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

Hi. Good morning, and welcome back to the Barclays global health care conference. My name is Andrew Mok. I am the facilities and managed care analyst here at Barclays. And I'm pleased to be joined on stage with Cindy Baier and Dawn Kussow, CEO and CFO of Brookdale. Welcome.

Thanks for having us.

Thank you. Thank...

Maybe to start, for those in the audience that may not be familiar with Brookdale and the senior housing space, why don't you give us a brief overview of the company and current state of affairs?

Thanks, Andrew. Again thank you so much for having us. Brookdale is the nation's largest senior living operator. We are a pure play in senior housing. We operate 650 communities, approximately, in 41 states; and we have the ability to serve about 58,000 residents. About 70% of our portfolio is Assisted Living and Memory Care. And the reason that's important is because, as the aging population needs services, we're perfectly positioned to do that. We are known for our clinical capabilities, industry-leading clinical capabilities, as well as our innovative care models. You think about the residents that we serve. They have a greater need for services because of the chronic conditions that they have. There's also a dramatic decline in the caregiver ratio, so there aren't as many daughters and sons to take care of mom and dad. And then the loneliness epidemic is really important. And it gives -- our communities give seniors a chance for connection. About 94% of our business is private pay, which leaves us less exposed to impacts from Medicare or Medicaid changes. And we have seen a lot of progress over the last several quarters in terms of improving our capital structure, which positions us for success as well as future cash flow growth. And our fourth quarter move-ins provided very strong momentum coming into the new year. And we expect that momentum to continue, as we just released with our -- occupancy release yesterday.

Great. And on that occupancy recovery: I think you've recovered almost 700 basis points of occupancy over the last 3 years. Your 2025 outlook embeds continued improvement. What gives you confidence in that? And what are the early indications for occupancy to start the year? Maybe touch on some of those numbers in the release.

Yes. I'll start. And thank you, Andrew. We've put out our guidance for 2025. And when we thought about our occupancy guidance, there's a couple of things I'll point out. That guidance is based upon move-ins and attrition rates that we saw. We saw some improving attrition rates through 2024, and we carried that into '25. We also had the third-party referral disruption last year and we haven't fully lapsed that. And so we baked that into our considerations for our guidance, as well as the fact that we always have a flu season, but we've been seeing -- this is really the most challenging flu season since 2018. Now our infection control has been really promising through what we've seen, so far, but certainly not through that entire flu season yet. And then of course, the disruption or potential disruption with the Ventas transition. So we'll be transitioning 55 communities by the end of the year. And so there's always a level of potential for disruption as you transition communities, so we thought about that as we thought through our occupancy guidance. Now what I'll say about our guidance is we are really optimistic. We -- if you listened to our Fourth Quarter Call: We had move-ins that were 8% above pre-pandemic levels. And we also had the strongest -- the most number of move-ins in the fourth quarter than we had since 2016. So very strong. And that carried through into January and, like Cindy said, into February as well. Typically you'll see, our occupancy, it will decline sequentially from fourth quarter into the first quarter. We saw only a 10 basis point decline in January occupancy. And then in February, we saw our occupancy grow, which we've never seen before; and so we are really excited about that. And so why that's important is because, as you kind of make that turn and you have to get back the occupancy that you lost in the first quarter, we've really kind of accelerated that occupancy growth with turning on -- in the month of February. And then the last thing I'll point out is Cindy is talking about, has talked about our accelerated occupancy growth. If you look at our year-over-year occupancy between October fourth quarter, January and February, that occupancy growth really accelerated, as our year-over-year growth in October was only 80 basis points. The fourth quarter was 100 basis points. And then looking at our January growth, we're 120 basis points, and February 140 basis points, over prior year. So we are seeing that acceleration year-over-year.

Got it. And do you think that 100 basis points plus -- I know there wasn't a formal occupancy target for the year. Are you comfortable with that 100 basis points up for the full year?

Up for the full year, of course, yes. Yes, of course.

And then you mentioned the strong February and the atypical kind of progression from January to February. What in your view is driving that? And would love to hear more color on that trend.

Yes. I think what we're seeing is just what we said, is that we've been very focused on move-ins and making sure that we're getting move-ins at the highest possible rate. And then that favorability in our attrition rate, we're continuing to see in the month of February. So both on the move-in and the move-out side.

And just to add a little bit more color to that. If you think about what Brookdale does: We are really taking care of people who need care and connection, and so we've been very focused on resident satisfaction. And we've seen our resident satisfaction improve. We've been very focused on our associates. And when you have associates who are with you for a longer period of time, they are more efficient in their roles, but they also build relationships with residents that improve resident satisfaction and reduce attrition. And then I'm really proud of our marketing team for the work that they've done around the internal marketing spend. We had third-party disruption from lead sources last year, but we've more than overcome that and it's really coming together nicely.

Right. And despite those occupancy gains, you're still, I think, only a bit more than halfway back to your target of 84.5%, so there's still a lot of runway there. Can you talk about the opportunities and challenges in achieving that 84.5%?

Sure. One of the reasons that we put the 84.5% pre-pandemic occupancy in our investor presentation was just to demonstrate sort of where we are relative to our pre-pandemic levels, but I think it's really important to know that we have more than recovered our 2019 RevPAR. Our RevPAR is actually 18% higher than it was in 2019. And importantly, on a per-unit basis, our same-store operating income is 8% higher. So we're showing that there's still a lot of opportunity from rebuilding occupancy, but as it relates to profitability and the cash flow that comes through that, we've really rebuilt that. And for us, it's really always been around building cash flow, as opposed to occupancy for occupancy sake. I love the position that we're in because, if you think about it, we have more opportunity for growth than our competition because we've been disciplined about how we've rebuilt occupancy. And when we put those units in service for residents as we continue to grow occupancy, there'll be a nice flow-through to improve both our RevPAR and our adjusted EBITDA.

Right. And the occupancy recovery is so important. I think the natural question is like how much leverage will you get on your fixed-cost structure. Can you comment on the fixed-cost structure of the business and what every 100 basis points represents in terms of NOI?

Yes. It's certainly -- the senior housing industry is certainly inherently a fixed-cost business, so you're going to incur a certain amount of cost regardless of the number of residents in our community, but the important point is that there's a threshold. There's certainly a threshold with the occupancy levels where you've covered your fixed costs. And then any incremental move-in is going to have a significant amount of cash flow on the flow-through. And so the result is, as you continue to grow occupancy, you're going to have that disproportionate impact of the cash flow. And so we've demonstrated this as we've recovered with our communities by the growth of that occupancy; and then as we're getting to that inflection point, certainly starting to see more of that disproportionate cash flow of our business. And of course, it's going to vary by product type. Because if you think about kind of an AL product type versus an IL product type, your variable costs might only be food, as opposed to maybe the labor component to that. And so it's going to be varying there or even by the size of the community.

Got it. Understood. You mentioned earlier the third-party paid referral disruption in 2024 that led to softer occupancy growth. Can you, one, maybe remind us what that issue was? And what's the latest on how that's tracking and how that impacts the outlook for 2025 as you anniversary some of those events?

Sure. Starting in March of 2024, we saw disruption of our 2 largest paid third-party referral sources. And we recognized that, that was something that we needed to address, so we took action to redeploy and increase our internal marketing spend. That has been incredibly successful in overcoming the weakness in the third-party paid referral sources. And in the fourth quarter, we saw very strong growth in our move-ins year-over-year. Where it stands is we have seen very strong improvement in 1 of the 2 paid third-party referral sources, but we're continuing to see disruption in the second. What's important, though, is, because of our increased internal marketing spend, we're able to deliver more move-ins despite that weakness. And so I think that really is a strong point for us. And I think that, that demonstrates just the flexibility of our business. We've had strong momentum in the fourth quarter. And as we just talked about, the momentum continued into both January and February, with February being the best February occupancy build then that we've seen.

Got it. So you moved some of those marketing and -- spend dollars internally. And you think you're seeing even -- potentially even better ROI on those internal marketing spend dollars. Just how does that compare?

It's more efficient for us to have internal marketing spend in terms of total cost. There's a little bit of difference in the accounting where, if you spend money internally on marketing spends, it's expensed when you do the marketing, whereas if somebody moves in, you amortize that cost over a year.

Got it, okay. And then obviously there's a -- big demographic shifts coming as baby boomers age into -- age through Medicare. What does the average age of new residents look like today? And how has that trended over the last 5 years or so?

So the average age of our new resident is 83. And it's important to note that age is different between product type. About 70% of our product is AL and memory care. And the person who moves into AL and memory care is nearly 2 years older on average when they move in. About 30% of our residents move in at age 80 or younger, and the baby boomers are turning 80 this year. We've seen a decrease in the average age of our residents at move-in, and that's something that we're very optimistic about.

Got it. So all the occupancy you've seen, the kind of recovery to date, you don't even attribute that much to the baby boomer growth yet. You're just on the cusp of that. When do you think that's really going to start to move the needle? And I know you mentioned this year, but it's a little bit older move-ins. I think first baby boomers are going to turn 80 in...

They turn 80...

Around 2025, 2026. But how -- when do you think it's really going to start to move the needle on occupancy from a demand perspective?

I think the nice thing is that we are already outperforming our pre-pandemic occupancy growth. And we're just on the early ages of the baby boomers. 30% of our residents who move in are younger than the age of 80. There's a pretty wide dispersion of the ages, when someone moves in, but I think that we are well set up for many years to come. And one of the things that I think about is our independent product line is seeing the benefits sooner than our assisted living and memory care. And as the baby boomers continue to age, I think there's many, many years of continued occupancy growth for us.

Got it. And then new construction and new starts have been steadily decreasing for the last several years, leading to lower inventories, better absorption and higher rents. Do you expect this to continue? Or are you seeing greater signs for new construction following the recalibration of the excess supply in the market?

Yes, we certainly expect it to continue. So if you think about the rising costs of -- the construction costs, the material costs, the labor costs, the interest rates, we've definitely seen, as you pointed out, the slowed -- the slow construction since the pandemic. As a matter of fact, we've seen 60% full or -- decline in inventory since 2018. And then if you think a little bit closer to Brookdale, within the 20-minute radius, we've seen a decline of 89% from its peak on new starts within our communities, so certainly something that we would expect to continue. And if you think about even if the macro environment were to quickly shift, which we don't think that it's going to do, it takes about 5 years to get kind of a shovel in the ground and a community built where people are serving residents. A lot of the new construction that we've seen have been more around the luxury-type product type. And so we don't think that there's a lot of new construction kind of coming online that can offer services at our price point.

Got it. That's helpful. And you mentioned earlier this year's flu is one of the worst we've seen since the 2017, 2018 season. How does the flu impact your business? Is it -- does it impact the occupancy? Is it more elevated costs to take care of those members?

So really both. I think the biggest impact is on occupancy. And if you think about the age of the residents that we serve, they are the most vulnerable to any virus. And anything can change their health condition, and so we do look at that. It also affects move-ins. If you have to close your community because of a flu outbreak, for instance, it slows move-ins. Now what I'm really excited about is, despite the fact that it has been one of the most challenging flu situations in the last 15 years, within our communities, we've had absolutely great experience. We're very proactive in terms of conducting vaccination clinics for our residents and our associates. Our residents tend to have a very high vaccination rate, and so that helps. And one of the silver linings of COVID, I think, is that we've really stepped up our infection prevention controls, whether it's cleaning, hand sanitation, making sure that residents and associates are isolated. The cost side that we really see is on increased cleaning costs. And if you have to have your associates to isolate as a result of the flu, you may have to incur overtime or premium labor.

Right. Maybe sticking on the labor point for a second, as it's I think 2/3 of the costs of your business, can you talk about like hiring and retention efforts at the community levels? Where have you made the most progress? And which positions have been the most difficult to fill?

Let me start with the positions that are most challenging. The position that is probably hardest to fill is our nurses. And that makes sense because there's a national labor shortage as it relates to nurses. And everybody is competing for that talent, but we have made so much progress both on our key 3 community leaders, our executive directors and our health and wellness directors included, as well as our associates. Our associates, we've improved our turnover by 13 percentage points from 2024 relative to 2023. And that was driven by 7 consecutive quarters of year-over-year improvement in retention. And what we've really done to achieve this is we've really focused on the culture. We've focused on total rewards for our associates. We've focused on the onboarding experience to make sure that, once someone joins us, they have that good experience as well as good training and career pathing. And so we're very proud of the fact that our workforce is very stable. And we're making progress on that front.

Great. And then maybe comment on the underlying wage inflation that you're seeing in the market. And now that we're a few years removed from the pandemic, how would you compare the post-pandemic labor market to the pre-pandemic labor market?

Yes. There's no doubt that the wage inflation has been challenging. Particularly, as you just pointed out, coming out of COVID, 2022, we had a very high labor inflation. What we saw in '23 and '24 is we saw that starting to moderate. And then what we -- our expectations were that it would continue to moderate into 2025 but at a little bit of a higher cost than what we have historically seen kind of pre pandemic. One of the things that we focus on is making sure that we are competitive from a total rewards perspective as we're looking at compensation and benefits for our associates.

Great. So moderating but to a level that's above your pre-pandemic historical level of wage inflation...

Yes, [indiscernible], and yes, correct.

Now that you're expecting to be free cash flow positive for this year, how should we think about capital deployment? As discretionary free cash increases must be an exciting topic for a CFO.

Yes. What I'll say is that I'm really excited about the fact that we had positive free cash flow in the back half of 2025. And we're expecting meaningful improvement -- in '23 -- positive free cash flow in the back half of 2024. And we're expecting meaningful improvement in 2025. We're going to continue to appropriately invest in our associates, our communities; and that will benefit our shareholders. One of the things that Dawn and I have been talking about and you'll see a little bit more about is more revenue-enhancing CapEx. And we're really set up incredibly well for that. If you think about all the work that we've done with our lease renegotiations over the last years: Our landlords are funding a lot of the CapEx that we use in our communities. And that will allow us to position our business for success in the future.

Got it. And any other -- are there any desires to expand the portfolio or other -- are most of these expansions you're talking about within the existing portfolio, or are there any other kind of lines that you would look to add?

I think most of the work that we'll do is within our portfolio. Certainly there may be an opportunity at some future point, not this year but some point in the future, to increase the density. And also, looking at our leverage, we'd love to have lower leverage as time passes.

Got it, okay. And then Brookdale has been scaling the HealthPlus VBC program for, I think, a few years now. Can you talk about the adoption rates and interest from managed care? Is the program currently profitable? And how should we think about the contribution from HealthPlus?

I don't really think about HealthPlus in terms of adoption rates with managed care plans. We have HealthPlus in 129 communities today and that is available. Those services are available to every resident in the community, and so they benefit from the RN care coordinator and all the benefits that come through the program. We'll expand HealthPlus in roughly 60 additional communities today -- or this year, assisted living communities. And if you think about HealthPlus communities, we, for the third year now, have had a third-party look at our HealthPlus outcomes. And we've expanded it to include any community that's operated under the HealthPlus platform for at least 12 months. And what we see is residents have 80% fewer urgent care and emergency room visits, 66% fewer hospitalizations. And importantly, on the operational metrics, we see strong performance from attracting residents, from the length of service of our employees and importantly from the financial performance of the communities relative to non-HealthPlus communities.

Great. I wanted to talk about some of the D.C. and regulatory items. We're only 2 months or so into the new administration. Is there anything to call out from a regulatory backdrop? It seems like most of the obviously targeted areas are on the Medicaid and the exchange portion. It seems like your business would be fairly insulated from that, so anything that you're monitoring that could be more impactful to your business?

So 94% of our business is private pay, so we are pretty isolated from most of the changes that are being discussed. What I will say with the new administration is we do expect less regulation and maybe some rollback of regulation of some recent proposals that could be good for us in the small percentage of our business at skilled nursing.

Are you talking about things like the minimum staffing rule, things like that?

Yes.

But that doesn't impact your business...

A tiny [ business ]. We've got about 2% of our business at skilled nursing.

Got it. Okay. And then maybe just finally here, the new EngagementPlus program that you highlighted on the recent earnings call. Could you provide a little bit more color on that program and what you're excited about there?

EngagementPlus is really allowing us to deliver a better resident experience. It accelerates the time that we can spend with residents by helping them pursue their passion -- learn their life story -- make new friends, be engaged. And it's really about individual experiences within a community so that the residents have as much personalized experience as they can possibly have.

Got it. Well, we're just about up on time here, so why don't we end it there? And thank you for joining. And please enjoy the rest of the conference.

Thank you so much.

Thank you very much.