Hello and welcome to the Brookdale Senior Living Fourth Quarter Earnings Release Call. My name is Lauren and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Kathy MacDonald, to begin. Kathy, please go ahead.

Thank you and good morning. I'd like to welcome you to the fourth quarter 2021 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Steve Swain, our Executive Vice President and Chief Financial Officer. All statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date and we expressly disclaim any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as the reports we file with the SEC from time to time, including risk factors contained in our annual report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the release for the full safe harbor statement. Also, please note that during this call, we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information which may be found at brookdale.com/investor and was furnished on an 8-K yesterday. Now, I will turn the call over to Cindy.

Thank you, Kathy. Good morning to all of our shareholders, analysts and other participants. I hope that you and your loved ones are safe and sound. Welcome to our fourth quarter and year-end 2021 earnings call. During 2021, we utilized the knowledge we gained from the first year of the pandemic to begin our recovery. Despite multiple new COVID-19 variants, we delivered 10 months of sequential occupancy growth. As we enter the third year of the pandemic, our focus is to accelerate our occupancy growth and to improve margins. Our associates have my deepest gratitude for their extraordinary leadership, as well as their dedication to and compassion for our residents. During this lengthy, unprecedented public health crisis, our associates' efforts have been intense and they have remained steadfast in their commitment to the health and well-being of our residents. I am also thankful for the trust that our residents and their loved ones have placed in Brookdale. As I reflect on the past year, I am very proud of our ability to rise to the many challenges we faced from the pandemic. We entered the year in a race between COVID-19 vaccines and exponential growth in cases in the general U.S. population. By April, we were celebrating the speed of the vaccine rollout to our Brookdale communities and the effectiveness of vaccinations. Brookdale reported a 97% decline in resident COVID-19 cases in our communities from the peak in mid-December 2020 to the end of April 2021. As you know, the pandemic has been incredibly intense for all healthcare workers, including our senior living associates. Our associates stood strong on the front lines, supporting our residents and each other. That said, the success of the vaccine and the reduction of cases in the U.S. resulted in businesses across many industries reopening…

Thanks, Cindy. There are three key takeaways related to our financial results. First, RevPAR growth. Fourth quarter RevPAR increased 4% compared to the prior year quarter. This was the first quarter with year-over-year RevPAR growth since the brunt of the pandemic. 10 months of sequential occupancy growth in 2021, combined with continued price discipline drove a strong first year of the recovery. Second, expenses. On a sequential basis, lower G&A partially mitigated the higher use of contract labor. And fourth quarter adjusted EBITDA increased 4%. The Third, liquidity. To strengthen our balance sheet, we completed two significant transactions in the fourth quarter. We raised over $200 million from a convertible notes offering and completed a $100 million refinancing of our first quarter 2022 debt maturities. In addition, we prepaid nearly all of our remaining 22 maturities. Now, let me provide context for these highlights on a same-community basis, starting with revenue. RevPOR or rate was approximately 3% higher than the prior year on both a quarter and annual basis. In the fourth quarter, we had similar rate pressure as the third quarter. The impact was partially offset by higher move-in rates for new residents entering our communities. Combining rate with occupancy growth, fourth quarter RevPAR increased nearly 4% on a year-over-year basis. This is significant progress given the multiple COVID-19 waves that hit in 2021. Turning to operating expense. For the full year, operating expense was 0.6% favorable, mainly due to lower COVID-19 costs. The fourth quarter operating expense was 2.2% higher compared to the prior year quarter and 2.4% higher sequentially. The fourth quarter OpEx increase was driven by significantly higher contract labor costs. With the rise of the Omicron variant and a difficult labor market, staffing needs grew throughout the quarter. This drove the use of contract labor…

In 2022, the baby boomer demographics are finally at a point Brookdale dreamed about more than 15 years ago. There is a rapidly growing senior population that requires high-quality needs-based services. Starting this year, we expect more than one million new seniors will enter our target market every year for the rest of this decade. Even before the pandemic, new supply was shrinking. And for the past two years, supply has become a more significant tailwind. In the second half of 2021, NIC reported there were the fewest units under construction since 2015. Throughout the pandemic, Brookdale continued to work with a third-party service to conduct brand awareness surveys. Brookdale mentions are around 2x greater than the next closest competitor among people who expressed awareness of Brookdale without prompting. We also continue to drive our leadership position with our clinical and operational expertise. In addition to these promising statistics, I'm confident Brookdale has the right team. We are focused on what matters most, enriching the lives of those we serve. Throughout the year, I hear stories of our residents' determination to pursue their best lives. This inspires me to continue to push Brookdale forward, to be the best senior living company in the industry. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Tao Qiu from Stifel. Tao, please go ahead.

Hey, good morning, everyone. Cindy, the positive commentary offered today certainly feels like we're turning the page on the pandemic. And this is the first time you've given a full year guidance. The recovery has been on firmer footing since spring last year but there are still many uncertainties on labor and the public health emergency is still ongoing. So what gives you the confidence of providing outlook for 2022?

Tao, thank you so much for your question. We have now been operating in a pandemic for the third year. And so we have a lot of experience in what happens during a COVID wave. We have been very excited that despite the COVID waves during the fourth quarter, we were able to outperform our historical move-in growth with strong performance on move-outs, controllable move-outs. As we look at the market, we do see a very competitive labor market but we're taking proactive steps to effectively manage that. And so for those reasons, we believe that providing guidance is the right thing. And as you can see from our guidance, we're solidly on the path to recovery.

Got you. Yes and thanks for the building blocks for the guidance. My next question is about the long-term margin outlook. Clearly, the margins -- the guidance shows the operating leverage of the business. But when we talk about the industry and Brookdale, when we always refer to the average number, I know that our average margin is down 10 percentage points compared to pre-COVID levels. But at the same time, you also have a 1/4 of your communities above 85% of occupancy. Could you help us understand how margin has evolved for these properties that either haven't experienced so much decline in census through the pandemic or recovering faster? Or how does margin compare to pre-COVID levels today?

Look, the good news is that there's a lot of opportunity for margin expansion. Our business has high fixed costs associated with operating our communities 24 hours a day, 7 days a week, 365 days a year. Steve can talk to you a little bit about what we expect for the future but needless to say, we expect margin growth.

Yes. We do, as Cindy said, expect margin expansion as we scale operations. The expected operating expense improvements will be driven primarily by labor which we expect to improve. We're improving labor by filling open positions, so contract labor and overtime will be expected to decline. And of course, when we backfill a contract labor, outsource associates with a new hire, it's at a lower rate. So as occupancy builds kind of throughout 2020, communities will be covering their fixed staffing cost and, therefore, are expected to drive higher incremental margins.

And certainly, over the long term, we would expect to return to pre-pandemic margin level.

Okay. I'm just trying to understand what the gap today on the more stabilized properties. Obviously, you've got the higher rate increases offsetting some of the labor expenses. Just -- if occupancy is pretty much close to pre-pandemic levels, what's the gap on the margin there?

Yes. I think in the higher occupancy communities, what you have to recognize is that is that we did our rate increase sort of January 1 which took into consideration the labor pressures that would not have been reflected in our fourth quarter results. And certainly, our fourth quarter contract labor was significantly higher than we expect once we get our hiring back to more traditional level.

Great. Tao, we should probably turn on to the next question or the next person who's going to ask a question. Thanks, Tao.

Our next question comes from the line of Josh Raskin from Nephron Research. Josh, please go ahead.

Hi, thanks. Good morning. I've got a question and maybe a follow-up as well. So if I think about the EBITDA guidance for 2022, it's an increase of, let's call it, $110 million or so over the 4Q run rate. And Steve, I want to make sure I heard it right. Did you say labor would increase as a percentage of revenues? And so if so, if it's not labor, maybe I misheard that, what are the major buckets to get that incremental $110 million or so of EBITDA? And how much do each contribute?

Yes, the major buckets, of course, is revenue growth. So RevPAR of 10% to 12% will increase revenue by approximately 10% to 12%. So that's over $250 million. And then -- but kind of looking at expenses, I said that operating expense, on a year-over-year basis, would be up about 5%. So that takes care of kind of NOI margin, if you will. And then looking at G&A on a year-over-year basis, G&A, when you think about kind of some of the building blocks there, will have merit. We will be resetting kind of the bonus and benefits accruals and in fact, going to open positions to more physicians as well as increasing travel a little bit. So hereto, G&As will be up a few percentage points. Did I -- to kind of get you to the EBITDA guidance for 2022 which is, of course, 80%.

Yes. Okay. And then maybe taking that step back. So occupancy got up to 73.5% weighted average in the fourth quarter but that's still 1,100 basis points below where you were at the end of 2019. And today, you've got 22% fewer beds than you did in 2019. So I'm trying to figure out what's a reasonable EBITDA target. I heard Cindy just say you'd expect long-term margins to be back to prepandemic levels. I assume that's in a percentage. So you did $400 million of EBITDA in 2019. What's the bogey? What's the, "Hey, when we get this set of communities back to where we think we can." What's a reasonable number?

So the way that I would think about that is our industry and Brookdale, in particular, has been at that 89%, 90% sort of stabilized occupancy before the oversupply hit the industry. So we're looking at a path to get back to that 89% to 90% stabilized occupancy across the portfolio. We can't provide a time line at this point in terms of when that will happen but that's our goal. And certainly, in an inflationary environment, our goal is to match RevPOR growth with cost growth. And so that's something we'll pay a lot of attention to and that will help us with our margins over the longer term.

Okay. So you're saying well above the 2019 levels, right? And so your expectation would be that supply and new construction wouldn't pick up like it did last time when occupancy got up into the high 80s?

There's no question that we are seeing some increase in new supply this year relative to during the pandemic but there are fewest genus [ph] under construction in many years. And what that tells me is that for the next 18 to 24 months, we have a tailwind of the reduction in supply from the pandemic. It's important to note that there's significant growth in the population of seniors entering our marketplace, with one million new seniors entering our target market this year and every year for the near future.

Our next question comes from the line of Steven Valiquette from Barclays. Steven, please go ahead.

Great, thanks. Good morning, everybody.

Good morning, Steven.

So all your commentary on the labor expense was pretty helpful. I guess, I'm just curious, as a follow-up, whether or not you're seeing any notable circumstances within the overall Brookdale community portfolio, where you've had to turn away any new prospective residents because of staffing issues. Or can we check the box that the potential trend of, let's call it, lost occupancy due to labor shortages is hopefully something that you're generally not expecting to be prevalent within Brookdale in '22 because of your ability to tap into temporary or contract labor across the majority of your communities? Just curious to get your thoughts around that.

Thanks for the question. Let me start by saying there have been two factors that I think about as it relates to new move-ins. And I think the first is when a community is closed to move-ins because of regulatory requirements and that's something that has been a very small issue for us during the fourth quarter and into 2022. The second issue that you asked specifically about is whether have had to turn away move-ins because of labor in our communities and that has not been a significant issue. One of the things that's true about our business is that we have to be staffed and we have to operate 24 hours a day, 7 days a week, 365 days a year. So if we have an opening, we need to call in contract labor. And that is an expensive alternative for us. It can be 2x to 3x the cost of our normal workers. So it is something that we pay attention to but luckily, we have not had to turn away any significant number of residents as a result of labor.

Okay. All right, perfect. Appreciate the color. Thanks.

Thank you.

Our next question comes from the line of Brian Tanquilut from Jefferies. Brian, please go ahead.

Hey, good morning, guys. Just, I guess, a follow-up to Josh's question earlier. So as I think about the components of your margin expansion on the EBITDA guide, obviously, revenue will be the key driver given that OpEx is growing in G&A. So if I'm trying to look, Cindy, at the RevPOR or even, like, RevPAR growth, your RevPOR growing mid-singles -- I mean, how does that compare to the rest of the industry based on what you're seeing? And how are you thinking about the market share gains or the outperformance versus NIC data that you've seen in the last quarter, given that pricing strategy?

Brian, we have always been very disciplined about rate and that's something that's been true throughout the pandemic. From what I understand, the industry recognizes that it's necessary to drive rate because of the inflationary environment that we're in. And so if you look at the public commentary of other operators and of the healthcare REITs you'll see that rate is higher in 2022 than it has been historically. So we think that's something that is very good. Now, the opportunity that is unique to Brookdale is we have more upside in our portfolio. And if we can continue which I believe that we can, that sequential occupancy growth, that will give us significant leverage. If you think about sort of 2022 and from March low to December, we grew occupancy 420 basis points. And certainly, we've demonstrated that we can have a long run of occupancy growth. And so as we do that, our shareholders will be rewarded by that 10% to 12% revenue growth which will drop to about an 80% improvement in our EBITDA -- adjusted EBITDA during 2022. And then we'll continue to grow from there.

Got it. And then, I guess, for Steve, you burned $139 million of cash during the quarter. I get that some of that is paying back money to the government. But how should we be thinking about your visibility into stabilizing cash flow? And I know you've got ample liquidity but $139 million of cash burn is something that we're watching. So just curious on your thoughts there.

Yes. Thanks for the question. In the fourth quarter, we had a significant use of cash due to working capital needs. For instance, we paid back $35 million of carriage funding that we received in 2020. So the -- that was kind of onetime in nature which was the kind of the majority of the working capital needs in the fourth quarter. The momentum we had in 2021, 10 months out of sequential occupancy growth, we believe that momentum and the rate increase in 2022 as well as the occupancy growth that we're seeing are -- projects to see in 2022 will drive sizable EBITDA growth, as we've talked about. So by the end of 2022, we expect to have significantly reduced our cash needs from the operations. Bottom line, cash flow and liquidity are certainly a priority and we'll continue to take proactive steps as well as driving and executing on the core business.

All right. And then a quick follow-up for me, either for you or Kathy. Just thinking about your interest rate exposure, how should we be thinking about the exposure to variable rates and -- as we think about rates going up in the next few months?

So our debt is 62% fixed and 38% variable. The average rate of our variable debt is low, 2.4%. If the 30-day rate increased by about 100 basis points, the annualized interest cost would be $15 million or so. But remember, we paid off our only high interest rate loan in October and prepaid substantially all of our remaining 2022 maturities which is saving several million dollars of interest expense. So currently, on a year-over-year basis, we expect a relatively flat interest expense in '22.

Awesome. Thank you.

Thanks, Brian.

The next question comes the line of Joanna Gajuk from Bank of America. Joanna, please go ahead.

Hi there, this is Courtney Fondufe on the line for Joanna. Thanks for taking the question. So I guess just the first question, you guys gave a lot of really helpful labor commentary and you were saying you made adjustments at the market level for the rates you are paying. What was the underlying cost inflation that you saw when you made those adjustments? And I guess what are you expecting for 2022?

It's good to hear from you. As we went through the labor rates, it varied by market and it varied by position. Certainly, as you would expect, we have seen more inflation in our nurses than our other positions. But then when you look at caregivers, med techs, CNAs and dining staff, you've seen sort of more labor inflation there. I think we've seen more labor inflation at the hourly worker level than we have at the salaried worker level but it has been something that we've paid attention to. And it's a pretty dynamic market, so we're going to continue to keep our finger on the pulse during 2022. We are going to make adjustments as appropriate. And then, of course, we're going to focus on the things that we can control outside of wages which is really, the culture, the career development, the learning opportunities so that our associates can really live their best lives as well.

Okay, super helpful. And then I guess on that line of rates, you guys mentioned that you did introduce the rate increases in January in Q1. But did I hear correctly that you said you didn't get much pushback from residents? And could you speak to why?

Look, one thing I will say is that our executive directors have done just an amazing job about talking to our residents about the rationale for the rate increase. Our residents care very much about the associates who support them and want them to be paid a fair wage. So given that a lot of the rate increases is driven by inflation and labor costs, that was obviously part of the explanation to our residents. And we have not seen a material increase in attrition of our residents base as a result of the wage increase. So that has been very positive. And as you know, most of our in-place resident rate increases occurred in January and we had to give notice to them in the fourth quarter of 2021.

Okay, perfect. Super helpful. And then last question for me. Just one thing on the guide. You guys said you expect development CapEx to grow to $20 million. I think it was just $3 million in 2021. So just what projects are you guys assuming in that guide?

Well, quite honestly, we have a large pipeline of Program Max, program projects that redevelop our communities. Often, it's conversion of units from assisted living to memory care or repositioning the community within the marketplace. So there are a wide variety of projects that are teed up, not all of which we will get to in 2022.

Got it. Thank you so much.

Thanks, Courtney.

Our final question comes from the line of Ben Hendrix from RBC Capital Markets. Ben, please proceed.

Thank you. Just a quick question back to the labor. And just wanted to get any indication or any data points you can provide around the magnitude of net new hires that you completed in December and January and kind of how that -- how do you expect that pace to continue through the first quarter?

Yes. So we had increasing progression on net new hires in October, November and December. And in January, we did even better than the fourth quarter. So it's going to take us a few months to get our net hiring to where we want it to be. But needless to say, we're making great progress and I'm incredibly proud of the work that the team is doing to attract, engage, develop and retain all of our associates.

Appreciate that. But I -- is there -- you can't offer like a percentage increase or otherwise, in terms of magnitude?

It's in the hundreds that we are net positive in terms of hires in the hundreds.

Thank you very much.

Thanks, Ben. I want to thank you for your interest in Brookdale and for joining us this morning. This concludes our call.

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