Brookdale Senior Living Inc. ($BKD)

Good morning, and welcome back to the Barclays Global Healthcare Conference. We're pleased to have on stage Brookdale Senior Living, and with me is Nick Stengle, CEO; and Dawn Kussow, CFO. Welcome.

Good morning. Thank you, Andrew.

Good morning, Andrew.

Nick, you've been in the CEO role for about 5 months now. For those who may be less familiar with your background and Brookdale, can you share what drew you to the role and how you're thinking about the opportunity in front of you?

Yes. No, I appreciate Andrew. So as you look at my background, I'll share maybe the 30-second or 1-minute summary. It's been underpinned truly by leading people towards achieving a mission, started very early in my career. So I was in the military. I was an officer of fighter pilot. I did that for many years. Very quickly transitioned to hospitality with Marriott Global Operations, a restaurant -- large restaurant company, about $3 billion in revenue where I laid operations for that across 1,600 different restaurants. Then stepped into the health care space, where I led operations for the largest home health company and then shifted to the largest hospice company, so very much on the senior side of the health care spectrum in the post-acute care space. And I was also the COO of Sunrise Senior Living, a privately held fairly large kind of top 5 operator of senior living. So I think as you look at the kind of the dots across my career, it's always been about operations, very much in the COO type role, leading operations, leading people, really managing and owning a P&L and income statement fundamentally from the revenue through the expenses to generate NOI in this case. So that's kind of the underpinnings and a large part of why I've come to Brookdale. The story of Brookdale as it evolves is becoming more and more an operating story. And one of the points that we've, as a team, Dawn, myself and the management team is pivoting towards this idea that we are, first and foremost, an operating company that's built upon a foundation of very scarce real estate. But the way we maximize the value of that real estate is as an operating company.

Great. And when you took over the role, I think the stock was trading at around $8. It's now north of $14.50 today. So clearly, the market is acknowledging that opportunity. What are you doing operationally to ensure the organization stays focused on execution and delivers against its promise?

Yes. It was $8.02, by the way.

I knew you would know it.

I happen to know these things. So first, me, so new CEO, obviously, an operating background, and that was by no means an accident. That is truly part of kind of what the Board was looking for in the interview process and my own vetting was this idea that there is real value there. But then very quickly, we did announce hiring a COO, first COO we've had in nearly a decade at Brookdale, which for a company that's 30,000-plus employees spread across 41 states, 500-plus, 550-plus communities, it just kind of begs this idea of having a COO where we have a leader that wakes up every morning that is 100% focused on driving move-ins, driving retention, driving employee turnover, all those metrics. So that's one very key part of the strategy is really just clarifying the -- connecting the dots from the management ranks all the way down to multiple hundreds of communities. Part of that -- and again, sometimes it gets lost in meetings like this, but I cannot overemphasize enough the importance of our regional structure. And I mentioned it on our first earnings call I did back in November when we released our Q3 numbers and talked about it quite a bit at our Investor Day is this regional structure. So yes, we are the largest operator. Yes, we are the third largest owner of senior living real estate. But the reality is sometimes being big can be problematic when it comes to what happens across every individual community in every single market. So the structure we now have is one where we can leverage our scale, leverage the depth of knowledge, expertise, the functional centers of excellence we have, whether it's dining or facilities management, whatever the case may be. But then the reality is we have to win or lose within what happens within the 4 walls of each community. So our regional structure truly sets us up with clarity organizationally how that works. And just to be clear, we have an individual, 6 of them, VPOs. Other companies might call them presidents, general managers, we happen to call them BPOs. Just recently, as in the last few days, we now formally have sales reporting to that VPO at the regional level. We have the clinical team reporting the BPO at the regional level. We then in turn lead a district team and then in turn lead their communities. So we, in effect, have become a company of 6 smaller companies with a regional team that runs their portfolio. Again, sometimes things like this get lost in the nuances, but it's an absolutely critical component in defining the culture of the company, first and foremost, organizationally.

Excellent.

And actually, let me add one more thing, Andrew, sorry. We also hired just recently an SVP of Strategic Operations. Again, sometimes things like this get lost in the mix, but it's a new role. And as a company, we sometimes get beat up by G&A as a percent of revenue. I will tell you, and this is an incremental role, brand-new role at the Senior Vice President level. And I feel so strongly -- we felt so strongly that it was an appropriate role because we're going to consolidate pricing, our pricing analytics, our pricing reporting and our pricing implementation under this individual who, by the way, did it also at Sunrise in a very successful fashion. And then more importantly, we're going to bring all our CapEx deployment under the same role, where instead of a kind of an allocation methodology where it's more capital allocation in previous years, it's more programmatic capital deployment driven out of the team that is led by the Senior Vice President of Strategic Operations.

Great. So bringing over some talent that you've worked with, it sounds like in the past, new organizational structure. Can you tell us how much time are you spending with each of these or divisions within the company? I know you were on the road a lot over the last few months.

Yes. So I started on October 6, it was a Monday. That Tuesday, I visited my first community happened to be in Nashville. So it was a short drive. The very next week, I did a bunch of investor tours in New York, Boston meeting many of our investors hearing from them directly. And then I spent the next, in effect, 3 months going out visiting communities, doing roadshows. And unfortunately, I cannot touch that many communities. I do have a goal, internal goal, to eventually be in every one of our communities, but there's going to be 517 of them, and I'm only visiting maybe 50 or so a year. So it's going to take a while. So maybe I'm on a 10-year trajectory, I guess, what the math indicates. But the real cool thing is we get to bring all the executive directors. So we were in Kansas City, we were in Denver, we were in Dallas, and we were in Charlotte. I'll be in Dallas next week, New Jersey, the week after that, where we bring all the executive directors from the market, call it, an hour or 2 drive. So I've now met in person about 150 of our executive directors. Virtually, I've met all of them multiple town halls. In fact, we just had one last week announcing a lot of our more recent organizational changes around sales reporting to operations. And the real point I want to emphasize this is we, as a company, firmly believe, and I think many of our peers would argue the same that the Executive Director is the most important role. I'm here standing in front of you as the CEO, but I will tell you, the executive directors are the most important. We have over 500 of them. So the success as a company is defined by the success across every individual community. So our job, my job, Dawn's job is to make sure that Executive Director is fully empowered. They have the right training, the right resources, the right support, the right reporting and also the right level of accountability put on them. And me, Dawn, being out there with our management team, meeting with our executive directors in person has been absolutely critical in changing this mind shift of being more offensive in nature.

Great. And taking a step back, one of the most compelling elements of your story is the secular demand tailwind, right? Baby boomers are just beginning to age into the 80-plus age cohort, while new supply and inventory growth has moderated to below 1%. So fundamentally, why do you think new senior housing supply hasn't kept pace with demand? Is it interest rates, construction costs, other structural factors? And then looking ahead, what do you think needs to change for new construction activity to meaningfully increase?

Yes. So I mean, Andrew, I think it's all of that. It's the cost of capital, cost of materials, cost of labor, which is directly tied to the availability of labor. I mean all of those things really stifle the ability to invest, which then, in turn, creates -- the need to get a return creates price points for customers that potentially are out of reach. In fact, some companies that do a lot of development, which we do not, they're basically indicating they need to see pricing increase by 20%, 30% from present day rates to justify the investment of today. So those are all very real dynamics. The other part of it, there was a big boom in supply that occurred in 2015, '16, '17, which was a little premature in anticipation of the Silver tsunami, which now is fully upon us. But back then, that many years ago, a little premature and many folks got burned and they remember that very clearly. So I think there's a little -- still a little trepidation. The other part of it is senior living development and construction is very specialized in nature. It's not quite as easy as multifamily and other kind of residential type structures. For sure, it's what happens within the 4 walls, the kitchens, the activity. So there's that part of it. But the other interesting thing is, and I got to very clearly at Sunrise because Sunrise does do quite a bit of development. The entitlement and zoning component is far more challenging. It takes a much bigger lift to convince whatever local authority allows you to build where you want to build, which is typically close to residential. So typically, cities and other developers that are not in this space want you to be kind of far away. That doesn't work for customers, the senior living customer, they want you to be close into the commercial residential aspect, and there's a push-pull there. So it will take 3, 4, 5 years from when you identify a piece of dirt that you have bought and think is an amazing senior living community to when resident #1 can move in. And that's the other part. This is not only is it hard to begin a project today, even when you do, it takes a long horizon before resident #1 comes in. So I'll tell you, I mean, eventually, I do believe the supply-demand dynamics will drive more growth in inventory, but it's definitely not happening right now. And even if it were to happen, the capital rushing in today, it's not going to be another 5 years before it shows up. So we feel pretty good about that dynamic for sure. And let me add just one more thing. The other reality is -- sorry, the other reality is for projects that are opening up today, the price point is so much higher than where we compete. So it's almost of a different customer. So by no means would I ever -- am I excited if a competitor opens up right across the street from an existing Brookdale. But the reality is we're chasing a different customer set because that new community is forced to drive a price point that's far higher than what we require to make our returns appropriate.

Great. It sounds like a lot of competitive moats on multiple levels there. With that backdrop, I think it's pretty clear the direction that occupancy is headed for the industry. What are the key factors that will dictate the pace of your occupancy gains and whether or not Brookdale outperforms the broader industry?

Yes, I think the key aspects of our occupancy growth is certainly going to be the same key aspects that underpin our multiyear model. We came out with a multiyear guidance that said we would deliver mid-teens adjusted EBITDA growth over the next several years. And the key things that we look at and we model out is really the leveraging of the supply and the demand. We're at this precipice of this where demand is going to very soon outpace our supply. So we just have to make sure that our targeted efforts towards driving our occupancy in the markets that we're in, that we can capture that demand in those markets. It's going to be the getting critical mass at the market level. And so one of the things that we've been talking about is not only having our EDs and having our HWDs and our salespeople selling at the community, but selling within a market, looking at our industry or looking at our communities at a market level to make sure that we're cross-selling within the market. So if a resident isn't a good fit for our community A, maybe it's a good fit for a community B, and we're putting that resident into community B. So it's really prioritizing markets, winning at the market level. And then I would just say the last thing is really operationally -- operational excellence. It's one of our key cornerstones or it's one of our key priorities. Nick just talked about 2 key roles that he hired, the COO that he brought in and then the SVP of Strategic Operations. So kind of pricing and CapEx deployment and doing all of that more smartly. And then that way, we can leverage things at the community level with the key 3 in our communities, but then we can also leverage our corporate structure, rolling out our Health Plus and making sure our Health Plus is in our communities, leveraging our marketing, making sure our marketing spend is being strategic within markets. And then we're also getting the biggest benefit for our dollars. And so just really operational excellence is where we've been focused, and that will be one of the key factors.

You just released the February occupancy update. I think total occupancy was 82.1%, up 280 basis points year-over-year, down 20 basis points sequentially. I think the same-store metrics might have trailed that a bit. Can you talk a little bit more about the recent occupancy trends, what's impacting those items?

Yes. So there's real seasonality in the industry as much as it is in our company. So going back from 2013 to 2020, so kind of a pre-COVID era when occupancy was more or less stabilized as an industry, for sure, more or less stabilized at Brookdale, the sequential occupancy from January to February on average was a 30 basis points drop -- 30 basis points. So put the number in your mind. Since COVID, obviously, a little bit of a rebound. So removing the COVID years, a lot of noise, obviously, around the months of January and February. But when you look at 2022, 2023, '24, '25, it was a 10 basis point drop from January to February. We just reported a 20 basis point drop. So for sure, there's a seasonality component. And I would argue what happened this year kind of falls well in line within that 30 when it was stabilized when the occupancy rates were roughly where we are today as compared to where the rebound was, again, still a drop despite the rebound. So we're right in the middle in our February results. The other part I'll throw out in, I mean, it's undeniable. These snowstorms, the ice storms through Texas, through Tennessee, the massive snowstorm that went up through Massachusetts, Rhode Island, which we have meaningful impact, by the way, in all those states, definitely clipped us a little bit. But the nice thing about our industry, especially the segment that we're in, assisted living memory care, it's nondiscretionary. You really can't defer it much. The alternatives are great. So the move-ins that would have occurred in January or February, the tours that would have occurred in January or February will still be there. It's not perishable. It's not like that customer disappeared and found an alternative because the entire market was impacted. So we feel really good despite the storms, kind of that will work out. The other thing I do want to share, we pushed a pretty meaningful rate increase on January 1 this year, far more than we did in 2025. And even though it's a fairly inelastic decision, and it's a very sticky purchase decision when you go into senior living, it's not perfectly inelastic. So our move-outs have increased ever so slightly. But again, we feel really good about the economics of that in-place rate increase, the overall economic impact that will have kind of in a longer-term game and by longer term over quarters as opposed to looking at these month by month by month numbers.

Right. Can you give us a sense for the variation of the pricing actions that you took? You mentioned centralizing that function to a specific person earlier. Just what sort of variation do you see play out?

Yes. So pricing -- so I was at BCG, I didn't mention that when I was doing my little career recap. I was at BCG for 3 years, and one of those 3 years was exclusively a pricing project, most remarkable. I mean, I learned to value the analytical rigor and the financial impact pricing can have, both from the overall purchase decision and for sure, for the unit economics of that purchase decision. So the real point that we are kind of leaning into for pricing is, first, by centralizing, provide more analytical rigor. And the interesting we think with pricing is implementation execution matters even if you have the best analytics. If you give freedom on the execution, it can be all over the place. And unfortunately, we've had a little bit of that where it's more organic in nature, how we implement. By centralizing, we can have a tight process where we monitor and report on the actual execution. For sure, that's part of it. The other interesting thing is in pricing, you want to start disaggregating things very quickly, and I don't want to make this super academic. But let me give a real example that I think many of you will understand. So we will look at occupancy, right? We talk about a headline number, you just shared a number. But the reality is occupancy matters by type. So it's AL versus memory care versus IL. That matters because the purchase decision is very different. So if you're occupied 100% memory care, but 70% AL, it's a different customer set. So you have to acknowledge that. And then even more importantly, it's by unit type. So studio versus a 1-bedroom versus a 2-bedroom. And we have situations where our 2 bedrooms are 100% occupied. Our studios are 50% occupied. So with better pricing analytical rigor, you can make different decisions to drive occupancy where you have that availability maybe at a meaningful discount, all the while putting the person on a waitlist for the 2-bedroom, which is really where they want, but get them into the community. We can position the pricing where it makes sense. And then as soon as the 2-bedroom is available, they're at the top of the waitlist to then transition to the 2-bedroom at a higher rate. So those are the types of things where a very well-operated community would naturally do, but you're relying on an organic nature of that with a good well-run-up community and not all of them obviously are A++. So by centralizing that, we can help modify and guide that a bit better.

Great. All that makes sense. Moving on to capital deployment. Community CapEx embedded in this year's guidance is running at roughly $3,500 plus per unit, a meaningful step-up from about $3,000 per unit over the last 3 years. What's driving the acceleration in reinvestment now? And how does your current approach to community CapEx differ from the strategy you've pursued in recent years?

Yes, I'll make a couple of points, and Dawn, please fill in. So last year, 2025, we spent a net of landlord funding, $175 million of CapEx. We received another $30 million, if I recall correctly, of funding from our landlords in our triple net lease portfolio. This year, our -- it's not guidance per se, but we put in our 10-K, $175 million to $195 million. But as you pointed out, on a lower unit base, so the per unit number does increase because it's kind of a compounding math there. The real point is we have proven that you can get a very handsome return if you invest capital in a meaningful, deliberate, purposeful way. In the past, our capital deployment has been a little bit more of a capital allocation game, and I think I mentioned that earlier, where this community based on size, gets $50,000; this community is a larger one, so it gets $300,000. But we lose sight of the fact that, that bigger community might be 95% occupied. So we will kind of allocate -- we would have allocated a bunch of money because the size of the community sort of implies and needs it when the reality is the incremental NOI we would generate would not be that great because it's sort of 95% occupied. So the real point is going forward with our capital deployment, it's more capital deployment, it's more programmatic, it's more packaging it and spending the money in a more deliberate way such that, first, we have a pro forma, we have a return expectation. We monitor that return expectation. And through the SWAT team process that we've been talking about, we've proven that it works. We can get occupancy to go from 70% to 90% with a well developed capital deployment plan, which is exactly what we're leaning towards.

Yes, I would say that exactly what Nick said is that the SWAT teams that we've had, we started doing more capital deployment. We talked about first impression or fresh impression CapEx last year and the year before. Now we're adjusted free cash flow positive for the full year. So we do have capital to deploy. And the fact that we have all of this organic growth and we have all this organic opportunity in front of us, the fact that we can go out, deploy capital, invest in our communities and get a high return for those projects because we're doing it smartly is absolutely the reason why we took our CapEx number up a little bit.

And the run rate -- again, I don't want to do multiyear projections, but the run rate feels about right. So $175 million, $195 million, that feels about right. But we're always going to be looking at a project-by-project pro forma-based review of the return we expect, and we will monitor that and make adjustments as necessary.

Great. And in addition to the higher CapEx, you've also signaled a more offensive approach overall to M&A. Can you talk a bit more about the acquisition pipeline? And what are the characteristics you need to see in terms of strategic fit, return hurdles in evaluating potential deals?

Perfect. First, I'll take the disposition side of that answer. So we've been communicating our go-forward consolidated footprint, consolidated being our leased and owned communities, which we own the NOI for 517. That's the number, and we'll -- we should be there by the end of Q2. We do have a handful of dispositions. We're still working through a bunch of LOI. So that pipeline is working out very nicely as we'd expect, getting great proceeds. So -- but we're done, and that's the real point -- like we're not going to do any more large again. In fact, let me pause for a moment, very dangerous in the business world to be principal and use words like always and never. So I won't do that. But we are pretty much done. We feel really good about the portfolio we now have. At the peak, we were 1,150 communities. This is going back now 10 years, have been rationalizing it down. We have now picked the communities we feel we can win with. And the ones we are disposing of are ones that somebody else can win with, and we're not competing with. They're not worth the effort, very small, underperforming, et cetera. But then the flip side is on the acquisition side. I don't think we made an acquisition in years. Obviously, a lot of reasons why that is. But we are now truly in an offensive posture, and we are looking to fill our bingo card. In fact, I'll put in a pitch now. If you did not listen to our Investor Day that we did at the end of January, if you're in this room or listening in, I do recommend you take a look and go beyond just the transcript and maybe the slides. Do take a look at the video. I think Dawn and I and Mary Sue, our COO, shared a lot of the specifics even more than I'm about to share. But the point is we are looking to win in markets and fill our bingo card. We're looking to make targeted acquisitions where we have a void where we already are. We're in 41 states today. We are not looking to be in 42 states or 43. That is not our growth strategy. We're not looking to be in our 81st city or 82nd city. So take markets we already exist in. We know the market, we do well, but there's a void. Typically, it's a geographic void. It's a part of the city we're not in. Sometimes it's a care type void. We don't have enough memory care. We're looking to make small acquisitions by small 1, 2, 3 communities in a market to fill that void. So that's kind of the approach.

Great. And lastly, I wanted to touch on the expense side of the equation. As occupancy continues to improve, can you remind us how much of your cost structure is fixed versus variable and how that might differ between the independent and assisted living facilities?

Yes. If you think about the cost structure, our cost structure, 65% of our cost structure is labor. And so the breakeven point or the fixed cost structure in the IL, AL memory care is going to differ just by product type because you have more labor in kind of that AL memory care product type. And then it also is going to be variable based upon the size of the community, the location of the community, the acuity levels. All that we said, it's going to vary significantly when you think about -- or not significantly, but different from buy your product type. So if I think about our AL product type, it has more labor than our IL product type. And so generally, I would think about that breakeven point to be a little bit higher than what it is in the AL. But all to be said is that labor costs are very important. If you look at our occupancy, we are well over that breakeven point. We've been cash flow positive, and we're looking more at that incremental margin and that incremental flow-through.

And where are you seeing the greatest inflationary pressures? And what are you doing to manage those today?

We actively manage expenses. We're looking at our labor costs, our labor rate per hour, the hours that we're putting in. But we are also seeing our labor inflation moderate. So with labor being the largest portion of our cost base, we're happy about where our expense base is and what the expectations are. If you think about things like real estate taxes, utilities, food, supplies, some of the other larger costs in our other expenses, really a 1% inflation in those is really not going to be as material as if you had a higher labor inflation. But again, with labor costs moderating and labor inflation moderating, we're happy with where our cost base is.

Great. Well, we're out of time. So Nick, Dawn, thank you for participating today, and please enjoy the rest of the conference.

Excellent. Thank you, everyone. Thanks, Andrew.

Thank you.