Size helps Brookdale in natural disasters, CEO says, but financial effects linger

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Detail from Brookdale Senior Living's third-quarter 2017 presentation for investors.
Detail from Brookdale Senior Living's third-quarter 2017 presentation for investors.

Brookdale Senior Living may be experiencing financial difficulties, but the size and scale of the country's largest senior living community operator was a benefit during the recent hurricanes in Texas and Florida and the wildfires in California, President and CEO Andy Smith told shareholders and analysts participating in a third-quarter earnings call on Tuesday.

A total of 143 communities in Texas and Florida were affected by the storms, he said, and 26 of them were evacuated.

“Together, we are proud that these disasters showcased the character of our associates and the advantages of our scale,” Smith said.

Brookdale, headquartered in Brentwood, TN, had the human resources to arrange for generators and fuel for affected communities, order extra equipment that was needed, order buses and set up communication with resident families, he said. Staff at nearby communities provided relief as needed. “Repair and restoration teams were on the ground cleaning up the damage even before the storms ended,” Smith said.


Financial results

Brookdale reported a GAAP net loss of $413.9 million for the third quarter of 2017 compared with $51.7 million for the third quarter of last year.

Earnings per share of $2.22 missed analysts' projections by $1.97. Revenue of $1.18 billion was down 5.6% year over year.

The company's common stock began the day Tuesday at $10.26 and ended the day at $8.81.

Additional information can be found at the company's website.

The only major revenue effect of the natural disasters was to the ancillary services business in Florida, because patients or employees were not available, he said. Chief Financial Officer Cindy Baier said the company lost more than $3 million in home health business in Florida because of Hurricane Irma.

“Since we elected to continue to pay our home health associates during the lost days, the impact of lost revenue fell to the bottom line,” she said, adding that effects will extend into the fourth quarter.

Brookdale earned $9.8 million in operating income from ancillary services during the third quarter, Baier said.

Smith said seniors housing revenue did not see a “major impact” because many residents of affected communities were evacuated to other Brookdale communities and returned home relatively quickly. “We did incur significant operating expenses primarily for added labor expense, overtime and equipment rental, and we did incur some physical damage to our communities, which we're in the process of remediating,” he said.

All except one of the hurricane-affected communities is operational now, Smith said, although damage at some communities means that some units are out of service.

The hurricanes negatively affected third-quarter adjusted earnings before interest, taxes, depreciation, and amortization by about $9 million, however, Baier said, and EBITDA in the fourth quarter will be negatively affected by about $3 million to $4 million due to lower ancillary services revenue and other factors.

Hurricane responses — additional staffing and supplies — increased operating costs in the quarter by about $5 million, she said. The company also provided $400,000 of rent credit to displaced residents, Baier said.

All told, Hurricanes Harvey and Irma are expected to have a negative impact to full-year 2017 adjusted EBITDA of approximately $12 million to $13 million, she said. “We also expect to incur at least $15 million to $17 million net of insurance reimbursements of hurricane-related capital expenditures during the next year or so,” Baier said.

Twenty communities in California were affected by the wildfires, Smith said, and six were evacuated.

“I'm pleased to say that all of our residents have moved back home and we didn't have any significant property damage,” he said.

Baier said that the financial impact of the fires on Brookdale will be less than $1 million.

HCP, Ventas, Brookdale employees and numerous vendors contributed to the company's Associate Compassion Fund, which assisted employees who sustained significant losses from the natural disasters, Smith said.

$3 million spent for generators

Baier said that the company spent $3 million in the third quarter in response to an emergency rule issued in Florida that had given assisted living and nursing home operators 60 days to obtain generators and enough fuel to enable them “to sustain operations and maintain comfortable temperatures” for at least 96 hours following a power outage.

After the state Division of Administrative Hearings decision declared that the rules “are invalid exercises of delegated legislative authority,” the issue remains in court because provider groups and the governor disagree as to whether they remain in effect while the governor appeals the DOAH decision.

“While the emergency order has been overturned, there are legislative and regulatory rulemaking actions in process to address generator requirements. ...and we're closely monitoring developments to determine what additional costs may be incurred to meet any new generator requirement,” Baier said.

The company expects to have additional capital expenditures related to generators next year, she said.

HCP agreement meets goals

Smith and Daniel Decker, the executive chairman of the company's board, also discussed the company's agreement with real estate investment trust HCP, announced last week, via which HCP will reduce the exposure to Brookdale in its portfolio and Brookdale will gain more flexibility to negotiate to sell some or all of its assets in a series of transactions.

“The underlying goal of our company is to increase the durability of our cash flow and increase its growth trajectory,” Decker said. “The HCP transactions fit perfectly with that goal.”

“We really believe this was a win-win deal,” Smith added. “HCP has been very public about their goal of reducing their Brookdale concentration. We also have been public about our desire to reduce the burden of underwater leases, to continue to rationalize our portfolio, to simplify our business and to improve the change-of-control provisions in our lease agreements. These transactions met the respective goals of both parties with a fair and balanced economic outcome for both.”

Review ongoing

Brookdale board members, management and legal and financial advisers are continuing their efforts to try to “enhance shareholder value” beyond the HCP agreement, Decker said.

“We acknowledge that it has been a long process and that we have been limited in what we can publicly say about the status,” he said. “We know that many of our shareholders would like for us to provide more transparency regarding the process and we certainly appreciate that. However, for a variety of reasons, there are limits to what we can say while the process is ongoing, and it wouldn't be in our company's or shareholders' best interest to provide more detailed information at the present time. But know that we're working as expeditiously as possible to bring the review to a conclusion.”

The company has not made any decisions regarding any particular transactions that have not been announced, he said.

Additional news shared

Other points made by Smith during the call:

  • Industry trends. Brookdale is anticipating that elevated levels of new openings and associated lease-up pressure will continue through 2018. “There were some positive signs in the industry, however,” Smith said. “Absorption continues to trend up, and new construction starts are down by almost 50% from where they were two years ago.” Brookdale saw similar trends in the markets in which it operates, he said. “We saw 47 new projects gets started in the third quarter, similar to last quarter. At this point, we expect 273 competitive communities opening in the future, and that's down from the 285 that we saw in the second quarter of this year.”
  • Occupancy. Occupancy grew sequentially from the second quarter by 20 basis points, grew every month in the quarter and continued to grow in October, Smith said.
  • Executive director retention. Brookdale has adjusted compensation, simplified roles and reduced administrative work, and it continues to offer training and development programs, in an effort to retain community-level leaders, Smith said. “We've continued to see a good improvement in our key leadership turnover,” he said. “Voluntary turnover in our consolidated portfolio improved by 26% year over year, and of the executive directors who have voluntarily left the company over the past few years, just shy of 20% of them have actually returned to the Brookdale family.”
  • Customer satisfaction. Brookdale previously introduced the net promoter score as a proxy for gauging overall resident satisfaction and loyalty at the community level. “Our NPS scores improved dramatically in 2016 and again improved significantly this year, evidencing our team's focus on customer service,” Smith said.
  • Sales and marketing. Sales and marketing have been combined under Ryan Wilson, who joined the company earlier this year and is chief growth officer and senior vice president of sales. “We continue to focus on marketing, combining digital, social and local marketing activities with the activities of our 1,600-person sales force, who have been now undergoing more robust training,” Smith said. “We believe that we are seeing the results of these efforts and again have five consecutive months of positive net move-ins starting in June.”

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