The Case for a Bolder Strategic Pivot for Brookdale Senior Living

So far in 2023, senior living headlines reveal a sector in pain, with industry giant Brookdale (NYSE: BKD) among those feeling the sting.

Late last week, Brookdale warned that full-year 2022 earnings would likely be below expectations and announced a C-suite shakeup. Today, the share price hit a new 52-week low, at $2.42 a share.

This latest news comes after an equity raise last fall that sent Brookdale shares into a nosedive. While revenue growth has been strong, the provider is on thin ice with investors and may need to make a more dramatic pivot.

Another industry giant, on the nonprofit side, announced just such a dramatic move last week. The Evangelical Lutheran Good Samaritan Society announced a plan to exit 15 states, reducing capacity by about 30% in a move to concentrate on core markets in seven states.

And then there is the lease restructuring that Maplewood Senior Living is undertaking with landlord Omega Healthcare Investors (NYSE: OHI), due to a cash crunch.

In this week’s exclusive, members-only SHN+ Update, I analyze the recent news and offer my takeaways, including:

• Expense pressures have operators on a knife’s edge
• Brookdale may need to overcome a reluctance to sell assets
• An entrenched corporate culture may be holding back Brookdale’s progress

Operators on knife’s edge

For both Brookdale and Maplewood, occupancy and rate increases have been strong, but not strong enough to offset expense pressures.

Maplewood’s situation also is tied to the lease-ups of expensive new communities in Manhattan and Princeton, which necessitated Omega increasing a secured credit facility by about $13 million to support near-term liquidity needs.

Brookdale expects to achieve full-year 2022 RevPAR growth in accordance with previous guidance, while total revenue and other operating income will exceed expectations. However, the company is forecasting that operating expenses increased slightly more than 1% in Q4 2022 on a sequential basis. Brookdale’s leadership had expected a slight quarter-over-quarter reduction in expenses.

The C-suite changes appear to have consolidated the CFO and chief accounting officer positions into a single role, while eliminating the EVP-community operations position. The moves are meant to “drive improved efficiency and better align our expenses with revenue,” CEO Cindy Baier said in a press release.

Achieving these objectives might have involved job cuts throughout the enterprise, with Brookdale’s press release citing “additional corporate and field optimizations” in addition to the leadership reorganization.

Labor is by far the biggest operating expense for senior living operators, but I had conversations last week with several executives, who spoke about rising costs across the board, with roughly 10% to 12% increases for food, 5% to 10% increases for supplies, and 10% to 15% increases for insurance.

All this adds up to providers in a precarious financial position, particularly if there are any unexpected shocks to the system. Weather-related catastrophes would be in that category (Brookdale’s Q4 results were affected by Hurricane Ian), as would another Covid-19 surge that necessitates increased use of agency staffing.

But even without such shocks, operators are feeling the effects of a tough 2022 and face more struggles ahead. As Stifel analysts wrote regarding Brookdale:

“[Last year] turned out to be much more challenging than we’ve anticipated. Excluding HHS grants, adjusted EBITDA margin only improved a modest 130bp, casting doubt if and when margin will return to teens level. Although we expect a faster margin recovery in 2023, persistent operational challenges indicate it won’t be a cakewalk.”

Brookdale’s next moves

Brookdale emerged from the height of Covid-19 as a stronger industry leader, having stepped up operationally during the pandemic while taking steps to solidify its financial position. But questions about Brookdale’s future have been getting louder over the last several months. 

I believe the recent leadership changes highlight more uncertainties, particularly related to the elimination of the EVP-community operations position.

When Kevin Bowman took this role, he was positioned as taking the reins from Cindy Kent, who had left the company after serving as president of senior living operations. Going forward, the VPs leading Brookdale’s East and West Divisions will report directly to Baier.

Perhaps this arrangement flattens the company’s hierarchy in a way that will prove effective, but with Kent’s exit and now the elimination of Bowman’s role, the provider seemingly has struggled to find the right approach to operational leadership. 

I do find it curious that a company of Brookdale’s size — in a business as operationally intensive as senior living — does not have a COO. Another publicly traded operator, AlerisLife (Nasdaq: ALR), recently went through an external operational review that recommended the appointment of a COO, among other steps.

The C-suite changes come on the heels of an equity raise that Brookdale executed in November 2022. Creating a “rainy day fund” might have been a good move, particularly given expense pressures heading into 2023. However, investors were jarred by the dilutive raise, particularly because Brookdale leadership had just touted solid liquidity during an earnings call.

Brookdale’s share price plunged on the announcement of the equity raise and has fallen by nearly 44% over the last six months.

The value of Brookdale’s owned real estate should set a floor on the share price, the Stifel analysts point out, and they believe that leadership needs to be “more proactive closing the gap in valuation as well as reestablishing credibility with investors.” They described last week’s leadership shakeup as a “first step” but urged that “more is needed.”

Baier’s exit would be one big move, of course, but she has done a lot of heavy lifting during her tenure, first to lead the company to a stronger position after the painful Emeritus merger, then to guide the enterprise through Covid-19. Laying the blame for all the company’s current woes at her feet may not be warranted, but at the least, more transparency and accountability about the equity raise is needed. Perhaps that will be forthcoming on the next earnings call. Company leaders declined to speak with me or provide comment for this piece.

Beyond leadership considerations, Brookdale could be due for a bigger refresh, similar to what several other large providers have undertaken in the pandemic years — some from a position of strength, others while struggling. And not all of these strategies have yet proven successful, but they do signal an urgency to reposition for the future.

Atria made a big move with its Holiday acquisition. Sunrise Senior Living announced a new vision statement at SHN’s BUILD event last fall. Discovery Senior Living is pursuing a novel approach to building scale through largely independent regional operating companies, and just recapped to fuel further growth. AlerisLife shed hundreds of properties, rebranded, and appointed a new CEO; Sonida Senior Living (NYSE: SNDA) also rebranded and has a new chief executive. And on the nonprofit side, Good Sam just announced its big plans.

A bigger pivot from Brookdale could involve a restructuring of its large portfolio. Selective asset sales could alleviate some of the drag on cash flow, help fund a stock buyback, and create clearer segments within the portfolio — perhaps even the creation of multiple brands differentiated by price point or other criteria, as several other large providers have done.

And if the recent leadership shuffle was indeed just part of a larger, enterprise-wide reduction in workforce, a leaner portfolio might make sense.

But Baier and her team seem to be “entrenched” in the current portfolio, to again quote the Stifel analysts. Analyst Tao Qiu is uncertain why Brookdale’s leadership seems reluctant to sell assets, he told me, noting that transactions would help signal the value of the company’s real estate to investors.

There is another potential big move that has been rumored, of an outright sale of the company, likely to a private equity firm. So many sale rumors have swirled around Brookdale that it’s hard to take the latest speculation too seriously. But taking the company private would alleviate shareholder pressure, if the company’s strategy is to wait for the coming “supercycle” driven by high demand.

The most potentially transformative strategic play, in my view, would see Brookdale tie up in some way with a large health system or payer. HCA is the logical option, given Brookdale’s shared home health business with the hospital giant and the two providers’ similar footprints. 

However, creating meaningful integration between senior living and a health system is difficult — just ask ProMedica. And like other health care providers, HCA is facing staffing shortages and economic uncertainty. HCA’s executives declined to share a 2023 outlook on their usual timeline due to these uncertainties. An acquisition of Brookdale hardly seems in the cards.

When Baier took the reins as CEO in 2018, she noted that the board appreciated that she knew “how to get things done in Brookdale’s culture.” 

But I wonder if an entrenched culture is one reason Brookdale has struggled over the years to retain top talent brought in from other industries, including Kent and former COO Labeed Diab. Changing a corporate culture is a notoriously daunting undertaking, but such culture change may be needed in order for Brookdale to make bigger and bolder moves into the future.