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

Everyone thanks so much for sticking around and coming so early here. My name is Joanna Gajuk. I work at Bank of America Equity Research. And my pleasure now to host this session with Brookdale Senior Living. They're the largest new housing operator in the U.S. And today with us is Dawn Kussow the CFO; and Jessica Hazel from Investor Relations. And thank you so much for coming down here and spending some time with us. So we're going to go right into questions.

So maybe first, we can talk about occupancy because obviously, that's been the area of outperformance, especially Q4 was pretty good. And then Q1, which tends to be not such a great quarter to start with. And it turned out to be like actually very nice occupancy quarter. So maybe -- is there a way to think about the drivers of it? Like as an like what's sustainable? What's not? Because I was thinking, obviously, staffing, you guys did a pretty good job on improving retention and reducing turnover. So I was thinking maybe some of that, and obviously, aging demographics. So is there a way to kind of quantify or get a sense of what are the main drivers too? And also, the last 1 is seniors, I guess, returning and kind of behaving more normally. Obviously, that feels like it's already -- you should forget about COVID, but it seems like there's maybe still some of that was going on and now it's maybe normalizing. So can you talk about all these things and how you think about what's sustainable there when it comes to occupancy?

Of course, Joanna, thank you. And thank you very much for having us here, Jessica and I are very happy to be here to talk about Brookdale and just the incredible growth that we've had and certainly share our story. So as it relates to occupancy, you're exactly right. Typically, the fourth quarter to the first quarter, we see a leveling off of our occupancy, and it tends to go backwards, just because of normal seasonality with the flu season, et cetera. And this year, that backwards trend was better than our historical norms. And so we were excited about that. And -- or what we saw that was driving that is we saw our move-ins in the first quarter to be 7.5% better than our 3-year historical average. And really, we are in a unique position where the supply-demand fundamentals are in our favor, and we saw that coming through with that better than historical, better than our 3-year average move-in. Now on the move-out side, we also saw less move-outs as compared to the prior year because as you know, we do our rate increase on January 1. And so all of our in-place residents get their rate increase on January 1. Last year as you know, we did our historical high-rate increase as we're still recovering through the pandemic. And this year, our rate increase was a little bit less than that. But it was still higher than our pre-pandemic rate increases as we're still recovering and focusing on charging an appropriate rate. So if you compare our financial move-outs, they improved this year as opposed to last year, just with that little bit of a lower rate increase. We're really optimistic about occupancy through 2024 with the favorable first quarter occupancy.

Great. And I guess when thinking about occupancy as it relates to profitability and margin. So is there a sort of like an optimal occupancy or the level where you should -- you kind of aspiring to get back to in order for margins to kind of normalize? I mean the margins didn't normalize actually, so we can talk about that, too. But is there like -- do you require to reach certain level of occupancy to have the margin return?

Yes, it's a great question. And so what we've been focusing on is getting every room and service at the best profitable rate. So it's really kind of balancing that rate and occupancy. And so we have been very focused on our RevPAR growth. If you think about our historical margins, we were operating at low to mid-30% margins pre-pandemic. And that was at an occupancy rate of 84.5%. And so as we said in our first quarter earnings call, one of the things that we're really proud of is our same community operating income. If you annualize our first quarter and you take that on a per unit basis, it is ahead of where we were from an operating income standpoint on a per unit basis ahead of 2019. And so to the point of recovering our margin, we're excited about that statistic because we still do have occupancy growth and occupancy recovery to get to. So that would just lead to that incremental margin and getting back to our historical margins, which we fully expect to do.

Right, exactly. And to your point, the occupancy has been recovering. When I look versus the lowest point right, versus the drop, you recover like more than 800 basis points, so pretty impressive. But it's still like maybe 600 or so below, I guess, where Brookdale's occupancy was the 84.5% or so. So still like -- there's still more room. So I guess the question is 2 parts. So first, like why, I guess it's taking that long, right? Because it's still -- I mean you did a great job, but I guess there's still more to come. And then the second part is how long you think it will take to kind of return to that level?

Yes, it's a great question. And like I said, I think really what we've been focusing on very diligently over the last 5 quarters, call it, is that RevPAR growth and just making sure that we have that quality top line. We put the historical high rate increase last year. That was a little bit lower this year and just making sure that we are charging an appropriate rate that remains affordable to the residents and just balancing that and making sure that we have that steady and sustainable growth with a quality top line because we're already seeing the results in our margins.

And when it comes to your guidance, maybe switching a little bit more the near-term commentary around your second quarter guidance, right, it implies EBITDA essentially be flat or maybe down $5 million or so quarter-over-quarter, right? So you assume the occupancy and typically occupancy increases, right? So why is that EBITDA actually declines, while occupancy is expected to grow sequentially?

Yes. So we have in our investor presentation laid out normal seasonality factors. So we have several normal seasonality factors if you look at our results quarter-over-quarter. For instance, in the first quarter, we pay out our bonus payments. And so we expect a little bit of a cash outflow. Those are the things that we're laying out in that last page of the investor presentation. So if you think about first quarter to second quarter, it's normal that our adjusted EBITDA would step down, and there's a variety of factors. So our occupancy that stepped down fourth quarter to first quarter. We're trying to making the turn in our occupancy in the second quarter. So we have to rebuild that loss of occupancy from fourth quarter to first quarter. And so we would expect that to happen quicker this year. We've said that in our prepared remarks in our quarterly earnings call because that stepped down just was better than historical norms. And so you see that also in our April occupancy. Our average April occupancy was flat with March, but our ending occupancy was up 10 basis points. So that just evidences the fact that we've been rebuilding that occupancy a little bit sooner. Now from a rate standpoint, we do our January 1 -- on January 1 we put our in-place rate increase in effect. And typically then throughout the year, you'll see our rates stepped down through the quarters. That's a function of a couple of different things. First of all, as we have normal attrition with our residents, usually we see a higher acuity resident that's moving out and then a lower acuity resident that's moving in. So that will impact our care rate. Also, we would have our product mix that we see some seasonality through the quarters with as well as the fact that we have normal discounting that happens through the year. So our guidance would imply a step down in our revenue, which is normal from first quarter to second quarter. Now if you think about the expense side of things, the largest headwind that we have in the second quarter comes with our merit. So we put our merit increase in late first quarter. So you have a relatively large labor headwind that comes through in the second quarter with getting the full year impact -- or excuse me, the full quarter impact of those labor costs. Now what I would say is that would -- or that would be partially offset with the fact that we have some utility costs that we'll see favorability in the second quarter compared to the first quarter. And then I'll just remind you that we had winter storm costs in the first quarter. We wouldn't expect those winter storm costs to continue, but those favorability in those expenses would not more than offset that merit demand. The other thing that's really important, I think, in our guidance is, as you go through the math is that we really do expect and it's in our guide for adjusted EBITDA performance improvement in -- from the low-end all the way to the top-end. So we do expect to continue that performance improvement into the second quarter.

No, this is great. And you mentioned when it comes to rent increases, right? So this year, much lower, so, I guess, call it, mid-single digits, and you mentioned discounting. So can you give us a flavor of whether there's like more or less discounting than normal? What kind of activity you're seeing there? How competitive it is when it comes to rents?

Yes. So what we -- when we put our rate increase in place on January 1, we actually start selling that rate to incoming residents in October of the year before. And so what we saw last year in the fourth quarter was a higher level of discounting from our competitors. That was more on the local front. And certainly, our EDs and our communities, and our salespeople, and our communities have the tools and acted appropriately in response to that higher level of discounting that we saw last October. What we have seen is a positive trend in 2024 as it relates to discounting. So our discounts as a percentage of revenue have certainly come down.

Great to hear that. And maybe we'll switch to another topic that it feels like we don't spend that much time on earnings calls but HealthPlus program, clearly, right? It's been something that the company has worked for quite some time now. And I guess there's some plans for expanding to additional communities. So maybe talk about these plans and how many -- what percent of, I guess, your communities and units have access to this program and also how quickly, I guess, you're capable of expanding in? Or do you have any targets when you might have it in all communities?

Yes. Yes. So for those of you that don't know, Brookdale HealthPlus was designed to help improve the quality of life of our residents through evidence-based preventative care coordination. And we are just so proud of this program, which actually just received a Best of the Best award from Argentum, which is one of our industry associations. So it's great to be recognized, externally in addition to the outcomes that we're seeing internally for Brookdale HealthPlus. We are currently in about 50 communities. We started that rollout right at the start of the pandemic in a few communities, added additional ones last summer and are continuing to see positive outcomes. And so we expect to expand Brookdale HealthPlus to up to 130 communities by the end of this calendar year would be our total number that we're working towards. One of the things about it is as an innovative care delivery model with care coordination, we are so proud of the program and think that it really just distinguishes us as the senior living leader in value-based care. And we had a third-party study of our Brookdale HealthPlus communities and what that study found was that residents in those communities actually had 78% fewer emergency room and urgent care visits and 36% fewer hospitalizations than similar individuals living in private residences. So overall, seeing very positive outcomes from the program, not only in the lives of the residents, but just throughout our entire communities.

No, this is great. And I guess I was thinking, so you mentioned you obviously delivered better outcomes and you've been recognized so that's great. But is there a way for us because obviously, people in this room [ are of ] quantitative nature. So any numbers around it in terms of just like how it flows through to the bottom line? Is it like are you charging more? Are you able to kind of maybe raise the rents a little bit more because of these services in these communities. And then I guess, does it mean that maybe the communities where you offer this program generating better margins?

Yes. So Brookdale HealthPlus has provided to the residents within those communities no incremental cost. So we do not charge an additional amount for those residents. From a staffing standpoint, those residents are provided access to a registered nurse care manager who not only supports the care coordination for the residents, but also just further promotes our residents overall health and wellness, which is something that is very important to us. The registered nurse care managers are provided with the latest technology and communication tools to really enable that responsive and effective care coordination. And it goes across the resident, their primary care provider, specialists they may be working with as well as the resident family members. Now one of the things that we're seeing outside of that third-party analysis that I spoke to is within our HealthPlus communities, we actually have higher resident retention. We have higher move-ins. We have improved associate retention, and we also have improved resident satisfaction. So these are less quantifiable in the short term. That's something that we are monitoring and are continuing to see in those communities. And each of those really fits within our key focus areas within our business. So very proud of those positive outcomes. Now from a cost of Brookdale standpoint, the main incremental costs are that registered nurse care manager as well as more robust electronic medical records. But what we're seeing is that those costs are largely offset by a payer per member per month that we're receiving for the positive outcomes that we're delivering within our HealthPlus communities. So as we look more broadly, we believe that HealthPlus will be profitable to our Brookdale communities, be supportive of lower health care costs for our residents and their families, will be beneficial to our Brookdale shareholders, and will ultimately help support lower cost to the overall health care system. So definitely seeing positive benefits from our HealthPlus program.

So you mentioned that you received -- so I guess, is there -- you offer this program in communities that have -- it's not paid out of pocket. There's like a payer involved. Is it Medicare Advantage plans that covers those services?

We currently have one payer that we are receiving a PMPM from, and we're in conversations with other potential payers just given the positive outcomes that we're able to see. And from this payer, we've received incredible feedback on what they are seeing from their plan participants compared to other individuals and other communities that are not Brookdale and specifically HealthPlus communities.

Right, because the HealthPlus cannot cover the actual stay in the facility. So this is like an additional fee you receive from the payer because the members reside in your community, and there's this program. So the payer says, "Okay, we're going to pay you to cover the cost of the RN and the systems and then it's going to accrue to us because the senior is going to stay healthier in your community.

That's exactly right. It's in incentive because of the positive outcomes that they are seeing.

So you're saying you have this with one plan. Is it regional? Is it multiple markets? Or is it just about one community?

It's multiple markets.

It is multiple markets. Okay. And so how long you've had you have had this contract?