Hello, everyone and welcome to Brookdale Senior Living's Second Quarter Earnings Conference Call. My name is Bruno and I'll be operating your call today. [Operator Instructions] I will now hand over to your host, Jessica Hazel, Vice President of Investor relations. Please go ahead.

Thank you and good morning. I'd like to welcome you to the second 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 filed 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.

Thank you, Jessica. Good morning to all of our shareholders, analysts and other participants. Welcome to our second quarter 2023 earnings call. I am pleased to announce that we have delivered remarkable year-over-year results for the first half of 2023, supported by our strategic priorities and ongoing initiatives, and are positioned for extraordinary future growth. For the second consecutive quarter, our adjusted EBITDA results exceeded our guidance. We are incredibly focused on execution of our recovery strategy that prioritizes profitable and sustainable long-term growth through operational excellence of our key strategic priorities. As a reminder, our strategic priorities include get every available room in service at the best profitable rate, attract, engage, develop and retain the best associates, and earn resident and family trust and satisfaction by providing valued, high-quality care and personalized service. Our positive momentum of top-line growth and expense management continued in the second quarter, which yielded a year-over-year adjusted EBITDA increase of 61% and an adjusted free cash flow improvement of 85%. This is even more impressive considering that as a result of the Omega and Welltower Lease amendments, we had approximately $10 million of lease payments that impacted adjusted EBITDA this year, but didn't affect last year due to changes in lease classification. There was no change in adjusted free cash flow as a result of the classification change. We believe this strong performance is being achieved through disciplined decision-making and by aligning the organization around the most critical actions that will drive meaningful results for years to come while delivering a steady and measured pace of immediate growth. Importantly, our RevPAR has now exceeded our pre-pandemic results for two consecutive quarters and we have opportunity for continued growth as we increase our census. Demand for our product offerings is strong and our teams have…

Thank you, Cindy. Good morning and thank you for being here today. We were pleased with our second quarter results, which included continued year-over-year gains in our key operating metrics, including occupancy, RevPAR, community operating margin, adjusted EBITDA, adjusted free cash flow and ultimately, our liquidity position. We are proud of these results, and believe that they are a testament to consistent execution of our strategic priorities and commitment to growth. beginning with second quarter revenue, consolidated senior housing revenue grew 11% over the prior-year second quarter. This was driven by a 190-basis point increase in occupancy and an 8.8% increase in RevPAR. Both move-in and move-out volume improved compared to the first quarter, contributing to sequentially favorable weighted average occupancy for the second quarter. As expected, we recovered the seasonal occupancy loss from the first quarter, grew occupancy every month within the quarter, and at June month-end, had returned to a level above the 2022 year-end. with 11.6% year-over-year growth, second quarter consolidated RevPAR was in line with our previously provided guidance range. specific to our same community portfolio, RevPAR grew 11.9% year-over-year, driven by 210 basis points of occupancy growth and an 8.9% increase in RevPAR. moving to expenses. Our second quarter consolidated facility operating expense was approximately $531 million. We were pleased to maintain flat facility operating expense compared to the first quarter, while sequentially growing our occupancy rate. within same community facility operating expense, labor expense as a percent of revenue decreased 500 basis points compared to the prior-year second quarter while other facility operating expense decreased more than 60 basis points. Same community premium labor expense continued to decline in our second quarter and our year-over-year reduction in contract labor was more than 80%. while labor is two thirds of our expense base, we also…

In the midst of an evolving industry landscape, we are starting to see at the beginning of a multi-year cycle of remarkable progress. The broadly anticipated supply and demand dynamics strengthen our runway for organic growth. Additionally, as I've shared, Brookdale's unique advantages establish us as the leader in the senior housing industry. These competitive advantages coupled with our passionate and committed associates, with their unwavering focus on enriching the lives of those we serve, lay the groundwork for an incredibly promising earnings future. We are eager to embrace the opportunities of this new era in senior living. And while there's often a temptation to seek rapid growth and immediate results, I believe that sustainable success is the outcome of careful planning, solid execution and measured steps. I see a clear path into a long and successful future for Brookdale. operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Ben Hendrix from RBC. Ben, your line is now open. Please proceed.

Thank you. Good morning, and congrats on the strong quarter.

Hey, Ben. Good morning.

Good morning. I certainly appreciate your thoughts on the operating income potential as we get back to pre-pandemic occupancy that you've set forth in the presentation. Clearly, strong fixed cost leverage highlighted there. Can you talk about the staffing assumptions baked into those numbers? And are we at a total staffing level that can sustain pre-pandemic occupancy? Or would you require further reduction in agency costs to fund a larger number of full-time staff to achieve that $1.1 billion scenario you highlight? Thanks.

Ben, there are a lot of really good questions within that overall question. and what I would say is that the slides that we've added on page 17 of the investor deck, they really demonstrate the massive leverage that is built within our portfolio. And the way that we did the calculation is we did not assume any revPAR growth, despite the fact that we have a history of increasing rate over our cost increases. We also assumed that we would get to the midpoint of our historical operating ranges and this does recognize that we would have to increase the size of our workforce as we do increase the occupancy of the portfolio. But what I'm really grateful for is, in 2022, we increased our workforce by 15%. And during 2023, we've seen stabilization of that workforce. And so I think that the labor markets are recovering and I think that as we grow occupancy, it should be something, where we can grow the necessary associates through a disciplined approach. And I don't really see us getting back into a situation, where we see significant contract labor like we had in 2022. I think that we will be able to grow our workforce, where we need it slowly, over time, as we rebuild that occupancy.

Thanks. And as a follow up to that, given the favorable supply and demand dynamics that you highlighted, can you talk about your forward view of industry rank overall, and specifically, Brookdale's ability to sustain a strong revPAR momentum that you've seen in recent quarters? Thanks.

Yes. look, I think that our focus at Brookdale is to make sure that we are providing high-quality, valued services and we want to make sure that we're balancing affordability for our residents with good stewardship of the revenue that we receive through them, through tight expense control. I do think that with very strong supply and demand economics kind of trends coming forward, there is a good opportunity for us to appropriately price our product while growing profitability and cash flow of the company.

Thanks, guys. Great quarter.

Thanks, Ben. We were pretty happy.

Our next question comes from Josh Raskin from Nephron Research. Josh, your line is now open. Please proceed.

Hi. Thanks. Good morning. As you look at Jan 1, 2024, do you think there's an opportunity for outsized pricing again? Does the cost structure seem to be normalizing and do you think competitors are getting back to more discounting, perhaps more competitive pricing environment?

Yes. if I look forward to January 1st, I think that we're definitely seeing cost pressures decline. You can see the rate of inflation for all costs is coming down. And so we don't have the same situation that we had in 2022 going into 2023. we're making progress and we're seeing a more normalized inflation in our costs. So, I think that's something that we'll take into consideration for our January 1st price increases. Now, with regard to the competitive environment, 90% of our competitors operate five or fewer communities. So, it's always true that you see everything in the market and some markets are more competitive than others. We've seen it be particularly competitive in Los Angeles, as an example, in Houston, Texas and Orlando. but it's always the case that we have some markets that are more competitive than others. Now, what I would say is what we're really focused on is making sure that we provide high-quality, valued services at affordable price point for our residents. We're really excited about the value of assisted living. If you think about the fact that assisted living and memory care is 25% of the cost of having a home healthcare aid, and that doesn't even include the cost of someone who stays at home. I think it's an attractive product for people, who need our services. But there will be times, where there's discounting and we need to make sure that we can appropriately differentiate the value that Brookdale provides compared to our competitors. And HealthPlus, quite honestly, is one of the big reasons that I think we'll be able to do that even better in the future. Think about having 78% lower hospitalizations than similar people, who live at home or 78% lower urgent care visits than similar people who live at home, or 36% lower hospitalizations. There's real value. And in staying healthier and we just need to make sure that we're balancing the value proposition we have with the rate that we charge.

Okay. so, we should start thinking more about a revPAR number that's maybe more consistent with historical levels and not certainly moderated from what we're seeing this year.

Yes. we're not getting guidance at this point. but what I will say is I would expect some moderation in 2024, compared to 2023.

Okay. And then can you give some statistics on retention and sort of average length of stay, monthly stay for your residents? I'm curious how that looks relative to pre-pandemic and really just trying to get at the acuity of your residents and maybe the opportunity to sell additional services as you talk about HealthPlus. and if that current resident base should be generating maybe more revenue than prior to the pandemic.

Yes. if our overall portfolio -- if you look at our overall portfolio, our average length of stay is slightly under two years. That certainly varies by product line, with memory care being the shortest, assisted living being the middle and independent living being the longest length of stay. One of the things that is true, because we have been building our occupancy and because we have a higher mix of new residents in our community. naturally, that would press our average length of stay of existing residents down just a little bit. So, we've got a little bit of opportunity to improve our length of stay as we sort of get to a more normalized occupancy and we hold it. When you think about the acuity of our resident population during the pandemic, we ended up with a higher acuity resident, who moved in, but that has returned to pre-pandemic norms in the last couple of years, both 2022 and 2023. And that's something that's really good, because if you think about during the pandemic, I think people hesitated to move in until they really needed the care and services. but now, they're moving in at a more normal acuity compared to pre-pandemic. And so that should bode well for a longer length of stay. And when I think about what HealthPlus can do for us, now it's only in 50 communities. Again, I think what that will do is it will attract someone who's really focused on maximizing their health span. And I think that we are uniquely positioned to help seniors, who are looking for that as they continue their lives.

Okay. All right. So, it sounds like probably there's a lot going on. but it's really just the growth in the new residents that have brought that number down a little bit. So maybe, a little apples to oranges.

Yes. And I will say that we did have higher move-outs for financial reasons due to the larger than normal rate increase. But I do think that we saw sequential improvement for that between Q1 and Q2. and we've seen continued improvement in that in the month of July. So, I think we made the right decision to appropriately factor in the cost of operating our services to our rate increase. But that was a factor that in the first half of the year, definitely affected sort of our occupancy rate and our sequential growth.

Okay. thanks.

Thanks, Josh.

[Operator Instructions] Our next question comes from Joanna Gajuk from Bank of America. Joanna, your line is now open. Please go ahead.

Oh, thank you. Good morning. Thanks for taking the question. So, if I may, just a couple of questions on the guidance here for a third quarter. So, you outlined, obviously, the seasonality right, quarter-over-quarter headwind there. but I guess you expect $5 million to $10 million growth at the core to help offset that. So, I guess, can you help us understand that number? How much do you assume grant income will be in that number? I mean I understand that occupancy growth is driving this and the fixed cost leverage there. And also, is there any benefit from selling the entrance fee community in second quarter?

Hi, Joanna. This is dawn. Thank you for the question. Let me just turn to page 10 in our investor presentation. and if you -- and I'll walk you from second quarter into third quarter. If you think about our second quarter, we had said in the second quarter that we had expected grant income, and we recorded a little bit over $4 million that would have been included in our guidance number. And so if you think about just the grant income, we'll expect a little bit less into the third quarter, but nothing material. So, just doing the walk from second quarter over to third quarter, our normal seasonality factors, we outline on the last page of our investor deck. So, we expect higher utilities in the third quarter that's seasonal. We also expect an extra work day. So that's a lot, mostly labor. and then also two of the days in the third quarter versus the second quarter, either a weekend day or a holiday, where we have incremental labor costs. And so the second piece is really the impact of the lease classification. So, because Welltower [indiscernible] mid quarter, second quarter, we have a small lease reclassification, again, a reduction of our adjusted EBITDA sequentially, but no impact to our EBITDAR, or our adjusted free cash flow. And then the performance expectations that we expect the $5 million to $10 million is really we expect occupancy to increase, and we expect to have normal seasonal impact on our revPAR. And then as that occupancy increases, we expect to leverage our fixed cost structures, as well as have better expense management in the third quarter. So, if you saw the expense management that we showed in the second quarter, we continue -- we expect to continue that in the third quarter. and then circling back to the entrance fee community, there's not anything material between sort of Q2 and Q3. It did, of course, produce adjusted EBITDA. but in the scheme of Brookdale, with our size and scale, it's just not material.

Great. No, that's helpful. I guess, to summarize the kind of the core growth of $5 million to $10 million sequential growth that's really occupancy driven and leveraging of the fixed cost rate. That's the way to think about it.

And the continued expense management expense.

Expense. So, on the occupancy rate, so you talk about 10% to 10.5% RevPAR guide year-over-year. So, it seems like it implies occupancy growth about maybe 90 bps quarter-over-quarter. Is that in the ballpark? And I guess you did disclose that July occupancy increased 30 bps. So, I guess that would imply that maybe you assume the other two months also growing a similar pace. So, is that kind of the way to think about it? And also what gives you confidence that it could grow at this pace, I guess in the prior two years we saw some deceleration. I guess these were different years with higher sequential growth. but nevertheless, we saw July being the strongest and in August, September being a little bit less than that. So, how to think about this guidance for Q3 versus Q2 occupancy growth? Thank you.

Joanna, thank you. I would say that we're not guiding, we're not giving specific occupancy guidance for the third quarter. But I think your thought process is fair, particularly as you think about the revPAR pressure, the normal seasonality on the revPAR pressure. And then pointing back to, of course, the assumptions page in our investor deck, where we had our historical high seasonal growth in the third quarter with the summer selling season.

And if I may just last one on that slide, in terms of the nondevelopment CapEx, that implies some deceleration there, sequentially Q3 from Q2. So, how should you think about it going forward in terms of CapEx? I guess, some of your peers talk about more of a development spending in the communities. So, do you expect more CapEx as you head into next year? Thank you.

What I'll say about CapEx is we spent a total of $120 million in the first and second quarter net. and so we had elevated CapEx. because within those numbers, remember, we had Hurricane Ian and Elliott CapEx spend. and we've spent a total of $24 million, of which we've gotten reimbursed a $9 million of that. And so what you're going to see in the second half of the year is the remainder of our $200 million of non-development CapEx spend. So, about $40 million a quarter, or $80 million for the second half of the year. And you'll also see that reimbursement come through in the back half of the year on the hurricane spend.

And we're just in the middle of our budgeting process for 2024. So, we're not ready to go there yet. but at the appropriate time, we'll share our expectations for next year and the continued growth that we have getting back to our pre-pandemic, and beyond occupancy and margins.

Thank you.

Thanks, Joanna.

Thanks, Joanna.

Our next question comes from Steven Valiquette from Barclays. Steven, your line's now open. Please proceed.

Great. Thanks. Good morning, everybody.

Good morning, Steve.

So, I think for us -- hey, good morning. So, I guess just given some of the different trends witnessed this quarter across the industry on sequential occupancy trends across property type. When thinking about AL versus IL versus CCRC, just curious if you can just provide a little more color on your sequential occupancy trends and outlook relative to these three different segments, especially in the context of the CCRC occupancy trending down a little bit. I know it's smaller for you guys. but just curious, just additional color across the different property segments. Thanks.

Yes. it's a good question, Steve. What I would say is IL recovery has been sort of sequentially a little bit softer than the rest of the portfolio. And our CCRCs, we have a smaller number of communities. and so if there's anything that affects a single community in the CCRCs, it can have an outsized impact. Dawn talked about sort of Winter Storm Elliott earlier as it related to CapEx. We did have one of our CCRC communities that was heavily affected by Winter Storm Elliott, so that does have an outsized impact. And we also talked about some pressure that we were seeing in Houston. and Houston, one of our CCRCs is not performing the way that we would like it to. And so that also affects sort of the impact. But certainly, we see strong growth in our memory care and that is something that we would expect to continue, AL as well.

Okay. All right, that's it for me. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Have a great day. Thank you.