NYSE: BKD) any time soon.

Instead, the Brentwood, Tennessee-based company — fresh off a busy year of dispositions, lease restructurings with REIT landlords and discussions with major shareholders — is focused on improving the senior housing portfolio it has today, according to CEO Cindy Baier. Once the company makes further strides in its basic operations, it will be better positioned to undertake new initiatives — with Medicare Advantage being one area of interest.

“The vast majority of the portfolio reset is largely behind us,” Baier told Senior Housing News. “We’re going to be investing in our communities and really making sure the properties we still have are in the right condition for our residents.”

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Brookdale has focused on turning around its struggling operations since Baier took the CEO reins about one year ago. Part of that turnaround strategy hinged on shrinking its overall portfolio and re-balancing from leased properties to more owned assets. Last June, Baier pledged to trim about 20% of the company’s then-1,010 properties, most of which it gained in its mega acquisition with Emeritus Corp. in 2015.

And while there are still some planned asset sales left to complete, she has already made significant progress toward that goal. Brookdale has shed 137 properties through assets sales or lease restructurings in roughly the past year, leaving it with 892 senior living communities as of Dec. 31, 2018. In doing so, the company generated a net asset sale gain of $186.5 million — part of which it plans to put back into its existing communities in a $250 million capital expenditure spending package that’s $75 million more than what the company spent in cap-ex last year. Those improvements will include major projects such as new roads and pavement, HVAC systems, water heaters, nurse call systems, fire suppression systems and apartment refurbishments.

“We’re going to be kicking off a ‘pardon our dust’ campaign to excite our associates and our residents as we invest in the communities for the future,” Baier told SHN.

The dispositions and restructurings also contributed to a decrease in total revenue for Brookdale. Total revenue for the fourth quarter of 2018 was $1.07 billion, a roughly 8.3% decrease when compared to $1.17 billion it saw in revenue for the same quarter in 2017. And resident fees decreased 11% from the fourth quarter of 2017 to $806.8 million in the fourth quarter of 2018.

Weighted average occupancy for the largest U.S. senior living provider was 84.4% in the fourth quarter of 2018, a drop of 80 basis points from the same period in 2017. Independent living fared the best out of any of Brookdale’s senior housing segments, with an average occupancy of 90% in the fourth quarter of 2018 — a sizable gain when compared with the 88.1% independent living occupancy the provider saw during the same period in 2017. At the same time, RevPOR — or average monthly senior housing resident fee revenues per occupied unit — increased 3% for the fourth quarter of 2018 when compared to the fourth quarter of 2017.

Overall, though, Brookdale leadership was adamant that all signs point to a slightly better year in 2019, and perhaps an even better one after that.

“We believe in the positive trend in senior housing as the crest of the silver wave is approaching,” Baier said Thursday during a fourth-quarter earnings call with analysts and investors. “We are committed to the multi-year roadmap I introduced in February 2018, and we are committed to our turnaround strategy.”

No OpCo/PropCo

Brookdale also weighed in on a proposal from activist shareholder Land & Buildings to split the company into two parts, with one dedicated to real estate ownership and the other focused on operations. And the company’s answer is: No.

“We do not believe that an OpCo/PropCo transaction is advisable to pursue at this time, as it likely wouldn’t create additional shareholder value,” Baier said on Thursday’s earnings call. “A separation would result in an operating company with uncertain viability and a single operating PropCo REIT that is unlikely to trade well due to key structural deficiencies.”

Baier listed three main reasons an OpCo/PropCo arrangement wouldn’t work for Brookdale, based on what she described as a thorough review done in consultation with investment bankers:

  • Existing third-party lease obligations and new potential leases, along with funding of near- and long-term cap-ex needs, would potentially create a challenging cash-flow situation for the operating company.
  • The PropCo’s valuations would be impacted by the perceived tenuous viability of the OpCo, and its initial single-operator exposure and higher-than-usual leverage profile would limit its ability to grow and diversify.
  • Such a deal could carry tax implications, which could prove a substantial burden for the new operator.

The way forward

Embedded in Brookdale’s current strategy is a plan to boost recruitment locally and on the corporate level and slowly but surely adopt new technology. And, the provider is looking at new ways to work Medicare Advantage into its operational model.

The company is currently searching for a chief people officer — a role that will likely be called executive vice president of HR when filled, Baier told SHN — and a new chief information officer. On the community level, Brookdale has adopted a new part-time benefits program, and continually offers competitive pay packages, to help attract and keep quality workers.

On the technology side, Brookdale is in the midst of rolling out an electronic residency agreement platform that will let new residents sign such agreements online and print them out for future reference. The initiative will let Brookdale collect data relevant to its resident billing, a development Baier said she’s especially excited about. And, the company is also piloting smart-home technology in some of its communities and looking into other ways to use technology to boost efficiency in areas such as scheduling.

Regarding Medicare Advantage, Baier told SHN it was too early to talk specifics. But she said the company was exploring a few options, includings starting a plan on its own or partnering with a third-party MA provider.

One thing that likely won’t change for Brookdale any time soon is the way it brands its communities. Elsewhere in the senior living industry, like with Lake Oswego, Oregon-based Eclipse Senior Living, leaders have suggested that it might be wise to adopt a hotel-like model, where communities are packaged under different sub-brands. But Baier pushes back on the idea that hotels and senior housing have much to do with one another.

“What I genuinely believe is that each community’s local reputation is the single-most important thing, and the quality of people in the community is more important than the flag on the door,” Baier told SHN. “If you think about senior living, it’s much different than hotels. This is a decision someone makes very infrequently, and they’re going to spend the time to do the research to make sure that it’s the right community.”

While 2019 should be another trying year for Brookdale given current market conditions and other pressures — and that’s reflected in the company’s EBITDA and free cash flow expectations for the year ahead — 2020 could be the year the dark clouds truly start to lift. Still, in the meantime, some investors might be turned off by the provider’s slow recovery, according to Stephens Analyst Dana Hambly.

“The company ruled out a REIT spin for now, which may be pressuring shares, though we did not think this was a reality to begin with,” Hambly wrote in a note to investors. “Brookdale accomplished plenty in 2018 relative to repositioning the owned/leased portfolios, improving employee retention, and setting a strategy for long-term growth, so it is frustrating to see that it has created no shareholder value.”

Brookdale’s share price fell roughly 14.7% to land at $6.93 by the time the markets closed Thursday.

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