Lucinda “Cindy” Baier

Brookdale Senior Living President and CEO Lucinda “Cindy” Baier had a message Thursday for all those who, for the past several years, engaged in “speculation about whether Brookdale became too big to be successful.”

“With our 2019 plan, we believe that we will have the optimal portfolio and experienced staff to deliver long-term returns,” she said during the organization’s fourth-quarter and full-year 2018 earnings call.

The country’s largest senior living operator, based in Brentwood, TN, is now 22% smaller than it was after its 2014 merger with Emeritus Senior Living, Baier said. “We intentionally reduced our portfolio from over 1,100 to less than 900 communities,” with 131 management agreement terminations or sales occurring in 2018, she said. A Brookdale spokeswoman later put the approximate number of communities now at 892 across 45 states.

Brookdale plans to become even smaller in 2019, although the change to portfolio size won’t be “massive,” Baier said. The company lists 13 properties as assets held for sale and has identified communities for real estate investment trust Ventas to market. “That’s likely coming in the back half of the year, given the time to do the marketing and transition,” the CEO said.

Under an agreement with Ventas announced in April, the REIT can sell up to 15% of the properties that Brookdale operates under triple-net leases in the Ventas portfolio, to diversify and improve the quality of the REIT’s portfolio or reduce the number of leased assets.

“Let me be clear,” Baier told shareholders and analysts. “With our recent real estate accomplishments and planned 2019 closings, we are confident that we will be successful with the remaining portfolio.”

Opco / Propco ‘likely would not create additional shareholder value’

Brookdale also looked at whether separating all or a portion of the company’s real estate from its operations into a new public REIT structure — a transaction known in the real estate industry as opco / propco, for operating company and property company, respectively — would enhance shareholder value, Baier said. The company was assisted in its review by an external financial adviser who was recommended by a shareholder “who has publicly advocated for a REIT separation transaction,” she added.

The analysis included confidential information about Brookdale’s operations, debt and lease applications and considered a range of opco / propco structures such as triple-net lease and RIDEA managed structures, Baier said.

“Based on this review, we do not believe that an opco / propco transaction is advisable to pursue at this time, as it likely would not create additional shareholder value,” she said. “A separation would result in an operating company with uncertain viability and a single-operator propco REIT that is unlikely to trade well due to key structural deficiencies.”

Baier did not name the shareholder or shareholders who prompted the review, but both Land and Buildings and Macquarie Investment Management issued public letters in 2018 calling for Brookdale to sell its owned real estate.

Land and Buildings also previously had called for the accelerated de-staggering of board elections so that all directors up for election are elected to one-year terms. Approximately one-third of the board’s directors are elected annually to serve three-year terms.

Brookdale had planned to hold annual elections of all directors beginning with the 2021 annual meeting. Baier announced during the call, however, that the company would be accelerating the pace of de-staggering beginning at this fall’s annual meeting, assuming that shareholders approve of the move.

Improving move-ins is a top goal

Brookdale had a 90% occupancy rate in independent living, which was a 50 basis point increase from the third quarter to the fourth quarter and a 110 basis point improvement for the full year. “But we have work to do in assisted living and memory care,” Baier told McKnight’s Senior Livingin an interview after the earnings call. “One of the things that has held us back is sales director turnover,” she added.

Brookdale is planning more coaching, mentoring and training for its sales directors and is changing the corporate reporting structure, she said.

“We’re going to improve our organizational alignment by having sales report all the way up through sales and then have a sales leader report to Mary Sue Patchett, our executive vice president of community operations, to get that execution down,” Baier told McKnight’s Senior Living. “Our operating team is fabulous at execution, and that will also increase the connection between operations and sales.”

With its attention to sales directors, Baier said, Brookdale hopes to replicate the success it has seen in executive directors and health and wellness directors retention. “In the fourth quarter 2018, we saw 100 basis point improvement from the third quarter of 2018,” she said. “This continued our retention rate trend of these two positions above 70% for the past six quarters on a trailing, 12-month, year-over-year basis. As of year end, we had only 31 open executive director positions. That’s just 3% of our nearly 900 communities.”

Overall, she told McKnight’s Senior Living, “This is the third year of a three-year plan to really make a significant above-industry, market-leading investments in our people, because our goal is to build the best team in the business, and so that is something that we’re going to continue as well. We know that having the best people will result in top-line growth, which is what this is all about.”

Resident rate increases have helped fund the salary investments for community leaders, said Steven E. Swain, executive vice president and chief financial officer.

“We haven’t really seen an increase in resident attrition as a result of higher-than-normal rate increases,” Baier said. “I think that our residents understand that we have to pay to have the right staffing in their communities and to get the right associates. We’ve actually had residents say to pay people more. As we explain the reasons for the rate increase, they tend to understand.”

New rates for existing residents were effective Jan. 1.

$250 million in capital expenditures planned

In addition to investing in employees, Brookdale plans to spend $250 million in capital improvements in approximately 700 communities, “which is $75 million more than Brookdale spent last year on a smaller portfolio,” Baier told McKnight’s Senior Living. “And that is net of investments that we’re going to get from some of our REIT partners, so the gross investment that we’re making is even more than that.”

The projects will affect roofs, pavement, HVAC systems, water heaters, exterior paint and lighting, windows, doors, plumbing, drainage systems; nurse call systems, fire and life safety systems, landscaping, fencing and more, she said.

“Usually what happens when you invest CapEx is that you improve associate retention rate,” Baier said. “And actually, it’s something that’s exciting for both the residents and new prospects, and so we’re hoping that we can capitalize on our CapEx.”

A marketing campaign called “Pardon Our Progress” will accompany the effort.

Expansion in hospice, maybe Medicare Advantage

Baier said Brookdale expects the company’s existing hospice program to grow and also that the company is looking at expanding it to new markets.

Specifically, she told McKnight’s Senior Living, Brookdale is looking at Sacramento, CA; Portland, OR; Detroit; and North Carolina. “We may extend it to more markets than that,” she added.

Also, a Medicare Advantage plan may be in the works, either through Brookdale or a third party, Baier said. The company has not committed to doing anything, but “it’s services that our residents need, and it’s gaining traction in the United States,” Baier said.

“We’re in the evaluation stage right now,” she told McKnight’s Senior Living.

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