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

Hi, everyone. I'm A.J. Rice, the health care service analyst at Credit Suisse. We're very pleased to have next up presenting Brookdale Senior Living. And representing the company, Cindy Baier is the Chief Executive Officer; Steve Swain, Chief Financial Officer; and Kathy MacDonald, who runs the Investor Relations effort at Brookdale. I Know a lot of times there might be people new to the Brookdale story, so I'm going to ask Cindy to take a minute and just set the stage for people relative to Brookdale. And how the company operates 685 communities across the U.S., but there -- the company offers a diversified mix of services. What's distinctive about Brookdale in the portfolio that you'd like to highlight for somebody that was new to the story, Cindy?

Thanks, A.J. Thank you so much for having us. It's a delight for us to be here today. The thing that really differentiates Brookdale more than anything else is our experienced staff. Senior living is a business all about people taking care of people. And our company has been in the industry in senior living for more than 40 years. And we have 3 top operational leaders who have a combined 80 years of experience in senior living, and that is combined with our sales leader who has been in the industry for 17 years. So adding these 4 together, we've got nearly a century of significant experience to drive our business forward. The second thing that really differentiates us is that we're the largest operator in the senior living industry. And what our scale does is it allows us to have centers of excellence with deep functional expertise, and that allows us to share best practices across all of our communities. This is something that really benefited us during the pandemic. And finally, Brookdale is unique because it is the unique mix of health care, hospitality and real estate that support seniors as they manage the challenges of aging.

Okay. That's great. Just to jump from a very high level to specifics, I think in September, when you reported third quarter, you said you'd seen 7 consecutive months of occupancy growth, which is a turn from what happened a year ago when occupancy was under pressure following the start of the pandemic. Can you give us an update as to what you are seeing in terms of move-ins, move-outs, occupancy? Can you walk us through some of the challenges that you've gone through to stabilize occupancy with growth seemingly now on a positive trajectory? And do you have a sense of how that might continue to play out as you look out in a little ways?

Yes. I am very happy to report that we now have 8 consecutive, sequential months of occupancy growth in October. And this continuing trend is really outstanding, when you think about the delta variant and the challenge that, that had in the general population, particularly in the August, September time frame. If you look at our move-in recovery, it exceeded our normal historical levels in September, and we were over 100% of our 3-year average from 2017 to 2019 during the month of September. Now the industry has definitely seen some challenge with each new pandemic wave. What that means is that prospects, especially for independent living, take a little longer to make the decision to move into senior living, they just pause for a little while. Now when we think about the trajectory, we do have momentum entering the fourth quarter. And we do expect that we will have sequential occupancy growth, and that will drive improved EBITDA on a sequential basis. It's also important to recognize the normal seasonality in our business. Now while we've had 8 sequential consecutive months of occupancy growth, I don't want you to get discouraged if there's a month where we step back. Because the normal seasonality of our industry is as follows: the fourth quarter is normally flat to slightly down, and we are expecting that we'll grow occupancy during the fourth quarter; our first quarter in the industry, the occupancy normally declines, and we normally see that because a lot of times we find that seniors hold on for the holidays. And then after the holidays, they tend to pass. And so that is something that normally is a headwind for our business in the first quarter of the year. Then we see a decline in occupancy normally through April or May when the occupancy starts to trend up going into building occupancy in the third quarter, which is normally very strong for us. So we do think that we should perform better than our historical sequential -- our historical seasonal trends. But I do want to make sure that people understand that our business is a very seasonal business so that if the normal seasonal trends come back in, it doesn't create any unnecessary concern.

Okay. No, that makes sense. I think you previously indicated that each percentage point increase in occupancy results in about a $20 million increase in operating profit. I want to make sure that I got that number right. And as people think about the ups and downs, is the inverse true or is there any reason that it's not quite as painful on the way down?

Yes. You bet, A.J. I think the rule of thumb that you mentioned about every percentage of occupancy changes operating profit by about $20 million is good for the long term. During the pandemic, initially, we were able to scale ours with lower occupancy. However, we did hit a kind of a minimum staffing level at individual communities. So the number of hours became a little bit more fixed in nature. Now as you mentioned, on a positive note, as occupancy increases, for a period of time, we expect to see productivity improvement with fewer incremental labor hours as we grow occupancy.

Okay. Interesting. When you go back and think about the COVID cases, we've seen surges become more localized and not be national in scope as the -- has this impacted trends in local market? Is the way a local market responds or responded to the Delta surge now different than what you saw in previous surges?

So the Delta surge was primarily in the third quarter and our occupancy increase in the third quarter was actually outstanding in light of the Delta variant. And that challenge was primarily in the, as you mentioned, the general population. Within our communities, the Delta variant had a much smaller impact than the pandemic wave, for instance, last winter. Because 95% of our residents are currently fully vaccinated. So that kind of blunts the impact.

Okay. And it seems like your infection rates generally have been better than the national average. I don't know if you have [wait] trace that versus other assisted living or independent living operators. Is this -- how much of this is geographic? And how much is doing something different than your peers?

Yes. A.J., I'd like to say that we're thrilled that over 99% of our communities are open and that's great progress versus a year ago. I think what I do is I credit the effort to our community associates for what they've done in the communities, the 95% resident vaccination rate that Steve just mentioned, and also the fact that 96% of our eligible associates have already received their first dose of the COVID-19 vaccine. So when you combine these 3 things, we believe this has really helped us keep our current infection rate low.

Okay. Interesting. Do you expect that Brookdale has gained share, will gain share coming out of the pandemic, given that you kept facilities open, you have brand recognition, perhaps gained to the way you handle the pandemic? And maybe that some of your competitors don't have the financial resources that the company has.

A.J., I think that Brookdale does have the opportunity to gain share coming out of the pandemic. And one of the reasons that I think that that's true is that our brand awareness is strong. Our unaided mentions is more than twice the next closest competitor. And our win local strategy is really a key driver. We have strong liquidity, and that is really important. And I also think the fact that we've got a highly vaccinated associate base with 96% of eligible associates being vaccinated. That's also really important. But our focus is really on driving RevPAR, revenue per available room growth, rather than just occupancy growth. And we want to make sure that we stay focused on charging a fair rate for the services that we provide. So it's not just about growing occupancy for us, it's about growing revenue, serving more seniors, helping them better manage the challenges of the aging.

Interesting. Okay. Is your sales force and the field teams have adapted or changed in any way during the pandemic? Can you speak about the sales transformation strategy that you've talked about and if available, quantify any way that, that might be accretive to earnings going forward?

Okay. So kind of as part of our local strategy, for instance, we have refocused our attention on local outreach. Winning it locally is certainly a strategy that we have. We're pleased with our ability to convert these leads into move-ins, which is really the name of the game, the conversion rate, particularly in assisted living and memory care. In addition, this year, we strategically and opportunistically allocated marketing dollars to particular areas, which has delivered nice returns on those leads. And lastly, specifically to kind of the sales plan, although we did many things. I'll give you an example. Our sales commission plan, we are now incentivizing sales reps for revenue growth. And in the past -- whereas in the past, it was occupancy growth. So this commission plan aligns with what Cindy just said, maximizing RevPAR. And in fact, that has driven additional revenue. So kind of taking the sales and marketing efforts together, we believe this has certainly helped achieve our occupancy gains that have outpaced NIC for the past couple of quarters.

Okay. Another thing when we think about share, particularly in the pandemic, coming out of the pandemic relates to how assisted living, independent living relates to in-home care. Do you expect assisted living and memory care to lose share to in-home providers? How about your skilled nursing facility portfolio? Do you think more companies allowing permanent work from home will impact the industry? Its families may have a bit more opportunity to support their older loved ones.

There may be some impact for independent living, but what is important to remember is that about 70% of our units at Brookdale are for assisted living and memory care. And I'm not sure there's going to be much of a permanent shift to home care for this particular population. In assisted living and memory care, their activities, and there's 24/7 care available. Adult children can support their older loved ones, they're still working. And between the cost of hiring care in your home and the isolation of seniors not being engaged with their friends as they age, there's really a lot of compelling reasons for senior living. And quite honestly, I've been pretty encouraged that the penetration rate of our senior living is really held up during the pandemic. So I think there's a lot of reasons to think that we're going to come out pretty well.

Okay. Yes. How about talking a little bit about your testing efforts and update on the strategy there, the amount of tested you're performing stable, increasing at this point coming down? How about the timeliness and cost of test? Is that improving for you? And I guess, what about this Abbott BinaxNOW COVID-19 diagnostic test that the government is supposed to provide? Have you been able to get that? And how long will that supply last?

Kathy, you are on mute. Kathy?

In summary, our testing cost has decreased. How I explained it is in August, we announced our associate vaccine requirement. And I'm pleased that we're ahead of the federal government mandate. So we have plenty of time to educate our associates. As of this week, 96% of our eligible associates have received at least their first shot, and that's before our targeted deadline. And so how this links to your question is we do continue to test per CDC guidance for symptoms as well as directed by state and local agencies. But with the high vaccination rates of both the residents and our associates, the testing costs have dropped dramatically. And in addition, I think we believe seniors are more apt to move into our communities when they know that both residents and associates are vaccinated.

Okay. One of the hot topics in health care on the third quarter discussion was around the tight labor market. Mike gets you to comment on that as contract labor utilization has been higher than normal. And if so, when do you foresee that regressing to normal levels as the primary factor driving those labor challenges been a function of replacing workers out of quarantine? Or do you see more broader issues that work there?

There are several factors that are really challenging the industry. I think for the nursing shortage, that's really impacting the entire health care industry. For hourly workers, the end of the federal unemployment assistance programs helped, but there is a lot of demand for workers as employees are restarting, our industries are restarting at the same time. And if you think about this, because of the fierce talent wars, we've had to use more expensive contract labor and over time to maintain our high-quality services and to support our occupancy growth. But it's clear that hiring to fill open positions is a key priority. And so we've really increased our recruiting efforts to fill these open positions. I do expect the intensity of the competitive labor market will be transitory, and we'll continue to work through these challenges. Now I want to be clear, I do think that the base labor rate will be higher in 2022 than it is in 2021. But we do think that this impact will be partially offset from being able to reduce that turnover and the implementation of less overtime and contract labor in our communities. And as Kathy has said a couple of times, we're really grateful for the high vaccination rates among our associates. And that has helped protect them against COVID-19 as well as reduce the impact of quarantines, which, of course, has an impact on the cost and availability of labor.

Right. And you alluded to it earlier, it sounds like you got some flexibility on your RevPAR to increase to make up for some of this as well, is that right?

Yes. I do think that we will likely have a higher next year as a result of passing along some of the labor costs that we're incurring with our resident population. So yes, I do think there's some flexibility there.

Okay. Okay. Maybe take a minute to talk about the company's liquidity profile at this juncture. Perhaps discuss where the company stands with respect to capital structure priorities as of recently. If you had any lease restructurings, and I think you did talk about a refinancing you on the call and some other things you're looking at. Maybe give us a little bit of update there.

You bet. We continue to strengthen our liquidity position. We've had several recent and significant transactions. So in July, if you recall, we increased our liquidity by more than $300 million as we sold 80% of our home health hospice and outpatient therapy business to HCA. We retained 20% of that newly-formed venture to benefit from future growth of that business. So a win-win transaction there. We also significantly strengthened liquidity with a convertible notes offering, which closed on October 1 with $208 million of net cash proceeds. So turning to the capital structure priorities. With these proceeds of the convertible notes, we immediately paid off the only high interest loan in our portfolio of $45 million. The second step, which we expect to complete here in the next couple of months, by year-end, will be to refinance all of our first quarter 2022 maturities, which is really good news. And then the third step will be to refinance the rest of our 2022 debt maturities. In fact, we're currently evaluating using cash to prepay all remaining 2022 maturities early and save several million dollars of negative carry. As we kind of complete these steps, we'll assess future uses of cash. One thing I'll note also is after our earnings call, a few investors asked if we're planning to use cash for any big transactions or significant new CapEx investments. So just to be clear, we are still primarily focused on winning the recovery as we already discussed with our existing portfolio, and we don't expect any sizable transactions. And then secondly, we expect to communicate 2022 CapEx to be in our normal range of up to $2,500 per unit.

Okay. It's great. Well, I was going to ask you about the development projects. Next, I think during the pandemic, you delayed some projects, understandable given the dynamics of the pandemic. Can you talk about the decision a little more? And are you looking to recommence that work at some point on those projects? Or are those on hold? And I'm going to throw in the construction cost question because we've also been getting a question people are looking and across the entire economy or the construction cost increasing. Does that have an impact on your IRRs as you look at projects?

Good questions, A.J., for sure. If you look at pre-pandemic, those years '18, '19, the development CapEx was around $25 million per year. Now we did slow down during the pandemic, and -- but I don't expect development CapEx to vary from our historical levels as we look forward into 2022 and winning the recovery. Now certainly, the development CapEx, 2 things there. We look at IRRs, the incremental cost of -- not only the equipment, the physical assets themselves, but also the labor. And we also look at the lead times and those are both factored into the potential payback of those projects.

If I can just add on to Steve's comment, what are the big benefits to us of sort of inflation in materials costs and also inflation in labor rates and issues with the availability of materials and labor is we have our communities are in service today. We have the ability to grow occupancy within those communities. And for somebody who's building a new community, that's just another headwind that they have to face before they can put more competition closer to our communities. So to a certain degree, that's another benefit for us.

Right. And I know you guys track that very well, new builds and so forth and what's in the pipeline. It may be too early to see whether that's having an impact on construction and what's out there in the broader market that you may get that information with a lag. But I just wondered if you've been able to see that the rising construction and inflation and labor is having an impact already.

Well, I do think that the pandemic overall has had an impact. And one of the things that we put in our investor presentation sort of every quarter on Page 10, is sort of the supply within our markets. And in the third quarter, we saw that our starts were 88% lower than the peak and the opens were 71% lower than the peak. And what that means for us is usually the first year after a new community opens, we see the biggest impact of a new competitor. So I do think we're seeing some benefit there.

Okay. As we head into '22, obviously, there's a lot of things to be focused on. I know you haven't given your formal guidance yet, but what do you think are the big open questions? I know there's a lot of variables, but some you'll have pretty good visibility on some, they may be bigger open questions. What are some things that would meaningfully positively or negatively impact results relative to where we sit today?

My 2 focus points are: how do we gain occupancy and grow market share while getting the strongest rate possible; and second, what is the best way to solve the contract labor headwind while continue to improve margin and revenue growth?

Okay. Okay. One thing you talked about a little bit on the call in some of the management changes, people. And I think you were really emphasizing having people that were within the company being elevated to senior positions. What's -- give us a little bit about some of the evolution of the management and maybe this is a good place to end. And how Brookdale thinks about filling those senior positions when they come open?

Absolutely. I have never felt better about the management team than I do today. I think we've got a very diverse team that has a combination of people who've grown up in the senior housing industry. Importantly, our top operators are seasoned with deep expertise in our company and the industry. So I think that bodes really well. But we've also benefited from leaders who have come from outside the industry, whether it be large companies, whether it would be other parts of the health care sector. And that's really given us a fusion of new thinking that's been very beneficial to us. And certainly, we're always looking to have the best team in the industry, and I just feel like we have that today. So if I can, I'd just like to close with some reasons why I think it's a good time to invest in Brookdale. So from an operations standpoint, we have experienced operators. We've just talked about that. We differentiate Brookdale by having a unique mix of experience at the conversions of health care, hospitality and real estate. From a supply perspective, there's the fewest units under construction since 2015. And so this gives us a significant supply tailwind. Demand for senior living is rapidly increasing with more than 1 million new seniors entering our target market every year through 2030. And with our 8 consecutive months of sequential occupancy growth, Brookdale has really set a strong foundation for the future growth. A.J., I really want to thank you for inviting Brookdale for this discussion and for having us participate in your conference.

Okay. And I appreciate you guys participating once again as well. I think we covered a lot of territory, so that was great. And hopefully, next year when we do this, we'll be doing it in person as opposed to virtual. But I do thank you for participating today.

We would like that. Thank you.