Brookdale Operations Improve, Takeout Chatter Focuses On Foreign Buyer

May 9, 2017, Alana Stramowski, Senior Housing News - Brookdale Senior Living (NYSE: BKD) shares were up Tuesday after the company seemed to get a handle on its operations in the first quarter.  Meanwhile, speculation continued that the company may be considering selling itself in whole or part, and some observers believe a Chinese firm is currently the most likely buyer.

Rumors have been circulating since the beginning of the year that Brentwood, Tennesse-based Brookdale—the nation’s largest senior living provider—might be exploring a sale of the whole company or a significant portion of its owned real estate, while company executives have been tight-lipped on details.

“The first quarter was a good start to the year as we continue to be highly focused on execution of our business strategies including and achieving consistent operational excellence and optimizing our portfolio,” Daniel Decker, executive chairman at Brookdale, said on Tuesday’s earnings call with analysts.  “Our board in conjunction with management remains very hard at work on our ongoing process to explore options and alternatives available to us to create and enhance shareholder value.”

Private equity firms and real estate investment trusts (REITs) have been floated as possible buyers of Brookdale’s real estate.  But at the moment, there is chatter that a Chinese firm is interested in Brookdale, Jefferies analyst Brian Tanquilut told Senior Housing News.

This makes sense, he believes, given the abundance of foreign capital that has been chasing U.S. real estate in recent years, and specifically China-based buyers that have been targeting senior housing during the last few months.

Taikang Life Insurance Group, Cindat, and China Union Life are among the firms to make sizable acquisitions in U.S. senior housing over the last two quarters, with a recent Cindat/China Union deal involving Brookdale.

On Tuesday’s earnings call, Brookdale CEO Andy Smith declined to speak specifically about any current negotiations the company might be involved in, but did field a question from Tanquilut about the interest of foreign capital in the senior housing space generally.

“I think there is a lot of equity capital that’s interested [in senior housing] including traditional participants as well as foreign participants,” Smith said.

Jefferies upgraded Brookdale’s investment ratings at the end of March 2017 based on its analysts’ view that Brookdale’s risk-reward profile is compelling given the possibility that the ongoing strategic review process of the company could result in a sale.  The thinking seems to be further borne out by Brookdale’s performance in the first quarter of 2017, in which it managed to control costs and largely hit its performance targets in a challenging operational environment.

Cost Control Success

Despite more than doubling its net loss on a year-over-year basis, Brookdale successfully controlled costs to offset lower seasonal occupancy levels in the first three months of 2017.  For the first quarter, occupancy was 85.3%, compared to 86.1% in the first quarter of 2016.

The lower occupancy was due to two main factors: the flu and competition, Brookdale’s chief executive said.

“I don’t know if we can parse it down to one or the other,” Smith explained.  “New competition created pressure on occupancy and rates in many circumstances.  In respect to flu-related deaths, we saw an increase of 10% year-over-year.”

The company also had to embargo roughly 25% of its communities from new move-ins due to the flu for some period of time, Smith added.

Still, Brookdale was able to manage through these issues and came out with an increase in its year-over-year adjusted free cash flow, which went up by $35.6 million to $63.4 million when compared to the first quarter of 2016.

“Brookdale’s earnings strength was driven by impressive cost control at the facility level and in corporate general and administrative [costs],” Tanquilut wrote in a note Tuesday.  “Brookdale’s success in managing costs more than offset anticipated occupancy weakness that was driven by typical seasonality, a heightened flu season, and continued competitive pressures.”

Specifically, the company saw success in controlling costs of food, repairs and maintenance, communication and bad debt, CFO Lucinda Baier explained.

“All of those areas were improved year-over-year on a same store basis,” she said.  “We had good expense control broadly.”

Another move was lowering the level of rent discounting to new residents.

“We are trying to minimize our incentives and discounting as best as we can, but we have to respond on a local market by market basis,” said Smith.  “In many cases there is very aggressive discounting used by the new competition. In many markets throughout 2017 we expect to have to respond with some degree of incentives and discounting, but we are trying to limit it.”

The company managed a tough labor market in the first quarter, with wages up 4% year over year on average. Brookdale anticipates as much as a 6% increase in total labor expense by the end of the year.  However, executives held their outlook overall for 2017 earnings targets, and said they can manage labor pressures with increased occupancy.

As of market close on Tuesday, Brookdale’s stock was up 4.35% to $13.20.