Historically, and we are going back more than 12 years, the third quarter has been the best quarter of the year for occupancy increases, and usually cash flow increases based on those census jumps. This was certainly the case for Welltower and Ventas this year, the two largest owners of seniors housing communities. Unfortunately, Brookdale Senior Living, which continues to underperform the market and lags these two REITs, leaves investors disappointed and wondering what is wrong. And dare we say disillusioned with management’s forecasts, which have not panned out at all this year.
Don’t get us wrong. Occupancy has increased, but not in the way investors expected, and “little” things like operating margin are moving in the wrong direction. Same-community occupancy increased by 100 basis points year over year to 78.9%, almost all of which did come in the third quarter, thankfully. But at 78.9% for the third quarter, that stands at just 40 basis points higher than the fourth quarter of 2023. That is not a significant jump in nine months, and they need bigger increases than that. In addition, that level of occupancy remains way below both Welltower and Ventas.
The good news is that the higher-occupied communities continue to post increases. Those communities with at least 90% occupancy increased to 27% of the portfolio compared with 23% in the second quarter. And those with less than 70% occupancy (156 in Q3) decreased from 28% of the portfolio to 25%. Given where we are in the recovery, that remains too low and too large of a percentage of the portfolio, but at least moving in the right direction. We continue to believe that the major problem is the communities themselves, probably the age and condition, despite capex improvements.
On the operating margin front, sequentially it declined by 90 basis points to 26.5%, even though year over year it increased by 100 basis points. RevPOR also dropped a bit in the third quarter sequentially, but was 4.2% higher year over year. Breaking it down by operating segments, the IL operating margin (12,579 units) declined by 120 basis points sequentially to 32.5% despite a 90- basis point increase in census. Similarly, the assisted living segment (33,240 units) operating margin dropped by 90 basis points sequentially to 26.1%, despite an 80-basis point increase in occupancy to 78.5%. Only the CCRC portfolio posted an increase in margin of 50 basis points to 17.9%, with a 50-basis point increase in census to 77.0%.
What did all of this mean to shareholders? The share price plunged by 16.6% to $5.39 per share in morning trading, even though it started to make a bit of a comeback later in the day. Shareholders are losing patience.
