Even in the depths of a pandemic and a disrupted economy, there is always the bright side of things, right? Brookdale Senior Living, the largest seniors housing provider in the country, reported its third quarter earnings results and certainly had some positive things to say about where the company is today and how it will improve in the future. Always lead with your best. Unfortunately, shareholders focused on the problems and sent the share price down by 15% right off the bat.
The good news for the future is that they completed a major lease restructuring with Ventas, reducing future cash rent by about $500 million over the remaining lease term ending in December 2025. The company also has $491 million in liquidity and has no major debt maturities until 2022. In addition, 95% of their communities are open for move-ins, and same-community revenuer per occupied room (RevPOR) increased sequentially by 60 basis points. All very positive.
Even with the surging pandemic in many parts of the country, move-ins are picking up, increasing by 38% in the third quarter compared with the second quarter. Even with that increase, same-community occupancy has dropped by 900 basis points since March, and was at 74.0% in October (consolidated occupancy was 73.8%). In our analysis of the market in November’s The SeniorCare Investor, we forecast that assisted living occupancy nationally would probably be hitting 75% by the end of the first quarter 2021. It looks like Brookdale is already there.
Like most companies, the rate of occupancy decline has been slowing, helped by better infection control protocols and an increase in inquiries, tours and hopefully move-ins. We have focused on occupancy for several years as we have watched it slowly decline, until the rapid plunge in March, because census obviously drives revenue and cash flow. Without census, you have no business.
Brookdale’s EBITDAR margin in the third quarter was 12.9%, and the EBITDA margin was just 5.7%. Can you imagine what an extra 10 percentage points of census would do to that margin, when most of any increase above 75% goes straight to the bottom line? You really can’t survive very long with those kinds of margins in this business, even with the lease savings from their deal with Ventas.
While we have predicted that, regardless of the severity of this year’s flu season, the impact on senior living should be minimized because of all the infection controls in place to deal with COVID. If not, and Brookdale’s census continues to decline through the first quarter, they could be looking at sub-70% occupancy by April if census declines by 60 basis points a month.
Given the coming winter season, that could be a grim reality especially if states start to do rolling lockdowns to deal with community spread. We hope not, and CEO Cindy Baier will do everything she can to prevent that from happening, but certain things are out of her control.
We hate to say it, but someone’s pain will end up being someone else’s gain. The senior living market will be an investor’s paradise for a few years, and those with cash will be snapping up properties for the next several years at bargain prices. Ms. Baier would prefer to be a buyer, and not a seller, when this comes to pass. To do that, she will need to move the needle significantly on census. It could happen.
