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

Great. Welcome back to the Barclays Global Healthcare Conference. My name is [ Andrew Mok. ] I cover Managed Care and Facilities here at Barclays, and I'm pleased to welcome Jessica Hazel, Vice President of Investor Relations. Jessica, welcome.

Thank you.

Great to have you here. Maybe start with [indiscernible] nature of the business, being your housing pricing post-COVID has been a major theme. Can you maybe elaborate on the in-place resident rate updates that you're implementing in 2024?

Yes. So just to give you a little bit of background. Prepandemic, our pricing actions were generally tied to a targeted [indiscernible] to the cost of living expectations for that particular year. Again, with the impact of the pandemic and its follow-on effects, including [indiscernible] force of the disruptive labor market and the broad and significant inflationary pressures that we were all facing, the cost to continue to deliver high-quality caring services to our residents increased dramatically. So in 2023, we took a historic high price increase to appropriately address this elevated expenses [indiscernible], which is the largest portion of our community operating expense. Also on the earnings of the business like [indiscernible], food, utilities, et cetera, and elevated interest rates. And that pricing increase, combined with our occupancy growth in 2023, supported a same community RevPAR increase of 11.4% over the prior year. We were very pleased with that decision and the resulting outcome. Now moving to 2024, in your specific question, we took a lower pricing increase on January 1 than in the prior year, but is still elevated above our historic norm. Through this, we remained focused on ensuring appropriate pricing for the services that we delivered in our communities, while also remaining affordable for our residents. And we believe that our pricing this year appropriately addresses our cost. I will have to say our community leaders are very diligent and have done a great job in conveying the rationale of our pricing increases to the residents. And in our quarter-to-date results, we have seen strong move-ins and move-outs below the prior year. So we've been very pleased with the pricing action.

Right. And given that balancing act between pricing and occupancy that you just discussed, how do you think the pricing evolves over the next 2, 3 years beyond 2024?

So our first strategic priority is to get every available room in service at the best profitable rate. And it's going to be through that balance of occupancy and rate that will continue to deliver RevPAR growth as well as support profitable occupancy increases. Not only that, but with the supply and demand dynamics, providing a tailwind in your housing for many years to come, we believe that there will be continued opportunity beyond 2024 to continue to grow both occupancy as well as rate.

Great. And you mentioned the competitive environment as a factor to some of those January 1 increases that you put through on your 4Q earnings call. Can you give more color on that broader competitive dynamic in the market? What's specifically, are you seeing that prompted those actions?

Yes. I think specific to our comments on that earnings call, just as for many years, we have taken our market rate increase for new residents at the beginning of October. And then in 2023, what we saw are more competitors utilizing discounts and sales and [indiscernible] programs, particularly within that month of October. So it's more isolated as opposed to very broad. And it was also in a particular market. So our community leaders [indiscernible] in were appropriate on their competitive response to that environment in their local markets, and that was related to the comments we made now. I would caveat by saying that with about 90% of operators in our industry, having 5 or fewer communities that they operate, there could be a lot of variability in what we see from market to market.

Great. Maybe specifically on the 2024 outlook. Do you want to elaborate a little bit more on the occupancy and momentum that you have for 2024?

Yes. I would say that since the start of our recovery from the pandemic, our annual occupancy growth has been stronger than in a normal year, and we would expect that same thing to continue in 2024 as a result of the supply and demand dynamics, as a result of our solid operational plans and the momentum that we built with our success in 2023 and as a result of continued strong execution. Now specific to 2024, we believe that we'll see that normal quarterly cadence of occupancy change related to the prior quarter, so sequentially, that results in the first quarter being a step back in occupancy from the fourth quarter and then a build of occupancy throughout the remainder of the year. We outlined that as well as seasonality factors for a number of areas of our business in a seasonality table in our investor materials if you would like to look at that. Like with 2023, we would expect positive year-over-year growth in occupancy for the full year in 2024 on top of that normal seasonal quarterly cadence. And that's what we have already seen in our quarter-to-date trend in February that we reported last Friday.

It sounds like maybe a return to normalcy around seasonality trends. But just taking a step back, where those occupancies sit today versus maybe prepandemic? Can you give us some perspective on that occupancy?

Yes. So we are right now bumping up against 78% occupancy. Prepandemic, we were like 84.5%. And then our peak was at 89%. So what we would expect is to continue to have those annual occupancy increases as we work towards, not only that prepandemic average of 84.5%, but also grow to our peak level. And then ultimately, given all of the dynamics grow beyond [indiscernible] the longer period.

Got it. Do you still think that's a pretty big runway here to recover a lot of the occupancy from prepandemic?

Yes. We believe that there is significant runway there, a [ multitude ] of reasons.

Okay. Great. Maybe shifting to demographic factors, baby boomers are now aging into that 75-plus age cohort. How significant is that for the underlying fundamentals and demand of your business? What are your expectations over the next 5 years, given the level of growth that we might see in this age cohort?

Yes. I think that there is going to be significant demand for senior living from that baby boomer population. Currently at Brookdale, about 19% of our residents are baby boomers. And for the 75 plus age cohort, that population specifically is expected to grow more than 30% between now and 2030. So we are seeing from the data, an expectation for about 1 million new seniors entering our targeted [indiscernible] cohort each year more than. So we think that the demand, particularly from this baby boomer group, will support these year-over-year occupancy growth, not only in our current year, but also for many years to come. And again, that's exactly what we're seeing is that seasonal trend plus our February occupancy results were 160 basis points above the prior year February. So it's just continuing to deliver that strong growth and grow over time until we're back to those occupancy levels that we discussed.

Great. Maybe on the other side of occupancy, labor costs have generally been coming down across the industry over the last 18 months or so. How are you managing labor costs at your properties? And can you comment on how much contract labor you use and what sort of tailwinds that might have presented to you over the last 15 months? And what's your outlook from here on labor?

So our goal at Brookdale is to match our labor with the needs of our residents, while providing high-quality care and services and remaining in compliance with all applicable regulations. That's our target. Specific to contract labor, that for us peaked in December of 2021 and remained [indiscernible] throughout 2022. Now thanks to the efforts of our teams, we made remarkable progress on reducing contract labor in 2023 and filling more shifts with full-time and part-time Brookdale associates. So what we would say now is that our contract labor is largely back in line with that pre-pandemic inflation-adjusted level. While we're continuing to monitor contract labor closely, where we think that there is the most opportunity for labor improvements in the near and the long term is through further improvements in overtime and premium labor, the opportunity that comes from incremental occupancy growth and further improvements in associate turnover. So those are the areas that we will continue to focus to see this labor improvement.

Great. When I think about just broader margin expansion opportunities, where also the DC potential [indiscernible] [ 2 or 3 ]. It sounds like the occupancy in general would leverage the cost basis, but I'm just curious to hear your perspective on potential margin improvement opportunities.

I think we've touched on the main factor already. So it's -- I'm sorry -- from higher occupancy, from appropriate pricing and from continued improvements in retention and turnover, those are going to be some of the primary drivers of our future margin growth and expansion. So when you think about it, Senior Living is a high fixed cost business. So as we grow occupancy, as we grow rate with the ability to leverage those higher fixed costs, then as we further improve our retention and turnover, our Brookdale associates naturally become more productive, and so we would expect this productivity to support additional margin improvement, while remaining in compliance with applicable regulations. So one thing I will say about margin growth. In 2023, we demonstrated our ability to deliver meaningful margin expansion. We had a 43% improvement in same-community adjusted operating income, and that supported margin expansion of a pretty significant level last year. So we have confidence that as we [indiscernible] down this path of recovery is towards those prepandemic segment operating margin levels that we had previously.

Great. Can you talk a little bit about the value-based care initiatives that you have through your HealthPlus program? I think you're expanding this program to 130 communities in 2024. Maybe elaborate on that economics. So you're receiving a capitated PMPM, just some of the traditional things that we would look for in a value-based care program?

Yes. I'll start with HealthPlus and then I'll turn to the economics aspect of that. So Brookdale HealthPlus is an innovative care delivery model with care coordination, and what we believe is that it positions Brookdale as the senior living leader in value-based care, and it's through evidence-based preventative per coordination. Each HealthPlus community has access to an RN care manager, who uses the latest tools, the latest technology to enable responsive and effective care coordination. And we've been very pleased with the results, not only that we've measured, but also we had a third-party company measure our Brookdale HealthPlus results. And what they found is residents living in Brookdale HealthPlus communities had 78% fewer urgent care and emergency room visits and 36% fewer hospitalizations than similar individuals living in private homes. Within our own data, we're also seeing higher resident retention, more move-ins, higher associate retention, and so we expect that the program overall will continue to improve resident satisfaction, deliver resident quality of life and support [ tangible ] costs to not only our residents and our families, but also to the [indiscernible] health care system. Now specific to what that economic -- what the economics look like. HealthPlus is provided to our residents at no incremental cost and the cost specific to Brookdale are largely related to the robust electronic medical record and that shared RN care manager. From a revenue standpoint, we currently have one payer who is providing quality-based PMPM for the positive outcomes that they're seeing in our communities, and we're in discussions with other potential payers for that. So when you consider all of the factors that we are seeing favorable outcomes from Brookdale HealthPlus, we believe that it leads to more profitable communities and will support more profitable communities effort delivery time.

Great. Speaking of more opportunities, with respect to the portfolio expansion, where do you see the greatest opportunity there?

Yes. I would -- I'll just address this in 2 ways: our real estate portfolio and our product mix. So over the last several years, specific to our real estate portfolio, we have consciously shifted our portfolio by increasing our concentration of owned assets. Currently, about 55% of our consolidated portfolio, our own communities. And we think that own communities allow us to fully capitalize on the powerful industry recovery that lies ahead. So we would anticipate over time, continuing to have focus on a higher mix of owned communities. Specific to our product mix, we are more heavily concentrated in needs-based businesses, including assisted living and memory care, where we are about 74% needs-based product offerings. And we think just given the fact that there are more seniors entering the target age demographic, that those seniors are facing more chronic conditions, whether that be Alzheimer's, dementia, diabetes, high blood pressure, which is going to lead to higher acuity needs, that being in these needs-based product offerings best positions us for all of that growth opportunity that is providing that strong runway. And we've grown our needs-based concentration of our portfolio by about 10 percentage points since 2017, and we would expect to maintain this higher level, just given the macro factors that are going to support the largest growth opportunity in that area.

Great. And this is health care, so it wouldn't be a proper chat without bringing up regulations. Just curious what regulations should we be on the lookout for? What's on the potential horizon? What could impact and help to evolve the business?

Nothing specific to talk about right now, but there is no question that the pandemic heightened the importance of our entire senior living industry. And so unsurprisingly, the regulatory environment is increasing. We at Brookdale, we will just continue to respond appropriately through an intense focus on quality and ensuring that we are in compliance with all regulations in the industry.

Great. Well, let's wrap it there. Jessica, thank you so much for joining us today, and please enjoy the rest of your conference.

Thank you so much, Andrew.

Thank you.