Maybe I am just too much of a skeptic
By Steve Moran
Note to reader: After I wrote this article, as is my custom, I shared a draft copy with Brookdale which kindly provided some responses and their perspective on certain elements of this article. We have had some times where we had great differences, this time not so much. But it is fair to share their perspective when it is different than mine.
I love Brookdale. I think they have done some good things to improve performance and that they are better than they were. I read the earnings release documents, I listened to the earnings call, went back and looked at the data again, and then I had a short call with Cindy Baier, their CEO. Finally, I dug into the supplemental report that had some things I missed the first time around.
The stock market seems impressed with the share price going from $7.18 just before the quarterly release to $8.05 on Thursday, August 8, 2019. Maybe I am just too much of a skeptic but I am still going . . .
Let’s Start with the Good
This is directly from their press release with some added commentary by me (not in italics):
“Positive year-over-year same community move-in growth for the first time since the third quarter of 2017.” This is, for sure, the very best news and would seem to indicate that things are indeed turning around.
“All Senior Housing segments grew same community revenue year over year”. Good news but the question is, ultimately, how much and is it more than expenses increased?
“Revenue per available unit (RevPAR) and revenue per occupied unit (RevPOR) increased year over year 1.9% and 3.3%, respectively, on a same community basis”. Same question as the prior bullet.
“Health Care Services revenue grew 2.6% sequentially and 4.2% on a year-over-year basis.”
“Since the first quarter of 2018, community sales have generated over $230 million of net proceeds”. Big number but not sure that the long term sale of assets is a business strategy.
“Net Promoter Score® (NPS®) is up over 20% since our last survey with over 50,000 customer responses”. This is another great leading indicator, but I would like to know what the baseline was.
Brookdale’s clarification: Probably a reason why companies don’t share the actual score is that NPS is not rated 0 – 100. There can be negative scores, too. The best way to look at our score is by benchmarking. Brookdale is now in the same category with Nordstrom.
What Left Me Going Hmmm . . .
These are the things that left me wondering if this is a trend (and I hope it is, since I own a tiny number of shares) or just a blip.
The earnings call and even my call with Cindy seemed so so scripted, including the answers during the Q & A part of the earnings call. I know that earnings calls are always superscripted, but found that in the past the Q & A and the few times I have done a post-earnings call interview, I was able to gain some additional insight.
I am grateful for the chance to do the interview but I am not sure it really shed much light on what I got from reading and listening.
Facility operating expense increased $31.5 million, or 5.8%, mostly because of labor but with additional contributions from marketing and advertising, property remediation, and higher insurance premiums. – This is a big jump against modest revenue increases.
From Brookdale: It’s worth noting that, as part of our people-focus goal, we took higher-than-industry price increases so we could invest more in the associates who take care of our residents. As Cindy mentioned on the earnings call, this year is the last of our three-year journey making “above industry” investments in our associates. Our goal is to build the best workforce in the industry and the retention rates we quoted on the call are showing the progress we’ve made.
Their weighted average occupancy is still trending down (83.7%) at the end of the 2nd quarter.
From Brookdale: The agony of weighted average! Starting at the lowest occupancy point in April is what causes the weighted average pain. We turned positive in May (one to two months earlier (!) than the past few years) AND continued to improve occupancy in June, but you don’t see the “weighted average” benefit until the third quarter. Your point of not yet seeing occupancy gains is why Cindy leaned forward and talked about occupancy continuing to improve in July. And I’ll mention that, at the end of the day, I’m glad you highlighted RevPAR, which pulls rate & occupancy together.
They have 328 (49%) communities at 85% occupancy or less, with 220 (34%) of them at under 80%.
My biggest areas of concern come from this chart and the supplemental report you can find on the Brookdale investor page.
Top right is the big positive news number, a very nice increase in move-ins.
But . . .
Leads in the last two quarters are down and this is a concern because it means they will need to be closing at a higher rate. That being said, this is the 2nd quarter, leads are down, and they still had a nice bump in occupancy, so maybe they are closing more effectively.
As concerning, is that first visits were down a fair amount, which would be consistent with fewer leads the quarter before.
They have had 5 quarters of reducing controllable move-outs, which is great, but in this report, that number moved back up. While they expected this at some level because they have had such positive results in the prior 5 quarters and a rate increase, it is still a concern. It might suggest they are still not quite getting their culture to where it needs to be.
From Brookdale: We understand your concern on the chart. It’s not intuitive how lower leads and first visits result in higher move-ins. We don’t want to give away specifics that our competitors could then replicate, but our conversion rate is much better than a year ago. We’ve seen a meaningful (double-digit) improvement in our conversion rate.
The Most Positive Thing . . .
The most positive part of the earnings report was a description of how they took 30 high-potential, underperforming communities and gave them hyper-focused attention that resulted in positive improvements, though when asked about it, Cindy declined to give any specific numbers. She did say, they are targeting a similar effort at another 40 or so communities.
From Brookdale: Regarding the approximately 30 high-potential communities: The focus was on low-occupancy communities so while we delivered an amazing improvement, we didn’t want to quote a percentage and have investors extrapolate from that.
I am hoping this is the first in a series of improving quarterly reports, but I see some significant concerns, though I am not selling my shares.
I would love to hear your thoughts.
I continue to stand ready to join the Brookdale board or be hired as a consultant to help make their culture better, which is the key to creating a massive increase in occupancy, profitability, and an improved stock price.