Hello, everyone, and welcome to the Brookdale Senior Living First Quarter Earnings Call. My name is Victoria, and I will be coordinating your call today. [Operator Instructions]. I'll now pass over to your host, Kathy MacDonald, to begin. Please go ahead.

Thank you, and good morning. I'd like to welcome you to the First Quarter 2022 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 the factors that could cause actual results to differ are detailed in the earnings release we issued yesterday as well as in the reports we file with the SEC from time to time, including the risk factors contained in the 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 you and your loved ones are healthy and happy. Welcome to our first quarter 2022 earnings call. We are pleased to report revenue growth in the first quarter, continued strong recovery indicators and significant achievements against our 2022 priorities. COVID-19 continued to play a role in the first quarter with the Omicron variant causing of pandemics highest feet of U.S. cases today. For Brookdale, thanks to the hard work of our associates and a concerted effort to learn from and advance our mitigation and prevention efforts. We continued our strong infection control. Indeed, over the past 2 years, we've gone to great lengths to learn how to navigate the challenges of COVID-19 using highly effective tools to help protect our residents and reduce cases in our communities. With second booster shot approved for seniors, our clinical team diligently and promptly work to schedule clinics for our residents. We've made good progress and are working to complete these clinics for all of our communities as soon as possible. Moreover, with the increased worldwide awareness of viral infections and the related impact on seniors, coupled with our community's strong infection control, the impact of seasonal flu has been low in 2022. I am grateful for our associates who continue to go above and beyond to make the health and well-being of our residents, their top priority. Our business depends on people taking care of people, and I am so thankful for the leaders within Brookdale who make our caring culture a reality. As I have mentioned, we have already made great strides on our 2022 strategic priorities. Our first strategic priority to get every available room in service at the best profitable rate is directly linked…

Thanks, Cindy. Let me start with 3 key takeaways. First, RevPAR increased 11% in the first quarter compared to the prior year quarter. This growth was from the compounding effect of both a strong 5% net rate increase and a nearly 400 basis point occupancy increase through March. We are pleased occupancy momentum continued in April. RevPAR on a sequential basis increased 5%, mainly driven by the January 1 rate increase for in-place residents. Occupancy was nearly flat, representing much better performance compared to a pre-pandemic first quarter seasonal decline. Second, expenses. On a sequential basis, facility operating expenses were 5% higher. However, contract labor was slightly lower. The rate increase mitigated higher operating costs resulting in a sequential adjusted EBITDA increase of approximately 4%. Third, there is a significant top line growth opportunity given the favorable supply-demand tailwinds, with growth of our target population for the rest of this decade and a relative decline in new senior housing units under construction, the runway for strong revenue growth is compelling. Now let me provide context for these highlights on a same community basis, starting with revenue. Occupancy was 390 basis points better than the prior year quarter and nearly flat on a sequential basis. The sequential result is outstanding when you consider the pre-pandemic context where the first quarter occupancy generally declined sequentially by approximately 80 basis points. RevPOR or rate was more than 5% better than the prior year quarter and on a sequential basis. Combining the occupancy and rate growth, our RevPAR grew 5% on a sequential basis and 11% on a year-over-year basis. Turning to operating expense. Starting with labor on a same community basis, the first quarter labor expense increased nearly 4.5% sequentially. The key drivers of the sequential labor increase were, we realized a full…

I continue to strongly believe in the long-term opportunities for senior housing and thus, for all our valued stakeholders. As I mentioned earlier, we are a learning organization. We took what we learned from the first year of the pandemic to drive a strong recovery in 2021. With that enhanced knowledge, in 2022, we are committed and believe we are well on our way to executing with excellence against our strategic initiatives and improving our performance on an accelerated pace.

Victoria, we are ready for questions.

[Operator Instructions]. And our first question comes from Brian Tanquilut from Jefferies.

Just a first question for me. I guess, Cindy, as I think about your EBITDA performance for the quarter, I look at the historical trends where normally Q1 represents roughly 25% of the annual EBITDA. But obviously, we're in different times. So maybe you can just help us bridge from your Q1 performance and how you gain confidence that you can hit the full year guidance for earnings?

As I think about our guidance for the year, without giving sort of individual line item guidance, I think this is a good way to think about it. If you think about our first quarter, we had $37 million of EBITDA, and you multiply that by 4 quarters. But what that doesn't include is the build in occupancy. And so if you look at the occupancy gain in the middle of the range, the rate is already sort of baked into the run rate. And if you think about what we said previously, we're expecting occupancy growth, at least as good as last year. So that's the biggest part of the ramp between our first quarter results and where we expect to end the year. Second, we expect to lower our net labor cost. And really, when you think about this, both Omicron and the intensely competitive labor market resulted in us using more contract labor in the first quarter than we historically did. Now it's improved in the fourth -- from the fourth quarter, but it was still elevated. And so we're expecting our contract labor to come down sequentially with most of the improvement in the back half of the year. And so we'll have less contract labor, which is 2 to 3x as expensive. That will be offset by our merit or annualized market adjustment and the variable staff increase with higher occupancy. So the third thing is lower COVID expenses. And if you think about the $10 million of COVID expenses we had in the first quarter, that's higher than we normally have. And given sort of the experience that we've had with COVID, we would expect that to be less throughout the year. Perhaps half is much less. And so if you think about all that, that will get you to the middle of the higher-end range. The last thing that I really want to highlight, and this really sort of gets to the contract labor issue, it's just the progress that we've made on net hires. We have improved the number of Brookdale associates every single month since November, and that includes all the way through April, which isn't part of this reporting period. And sort of Q4 to Q1, our net hires doubled. Now why that's important is if you think about net hires, it takes a little while to get them on board. And then they have to be trained. And while they're training, essentially, you have to pay the worker to train. And at the same time, you have to have that contract labor, which is 2 to 3x is expensive. So that should help you understand sort of how we see our first quarter results bridging into our guidance for the year.

Appreciate that color. And then I guess my second question, Cindy, as I think about a rising rate environment and potential recession on the horizon, maybe if you can share with us your thoughts on the experience that Brookdale had in the past on what that does to your business, both from a move-ins or an interest level perspective? And then maybe just as you look at your maturities coming up, how you're planning around a rising rate environment?

A rising rate environment. I think the thing that we are encouraged by is that this year, our residents got their highest increase that they've had in social security for a while, almost 6%. And that gives them increased purchasing power. We always focus on making sure that we're providing value for the services that we offer. And that's something that's incredibly important. Now we try to forecast what our costs are going to be before we do our rate increase. And what's good for our residents is they have a consistent monthly expense every month. And in some ways, that's much more comforting than people who are seeing sort of massive inflation and gasoline prices or food costs. But really, we do pay a lot of attention to affordability. Steve, I'll turn it over to you now.

Yes, you bet. So at the end of Q1, roughly 62% of our debt was fixed and 38% variable. So the interest impact of increasing rates in the company for every 100 basis points of LIBOR or so for leads to an annualized interest expense of approximately $15 million. Looking at the current yield curve, which changes frequently, we estimate interest expense will be roughly $10 million higher than 2021. Just for context, even with the higher 2022 interest expense, our debt interest is still $20 million lower than it was in 2019. And I think you asked about maturities. We implemented our positive refinancing plan in 2021, where we don't have any remaining 2022 maturities. And we don't expect our 2023 maturities, a little over $200 million to be a net use of cash.

And then last question for me. As I think about seasonality factors and occupancy, how are you planning around that? What are your expectations? I know it's a little different this time around. But just thinking about this for modeling purposes. And I know, Cindy, in the past, you used to give statistics on inbound calls and inquiries and conversion. Maybe you can just share any color on that.

Yes. Let me start by saying I was completely pleased with our first quarter performance on move-ins. If you think about sort of our normal pre-pandemic seasonality, what we would have expected to see is about an 80 basis point decline between Q4 and Q1, and we were nearly flat. So that was just fabulous from my perspective. Now if you look at sort of our seasonality, what you've seen is since March of 2021 to April of 2022, we built 450 basis points of occupancy. And we certainly do expect that our occupancy performance this year will be at least as good as last year. And in the second quarter, we think, even stronger than the second quarter of last year. What we're really seeing from the inquiry side, on inquiries, they are about 6% higher than our 3-year pre-pandemic average, which is really good. Our resident move-ins are about 3% higher. So we're seeing a very encouraging outlook. And I think that relates to the fact that we now have 1 million new seniors entering our target potential market this year, every year for the next decade. And at the same time, we're seeing that the pandemic impacted demand. And so we've got a bit of a tailwind from the slowdown in construction as a result of the pandemic.

Our next question comes from Joshua Raskin from Nephron Research LLC.

This is actually Marco on for Josh. Based on our math, it looks like the midpoint of guidance implies an EBITDA margin of about 9.5% to 10%. In light of the current debt levels, it appears that margins would have to increase significantly, perhaps even double to reach a more sustainable level of leverage. So as you think about the levers to get there, should we expect to see this accomplished primarily through higher occupancy growth? Or do you think that rate can outpace cost growth and be a driver as well in the next few years?

Absolutely. There is no question that our leverage is impacted by the pandemic and the impact of the pandemic on our adjusted EBITDA. As I explained to Brian, I do think that the occupancy gain is a significant factor that will improve our leverage, particularly as it has a very strong rate associated with it that we saw. Second, we expect to improve our labor costs as we go throughout the year, and that will also improve sort of our bottom line leverage. We're always focused on making sure that we are creating an attractive value proposition for our residents. But we do have a lot of built-in leverage in our communities based on the occupancy rate. So as our occupancy goes up, our overall margin rates will improve. And that will help leverage.

And then if I could just ask one more quick one around contract labor. Other than your associates quarantining were there any other drivers for the uses of their contract labor in the quarter? We're just trying to understand how much of the contract labor pressure is directly COVID-related?

Absolutely. We are focused on increasing the number of associates that we have in Brookdale. So that is something that we started in the fourth quarter of last year with great progress for every month since November. So we're looking to increase the number of associates we have. Quarantining was absolutely a factor. We did have extra labor costs associated with Omicron during January and February in particular. But what I think we're really focused on is making sure that we have enough associates so that they've got the flexibility to take the shifts that they want, and we've got adequate Brookdale associates who can do that. So I think those are really the 2 things that we really focus on. And of course, the general market environment is something that we always pay a lot of attention to. It's been widely publicized that nurses are in very, very tight supply. And so that's one area where we use contract labor more than other places.

Our next question comes from Tao Qiu at Stifel.

I wanted to follow up on another part of the guidance, which is in the top line. It sounds like we are seeing earlier occupancy deal than previous years and also second quarter is expected to be stronger than you step up last year. And just thinking about the general -- the competitive environment, I think last year, operators are offering many concessions. Do you expect you and your competitors to be less promotional going through the strong leasing season given the strong demand so far? And does that make you more optimistic than you make that to the top range of that 10% to 12% outlook?

We are really happy that our occupancy has turned positive and inflected positive earlier this year than in our past. Historically, what we would see is occupancy decline until about April or May, and then it would inflect and turn positive. So certainly, what we're seeing is improvement there. What we're really also seeing is the price competition in the market is less than it was, it's the height of the pandemic, and we're seeing less discounting. I think that reflects the fact that the occupancy in the senior housing industry is rebounding. And I also think that reflects the recognition that there's inflation in the market. And so it's really unprecedented [Technical Difficulty] that we would be able to grow occupancy and put in an above-normal rate increase. And so we're feeling pretty good about top line growth.

My next question is about the partnerships. You guys brought HCA onboard last year with the JV. And it sounds like you may get another partner in the UnitedHealthcare, not that company try to acquire OHD. With the growing penetration of Medicare Advantage and health care delivery moving to a value-based care model. Have you thought about how you could leverage through relationship with HCA and potentially United and others to grow referrals, quoting of care, improve quality or revenue experiences or maybe ultimately participate in potential Medicare savings, you may help our health care systems and managed care partners achieve. Appreciate any insight you can share on the broader booked strategy on this topic.

It's a really good question. We are focused on the health and well-being of our residents. What we're really trying to do is allow them to live the best quality of life they can and to improve their health span. And we know that the things that we do in our community has real value to the lives that our residents leave, whether it's proper nutrition to dining room, whether it's exercise through the BFED programs, whether it's preventing isolation and encouraging social connection. That's really important in terms of health outcomes. And so we're excited about the partnership that we have with HCA, with LHC and the possibility for an even deeper relationship with UnitedHealthcare because if you think about it, with Medicare Advantage plans, what is happening is providers are taking on more risk. And so when you recognize the value that our product provides to the health outcomes of our residents, that's something that is real value. We're still in the very early innings of it. And we do think that as Medicare Advantage grows and as we become much more closely integrated with the health care continuum, good things will happen.

Our next question comes from Steven Valiquette at Barclays.

So yes, I know that pricing and RevPOR have already been touched on a few times this morning. But just to maybe think about things beyond '22 a little bit, there is a growing driver among some investors and even some conjecture from at least some of the other senior housing companies that are talking about the potential for a multiyear cycle of and resident annual rate increases trending well above historical averages in the current inflationary environment. I know it's hard to predict any sort of multiyear trend, but I'm wondering, at least for 2023, do you have any sort of preliminary view on whether your RevPOR growth in '23 could mimic what we're seeing in '22? Or is there already a bias that maybe '22 is a unique year? And maybe '23 increases could be less than what you're experiencing in '22? Just want to get your preliminary thoughts around that.

To make sure that we are providing an attractive value proposition for our resident. And that takes into consideration everything that's happening in the macro environment, whether it's rising interest rates, rising labor cost, rising food costs, the like. But at the same time, it's important to make sure that we have an affordable product. So we'll be balancing the cost of providing our service with the resident focus and making sure that it's affordable. Now I do think that residents are likely to see a higher-than-normal increase in their Medicare, which would give them a higher ability to see some inflation in their cost of services.

Our next question comes from Ben Hendrix at RBC Capital Markets.

Steve, just a quick follow-up question on your second quarter comments. You mentioned the sizable sequential increase in adjusted EBITDA for the second quarter. I was wondering if you could in that vein kind of add a little bit of more color around the OpEx contract labor decreases, partially offset by merit increases. Can you kind of think about how kind of the magnitude of those impacts in the second quarter?

Sure, Ben. So kind of a few ways to triangulate the impact of labor as you look between first quarter and second quarter. As we've said, even with the additional labor needs associated with growing occupancy, we still expect total labor expense will decrease from the first quarter results as we reduce contract labor. So that's one triangulation point. And kind of taking occupancy growth out of it, and just looking at the labor rates, we expect improvement in labor cost per occupied unit. So that's kind of the rate of labor, if you will. And we expect an improvement over the next few quarters as we take contract labor out and that normalizes. And kind of the third way to triangulate the impact of labor cost is at a high level, as the labor expense decreases from Q1, we expect that to drive NOI margin expansion throughout the year. So again coming up as we increase the occupancy and tier expense, we expect to see a sizable sequential increase in EBITDA.

Great. That's helpful. I also just wanted to have one more follow-up, just more broadly. I know you saw some occupancy mix shift towards kind of more need-based AL and memory care. Can you just talk about the dynamics kind of driving that? How much of that is kind of structural and strategic versus -- or also how much impact how you're thinking about labor with regard to that mix shift?

Sure. Brookdale at its core is largely assisted living and memory care. That's intentional, and it's a product where we think we are clearly differentiated. We are excited that we are seeing sort of move-ins for our independent living product, return close to our historical norms. But our growth in memory care was certainly out-sized during the quarter, and we're quite excited by that. I think that is something that we've had a lot of opportunity as we move forward. We have a lot of built-in leverage in our portfolio that we can take advantage of. And as the move-ins continue to improve, that will give us better financial results.

We will now move on to our final question from Joanna Gajuk at Bank of America.

So actually, first, can I just quick follow up on this last comment. So you're talking about the shift to these higher acuity type services, memory specifically. And with that, obviously, comes a higher demand for this skilled labor, right, specifically nurses. So how do you handle that? I guess it sounds like currently you have to currently rely on contract labor because of the shortages of nurses across how to continue. So how do you kind of solve for that? Are you seeing more interest from these nurses to kind of come to senior housing versus maybe some other settings because of the burnout and whatnot? So kind of any color kind of how do you -- how you're positioned to attract businesses in order to grow the memory care and assisted living going forward?

Absolutely. So the thing that I will say is unique about senior living is something we call the second paycheck. And that is the relationship that you have with residents and families. That is something that's unmatched [Technical Difficulty] for nursing and any other care setting. And so it's necessary to have appropriate recruiting efforts, attractive compensation and benefits. It's important to make sure there's schedule flexibility and then to make sure they've got the support that they have within the community. And so as we improve our staffing of Brookdale associates and we rely less on contract labor, I think that will also bode well for our nurses because they will be having Brookdale associates to care for our residents.

And I guess staying on the topic of hire. So it was good to hear you increase your workforce by 2.5%, so it's pretty good traction there. So I'm just curious, any kind of high-level thoughts, what resonates the best with this new high equity coming to see housing? And I guess I assume it's probably -- I mean, I'm curious to hear your thoughts whether these are mostly new hires, like younger, adults younger workers. And with that, we're hearing, obviously, younger people more interested in the economy, junking jobs and also flexibility. And you mentioned flexibility in some of -- one of your responses. So what exactly can you offer to these younger people coming into working in senior housing? And what's driving this pretty good growth in that hires?

At the top level, one of our strategic priorities to attract, engage, develop and retain the best associates. And so when you think about the net hires, we've been focused on the things that we're doing to retain our existing associates. And the top 2 things that we've done to retain our existing associates are targeted wage increases to improve retention. That helps us with our net hires. And then we have technology that we put in place that allows our part-time associates to pick the shifts that they may want. And that includes not just the Brookdale communities that they work at both the times, but also surrounding communities. And if you think about the top 2 things that we've done to increase new hires, we have increased the number of recruiters that we have in the local markets to help our communities with their recruiting efforts. And we also have increased short-term incentives to support recruiting in certain markets. These 2 things obviously are yielding great benefits because as we said, every single month from November to April, we've increased the net hires at Brookdale.

This was the very last one, sorry. Any comment on like any other cost areas in terms of inflation obviously we hearing cost inflation across the board. So anything there to kind of call out? And what do you expect in terms of the magnitude of those cost increases for the year?

Yes. So firstly take that question. The one thing I can't believe that I didn't say is Brookdale has unmatched opportunities for progression within Brookdale. And that's better than any other company within senior living, and we were recognized by Training magazine for their APEX Training award. This is the second year end in a row that we've got in that award. But really, we're focused on allowing people to progress from either a server or a caregiver to a med tech and a CNA by providing training and supporting that development opportunity. So that's something that's really important. With regard to inflation, I'm going to turn that over to Steve.

You bet. Joanna, so really expensing capital. expense after labor costs, which we've already hit on. The next biggest categories of expense are food and utilities. Of course, those categories are really just a fraction of the labor costs. And while food inflation has increased, so far, we've been able to mitigate that pressure due to our scale benefit of a larger number of communities. And utilities, to date, we haven't seen a significant increase in rates. However, in the future, we do anticipate increases with rising energy costs and just the geopolitical uncertainty. We'll continue to take actions to partially mitigate these rising utility costs through sustainability investments such as lighting and water consumption. As far as CapEx, we are seeing a moderate inflation risk, and we're also seeing some supply chain risk leading to increased lead times for things like kind of furniture and appliances. However, we have been able to generally manage these risks through product substitution and pricing protection given our large existing contracts. So that's kind of how we see inflationary pressure as we go forward. And again, we're reiterating our 2022 EBITDA guidance, which contains those assumptions.

So I think that was the last question that we have. And what I'd like to say is thank you so much to all of our Brookdale associates, particularly our mothers in advance of Mother's Day. And I want to thank some mothers and grandmothers who've chosen to call Brookdale Home. So have a great day. Thank you.

Thank you, everybody, for joining today's conference call. You may now disconnect.