There will be a time when we don’t wait to see what Brookdale Senior Living has done each quarter and use it as a barometer for the industry, but that time is not yet here. Brookdale did not report any surprises for the fourth quarter, which in the environment of the past several years is good news because surprises have generally been negative. What they did report is that they have basically started their rise from the bottom, even though the rise will be too slow for many shareholders.
First off, same-community occupancy increased 30 basis points sequentially and posted an increase for the second straight quarter. Occupancy was also 110 basis points higher than the second quarter. Same-community operating margin was up 200 basis points sequentially, but still below every quarter in 2018. On the negative side, full-year labor costs were up 5.5%, and year over year they were up 6.3% in the fourth quarter. This remains the Achilles’ heel of seniors housing as the entire sector tries to rebound. Occupancy may increase, which helps to push rates higher, but all the gains can be erased if the labor shortage and escalating wages don’t improve. Unfortunately, this will not happen in 2020, and maybe not even by 2021.
What we liked was the confidence displayed by the CEO, Cindy Baier, and some non-financial comments. What struck us the most was that 70% of the Executive Directors have been with the company for at least two years. Now, maybe some of them are not the best ones out there, but as we all know, everything at the community level starts with the ED. If that position is a revolving door, then like dominoes, everything else starts to fall apart.
In addition, she reported that 3,000 former employees have returned to the company. We suppose the grass was not too much greener elsewhere, and that extra dollar an hour may not have been worth it. This is often the case. But if Brookdale can stabilize its own labor force, it will go a long way to stabilizing and building their census and rates. We remember a few years ago when every CEO we spoke with said they had dozens and dozens of Brookdale resumes on their desks. We don’t hear that too much these days. That is good news for Brookdale and the industry.
Ms. Baier reported that they completed the “vast” majority of the real estate restructuring, which we suppose means that they will not be slimming down too much more. We still believe 663 owned and leased communities, and another 100 managed, is too many for this sector, even in the best of times and the best of management. But they now own (330 properties) about as many as they lease (333), which is a reasonable mix. The portfolio is now one-third smaller than it was when the Emeritus/Brookdale merger closed, which will still go down as one of the all-time mistakes.
When Ms. Baier took over, Brookdale was like the Titanic, but instead of hitting icebergs, it was nicking them, one after the other. Not enough to sink the ship, but almost. Baier’s financial acumen was needed after her predecessor’s legal and deal-junky aptitude, and that has been put to good use. Making the transition to an “operations-driven” CEO in 2020 will be the key. She probably thinks she is there, but it is always a tough balancing act. They are finally moving in the right direction, but have to maintain the momentum for more than a few quarters. Shareholders liked what they heard, sending the share price up as much as 24% in the first few hours.