November 8, 2021, Ben Swett, The SeniorCare Investor - As the largest seniors housing company, all eyes are always on Brookdale Senior Living and how it is performing. Investors seemed to like what they heard and saw after the company released its third quarter earnings report last Friday, sending the shares up by 14% to close at their highest level since August 2.
Part of the good news was that the company will start issuing earnings and cash flow guidance moving forward, something that Brookdale and most other companies suspended with the onset of the pandemic. In addition, they reported their eighth straight month of census increases dating back to the bottom in February. In February, the weighted average occupancy was 69.4% and in October it rose to 73.3%, a 390-basis point increase.
Historically, across the industry the third quarter is the strongest for occupancy gains and the only quarter that consistently posts increases. For Brookdale, the third quarter saw an increase of 180 basis points in weighted average occupancy, while the end-of-quarter increase was slightly lower at 160 basis points. These are great numbers, even compared to pre-pandemic census changes, but there has definitely been a slowdown. The monthly census increases peaked in June and July, at more than 70 basis points each month, but in October the increase was a much smaller 30 basis points. The Delta variant was blamed.
If Brookdale, and others in the industry, can post 100-basis point increases every quarter for the next several years, that would bring Brookdale to a respectable 86% by the end of 2024. That does fit our model of a 2024-2025 census recovery. But, and it is a huge but, that would mean avoiding the historically tough first quarter census loss. To compensate for that, census would have to increase by more than 100 basis points each quarter, something that has never occurred before. No one talks about the flu season anymore; it will be all about pandemic spikes and new variants. And, let’s not forget they will have to find staff to take care of these new residents, a lot of staff, not to mention executive directors to manage that staff. Apparently, Brookdale suffers from a 30% ED turnover rate, probably from burnout. Given their size, that means finding 200 new EDs every year. Yikes.
In other good news, liquidity has improved, helped largely by the proceeds from the sale of an 80% interest in their home health business, plus the proceeds from a $230 million convertible note issue with a 2% interest rate. In addition, G&A expense is trending down and is now at 7.1% of revenues. G&A dropped by 19% year over year, but revenues matched that with a 20% decline. Brookdale’s EBITDAR margin is a low 13%, and to get that up to where it should be, profitable census increases will be needed. We say “profitable” because labor pricing spikes are expected through next year, and who knows about other costs. At least they are on the right track.