Brookdale President and CEO Cindy Baier

Brookdale Senior Living is in the “seventh inning” of trimming the size of its portfolio through community sales and lease terminations, President and CEO Lucinda “Cindy” Baier said Tuesday on the company’s third-quarter earnings call.

She used the analogy of a nine-inning baseball game in response to a question from an analyst.

The country’s largest operator of senior living communities had 961 properties as of Sept. 30, according to supplemental information the company released in conjunction with the call.

Since the beginning of the third quarter of 2017, the company has sold or terminated the leases of 104 communities, Executive Vice President and Chief Financial Officer Steven Swain said. The size of the leased portfolio has been cut by 22% in that time, Baier said. Since the beginning of 2018, the leased portfolio has been reduced by 16%, Swain said.

Executives reviewed recent transactions involving real estate investment trusts Ventas, Welltower and HCP:

  • Many of the assets that will be sold as part of Brookdale’s lease-restructuring deal with Ventas have been identified, Baier said. “I would expect those properties to be sold during 2019,” she said. Under the terms of the deal, Ventas is permitted to sell up to 15% of its leased Brookdale properties to diversify and improve the quality of its portfolio or reduce leased assets, Ventas Executive Vice President and Chief Financial Officer Robert Probst said on the REIT’s recent earnings call.
  • The $194 million sale of Brookdale Battery Park in Manhattan to Ventas, which was announced in August, closed Nov. 1. “We’re very pleased with the price that we received,” Baier said. “It will be a fantastic asset for Ventas, and we’re pleased that will continue to operate the property.”
  • In June, Welltower and Brookdale agreed to part ways on 63 communities. As previously announced, two master leases through Welltower, involving 11 communities, were terminated at the end of the third quarter. “I feel like our Welltower portfolio is in great shape,” Baier said.
  • Many of the transactions involving HCP that were announced a year ago now have been completed, Baier said. In the REIT’s recent earnings call, HCP President and CEO Thomas Herzog said that 35 of its Brookdale communities had been transitioned from Brookdale to other operators in the third quarter. HCP expects that four more transitions will be completed by the end of the year, he said. Also in the third quarter, HCP completed the $264 million sale of 17 Brookdale-managed communities to an investment fund managed by affiliates of Apollo Global Management. The REIT expects the sale to Apollo of two additional communities in the portfolio to close by the end of the year for approximately $113 million. An additional 10 Brookdale-managed properties were sold to third parties in the quarter, HCP said.
  • Eighteen additional assets in the third quarter were put under contract to be sold, Baier said.

“We, of course, will continue to review our assets to see whether there are additional assets that need to be sold or monetized, but that is all dependent on our credit line restructuring, as we’ve talked about in the last two calls,” Baier said. “We’re still on pace to get that restructuring done before the end of the year, and once it is done, we’ll step back and re-evaluate whether there’s more work to do.”

Progress on turnaround strategy

Brookdale is seeing positive effects of its turnaround strategy, Baier said.

Retention of executive directors and health and wellness directors has remained more than 70% for five quarters on a trailing 12-month, year-over-year basis, she said.

“Internal research shows us that our communities perform better when an executive director has been in their role for over two years,” Baier added. “Over 60% of our current the EDs have achieved this milestone.”

Additionally, sales leads were up 7% compared with the third quarter of 2017, she said.

Third-quarter 2018 consolidated same-community operating expenses increased 4.5% compared with prior-year quarter, Swain said, and same-community total compensation increased 5.5% for the third quarter and 5.1% year-to-date compared with the prior-year periods.

“This reflects a wage pressure due to a tight labor market, plus our intentional above-industry investments in key resident-facing associate salaries, along with more robust benefits, to improve our ability to recruit and retain the best associates in the industry,” he said.

Same-community operating income declined 8.2%, same-community revenue per occupied unit increased 1.3% and same-community revenue per available unit increased 0.2%, all compared with the third quarter of 2017. Same-community weighted average occupancy improved 20 basis points on a sequential basis, which was slightly better than the industry, as reported by the National Investment Center for Seniors Housing & Care, Brookdale said.

2019 outlook

Regarding 2019, Baier said Brookdale expects “the competitive landscape will continue to be difficult” and that “the supply headwinds will persist for the vast majority of 2019 before improvement.”

Year-over-year occupancy at Brookdale communities will be down, she said, “but we expect to gain occupancy compared to our industry peers.”

Baier also predicted that the company’s in-place rent increases will be larger than in 2018, that labor investments will continue and that capital expenditures to improve the physical conditions of communities will increase.