Brookdale Senior Living reported its best EBITDA performance in several years, nearly topping $100 million, RevPOR continues to grow (5.8% sequentially), and second quarter guidance for adjusted EBITDA is now between $93 million and $98 million. On the labor front, they had a solid 70% retention rate for Executive Directors for the trailing 12-month period. But…the company continues to struggle on the occupancy front.
Second quarter weighted average occupancy was just 77.9%, down 50 basis points from the fourth quarter but up 160 basis points year over year. On a consolidated basis, weighted average occupancy in April, 77.9%, was a hair higher than in August of last year, and end-of-month occupancy in April was 79.2%, also about the same as at the end of August.
We had been hoping that they would break out of the annual first quarter declining census levels of past years (for them and everyone else), especially with a relatively mild flu season, but we will have to wait. We will also have to wait for the company to break through the 80% occupancy barrier, having come so close in each of the past nine months. However, weighted average occupancy peaked at 78.6% last October. Higher rates are driving the increased cash flow, but they need that to combine with better occupancy. They are coming so close.
What is a little disconcerting is that Brookdale’s poor performers seem to be growing. In the fourth quarter 2023, 156 communities had occupancy of less than 70%, but this grew to 167 in the first quarter, or 27% of the portfolio. The top performers, however, with occupancy greater than 85%, declined from 248 communities in the fourth quarter (40% of the total) to 224 in the first quarter (37% of the total). The company had 145 communities with occupancy greater than 90%, so we know it can happen. We just wonder whether the laggards will ever get over 75%, let alone reach 80%.
Same-community adjusted operating income grew 12.0% year over year, and the operating margin hit 27.6% in the first quarter, up 140 basis points year over year. Now, imagine if occupancy did not take a step backwards in the first quarter. The independent living portion of the business posted a 32.9% operating margin in the first quarter, assisted living (by far the largest) was at 27.4% (up 160 basis points year over year), and even though the CCRC business posted a 150-basis point increase in margin, it is a relatively low 18.8%.
The leased portfolio of 277 communities outperformed the “owned” portfolio of 345 communities in both weighted average occupancy (79.0% vs. 77.3%), as well as operating margin (29.6% vs. 25.4%). The biggest group of leased communities, with more than 100 buildings, are leased from Ventas, a lease that expires at the end of 2025 with negotiations set to begin before year end. Those leased operations are improving, and that bodes well for both sides.
Speaking of Ventas, its 477 same-community SHOP communities posted occupancy of 84.6% in the first quarter, up 240 basis points year over year but down 20 basis points sequentially, both better than Brookdale, especially on the overall occupancy level. Welltower’s SHOP communities (935) posted a 30-basis point sequential increase in first quarter occupancy to 82.5%. But the same-community portfolio (665) posted a 340-basis point increase in occupancy to 83.4% year over year. Same-community net operating income grew by a whopping 25.5% year over year. These are the kind of numbers we would like to see Brookdale post. Someday, but they will need a good bump in census to achieve any of their goals.
The share price initially dropped 4% to $7.06, but quickly jumped to $7.55, and then yo-yoed down to $7.12 after the earnings call. We have to assume investors are trying to figure out what the future really holds, because there certainly are mixed signals. And we believe that the REIT SHOP portfolios will continue to outperform Brookdale, as National Health Investors also did in the first quarter, and they expect their SHOP NOI to grow by 25% to 30% year over year. This is progress.
