Welcome to the Brookdale Senior Living Third Quarter 2022 Earnings Call. My name is Irene. I will be coordinating your call today. [Operator Instructions] I would now like to hand over to Kathy MacDonald to begin. Kathy, please go ahead.

Thank you and good morning. I’d like to welcome you to the third quarter 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, maybe 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 our annual report on Form 10-K and quarterly report 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 maybe 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 third quarter 2022 earnings call. We appreciate you joining us today. We are pleased to report that we saw a number of operational improvements during the third quarter despite numerous challenges from Hurricane Ian. Our senior housing revenue growth was strong for the third quarter as RevPAR increased 10% for the quarter and year-to-date compared to the prior year periods. Weighted average occupancy grew at nearly the same sequential rate as last year even with Hurricane Ian impacting the last week of the quarter. Year-to-date, RevPAR was 4.5% better than last year, which helped mitigate the continuing impacts of inflation and the challenging labor markets. Adjusted EBITDA, excluding government grants, increased 16% compared to the prior year quarter. In addition, we recognized Phase 4 provider relief funds in the third quarter. Sequentially, the other operating income increase of $58 million helped deliver a 111% increase to adjusted EBITDA and the grants resulted in positive adjusted free cash flow. We are pleased that the contract labor declined more than 40% from the second to third quarter and offset nearly all of the sequential incremental cost, most notably the extra calendar day, which was also a holiday. That said, with the impacts from the extended labor recovery, Hurricane Ian expenses and higher general repair and maintenance costs, we find it necessary to revise and tighten our adjusted EBITDA guidance for the year. Let me turn to our third quarter financial highlights. RevPAR increased 10% compared to the prior year quarter and we continued on the strong path of occupancy recovery. The third quarter’s weighted average occupancy increased 390 basis points compared to the prior…

Thanks, Cindy. I am glad to be back from medical leave and sincerely grateful for all the thoughtful wishes as well as the outstanding Brookdale team who stepped up in my absence. Let me now provide three key takeaways for the quarter. First, RevPAR increased 10% in the third quarter compared to the prior year quarter. Second, expenses, on a sequential basis, facility operating expenses increased about 2.5%, along with broad inflationary pressure. The most notable items included seasonally higher utilities and labor expenses from an additional calendar day, which was also a holiday. Third, sequentially, we recognized an incremental $58 million of other operating income, primarily driven by provider relief funding received in August. As of September 30, our total liquidity was nearly $400 million. Now, let me provide context for these highlights on a same community basis starting with revenue. Occupancy increased 400 basis points compared to the prior year quarter and sequentially increased 190 basis points. RevPOR or rate improved 4% compared to the prior year quarter. On a sequential basis, RevPOR was lower by 40 basis points. This was about half of the first to second quarter’s change due to the benefit of stronger third quarter move-in rates. With positive demographic tailwinds, pricing power and only 2% of our communities currently exposed to new construction starts, we see a long runway for revenue growth. Turning to operating expenses, starting with the labor, the third quarter labor expenses increased 1% on a sequential basis. We reduced contract labor by more than 40%, which mitigated increases for an additional calendar day, which was also a holiday and direct labor and overlapping costs due to training new associates. As our permanent workforce stabilizes, we expect further reductions in contract labor, lower overtime and improved productivity. Other facility operating expenses…

To summarize these remarks, we believe continued occupancy growth in 2023 coupled with a strong in-place resident rate increase on January 1 will drive significant EBITDA and adjusted free cash flow growth. We have seen move-in success with our AI-driven analytics pilot, which accelerates resident socialization and engagement by connecting new and existing residents with common interest. Our overarching focus is the health and well-being of our residents and associates and we are continuing to innovate. As an example, we are seeing improved outcomes in our HealthPlus communities such as lower emergency room or urgent care use and lower hospitalization rates when compared to similar populations. Our innovation is another way to differentiate our services. And we look forward to expanding this program to additional communities in 2023. As we close our prepared remarks, I want to thank all of our associates both corporate and field for their commitment to enriching the lives of the seniors we serve. Operator, we will now open up the call for questions.

[Operator Instructions] Our first question is from the line of Brian Tanquilut of Jefferies. Please go ahead.

Hey, good morning.

Hi, Brian.

Good morning. So I guess my first question is for Steve first, as I think about the guidance adjustment for the year and your Q3 performance, maybe if you can just walk me through how you are bridging sequentially and how you are thinking about the EBITDA progression? Thanks.

Sure, thanks and morning, Brian. The middle of the guidance implies $60 million of EBITDA on the fourth quarter. I will start with third quarter’s EBITDA run-rate of about $40 million without grants and bridge the $20 million to Q4 EBITDA. Really three components: first revenue, we expect fourth quarter occupancy growth to be over 50 basis points on a sequential basis. That’s well over 300 basis points on a year-over-year basis. So that math is pretty straightforward. Second is labor, we have and expect to continue reducing premium labor have a larger Brookdale workforce and see more efficiencies in our operational workforce thereby reducing overlapping expenses. And third, other facility OpEx, we expect lower seasonal utilities and repairs to generally be offset by Hurricane Ian, which is in the neighborhood of $7 million of net impact. So, these components should bridge you to the fourth quarter guide.

Got it. And then Steve as I think about 2023, I know it’s early to think about guidance, but given what you just gave us on the bridge from Q3 to Q4, maybe adjusting for that $7 million Hurricane Ian number. So, let’s just say $67 million. Is that the right baseline to sequentially build earnings off of as I think about 2023? I mean, is that the right ballpark for like annualizing and putting in some growth expectations in there?

So, I don’t want to get too far ahead of my skis. So I will give you a little color on 2023. It appears we are at the beginning of somewhat of super cycle meaning, we believe occupancy growth coupled with strong rate increases will drive EBITDA in 2023. So by way of example, let me connect a couple of dots for a sharper picture of Q1. I stated that our 2023 rate increase will be greater than 2022. So, for perspective, 2022’s average in-place resident rate was in the high single-digits and for perspective that led to a sequential RevPOR increase of 5.4%. Over the past couple of months, our 60-day and 90-day rate notification letters were mailed out to residents and our 30-day letters will be mailed on or before December 1. This year, 2023 average in-place resident rate increases will be over 10%. So, this of course will have a significant benefit to the bottom line.

Got it. Okay. And then last question for me as I think about labor, it sounds like things on the macro level should be driving some improvement in terms of what’s left in terms of opportunity to bring contract labor down and maybe just overall facility operating expenses on a $1 basis. Maybe if you can just walk us through what’s left and what are the initiatives that you are putting in place to drive, I mean, very impressive 40% decline in contract labor in Q3, but how much juice is left on that factor?

There is a lot of opportunity. And our goal has been to attract, engage, develop and retain the best associates. So I am pretty consistent at Brookdale, but it’s fair to say that our contract labor peaked in December of last year. And on a monthly basis, we have now brought our contract labor down by 75% from the peak. The most effective thing that we have done to drive that improvement is our focus on net hires. And we have hired more than 4,500 new Brookdale associates this year and that’s a 14% increase in our workforce. The reason that focusing on net hires is so important is because if you think about just the cost of premium labor, and if you compare it to the cost of a full-time Brookdale associate, contract labor can be 2x to 3x over time is 1.5x. So what we need to do is keep increasing our full-time Brookdale associates and our part time Brookdale associates too, so that we can work more hours on that standard hourly rate. The second thing that we need to do is we need to improve our turnover. One of the realities that we face is the pandemic has been particularly hard on healthcare and senior living. And so we have seen an elevated turnover rate. And what we need to do is bring that back down. So we are very focused on that. We have increased compensation to make sure that we are paying appropriate market rates. We are looking at our benefit. We are giving career pathing opportunities that are unmatched in our history to our associates by prepaying training costs for CNAs and med-techs, so that people can grow their career with us. And we need to make sure that people understand that they can have a good life with Brookdale and they can live the quality of life they want to, while still serving our seniors and being united by our mission, we will keep our focus on that.

Thank you.

Thanks.

Our next question is from the line of Josh Raskin of Nephron Research. Please go ahead.

Hi, Josh.

Hey, good morning. You actually have Marco here on for Josh. Thanks for taking the question. If you look at Slide 8 of the investor deck, you know that there is $275 million in annual incremental revenue if the business is able to get back to that pre-pandemic occupancy level of 84.5% and $430 million if you are able to get back to the peak occupancy of 89%. So just wondering if you could provide some general thoughts on how we should think about the timing of getting back to those occupancy levels when those revenues will flow through to the reported results? Thanks.

Marco, it’s good to hear from you. I am sorry that we missed, Josh, but it’s great to have you on the call. If I think about the road to recovery, there is no question that we are firmly on the road to recovery. And I think that the last 2 years are indicative of the progress that we can make. I am really pleased about the fact that we had such strong occupancy growth. Since we inflected in March of 2021 we have seen 780 basis points of occupancy improvement. And we have in the third quarter seen the strongest movements in our company’s history. So, I do think that we are at a time now where supply and demand are tailwinds as opposed to headwinds with that [indiscernible] demographic and the constricted supply as a result of both COVID-19 as well as rising interest rates. So, our expectation is that we will keep pushing to see move-ins increase. And if you think about sort of move-outs, I think we have worked through the vast majority of our higher acuity move-outs as a result of the pandemic. That’s one of the things that tempered our progress in 2022, because people moved in with us when they had higher acuity. Therefore, the time before they needed additional services or the past was shorter than we have seen historically. So I think that will be something that is more normal for us, moving forward.

Okay, great. Thank you. And then if I could just squeeze one more quick one in just wondering if you could give some thoughts on how you view the current market for divestitures and whether you are seeing any inbound interest? I know it would also be helpful if you could speak to Brookdale’s appetite for reducing debt in light of the lower EBITDA levels? Thank you.

I think that the biggest opportunity that we have in front of us is the huge opportunity that is in front of us. And if you think about Slide 8 that shows the revenue opportunity at today’s market rates, and as Steve mentioned, we are expecting to pass through a stronger than average and a stronger than 2022 market rate increase in 2023. Now, that’s not to say that we will never sell real estate. There maybe a community here or there that doesn’t fit with our strategy and that we choose to dispose of. But it’s not a bigger part of our future as it was of our past. And I think that if you think about leverage levels, the real issue with the leverage is the level of our adjusted EBITDA, not the level of our debt. So as we improve our adjusted EBITDA, our leverage ratios will drop just by the improved performance and we do see a path to strong improvements in profitability and cash flow.

Okay, great. Thanks very much.

Thanks, Marco.

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

Great, thanks. Good morning, everybody.

Hi, Steve.

Hi, good morning. Just a few questions here. First on just to kind of clarify around the hurricane impact, does any of that from a distant EBITDA perspective flow into 2023? It was all that sort of normalized as you are exiting the fourth quarter just want to confirm yes or no does hurricane impact bleed into next year or not? And then the other question is kind of more of a semantics question, I guess I was curious the way you describe the rate increases for ‘23. To the actual and resident lease contracts actually show like specific rate increase components for either inflation adjustments or labor, I don’t want to call the surcharge, but to show components like that or is it just sort of one rate just with an overall percent increase without really much explanation for why it’s going up, the level it’s going up? I am just curious on the semantics or the components around the verbiage in the contracts themselves? Thanks.

So I am going to take the rate question first and then we will go to the hurricane question. We set each and every resident rate individually. And as you might imagine, it’s important to us that our residents understand the rationale for our rate increases. So our executive directors will sit down with our residents and explain sort of the pressure that we’ve seen in labor costs, the other inflationary costs that we are bearing and we will share with them their individual rate increase. Now usually there is two components to our residents rate and that’s rent and care. Care as you might imagine changes more regularly as our residents support needs increase. But there are one-on-one discussions at the individual resident level. Unlike some of our competitors, the vast majority of our resident rate increases are January 1. And so virtually all of our in-place resident rent increases occur there, we do start selling market rates in October 1, so that will give us a benefit for the fourth quarter. Now, if you think about the hurricane cost, and Steve can correct me on this, with regard to OpEx, we would expect most of that, virtually all of that, there might be something tiny that goes into 2023. But virtually all of it should be in 2022, because really what that is the incremental labor and the repairs and maintenance. Now as it relates to CaEx that might not all occur sort of in 2023, sometimes that trail – 2022, sometimes that trails into the following year. And Steve, is there anything you want to add to that?

No, that’s it. It’s really CapEx that might bleed into 2023. We have 70 communities impacted. So they are going to be a handful that still have CapEx costs.

Would there be any loss revenue though from the ‘23 as far as hurricane impact or just insurance or to make you whole on that?

So, we have business interruption insurance. And as we said, in the prepared comments, all 9 of our communities have residents who have returned home from the hurricane. Now as we think about it, we probably lost about 40 move-ins at the end of September from people who are in the process, but didn’t move in that last week of September. And then when you relocate residents or when families have personal catastrophes, you may lose some residents because their family has moved away. And that’s – I don’t think that’s something that’s material. But I also won’t say the number is absolutely zero.

Got it. Okay. Thanks.

Thanks. I should also say we are seeing strong move-in activity in the State of Florida. So, I want to make sure that I leave on the positive and we usually do see that after a hurricane.

Thank you. Our next question is from the line of Tao Qiu of Stifel. Please go ahead.

Hey. Good morning.

Good morning Tao.

Welcome back, Steve. So, my first question is really a clarification on the question earlier. You mentioned the two pieces there where you would see higher rent growth is on January 1st. And I think third quarter, you can look at the care revenue that was kind of affected by the normalizing acuity. So, how should we think about, the care pushing up their rate, in terms of that progression throughout the year and next year, and secondarily thinking about discounts on moving, how has they evolved over the year and maybe your outlook for next year as well?

Yes. Let me just start by saying, care revenue is generally between 15% and 20% of our overall revenue. And we did see during 2022, our revenue acuity the third quarter was consistent with our pre-pandemic acuity of our residents. So, we think that is an impact that we have really already experienced in 2022. And I will leave the rest of the question to Steve.

You bet. Like Cindy mentioned, we have seen some lower care revenue due to the higher acuity residents. So, that moved in during the pandemic, but now moving out. But we expect these needs based move outs to stabilize as recent move-ins have reflected residents with lower acuity kind of back to the pre-pandemic level. So, as lower acuity residents move in, we should see longer length of stay and a kind of a stabilized care revenue. As far as the kind of the year-over-year dollar amount on rates, I have mentioned that rent is over – going to be over 10% in 2023. And generally speaking, that’s a weighted average number that includes what I just gave you both rent and care.

The second part of that question is really about discounts on the moving. And now that we see a little bit of deceleration on how to decide do you feel like we need to do more discounting in order to boost occupancy?

Well, I think it’s important to know that like October 1st, we started selling at a higher rate. And so what that means is that the new movements are higher relative to our existing residents than they have been previously. Now, we are seeing generally an improvement in the discounting across sort of the country. But there is always a community or a market where there may be a new competitor, where discounting is both necessary and appropriate. But our goal is to always maximize RevPAR to balance growing occupancy and wait. And I think that we have demonstrated in our history that we have done that well by only taking discounts where it’s necessary to get a better growth of RevPAR.

Yes. Throughout the year, we have seen sequential improvement in re-lease rates, which we have seen particular strength compared to in-place resident rates in AL, for instance. So, we do think that we are at the beginning of a super cycle on, if you will, where we have occupancy growth and strong rate performance?

Great. Super cycle, I like the word. So, my second question is on labor, the thing you mentioned, 14% growth in full time employee this year, I don’t know if it is possible to quantify any additional hiring that you anticipate for next year to replace contract labor and also anticipate additional occupancy recovery?

Yes. It’s a really good question. What I will say is, I want to keep hiring associates until we are able to staff as many hours using regular wages as possible. And the reason that that is not an absolute number of people is because the workforce has changed compared to the pre-pandemic. And people want to work, when they want to work, where they want to work and how they want to work. So, even if you have got the same number of associates, they may not work as many hours, if they are part-time. And there is always a little bit of friction in terms of when your schedule is open, and somebody wants to fill that particular schedule. The other thing that’s different from pre-pandemic, if we have more people who need to quarantine, so that we can sort of keep them away from residents when they may be infectious from infection. And so it will take more workers to, to sort of staff our communities. But that doesn’t mean more costs, right. What we should have as we stabilize is we should have a lower cost per hour, because we are working to eliminate that premium labor. And that’s the play that we are trying to make. So, I think we hang for a little bit and we will constantly make sure that we have got the right mix of employees in the right location.

Great. And last one, if I may, Cindy, look at 2022 so far, just as we saw totally was getting better compared to prior years. We had another unprecedented year in terms of I mean Corona, hurricane, inflation, which certainly makes forecasting very difficult. As you think about next year, what is your guidance philosophy and do you expect to provide a full year guidance as many of your peers are still guiding quarter-to-quarter?

I will say that I have never experienced a 100-year pandemic, a 40-year inflation, fifth worst hurricane in the United States, unprecedented labor market pressures. And it has really challenged our ability to provide guidance that’s been helpful. If I could get in a time machine and go back, I probably would have given guidance for the quarter as opposed to the year. Having said that, we will evaluate what the right position is for guidance in February. And we will try to make the best decision for our shareholders. Our goal is to try to share with you what we know or what we think we know. And there is no question that this year’s operating environment was a lot harder than we expected.

Great. Thank you.

Thanks.

Our next question is from the line of Joanna Gajuk of Bank of America. Please go ahead now.

Thank you so much for taking – hey, good morning. Thank you so much for taking the questions here. Sorry, if I missed the discussion around pricing into next year, I mean previously, you were talking about your expense increases to be higher than this year. Some – we heard some other operators talking about, raising rents by 10%. And I guess pulling it forward, it’s increasing, pulling them forward into this year, actually. So, how should we think about what Brookdale is planning to do in terms of the magnitude of the rent increases next year, and any potential for timing change of these increases? Thank you.

Yes. I think the first thing to address is timing. And what’s different about Brookdale is the vast majority of the rate increase for January 1st. So, if I had anniversary increases that weren’t going to take place until June or July of next year, I might think about whether putting a mid-year rate increase was the right thing to do. When we evaluated that internally, we thought that there was more trust from our residents by maintaining our rate for the year, and then to pass through an appropriate and fair price increase on January 1st of next year. As I said earlier, our expectation is that we will set rates at the individual resident levels, taking into consideration the pricing plans that they have. But on average, we do expect that our rate increases will be double digits.

Yes. That makes sense. And I guess another topic, sorry, if I missed that in terms of a flu activity. So, we see earlier start of the flu season. So, any commentary there in terms of what you see in your communities, have any admission bans on your communities. And is there anything you build that into your guidance for Q4? Is it more a Q1 sort of event if it continues to be at this high level? Thank you.

I am grateful that all of our communities are open, and we do not have any flu closures. Now traditionally, the flu season is a Q1 issue for senior living. But if you look at the CDC statistics, there is no question that there is elevated flu activity in the United States. And so what we are focused on is trying to make sure that our residents and associates are vaccinated for both the flu and for COVID-19 to minimize any impact on the residents. If you do happen to get infected, we have not specifically reflected increased flu-related guidance into our fourth quarter. But it is something that we are very focused on to make sure that we are maintaining our strong infection prevention protocols. And this is just a point to go back to the pandemic when both prospects and healthcare providers alike recognized for bills to build clinical leadership during COVID. So, we are going to keep strong infection prevention protocol. And that’s going to be our focus because our top priority is always the health and well being of our residents and associates.

Definitely makes sense. And I guess if may squeeze the last one. So, you mentioned contract labor expenses, obviously, very good job there in terms of reducing your reliance on contract labor. But as we think about the, I guess both your clinical labor and the unskilled labor, how should we think about wage growth going forward? So, some contract labor expense coming down, but then I guess we are still in a very high inflationary environment. So, how should we think about wage inflation in those two buckets, the skilled and unskilled labor going forward into next year? Thank you.

Yes. Our same community labor expense was up 11%, sort of year-over-year in the third quarter. Part of that was rate, part of that was occupancy. I think that we made significant wage increases, as have others in our industry during the fourth quarter of 2021. And throughout 2022. I do think that the rate increase will be less in 2023, than it is in 2022. But we are still working on setting our budget and we have to respond to the labor market as appropriate. Unlike other healthcare settings, we don’t really have the option of shutting away and reduce beds, our residents live with us. So, we need to make sure that our communities are appropriately staffed. And the most efficient way to do that is with full-time and part-time Brookdale associates working regular hours. So, our focus is going to be on attracting those associates, retaining them, engaging them. And hopefully, the reduction in contract labor and over time will more than offset some of the pressures that we see in wages or at least partially offset, I shouldn’t say more than offset, I don’t think the costs are going down. Thank you.

Right. I appreciate to grow occupancy. Thank you so much for that color.

And our next question is from the line of Ben Hendrix of RBC. Ben, please go ahead.

Thank you guys. Just a – sorry to harp on rates. But just a two-part quick follow-up on the double digit in-place rent increase. If we isolate the street rents that went into effect in October, or were they kind of in that double-digit range as well? Just wanted to get an idea of how are they compared or if there was a discount to that – to what you put in place for what you are putting in place for the in-place rent? And then given the magnitude of that rate growth year-over-year, how do we think about the degree to which that might temper occupancy growth in 2023 versus this year? Thanks.

Yes. So, the rate increases that we put in place were generally the same for the market rate increases, and the in-place rate increases. Now, it’s important to note, that there is a toolkit that our sales associates have to get people to move in. And so that toolkit is always available to our sales associates. If you – I do want to make sure that you know that even if we say that we are going for double-digit rate increase, it doesn’t net down to a double-digit increase in RevPAR. And I think Steve tried to take you through that at the beginning of the call. Steve, do you want to add?

No. That exactly is, we start in the fourth quarter to pre-price or the rate increases. And the RevPAR that we are going to see next year, I gave you an example of 2021 fourth quarter into 2022, RevPAR being up 5.4% on a slightly less than double digit in-place rate increase.

Thanks guys. And then just any thoughts on how occupancy might progress given these rent increases versus this year.

We are always balancing occupancy and rate. And our belief is that if we charge fair rates for our services, that will not be a barrier to growing occupancy, particularly in a setting where there is new supply growth. The silver lining of the pandemic is that people have put less new units under construction. And that is very positive for us. At the same time, there is unprecedented demand for the seniors who need the care that we provide. And we think those two things going together will help us continue to grow our RevPAR and ultimately translate into improved adjusted EBITDA and better cash flow.

That’s great, guys. Thank you very much.

Thanks so much.

We have reached the end of the question-and-answer session. And I will now hand the call back over to Cindy for closing remarks. End of Q&A:

Thank you so much, Harry. I want to thank everyone for joining us today. And I am very optimistic about prospects for the future. We have done two things incredibly well. This year, we have grown occupancy and we have protected the rate that will continue to be a focus. We are making progress on our labor and we will continue to stay focused on that. With that, I am going to ask you to close the call, Harry. Thank you so much.

Certainly. Thank you for everyone who has joined us today. This concludes Brookdale Senior Living third quarter 2022 earnings call and you may now disconnect your lines.