Brookdale Senior Living Inc.

Good morning. This is Kathy McDonald. I'm very sorry for the technical delay. Thank you for joining us, and welcome to the second quarter 2021 earnings call for Brookdale Senior Living. Joining us today are Cindy Beyer, 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, 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 our non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brookdale.com forward slash investor, and was furnished on an 8K 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 that you and those you care about are safe and sound. Welcome to our second quarter 2021 earnings call. The COVID-19 pandemic continues to demonstrate Brookfield's versatility and resilience, and those attributes are proving critical as we continue to win the recovery and help save lives. As the economy reopens and our entire industry is in a lease-up mode, we are operating in an intense and dynamic environment. We will continue to build on and refine our plans to position Brookdale for long-term success. We've made great progress this year to capitalize on the opportunities. I am pleased to report that we have delivered five consecutive months of occupancy growth. The June month end occupancy showed a significant step up, which led to an even stronger July occupancy result. The work has been hard and has placed tremendous demands on our associates. The tenacity of our team members at the communities with the diligence of our regional and corporate associates has helped protect the health and well-being of our residents throughout the pandemic and accelerated the COVID-19 vaccination process so that we could reopen our communities more quickly and with appropriate safety protocols. Thanks to our hard work, the initial phases of recovery occurred earlier than expected, and we have been able to stay focused on achieving our growth objectives. As of July 1st, we further strengthened our liquidity position by over $300 million when we completed the 80% fail and smooth transition of our home health, hospice, and outpatient therapy business to HCA healthcare. We are pleased with this value-enhancing transaction and that high-quality healthcare services continue to be available to our residents. Brookdale's residents will benefit from a seamless offering of services across a broad care continuum. The transaction represents the latest step in our ongoing efforts to drive meaningful shareholder value, significantly improving our liquidity, while positioning our core senior housing operations for sustained growth. At the beginning of the year, I introduced three growth pillars in our plan to put the pandemic behind us. The first pillar, our vaccine clinic strategy, is largely complete. I believe our success with hosting over 2,000 vaccine clinics in four months enabled us to accelerate opening our communities and our occupancy recovery. We remain diligent in helping protect our communities, residents, and associates, especially in light of the Delta variant. We continue to meet with the CDC state and local health officials to help ensure we stay informed of new developments and best practices and implement effective protocols in support of the well-being of our residents and associates. Our ongoing efforts are a testament to our expertise and how helping people with the challenges of aging is one of our core strengths. The second pillar was to sharpen our business edge through sales transformation. As part of our win locally strategy, we have refocused our attention on local outreach engagement. In addition, during the second quarter, we strategically and opportunistically allocated marketing dollars to particular areas, which is delivering strong returns in our leads. Taken together, we believe this helps us achieve occupancy gains that outpace the industry. We are pleased with the sequential improvement in leads, as well as our ability to convert leads to move-in, particularly in assisted living and memory care. The third strategic pillar we announced was to better capitalize on the higher concentration of our portfolio in assisted living and memory care. In addition, we wanted to better capitalize on our demonstrated leadership position for our residents and prospects. We are well equipped to serve appropriate residents with complex medical conditions. We also have industry-leading customer satisfaction, evidenced most recently by our J.D. Power Award for assisted living and memory care communities for ranking highest in customer satisfaction. Our success with this pillar can be seen in our sequential occupancy growth in the assisted living memory care segment, which is approximately 70% of our portfolio today. The outsized recovery in our memory care portfolio is particularly notable. The successful execution of these three strategies means that we are ideally positioned to benefit from the broader recovery. Let me turn to our financial highlights for the second quarter. The industry, as reported by Nick, showed that the second quarter senior housing occupancy increased approximately 10 basis points on a sequential basis for stabilized portfolios. We are pleased Brookdale's occupancy grew significantly faster on a same community basis. During each month within the quarter, our move-ins accelerated. Of note, our same community June move-in volume was the strongest since August 2019. This is particularly positive to see happening in the second quarter since our strongest occupancy growth historically occurs in the third quarter. For the second quarter, on a same community basis, our senior housing occupancy grew 90 basis points with assisted living and memory care occupancy increasing even faster at 110 basis points on a sequential basis. Sequentially, our independent living occupancy percentage was relatively flat for the quarter. We were pleased, however, to see occupancy turn positive in May and accelerate in June. I am proud that we were able to continue managing and maintaining overall rate discipline. While we've seen some competitors within the industry use significant discounts during this pandemic-related lease-up period, our dynamic pricing strategy is working. By focusing on both price discipline and occupancy growth, we believe we will achieve a better sustainable result. Turning to operating expenses, senior housing expenses were slightly lower on a sequential basis. When you bifurcate the key elements of OPEX, the favorability was from a reduction in COVID-19-related expenses that corresponds with a significant drop in cases in our communities. As expected, the expense increase was mainly labor-related, along with slightly higher incremental marketing investments. I want to address labor, since at our core, Brookdale's business depends on people taking care of people. While the general population is worn out from the challenges of the pandemic, those who have been vaccinated are returning to life's normal routines. However, Brookdale's everyday heroes remain on the front line. Our community associates continue to incorporate enhanced protocol to help protect against COVID-19 since our industry helps protect the population that is most vulnerable to this virus due to age and chronic conditions. With the exception of the industry being in lease-up mode, I believe the largest current pressure on the industry is related to labor. We must ensure that the senior living industry continues to be an attractive place for associates to fulfill their purpose, earn competitive compensation and benefits, and grow professionally. With today's intensely competitive environment, we increased our recruiting efforts to fill open positions and actively adjusted wages to remain competitive in the market. Our goal is to ensure that our communities continue to be staffed with full and part-time associates. When we have openings, however, we use contract labor and overtime, which can be expensive. While we feel this near-term pressure, we also believe the environment will improve. In states that ended the enhanced weekly unemployment payments, there has been a recent drop in unemployment claims. As more people return to the workforce and through our extensive internal efforts, we expect that our labor costs will stabilize later this year. As we gain momentum, we are mapping a range of positive Rose Park growth trajectories. We will continue to issue monthly occupancy press releases so you see our progress in a timely manner. The fierce competitive workforce environment will put near-term pressure on our margin, but we expect this will be transitory and that our margins will improve in 2022. At Brookdale, we provide clinically needed support to help manage the challenges of aging, and I strongly believe in the need for senior housing and care. More than one in four seniors isolation, and the increased risk of dementia, stroke, and heart disease that comes with it. Our communities help satisfy seniors' desires for engagement, social and emotional well-being, and we know the power of community. Brookdale is ready to meet seniors where they are, whenever they need us. We are the senior living provider of choice experience, and expertise to help seniors thrive. With that, I'll turn the call over to Steve.

Thanks, Cindy. There are three key takeaways related to our financial results. First, REVPAR growth improved on a sequential basis. We outpaced the industry in occupancy growth while maintaining REVPAR. Occupancy inflected positive earlier in the year than we expected. This momentum is a good sign as we enter the third quarter, which historically delivers the strongest quarterly sequential occupancy growth. Consistent with our pricing strategy, we were able to maintain REV poor on a sequential basis while using targeted discounting in select competitive markets. Second, OPEX. With high resident vaccination rates and fewer COVID-19 cases in our communities versus the first quarter, we were able to significantly reduce COVID-19 costs both on a year-over-year basis and sequential basis. As Cindy detailed, the intensely challenging labor environment largely offset this benefit. Third, liquidity. With the completion of the sale of our healthcare services segment on July 1st, we have incrementally strengthened our liquidity position. Now, let me provide some context for these highlights, starting with occupancy. This is the first time occupancy grew every month in the quarter since 2019. Second quarter weighted average occupancy was 70.4%, up 90 basis points from the first quarter on the same community basis. REVPOR, or rates, was 4.2% better on a year-over-year basis, driven primarily by our annual price increase at the beginning of the year. On a sequential same community basis, we saw rate increase slightly. The annual increase and maintaining rate discipline through the year helps us cover some of the extraordinary costs related to the pandemic. Turning to operating expenses, on the same community basis, the second quarter senior housing operating expense improved 6.1% year-over-year and was slightly favorable sequentially. The primary driver of the favorability was a reduction of COVID-19 costs of approximately $45 million on a year-over-year basis and $17 million on a sequential basis. Excluding COVID-19 costs, labor expense increased sequentially, primarily due to the difficult labor environment as we use contract labor and overtime to mitigate open community positions, along with seasonal increases from an extra workday and the annual merit increase. For other operating expenses, Excluding COVID-19 costs, the sequential increases were due to higher insurance-related expenses along with incremental marketing investments to help win the recovery. Healthcare services operating results were included in the consolidated second quarter report. With the transaction completed on July 1st, going forward, the segment will be removed from consolidated results and the $306 million of net cash proceeds will be reported as net cash provided by investing activities. Turning to G&A. Excluding transaction costs and non-cash stock-based comp, the second quarter increase both year-over-year and sequentially was from higher short-term incentive accruals as we gained occupancy earlier than we expected. G&A expense will be lower in the third quarter as we see the reduction in costs related to healthcare services associates who transitioned with the sale of that business. Adjusted EBITDA for the second quarter was $33 million compared to $45 million for the prior year quarter. The impact of lower senior housing NOI due to the pandemic was significantly mitigated by the benefit of the negotiated cash rent reductions. This highlights both the need and benefit of last year's win-win agreement with VENTAS. Adjusted free cash flow was $168 million lower in the second quarter compared to the prior year period. The largest driver of the difference was due to the CARES Act. $146 million was related to the prior year quarter when we received $85 million of Medicare advance payments, accepted $34 million of provider relief fund grants, and benefited from $27 million of deferred payments under the payroll tax deferral program. In addition, for the current quarter, there was a $14 million use of cash for the initial repayment to the Medicare Advance Payment Program. In the second quarter, non-development capex was $14 million higher than the prior year as we continue to make investments across our communities as planned. Turning to the third key highlight, liquidity. As of June 30th, total liquidity was $388 million compared to $439 million as of March 31st. The change was primarily from the impact of adjusted free cash flow. On July 1st, net proceeds from the sale of our healthcare services business would add $306 million to the quarter end liquidity. To wrap up, let me share some directional financial expectations for the third quarter. With recent occupancy trends, we expect sequential growth in the third quarter to accelerate. We expect rev pour to be flat to slightly down based on the competitive nature of the lease-up environment in the industry. We will continue to monitor market rates and adjust as necessary. With our occupancy and rate expectations rev par, sequential growth could accelerate to nearly double the percentage growth of the second quarter. With the intense labor market competition, we expect higher costs from contract labor and overtime, along with the seasonal extra day and extra holiday in the third quarter. For other operating expenses, we also expect higher marketing investments to help us drive accelerated occupancy gains along with higher seasonal costs such as utilities. G&A expense will be lower as the Healthcare Services Associates transition to HCA Healthcare. Because we expect to provide transition services in connection with the sale, it will take time to see the full indirect expense benefits. Turning to other key drivers of adjusted free cash flow. Annual non-development CapEx investment is expected to remain at approximately $140 million for 2021. And we will book approximately $5 million of state tax expense related to the healthcare services sale in the third quarter. Looking longer term, we remain confident in the growth opportunity of our business based on three key drivers. First, demand. Demand for our communities is returning. We are firmly on the path to recovery and gaining momentum. A notable increase in the senior population is beginning and nearly 65% of the target population lives within 20 minutes of a Brookdale community. Second, new supply has dropped dramatically, and this will provide us a positive tailwind for the next several years. Finally, there is demand for high-quality needs-based services due to a significantly higher presence of chronic conditions and, over time, fewer unpaid caregivers. Importantly, our community associates have the skills and desire to provide these services. With this solid foundation for growth, returning just to 2019 pre-pandemic occupancy and margin levels would drive over $300 million of additional NOI. I will now turn the call back over to Cindy.