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

Okay. Great. We're going to get started with our next session here with Brookdale. I'm Steven Valiquette, the health care services analyst here at Barclays. So with us from the company, we have Cindy Baier, the company's CEO also Dawn Kussow, the new CFO of the company; and Jessica Hazel from IR is in the audience here as well. So consistent with this whole conference, this will also be a fireside chat. So I think with that let me give my kindling sticks to the fire -- I apologize.

Well, while you do that, let me just say thank you so much for having us. We're so grateful to be here. It's a wonderful conference. And it's nice to be here with you today.

Great. Thanks. Appreciate that. For the record, I think there's -- I think I'm doing 23 fireside chats as part of this conference. Here we go.

So let's spend a little bit of time just talking about some of the pricing and occupancy trends. Then we'll dive into labor and some of the other operational questions after that. And if we have time at the end, we'll hit on some of the balance sheet and capital deployment questions as well. So it's kind of what I'm hoping to hit on. So just to kick off, one of the continued key positive trends for senior housing for '23 is really the pricing power because of the cash pay nature of the business that really, in my mind, distinguishes this business from a lot of the other health care provider businesses that we track within our coverage. So maybe just kind of remind the audience your strategy for the in-place resident rate updates for '23. I think for the industry, it's actually even trending a little bit better for '23 versus '22, but also how that stacked up versus the industry in terms of how you guys are putting in those rates for this year?

Sure. Unlike others in the industry, we take the majority of our pricing increases for in-place residents on January 1. And while others may have had in-place resident increases throughout 2022, we took most of our increase in January 1. And we start selling those rate increases for new residents in October. So for the fourth quarter, we see a very small step up from the new residents, but the vast majority of our rate increases occur on January 1. Now we made the decision to stick with our annual rate increase process. That's a little different than some of our competitors. I think some of our competitors decided to pull their rate increases forward. We thought for the trust of our residents, it was a benefit to having that same annual increase cycle. And I do think that we've seen a historic rate increase at Brookdale. One of the things that we announced on our earnings call was that our January RevPAR, which is revenue per available room, was up 13% year-over-year. And that is the combination of a very strong rate increase as well as year-over-year occupancy growth. So we're off to a great start for 2023.

All right. Great. So just on the occupancy side, you guys are still giving some of the monthly numbers, so it helps us to track what's going on intra-quarter. It looks like the results for January and for February were kind of in line to maybe a tad better than what you talked about as far as guidance for the call. Maybe you could just provide your own color on how that's trending so far now that we have 2 months of data for you guys -- for the quarter.

Yes, of course. So on our earnings call, we talked a little bit about our occupancy. And if you think about pre-pandemic occupancy, typically, we'll see a seasonal decline between the fourth quarter and the first quarter. And generally, that's been about 80 basis points pre-pandemic. And on our earnings call, our guidance was that we would -- that would be in line with our expectations with our guidance. Now with 2 months under our belt, what we'd say is that it's trending similar to what we would expect, and it's in line with that guidance. The one thing that I would add is, Cindy, just talked about our RevPAR growth in January at 13%. February RevPAR growth was strong, staying at about 13%. So we did give RevPAR guidance of 11% to 12%. We would expect to come in kind of at the top end of that range with February behind us.

Okay. Great. Just jumping around here a little bit, still on kind of pricing and occupancy. Remind us whether or not you guys are in a position to still potentially receive any incremental stimulus relief funds in 2023? Or are we past most of that incremental opportunity right now? I'm curious where that stands.

Yes. Yes, it's a good question. What I'd say is that we are very grateful for all of the stimulus funds that we received. There was a large effort internally to get Brookdale kind of on the board, if you will, and to get in line for that stimulus money. And it was really helpful as we are protecting our residents and our associates to help offset part of that economic impact. But as it relates to 2023, I think our expectation would be that we would not get anything federal. And then if we receive anything from state that it would be relatively minimal.

Okay. Great. Okay. And maybe final question here just on the occupancy side of things. The -- I guess, pricing to a little bit, but the -- this sort of the -- kind of oscillates week by week and day by day now it seems as far as how much investors are focused on this. But as far as the recessionary risk, historically, senior housing has had some oscillation, let's call it, around macroeconomic trends. But how are you guys thinking about that right now in the current environment? Was there anything baked in for at least the near-term outlook for any impact from this or risk around this?

Yes. And I think how we think about recessionary risk is -- so a couple of things I'd say is, first of all, about 70% of our units are AL and memory care units. So that's our consolidated units. So because of the need-based nature of them is that we're slightly protected from the fact that -- of a recessionary risk. And the other way that we're thinking about it is really the population of residents, potential residents. If we think about how they're funding the -- they're funding our communities, what we've seen is they've built a significant amount of wealth in their portfolio since the last recession. If you think about housing prices, they've nearly tripled since the last recession. And then more recently, what we've seen is the cost of living adjustment that came out was in the high single digits, which has been higher than historical. So I think Brookdale is in a great position to somewhat be protected from the recessionary risk.

Okay. Great. Maybe we'll shift gears here a little bit and talk about the labor and some other operational questions. Now that you're in a position to talk about what's happening so far in calendar '23. But maybe just give us your latest updates, if you're able to, on just labor trends so far this year and the plan like everybody to hopefully reduce the contract labor costs this year versus last year?

So I think 2022 really set the stage for us to be successful in 2023. One of the things that we were able to do was to increase the size of our workforce by about 50% -- 15%. And that has been very helpful to us in terms of being able to reduce contract labor while continuing to meet resident needs and provide high-quality services. Just at the macro level, if you think about the labor market, they are the worst labor market in 50 years. If you think about senior living, in particular, there is a shortage of 400,000 caregivers for older adults. And within the pandemic between February of 2020 and November 2021, 10,000 workers left senior living. So if you think about the fact that we were able to increase the size of our workforce by 15%, and that's pretty impressive. And so what that allowed us to do is it allowed us to reduce our contract labor from the peak in December 2021 to the fourth quarter of 2022 by 80%. We further reduced that contract labor in January, and then we further reduced that in February, all while continuing to meet residents' needs and to provide high-quality care. So I think that we will continue to see the shifts that we have be filled by workers working regular hours as opposed to overtime or contract labor. We still have some work to do, but we've made great progress. And I do think that we'll continue to see labor productivity as we get our turnover under control. One of the things that we've seen in the labor market is that workers quit in the first 90 days at a higher rate than they do at other times. So as we stabilize that workforce, that will also help us with labor productivity, and we'll further improve our labor productivity as we grow occupancy, which is a key priority of ours for the year.

Okay. Great. Okay. Just bouncing around here a little bit. So recently, there were some disclosures that Brookdale elected to not exercise your lease renewal option with one of your REIT partners. It's a public company, LTC properties, so it's kind of disclosed on both sides, I guess, maybe just -- if you could provide a little more color just on the background and the decision to not renew that lease?

So let me start by saying that we have had a very long and productive relationship with LTC, and we're very grateful for the communities that we've leased from them over the years. At the same time, our obligations are to Brookdale shareholders, and we look at every decision to see what's the best decision for the shareholders over the long term. These communities are a little smaller than our normal communities, and they do represent about 3% of our units. But as we look forward, we think that Brookdale will be better served by not renewing at the option rate that was provided in the lease.

Okay. All right. Kind of more of a high-level open ending question, but -- obviously, the pandemic's impacted a lot of business models in different ways. So I think as far as senior housing and how much the pandemic's really kind of changed the overall operating environment, maybe just talk about something's you might see there, maybe permanent changes in the business now post-pandemic versus pre-pandemic?

One of things that Brookdale has chosen to differentiate itself on is quality service and the quality of the health care. We started that well before the pandemic. And I do think that served us well during the pandemic. I was really proud of the fact that providers and prospects of Brookdale's response to the pandemic is the best in the industry. But if you sit and say, what is the core of that, it's really providing good health care services to the residents in our communities so that they can increase the length of stay with us, that they can lead healthier lives and they can reduce the expense on the health care system. And so you'll continue to see us move into that health care services and the quality of care. And that is probably the biggest difference. You can see telehealth has been something big that we brought into our communities, and that works really well. We've got more third-party nurse practitioners and doctors rounding in our communities to make health care more convenient for our residents, and I think that will continue. But big picture, what you'll see is Brookdale differentiating on health care.

Okay. Again, also another operational question here, just thinking about senior housing supply and demand. One of the other variables that at least right now is certainly positive, which -- it doesn't fall in that permanent category. But as far as the rising construction costs, it's kind of led to a slowdown in construction starts across the industry, which certainly provides tailwinds for you guys given your large footprint, as you're the largest player in the industry right now. So just curious how much that's provided some incremental tailwinds for you guys over the next couple of years. Just if you can quantify anything around that, that would be great too, but just looking for any qualitative work, quantitative color around the benefits from that situation right now.

Yes, I think it's probably an understatement to say that we're excited about the economic supply and demand tailwinds that we are expecting. I think our investor deck does a really nice job of laying out. There's a page in our investor deck that does a nice job of laying out kind of the new opens and the new starts in construction. But on the high level, what we've seen is, as you pointed out, higher construction costs, higher labor costs, higher interest costs have made it really burdensome from a construction and a new start standpoint. I think if you look at new starts, they're down from 2018, almost 50%. And then if you look a little bit more closely to new opens in Brookdale from the peak, almost 75%, they're down. And so that's really kind of on the supply side. And then on the demand side, what we're seeing is the census bureau has come out to say that there's 1 million new residents kind of coming into the target age every year for the next several years. And so with an 11% penetration rate, we're -- like I said, it's probably an understatement that we're excited about the fact that 70% of our units are AL and memory care, and they're needs based. And so I think we're in a good position to take advantage.

So I think a multiyear period of favorable supply and demand tailwinds, and that reflects into more move-ins. So one of the things that we've been talking about and that we've experienced is our move-ins are actually exceeding our pre-pandemic events. And so that should bode very well for the next several years.

Okay. All right. So maybe shifting gears here again, we'll go through some questions here around the balance sheet and capital deployment. I know, Dawn, you're kind of new to the role. So it's kind of a -- I'm not sure if this question might be for both of you guys, but I guess whoever wants to kind of answer some of these. So again, just kind of high-level thinking about the balance sheet, you guys have done a pretty good job sort of pushing out maturities over the past couple of years or so with some of the refinancing activity that you've done. But given there's another one, I think, approaching -- next one, what, September 24, somewhere in there, I think. I don't know if that's on your radar screen for now. But can you just give us an update on how you're tackling just debt levels and interest rates with the rising interest rate environment, the way things stand right now?

Yes. I think how we're thinking about it is we're very excited that we have pushed out all of our -- or we've refinanced and taking care of all of our debt maturities for the next 1.5 years. So the current environment, that's something that is a benefit to us. Now as we think about that maturity is coming 1.5 years from now, we're very much focused on the recovery of those assets. They recovered in 2022. And we will continue to focus on growing top line revenue and cost control, particularly in the labor, and we feel very confident that when we put those assets out, they'll be in a position to be refinanced.

All right. Great.

And just to add, while Dawn is new to the role, she's been a strong part of our finance organization for 16 years, and so she's got deep experience in all things finance.

Okay. Great. Just thinking about the overall footprint of senior housing portfolio that you guys have right now. You guys haven't really had much change over -- there's hasn't been really a whole lot of acquisition activity, but really not a whole lot of divestitures either. I think the only kind of large thing you did was really divesting the home health business. But really, the -- just the question is just thinking about going forward from here, is the current size of the number of properties, et cetera, kind of where you want to be right now? Or is there any desire to either increase facility count or shift up the geographies up or down? Just curious how you're thinking about portfolio rationalization and/or expansion the way it stands right now?

Well, from 2020 to now, we haven't done a lot with the portfolio, but I think that's because we did so much work in the years preceding the pandemic, including divesting of all of our entry fee CCRC assets in January 2020 to lower our SNF exposure, which we look back and say, it was a really good decision. But when I look at the business, what I'm most excited about is the fact that we've got 70% of our business is in private pay, AL, memory care, which is higher acuity it -- needs driven. So that's critically important. We're within 20 minutes of 2/3 of the population, so we're where people want to be. And then I think that there is so much opportunity in our existing that the most important thing for us to do is to recover that pre-pandemic occupancy and beyond. And then we can look at whether there is the opportunity to increase our density in markets or to look at other transactions that would accelerate our growth.

Okay. This was the question, otherwise, it kind of comes up from time to time. But as far as your mix of the assisted living versus independent living, curious how you're thinking about that mix right now? And also maybe tied into that question. I don't know if this is on your radar screen or not, but there's been a couple -- at least one health care REIT talking about on independent living, maybe taking more control of the operations having maybe less partnership. I don't know if that changes the landscape at all. And IL, if that's on your radar screen? If not, that's fine too. But just curious how you think about that mix? And do you rethink IL at all if there's some changes going on in the competitive landscape?

Well, I do think that having a REIT sort of -- be a capital provider as well as a competitor within IL is something that we have to pay attention to. But the sweet spot of Brookdale really is always needs-driven care in that Assisted Living and memory care. And one of the things that we saw during the pandemic, and I think others saw as well is that senior living is a very operationally intensive business. And so I think that's definitely true in the part of the business that we operate in. And we do think that we're well positioned to have a continuum of care. Even if somebody moves into an IL community, chances are they're going to need a higher level of care, whether that's AL or memory care as they age and having the competency to operate across the broad continuum of care, I think, is in our interest.

All right. Great. Also thinking about CapEx spend. Over and above the normal kind of maintenance CapEx, just remind us areas of spend, what the priorities are for the more strategic dollars you're spending? I don't know if memory care expansion is still a key area of focus and maybe there's other things you're focused on, but just curious how you guys are thinking about the additional, discretionary CapEx dollars and where you're spending that?

Yes. So I think how we -- so every year, we evaluate what our needs are and the best possible best in -- use of our money. And typically, we spend $2,000 to $2,500 a unit in CapEx. 80% of our CapEx that we spend goes towards directly to the community and the other 20% is more, we'll call it, corporate CapEx with IT across the company or strategic projects and things in that nature. So as we think about that $2,000 to $2,500 per unit, is generally, if we think about unit turns or if we have cyclical projects, roofing, siding, things of that nature, we're evaluating that at the beginning of the year. Now I will say that in 2023, we've taken that spend up to $3,200 per unit, just given the priorities that we've seen in the company and where we think the highest and best use of our dollars are.

Okay. Great. Maybe a final question or 2 here. We talked about some of the executive changes at the beginning of the call a little bit. But I think you also talked about more recently maybe some evolution of the executive director role. Can you just give us your updates on how this role might be changing within the company?

Absolutely. During the pandemic, I will say that the health and well-being of our residents and associates required sort of Herculean efforts. And so that was something that was much more operationally intense than we've ever seen in our history. And I'm very proud of our Executive Directors' ability to sort of flex to that. Now that we are in the recovery mode, though, we are looking for more of a growth mindset for our executive directors, and we want to make sure that they're sales forward in terms of getting more of our units in service more quickly, and that they have strong financial acumen to manage their communities. And so we will provide training to sort of increase the skill set of our executive directors because we've got some amazing talent. But then as we bring new executive directors into our communities, we will look for those core competencies in addition.

All right. Great. All right, with that. I think we're down to the final minute, so maybe we'll just end it there. So I appreciate you guys taking the time today to answer our questions. And enjoy the rest of the conference.

All right. thank you.

Thank you very much. Thank you.