Good morning. Thank you for attending today's Brookdale Q1 2023 Earnings Call. My name is Cole and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I'd now like to pass the conference over to our host, Jessica Hazel. Please go ahead.

Thank you and good morning. I'd like to welcome you to the first quarter 2023 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Dawn Kussow, 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 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 brookdaleinvestors.com and was furnished on an 8-K yesterday. Now, I will turn the call over to Cindy.

Good morning to all of our shareholders, analysts, and other call participants. I hope that you and your loved ones are well. Welcome to our first quarter 2023 earnings call. At Brookdale, our overarching priority is the health and well-being of our residents and associates. For this reason, I want to start with an update on an overnight tornado that hit our Shawnee Oklahoma community a few weeks ago, causing significant damage to the building. Let me say that I'm immensely proud of our team who acted with incredible bravery, remaining calm in the face of danger, and executing the communities crisis and evacuation plans flawlessly. As a result, I am grateful to report that none of our residents or associates were severely injured. We experienced prior natural disasters and every time our on-site associates have quickly and appropriately responded. With Brookdale's size and scale, we were able to mobilize teams across the organization quickly to help ensure the safety and security of our residents. I'd like to take a moment to express my heartfelt gratitude to our dedicated associates who tirelessly worked to care for our residents, both those who helped ensure their safety during the tornado who stepped in to care for them following the destruction are who worked hard to make them feel at home in our sister communities in Oklahoma. Our team's resilience and commitment to our residents demonstrate the true spirit of Brookdale and I am honored to work alongside such compassionate and courageous individuals. At present, we are still gathering reconstruction estimates and information regarding insurance reimbursement. Recognizing this uncertainty, we have incorporated our best possible estimate into our second-quarter guidance range. We have begun reconstruction and look forward to reopening our Shawnee community in the coming months. Like all years, 2023 is an…

Thank you, Cindy. Good morning and thank you for being here today. I'd like to speak to our strong first quarter results, provide insights to our second quarter guidance, and close by adding to a few of Cindy's comments. Beginning with first quarter results. Senior housing revenue increased 12% over the prior year first quarter. This growth was driven by a 290 basis point increase in occupancy and 8.6% RevPAR growth. Occupancy was largely in line with expectations even with the elevated controllable move-outs that Cindy spoke to. RevPAR was favorable to our expectations, thanks to the judicious rate management and the diligence of our community leaders as they work with residents and communicated the need to incorporate recent unprecedented labor and inflationary cost into this year's rate increase. We were pleased with this performance, which drove 12.9% year-over-year RevPAR growth well above the guidance range we initially provided. We also recognized approximately $2 million of other operating income from state grants during the quarter. Our teams remain diligent and pursuing available government support as we continue to recover lost occupancy from the pandemic. We anticipate reporting modestly higher grant income in the second quarter. Moving on to expenses. Our first quarter facility operating expense was approximately $531 million. These results demonstrate improved expense management, including our focus on reducing premium labor by filling shifts with full-time and part-time Brookdale employees, while ensuring that we continue to meet our residents' need, provide high-quality care and services, and remain in compliance with applicable regulations. Excluding the benefit from other operating income, same community operating margin was 26.1%, a 640 basis point improvement over the prior year. I am very proud of this operating margin improvement, resulting from the continued focus and dedication of our teams to be physically responsible and balanced…

In closing, we have established a strong foundation for success through the tremendous dedication of our passionate team. There is a significant and increasing demand for our communities from an aging demographic and this demand has proven to be robust. Brookdale scale, clinical expertise, and innovative healthcare services like Brookdale HealthPlus set us apart from competitors and we plan to leverage our strengths and maximize compelling demographic tailwinds to create significant value for our shareholders. Operator, please open up the call for questions.

[Operator Instructions] Our first question is from Steven Valiquette with Barclays. Your line is now open.

Hello, thanks, good morning. Congrats on these solid results. One question I have is just on Page 3 in the supplement where every quarter you show the occupancy bands for the consolidated communities and not significant on the something negative thinking about as well surprised to see the number of facilities with under 70% occupancy jumped up to around 200 facilities this quarter versus 180 in the fourth quarter. Another seasonal factor is there. But really I guess the bigger question is, I guess, I'm just curious should we assume that over time this number will keep trending down obviously but at some point is there a target for the number we still use that you think would be kind of permanently maybe under 70% and would there be a strategic review. Just kind of -- just curious on your thoughts big picture around the kind of the bottom end of the consolidated portfolio as far that occupancy band. Just any color going forward. Thanks.

Steve, thanks so much for your question. We're really excited about our first quarter results. When you look at the occupancy bands in the first supplement Page 3, we do have our results come down sequentially from Q4 to Q1, because of the normal seasonality of our portfolio. We do have a number of communities that are under 70% and we have plans to improve the occupancy in those communities. Now there are some complications about how you might adjust the portfolio. As you know, most of our leases are structured as master lease agreements and what that means is we need to renew a pool of assets together. We can cherry-pick and take the best assets. That said, we do enter into discussions with our landlords about whether it might be possible to sell certain assets that we think could be better suited outside of the Brookdale portfolio. I also think it's important to note that Brookdale is largely a private pay business. Unlike other competitors, we don't have as much Medicaid, and Medicaid communities are often a higher occupancy. I also think it's important to note that we have focused on driving RevPAR. And if you look at the results of our RevPAR, our adjusted EBITDA, our facility operating income, and our absolute margin rate, I think our performance as a whole compares very favorably to our peers.

Okay, great. Just one quick follow-up question. The -- just -- regards to the Welltower release, the pool of $17 million will be available for CapEx funding. Is there any sense on -- already on how that's going to be spent? There is more refurbishments or are you looking to increase some of the acuity maybe Alzheimer's offerings, et cetera? Just curious any -- just high level color on how that might be spent, if there is any earmarking for that already. Thanks.

Yes, good question, Steve. Let me just say that the Welltower transaction is a great transaction for us. As you know, it's a reclass in terms of the rent payments. We will not have an increase in cash rent. There will not be any change to our adjusted free cash flow. There will be no impact to adjusted EBITDAR, which is a standard and widely used valuation method. When it comes to the CapEx pool itself, one of the communities that we will use CapEx on is Brookdale Shawnee. That's the community that I referred to at the beginning of the call that was impacted by the tornado. We are still in the early stages of deciding where and how that CapEx will be deployed. What I'm excited about is that, that CapEx pool will improve both the profitability and the liquidity of the communities over the near term and drive even stronger performance.

Okay, great. Okay, thanks.

Thank you, Steven. Our next question is from Josh Raskin with Nephron Research. Your line is now open.

Hi, thanks. A couple here. Just a first quick one, do any of the other larger leases that you have outstanding have any net worth covenants or was -- I know you've mentioned Welltower was unique, but I don't know if there's others that have that.

No, there are not. It was only in the Welltower lease.

Okay. And then just looking back, sort of pre-pandemic, if you think about occupancy levels by segment, assisted living is about 570 basis points off the first quarter of 2019. But IL is still over 1,100 basis points. So I'm just curious, is there an opportunity to convert some of those IL beds into something more acute like AL or memory care and just help us understand the CapEx requirements, regulatory approvals, landlord approvals, things like that, that would be needed?

It's a really good question. And if you go back before the pandemic, I would say that Brookdale was incredible when it came to development CapEx. And what we often found is that we could take IL units and convert them to a higher acuity, particularly early-stage dementia or Alzheimer's care and that was very successful. Now, the regulatory environment varies greatly. We do have a community in New York for instance that has been built where we're still awaiting regulatory approval to open a long time after the community has been operated. So we'll look at those probably in 2024 and beyond that what we saw in 2023 was the best near-term opportunity for improvement in revenue, adjusted EBITDA, and cash flow, was to really look at those short-term improvements that could drive our improved recovery and that's why you haven't seen those programs this year. But looking forward, I do think that's a wonderful opportunity for us.

Got you. And then just if I could sneak one more in, just Brookdale HealthPlus, I thought the commentary was interesting there. Is that a revenue opportunity in terms of listed rate add-on or is that sort of part of the overall rate and help support the increases that you guys are getting?

We do not charge separately for Brookdale HealthPlus. If you think about the value proposition for our residents, what that does is that allows them to increase their health span which will increase length of stay. We also have seen that it attracts more residents to our communities. So we accelerate move-ins. So from us, that really helps drive sort of the revenue growth which I think is really attractive. Now, if you think about sort of the transition to value-based care, we have demonstrated that our outcomes are better than residents who live outside Brookdale communities and live in private residents. They've got fewer ER visits, your hospitalizations, and urgent care visits, and so that will create value for the healthcare system, overall. We're still working on how we will capture more of that value for the Brookdale shareholders.

Okay, thank you.

You're welcome.

Okay. Thank you, Josh. [Operator Instructions] Our next question is from Ben Hendrix with RBC Capital Markets. Your line is now open.

Hi, thank you and I appreciate all the commentary about the leases. I just wanted to follow up on kind of the covenant side. You mentioned that the unique covenant was removed from the Welltower leases, but can you kind of talk about kind of where we go from here from a balance sheet perspective, where your next pressure points are? And how we think about your strategy going forward from this lease renegotiation. Thank you.

Yes. Our balance sheet is in good shape, right? One of the things that we were able to eliminate from this Welltower lease -- all three Welltower leases is the unique net worth covenant, and that has been replaced with a tangible net worth covenant. And if you calculate the tangible net worth under the lease at March 31 our covenant would have been $4.4 billion of tangible net worth, that's what our calculation would have been. And that compares to a covenant of $2 billion, so more than $2 billion of cushion in that covenant, so that can get some really good shape. We've been very proactive throughout the pandemic looking at our upcoming maturities and our next maturities are in the fall of 2024. And Dawn and George Hicks, our Treasurer already looking at opportunities to think about how we would handle those.

Thank you.

Thanks, Ben.

There are no additional questions waiting. So this concludes the end of the conference call. Thank you for your participation. You may now disconnect your line.