Brookdale Senior Living Inc. (NYSE:BKD) Q4 2023 Earnings Call Transcript
Brookdale Senior Living Inc. (NYSE:BKD) Q4 2023 Earnings Call Transcript February 21, 2024
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Operator: Good morning, all and welcome to the Brookdale Fourth Quarter 2023 Earnings Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to turn this conference call over to our host from Brookdale's Investor Relations team, Jessica Hazel.
Jessica Hazel: Thank you, and good morning. I'd like to welcome you to the fourth 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.
Cindy Baier: Thank you, Jessica. Good morning to all of our shareholders, analysts and other call participants. Welcome to our fourth quarter and 2023 year end earnings call. We started 2023 with a clear vision and intense focus and a commitment to deliver positive results. This commitment extended beyond achieving positive operational and financial outcomes it also encompassed fulfilling our overarching priority, which is the health and well-being of our residents and associates. We dedicated ourselves to ensuring that we had created the right plans and initiatives for the year, had clearly communicated why these were the most important priorities and had the right people in place to effectively meet our objectives, but our efforts didn't stop with our plans.
Our leaders focused intensely on achieving our objectives, worked together as a team and adjusted our tactics as new information became available. For this, I'm extremely grateful to our team for their leadership and their efforts, and I'm proud to say that the result was an incredibly strong year marked by more residents who chose to be part of a Brookdale community, which led to greater occupancy, significant improvements in our operations and robust financial growth. Although complete recovery is still ahead of us with each quarter of 2023, we continue to build a solid foundation that paves the way for sustained growth. For the fourth quarter, we are pleased to report another quarter in which both RevPAR and adjusted EBITDA achieved or exceeded our previously provided guidance.
Additionally by remaining focused on our key strategic priorities, we delivered a number of positive outcomes, throughout our community operations, our real estate portfolio and our financials. Same community RevPAR increased approximately 10%, over last year's fourth quarter on positive occupancy and RevPOR growth. By pursuing RevPAR, through a balance of occupancy and rate, we delivered favorable top line results. In the fourth quarter, we maintained the positive margin improvements we have achieved throughout 2023, while ensuring that we continue to meet our residents' needs, provide high-quality care and personalized service and remain in compliance, with applicable regulations. Through RevPAR growth and appropriate expense management, same community adjusted operating income grew 37%, over the prior year fourth quarter.
In addition to these financial accomplishments, we once again achieved meaningful progress towards our leadership retention and associate turnover goals. This is critically important because our business is all about people serving people. Year-over-year, retention rates for our Q3 community leadership roles increased 190 basis points and full-time hourly associate turnover improved by 910 basis points from the prior year fourth quarter. I am incredibly proud of the progress, we are making in this critical area of the business. Lastly, as reported in December, we completed two financing transactions and sold our remaining equity interest in our home health and hospice venture. Dawn will share the specifics, but I want to recognize our Brookdale team for the successful completion of these transactions, particularly our Treasurer, George Hicks and to share my gratitude toward each of the counterparties.
As we close out 2023, I would like to highlight some notable accomplishments that significantly contributed to our remarkable results. This year was pivotal in refining our operations to favorably impact our performance, as we further recover from the pandemic while continuing to support consistent, and high-quality resident experiences. We began the year with a strategic rebuild of our senior leadership team. These changes while incredibly difficult or central for matching our organizational structure, with our business priorities and streamlining decision-making. We then, evolved the Executive Director role, to emphasize a stronger growth mindset, combining both mission and margin and underscoring strong business acumen for the incumbents and future community leaders all the while maintaining our focus, on driving resident satisfaction and providing high-quality care and services.
This led to some turnover in 2023, but it was a necessary step to foster a culture of excellence and continue effectively delivering our mission. And by year-end, these changes have started yielding noticeable positive improvements, at the community level. We further supported a growth mindset by introducing new training for our community and field leaders, to provide alignment across our core priorities and support operational excellence that would enhance not only the business, but importantly, our overall resident and family satisfaction. To attract, engage, develop and retain the best associates We piloted and launched several new processes and programs that resulted in outcomes, like the improved retention and turnover that I spoke to.
By hiring associates, who are dedicated to our mission extending the length of employment of our Brookdale community leaders, and hourly associates and increasing the number of shifts staffed with full and part-time Brookdale associates rather than contract labor, we are building stronger teams that will have a favorable impact for years to come. I am so pleased with the community level successes we have already seen from these improvements. We remain committed to continuous improvement and are confident in our plans for further progress. Our annual resident and family survey, which we completed in the fourth quarter and which received roughly 45,000 responses, once again provided invaluable insights. Resident and family satisfaction has consistently been a key priority at Brookdale.
This priority became even more critical in 2023, given the rate increase we implemented at the beginning of the year. I'm proud to report that our total company engagement score improved by a significant amount with positive increases across all of our product lines. Additionally, we are grateful that the vast majority of our residents responded overwhelmingly that they would recommend or highly recommend their community to friends and family. These positive results reflect the great work of our dedicated associates, and we will build upon this to ultimately achieve our desired overall satisfaction goals for Brookdale residents and their families. We are always extremely appreciative of the meaningful insights received for regular resident and family engagement and we'll continue to focus on this critical area.
Another accomplishment in 2023 was the expansion of the Brookdale Health Plus program, which has demonstrated remarkable success in improving resident health outcomes, through its innovative care delivery model. Independent evaluations confirmed that residents in our Health Plus Communities experienced fewer urgent care visits and hospitalizations, underscoring the effectiveness of our proactive and preventive care measures. Planning for our next Brookdale Health Plus expansion is well underway, and we expect to have nearly 130 communities in this industry-leading clinical program by the end of 2024. The continued expansion of Brookdale Health Plus not only creates an integrated benefit for our residents, but also it creates value for many stakeholders and further establishes Brookdale's position as a market leader and industry innovator.
Also, in 2023, we continue to proactively manage our leased and owned portfolios to further improve our long-term financial position. This included negotiating favorable terms with two long-standing landlords as well as making strategic decisions about our portfolio, such as disposing of certain leased and owned properties that were no longer right for Brookdale. Through these transactions, we not only obtained additional landlord funded CapEx, but also secured favorable purchase options on certain communities that were previously not available to us. This will support future cash flows and enable us to further improve our own to lease portfolio mix in the years to come. Lastly, as a result of our strong 2023 adjusted EBITDA growth, our annualized leverage decreased from 19.8x at the end of 2022 to 11.1x at the end of 2023.
Throughout the pandemic and subsequent recovery period, we have successfully executed plans to manage our capital structure and maintain appropriate liquidity. Our fourth quarter transactions are the most recent examples of this. Combining a passion for successfully executing our mission, while focusing on delivering an appropriate margin is critical for our success. While our overarching priority remains the health and well-being of our residents and associates, cash flow and liquidity will continue to be our top financial priorities. In summary, 2023 was a year of strong and steadfast execution of our strategic goals, solid operational improvements and meaningful growth towards full recovery. In a moment, Dawn will share with you the measurable results of these efforts which are significant, while I'll now turn to our 2024 plans.
As we look to 2024, our expectations are simple, stay the course. We have worked incredibly hard to lay a strong foundation for future growth. And we intend to build upon the successful execution of our strategy. Our commitment is to continue to provide growth opportunities and rewards to our people, while reinforcing the favorable initiatives and processes that we introduced in 2023. Brookdale remains a learning organization. Accordingly, we'll take our learnings from 2023. And we will address and improve areas that require ongoing refinement in our continuous pursuit, to be the nation's first choice in senior living. We made remarkable progress last year, but driving meaningful change through an organization and reaping the full benefit of that change takes time.
We take pride in our accomplishments. And we also see them as stepping stones, towards our full recovery and achieving our ultimate potential. As such, our teams throughout the organization are incredibly committed to executing against our key strategic priorities that guided our success and growth in 2023. These key strategic priorities for 2024 will remain. First, get every available room in service at the best profitable rate. Second; attract, engage, develop and retain The Best, associates. And third, earn resident and family trust and satisfaction by providing valued, high-quality, care and personalized service. Through consistent execution of these, I believe we will grow occupancy and RevPAR, deliver meaningful 2024 adjusted EBITDA growth and adjusted free cash flow improvement and support further shareholder value creation all while continuing to grow resident satisfaction.
I look forward to providing you with positive quarterly updates on our progress throughout 2024. I'll now turn the call over to, Dawn.
Dawn Kussow: Thank you, Cindy. Good morning, and thank you for being here today. We were very pleased to finish 2023 with another quarter of solid operating results and financial growth. Beginning with fourth quarter revenue, Resident fee revenue grew 8.9% over the prior year quarter. Fourth quarter consolidated RevPAR growth was 10% over the prior year, which is in line with the top of our previously provided guidance range. Our year-over-year RevPAR growth was attributable to a 130 basis point increase in weighted average occupancy and an 8.1% RevPAR increase. This marked our ninth consecutive quarter of year-over-year occupancy growth. Sequentially, these results represented an 80 basis point increase in occupancy and a 0.5% decrease in RevPOR, compared to the third quarter.
We are pleased to report that this sequential occupancy growth was meaningfully above normal pre-pandemic seasonality for this period. Fourth quarter RevPOR was slightly below our expectations, due to resident mix disposition timing and our competitive response on pricing. Our same community portfolio performed largely in line with the consolidated portfolio in the fourth quarter, including RevPAR growth of approximately 10%, a 130 basis point increase in weighted average occupancy and approximately 8% RevPOR growth over the prior year. We are pleased with these top line results. Moving to fourth quarter expenses. Consolidated facility operating expense was $530 million while same community facility operating expense, as shown on page 8 of our financial supplement, was $513 million.
Fourth quarter same community adjusted operating income grew by 37% over the prior year fourth quarter, significantly outpacing our peers. This was our ninth consecutive quarter to deliver year-over-year adjusted operating income growth. We are very proud of this progress as we diligently work to return to pre-pandemic segment operating margins while continuing to ensure that we meet our residents' needs, provide high-quality care and service, and remain in compliance with applicable regulations. Same-community fourth quarter adjusted operating margin was 26.3%, which represented the highest reported margin rate since the initial impact of the pandemic. This solid progress is a result of favorable outcomes from the 2023 accomplishments Cindy spoke to, including continued RevPAR growth and appropriate expense management.
Fourth quarter general and administrative expense was approximately $1 million, lower than the third quarter. Cash operating lease payments were $65 million, which is in line with our previously provided expectations. Fourth quarter adjusted EBITDA was $85 million and exceeded the top end of our guidance range by approximately $3 million. This positive result was due to a combination of strong flow through of fourth quarter revenue and modest favorability in G&A. Compared to the prior year fourth quarter adjusted EBITDA grew 83%. This remarkable growth was despite the $13 million quarterly impact of the changes in lease classification and the $5 million in government grants and credits recognized in the fourth quarter of 2022 versus no grant income in the fourth quarter of 2023.
Adjusted free cash flow was negative $21 million for the quarter. Normal seasonal working capital, specifically annual real estate tax payments, was the primary driver of the variance to the third quarter. Fourth quarter non-development capital expenditures, net of insurance proceeds, were $36 million. For the full 2023 year, we incurred approximately $26 million in reimbursable remediation costs and received approximately $24 million of insurance reimbursement related to the 2022 natural disasters. As of December 31, total liquidity was $341 million. The primary driver of the $65 million sequential decrease in quarter-end liquidity was related to the refinancing transaction we reported in a press release on December 27. In the December press release, we announced four completed or pending capital markets transactions.
I'll speak to each of them briefly. First, we obtained a $180 million agency loan under an existing master credit facility agreement with Fannie Mae. The loan is secured by non-recourse first mortgages on 47 communities that also secure another larger tranche of debt with a later maturity. The loan has a fixed interest rate of 5.97% and a borrow out provision which allows for potential additional proceeds in 2024, as communities in the loan continue to recover. We used proceeds from the $180 million loan, coupled with cash on hand to repay a $260 million loan, which was set to mature under the credit facility in September 2024. With this transaction, we cleared our maturity runway for the next 18 months and rightsize the latter tranche of the existing loan.
We were very grateful for Fannie Mae's partnership in this transaction. In the second transaction, we amended our existing revolving credit agreement which increased the commitment by up to $20 million and extended the agreement to January 2027 with additional extension options thereafter. Third, we sold the remaining 20% equity interest in our home health and hospice unconsolidated venture for aggregate proceeds of $27 million. And fourth, as part of the press release, we noted plans for a new financing transaction. Earlier this month, we completed a new financing transaction to obtain $50 million of bank debt, which matures in February 2027 with two one-year extension options. This property level mortgage financing is on 11 previously unencumbered communities and carries a variable interest rate of 350 basis points over SOFR.
We are very pleased with the outcome of each of these transactions and believe they are examples of our continued proactive management of liquidity and our capital structure. Our next debt maturity without extension options is September 2025. Cindy walked you through some of our 2023 accomplishments. Thanks to the hard work of our approximately 36,000 associates, we have delivered measurable positive results in 2023. I'll share a few of the highlights. As of 2023 year-end, weighted average occupancy has grown a total of nearly 900 basis points from the start of the pandemic recovery. Full year same-community RevPAR grew 11.4% which significantly outpaced our peers. Same-community adjusted operating income which excludes government grants grew 43% over the prior year supporting a 580 basis point improvement in adjusted operating margin.
On a per available unit basis, our same-community adjusted operating income has reached 92% of the 2019 same-community adjusted operating income we reported. Given the significant runway still available to grow occupancy, we believe this reflects a very strong recovery. Lastly, adjusted EBITDA grew 39% over the prior year while adjusted free cash flow improved 76%. This was despite $71 million of higher grant income in the prior year than the $41 million impact of the two changes in lease classification. I am proud of these results and deeply appreciative of our team's efforts that went into achieving them. Turning to our first quarter expectations. In yesterday's press release, we guided to first quarter RevPAR growth of 6.25% to 6.75% over the prior year and adjusted EBITDA in the range of $90 million to $95 million.
There are a few considerations I'd like to provide specific to these guidance ranges. Regarding RevPAR, we anticipate first quarter weighted average occupancy, will reflect a normal seasonal trend for this period. As a reminder, pre-pandemic the first quarter generally declined sequentially compared to the fourth quarter. We saw this normal seasonality return in the prior year first quarter, and have built this expectation into our guidance. January weighted average occupancy was 78% a 140 basis point increase over the prior year January. Additionally, we implemented a lower January one in-place resident rate increase than in the prior year, but higher than historic norms. We remain focused on ensuring appropriate pricing to match the services we deliver in our communities, and believe our annual pricing increase appropriately addresses our expected labor costs, which is the most significant portion of community operating expense, as well as normal inflationary increases on food, supplies and utilities in addition to interest rates which remain elevated.
Regarding our adjusted EBITDA guidance. While it has been more normal course for me to note sequential variations and expectations, for this particular quarter, I believe noting a few considerations compared to the prior year first quarter would be more helpful. First, there will be an incremental day this year, specifically leap day, which results in higher expense with only a minor impact on revenue. Second, given the timing of a 2023 change in lease classification through the second quarter of 2024, there will continue to be a year-over-year impact to adjusted EBITDA. Specific to the first quarter this is a $7.4 million, year-over-year impact. As a reminder, this lease accounting change decreased adjusted EBITDA, but has no impact on adjusted EBITDAR, a standard and widely used non-GAAP valuation metric, and no impact to adjusted free cash flow.
Third, in the prior year first quarter, we recognized $2 million in grant income and our guidance does not assume any grant income in the first quarter of 2024. Lastly, while we are still fully assessing the total cost of needed maintenance and repairs, we currently estimate the expense impact from the two January winter storms to be approximately $2 million. This estimate is reflected in our adjusted EBITDA guidance range. I am very proud of the progress our team has made in 2023, and I am looking forward to our continued success in 2024. I'll now turn the call back over to Cindy.
Cindy Baier: Today, standing on the other side of this remarkable year, I am not just proud of what we've accomplished, but also more determined than ever to continue on our path of sustainable growth for the benefit of our residents associates and shareholders. The future holds even greater opportunities and we are fully committed to seizing them and building a stronger Brookdale, so that we may serve the need of more seniors for years to come. I'll close by saying, thank you. Thank you to our residents, who call Brookdale Home, to our associates who are dedicated to the health and well-being of our residents and to our shareholders for their continued partnership trust and support. Operator, please open the line for questions.
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