Cindy Baier
Lucinda “Cindy” Baier

Positive occupancy and revenue trends and the $1 billion in “mutually beneficial” transactions recently announced with the real estate investment trust known until last week as HCP (now known as Healthpeak) “provide further evidence of the progress we are making with our strategic plan,” Brookdale Senior Living President and CEO Cindy Baier said Tuesday.

“Put simply, the transformation we initiated last year is working,” she told those participating in a third-quarter earnings call.

The company had two consecutive quarters of year-over-year growth in move-ins in the second and third quarters, Baier said, noting that move-ins were up 6% year-over-year in the second quarter and 8% year-over-year in the third quarter.

Brookdale also had the best third-quarter same-community occupancy growth since its merger with Emeritus Senior Living in 2014, she said.

“Occupancy for the industry improved 30 basis points on a sequential basis … [and] same-community sequential occupancy improvement was more than double the industry, achieving 70 basis points’ growth,” Baier said.

“On a same-community basis, our occupancy growth for the quarter exceeded the industry by 20 basis points for independent living and by 80 basis points for assisted living,” Baier added. And post-quarter numbers for October continue this positive occupancy growth trend, she said.

Revenue per available unit and revenue per occupied unit increased year-over-year 1.8% and 2.8%, respectively, on a same-community basis, the company reported.

“Our first priority was to drive top-line growth, and I’m extremely pleased that the investments that we made in associates, marketing and capital expenditures drove this great occupancy growth and translated into strong senior housing revenue,” the CEO said.

Operating expenses a challenge

Brookdale is working to address operating expenses, Baier said. 

Approximately 65% of community operating expenses are related to labor, she said.

“Year-over-year same-community labor expense increased 6.8% for the quarter, resulting in a 5.3% increase year-to-date,” Baier said. “This is within our initial guidance expectations range of 5% to 5.5%, but with the tightest labor market in 50 years, we expect to be at or slightly above the top end of our range for the full year.”

Chief Financial Officer Steve Swain said that the 6.8% increase seen in the quarter mainly was due to wage rate increases and higher benefits expenses.

Driving other facility operating expense increases were marketing and advertising investments, property remediation and higher insurance premiums, the CEO said. “Given the topline success we’ve driven with our internal marketing efforts, we expect to continue these investments in the fourth quarter,” she added.

“It is important to note that we expect years of revenue growth from higher occupancy, and we recognize that now is the time to make marketing investments to realize this revenue opportunity,” Swain said in his remarks.

Transactions with HCP / Healthpeak

Baier said she is “thrilled” about the transactions with HCP / Healthpeak that were announced in early October, because they help meet her desire to “unlock the value of the entry-fee continuing care retirement community or CCRC, venture.”

Under the agreement, HCP will acquire Brookdale’s 51% joint venture interest in 14 entry-fee CCRCs (which Baier said included one agreed to after the October announcement), which will increase the REIT’s ownership interest to 100%. Life Care Services will take over management of the CCRCs.

HCP also will pay Brookdale a $100 million management termination fee.

Additionally, Brookdale and HCP agreed to restructure a portfolio of 43 triple-net leased senior living communities, with Brookdale acquiring 18 of them, one property transitioned to a third party, and the leases for the remaining 24 communities amended and restated.

“Since the beginning of 2018 … we will have restructured leases with our three largest REIT partners, reducing our leased portfolio by 27%, and will have increased our owned communities to be the majority of our consolidated portfolio,” Baier said. “This sets the foundation for a bright future.”

Outlook for 2020

Noting that many of the company’s units are in assisted living, where there has been high competitive pressure, Baier said Brookdale expects the competitive environment to improve “significantly” in 2020.

The construction pipeline around the company’s communities now is 14% lower than the peak in the first quarter of 2018, she said.

“We have always said the new openings affect us for about a year after a competitor opens, and in the third quarter, our opens were 53% lower than the peak in the second quarter of 2017,” she said. “And they were actually down sequentially 35% from the second quarter of 2019. The backdrop of having an improving industry is critical to our success in 2020.”

Further out, demographic trends bode well for the company, Swain said, noting that 15% of Brookdale communities’ new residents already are baby boomers. Members of that generation are turning 55 to 73 in 2019.

“The boomer generation, or silver wave, is 50% larger than the Silent Generation, which is the generation that makes up the bulk of our move-ins today,” he said.

“Between operational improvements and supply demand tailwinds, over the next five years, we expect occupancy will increase to 89% or 90%, returning to our past achievement,” Swain said. By 2024, he added, RevPOR should increase by $200, to $1,000 per month, compared to 2019.