Brookdale has been in the headlines lately, with the departure of its president of senior living, Cindy Kent, and its plans to offer $200 million in convertible senior notes.
These are just some of the company’s latest changes and moves under the direction of CEO Cindy Baier. And I think there is evidence that some of the recent moves Brookdale has made under Baier’s leadership will help insulate it from future distress during its recovery and prepare it to grow as the pandemic recedes.
Two factors in particular lead me to think this way:
— Brookdale manages around 680 communities around the U.S., with a higher concentration of assisted living and memory care communities in its portfolio to capture needs-based demand
— Brookdale is cushioned against further market disruptions thanks to savvy moves to improve its balance sheet
Going forward, it seems to me that the biggest unsolved challenge is the cost and availability of labor, and I believe those are headwinds that won’t let up anytime soon.
Still, I think Brookdale and Baier deserve a lot of credit, given the state that the company was in just three years ago.
If you had told me then that the operator would face a deadly global pandemic in 2020, I would have guessed that such a crisis would have compounded the difficulties that the company has faced since the merger with Emeritus in 2014.
But the opposite has happened, and I think Brookdale is emerging from the pandemic with a burnished reputation, increasing investor confidence and in fighting shape.
Smaller, more targeted portfolio
Brookdale is a much leaner company today than it has been at any time since the Emeritus merger. In recent years, the operator has spent time restructuring leases with its biggest landlords, such as Ventas (NYSE: VTR). And in the pandemic years, Brookdale has slimmed down even further, going to about 680 communities in 41 states.
Brookdale’s operations are also heavily weighted in favor of assisted living and memory care units, which comprise roughly 70% of the company’s senior housing portfolio, according to Baier.
Although it has varied somewhat from one market to the next, Brookdale’s AL/MC segment performed relatively better during the pandemic recovery period, and added 110 basis points of occupancy in the second quarter of 2021. That is an improvement over the operator’s independent living segment, which was relatively flat for the quarter, sequentially.
“Where we have seen the outperformance is really in our memory care communities. In particular, their performance during the second quarter was absolutely phenomenal,” Baier said during the company’s second-quarter 2021 earnings call. “And then what we’ve seen softness in is independent living, and that’s something I think is [true] across the industry, as well.”
And demand appears to have held for Brookdale as the delta coronavirus variant tore through the country over the summer. Though its recovery slowed at the end of the summer, Brookdale saw its seventh consecutive month of occupancy gains in September. One big asterisk is that the third quarter is typically when Brookdale sees most of its growth in move-ins and occupancy. But recent trends paint a picture of steady improvement.
Given its relatively stronger performance, the assisted living and memory care segment should help the company weather future disruptions, and Brookdale’s leaders in recent months have worked to capitalize on the company’s concentration of higher-acuity communities. In fact, better capitalizing on the higher concentration of assisted living and memory care communities in its portfolio is one of Brookdale’s three “pillars” key to the company’s recovery.
During the company’s 2Q21 earnings call, Baier noted that the company is “well-equipped to serve residents with complex medical conditions.” She also touted the fact that Brookdale tied Chicago-based Senior Lifestyle Corp for the no. 1 ranking among assisted living and memory care decision-makers in the 2020 U.S. Senior Living Satisfaction Study from global marketing information services company J.D. Power.
Going forward, Brookdale could further bolster and innovate its health care offerings by working with new partner HCA Healthcare (NYSE: HCA), the nation’s largest hospital system. Earlier this year, Brookdale sold 80% of its home health business to HCA.
Brookdale believes that the home health and hospice business could grow under the new JV, and in the process provide new services to Brookdale residents under the auspices of HCA. In the past, Baier has noted partnerships with health care providers as part of her long-term vision for the company.
“There’s a real opportunity to get upstream and increase [residents’] healthspan by giving them proper nutrition, proper purpose, exercise, all those things,” Baier said in late 2019. “By partnering with payers, hospital systems, with other members of the health care ecosystem, we think we can actually improve penetration [rates].”
In terms of the portfolio’s geographic composition, the operator has a high concentration of communities in Texas and Florida, with more than 200 communities spread across the two states. While certain Texas markets in particular have suffered from occupancy woes tied to oversupply, these also are states that should see significant demand as the boomers age — and even the supply pressures have eased of late.
Indeed, the company is seeing a much more favorable supply-demand dynamic than any time in recent history.
New construction starts within 20 minutes of a Brookdale community are 44% lower than a year ago, and that should give the operator a tailwind for several years, Baier told SHN in August.
The industry overall may be entering a “window of limited inventory growth,” NIC Chief Economist Beth Mace told SHN in October. While the onus is on senior living operators to make the most of muted inventory growth and build occupancy in the next couple of years, that will certainly be easier with fewer shiny new communities to compete with.
With the portfolio in better shape, Brookdale also is engaged in operational initiatives — notably, a “sales transformation” that the company is already seeing dividends from that effort in the form of increased leads and move-ins.
Liquid courage
Perhaps the most important component of Brookdale’s recovery is its balance sheet. After all, long-term plans are naught if you can’t survive short-term disruptions.
To that end, the operator has spent considerable time and energy building up a monetary cushion and getting a handle on debt. Recently, the company announced it was offering up to $200 million in convertible senior notes that are due on Oct. 15, 2026. Brookdale said it is using the proceeds for general corporate purposes, such as refinancing or repaying maturing and other debt.
The transaction was a “win-win” for Brookdale and its investors, according to Stifel.
“Brookdale gets attractive unsecured financing to pay off maturing mortgages and extend debt maturity without dilution to equity,” Stifel analysts wrote in a Sept. 27 note. “Investors get an opportunity to participate in the recovery and growth of earnings without enduring short-term volatilities.”
From a liquidity perspective, the aforementioned deal to sell an 80% stake in the home health and hospice business resulted in about $306 million in net cash proceeds.
And even prior to that deal, the company had built up a significant cushion. As of June 30, Brookdale’s liquidity totaled $387.8 million.
These are just a few of the company’s recent moves to improve its balance sheet. The bottom line is that the company has a longer runway now to help deal with any future disruptions.
“While industry supply growth was significantly slowing, Brookdale restructured its enterprise through asset and service line divestitures and has improved its balance sheet and maturity ladder,” RBC Capital Markets Analyst Frank Morgan wrote in a Sept. 9 note to Brookdale investors. “Demand for need-driven services continues to grow, and the occupancy improvement over the past six months is very encouraging, demonstrating that the safety afforded from resident and staff vaccinations will allow the recovery to continue.”
Brookdale shares are currently trading at close to prepandemic values, and the company is seeing increased interest from certain investors, including hedge funds.
A recent analysis from financial news site Insider Monkey showed that Brookdale was in the portfolios of 32 hedge funds at the end of 2Q21 — nine more than it started the quarter with.
Staffing is the big challenge
While I’m bullish on Brookdale’s performance through the pandemic, I believe that the company’s long-term success — like that of providers across the industry — hinges on staffing. Whether Brookdale can effectively recruit and retain workers in the coming months will help determine how quickly it can recover and ultimately grow.
In May, Baier noted that the operator had seen “a number of postings where applicants won’t show up for interviews, or they won’t return calls.”
Baier has since said that while a fiercely competitive labor market will put near-term pressure on the company’s margins, she also believes these challenges are “transitory” and that margins will improve in 2022.
While it’s possible Brookdale’s margins will improve next year, I don’t agree with the notion that labor challenges are transitory or that they will let up by 2022. The pandemic has led to a period some have called the “great resignation,” and many hourly workers have reassessed what it is they want out of work and how much they want to earn. It’s no secret that the senior living industry is vulnerable to this phenomenon, given how many people it takes to adequately staff a community.
I think back to several months ago, when I spoke with a worker at a large provider’s community in the Pacific Northwest. They told me that they thought the industry itself had structural issues in the way it employed and paid people, and that workers were losing patience with non-livable wages and sometimes-frustrating work schedules.
Since writing that story in July, I have talked to or heard of operators who upped wages and have gotten more creative with the way they schedule shifts — Brookdale included. Even the worker I talked to for that story recently said they got a substantial pay raise, and felt like their employer had started to value the importance of their work more.
The challenge for a company like Brookdale is doing this at scale, and offering both attractive jobs for employees while also trying to grow revenue and margin.
I assume the departure of Kent could complicate those efforts. As president of senior living, she oversaw some pandemic workforce initiatives that included a push to train Brookdale’s workers to become “corporate athletes,” and bringing in a military official to discuss managing fatigue during times of stress.
And while Brookdale told SHN it had already backfilled her position by promoting former regional vice president of operations Kevin Bowman to the role of executive vice president of community operations, the leadership change comes at a tough time for recruiting and retaining frontline workers, and for maintaining company culture.
It should help that Bowman first joined the operator in 2016 and has spent time in other regional leadership roles with the company. Before that, Bowman worked as COO of Vista Cove Senior Living. He also spent time as a regional director of operations for Sunrise Senior Living in the mid-2000s.
With the change in title, Brookdale also modified the position to have an even sharper focus on operations, a representative for the company told SHN in October.
Appointing someone with deep experience leading community operations makes sense for Brookdale, which has for years extolled the benefits of its “win locally” strategy. While he has a tough job ahead, Bowman’s promotion strikes me as another smart move among many that Baier and the Brookdale leadership have made during some of the toughest conditions the industry has ever faced.
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