Brookdale Senior Living Inc. (BKD) Earnings Call Transcript & Summary

Hi, everybody. I'm A.J. Rice, the healthcare services analyst at Crédit Suisse. We're very pleased to have, as our next presenter, Brookdale Senior Living. From Brookdale today, we have Cindy Baier, President and Chief Executive Officer; Steve Swain, Executive Vice President and Chief Financial Officer; and Kathy MacDonald, Senior Vice President and Director of Investor Relations. We're going to do this as a back and forth, a fireside chat type of format, but I thought, first, Cindy, I would pass it on to you for anything you wanted to highlight. I know you guys had an 8-K released this morning as well as just recently reported your fourth quarter and any key takeaways from that you'd like to level set people with.

A.J., thank you so much for having us. We're very grateful to have the opportunity to talk with you today. We do have 2 new pieces of information to share, which are both pretty exciting. First, this morning, we posted a new investor presentation that shows that we received $67.5 million of funding from Phase 2 of the Provider Relief Fund. We are just so incredibly grateful to HHS and the states for the grants that we have received. And second, we wanted to let people know that to provide additional visibility for the interim period starting with our November results, we'll start publishing monthly occupancy. We expect to continue to publish until we return to financial guidance, at which point we would return to our historical practice. So that is our good news to start with. And then it would be remiss if I didn't say how excited we are about the announcement of a potential vaccine for COVID-19 and to highlight that senior living is prioritized to receive vaccines in our communities. Our expectation would be that Brookdale residents and associates in the communities would actually get the opportunity to get the vaccine when available through a partnership with CBS. So that's something that really is exciting for us. And certainly, during our last earnings call, we highlighted just the swift and robust actions that Brookdale has been taking to strengthen our operations and our financial positions and to be a clinical leader during the COVID-19 pandemic, and this all fits right into that.

No, that's great. That's great. Just because I'm sure there's a lot of people listening that would probably not be as familiar with the up to the minute of the Brookdale's story, like many health care providers, health care companies, you experienced a significant dip in occupancy, I guess, or in whatever you want to call it earlier in the year and you have been steadily rebounding, as you point out. Maybe just walk people through that, if you don't mind a little bit.

Certainly. Let me just start with an overview of sort of our business.

Okay.

So based on September year-to-date, our business is 83% senior living and about half of our communities are owned. The rest of our communities are either leased or managed. We have 12% of our business that's health care service, and 5% of our business is managed. Now because of our size, we've really been better positioned to manage through the pandemic because of our clinical and operational expertise and our ability to achieve economies of scale. We have done a lot on the cost side and particularly, our health care services benefits from the volume of purchases in senior living. Now on the senior living side, if you go back to the beginning of the pandemic, on March 17, we actually withdrew our guidance because it was very obvious that the pandemic was going to have a very significant impact on our industry, and we needed to close our communities to visitors as well as to prospects. And so as you might imagine, that had quite an impact on the number of people who were willing to move into a senior living community when they couldn't necessarily see the community in person or meet the people who would be helping to take care of them. So we have been very excited to see the recovery that we have had in move-ins from that low point in April through the month of October. In fact, we've seen a 78% improvement in move-ins during that window. So that's something to be encouraged by, just the improvement in the trajectory of move-ins.

And when you think about people being able to get into the facility and see, are your facilities across the country opened for that now for people to consider potential for it or is there still some closures?

So 95% of our communities as of October 30 are open for new move-ins. And the vast majority of the communities are open to prospects touring the community prior to moving in as well. There are a few states that still have restrictions on prospects touring prior to moving in.

Okay. And we obviously are reading about these little mini surges around the country. Does that -- if they're open, they're staying open? Or when you have a little surge like that, you have to consider closing them? Or how are you responding to the surges?

Well, so we're very proud of our 40 years of strong infection control protocols. And our experience with COVID-19 has been really quite strong. As of October 31, only about 1% of our residents have a positive COVID test result. And what we know is that because we've got strong infection control protocols, we've been able to demonstrate that to the state and local licensing jurisdictions. And so we've largely been able to keep our communities open even during the spread of COVID in the broader metropolitan areas that we operate in.

Okay. As you said before, you think the launch of the vaccine will be prioritized for your people. Do you think most of your residents would proactively take the vaccine? If you surveyed and asked them whether they'd be willing to take it if it's available to them?

Well, the one thing that we know is that every year, we conduct flu clinics for our residents and our associates. And we do have strong participation in those clinics. We also know that the risk of a bad outcome, if a resident at our communities contracts COVID-19, is quite high. Our residents generally are in their 80s or higher and have multiple comorbidities. So there are a lot of really good reasons for our residents to want to take a vaccine. Now we've got time to do education within our communities. We have 6,000 nurses, an unmatched number of nurses in senior living. So we are optimistic that most residents and associates will welcome the opportunity to be protected from COVID-19, particularly if the effectiveness of the vaccine is in that 90% range that we've all seen reported in the news.

Yes. Yes, that makes sense. And you said you're working with CBS. Is that their Omnicare operation that would come into the facilities and administer the vaccine? Is that the way it would work for you guys?

We absolutely do have a strong partnership with Omnicare. And the vaccine clinics would be conducted in our communities.

Okay. Interesting. So we talked a little bit about the influx of residents and what's happened there. How about on the attrition side? Has the pandemic had any impact on the rate of move-outs or -- in any material way?

So we are very pleased that on a year-to-date basis, our controllable move-outs are better than last year. Now it's fair to say that COVID has been quite the year. So certainly, in the second quarter of the year, when the entire world sort of sheltered in place, our residents did the same, and we saw a very significant reduction in controllable move-outs in the second quarter. Now we expected that when the U.S. opened back up that our move-outs would return to more of a historical norm, and they have done just that. But we've seen on a year-to-date basis, our controllable move-outs are better than they've historically been.

And as you think about the revenues or the rates at which you're charging on both the residents that are in place, obviously, they get annual increases as well as the new move-ins, have you done anything different to respond to the dynamics you laid out on the volume side?

We've absolutely been a nimble organization, and we're very happy that in the third quarter we are actually able to get a 60 basis point sequential improvement in RevPOR, which is revenue per occupied room, and that translates -- that's on a same-store basis, and that translated into a 70 basis point sequential improvement in same-store NOI. Now it's fair to say that the vast majority of our industry operates 5 or fewer communities. In fact, 90% of our competitors are small competitors that operate 1 to 5 communities. And so what we see in local market is very local, and our team has been very good at protecting the rate, but also making sure that we're responding to the local market conditions that we see. I don't know, Steve, is there anything that you want to add to that?

No, I think you basically covered it. Just a quick reminder that reported RevPOR includes in-place resident rates. So pricing actions of new customers or new residents, they're not immediately seen in the weighted average price. And like Cindy mentioned, we attribute these strong rates to both the move-in pricing discipline that we have as well as the ongoing benefit of our annual price increase, which happens every January. So we're planning to have our January price increase in a couple of months.

Have you announced on average what that is across the portfolio?

We haven't. It's likely to be -- it's not likely to be stronger and probably a little bit softer from previous years.

Right. I was going to ask on your -- what is it 0.6, I think you said same-store RevPOR increased...

60 basis points, yes.

Yes. 60 basis points. Is that -- how does that compare to a normal year, if there had been a normal year?

We were happy to see the sequential improvement between Q2 and Q3. It's often the case that your strongest rate increase is in the first part of the year. Because as Steve said, on January 1 you do your in-place rate increase. And so the fact that we were able to see that increase between Q2 and Q3 is something that we're really very proud of, particularly in the toughest operating environment in our lifetimes.

Right, right. And I'm jumping around a little bit here. But on the competitive landscape, you alluded to sort of what your competitors look like, a handful of facilities would be typical for most of them as opposed to a national player. What -- how are they responding? Or do you think you're in a position to gain share vis-à-vis them? And what would be the driver of that share gain?

Well, throughout the COVID pandemic, our top priority was the health and well-being of our residents, our patients and our associates, and we have unmatched clinical centers of expertise and other centers of expertise. So what we really tried to do was to create that leadership position. And I think that we have done just that. If you look at some of the messages that we've received, Brookdale has been rated highest of any operator on our COVID-19 response, and that was an independent panel that we did of the top 10 markets that Brookdale operates in. So again, I think that people recognize just how strong our response was to COVID-19. It's also important that 50% people who are actively searching for senior living rated Brookdale as excellent. And believe it or not, Facebook actually selected Brookdale as an exemplary leader of social media for our COVID-19 response. So we have taken a disciplined clinical and strong operational approach to infection control during COVID-19. That's something that small competitors just can't match. I think a lot of small competitors really have done the best that they can but it's been harder for them to keep up with all the clinical protocols as well as to obtain PPE. COVID-19 is one area where size and scale has really mattered. We were able to reengineer our supply chain, screen hundreds of vendors to get the products that we needed to protect our residents, and that's something that we're very, very proud of.

I understand that, that's helping you reassure the residents you have and get new ones. But some providers are talking about that PPE cost as being meaningful enough that it moves the needle on cost and some of the other infection control things they're having to do. How does that shake out on the grand scheme of things for you guys on a cost perspective?

Well, we're really happy with the fact that, on a year-to-date basis, we've received $106 million of grants from the government. Those do not have to be repaid. And year-to-date, our COVID-19 response costs are about $95 million. So there's no question that the battle against COVID-19 has been expensive. But we're grateful that we were able to play a key role in convincing the government, HHS in particular, of the critical need of senior living and to get that support to offset some of the very significant costs that we've incurred as an industry to protect our residents.

And I was going to ask you about that. The $95 million of COVID cost, different people are putting different things into those numbers when they talk about their COVID cost. What is in COVID cost for you guys?

That sounds like a perfect question for Steve.

We break it into 3 chunks. So 50% of the COVID costs essentially are PPE. So as Cindy mentioned, $95 million, so about a little less than $50 million of PPE. And we've really built up a nice inventory of PPE in the second quarter, and we're using that PPE in the third and fourth quarters. So that's why from the second quarter to third quarter, our COVID-related costs dropped about 60%.

Right.

That's 50%, 25% and 25%. So another 25% is labor. And so year-to-date, it's a little less than $25 million...

That's what you're paying for given bonuses for hero work or premium pay or what is that?

There was a little bit of that just as we have direct frontline associates responding to the COVID virus and interacting with residents. There was some premium pay. But as you would imagine that the number of COVID exposures really has decreased over the several months, labor costs have also moderated. So that's another good tailwind, if you will, on related costs. And then the last 25% is cleaning and other. So cleaning supplies, some of the health care costs, some of the testing, and that's between $20 million and $25 million as well.

Okay. And when you've -- I know you've also talked about COVID revenue impact and size that as well. What does that -- is that sort of people that you think would have otherwise moved in that didn't? Is that what you're capturing there? Or what are you capturing in that number?

Generally, it's a variance to occupancy level. So triangulating versus last year year-over-year as well as sequentially kind of pre-COVID and then the COVID period as well as looking at what the budget was. Those were the 3 initially approved methods from HHS.

And when you think about the impact of the dip in occupancy and now it's coming back and also just the reluctance to have people into the facility that don't need to be in there -- the facilities, has that had spillover impact on your healthcare services division in any meaningful way?

Yes, it has. As you might imagine, a large part of our health care services census is within the walls of our community. And then because the residents tend to have multiple product conditions and have a need for home health and hospice services. And so as occupancy within our communities has declined, that has had an impact on our health care services business. At the same time, we've been very successful in growing our outside-the-wall census in home health and hospice. And we believe that the conversion to health care at home is a tailwind that really benefits home health and hospice that we will benefit from.

Okay. And so that's a focus of yours. Do you have that sort of an emerging business or do you have a significant portion of your home health business at home at this point?

We are -- well, in our business, every part of home health or hospice is conducted either in our communities, which are whether residents call home or in the home of the patient. So 100% the way that we look at it is there.

Right, right. Okay. I'd be remiss, there's been considerable focus on the balance sheet as well and trying to make adjustments to improve liquidity, insulate the company from the volatility caused by the pandemic. Do you want to just walk through at a high level, some of the things you've done this year and what they mean going forward?

Sure. I'll start. The liquidity profile of the company, I just want to say that we view the balance sheet profile that we have in a positive light. We have taken decisive actions. The first quarter, we strengthened our balance sheet by refinancing essentially all of the 2020 maturities. And then in the third quarter, we completed 2 additional financing transactions. And as a result, we have no significant maturities until 2022. And if I'll -- if Cindy wants to comment on the REIT lease restructurings, I will hand it over.

Well, actually, I thought you were going to go to the Ventas restructuring because it's been such a fabulous transaction. But one of the things with Ventas is we have reduced our rent payments by over $0.5 billion for the remaining term of the lease. We did need to make a cash payment in the third quarter, but that cash payment has less than a 1-year return. So that's really exciting for us. And then with LTC, we were able to incorporate flexibility into that lease. So that if COVID goes the way that we expect, we'll renew the lease. If, for whatever reason, COVID is more challenging, then we can either not renew the lease and reduce our footprint.

And is that -- what is the trigger to decide whether the threshold has been hit on renewing the lease or not?

Well, we have until April to...

So is it your discretion?

It's an option, and it's in April of 2020 and if we renew the option, then we'll renew from 4 years through 2025. And if we choose not to renew, then the lease would end at the end of 2021.