Brookdale CEO: Lower Third-Party Referral Volume Hurt Occupancy Growth, Drove Sales and Marketing Shift

Declines in third-party referrals contributed to softer occupancy growth than leaders with Brookdale Senior Living (NYSE: BKD) looked for in Q3 2024, but they are bullish following the company’s recent move to acquire 41 properties.

Brookdale sees greater “strategic flexibility” to manage its portfolio following recent transactions totaling $610 million to acquire the previously leased properties, company executives said during the company’s third quarter earnings call on Thursday.

Brookdale CEO Cindy Baier also is glad that the U.S. Presidential election now has been decided, as she believes that uncertainty over the future held back move-ins and drove some rate discounting.

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Overall, Brookdale’s GAAP earnings per share of -$0.22 missed analysts’ consensus expectations by $0.05, while the company’s revenue of $784.1M was in line with expectations, according to Seeking Alpha.

On Thursday, Brookdale stock fell to $5.70, down 11.76% from the previous day.

Discounting, third-party aggregators contribute to impact marketing shift

In the third quarter, Brookdale reported 80 basis points of sequential occupancy growth, reflecting continued weakness in paid, third-party referral sources. Senior living operators often have agreements with paid referral sources to drive move-ins.

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Compared to the third quarter of last year, Brookdale reported 130 basis points in occupancy increase, marking the 12th consecutive quarter of year-over-year, same-store adjusted operating monthly income growth.

Compared to the same period last year, Brookdale has increased its adjusted operating income margin by 140 basis points, bringing its operating income margin to 27.2% in the third quarter. At-present, Brookdale’s weighted average occupancy is 79.4%.

Baier noted that occupancy growth in the third quarter was “not as robust as we had wanted.”

Move-ins were hampered by “softness” from two third-party referral sources. This prompted Brookdale to redeploy marketing dollars elsewhere to internal marketing and advertising sources, with campaigns centered in particular on the HealthPlus program and the company’s Clare Bridge memory care offering. But move-ins were not able to fully offset “continued decline from paid third party partners.” Baier said.

Recent sales and marketing campaigns center on Brookdale’s HealthPlus care coordination and Clare Bridge memory care program. For context, Baier highlighted Brookdale’s ability in garnering “a few hundred100” move-ins monthly from two, third-party referral sources, but she said that this volume had declined over time.

“One of the two, third-party referral sources, their volume is down and every [organization] is impacted,” Baier said. “With the second, we did actually improve our position within the third quarter.”

Baier also noted changes to the Google algorithm that “deprioritizes” third-party content, noting that the company believes third-party referrals are simply getting fewer leads organically, and this is impacting one of the two services used by Brookdale more greatly than the other, she added.

Baier noted that discounting “has been a little heavier in the third quarter than we, quite honestly, expected.” This stems from uncertainty Baier believes older adults felt due to the recent presidential race and general election cycle.

“When there’s uncertainty, prospects, older Americans in particular, are more reluctant to make decisions. I do think there might have been some additional last minute discounting in the third quarter leading up to the presidential election,” Baier said. “The good news is the election is over now, and there’s more certainty about the direction of the country so that should bode well for us and others in the industry moving forward.”

Ownership transitions detailed, offers ‘full advantage’

At the end of September, Brookdale announced plans to acquire 41 communities managed under triple-net leases for $610 million through a series of three transactions.

By replacing future lease obligations with more favorable ownership structures, Brookdale can increase cash flow, reduce exposure to lease costs, benefit more directly in value-creation opportunities and gain “greater strategic flexibility to manage our portfolio overall,” according to Baier.

“We have confidence in these communities and have proven that we can successfully generate and sustain value from them,” she said during Thursday’s earnings call.

The communities involved in the transactions are located primarily on the West Coast, including in Seattle and in the San Francisco Bay area, as well as in other parts of the country such as Colorado, Kansas and Tennessee.

“Ownership of these communities allows us to take full advantage of the senior living industry’s positive growth outlook,” Baier said.

The series of transactions could increase adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by $33 million annually, and improve adjusted free cash flow by an estimated $15 million annually after closing.

“We expect to close the transactions by year’s end,” Baier told investors and analysts on Thursday. Once closed, the transactions are expected to improve Brookdale’s balance sheet and reduce annual lease payments by $47 million.

When asked about the prospect of selling any of the communities included in the 41-property acquisition, Baier noted the “different” operating performance among communities, and she said that some of the smaller properties “may not fit exactly within our strategy.”

Baier teased future earnings calls to include further details involving the series of transactions.

“Anything we might do with the portfolio structure after that would be attractive and additive to those strong cash flow improvements that we talked about,” Baier said.

Brookdale will have an ownership ratio expected to increase to 66% after the fourth quarter, up from 49% ownership reported at the end of 2017 and reduce the company’s leased portfolio to 39%, according to the company’s third quarter financial presentation.

HealthPlus expansion continues

Brookdale leaders also announced the expansion of the company’s HealthPlus platform in more communities completed in the third quarter.

By the end of the third quarter, Brookdale had “more than doubled” the number of its communities to the program aimed at improving care and health outcomes of residents, while positioning the provider within a health care system increasingly tied to value-based care models. Recently, the company received third-party data from an analysis of the program that found Brookdale communities enrolled in HealthPlus had 80% fewer emergency department and urgent care visits and 66% fewer hospitalizations compared to seniors living at home.

“These results reaffirm our belief that HealthPlus provides a key competitive advantage for Brookdale and its positive impact will grow even further,” Baier said.

By the end of November, Brookdale will have completed its rollout of HealthPlus to 130 communities, ahead of “further expansion in 2025,” Baier said of the program.

“HealthPlus was always built on the understanding that if you have a better product for your residents, that you will have higher occupancy in the community, and that will translate into stronger cash flow,” Baier said. “The icing on the cake has always been the [per member per month payment] that we received from certain Medicare Advantage plans.”

PMPM revenue “essentially covers” incremental costs of the HealthPlus program within a given community, Baier said.

“I do think that continuing to strengthen the value proposition will allow us to continue to grow profitably, and so that’s what we’re really focused on,” Baier added.

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