By Steve Moran
First, I am not a Brookdale shill -- as some have accused me of being -- and likely some will feel even more strongly about me after reading this article . . . and I am sorry for that . . . kind of.
Second, the earnings report was a big bummer, no doubt about it.
Third, after seeing the results on Wednesday evening (February 13, 2019) and knowing I had a 10-minute interview slot with Lucinda M. Baier, Brookdale's CEO, today I kinda wondered what to talk about, except it would have been irresponsible to not talk about their numbers.
A Better Way
I want to be clear about this portion of the article. This represents my view (Steve Moran) and is not necessarily, or more accurately, it is not likely, they share my perspective on this.
Brookdale has faced multiple challenges from activist investors who, in search of some short-term gain have pushed, prodded, and threatened Brookdale in an effort to get them to spin-off all their real estate to a new REIT and become simply an operating company. Based on calculations and depending on which challenge you are talking about they projected a 40-60% uplift in share prices.
When it happened the first time, I suggested that it was a golden opportunity for Brookdale to clearly state that their strategy was one that did not include spinning off all their real estate assets to a REIT . . . that they felt it would not be in the best interest of residents, team members, and families. My thinking was and continues to be, if they had taken a stronger position on this, they would have sent a powerful message about their commitment to residents and their families and team members.
Unfortunately, though -- because it is so long in coming -- this announcement may have contributed to Thursday's stock decline. From Cindy’s perspective, there were some other contributing factors. A more aggressive than anticipated disposition of assets, which resulted in a lower revenue number, and a change in accounting standards that while non-cash resulted in lower than anticipated numbers. At least in part, because of these changes, the guidance for 2019 was a disappointment.
From my perspective, the glaring number was another drop in occupancy.
The Silver Lining
Here is why Cindy is optimistic (and yes I know it is her job to paint a positive picture), but they largely pass the smell test:
Their IL occupancy is now at 90%
They are aggressively working on team culture and the best evidence that it is working is that the voluntary move-outs have decreased significantly
They have made a commitment to invest significant dollars into the refurbishment and upgrade of their communities
They are continuing to invest in their team
They have diversified their board in terms of skill-sets and gender and there is hard evidence that board diversity is correlated to higher profitability
I continue to be a fan of Cindy and think they are on the right track. I still feel a bit squeamish about occupancy and the reality that it, not only has not turned around but is still heading the wrong way. I was kind of expecting/hoping they would be neutral or we would see just a tiny edge in the positive direction. That being said, I acknowledge that turning around a culture is a tough, tough thing to do and takes more time than you really want it to.
What could they be doing even better? Well, they could, of course, put Steve Moran on the board.
I would love to hear your thoughts.