Brookdale Senior Living has had its share of ups and downs since coming out of the pandemic bottom in March of 2021. Other than sequential occupancy, the first quarter was its best financial performance in a while.
Same-community revenue was up year over year by 13.1% and sequentially by 8.4%, labor expense was down 1.2% year over year and down sequentially by 0.6%, and while sequential occupancy was down by 80 basis points in the notoriously bad first quarter for providers, it was up 310 basis points year over year. It could have been a lot worse.
More importantly, same-community adjusted operating income was up 50.3% year over year and up 35.4% sequentially. And operating margins skyrocketed as well. You usually don’t see that much of an improvement in such short periods of time. But revenue growth combined with expense controls will do that.
However (isn’t there always a however?), overall occupancy at the end of April (77.6%) was still 30 basis points lower than at the end of August last year, its peak since the pandemic bottom. What seems to be holding the company back are 199 communities (31% of the total) with occupancy rates below 70%. How much below, who knows? But that is 1,500 to 2,000 basis points to make up to get anywhere close to stabilized occupancy for this group.
There are always laggards in any large portfolio, but this is a significant number. Our guess is that these are mostly smaller, older buildings in competitive markets, or larger communities in markets where supply and demand are out of balance. Combined with the 89 communities between 70% and 75%, the two groupings represent 45% of Brookdale’s communities. It will be a long slog to get them over 80%, which should just be a temporary goal.
Given the fact that 12% of Brookdale’s communities are over 95% and another 10% are over 90%, it may have less to do with management and more to do with the buildings and markets. Unfortunately, if it was “just” a management issue, it might be easier to fix. But with each passing year, the age, size and location of these suffering communities will only be exacerbated.
The company’s largest product type, assisted living (551 same communities), posted the best improvement in adjusted operating margin. It increased year over year by 770 basis points to 25.4%, mostly driven by the 550-basis point sequential increase. The second largest component, independent living (68 communities), posted a 320-basis point increase year over year to 33.4%, all because of a 440-basis point sequential increase.
All of this is good news, especially because the first quarter can be brutal. All eyes will be on the second quarter when the real selling season begins. But remember, from an occupancy standpoint, historically the third quarter has always been the best for improvement. Investors did not seem impressed, as the shares dropped by 1.0% on a very cautious day for the stock market.
