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

Thank you all. Welcome to Citi's 2024 Global Property CEO Conference. I'm Michael Griffin with Citi Research, and we're pleased to have with us Brookfield Senior Living and CEO, Cindy Baier. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. The disclosures available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you do not want to raise your hand. Cindy, I'll turn it over to you to introduce Brookdale and the team, provide any opening remarks, tell the audience the top reasons investors should buy your stock today, and then we'll get into Q&A.

Michael, thank you so much for having me. I'm joined today by Jessica Hazel, who leads our Investor Relations. And we really appreciate everyone who took the time to visit us in person this morning or to join the call. I'm very proud to introduce you to Brookdale Senior Living. We are the nation's largest senior living operator. And we serve residents who are generally in their 80s, all the way up to 100 or more. What is exciting about Brookdale is that we provide independent living, assisted living and memory care and the residents who live with us basically have the opportunity to thrive. We have 652 communities, and we serve them with 36,000 associates. Our business is at the intersection of health care, hospitality and real estate but it's important to note that 94% of our industry, our business, is private pay as opposed to government funding. And Brookdale really doesn't have any competitors of scale. We're at least twice as large as our next largest competitor. There are many good reasons to think about investing in Brookdale but one of the biggest reasons is that we are at the beginning of a powerful senior living recovery. And Brookdale has incredibly strong brand leadership. We have unaided brand awareness that's 2x the next competitor. There is accelerating demographic growth. If you think about the trends around aging seniors, they are accelerating very quickly. And the seniors have a lot more chronic conditions than they have historically, including things like diabetes, dementia and Alzheimer's. And that is where we're perfectly suited to help take care of them. At the same time, there's unprecedented demographic demand. There's also constrained supply. And inventory growth in our industry is at the lowest amount as it has been in a decade. So great fundamentals in the industry with accelerating demand and constrained supply. Brookdale is more concentrated in assisted living and memory care than our competitors. We've got about 74% of our business that's this needs-driven business. And the reason that this is important is because seniors, as I mentioned earlier, have more chronic conditions that they need help with, and we're perfectly suited to do that. We have industry-leading clinical expertise and we have launched proprietary programs like Brookdale HealthPlus, which have a demonstrated success in reducing emergency room visits and hospitalizations in the resonance that we care for. So that makes us a good choice for seniors who want to have a nice health span, for providers or payers who may be taking risk in a new value-based care environment because we lower the cost of health care for those associates. And one of the things that's also important is because we have about 55% of our business that is owned real estate, our valuation is underpinned by the real estate value. So I hope that's an introduction to why you should learn a little bit more about Brookdale.

Wonderful. Thank you so much, Cindy.

Starting off with operating fundamentals. Your portfolio continues to recover from the pandemic. How confident you are the strength -- are you in the strength of this recovery to continue over the near term?

I'm incredibly confident. If you look at our performance in 2023, we had industry-leading RevPAR growth, that's revenue per available room. And what that tells you is that we grew the top line very quickly. At the same time, our same community adjusted operating margin grew 43% last year, and we saw margin expansion for our same store adjusted operating margin grew by almost 600 basis points. So we had a great plan last year. We had solid execution. We've got strong demographics. We've got constrained supply. And we're planning on building on the success in 2024 and beyond to get complete recovery from the impact of the pandemic and more.

Maybe touching back on to what you mentioned in your prepared remarks just about the higher acuity setting. I mean, why does it make sense to focus more on assisted living and memory care, I guess, relative to independent living?

If you think about assisted living and memory care, it's a needs-driven business. And you have an accelerating demographic with more seniors aging into our target market than ever before. At the same time, you have more chronic conditions like dementia, Alzheimer's, diabetes. So seniors need support. And then if you think about the fact that the world is shifting from pay-for-service and health care to value-based care, seniors need to have support to maintain their chronic conditions and to be as healthy as they can for as long as they can. So we have industry-leading clinical expertise. We have Brookdale HealthPlus. Brookdale HealthPlus reduces hospitalizations by 36%, and it reduces urgent care visits by 78%. So if you think about the transition to value-based care, that's really important. It's also because it's a needs-driven business, it's exciting that it's more protected in the event of an economic downturn. And one of the things I should have mentioned earlier but didn't think to is Brookdale is a pure play. So we are a senior living operator. That's who we are. That's what we do. We're well positioned ahead of this massive sort of demographic shift and favorable fundamentals. And we don't have a worry about having a slower growth business to dilute our margin expansion and growth.

You've mentioned the HealthPlus program a few times now. I'm just curious if you can expand on any of the offerings or initiatives that the HealthPlus program is undertaking?

Absolutely. Brookdale HealthPlus positions Brookdale as the leader in value-based care in senior living. We have an innovative, proactive care coordination model that changes the operations of our communities and gives leading-edge technology so that we can help seniors manage their chronic conditions. Every community who is a HealthPlus community has access to an RN care manager who helps the resident manage their health care and their chronic conditions. They coordinate with the primary care provider, with other specialists as well as with the family and what that allows us to do is to help the resident have a better health span. And so the benefits of that are it increases length of stay. It has more residents who want to move in and live with us. We have better associate retention because they're leading-edge -- industry-leading expertise and then the health outcomes we've talked about. So the resident gets a better experience. And for the health care system, we lower overall health care costs. So if you were a provider or a payer who had risk on the outcomes of the population that you're managing, you should want your patients or your members to live at Brookdale because the residents will have a better health outcome than a similarly situated resident living outside -- or similarly situated senior living outside of the community with the same chronic conditions. So it's really exciting to be part of this.

What is the average length of stay at a Brookdale community? And have you noticed that it's gotten any longer over the past couple of years?

The average length of stay is about 20 months across the portfolio. Now that's a little less than it was historically, and it varies a lot by product line. In memory care, prepandemic, it would have been 18 months. Assisted living, closer to 24 months prepandemic and independent living is 36 months. Now what is important is that because we're growing occupancy as quickly as we are as a result of the pandemic, it takes a little while for the length of stay to return it normal because you've got more residents just moved in with you.

Do you notice a lot of times that many of the independent living residents will transition either to assisted living or memory care within your facilities?

We do notice that. And one of the benefits of a company like Brookdale, we're the nation's largest, and a lot of our communities have multiple care levels. So someone may start an independent living. They may transition to assisted living or they may transition to memory care. And what that allows the resident to do is age in place with teams that they're comfortable with. And it is -- it's very helpful for both residents and families.

You've talked about this large demand that you're seeing across the portfolio as we continue to recover from the pandemic. How have you been able to push pricing? And then how do you balance pushing pricing with growing occupancy?

So as I mentioned in my opening comments, we had industry-leading RevPAR growth in 2023. And that was the combination of the rate increase that we did both for our in-place residents as well as market rate increases and occupancy increases. What's important is to make sure that you're charging a fair price for the services that you're providing. And I will say that senior living is very attractive for seniors who need support for chronic conditions. Because if you think about the cost of bringing help into the home, whether it's private duty or family, the cost of that is quite expensive. So our product line is designed to capitalize on the economies that you can have by having people who need maybe 15 minutes here, 15 minutes there, but not a continuous block of time. And so we are looking forward to 2024. We did a price increase for our in-place residents that was not as large as 2023, but still was larger than our prepandemic price increases. And we do think that, that is going to set us up well for the year. Combined with occupancy growth, we'll see a very strong revenue growth this year.

Maybe to expand on that a bit. On the recent earnings call, I think you mentioned some more competitive discounting you were seeing in the fourth quarter. Was that macro driven? Was it market specific? Or if there's any color you can provide there, that would be great.

So let me start by saying for many years now, we do our market rate increases on October 1. So that if anybody who is with us in the fourth quarter, they traditionally don't get a rate increase on January 1. Now our industry is filled with very small operators. 90% of our industry are people who operate five or fewer communities. And so it's very hard to generalize and say what's happening in an individual market is going to be happening nationwide because most of your competition are these mom-and-pops that operate a small number of communities. Now what we did see in the month of October was we saw more competitors that either sales incentives or discounting. And so our teams reacted appropriately to address that. But I wouldn't take that as there being a concern over price. I think it was more competitors lining up against our traditional price increase.

Maybe expanding on that a bit. We've been hearing from some of the senior housing focused REITs that occupancy could buck seasonal trends in the coming quarters given the backlog of demand. Are you expecting this within your own portfolio?

We have been incredibly grateful to see outsized occupancy growth since March of 2021 when the recovery began. And I will say that we are expecting to see occupancy growth above the normal seasonal trends in 2024. Now having said that, the year of occupancy normally has a step back in the first quarter. That's normal seasonality. And then the occupancy will build for the rest of the year. And we are looking forward to 2024 growing occupancy faster than we did prepandemic.

Can you highlight any customer acquisition strategies that you have in the portfolio? Obviously, the key selling season as it comes into the summer is very important. So maybe just talk about customer acquisition and retention of it.

Sure. The most important thing that we can do for customer acquisition is to show seniors that they can live better by moving into a senior living community where they're supported with the help that there -- that they need for things that are getting harder and they live in a community of friends. So one of the things that we do is we show them how they can live the life that they want to live with the support that we can provide. And the first thing that we try to do is, once someone moves in with us, we want to delight our residents, right? Because if they're happy, they're going to stay longer, and they may want their friends to move in with us. That is why we're so incredibly grateful that we had more best of recognition from U.S. News & World Report in the last 2 years than any other senior living provider. That's a sense of the quality that we provide. In addition, in 2 years, we had the #1 customer satisfaction in assisted living and memory care by J.D. Power. That was 2020 and 2022. And then if you sit there and say, okay, that is what you do for residents who live with you, but what do you do to attract prospects? We have a great marketing team who's created a website that demonstrates our capabilities and gives people a chance to get the information that they need about the services that we offer, the location of our communities pricing as well. And then our sales team does a nice job of building relationships so that they can explain to prospects and their families or to others in the community why Brookdale is a good choice. And then as you would expect, we also do digital marketing and direct mail as well.

Maybe on the expense side, how are you controlling labor costs at your facilities? And what percentage of the facilities you use some form of agency labor? And how do you expect this to trend over the coming year?

So our labor costs are designed to be matched with the acuity of the residents that we serve, right? So each community has the ability to set the labor that they need to serve the residents that live with us because every resident is different and the residents' needs change over time. So that's the most important thing. It's also really important that our Executive Directors know that our top priority is the health and well-being of our residents and associates. So they have to make sure they're always providing quality care. They have to make sure they're meeting regulatory requirements and meeting resident needs. Having said that, we've made a lot of progress in 2023 on reducing the amount of contract labor that we have by replacing that labor with our Brookdale associates working normal shifts. Now like many in health care, we have a lot of contract labor. For us, it peaked in December of 2021 and remained quite elevated in 2022. We're now down about 94% from that peak. And I would say that our contract labor is at inflation-adjusted prepandemic levels. Now that's not to say that we don't have an opportunity in labor. We still have a fair amount of contract labor in our business. And so as we continue to sort of replace those shifts with workers who are working a regular shift as opposed to over time, that will bring our costs down. We've made great progress in the retention of our associates and the turnover. But as we continue to improve that, we'll also improve the productivity of our workers just naturally because they'll know the residents, they'll know their jobs and they'll be able to do them more efficiently. And then our occupancy, as occupancy builds, that will also naturally improve the productivity of our labor costs.

Just maybe turning to EBITDA margins for a bit. Do you expect the increases in revenue or controlling operating expenses? Which of those do you think will most impact expected EBITDA margin growth over the next 12 months?

So I believe that with an appropriate price increase and occupancy growth, our top line is going to grow nicely, and that will benefit EBITDA. But it's also important that we appropriately control our expenses. And so that will improve adjusted EBITDA as well. Again, we're always focused on the quality of the resident experience. We want to provide value, high-quality care and personalized services for our residents. And we want to do that in a way where we're meeting resident needs and we're providing quality care, right? So when we do that, I think it will translate into a nice growth as we've demonstrated in 2023, and we think that we've got many years of solid growth ahead of us.

What is the average staff turnover within the portfolio on a given year? And how does that compare to prepandemic trends?

We're about 10 points higher than we were prepandemic on our staff turnover. And the staff turnover really does vary by position. If you think about our Executive Directors, our Health and Wellness Directors, our Sales Directors who lead our communities, our goal is for that retention, not turnover, retention to be about 70%, and we're approaching that today.

Just on the portfolio broadly, you own about 55% of the lease, about 45%. Why does owning make sense in some situations? And conversely, why would leasing make sense in others?

So over in the last several years, we've intentionally shifted our portfolio mix to be more owned and less leased. And that has been good because we get all the benefits of ownership. All the economics flow directly to us when we own a property. Now leases make sense when you're trying to grow your business without putting a lot of equity capital upfront. And so that is why leases were historically used. Now looking forward, we do have some leases that are coming to their natural expiration at the end of next year, and that gives us optionality. If the leases are performing, then we'll renew the lease, and that will be good for our shareholders. If the leases aren't performing, we have a chance to either walk away from the lease or to restructure it to improve the economics for our shareholders.

Maybe just on near-term lease expirations that you might be working through. Are there any that we should kind of keep into focus in terms of ones that you may look to accept versus restructure? And if so, is it really dependent on the rent coverage within those facilities?

So we have 122 communities that have a lease expiration next year, and that's about $110 million for rent. Now while I can't speak about the unique aspects of any individual lease, what I can tell you is if you look at our supplement, you'll see that we lost $50 million or more, actually, a little more, of cash flow on our lease portfolio during the last year. And our lease coverage is under 1.0. And the lease coverage doesn't include all of the CapEx that we spend on the communities, which is how we got to the $50 million plus of cash losses. So what we will focus on as we get to lease maturity is the decision that is best for our shareholders. If the leases have good coverage, if the assets are high quality, if they're in markets that we want to be in, and they've got good growth trajectory, then we would consider extending the lease. If, however, the leases don't have good coverage or the lease terms or covenants or CapEx is too much, then we would take that opportunity to walk away.

Can you remind us what the average age of the portfolio is as well as CapEx burden on an average facility?

Yes. The CapEx that we're spending is $3,100 a unit on average and the average age of the communities is in the mid-20s.

That's exactly right.

And then just touching on real estate. Again, would you ever look to spin off the real estate into a REIT?

It's something that as a management team, our objective is to create shareholder value. And we have looked at it historically, but it hasn't made sense to do.

Maybe just a broad high-level question here. How do you think the trend to value-based care and at-home care will impact Brookdale?

I couldn't be more excited about the trends. And if you think about what the trend involves, it involves more care being in the home. And if you think about the community that we operate, they are the homes of our residents, right? So you've got tens of thousands of seniors who are going to be receiving more and more care in their homes. And that's why programs like Brookdale HealthPlus are so attractive, right? Because value-based care is all about trying to maintain wellness, trying to appropriately manage product conditions so that you can avoid some of the high cost of health care like hospitalizations. And so I think that it's important to know that Brookdale is perfectly positioned as the leader of value-based care in senior living. And the reason that we're perfectly positioned is because we have the industry-leading clinical team and because we piloted Brookdale HealthPlus in 2020, and we've built on it since then. So we've got a demonstrated track record of being able to help seniors have a better quality of life and to reduce the health care costs from their needs.

So it seems like you view this kind of at-home care as a complement relative to an alternative for your standard strategy of care in the facilities in your portfolio.

Yes. Value-based care is normally a payer or a provider like a medical group. And so we partner with both payers and providers to take care of our residents. So we have doctors and nurse practitioners who round in our communities. The residents love that. We have partnerships with payers like Optum that work with us to make sure that we're focused on the preventive care of residents, making sure they're getting their annual wellness visit and things like that. And so we're able to get a per member per month as a result of the quality of care that we provide.

I know that senior housing is obviously not as regulated as the skilled nursing industry just given the private payer mix. But are there any regulatory concerns that you might be aware of that we should highlight kind of looking at the year ahead?

One of the differences between senior living and skilled nursing is senior living is regulated at the state level. So it is highly regulated, but it's regulated at the state level where skilled nursing is regulated at the federal level. Now it's fair to say that during the pandemic, the important role the assisted living and memory care played in society was noticed. And so there definitely is a lot of attention paid to our industry. And it's fair to say that the regulatory environment is increasing, which is why, like always, we focus on providing quality care, meeting our resident needs and of course, maintaining regulatory compliance.

I think one trend that we've seen in senior housing recently is the favorable supply picture in terms of starts as a percentage of new construction. Do you expect this trend to continue in the near term? And I guess, how long until you'd expect a marked increase in supply, just given this demographic demand tailwind that we've been seeing?

I actually think it's going to be quite some time. If you think about inventory growth, it's the lowest level now that it has been in a decade. And if you think about the macroeconomic condition, interest rates have increased rapidly, the cost of construction has gone up significantly, credit officers are more constrained on the decisions they make to build a new community. And so you have to have a team that can design the new community. Many people have disbanded their teams. You have to have the design and the plan for the community, and then it can take up to 3 years, in an average case, 2 to 3 years, to build a new community. So I think we've got a several year window where supply is going to be very constrained. It's also important to note that if you think about the price point because it's so much more expensive to build a new community today, having a new competitor that can open and compete at your price point, I think we're protected there as well.

Do you expect there to be any distressed opportunities on the real estate side in senior housing? And if so, how can Brookdale capitalize on those?

There is a fair amount of distress in the industry. But what I can say is our focus today is to really capture the tremendous upside opportunity that we have in our portfolio. If you think about the fact that we've recovered over 90% of our prepandemic profitability, but we haven't increased occupancy to near the 84.5% we were at prepandemic. There's so much opportunity there that just keeping the team focused on driving that recovery as quickly as we possibly can by demonstrating that Brookdale is uniquely positioned to help older adults live better, I think that's where we should focus.

If you were able to increase occupancy back to prepandemic levels, what kind of margin uplift would you expect, assuming we could reach that occupancy level tomorrow?

Yes, we actually have a slide in our investor presentation that shows that. We think that through increasing occupancy and getting back to those prepandemic segment operating margins that we had specific to AL, IL and CCRCs that we could substantially grow our same community operating income to the tune of getting to about $1 billion by the time we get back to 89% occupancy, which was our peak.

ESG is an important topic that many investors place a bit focus on these days. Can you maybe highlight some ESG initiatives that Brookdale is undertaking?

Yes, I was actually very proud this year when Brookdale was named to institutional investors, all American executive team for small-cap best ESG. Really, when you think about our business, it's a business of people serving people, and our mission is to enrich the lives of those we serve. So the S within ESG is at the core of our business. We're also focused on appropriate governance practices. We're focused on capital projects like lighting retrofit, water consumption projects, other areas that we could reduce our energy and water usage and have a favorable impact on the environment. And Michael, before you go on, I do want to correct something earlier, we said that our target for turnover was 70%. And I just want to clarify that, that's for associate level turnover.

No, Jessica, it's actually for Q3 turnover.

I apologize.

Maybe just on the guidance for the first quarter of '24. You're expecting about 6.5% RevPAR growth and about $93 million of adjusted EBITDA. I know that some of the senior housing skilled nursing focused names have gotten back to providing full year guidance. I'm curious if there's any appetite to provide full year guidance or if it's just going to be on this quarter-by-quarter basis?

Well, for 2024, we're looking at quarterly guidance. And it is not that we aren't confident about what the full year would be. But I do think we benefited last year from having quarterly guidance at the same time that others had annual because we were able to get everyone focused on what to expect for the quarter to understand the seasonal occupancy trends, and we get a lot of positive feedback. So as you can see in the investor deck, we've highlighted the long-term opportunity. And we've indicated today that we are certainly expecting outsized occupancy growth this year, and you'll be able to see sort of what our rate growth is as well. So we're looking for a great year.

Are there any states that might be more favorable to operate and that you'd be looking to expand your presence? And conversely, are there any where it's a little more tough that you would see yourself lightening your exposure to?

There are absolutely states that are easier and harder to compete in. I think the important thing is to have a balanced view about the risks and opportunities from any particular market. Today, Brookdale's primary focus is capturing the powerful pandemic recovery. We have $1 billion of opportunity from that recovery, and so that's where we're focused.

Jessica, what's the #1 thing you're spending most of your time on these days?

There's been a lot of interest in Brookdale recently. I'm speaking to an increasing number of new investors that are just coming on board and learning about the story, including a lot of REIT-focused PMs. It seems like investors are really just looking for companies that were directly impacted by the pandemic and have significant opportunity to deliver meaningful growth, whether it's over the near term or the long term. And that's Brookdale ultimately. So it's been nice to talk to new people about Brookdale.

And I guess the same question for Cindy as well.

My focus over the last year really has been on the recovery. We have an incredible leadership team; we've got a rapidly growing business and it's wonderful to have the chance to tell that story to our existing investors as well as people who are looking at the stock for the first time.

I know we're kind of running up on time here. Does anybody in the room have questions? I've got my three rapid fire to end. What is the best real estate decision today: Buy, sell, develop, redevelop or pause?

Pause. As I said earlier, our focus is on capturing the benefit that's embedded in our portfolio. We don't need to spend a lot of additional capital to sort of get that. All we need to do is to continue to build on the solid operational foundation that we have established.

What is your expectation for same-store EBITDA growth for the senior housing industry overall in 2025?

I think it's growing. I think at the end of the day, we've got incredible supply and demand, and that will continue until 2025. I'd like to say that I love Brookdale's odds, given sort of our great performance in 2023 and the fact that we have a good plan, we've got solid execution and we're ready to win.

And lastly, do you expect there to be more, fewer or the same number of publicly traded health care operators a year from now?

I think there'll be fewer. I think in health care, scale matters. It's an incredibly complicated business and having the ability to invest in industry-leading programs is critically important. I'll just reference Brookdale HealthPlus. Smaller operators can't invest the time, money and focus on creating a program that has the same characteristics. So I think scale really is going to matter which will shrink the number of publicly traded health care operators.

Great. Thank you so much.

Thank you.