As you may know, we were never a fan of Brookdale Senior Living’s acquisition of Emeritus, and we are still not a fan of any company in the space operating 500 or more communities, let alone 1,000. It is just not that easy, and while we do not fault management for having a hard time of it, we do fault management for getting to the size it is. At least, the management responsible for the growth, and not the people trying to work things out.
Brookdale announced its first quarter earnings, and investors seemed to like what they saw and heard. They ignoredthe same-community decline on occupancy of 100 basis points to 85.7% year over year, as well as the 80 basis point sequential decline. The ubiquitous flu season was blamed, as well as competition in several of their markets. We do get a little tired of the flu season blamed by too many providers, since the flu season does hit every year. But Brookdale had some no-admits at communities during the worst of it, which definitely takes its toll on occupancy. And the company did not seem to do much better or worse than many of its peers.
What we do not like is how investors focused on the increased profitability. Yes, Brookdale posted an overall operating margin of 34.7% in the quarter, its best in a while and 110 basis points higher than the year-ago quarter (130 basis points higher sequentially). And the same community operating margin increased 50 basis points year over year and a whopping 160 basis points sequentially. Year over year they have held same community operating expenses to a 0.13% increase, despite everyone else suffering from labor cost increases that have not been seen for years. All great news, and investors responded by driving the share price up 12% in two days. Pretty impressive.
The problem is that when occupancy declines, and you have a tight labor force with new competition stealing your staff, it is difficult to increase your margins and profits. The only way is to make cuts, and those kind of cuts have a way of biting back at some point. It makes you look more profitable, but at whose expense? Take your guess. Remember when Assisted Living Concepts (ALC) was dropping occupancy to 60% and increasing operating margins, with all the analysts gushing over the great “cost control” measures from management? It was skimping and very low staffing ratios, which the buyer had to ramp up, to the tune of 400 line employees soon after taking over. We were glad they recognized the problem. While what happened at ALC is not comparable to the situation at Brookdale, cutting costs at a time when your competition is stealing your business is a short-term solution. But again, this makes sense if you are in it for the short term, with a potential sale looming, and the annual shareholders meeting pushed out a few months. Brookdale may have finally bottomed out operationally and with occupancy, and that is good news for investors and the industry. But we hope buyers understand what they will have to do to really turn this ship around.
