A lot has happened at Brookdale Senior Living (NYSE: BKD) over the last few years in what can only be described as a tumultuous period. Operating 844 communities as of March 31, the company is still the largest owner and operator of seniors housing in the country. However, Brookdale’s stock price has struggled mightily in recent years. While trading at nearly $40 per share as recently as 2015, the company’s stock price has not gone above $10 per share since late 2017. (The stock closed at $6.52 per share on Tuesday, June 11.)
The Brentwood, Tennessee-based company entertained acquisition offers at least twice, but instead settled on a change of leadership and a turnaround plan. Lucinda “Cindy” Baier was promoted from CFO to CEO in 2018 and immediately started trying to right the ship at Brookdale, in large part by paring the size of its portfolio up to 20 percent.
Her efforts appear to be paying off. According to the company’s first-quarter 2019 earnings report, same-community revenue per occupied unit (RevPOR) increased 3.7 percent on a sequential-quarter basis and 3.1 percent on a year-over-year basis. In addition, same-community independent living occupancy remained at 90 percent for a second sequential quarter and increased 150 basis points from the first quarter of 2018.
Baier sat down for a one-on-one discussion with Seniors Housing Business Publisher Richard Kelley on Tuesday in Chicago during InterFace Seniors Housing Midwest. The one-day conference — which featured a variety of panel discussions on topics ranging from development to operations to the state of the capital markets — took place at the Marriott Marquis Chicago, which is attached to McCormick Place. The conference attracted 285 attendees from across the seniors housing industry.
What follows is an edited transcript of the interview.
Richard Kelley: What do people in the audience need to know about the size and scope of Brookdale Senior Living today, specifically where the company has been and where it’s going?
Cindy Baier: Brookdale is a healthcare services company that intentionally owns real estate. We are big. We are three times larger than the next largest competitor in our space, and we operate in 45 states. We have over 800 communities. We have 65,000 associates. We have the ability to serve 100,000 seniors every day, including 80,000 residents in our communities and 20,000 through our home health business.
Now most of the seniors that we serve come to us between the ages of 75 and 91. Most of the seniors that we serve have at least $50,000 of annual income. What’s interesting is that 50 percent of our target customers live within 20 minutes of Brookdale. So, we’re everywhere that most people are.
While size matters, quality and personal touch are also very, very important. I believe, like many of you believe, that senior living is a very local business and we’re going to succeed one relationship at a time. So, we’ve been pursuing a local strategy that takes advantage of not just size, but also the scale that we have. We have more experience with seniors than anyone else in the industry, and we’ve been doing this for 41 years.
Our strategy is based on having the best people in the business because our job is all about making lives for seniors better and making sure that they want to call Brookdale home. Now we’ve been spending a lot of money in labor. We’re building the best workforce in the industry, and we’ve also been spending a lot of money in capital expenditures because with all of that new competition we have to make sure our communities are appropriately positioned.
And we’ve spent a lot of time simplifying our business. You see that we’re smaller today than we were a few years ago, and we’re doing that so that we can get a portfolio where we can make sure that our people are focused on the things that matter most: spending time with our residents, our patients and their families.
Kelley: What challenges are you and other operators facing in an industry where the pace of change has clearly accelerated?
Baier: There is no question that the silver wave of seniors is coming. It is going to put tremendous pressure on our healthcare system. If you think about seniors who are 75 years and older, 67 percent of them are going to have three or more chronic conditions. Sixty percent of them are going to have mobility limitations. So, the question is: How do you have the best life possible at the most affordable cost? If you look at the approach that CMS (Centers for Medicare & Medicaid Services) and state governments are taking, they’re really trying to reduce avoidable hospital stays and post-acute stays. They are really focused on changing the healthcare system from a system based on volume to a system that’s based on value. They’re focused on avoiding hospital readmissions. They want to improve health outcomes and are looking at patient and family satisfaction.
The question is how do you deal with limited resources in a rapidly aging world? If the elderly move into senior living, that certainly helps the seniors, their families and the nation address this issue because we know that health determinants are tied to social determinants. So, if you look at the behaviors that drive healthcare costs, we can provide support to that. We also know that healthcare is being provided as close to home as possible. We can help seniors avoid those unnecessary hospital admissions. We can help improve the quality of their lives by providing value and services at communities.
Brookdale’s business model has always been centered on the widest continuum of care in the industry. We have independent living, assisted living, memory care, skilled nursing and hospice. We have home health. We have a private duty service that allows people to age in place as long as possible. So, we’re very well positioned to address this issue and to really help seniors live the best life possible at the most affordable cost.
We’re innovative. We’re looking at things like adding telemedicine to our business. We’re also looking at whether dialysis plays a critical role in some of our communities to allow seniors to receive that healthcare at home where it’s more convenient and also avoid those hospital readmissions and post-acute stays that are so traumatic to seniors, their families, and very expensive for our healthcare system.
Kelley: Senior living is a very personal business. People who work in the industry are frequently very mission-driven. What led you to this industry, because it doesn’t seem that there was direct dotted line from your previous jobs to Brookdale?
Baier: That’s a really good question. I have been preparing for this job my whole life without realizing that I was preparing for this job my whole life. It started when I was in middle school. My mother had a really serious car accident. She was a single parent. I learned very early on to take care of someone. I learned all the things that are needed — cooking, bedpans, all the fun stuff — for somebody who can’t get out of bed.
Then my grandfather lost his sight as a result of complications from diabetes. So, he had no ability to live independently. I spent many years — through my college graduation — living with my grandfather and grandmother so that I could help take care of him.
I started my career in public accounting. Public accounting gives you the ability to learn the language of business, which is finance. You can’t be good at finance without understanding the business and understanding what really makes money and how to make the business successful. That made me a student of business.
I’ve held several different CFO roles in several different industries, learning everything from services to retail to real estate. That gave me a good foundation. I also gained a lot of experience in turnarounds, and as you’ve heard Brookdale is a turnaround. That gives me the courage and the leadership to [make] those hard decisions that are right for the business in the long term.
Getting to Brookdale was actually a little bit of an accident. A recruiter called me, and the minute I got the call I knew I had to be at Brookdale. I wanted to be their CFO. How many people get the chance to go to a business that has such a clear mission and to do something with their life that really matters?
Unfortunately, I lost my mom after I got into the business. But at end of her life she gave me a final lesson. That lesson was that as she aged and she needed to be in a community where she could get more support than my sister and I gave her, I learned about the importance of the workers in the communities. I learned how continuity really matters to the seniors we’re taking care of, how important it is that they have the tools to do their job correctly. That gave me even more information about what it takes to make Brookdale the best company [possible].
Kelley: You originally joined Brookdale as the CFO. Obviously, you had to know the company inside and out from a business and finance standpoint to effectively do that job. But that’s a lot different from being in the CEO seat. You had to assess if you wanted that seat. Has your perspective changed now that you’ve moved from the CFO role to CEO of the entire organization?
Baier: What hasn’t changed is my firm belief that our mission is critically important. Brookdale wants to succeed. We have to succeed because our business is so important. We make the difference in hundreds of thousands of lives every day. The question for me came down to this: Was I the best choice for the job? Was I willing to make the sacrifices that were necessary to do the job? So, I thought a lot about what was best for Brookdale, what the challenges were, what we were going to need to do to be successful. And I thought a lot about what it would mean for me and my husband and the sacrifices that we would need to make to take the job.
Now look, I knew that turnarounds were tough. I knew that we had an activist investor in our stock. I knew that there would be lots of hard hours and many tough decisions to make. I knew that I would likely be criticized, which is never fun. Having said that, I also knew that I’m extremely introverted and being a CEO is a very extroverted role. You have to get out and talk a lot, which is something that quite honestly I prefer not doing. But I also decided that I really had to fight for Brookdale, I had to fight for our associates, I had to fight for our residents, our patients and their families. So, when it came down to it, I knew there was no choice but to step up and take the CEO job.
The good news is that our core business is strong and we needed to make a really tough decision to shrink our portfolio down to a business that we can ultimately be successful with. We’ve done just that. Now I think my top responsibility is being the keeper of culture: passion, courage, partnership and trust. Those are the [attributes] that our associates are going to need to make Brookdale the best home for our nation’s seniors.
I am so proud of the work that we’ve done in enriching and saving lives. If you could have observed what our Brookdale team did during the hurricanes and wildfires, the extraordinary efforts they took to make sure that our seniors were safe, comfortable and that their families were well informed, it would make you so proud. We had Navy SEALs who came to us and said, “I’ve never seen execution better than this.” That is what our culture brings.
Brookdale is a company with a strong foundation. We’ve got 41 years of great experience, we’ve got tens of thousands of dedicated mission-driven associates, and we’re absolutely going to succeed. From the CFO role, I’ve brought [the mantra] that without margin, there is no mission. We’ll make all of our decisions based on that financial discipline that we know is needed.
Kelley: One of the most talked about issues in this industry over the last 18 months to two years has been staffing — the ability to attract and retain talent at all levels at the properties. As the largest operator in the industry, Brookdale sees and feels that issue every day. What will it take for Brookdale and the industry overall to keep good employees in the fold and also attract new ones?
Baier: At Brookdale, we really want to be a talent magnet, and culture is the center of that. We have to build a vision that people want to be part of, and we’ve very lucky that we’re a mission-driven business. Who doesn’t want to take care of seniors? It gives us a nice start. But we also have to focus on some of the basics. We have to make sure that we are investing appropriately in our workforce. We’ve spent three years of making above-market investments in labor so that we can really build the best workforce in the industry.
We’re also focused on things like simplifying jobs. We want to make sure that our people have the time to do what they came to Brookdale to do, which is to serve seniors and their families. We’ve been focused on looking at career paths because everybody wants to know that they have the opportunity to develop and grow. We’ve seen great, great progress. I’m pleased to report that between January and April, over 1,800 former Brookdale associates came back to us. They came back to us because they see what we’re doing with the culture, they see what we’re doing with the company, and they want to be part of our success.
I’m also very proud of the fact that we had seven consecutive quarters above 70 percent retention for our executive directors and our health and wellness directors. We’re sequentially making improvement with the retention of our salespeople. That’s pretty good. If you look at our hourly workers, we have seen an improvement of 360 basis points in the retention of our hourly workers in our communities.
So, everything tells me that the focus on the culture, the focus on the mission, the things that we’re doing to simplify [their jobs], the investments that we’re making, they are all working to make Brookdale a better company.
Kelley: Another big issue for the industry has been the uptick in new development, which impacts occupancy and rental rates. Obviously, Brookdale has a plethora of properties and every market is different, but in general what’s been the impact of this development wave on the company? Do you see the pipeline slowing down?
Baier: Oversupply is difficult, and let me tell you that Brookdale has been in the center of that storm. Most of our communities are assisted living or memory care, which has been at the heart of most of the overdevelopment. It has affected our occupancy and our financial performance for a few years now. The good news though is I do think the hard times are coming to an end, and I do believe the industry is starting to pivot to a more normal supply and demand environment.
Everyone in this industry saw the same trend: the silver wave of seniors is coming. But what’s different about this industry is that 95 percent of communities are operated by people who have five or fewer communities. So everybody rushed in at the same time. We really saw the effect of that.
We’re happy to report that a lot of industry experts, including NIC, are basically saying that by the end of 2019 the rate of new supply will be lower than the rate of absorption and that will be good for the industry. At Brookdale, we’ve seen improvement in our construction pipeline around our communities as well. It’s 10 percent less than it was about two years ago, and we’ve seen a very material, sequential reduction in both new construction starts around our communities as well as new opens, so that should bode well for us.
It takes 18 months to two years to build a community. So, we always have to pay attention to what’s coming into the market because there is no question that if you are in a market and somebody opens up a community around you it’s likely to affect your business. But we are making progress, and I’m very happy that we have seen sequential improvements in both leads, first visits and move-ins, which ultimately will be great for our occupancy. And in the month of May we were able to see sequential improvement in occupancy from April. I think the best is yet to come.
Kelley: Brookdale and all operators are faced with the challenge of growing occupancy, growing revenue or at least maintaining current levels. One way to grow revenue is to offer new services such as hospice, home healthcare. Is that a viable path for Brookdale?
Baier: It’s a huge opportunity for us, and in fact we already operate 20 hospice locations. This year we opened hospices in San Jose, California; Detroit; and Portland, Oregon. We have a resident base that needs this service. We first got into hospice because our residents asked us to. If you think about it, hospice businesses have a nice cash flow, they don’t require a lot of capital and they have good margins. So, we plan to continue to expand this business. We recently hired a very exciting new hospice leader, (Anna-Gene O’Neal, the former CEO of Alive Hospice). She will help us grow this business together with our existing team. I also think that home health is going to be able to grow significantly. We have the ability to expand significantly into more markets, but keep in mind there is still a lot of work for us to do.
Kelley: Brookdale recently unveiled some interesting research that sheds light on the need for more Americans to plan for senior living. Can you tell us some of the survey’s findings?
Baier: As you know the silver wave is coming. We wanted to take a fresh look at more than just demographics. Brookdale partnered with a company called OnePoll. We surveyed 2,000 Americans about planning for the future and preparing for senior living. We found that 58 percent of adult children are worried that their aging parents will need senior living assistance. The same percentage said that having a discussion with their parents about senior living was uncomfortable and stressful.
Guess what? We as an industry can change that. It doesn’t have to be uncomfortable and stressful to talk to your parents about things that are good for them. We have to make sure that Americans have more knowledge about the factors that are really going to make a difference for them and their loved ones. The results from the survey show that the majority of people are avoiding planning for the future. They are avoiding the difficult discussions. That’s human nature, but I’m sure this industry can help improve that situation.
Kelley: Any other noteworthy findings from the survey?
Baier: Almost half of adult children haven’t discussed financial planning. They don’t know where the money is going to come from. Forty-one percent have no plan in place if there is an unexpected health emergency or an unexpected death for their parent. So, if you get back to the fact that 58 percent say that having discussions about senior living is uncomfortable and stressful, that shows we just have a lot of work to do. You can go to our newsroom at brookdalenews.com to get all the relevant statistics. There is one conclusion that we came to about this. We can and should do more to help. We can do this through education, we can do this through community outreach. And it seems like we should be the best vehicle positioned to do this because our business is really all about quality relationships.
Kelley: You have a long lost aunt who comes to you and says, “I just received $50,000. Should I invest the money in Brookdale and other publicly traded seniors housing companies, or short I go and invest it in a project? I heard my friend is building a congregate care facility or an assisted living facility. Would that be a good investment?” What would be your response to that question?
Baier: The good news for me is that I have no aunts or uncles because my parents were both only children. I really don’t want to give investment advice. But what I can say with regard to Brookdale is that our strategy has really been focused on the long term. We are investing for the future and we do see a bright future. What we can say about 2019 is that our portfolio reset is substantially complete. We expect to capture the benefits of the third year of above-market investments in labor.
If you look at 2020 and beyond, operationally next year we expect to get the benefits of all the work that we’ve done. We expect we will feel the full effect of our strategy and turnaround plans. We’re going to capitalize on growth in targeted senior population, and we’re going to start to look at development again as well as some opportunistic asset acquisitions. We’ll continue to look at strategic partnerships where we can advance our mission with others.
Financially, we would expect to grow occupancy next year. It’s going to be great when we have labor costs that are growing more in line with inflation and normal cost increases than we have spent in the last three years. Our capital expenditures will be lower next year. By 2021, we really think that we’re going to get our capital expenditures down to $2,000 to $2,500 per unit. The normalized supply-demand environment will help us and others in the industry.
— Matt Valley