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

All right. So welcome to day 2 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst here at Barclays. We're going to kick things off this morning with Brookdale Senior Living. Happy to have Cindy Baier, company's CEO, with us. This will be a fireside chat. So I think with that, we're just going to dive right into the questions.

Steve, thanks so much for having me. And thanks for having the conference. It's so good to be together again.

Yes, absolutely.

So just to kind of start off here. One of the key positives for the senior housing industry in 2022 is the pricing power due to the cash pay nature of the business. So perhaps we can just start by having you discuss Brookdale's strategy for resident rate updates for this year and how that correlates with your revenue per occupied room or RevPOR growth expectations for this year?

Absolutely. So it's really important to us to provide value to the seniors that we serve, and 94% of our revenue comes from private pay from seniors. We did a great job this year with our executive directors explaining the needs to our seniors for a higher-than-normal rate increase. So we're expecting a mid-single-digit increase in revenue per occupied room. And really, when the conversations with the residents occurred, we explained to them that the caregivers that take care of them needed to have higher-than-normal rate increases. And so we were able to pass that rate increase along to our seniors. And we're very pleased with the rates and the way that they have been accepted by the residents. We give our residents notice of the rate increases in the fourth quarter of the year, and they take effect, for the most part from January 1. And we have really seen a pretty traditional response to our rate increases, which means that the residents have accepted those increases. So we're very pleased.

Okay. Great. So the obvious key and the positive pricing trend is that it offsets the rising labor costs that are pretty prevalent across the industry this year. So perhaps you can just give us your latest update on the labor trends, what you're seeing around that, but also I think more specifically, whether or not the use of the more expensive agency labor has potentially dissipated in February and March post this latest Omicron COVID case spike that we saw several months ago?

There is no question that it's an incredibly difficult labor market. The toughest in my lifetime. What we are seeing is we're still seeing elevated contract labor, but we're seeing sequential improvement. So when you compare December to January, January's contract labor was lower, and January to February, we saw continued improvement in February. But it will take a little bit of time for the positive momentum that we have in net hires to really reduce the labor cost. And part of the reason for that is that when you have a new associate, they have to complete their training before they can start working in the communities. So even if you have positive net hires, which we have for December, January and February, it takes a little while for the contract labor to come down. Another factor in our industry is quarantine requirements. And so, depending on the state, you could have associates who had to quarantine for up to 2 weeks, really as a result of some of the COVID waves that we saw earlier in the year.

Okay. I guess, also to follow up just on this topic of labor, breaking it down a little bit further. It does seem, first of all, pockets of labor pressure are mixed geographically, but also seemed like it kind of oscillated between the skilled labor versus the non-skilled labor within the facilities and really across this industry as we spoke to all the different providers and companies involved in the space. So I guess I'm curious which one is causing more pressure currently? I'm guessing it's probably still more on the skilled side. I just want to see how that's progressing on both sides of that. And really has that changed during the past 6 months in terms of which area has been more problematic between the skilled versus the non-skilled?

Yes. We look at both the various categories of jobs as well as the individual labor markets. And what I can say is that probably our single largest pain point is the nurses and that has been difficult throughout the pandemic. It's true in our industry. It's true in all of health care. There's just not enough nurses at this point in time. And so that's really been tough. But when I look at our job categories, I look at our community leadership, and we have seen a little bit of elevated turnover in our community leadership, particularly our health and wellness directors, and so that's been difficult because there's been so much competition for nurses. Then, I look at our caregivers and the hourly roles there whether it's CNAs or med techs, there's a lot of pressure in those labor markets as well. And then we've done a lot to really try to address it. As I mentioned earlier, we've seen 3 consecutive months of positive net hires. So we're making progress in recruiting more people into our industry. And we've really done that by focusing on our existing associates, where we've looked at wage rates for every market across the country as well as we've increased our recruiting efforts to make sure that we can attract talent to our industry but it's competitive at many levels.

Okay. Okay. I think if we shift gears here a little bit, and let's talk about the occupancy for a few moments. So I think to the untrained eye, if somebody is just looking at the monthly progression, they might see at -- the trends in the first couple of months in '22 for January and February appear to be kind of mixed or flattish. So maybe you can just provide a little more color on the seasonal pattern for occupancy in the calendar first quarter each year when you compare that versus the fourth quarter. And then based on that, say whether or not you're content with the trends we're seeing so far from your own perspective in the first couple of months of '22?

I'm going to start by saying we're pleased with our January and February occupancy trends. If you look at sort of prepandemic sequential occupancy improvement between the fourth quarter and the first quarter, normally, what you would see is a decline of about 80 basis points. And we're trending much better than that in January and February this year. And so that is really important because not only are we making progress on occupancy, but we're also maintaining rate discipline. When I look at our business, I basically see the seasonality pattern is normally you kind of have occupancy sort of come down in the first part of the year. Then, sort of in May or June, you normally turn positive and you grow occupancy. And then in the fourth quarter, you're normally roughly flat. So the fact that we are having positive net [ memo ] -- for the first time in the month of February, that's the first time it's happened since 2014. So that's really a lot to be proud of. And we are seeing sort of strong conversion rates when we get a lead. So there's a lot to be grateful for.

Okay. Yes. I think to maybe tie some of that together. I mean, you touched on this a little bit, but as far as the occupancy, is it being impacted at all by the higher-than-average rate increases put in place in January? And maybe that question, not just for Brookdale, but not to make it the industry's spokesperson, but are you seeing really across the industry that there's pretty good pricing power? Has anybody else you're seeing that maybe went too aggressive on rates and maybe lost some occupancy that you capitalize on or vice versa, maybe just the industry view of that pricing power as well...

Let me start with Brookdale and then I'll tell you a little bit more about the industry. I think throughout the pandemic, Brookdale maintained price discipline. And so we were always focused on providing appropriate value to the seniors that we serve and really not want to discount a lot during the pandemic because there's a lot of cost to our business model, whether it's the apartments that seniors live in or the care that is provided. So we've maintained great discipline. And what I've seen is that the industry, in general, has had larger-than-normal price increases and those seem to have held. Now our industry has a lot of small operators. So everything is happening in the industry. But there does seem to be a lot more pricing discipline this year than there has historically been.

Okay. Great. And you also touched on your lease a little bit. It seems like every senior housing operator and the REITs that are kind of dedicated to the space, you have also talked about a notable pickup in lease over the past month or 2. Everybody's kind of coming into 2019. And I guess from the outside, the numbers kind of get dizzying after a while on a percent increase versus '19, et cetera. I guess the question is, if we are going to compare it to prepandemic, are you seeing that the conversion ratios are about the same? So if lease are up, is that directly translating into better occupancy in terms of bringing people across the finish line?

Absolutely. So what we are seeing is that our leads are not as high as 2019 currently, but part of that is because we're being more effective with the targeting of our marketing spend. So we're using digital marketing to target people who are more likely to move in. And so we're seeing leads are more likely to convert to visit and that's more effective marketing. And then we're also seeing results of our sales transformation by having a higher conversion once someone tours the community, they're more likely to actually move in. So all of those things, I think, are pointing towards a very successful recovery. And if I look back to the start of the recovery, we're 390 basis points. And I think that's the balance of providing the appropriate value to the seniors that you serve, making sure that life truly is better by having a support of senior living and then focusing on what we can control, which is the resident satisfaction, the quality of the experience and then our marketing and sales efforts.

Okay. All right. Great. So maybe we can shift gears here a little bit. Just talk about some of your master lease renewal negotiations. So you've had a lot of success, obviously, with some of those renegotiations over the past couple of years with some of your major REIT partners. Maybe you can just remind us, and everyone in the audience, when the next major lease potentially might expire with one of your REIT partners and maybe just to highlight some of the stuff on the ones you've already renewed as well in terms of how much that sort of kind of helped stabilize things? But also should investors expect any changes with any upcoming leases or kind of more standardized status quo?

We've done a lot of heavy lifting over the last several years with all of the major REIT partners. And I think that the portfolio that Brookdale has today is a strong portfolio. We don't have any significant lease restructure or lease expirations until 2025. We got a small lease that expires at the end of this year. It's too soon to sort of say what we'll do with that lease but most of the work that's necessary for our lease portfolio has already been done. We have taken the opportunity to acquire assets that have formally been leased, we've restructured some of our leases, all to make sure that our portfolio is stronger for the longer term.

Okay. Great. Yes, I think also just sticking with the theme of talking about improving the balance sheet across the company. You've had some success with that, too, obviously, first, from the proceeds from the health care services asset sale to HCA. You've also had kind of a string of some debt refinancing that has certainly helped as well. So I guess, the question is, is there really more to do on the balance sheet stabilization near term? Or do you think that you're content with where things stand at the moment?

We've fairly done a lot with our balance sheet with the sale of our CCRC communities at the beginning of the -- right before the pandemic hit, with the sale of Brookdale Healthcare Services to HCA, that was just a grand slam transaction, good for everyone involved as well as repaying substantially all of our 2022 debt maturities. I think we're actually in pretty good shape. We've done a nice convert. We've done some debt refinancings that have been attractive. But I do think that we'll continue to look for ways to strengthen our liquidity and our balance sheet, although most of that is largely done.

Okay. Okay. Maybe we'll talk about some of the strategy for a moment here. So I think from an overall corporate perspective, Brookdale talked last year and this year, about 3 strategic pillars to differentiate the company in the marketplace. I don't know how much you want to talk about some of these, how much they progressed from the ones from last year? Just talk about the new ones for this year. But I'll leave it to you to sort of opine on how this is progressing as far as your 3 major focal points from a strategy point of view.

There is tremendous value created by getting our occupancy up and our attractive rates, right? There's a lot of leverage in our portfolio that comes to that. And ultimately, we're a business of people serving people. So our first priority is to attract, engage, develop and retain the best people. I'm very proud of the fact that we're making progress on that despite the difficult labor market. In December, in January and February and March to date, we are hiring more associates than who are leaving us. And so that is really very good. We want to become a talent destination where people can have a good career and they can grow with us. And for the second year in a row, we received the Training APEX Award, which is evidence of our commitment to developing our associates. The second thing that we want to do is we want to get every room in service at the best profitable rate. And that really is obvious, right? Our occupancy isn't what it was prior to the pandemic. And so by rebuilding our census at an attractive rate, we'll drop cash to the bottom line, and that's something that we're very focused on. And then really, the last thing is about our existing residents. Our goal in life is to make life better for seniors. And so we want to make sure that we're providing value, high-quality service to our seniors, and that's really our third priority. We're making great progress on all 3 of those. And when we do that, we'll basically have a much more profitable business that has stronger cash flows and then we can take the business to the next level.

Okay. Great. Okay. Maybe shifting gears here again. When I'm talking to investors around senior housing, I feel like probably one of the most underappreciated parts of the investment thesis is really when thinking about the supply demand. There's been a major slowdown really across the industry in construction starts, and I think that's underappreciated. Just how much this could provide some of the incremental tailwinds for Brookdale and really for the whole industry. So maybe you can just provide us some additional qualitative and any sort of quantitative color around this would be helpful as well.

Yes. So when someone starts a new building, it takes 18 to 24 months before that building is in service. And if I look at our year-end statistics, our opens were down 67% from the peak, starts were down 62% from the peak. So if you think about less competition entering the market, that's good for us, and will provide a nice tailwind. Then, when you think about inflation and labor availability, that also gives you some sense that new competition is going to be more expensive when it comes to the cost to construct a building than it was historically, which is good for us as well. We have a very good portfolio that is attractive. And when replacement costs are well above the cost of our portfolio, that's a good thing for us.

Okay. Somewhat tied into that one of their angles, I feel like maybe historically, there were a lot of developers from outside senior housing that just want to throw money at the industry and -- whether they were apartment guys that were, hey, we can do senior housing, too. How tough could this be? But...

I do think the pandemic...

You think less of that in terms of people wanting to this sort of waddle into senior housing versus where they were before?

I think the pandemic demonstrate how operationally intense senior housing is, and particularly assisted living and memory care, which is where the bulk of our portfolio is. We have a very strong health care focus in our business. That's one of the things that differentiates us. We also have best-in-class memory care. And so I think that people who thought it was like traditional apartments, I think, got a wakeup call during the pandemic.

Yes. Okay. Okay. And maybe tying some of that just into the size of your own company footprint right now as far as number of units, number of facilities, et cetera. What's the directional bias now on whether you potentially increase or decrease the facility count from where you are right now and/or your geographic exposure?

Yes. In the short term, our top priority is really to capitalize on the potential within our existing footprint, right? So there's tremendous leverage that comes from getting our apartments in service to the seniors that we can serve. Having said that, if you look further out, I do think there's opportunity for us to grow, whether that's becoming more dense in the existing markets that we operate in. I think we'll always stay within the United States. I think, we'll want to be in markets where we have the opportunity to win. And so that's something that is a longer-term focus for us, whether that is new development, whether it's selected acquisition but for now, the big focus is on capitalizing on our existing portfolio.

Okay. Okay. And I guess just when thinking about CapEx overall, I guess I'm curious to hear more about that then in terms of how much of that might be strategic CapEx versus just more maintenance CapEx? Where are you focusing more of your dollars these days? Is it either potentially on your memory care, expansion or is it more just on general maintenance CapEx? I mean, what's the best use right now?

Yes. So we've got $140 million of nondevelopment CapEx and $20 million of development CapEx in our guidance for the year. Now our development CapEx has increased from about $3 million last year. So that basically tells you that we do see an opportunity to get some of our communities repositioned where we'll have a more attractive portfolio. And those normally, projects have very good returns. But for our existing portfolio, our guidance has been $2,000 to $2,500 per unit for nondevelopment CapEx. And so that's $140 million that I talked about will be near the top end of that range this year. And I think that makes sense given during the pandemic, we did have a little bit of a slowdown on CapEx because we didn't want to have any unnecessary people in our communities.

Okay. Just kind of bouncing around here a little bit. You mentioned the asset sale, the HCA was kind of the home run on all sides or as I think you said grand slam.

I would say grand slam. It was good for our residents because they have access to quality services, it was good for our associates because HCA is such a leading health care provider, and it was great for our shareholders. So to me, that's a grand slam.

Yes. Okay. So I think as part of that deal, though, and there was obviously an upfront payment to you, but there's also some potential for incremental earnouts for Brookdale as well depending on the performance. I don't know if enough time has progressed for you to be in a position to either capitalize on that or have visibility on that. But maybe just talk about how the operation has progressed under their ownership?

Quite honestly, during 2021, the primary focus was on integrating the business to HCA. And as you know, in the markets the -- HCA didn't have hospitals, there was a disposition of a portion of the business to LHC. So we received $35 million of cash for that. I'm still very optimistic about the possibility for that business. I think it is something that is critically needed, and HCA is such a strong operator that we have great confidence in what will happen.

Okay. Okay. One of the other things that's kind of been off and on for the industry, you got delayed a little bit, I think, versus some other sectors. So when you think about some of the incremental stimulus or federal relief dollars kind of flowing into the industry, it's been pretty positive, I think, over the past 6 to 9 months or so. But where does Brookdale stand at the moment now and the potential to receive any additional stimulus relief dollars going forward from here?

So we have not yet received our phase 4 provider relief fund application, and we do have an application in. It's very sad for us that we basically have gone through the Delta and the Omicron wave without additional support from the government. And you can see from our P&L, how expensive the cost of testing, the personal protective equipment, the additional staffing has been. So we are anxiously waiting the government's determination on our application.

Okay. Okay. So with that, we've got a couple more minutes here. Maybe you can just spend a minute or 2 maybe clearing up a couple of things that investors might be confused about. I think some investors that they're not really close to the industry, sometimes they'll confused senior housing and assisted living with skilled nursing facilities or nursing homes. I think with all the headlines in the press recently about this call for just greater minimum staffing requirements to go up in the skilled nursing sector, maybe you can just distinguish that, that would probably not really apply to you. And is there any potential parallel outcry for just greater minimum staff requirements in senior housing? Or do you not see that happening? So maybe just talk about that for a moment.

Yes. So skilled nursing and assisted living are two very different businesses. Brookdale has about 3% of our portfolio is skilled nursing. That business is largely paid for by the federal government, be it either Medicare or Medicaid. It's regulated at the federal level. Assisted living is predominantly a private pay business. So it's paid for by the residents who live there through their retirement savings, their pensions or whatever, and it's regulated at the state level. And the way that assisted living works is that your staffing is dictated by the acuity of the residents that you serve. So if you're independent living, the staff that you need is a lot less because it's really just cleaning your apartment, entertainment, providing meals, transportation, that sort of thing. But if you're an assisted living, the staffing will vary depending on whether you need help with medication management, do you need help with dressing, maybe toileting, bathing, that sort of thing. And so we've got staffing that allow us to tailor our staffing to the specific needs of our residents. Now what's nice about that is that we tie the cost of our services directly to the support that's needed. And so that has been something that's been very successful for our industry. Now there are, at the state level, minimum staffing requirements. And of course, we comply with those requirements. So there hasn't been the same attention, I would say, as the federal government on SNFs.

Okay. Okay. That definitely helps to clear it up a little bit. Just within senior housing, which is 97% of what you do, maybe just a final question here in our last 1 minute here. When you think about breaking that down between assisted living versus independent living, the different levels of acuity, where do you think there's better supply/demand balance between those two right now? And also going forward, if you had -- if you could start from scratch and be more AL focused versus IL, which one would you prefer just going forward from here?

Well, our -- at Brookdale, the core of our business is really assisted living and memory care. We are best when we are serving seniors who need support, whether that's because they have dementia, or Alzheimer's, or whether they need support with the activities of daily living. As it relates to supply and demand, it's such an individual market-by-market proposition that we really look at the individual markets and we say, okay, here's where we're well positioned. Whenever a new competitor enters our marketplace, it will affect us for a year. And so really, it's community by community that we look at that.

Okay. So no real bias one way or the other between...

Other than we really want to be an assisted living and memory care, primarily.

Okay. With that, if we time to perfectly go on to 0 right now. So I want to thank Cindy for her time today, and thanks, everyone, for joining us. Thank you.

Thanks so much.