Brookdale Senior Living (NYSE: BKD) made forward progress on its occupancy rate in the first quarter of 2021, and CEO Cindy Baier is hopeful that the pandemic is waning. But, she also described a highly competitive environment and anticipates pricing pressure in the months ahead.
That optimism is buoyed by the fact that the Brentwood, Tennessee-based senior living owner and operator added 100 basis points of occupancy between February and April without lowering its average monthly rates. And as occupancy grows, that should boost the company’s margin, which had fallen as a result of the pandemic.
Brookdale is also poised to see a gain of about $300 million in net cash proceeds once the company closes a deal to sell an 80% stake in its health services business line to Nashville-based health system HCA Healthcare (NYSE: HCA).
At the same time, the company is sure to face a challenging labor market as other senior living competitors grow their workforces to deal with a similar influx of move-ins. Baier also noted that, because the entire senior living industry is currently in lease-up, other providers are resorting to “everything you can imagine” to win over residents.
The bottom line is that the company’s leaders believe that, while the future is still uncertain and some pieces have yet to fall into place, there is growing evidence that the worst of the pandemic is behind them.
“While we can’t tell you the exact timing of the recovery, based on our recent experience, and with dramatically lower construction starts and the accelerating demographic tailwind, I am confident that demand will continue to improve,” Baier said during the company’s first-quarter 2021 earnings call Friday. “I am very optimistic about our future.”
As of the first quarter of 2021, Brookdale had 695 communities in its senior housing portfolio, a little more than half of them owned by the operator.
Analysts who covered Brookdale’s latest earnings noted the company’s continued progress, and that it was poised for more possible improvement ahead.
RBC Capital Markets Analyst Frank Morgan said that the company potentially has “reached an inflection point with Covid-driven occupancy headwinds.”
“Senior housing move-ins grew in February and March, driving late-quarter occupancy improvement, which appears to have continued into April,” Morgan wrote in a May 6 note to investors. “We expect the vaccine to lift roadblocks to resident move-ins and healthcare provider referrals, which provides a nice setup for continued improvement though the year.”
And March and April brought “notable signs” that the operators’ senior housing occupancy had likely hit bottom, according to Barclays Managing Director Steve Valiquette and Assistant Vice President of Equity Search Eric Glynn.
“As high vaccine rates in communities have brought resident Covid cases down 97% since the mid-December peak, 100% of BKD communities have opened for new visitors/prospects,” the note from Valiquette and Glynn read. “This is also evident in the consolidated senior housing portfolio, where net move-in/move-outs were positive in March for the first time since the pandemic began.”
Brookdale’s stock grew nearly 11% to land at about $7.32 by the time the markets closed Friday.
Finding ‘MIMO’
One development that Baier touted on Friday’s call was that the company’s rate of move-ins versus move-outs — also known as “MIMO” — had turned positive for the first time since the pandemic began.
That was reflected in Brookdale’s occupancy, which registered at 71.1%, at the end of April, representing an improvement of 100 basis points over the company’s occupancy rate of 70.1% at the end of February. Much of this has to do with the company’s progress vaccinating its residents and employees, which has allowed Brookdale to reopen all of its communities to new move-ins and visitations.
“We are seeing increasing needs based demand from higher acuity care where 75% of residents are diagnosed with at least two chronic diseases,” said Brookdale Executive Vice President and CFO Steve Swain on Friday’s call.
As it grew occupancy, the company also grew its resident rates. First-quarter revenue per occupied unit (RevPOR) grew to $5,219, representing a 2.9% increase over the company’s RevPOR of $5,097 in the first quarter of 2020.
Brookdale’s leaders in the past have committed to preserving rate, and these results reflect “steadfast pricing discipline in a competitive rate environment,” RBC’s Morgan noted.
The company also expects to spend less on Covid-related expenses in the second and third quarters of 2021 as case counts continue to remain low in the company’s portfolio.
“As we increase occupancy levels throughout the rest of 2021, we do expect improved operating leverage,” Swain said. “As we improve on this operating leverage, we expect NOI margins to stabilize in the second quarter and then expand through the second half of 2021.”
As it held steady on rates, Brookdale faced pricing pressure from competitors.
“The entire industry is in lease-up, and we have 90% of our competitors operating five or fewer communities,” Baier said. “Everything you can imagine is happening.”
Baier noted that, while discounts and concessions are tools in the company’s toolbox, the operator’s sales teams will only wield them where it’s necessary to grow occupancy, and in a “targeted way.”
“The next several months are going to be very competitive from a pricing perspective, as the industry is under pressure,” Baier added.
Another hurdle ahead for both Brookdale and the senior living industry is labor, which Brookdale’s leaders expect to remain challenging as the industry works to regain occupancy.
“It is fair to say that it is harder to hire workers today than it has been in the last year, and we’re seeing a number of postings where applicants won’t show up for interviews, or they won’t return calls,” Baier said. “So, we really have to put our best foot forward to keep our communities staffed with appropriate mission-driven people.”
The company is experiencing the same pressures on wage rates, use of overtime, contract labor and premium pay as the rest of the senior living industry, Baier added.
Looking ahead, she sees inklings of a “return to enrichment and growth in our communities.” And while the company still did not offer guidance for the full year of 2021, Brookdale is “seeing the first green shoots of growth” in its senior living business.
“Demand for our communities is returning and gaining momentum,” Baier said. “With our recent occupancy growth and net MIMO results, we believe that we are at a positive inflection point.”
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