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

Okay. Great. Good morning. Welcome to the continuation of Day 2 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the Health Care Services Analyst here at Barclays. And our next session will be with Brookdale Senior Living. The stock's had a pretty good resurgence here in recent months on the back of the COVID vaccination progression, which we'll get into in our fireside chat format for the session today. From the company, I'm pleased to say that we have Chief Executive Officer, Cindy Baier, with us today; as well as Chief Financial Officer, Steve Swain. And also Kathy McDonald from Investor Relations is on as well.

So I guess we'll just dive right in, if we start with the positive impact of COVID vaccinations on overall COVID cases, certainly they're coming down now. I know the company on Monday night, you guys provided a monthly update for February that showed occupancy is still declining sequentially, but moderating a little bit as far as the pace of that. But on the plus side, both move-ins and move-outs improved in February versus January. To be able to start with that, maybe you can provide a little more color on the February trends and however that's kind of progressing on the back of that.

Absolutely, Steven. And thank you so much for having us. I agree with you. The benefit of a vaccine clinic is really starting to show with the decline of cases. In our communities, we've seen a 95% reduction in COVID cases since the peak in mid-December. We've had 8 consecutive weeks of declining active cases. And recently, we've seen no resident cases in the last few days across the portfolio. When you consider that we operate around 700 communities, that is truly amazing. We knew that getting the vaccines to our residents and associates was so very important to move forward. So we delivered our clinics 2.5x faster than the industry in the first month that vaccines were available. And our resident acceptance rate is currently over 90%. So if you compare our over 90% rate, I've recently seen a statistic from the CDC that less than 30% of seniors over 75 years of age have received at least one dose of the vaccine. And if you compare that to our February results, we are pleased with both move-ins and move-outs improved compared to January. And we've seen consecutive monthly move-in growth each month since November. If you think about everything that we've overcome since the pandemic began to the heroic efforts of our associates, it's truly incredible. Now that we've successfully completed virtually all of our second vaccination clinics and more than half of our third clinics, we are energized by the opportunity in front of us. There's such a feeling of positive momentum, and we are so focused on winning the recovery.

All right. Great. One thing -- thinking about the occupancy, the declines and now, hopefully, some recovery. Maybe just remind investors on the impact of COVID by property type between assisted living versus memory care versus independent living and also the SNF component within CCRCs, and this is also kind of a hypothetical add-on to this question, but what would be the optimal property mix during the recovery over the next year or 2, if you could hypothetically start from scratch with a new portfolio?

We have done so much heavy lifting over the last several years, and I'm really quite pleased with our current portfolio. I'm also excited about the new partnership with HCA Healthcare that we recently announced. Because we've seen a resident base that we serve that has a lot of elderly individuals with multiple chronic conditions. So we've regularly talked about taking advantage of our size and scale. And I believe that this relationship should provide a clear competitive advantage. Now SNFs have been particularly hard hit by the pandemic and we are pleased that we significantly reduced our SNF exposure with the sale of a majority of our entry fee CCRCs to Healthpeak in January of 2020. SNF is just a tiny part of our business right now, only around 3% of our units. The largest concentration of our business is in assisted living and memory care, which are needs-driven. Now our needs-based move-ins, especially memory care, have shown a significant amount of resilience. And because we have a higher concentration of assisted living and memory care than the industry, I'm optimistic. So as move-outs show improvement, I believe that move-ins will start to translate into improved occupancy, and we'll be able to capitalize on the operating leverage within our business. Just as a reminder, if you go all the way back in time to the beginning of the pandemic, our assisted living occupancy did better because of the longer length of stay. Now that we're on the recovery side of the business, and the pandemic, assisted living and memory care, our business should have better move-ins due to being needs-based.

Okay. Great. So Brookdale, like a lot of companies is not providing formal full year guidance for 2021. Nobody's really viewing that negatively for any companies, obviously. But as we do think about the quarterly progression of occupancy from here. I mean, the way it stands right now and with the vaccinations being pretty successful, do you have the confidence to potentially call the first quarter of '21 as the quarterly trough on occupancy, just based on the trends of the vaccinations, leads et cetera? Are there still just too many unknowns around either different strains of COVID or maybe a possible seasonal pattern where this comes back in the winter every year, so maybe the fourth quarter, we see a resurgence again. But just curious how we should think about the quarterly cadence, if you can provide any additional thoughts around that.

Yes. And let me go back to say that we're very encouraged by our vaccination progress and the fact that our seniors have led the way by getting vaccinated and there's no question that we've seen the benefits of vaccination within our communities with no new cases in the last several days and being down 95% since the peak. Now what our expectations are is as the country gets vaccinated, the number of Americans affected by the virus will decline. And we believe that a lower infection rate in the U.S. across the country will allow the country to return to a more normal life. And when this happens, we believe that we'll see an increase in interest in the prospects in joining our communities, and this will enable us to win the recovery faster. Now historically, we've seen a positive turn in occupancy within the second quarter. And then in the third quarter, seasonally, that delivered the best occupancy growth, and we expect that to occur again this year. We will continue to provide monthly occupancy until we return to providing guidance. And we'll know so much more in the next few months as we're excited to fulfill our mission to delivering more services to seniors.

Okay. Great. On the flip side of COVID, there's still some elevated COVID operational cost. I think it was over $30 million for Brookdale in the fourth quarter of '20. It still feels like a relatively high number to have to absorb. So I guess a couple of questions tied into that. First, I'm curious how much of the run-rate of some of those COVID costs are fixed versus variable currently? How much might also be a little more permanent in nature, just given the operating environment going forward? But probably most important of all, what's Brookdale doing to hopefully further bring these costs down this year?

Steve, can you take us through this one?

You bet. So the most important thing we can do to reduce variable COVID cost is to encourage our residents and associates to get vaccinated. To that end, as Cindy mentioned, we're really proud of the fact that during the first month of the vaccinations, we executed 2.5x faster than the industry. Our top priority is clear, the health and well-being of our residents, patients and associates. That's variable cost. Regarding fixed costs, as you know, we are regulated largely at the state level. It might take a while for regulations to catch up to the positive impact of the vaccine. So until they do testing requirements, for example, will be more fixed than variable in nature. For the first quarter, we expect a slight step down in costs from Q4, probably somewhere between the third quarter and fourth quarter 2020 COVID cost range. This level of cost is due to the third resurgence in the U.S., which affected January. And it is due also to the cost of conducting our vaccination clinics. But we are very pleased with the reduction in COVID cases. And with the low number of cases we expect a sizable reduction in COVID costs in the second quarter and another sizable reduction in the third quarter.

Okay. Great. That's definitely helpful. So separate from the never any questions around occupancy in senior housing, maybe we can talk about the margin profile of the overall business for a moment. I know that obviously, occupancy will impact margins, but the senior housing NOI margins for Brookdale, they dipped down to around 30% annualized in 2019 pre COVID. It had been a little bit higher a couple of years before that. But now it's come down both at around 20% exiting 2020 when we exclude some of the stimulus payments. So I guess I'm curious, how do you think -- well, first of all, how long do you think it will take to get back to the 30% range as we think about the recovery phase. And do you think we can ever get back to a mid-30% NOI margin and the overall operations that you enjoyed 5, 6 years ago.

Steve?

You bet. So I believe our margins can improve to the 30% range as occupancy returns back to normal. I can't put a time frame on it right now. There's too many unknowns, but I am positive about the future. Our recent market surveys showed that people getting vaccinated, 65% of health care professionals say they will accelerate referrals after people get vaccinated, and the 60% of prospects say they will feel more comfortable considering senior living. And of course, as Cindy mentioned, we have seen sequential move-in growth each month since November, even through the December-January resurgence. Lastly, thinking a little bit longer term, you add in the construction pipeline that has slowed significantly and the baby boomer demographics they will show strong movement into our target senior living category starting in 2022. So again, I'm confident that we will see our margins improve as occupancy increases.

I guess, at the end of the day, it is pretty heavily correlated and not to throw you a curve, I'll put you on the spot here, but is there any rule of thumb -- I can't help but notice that the -- for every 1% decline in occupancy, it seems to be roughly about a 1% decline in the NOI margin. So on the way back up, potentially, is that a good rule of thumb? I know it seems like that's a pretty good range, but I just want to see if that's something that you agree with or not agree with.

So Steven, given where we are sort of with occupancy, we do have minimum safety standards. And so that has not allowed us to cut costs as quickly on the way down with regard to occupancy, but the good news is on the way up, that should allow more of the revenue to drop to the bottom line. I'm sure Steve can add to that.

That's 100% correct, Cindy, that because of the minimum safety standards, we've hit some of the fixed cost points in some of the communities. But we certainly expect, as the occupancy comes back in that we're not going to increase those variablized -- those unvariablized costs as occupancy increases.

Okay. Great. All right. Well, let's shift gears here and talk about the recent transaction to sell the healthcare services asset to HCA. Certainly, this was talked about pretty heavily in conjunction with the last quarterly earnings call. But I think people are less familiar with it, I'll kind of leave the floor to you to talk about it in heavier detail. But also, we're looking at it that you'll still own 20% of it. So you'll have your share of the investment in affiliate income going forward once the transaction closes. And I guess I'm curious as we kind of think forward post the transaction, will the bigger ramp in that profit stream come really more from the top line growth that HCA might be able to generate from the overall operations once they have it? Or is it more about enhancing the margin profile? I'm sure it's both, but curious if one is more heavily weighted versus the other.

The good news is at the end. We expect the top line to improve, and we expect the margin rate to improve. But let me just step back a little bit and say that this transaction is a win for our patients and residents. It's a win for our associates. And importantly, it's a win for the Brookdale shareholders as well as for the HCA Healthcare shareholders because there's such great opportunities for both companies that are unlocked by this transaction. The partnership really provides opportunities to improve our health care service offerings within our communities, and that will allow us to enhance the resident experience. It also allows us to provide a much more integrated health care offering, which should be good. Now because Brookdale has a 20% interest, and we do expect that the Healthcare Services business will benefit from growth in census, we are looking for top line growth and significant top line growth. And then as you know, COVID has definitely impacted the HS business. And so we are expecting it to return to a more normal margin profile even without the transaction. Now if you think about -- for HCA Healthcare, beyond the home health and hospice business, there's an opportunity to provide additional services to older seniors with multiple chronic conditions, and we think this is a win for everyone involved.

Okay. Great. I know it's only been a short period of time since the announced sale, but are there any updates on just potential use of proceeds once the transaction closes. I mean, it does seem like from my point of view that the valuation was pretty positive. And the cash coming in the door upon close will certainly be positive. But any updated thoughts on potential use of proceeds?

Yes. We are certainly going to update you on the use of proceeds as we make progress on winning the recovery, and when we see the positive trajectory of occupancy growth. So stay tuned, there'll be more information in the not-too-distant future.

Okay. I guess -- one thing just to confirm around this transaction, too, it doesn't sound like there would be any sort of negative dissynergies for the senior housing business for Brookdale by selling this business. Just want to confirm that. And then also, maybe you can just remind us what the strategic rationale was or even the synergies for Brookdale to have owned this business segment originally. Take us back through history on sort of the chronology of where it started and what kind of -- what led us up to the sale right now.

Steve?

Sure. So, Steve, in the short term, there will be a little bit of fixed cost G&A that currently is being allocated to the Healthcare Services segment, like certain IT software costs that they won't just disappear with the sale, but we will certainly variabilize those costs as contracts renew. We are committed to designing the best organizational structure to support our business after the sale. The original strategy was to provide health care services needed by our residents. And this strategy and commitment remains. Expanding residents' access to these services and specialty care will continue to be a cornerstone for helping seniors live better lives.

Okay. Great. All right. I've still got a few minutes here. One thing that kind of pops into my mind a little bit is if we think about the overall size of the company, the number of centers and residences. Just curious are we still in the mode where we're trying to maybe sell a few assets if we can to preserve balance sheet capacity? Is there I mean maybe pendulum swinging back and go on the offensive and maybe try to re-expand the portfolio. Maybe give us an update on where we stand as far as sizing and footprint of the company and where we go from here.

Steven, there's no question. We've done a lot of portfolio rationalization over the last several years. And I think that's largely behind us. That doesn't mean that we don't have any assets, that we'll sell but it's a small amount relative to what you've seen in the last year. And I do think there is tremendous opportunity created by the COVID-19 pandemic. And so we are scanning the marketplace and looking for opportunities. But until we see our occupancy turn positive and until we see our business inflect, I think we're going to stay nimble with regard to our liquidity and we'll give you more information about our future plans as we win the recovery.

Okay. Okay. And since you mentioned the liquidity, aside from the proceeds from the asset sale to HCA, the company did some debt refinancings late last year as well, pushed out some maturities. If you can just take a minute and just talk about the overall liquidity position. Because obviously, with fairly high leveraging, investors just want to make sure that there's no other obligations coming up and that you're in pretty solid footing as far as overall balance sheet situation.

Steven, we spend a lot of time thinking about liquidity and making sure that we've got the liquidity that we need. Steve, why don't you take us through how you see it?

Sure. So liquidity, I guess, just for the entire year, you already asked one of the questions, throughout the pandemic, we have taken aggressive steps to operationalize our P&L and improve financial strength. We're focused on the health care, health and well-being of our residents. We have been leading advocates for explaining the importance of senior living to public officials, and we've been grateful for their support, the government support so far. But we are optimistic that the government will ultimately provide some funding for the public health cost of fighting COVID beyond the first half of 2020. So that would be one positive impact that we -- that we may see in 2021. In the meantime, we're aggressively focused on profitable revenue growth. We have charged our sales team with getting every unit in service at the highest possible rate. We know that profitable revenue growth depends on both rate and we're doing a great job protecting that rate. And as we've already discussed, looking for opportunities to increase occupancy. Historically, occupancy, as we've discussed, turns positive within the second quarter, and we typically see quarterly sequential growth in the third quarter. So given what we know now, we continue to disclose, that is our view in 2021. And -- so those are kind of the big pieces for liquidity in 2021. Regarding the 2020 cash flow steps is we've taken proactive steps again to strengthen our financial position. We've decreased operating expense in 2020, lease expense, G&A interest expense and some, we will continue to look for proactive steps to strengthen our financial position in '21.

All right. Great. And with that, I think we got about maybe 60 seconds left here. So maybe I'll flip it to Cindy to see if she has any closing remarks or any comments she wants to make about just kind of the status of the company as we see the clock winding down here.

Sure. Well, we have a lot of work to do. I really am filled with hope. We have overcome so much during the pandemic, and I'm optimistic that as we see the COVID-19 pandemic recede, we'll see the benefit of all of our hard work. There is a tremendous need for the services that we provide and the work that we do. Because of this, I believe in the long-term viability of the senior living industry as part of the health care continuum. We continue to enhance our winning formula to increase occupancy by differentiating Brookdale's best-in-class services to provide what consumers value most. So thank you so much. We really appreciate having the opportunity to talk with you today.

All right. Great. Thank you. And with that, we're out of time. So I want to thank everybody from Brookdale for their time today and everybody enjoy the rest of the conference.

Thank you.

Thank you.