Remember the signature tagline of the E.F. Hutton commercials of the 1970s and 1980s touting the sharp insights of the American stock brokerage firm? “When E.F. Hutton talks, people listen.” In its heyday, E.F. Hutton was one of the largest stock brokerage firms in the country.
When Lucinda “Cindy” Baier, president and CEO of Brookdale Senior Living (NYSE: BKD), speaks, the seniors housing industry also listens intently — in part because of the company’s sheer size. As of Feb. 1, the Brentwood, Tennessee-based company operated and managed independent living, assisted living memory care and continuing care retirement communities totaling 743 communities in 45 states, with the ability to serve approximately 65,000 residents.
Brookdale has endured its share of financial bumps and bruises in recent years. Most notably, Brookdale struggled to digest the acquisition of Emeritus Corp. in a $2.8 billion deal that closed in 2014. After joining the company as chief financial officer in 2015, Baier was appointed CEO in February 2018 to implement a turnaround strategy in an effort to boost shareholder value.
In Brookdale’s fourth-quarter 2019 earnings report released Feb. 18, Baier pointed out that the company is making “great progress” on carrying out its strategic plan introduced in 2018, and she highlighted some key performance metrics. Same-community fourth-quarter revenue increased 2.1 percent on a year-over-year basis. Same-community fourth-quarter weighted average occupancy improved 30 basis points on a sequential basis, outperforming the industry.
Still, Brookdale reported a fourth-quarter loss of $91.4 million compared with a profit of $131.5 million during the same period a year earlier. On a per-share basis, the company reported a loss of 49 cents. Losses, adjusted for one-time gains and costs, were 25 cents per share.
Baier talked with Seniors Housing Business about where Brookdale currently stands in its turnaround effort and the near-term outlook for the company. An edited version of the Q&A session follows.
Inside the Numbers
Seniors Housing Business: The net loss for Brookdale Senior Living was $268.5 million for all of 2019, a marked improvement over net losses of $528.4 million in 2018 and $571.6 million in 2017. When can we expect the company to show a net gain for the full year?
Cindy Baier: To report meaningfully on our business, the metrics that you should really focus on are adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted free cash flow. (Adjusted EBITA is a financial metric that includes the removal of various one-time, irregular and non-recurring items from EBITDA.)
As a company that owns and operates a really large amount of real estate, we have quite a lot of depreciation and amortization, as an example. We also have charges that have come from the acquisitions that we have historically done.
If you look at adjusted EBITDA and adjusted free cash flow, these metrics exclude depreciation charges and give us a better view of the performance of our business and the cash flow that our assets generate.
If you look at our guidance for 2020, we are expecting improvement on a year-over-year basis in adjusted EBITDA and adjusted free cash flow and that is very, very positive. (The company reported adjusted EBITDA of $401 million for all of 2019, in line with guidance. For the full year 2020, Brookdale projects adjusted EBITDA ranging from $410 million to $440 million.)
Redeploying Capital
SHB: Since initiating its turnaround strategy in 2018, Brookdale has substantially restructured its portfolio by selling off non-core assets, terminating leases, and making the necessary capital expenditures at its facilities to better attract and retain residents. In fact, Brookdale has achieved its goal of selling assets to generate $250 million of net proceeds. How are those net proceeds being redeployed exactly?
Baier: We’ve already deployed a significant amount in beneficial ways. You saw that we bought a lot of assets that we previously leased from HCP (now Healthpeak Properties Inc.). But we’ve also put a lot of dollars back in our communities through capital expenditure (CapEx) improvements. In fact, last year in 2019 we spent over $225 million on CapEx in our communities.
We’ve also been opportunistic in terms of redeploying capital through share repurchases, and we’re pretty judicious about how we deploy capital. We expect to continue that as we go forward, using the proceeds in a similar way. CapEx is certainly something we spend a fair amount of capital on, but we’ve also signaled that we’re looking at potential lease restructurings, investments to support our strategy as well as continuing to be opportunistic on share repurchases.
SHB: What is the average age of the communities in Brookdale’s portfolio?
Baier: Generally speaking, we are in the 20s — about 22 years on average.
SHB: That’s getting to the point where a lot of facilities need upgrades, right?
Baier: There is no question that we spend a lot on CapEx, and there is usually about a 10-year cycle on the CapEx that you need in a community. But remember that we’re always doing unit turns every single day. If a resident moves out, we prepare the unit for a new resident. As you probably remember, we announced a three-year CapEx program, and we are in the second year of the program in 2020.
Simplifying Its Business
SHB: In 2014, Brookdale entered into a $1.2 billion joint venture with HCP Inc. (now Healthpeak Properties) to own and operate continuing care retirement communities, but early this year Brookdale completed the sale of its 51 percent equity interest in 14 unconsolidated entry-free CCRCs, resulting in net cash proceeds of over $285 million. In effect, Brookdale is exiting all of its entry-fee CCRC operations. Additionally, Brookdale also has purchased 18 formerly leased communities from Healthpeak for $405 million. Why the change of course for Brookdale on the entry-fee CCRC front?
Baier: This was a deliberate transaction aligned with Brookdale’s strategic plan to increase our ownership of leased communities and to simplify our business. We received a number of benefits from this: we unlocked significant value that was not fully reflected in Brookdale’s share price; improved our financial strength by generating significant net cash proceeds and improving consolidated adjusted free cash flow; improved community ownership, reducing lease exposure and improving rent coverage; and provided capital structure flexibility.
By continuing to take actions that support our strategic plan, we continue to improve on our ability to fulfill our mission of enriching the lives of our residents, patients, and their families, and of our associates.
Black swan event in coronavirus
SHB: The coronavirus has rattled the global economy. Meanwhile, the healthcare community is doing all it can to stop the spread of the virus. According to media reports, Brookdale has enacted precautionary measures in accordance with current recommendations from the CDC (Centers for Disease Control and Prevention), which offers guidance for employers and businesses to control the spread of the virus. Can you describe some of the precautionary measures being taken in more detail? Are there any lessons learned from past viruses/contagious illnesses that are applicable in this case?
Baier: Let me just start with some context. In a normal flu season, there are 26 million cases of the flu, and there are about 20,000 seasonal flu deaths as a result of that. So, the coronavirus compared to that is very small at this point, but something we are certainly taking very seriously.
The preparations for viruses like the flu are very similar to the preparations we take for the coronavirus. Certainly, the first thing is to make sure that you are taking care of your employee population and your resident population as much as you can. We always run flu clinics, and we make sure we’re very observant on the symptoms so that we can isolate and make sure that the affected resident gets the appropriate care. That’s the first and most important thing.
Then there are protocols that you have around cleaning, for instance, to make sure that you are taking care of the environment that the residents live in. Very basic precautions like hand washing and covering your cough are very important.
We certainly have looked at the supply chain as it relates to the coronavirus, and we’re very pleased that we’re not currently expecting any supply chain disruptions. Making sure that we’ve got adequate food and medicines and durable medical equipment for all of our residents is critically important. We also want to make sure that we have plans in place so that if there is any disruption to our staff that we can deal with that as well.
The good news is that because of all the experience that we have with hurricanes and wildfires, we are very comfortable with what happens when we need our residents and associates to shelter together in place. We do that very well in other natural disasters.
So, there is a very long and extensive playlist. I’ve just given you a few of the highlights of things that we think about. But do know that we have a team that is well prepared. We have looked at this cross-functionally, and we will continue to look at it. We work closely with the CDC (Centers for Disease Control and Prevention) as well as the leading hospitals and healthcare systems to make sure that we are prepared as much as we can be, and that we are in a position to protect our residents and our associates.
Riding Out Volatility on Wall Street
SHB; Are you surprised the coronavirus has negatively impacted the stock market and the business community in general so swiftly? (The Dow Jones Industrial Average fell 12.4 percent the week of Feb. 24-28, the steepest weekly decline since the financial crisis in 2008.)
Baier: The same thing happened with SARS (severe acute respiratory syndrome). One thing stock markets don’t like is uncertainty. Because of the disruption in the supply chain, because of the amount of uncertainty due to the length of time between when someone is exposed and when he or she exhibits symptoms, it creates uncertainty for the market. This will settle. It’s just something that will take a little bit of time until the market has enough information to process.
SHB: Brookdale’s stock price closed at $6.93 per share on Tuesday, Feb. 18 — the day of Brookdale’s fourth-quarter 2019 earnings release — and then spiked to close at $8.39 per share on Wednesday, Feb. 19. The stock retreated to $6.39 per share at the end of trading on Thursday, Feb. 27, the day before our interview. What will it take for investors on Wall Street to warm up to Brookdale’s strategic plan, or do you feel that they already have?
Baier: The first thing I want to say is that I don’t want the coronavirus to overshadow the progress that we’ve made. There is no question that every stock in the market — with the exception of Clorox and a few others that are expected to benefit from the coronavirus — are under pressure as a result of the market dislocation from the coronavirus.
That is just like what happened in the case of SARS. This certainly isn’t specific to Brookdale. In fact, as you mentioned our stock price rose 21 percent after we announced earnings for the fourth quarter of 2019. So, our investors had very much warmed up to the story.
If you look at our 2019 stock performance, we outperformed all of the other operators in the industry as well as some of the REITs. So, I think that we’ve made great progress with regard to the stock price and would not want the isolated impact of the coronavirus to overshadow that story. We continue to demonstrate results. We’re executing against the commitments that we made to our investors as part of the turnaround strategy, and we’re getting a lot of new investors starting to look at the story, looking for the right entry point.
SHB: As a CEO, do you find that you have to explain the stock price a lot to investors?
Baier: I don’t have to explain the stock price to investors at all, but I do spend a fair amount of time talking about the stock price with our employees because I want to make sure they understand what’s happening in the broader market. They don’t necessarily invest every day, so putting our results in context and telling them why the stock is reacting the way it is is something that’s important.
Capitalizing on Its National Presence
SHB: On the people front, over 3,000 former associates of Brookdale returned to the company in 2019. Where were they returning from and why? What was the reason they left Brookdale in the first place?
Baier: It is true that employees leave for many reasons, just like any large company. Many times it’s due to personal situations. At Brookdale, we find that we’ve got an advantage because we’re national.
One of my favorite stories involves Steve Caruso (currently an executive director at one of Brookdale’s communities in New Jersey). Steve was on our operations team on the West Coast. His daughter (Sophia Anne Caruso) wanted to pursue a career on Broadway, so he moved across the country with us (transferring from Brookdale Park Place in Spokane, Washington), and believe it or not she became the star of “Beetlejuice.” By being such a large company, we can give our employees career advancement while they pursue their family lives.
It’s important to note that the workers who return to Brookdale come back for many reasons. We have the best systems in the industry that other companies can’t offer, and that’s not just IT systems. It’s processes and procedures and people. We have unmatched career opportunities. We make investments in our infrastructure that other companies can’t match.
And we have been making above-market investments in our workforce, particularly for the last three years with above-market wage increases and improvements in our benefit programs. I always said that I wanted to be a talent magnet, so we’re very pleased that our associates are returning home, so to speak. As you know, good people are critically important to our business.
Personal Reflections, 2020 Outlook
SHB: Through this ongoing turnaround process, what have you learned most about the company that you didn’t know before you assumed the role of CEO?
Baier: It is amazing to me the extraordinary things that our people do on ordinary days. Probably the biggest surprise to me has not been about the company and what we do, but the personal impact [the job] has had on me since I took over the role of CEO. As a CFO, I was always very focused on our residents and making sure they were getting the right care. But if anything goes wrong, if there is any service failure, I can tell you that I feel that very personally.
I have a strong desire to be very close to the operations of the business, particularly when something is challenging like a hurricane or a wildfire or some unanticipated and uncontrollable event. We just have to make sure our team is ready to protect our residents. I am always so proud and so grateful for the extraordinary lengths that our people go through in these very difficult times, and the genuine relationships that they have with our residents — just the comfort that they provide to residents and families.
SHB: If we were to have this same interview a year from now, what might we be talking about relative to Brookdale’s performance?
Baier: I think we’ll be talking about the continued improvement in adjusted EBITDA, the improvement in cash flow, the strong progress that we’ve made in building the best team in the industry — just the continuation of the success of our turnaround strategy.
— Matt Valley