As you know, we never expect much in the first quarter for seniors housing operators, because historically it is always the toughest quarter from a census perspective. And Brookdale Senior Living is like an aircraft carrier: it is so big that it can take forever to change direction, and mishaps can take even longer to correct across their industry-leading 678 communities. Their first quarter results showed some progress, but also showed that they have a long road ahead to increase census and control labor costs.
Digging out from weighted average occupancy of 69.4% in the first two months of 2021 is no easy task. And Brookdale should have a target of at least 85% across the portfolio, at a minimum. It will take longer than two more years, even as new supply has diminished with demand starting to grow, in theory. The crucial question is, will the demand want Brookdale’s communities, something newer, or something altogether different? Brookdale won’t be the only company struggling with that.
So, how did Brookdale do to start the year? The good news is that on a consolidated basis, April ended at 75.3% occupancy, up 80 basis points from the end of December, after a dip in January. Surviving the first quarter doldrums is crucial for any future momentum. But, and this is a big caveat, they must have a repeat performance of the last three quarters of 2021, when same-community census increased by 400 basis points. More than half of that increase came in the all-important third quarter, the one quarter when year in and year out, industry census rises.
The other issue is expenses, and particularly labor. Same-community operating expenses rose 10.7% year over year, but within that, labor expense increased 13.2%. Sequentially, labor jumped by 4.4% in the first quarter this year, and compared with last year’s third quarter, it jumped by 9.6%, which is troubling for a sixth-month period. Our assumption is that third quarter hiring jumped when the census increased by 210 basis points in that quarter alone. Someone has to take care of all the new move-ins, especially if staffing was already a little on the short side.
The concern we have is that we just don’t know when Brookdale will return to profitability, which it must do at some point to be viable. We are not talking about a GAAP profit, but sufficient cash flow to cover interest and lease expense, as well as annual capex at high enough levels to remain competitive. In examining the P&L, it looks like there was $82.8 million of EBITDAR to cover $41.5 million of lease payments and $33.2 million of interest expense. That barely covers it, but does not cover the $40 million of capex in the first quarter.
The largest component of Brookdale’s portfolio is assisted living, which represents about two-thirds of their total units. It also has the lowest weighted average occupancy of 72.9%. Although it is not broken out by community type, 38% of Brookdale’s communities (248 of them) had a weighted average occupancy below 70% in the first quarter. Of the total, 51% were below 75%. Therefore, the remaining 49% are between 75% and 100%, which means that at the low end, there must be some really low occupancy rates, maybe 50% and 60%. If they can’t be resuscitated soon, it is time to prune the tree, because it is unlikely that they will get a boost from the upcoming demographic shift, and capex may be wasted on them.
