Hello and welcome to the Brookdale Senior Living Fourth Quarter and Full Year 2022 Earnings Release and Conference Call. My name is Elliott and I will be coordinating your call today. [Operator Instructions]. I would now like to hand over to Jessica Hazel, Vice President of Investor Relations. The floor is yours, please go ahead.

Thank you and good morning. I’d like to welcome you to the fourth quarter 2022 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Dawn Kussow, our Incoming 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 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 maybe found at brookdaleinvestors.com and was furnished on an 8-K yesterday. Now, I will turn the call over to Cindy.

Thank you Jessica. We are pleased to have you join our Brookdale team. Good morning to all of our shareholders, analysts, and other call participants. I hope you and your loved ones are well. Welcome to our fourth quarter and year-end earnings call. Dawn will speak to some of the fourth quarter performance drivers but given our January release which included an outlook revision, I believe our reported results should be largely in line with any updated Street expectations. Reflecting on the past year I believe 2022 was a year of growth and continued recovery for Brookdale in several areas of the business, even so we have remaining opportunities to improve. At the beginning of 2022 I outlined three strategic priorities that would guide us over the course of the year. As you recall I have consistently spoken about these in our communications. They include attract, engage, develop, and retain the best associates, get every available room in service at the best profitable rate and earn resident and family trust and satisfaction by providing valued, high quality care and personalized service. While the health and well-being of residents and associates is always our overarching goal, these priorities have been our compass as we have navigated unprecedented macroeconomic challenges in highly competitive labor markets. Within Brookdale we have aligned our 2023 plans in support of the same key strategic priorities, but with an even tighter focus on all three areas. You think this is a guide, I'll summarize 2022 highlights and 2023 plans, beginning first with our priority to get every available room in service at the best profitable rate. During 2022, the number of seniors moving into our communities accelerated significantly resulting in same community movement volume that exceeded the three-year pre-pandemic average by 7%. Additionally, we continued positive occupancy…

Thank you, Cindy. I'm pleased to be here today and appreciate everyone taking the time to join the call. As Cindy shared, Brookdale accomplished a lot in 2022, particularly on the top line, but there were areas of the business where we didn't meet expectations, which caused 2022 adjusted EBITDA results to fall below guidance as reported in our January press release. Cindy spoke in detail about plans for 2023, including the actions we're taking to support significant adjusted EBITDA growth this fiscal year. I'll provide additional color on fourth quarter results and then I'll speak to the first quarter guidance we provided. Beginning with fourth quarter performance, specifically total revenue and other operating income. On a same community basis, fourth quarter RevPAR grew 10% versus the prior year fourth quarter, which included strong move in results at increased rates that began for new residents in October. The forward rates helped drive a trend change in RevPOR from sequential quarterly declines through the third quarter in 2022 to a modest positive uptick in the fourth quarter. On a year-over-year basis, RevPOR increased 4.5%. Weighted average occupancy increased by 370 basis points versus the prior year quarter and December represented our 14th consecutive month of year-over-year occupancy gains. Also thanks to the diligence of our teams, we recognized approximately $5 million of grants and other operating income. For the full year, RevPAR increased 10%, achieving guidance and total revenue and other operating income exceeded expectations. Turning to fourth quarter expenses. On a reported basis, facility operating expense increased 1% sequentially. We were disappointed with this result as we had anticipated a sequential reduction in reported facility operating expense versus the third quarter. The variance to expectation was driven by two things; first, labor expense improvement below what we had anticipated and…

There is a significant amount of change happening at Brookdale, in healthcare and with the global economy. And while it takes time to process change, I am confident the plans we are executing will improve Brookdale’s outcomes and position us to further grow RevPAR, appropriately control expenses while continuing to provide high quality care, and personalized service, and earn residents trust and satisfaction. I remain completely dedicated to our mission and optimistic about our future. And with that, operator, we will now open up the call for questions.

Thank you. [Operator Instructions]. Our first question today comes from Ben Hendrix from RBC Capital Markets. Your line is open.

Thank you and welcome Dawn and Jessica and others. I just had a question on guidance. The first quarter guidance seems to suggest that in 1Q you might realize that some of that sequential improvement in facility operating expenses that you had previously been expecting for 4Q 2022, so I was wondering if you could talk about the elements giving you confidence in that improvement in prior years and you touched on having to incur both the residual contract labor and new hire onboarding costs in the wake of turnover, and to what extent do you see that or how much visibility do you have into that and proving to the balance of this quarter? Thanks. Bye.

That’s a really good question. Thank you so much for asking. And Dawn will start with an answer and then I might provide some commentary.

Hi Ben, this is Dawn. Thanks for the question. I think what we would expect in our facility operating expenses is that we would have improvement from continued labor productivity reductions in the premium labors. I think in my prepared remarks we talked about that already moderating in January and then some favorable flow through from our pricing. And so in general, I'd say we would expect our facility operating expense as a percentage of our senior housing revenue to improve significantly from Q4.

And there's just a couple of things that I would add for context. Contract labor is something that we talked a lot about all through 2022. And if you look at January, and you look at the contract labor there, it is down 25%, from the average of the fourth quarter, that's one thing that gives me confidence. The other thing that I'm really proud of is our 15% increase in our community workforce during 2022, that's almost 5000 people. And if you think about that, we're better positioned to staff more and more shifts, with workers working regular wages, as opposed to overtime. And when you hire people, the highest turnover is in sort of the first 90 days. And so given that, we have to hire fewer people in 2023, that should really help us with our overlapping labor costs. And then the third point that I would make is a little over half of our hourly community associates has been with us less than a year. So as they continue to extend their length of service with Brookdale, they'll gain the residents trust and know their preferences more, and they will improve their productivity in serving the residents.

Thank you, and pardon me if I missed it, but did you provide a turnover rate and can you kind of talk about how that's gone from 4Q to 1Q and that'll be all? Thank you.

We haven't provided the exact turnover rate but our turnover rate has improved between the fourth quarter and the first quarter. And we would expect to see continued improvements, largely because of the initiatives that we have around retention, as well as the fact that we are slowing the growth of our net hiring initiatives because more of our communities have the right balance of workers to meet our resident’s needs.

Our next question comes from Tao Qiu from Stifel. Your line is open.

Thank you and good morning, everyone. Hi. Cindy, I really appreciate the remark of winning shareholder confidence back quarter-by-quarter. So I think I've heard that 13% RevPAR growth in January. I think you've guided 11% to 12% for the first quarter. So for the rest of the year I assume we will see an offsetting trend of continued occupancy gain and the sequential attrition of RevPOR. Do you think that RevPAR can accelerate from the guided range for the first quarter or do you think it should drift lower throughout the year very similar to 2022?

Dawn.

Yes, so as I think about the RevPAR guidance that we gave and the 13% in January, generally, what we see is really a step down in the rate month over month in the first quarter, as you mentioned due to discounting. And then also the number of days in February because we have revenue streams that we build by day. And so that will also impact our RevPAR in the first quarter. And then typically we'll see in quarter monthly decline in occupancy with just attrition and then the flu season as well in the first quarter.

And so Tao what Dawn is talking about through the first quarter that's really because of sort of our Smith census, which we get paid on a per day basis and our Medicaid census. But as we look for sort of the rest of the full year, Dawn, why don't you give a few comments on just our full year guidance overall.

Sure. So if I think about our full year guidance, and I'll point you to the investor presentation, Slide 19, where we've tried to lay out our normal seasonality trends. If I think about our full year guidance, I'll start with revenue. A recent pricing increase is expected to support RevPOR growth in 2023 that is really above the 2022 growth rate. Regarding occupancy for the full year we expect to return to more seasonality, which is outlined on Slide 19 of the investor presentation. And then there's a couple of things I would add to that. First, we have a higher than normal rate increase in Q1 and then second, we expect overall performance for the year to be above our seasonal trends. So you'll see a majority of the occupancy growth that we have is in the third quarter during our summer selling season. So remember, our census has grown though over the past couple of years, the number of move outs has naturally increased even at the same attrition rates. So if I look at the full year 2023, it's probably not unreasonable to assume a slightly less year-over-year occupancy growth compared to 2022's performance of 390 basis points. Second, I'll touch on labor. In 2022 we had a staffing as our persistent headwind, as Cindy had been talking about. We did deliver growth in the workforce, as Cindy just mentioned and we made positive strides reducing our premium labor costs. But as we said, in our prepared remarks, we still saw more labor hours than we expected and that was due in part to overlapping costs from elevated new associate turnover. So if we look at 2023, we will be looking at reducing our premium labor and our turnover rate. And that'll reduce those overlapping costs as well as positively impact hiring cost and resident satisfaction. And finally, a look at our seasonality, from quarter-to-quarter, we expect typical seasonal items. We have merit the number of workdays, holidays in the quarter, and then of course seasonal fluctuations on our utility costs, all of which we've outlined in Slide 19 for you to look at. So I believe, in my prepared remarks with our January results that we are off to a very good start in 2023, which gives me confidence that when we execute these company plans, we are going to drive sustained growth and the year even stronger than we started.

And when I think about the 2022, overall, we're going to continue our focus on appropriately having the right mix of labor in the communities for our associates. The labor market pressures have been intense and we do expect that we'll have incremental labor associated with increased occupancy. But I think that the cost of the shifts will come down as we reduce our premium labor by contract labor and overtime, but of course, we'll have normal merit market wage increases.

Got you, great color there. With COVID years we almost forgot about the seasonal nature of the care business. So really appreciate that slide and the explanations. My follow-up question is on the LTC lease; I think the new window is up at the end of February. I think you extended by one-year last year, what's your plan for that portfolio? And if you don't renew, what's the impact on EBITDA?

So what I'll say is with LTC, we're always looking for sort of a win-win scenario as it relates to our leases. But it's also fair to say that regardless of what happens with the lease, it will improve the position for Brookdale. And so you're always prepared to walk away from a lease if we can't get something that makes sense for us. But we do like the assets and we value a long term relationship with LTC. And so I'm hopeful that we'll get to a win-win.

Thank you.

Thanks Tao.

We now turn to Brian Tanquilut from Jeffries. Your line is open.

Hey, good morning. I guess Cindy, my question for you, obviously your RevPOR or the rate outlook for this year is pretty good. So maybe any color you can share in terms of what you're seeing or how you view the elasticity of demand for your business, obviously pretty significant rate growth here, so just what you're seeing in terms of new residents and existing resident’s reaction to the rates?

Yeah, Brian, it's a good question. And what I'll say is that we began selling sort of the new market rates on October 1st of last year. And if you look at our investor deck, on Page 6, you can see that our year-over-year movements for November, December and January were higher than they were in the prior year. And for the full year of 2022, we had more movements, 7% more movements than our three-year pre-pandemic average. So we're seeing just strong demand from that large, resilient, and growing 80 plus population. And with regard to in place resident increases, it's fair to say that the most important thing for our residents is to know that we are providing them affordable care and services. And so we talked to our residents about the pressure in the labor market, rising interest rates, we explain the rationale for the rate increases, and we've been pleased with the reaction so far. I do think that we've had a little bit of an elevation and financial move out set to be expected. We modelled it in when we created our budget. But if you think about the results that we achieved in January, a 13% year-over-year growth in RevPAR is something that we're quite proud of. And we believe that that will be a key driver in our post pandemic recovery.

Got it. And then in your prepared remarks, you talked about changing the role or enhancing the role of ED at the community level. Just curious, maybe if you can share a little more details on that and any changes to the incentive package for those EDs and also, if there's anything related to employee retention, in terms of new responsibilities or new goals for those EDs?

Absolutely. One of the things that we have done is we basically have tried to make sure that our team is focused on growth and having a growth mindset. And that's something that I really credit Rick Wigginton, for sort of bringing to the table and he has done phenomenally well, with our sales associates. You've heard me talk about the EDs being the CEO of their community and needing to make sure they've got the growth mindset. The first thing that we really did is help them clearly understand just the value of the apartments that are not in service, and the opportunity that creates. We've piloted some specific special compensation programs in some of our communities for 2023. And if those -- roll those out more broadly, as we go into the future. And then we've also redone the job description, so that it's clear that our Executive Directors understand exactly what is most important to success as an Executive Director, and we're working on developing training programs and cohorts that allow EDs to learn and grow as leaders to help support that. With regard to retention, it's going to be helpful not to be trying to grow our workforce as aggressively as we tried to grow and successfully grew in 2022. Because when you're recruiting new people, it takes some time for them to get embedded in the culture and to truly understand what makes Brookdale special as an employer. So having a more normalized hiring process will be helpful. But we're also doing a lot to make sure that we can demonstrate how people can grow with us. So we created some amazing programs last year for caregivers to become med techs or CNAs, which gives them a path to a significant increase in compensation, and the ability to provide a better life for their family. And so building on those initiatives is helpful. We've also created leadership development programs for our departmental managers so that they can grow into Executive Director roles. And we believe that by focusing on an appropriate associate value proposition, by making sure that people see the value of the work they do, by giving them a path to a better life through the things and skills they learned at Brookdale will help us with retention. And we couldn't be more excited about that. Because our business is just all about people serving people.

That makes sense. Thank you.

Thanks Brian.

Our next question comes from Josh Raskin from Nephron Research. Your line is open.

Hi, thanks so much. I want to understand the rate increase, the Jan one. Hi, how are you Cindy? I just want to talk -- stay on that rate increase. And I think you made a mention about move outs being a little bit elevated, could you just give us a sense of resident actions and specifically on the move out, sort of, what that data shows you relative to pre-pandemic trends? And then should we assume, a pretty significant slowdown in move outs now that the rates are in place?

Yeah, the guidance that we're giving, our formal guidance is to sort of an occupancy change in the first quarter that's consistent with our pre-pandemic levels in a range. Now, of course, we're hoping that it's going to be better than that. What we normally see after a rate increase is we give the rate increase 30, 60, 90 days ahead of time. And so certainly in the month of December, residents knew what the rate increase was coming and so we saw a tiny increase in financial movements there. In January, we expect that we would have seen the bulk of the increases, we do expect a slowing as the first quarter progresses and that is something that's truly normal. But as you can imagine, it's important to us to make sure that each resident understands the rationale for the rate increase and to have discussions with them about the rate that makes sense. And that's something that does continue.

Got you. And are you seeing competitors I'm talking about, competitors within say couple of miles of these facilities. Where are you seeing rates, were you seeing pretty consistent rate increases from the competition in your local markets, I know you guys could sort of track that better than we can?

Yeah, 95% of our competitors operate five or fewer communities. So it's fair to say with the almost 700 communities we have, we see just about everything. But what has been consistent and a constant theme is that senior living operators recognize the need to charge higher rates for the services that we provide, because of macroeconomic conditions, including historically low unemployment, significant increases in compensation at that lower hourly wage worker, pressures on nurses in the workforce, and raising interest rates. So I think that everybody sees the need to factor that into their pricing. So we have seen less discounting and higher price increases pretty much across the industry.

Got you. And then just last one for me. I think that you mentioned this, the tangible equity unit issuance took a few people by surprise. And so how are you thinking about leverage, not necessarily short-term debt needs, but just your leverage overall, your capital position, is there any anticipation of additional equity type instruments being issued and then would you consider asset sales, I don't know if that's instead or as well?

Well, the first thing I'll say, and then Dawn will provide a little bit of additional color on it. If you think about the debt that we have, it's not an issue that we have too much debt. It's an issue that our adjusted EBITDA has been impacted by the pandemic. And you can see that we are in the first quarter, expecting a very material increase in adjusted EBITDA, and then that will have a positive impact on leverage. Dawn, do you want to give just a little more color?

Yeah, thank you, Cindy. I think as I think about leverage, as Cindy said, it's really an adjusted EBITDA issue. And even if I just look at our guidance and take the midpoint and annualize the midpoint, I'm seeing almost 30% improvement in our leverage ratio year-over-year. And so that's how we think about -- what we think about our leverage.

I guess I meant more sustainably long term, right, you're probably not looking at double-digit leverage ratios and you guys don't give annual guidance now. So just trying to figure out, I understand you think it's more of an EBITDA issue, but either in denominator or numerator right, and so like what's the timeframe to think about something sub-8, sub-7?

Well, I think that our leverage will materially improve in 2023, and continue to improve in 2024. And I think that we will get back to a leverage ratio that makes sense. In a window that’s not all that far away.

Okay, perfect.

Our next question comes from Joanna Gajuk from Bank of America. Your line is open.

Good morning. Hi, thanks so much for taking the questions. So a couple of follow-ups. So on the contract labor, you talk about reducing and you told us you reduced about 80%, December to December, and I guess January some reductions there too. So that's good but can you give us a sense of like, the magnitude of things we are talking about, like what is this contract labor percent of revenues, or percent of your facility costs? And also, do you expect this to completely go to zero or you expect this to kind of normalize at a higher level, given how labor market is very competitive?

Hey Joanna, this is Dawn. I would say, in the context of our contract labor, really it's low single digits as a percentage of our revenue. And as Cindy mentioned, it came down almost 25%. If you look at the average of the fourth quarter monthly contract labor in over January now, what I'll say is we continue to focus on that and continue to try to reduce our premium labor. And I would expect that we would more normalize towards the end of 2023.

Yeah, and I think that it's low single digits as a percentage comp, I think is what you meant to say, Dawn, instead of revenue, is that correct?

Yes, that's correct.

And what I would say is, it's important to know that the vast majority of our communities are not using contract labor, right. The vast majority are not using contract labor. And where our contract labor is concentrated right now is in skilled nursing. And so we're working on getting that down pre-pandemic one didn't use a significant amount of contract labor in our communities and we're expecting that we will get back to there even given the very difficult labor markets, we've made such great progress with increasing the size of our workforce, and we'll focus on stabilizing that workforce during 2023.

Yeah because that was my other follow-up. So it sounds like with the labor costs are improving but at a slower and you mention the turnover vice because that sounds like that's where I guess things are slowing to improve this new associate turnover was higher, so what is the cost for that and then what exactly are you doing to lower this turnover for the new hires?

Yeah. So if you think about it, Joanna, the cost of a new hire is not just the recruiting costs, the pre-employment costs, but also the training of a new associate. And while the new associate is training, someone has to take care of the residents. So you've got a little bit of overlapping costs that doubles up. And as you would expect sort of as somebody changes jobs, the turnover is highest in sort of the first 90 days. So the most important thing that we can do is to make sure that that onboarding experience in the first 90 days is as seamless as possible so they understand how our culture works. They are getting embedded into relationships that work with the residents and associates. So they've got friends at work and they just become part of the culture. And so as I said, the biggest thing that is going to make a difference in our turnover rates is the fact that we're not trying to grow our workforce by 15% because you just have to hire so many people to do that. But also for those people we hire, being selective in who we do hire and then being careful in creating a red carpet experience when we onboard new associates.

Thank you. If I May another topic I guess that wasn't brought up so far I believe was CAPEX. So in the slides you talk about non-development CAPEX was $200 million for the full year. So and it's higher than I guess what you did this year. So do you expect to continue to ramp up CAPEX over the next couple of years and what kind of level are we thinking about say, couple of years out? And outside of non-development CAPEX what are your expectations for growth CAPEX this year and going forward and how you are funding these needs?

So as you might imagine, we're not giving guidance for CAPEX and out the years, but we have had years in our history where we have temporarily increased CAPEX and then we brought it back down. It's also important to note that our landlord reimbursements for CAPEX was down between 2022 and what we're expecting for 2023. So we're kind of constantly evaluating what is the right decision for our communities. We do have CAPEX that's required for unit turns and to replace end of life systems. But we look at every dollar that we spend whether it's a CAPEX dollar or expense dollar and make sure that we're spending our resident’s dollars wisely and we'll continue to do that. I will say that we're not expecting any material development CAPEX in 2023. We may have some tiny dollars that sort of spillover from 2022, but nothing at all big.

Alright, thank you. Thanks for the questions.

Thanks, Joanna.

[Operator Instructions]. Our next question comes from Steven Valiquette from Barclays. Your line is open.

Great, thanks. Good morning everybody. Hey, good morning. So just a question around the 1Q 2023 guidance for occupancy. It was talked about a little bit on this call so far obviously but you in the slide deck you alluded to that 1Q 2023 may be returning to that three-year pandemic average of minus 80 bps on a sequential basis versus 4Q. But then Cindy in your prepared remarks you talked about the strong January move in that you believe will support Brookdale's first quarter sequential occupancy change that is better than the normal pre-pandemic seasonal trend. So just want to make sure that we understand kind of the full messaging today when thinking about those two data points? And then I also have a follow up -- go ahead, I will ask the follow-up afterwards.

Let me start with that. Look, we're expecting a range, right. And at the end of the day when we look at guidance, we're trying to make sure that we have guidance that we can meet or exceed. When you're talking about my prepared remarks, we're talking about the full range and that's the way to reconcile sort of those two statements.

Okay, got it. And then just to follow up kind of on the same subject, but I was just curious to hear a little more color on with this. Much earlier peak of the flu prevalence this season versus historical trends I was just curious how that may have impacted occupancy in the fourth quarter if at all and then also how you're thinking about the flu impact if any within the 1Q 2023 guidance just given the pretty dramatic falloff and prevalence so far this quarter? Thanks.

I'm really proud of our strong infection control protocols. We did not have a significant flu impact in the fourth quarter nor have we had one in the first quarter. We haven't had a single flu related closure this year. So that's very good. Now as you know, flu can impact senior housing later than it does the general population. So we will remain vigilant through April, which is kind of the latest that we've really seen flu impact on the community. So it's too early to say that we are past the flu season, but it's one of the things that we do maintain vigilance on. We had flu clinics, vaccination clinics in 100% of our communities and we do focus on infection prevention and control.

Okay, alright. Appreciate the extra color. Thanks.

Thanks, Steve.

This concludes our Q&A and I'll hand back to Cindy Baier, CEO for any closing remarks.

I want to thank everyone for joining our call today. We are looking forward to 2023 being a strong year of execution for us and look forward to reporting our progress as the year progresses. This concludes our call.

This call has now concluded. We'd like to thank for your participation. You may now disconnect your lines.