Brookdale Senior Living Inc.

Hello and welcome to the Brookdale Senior Living fourth quarter earnings release call. My name is Lauren and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to host Cathy McDonald to begin. Cathy, please go ahead.

Thank you and good morning. I'd like to welcome you to the fourth 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 these factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as the reports we filed with the SEC from time to time, including 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 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 your loved ones are safe and sound. Welcome to our fourth quarter and year-end 2021 earnings call. During 2021, we utilized the knowledge we gained from the first year of the pandemic to begin our recovery. Despite multiple new COVID-19 variants, we delivered 10 months of sequential occupancy growth. As we enter the third year of the pandemic, Our focus is to accelerate our occupancy growth and to improve margins. Our associates have my deepest gratitude for their extraordinary leadership, as well as their dedication to and compassion for our residents. During this lengthy, unprecedented public health crisis, our associates' efforts have been intense. and they have remained steadfast in their commitment to the health and well-being of our residents. I am also thankful for the trust that our residents and their loved ones have placed in Brookdale. As I reflect on the past year, I am very proud of our ability to rise to the many challenges we faced from the pandemic. We entered the year in a race between COVID-19 vaccines and exponential growth in cases in the general US population. By April, we were celebrating the speed of the vaccine rollout to our Brookdale communities and the effectiveness of vaccinations. Brookdale reported a 97% decline in resident COVID-19 cases in our communities from the peak in mid-December 2020 to the end of April 2021. As you know, The pandemic has been incredibly intense for all healthcare workers, including our senior living associates. Our associates stood strong on the front lines, supporting our residents and each other. That said, the success of the vaccine and the reduction of cases in the U.S. resulted in businesses across many industries reopening in full force. creating fierce competition for talent. We, too, are competing for that talent. Our associates' passion, resilience, and commitment drive our success. They repeatedly rise to the challenge, from our executive directors and other community heroes who engage with our residents each and every day, to our clinical team who work through multiple sets of resident and associate vaccine clinics For each of our communities to our sales and marketing teams to find creative and effective ways to connect with prospective residents. And to our associates who support those who live or work in our communities. It has been an intense year and we are solidly on the path to recovery. At the beginning of 2021, I introduced three strategic pillars to differentiate Brookdale services and thereby increase occupancy. The first pillar was a focus on health plus care through our vaccine clinic strategy. We demonstrated this commitment early in 2021 by rapidly hosting three or more COVID-19 vaccine clinics in every one of our communities. By April, Our resident vaccine acceptance was 93%, and as of January 31st, 2022, was above 95%. As COVID-19 vaccines received FDA authorization, our vaccine strategy was further strengthened when we adopted a policy requiring our associates to be fully vaccinated with limited exceptions. As of the end of January, 97% of our associates are in compliance with our vaccine policy. Even before the international news broke about the Omicron variant, we knew that time was of the essence to set up booster clinics. We quickly identified more than 30 different pharmacies and healthcare providers who could assist with this massive effort since the government program ended with the completion of our initial vaccine clinics in April 2021. We completed booster clinics for all of our communities. In fact, the majority of our communities already have hosted a second booster clinic. Since we started our COVID-19 vaccine clinics, more than 175,000 of these critically important shots were administered to seniors in our communities and to our associates. Our 10-month occupancy recovery has been driven by our intense focus on vaccinations, executing our strong infection control protocols and our industry leading clinical and operational expertise, all of which allowed us to deliver service expected from our residents and their families, prospective residents and healthcare advocates. The second pillar was to sharpen our business edge through sales transformation. We applied a lean Six Sigma process to make our sales cycle more effective, efficient, and replicable across our diverse portfolio. Our marketing, connection center, and sales teams worked together to focus efforts where we had the best lead funnel opportunities. We continue to enhance our digital programs, including search engine optimization. These enhancements delivered a higher inquiry to move-in conversion rate, with the fourth quarter 2021 having the highest rate since the fourth quarter 2017. In addition, our fourth quarter 2021 move-ins were higher than our three-year fourth quarter pre-pandemic average, and this allowed our fourth quarter occupancy to outpace the industry sequentially, as reported by Nick on a stabilized basis. The third strategic pillar was to better capitalize on our leadership position for residents and prospects with higher acuity needs. With our deep understanding of seniors health care needs and how to create the right conditions to improve quality of life, we look to extend residents length of stay through an integrated health care continuum. We have taken steps to enhance our coordination with our residents primary care teams and After the mid-year transition of our home health and hospice business, we are working with HCA Healthcare and LHC Group to continue delivering high quality services to our residents. Since the vaccine-led start of our recovery in March 2021, occupancy grew 500 basis points in our assisted living memory care segment, which is approximately 70% of our portfolio today. These three pillars of growth led to a strong occupancy recovery in 2021. Let me share financial highlights for the fourth quarter. December was the 10th consecutive month of weighted average occupancy growth and was the first December in nine years to deliver sequential occupancy growth. In addition, the fourth quarter was the first positive year-over-year occupancy growth since the pandemic began. Historically, our fourth quarter occupancy percentage is relatively flat for the third quarter. So 100 basis point occupancy increase in the fourth quarter is outstanding. As the Omicron variant rose in the general population, we benefited from hosting booster clinics in our communities while continuing our strong protocols to help protect our residents and associates. As of early February, almost all of our communities were open to move in. As we continue to navigate the national labor crisis, we found it necessary to use higher contract labor at an accelerated pace in the fourth quarter due to staffing challenges and CDC state or local COVID-19 quarantine protocols where appropriate. Our contract labor levels remained elevated in January, but improved slightly month over month. In addition to the operational precautions we took throughout the pandemic, we also took important actions to help protect and strengthen our financial position. As of December 31st, we had $537 million of available liquidity. Beyond the benefit of occupancy growth, during 2021, we enhanced our balance sheet. Early in the year, we announced the sale of our home health, hospice, and outpatient therapy segments. and completed the smooth transition by mid year. In the third quarter, we announced the convertible senior notes offering that was significantly oversubscribed. Aligned with our stated use of a portion of the convertible notes proceeds, we paid off a small but high interest rate loan, refinanced the first quarter 2022 debt maturities, and prepaid a substantial portion of the remaining 2022 debt maturities. In 2022, We expect to receive government grants from Phase 4 of the Provider Relief Fund. This will offset a portion of the expenses we continue to incur to help protect our residents and associates against COVID-19. In summary, in 2021, we delivered 10 months of sequential weighted average occupancy growth and increased annual rev pour by 3%, despite new pandemic peaks occurring during the year. The actions we took strengthened our liquidity position, and we have the right team to set the stage for accelerating our profitable growth strategy. I'll now turn to our strategic priorities for 2022 and a summary of our financial guidance. We remain committed to our goal of being the nation's first choice in senior living by being the most trusted and effective senior living provider and employer. As we work to accelerate our recovery, We are focused on three priorities that will position us for growth. Our first priority is to attract, engage, develop, and retain the best associates. As a people-focused business, it is crucial that our associates have the right skills for their own development as well as for providing our residents with the best possible experience. I'm pleased that for the second year in a row, Training Magazine recognized Brookdale as one of the elite training APEX award winners. We continue to enhance our associate value proposition. Due to the unprecedented competition for talent, by the end of 2021, we reviewed wages in all our markets, made appropriate adjustments, and will monitor to ensure that we remain competitive in 2022. We started modifying our recruiting plans. By year end 2021, we saw net positive hires and our January net positive hires were even better. With this early success, we will continue to enhance our recruiting plans to make further progress. Our second priority is to get every available room in service at the best profitable rates. At our core, the business provides high quality needs-based services We will remain focused on driving appropriate pricing to match the services we deliver in each community within our portfolio. As part of our targeted sales and marketing efforts, we expect to attract the growing senior population through enhanced outreach and by publicizing each community's points of differentiation. Our final priority is to earn resident and family trust and satisfaction by providing valued, high-quality care and personalized service. Every positive encounter with a resident, family member or customer advocate can lead to future referrals. Therefore, it's important that we provide high-quality experiences in everything we do. While we believe we already have a strong customer focus, we're a learning organization and we will continue to raise the bar higher. Turning to our 2022 guidance, the recovery efforts we delivered in 2021 have set the foundation to accelerate growth in 2022. We expect annual REVPAR growth of 10% to 12%. We expect adjusted EBITDA in the range of $240 million to $260 million. This range implies substantial improvement. I'll now turn the call over to Steve.

Thanks, Cindy. There are three key takeaways related to our financial results. First, REVPAR growth. Fourth quarter REVPAR increased 4% compared to the prior year quarter. This was the first quarter with year-over-year REVPAR growth since the brunt of the pandemic. Ten months of sequential occupancy growth in 2021 combined with continued price discipline drove a strong first year of the recovery. Second, expenses. On a sequential basis, lower G&A partially mitigated the higher use of contract labor, and fourth quarter adjusted EBITDA increased 4%. Third, liquidity. To strengthen our balance sheet, we completed two significant transactions in the fourth quarter. We raised over $200 million from a convertible notes offering and completed a $100 million refinancing of our first quarter 2022 debt maturities. In addition, we prepaid nearly all of our remaining 22 maturities. Now, let me provide context for these highlights on the same community basis, starting with revenue. REVPOR, or rate, was approximately 3% higher than the prior year on both a quarter and annual basis. In the fourth quarter, we had similar rate pressure as the third quarter. The impact was partially offset by higher move-in rates for new residents entering our communities. Combining rate with occupancy growth, fourth quarter REVPAR increased nearly 4% on a year-over-year basis. This is significant progress given the multiple COVID-19 waves that hit in 2021. Turning to operating expense, for the full year, operating expense was .6% favorable, mainly due to lower COVID-19 costs. The fourth quarter operating expense was 2.2% higher, compared to the prior year quarter and 2.4% higher sequentially. The fourth quarter OPEX increase was driven by significantly higher contract labor costs. With the rise of the Omicron variant and a difficult labor market, staffing needs grew throughout the quarter. This drove the use of contract labor and overtime to support occupancy growth and open positions. Excluding the $74 million of grant income, Recognized in the fourth quarter of 2020, same community operating income increased 11% on a year-over-year basis. An operating margin improved 130 basis points. For management services revenue, we completed the transition of more than half of our managed communities in 2021. With a small portfolio, we started reporting management services in the all-other category. The fourth quarter G&A expense, excluding transaction and organizational restructuring costs, and non-cash stock-based comp was lower sequentially and compared to the prior year quarter. Given the unpredictability of the pandemic, there were fewer than expected health claims, and we also reduced our bonus estimate. Full year G&A expense was 4% lower than in 2020, primarily related to the Brookdale Healthcare Services Associates who transitioned with the business to HCA Healthcare effective July 2021. Adjusted EBITDA for the fourth quarter of 2021 was $36 million compared to $99 million in the fourth quarter of 2020 when we recognized $78 million of government grant income. Turning to adjusted free cash flow, working capital was a significant use of cash, driving fourth quarter adjusted free cash flow lower. $35 million was for scheduled CARES Act repayments and recoupments, mainly related to our payroll tax deferral program. In addition, approximately $40 million was for an extra week of payroll due to calendar timing, real estate taxes, and the working capital impact of fewer healthcare claims that I described earlier. Turning to the third highlighted topic, liquidity. As of December 31st, total liquidity was $537 million. The actions we took have fortified our balance sheet and enhanced liquidity throughout the pandemic. And most recently, in the past two quarters, we strengthened our liquidity position by nearly $350 million when we successfully completed the 80% sale of our home health, hospice, and outpatient therapy business to HCA Healthcare. And then the Brookdale HCA Healthcare venture subsequently sold a select group of agencies to LHC Group. We look forward to working with both companies and having these high quality healthcare services continue to be available for our residents. In the fourth quarter, we executed two significant transactions. We raised more than $200 million of cash through a convertible notes offering, which bears an interest rate of 2%. Then aligned with our intended use of cash, we immediately paid off our only high interest rate loan. In December, we completed a $100 million refinancing of our first quarter 2022 maturities. In addition, we used $141 million to prepay substantially all of our remaining 22 debt maturities, which will save several million dollars of interest expense. Turning to 2022 guidance. With 10 months of sequential occupancy growth in 2021, we have set the stage for delivering year-over-year REVPAR and adjusted EBITDA growth, resulting in adjusted free cash flow improvement. We expect annual REVPAR growth of 10 to 12% from occupancy gains and rate increases. We expect adjusted EBITDA in the range of $240 to $260 million. This excludes the benefit of future government grants. At the midpoint of the range, adjusted EBITDA would increase 80% from 2021. Let me provide the key building blocks that support this guidance. Starting with occupancy, we expect to return to more typical seasonal trends with the first quarter being the lowest occupancy quarter of the year. Then we expect to build occupancy in the second quarter and to accelerate that momentum in the third quarter. Pre-pandemic, first quarter occupancy declined sequentially by approximately 80 basis points. In the first quarter of 2022, we expect the seasonal decline will be less. January's sequential weighted average occupancy change of 20 basis points was less than half the December 2019 to January 2020 pre-pandemic change. For REVPOR or RAID, the majority of our in-place rent increases occurred on January 1st. For 2022, we took a higher rate increase to help mitigate higher labor costs. We expect a mid-single-digit annual REVPOR increase. While U.S. labor and inflation increases are well known, the executive directors in our communities took extra time to make sure residents and their families understood the rationale of our rate increase. This communication effort was effective. When compared to historical norms, we haven't seen a noticeable change in move outs related to the rate increase. Now, turning to community labor expectations in 2022, there are three key components of labor expense. First, contract labor and overtime. We had a sequential increase in the third quarter And as discussed, this accelerated throughout the fourth quarter of 2021. With a difficult labor market and COVID-19 affecting associates in January 2022, we continued to use higher levels of contract labor. We plan to actively reduce overtime and contract labor costs by filling open positions. The savings from lower overtime and fewer contractors will more than offset the cost of filling these positions. In most cases, The cost of contract labor per hour is at a significant premium compared to a permanent associate's rate. The second component is merit and market rate adjustments. As Cindy mentioned, in 2021, we reviewed wages in all of our markets and made adjustments where appropriate. We will monitor to ensure we remain competitive in 2022. The final component is incremental variable labor cost, which is expected to increase with continued occupancy growth. In summary, when we combine these three components, we expect total community labor expense will increase at a higher percentage in 2022. Therefore, we expect annual facility operating expenses to increase mid single digits in 2022. In our investor presentation, which is posted on our website, we listed other key financial considerations. With our expected strong occupancy and rate increases, Along with partially mitigating operating expense increases, we expect substantial EBITDA growth in 2022. I will now turn the call back over to Cindy.

In 2022, the baby boomer demographics are finally at a point Brookdale dreamed about more than 15 years ago. There is a rapidly growing senior population that requires high-quality needs-based services. Starting this year, we expect more than 1 million new seniors will enter our target market every year for the rest of this decade. Even before the pandemic, new supply was shrinking. And for the past two years, supply has become a more significant tailwind. In the second half of 2021, Nick reported there were the fewest units under construction since 2015. Throughout the pandemic, Brookdale continued to work with a third-party service to conduct brand awareness surveys. Brookdale mentions are around two times greater than the next closest competitor among people who expressed awareness of Brookdale without prompting. We also continue to drive our leadership position with our clinical and operational expertise. In addition to these promising statistics, I'm confident Brookdale has the right team. We are focused on what matters most. enriching the lives of those we serve. Throughout the year, I hear stories of our residents' determination to pursue their best lives. This inspires me to continue to push Brookdale forward to be the best senior living company in the industry. This concludes our prepared remarks. Operator, please open the line for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypads. If you change your mind, please press star followed by two. While preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from the line of Teo Cui from Stifle. Teo, please go ahead.

Hey, good morning, everyone. Seeing the positive commentary offered today certainly feels like we're turning the page on the pandemic. And this is the first time you've given a full year guidance. The recovery has been on firmer footing since spring last year, but there are still many uncertainties on labor and the public health emergency is still ongoing. So what gives you the confidence of providing Outlook for 2022?

Hal, thank you so much for your question. We have now been operating in a pandemic for the third year. And so we have a lot of experience in what happens during COVID waves. We have been very excited that despite the COVID waves during the fourth quarter, we were able to outperform our historical move-in growth with strong performance on move-outs, controllable move-outs. As we look at the market, we do see a very competitive labor market, but we're taking proactive steps to effectively manage that. And so for those reasons, We believe that providing guidance is the right thing, and as you can see from our guidance, we're solidly on the path to recovery.

Got you. Yeah, and thanks for the building blocks for the guidance. My next question is about, you know, the long-term margin outlook. Clearly, the margins, the guidance shows that the operating leverage of the business, but when we talk about industry, And Brookdale, we always refer to the average number. I know that our average margin is down 10 percentage points compared to pre-COVID levels. But at the same time, you also have a quarter of your communities above 85% of occupancy. Could you help us understand how margin has evolved for these properties that either haven't experienced so much decline census through the pandemic or are recovering faster? How does margin compare to pre-COVID levels today?

The good news is that there's a lot of opportunity for margin expansion. Our business has high fixed costs associated with operating our communities 24 hours a day, seven days a week, 365 days a year. Steve can talk to you a little bit about what we expect for the future, but needless to say, we expect margin growth.

Yep, morning, Tao. We do, as Cindy said, expect margin expansion as we scale operations.

The expected operating expense improvements will be driven primarily by labor, which we expect to improve. We're improving labor by filling open positions, so contract labor and overtime will be expected to decline. And, of course, when we backfill a contract labor outsourced associate with a new hire, it's at a lower rate. So as occupancy builds kind of throughout 2020, communities will be covering their fixed staffing costs and therefore are expected to drive higher incremental margins.

And certainly over the long term, we would expect to return to pre-pandemic margin levels.

Okay. I'm just trying to understand what the gap today on the more stabilized properties. You know, obviously you've got the higher rate increases. offsetting some of the labor expenses just, you know, if occupancy is pretty much close to pre-pandemic levels with the gap on the margin there.

Yeah, I think in the higher occupancy communities, what you have to recognize is that we got our rate increase sort of January 1st, which took into consideration the labor pressures that would not have been reflected in our fourth quarter results. And certainly our fourth quarter contract labor was significantly higher than we expect once we get our hiring back to more traditional levels.

Great. Hey, Tal, we should probably turn on to the next question or the next person who's going to ask a question. Thanks, Tal.

Our next question comes from the line of Josh Raskin from Nefron Research. Josh, please go ahead.

Hi, thanks. Good morning. I've got a question and maybe a follow up as well. So if I think about the EBITDA guidance for 2022, it's an increase of let's call it 110 million or so over the 4Q run rate. And Steve, I want to make sure I heard it right. Did you say labor would increase as a percentage of revenues? And so If so, if it's not labor, maybe or maybe I misheard that. What are the major buckets to get that incremental 110 million or so of EBITDA and how much to each contribute?

If the major buckets, of course, is revenue growth. So rev par of 10 to 12 percent. will increase revenue by approximately 10% to 12%. So that's over $250 million. And then kind of looking at expenses, I said that operating expense on a year-over-year basis would be up about 5%. So that takes care of kind of NLI margin, if you will. Looking at G&A on a year-over-year basis, G&A, when you think about some of the building blocks there, we'll have merit. We'll be resetting the bonus and benefits accruals and backfilling some open positions as well as increasing travel a little bit.

Their two GNAs will be up a few percentage points. So that should kind of get you to the EBITDA guidance for 2022, which is, of course, up 80%. Yeah.

Okay. And then just maybe taking that step back. So occupancy got up to 73.5% weighted average in the fourth quarter. But that's still, you know, 1,100 basis points below EBITDA. where you were at the end of 2019. And today you've got 22% fewer beds than you did in 2019. So I'm trying to figure out what's a reasonable EBITDA target. I heard Cindy just say you'd expect long-term margins to be back to pre-pandemic levels. I assume that's on a percentage. So, you know, you did 400 million of EBITDA in 2019. What's the bogey? What's the, hey, when we get this set of communities back to where we think we can, what's a reasonable number?

So the way that I would think about that is our industry and Brookdale in particular has been at that 89, 90% sort of stabilized occupancy before the oversupply hit the industry. So we're looking at a path to get back to that 89 to 90% stabilized occupancy across the portfolio. We can't provide a timeline at this point in terms of when that will happen, but that's our goal. And certainly in an inflationary environment, our goal is to match rough core growth with cost growth. And so that's something we'll pay a lot of attention to, and that will help us with our margins over the longer term.

Okay, so you're saying well above the 2019 levels, right? And so your expectation would be that supply and new construction wouldn't pick up like it did last time when occupancy got up into the high 80s.

There's no question that we are seeing some increase in new supply this year relative to during the pandemic, but there are the fewest units under construction in many years. And what that tells me is that for the next 18 to 24 months, we have a tailwind of the reduction in supply from the pandemic. It's important to note that there's significant growth in the population of seniors entering our marketplace. with a million new seniors entering our target market this year and every year for the near future.

Our next question comes from the line of Stephen Faliquette from Barclays. Stephen, please go ahead.

Great, thanks. Good morning, everybody. So all of your commentary on the labor expense was pretty helpful. I guess I'm just curious as a follow up whether or not you're seeing any notable circumstances within the overall Brookdale community portfolio where you've had to turn away any new prospective residents because of staffing issues. Or can we check the box that the potential trend of, let's call it, lost occupancy due to labor shortages is hopefully something that you're generally not expecting to be prevalent within Brookdale and 22 because of your ability to tap into temporary or contract labor across the majority of your communities. Just curious to get your thoughts around that.

Thanks. Thanks for the question. Let me start by saying there have been two factors that I think about as it relates to new move-ins. And I think the first is when a community is closed to move-ins because of regulatory requirements. And that's something that has been a very small issue for us during the fourth quarter and into 2022. The second issue that you asked specifically about is whether we have had to turn away move-ins because of labor in our communities. And that has not been a significant issue. One of the things that's true about our business is that we have to be staffed and we have to operate 24 hours a day, seven days a week, 365 days a year. So if we have an opening, we need to call in contract labor and that is an expensive alternative for us. It can be two to three times the cost of our normal, our workers. So it is something that we pay attention to, but luckily we have not had to turn away any significant number of residents as a result of labor.

Okay. All right. Perfect. Appreciate the color. Thanks.

Thank you. Our next question comes from a line of Brian Tanguillet from Jefferies. Brian, please go ahead.

Hey, good morning, guys. Just I guess a follow-up to Josh's question earlier. So As I think about the components of the margin expansion of the EBITDA guide, obviously revenue will be the key driver given that OPEX is growing in G&A. So if I'm trying to look, Cindy, at the REV4 or even like REVPAR growth, the REV4 growing mid-singles, I mean, how does that compare to the rest of the industry based on what you're seeing? And how are you thinking about the market share gains or the outperformance versus NIC data that you've seen in the last quarter? given that pricing strategy?

Brian, we have always been very disciplined about rate, and that's something that's been true throughout the pandemic. From what I understand, the industry recognizes that it's necessary to drive rate because of the inflationary environment that we're in. And so if you look at the public commentary of other operators and of the healthcare REITs, you'll see that rate is higher in 2022 than it has been historically. So we think that's something that is very good. Now, the opportunity that is unique to Brookdale is we have more upside in our portfolio. And if we can continue, which I believe that we can, that sequential occupancy growth, that will give us significant leverage. If you think about sort of 2022 and from March low to December, we grew occupancy 420 basis points. And certainly we've demonstrated that we can have a long run of occupancy growth. And so as we do that, our shareholders will be rewarded by that 10 to 12% revenue growth, which will drop to about an 80% improvement in our EBITDA, adjusted EBITDA during 2022. And then we'll continue to grow from there.

Got it. And then I guess for Steve, You burned $139 million of cash during the quarter. I get that some of that is paying back money to the government, but how should we be thinking about your visibility into stabilizing cash flow? I know you've got ample liquidity, but $139 million of cash burn is something that we're watching. So just curious on your thoughts there.

Thanks for the question. In the fourth quarter, we had a significant use of cash due to working capital needs. For instance, we paid back $35 million of CARES funding that we received in 2020. So that was kind of a one-time in nature, which was kind of the majority of the working capital needs in the fourth quarter. The momentum we had in 2021, 10 months of sequential occupancy growth, we believe that momentum and the rate increase in 2022, as well as the occupancy growth that we're seeing, our project to see in 2022, will drive sizable EBITDA growth as we've talked about. So by the end of 2022, we expect to have significantly reduced our cash needs from the operations. Bottom line, cash flow and liquidity are certainly a priority, and we'll continue to take proactive steps as well as driving and executing on the core business.

All right. And then a quick follow-up for me, either for you or Kathy, just thinking about your interest rate exposure, how should we be thinking about, you know, exposure to variable rates and as we think about rates going up in the next few months?

So our debt is 62% fixed and 38% variable. The average rate of our variable debt is low, 2.4%. If the 30-day rate increased by about 100 basis points, the annualized interest cost would be $15 million or so. But remember, we paid off our only high interest rate loan in October and prepaid substantially all of our remaining 2022 maturities, which is saving several million dollars of interest expense. So currently, on a year-over-year basis, we expect relatively flat interest expense in 22.

Awesome. Thank you.

Thanks, Brian. Thanks, Brian.

The next question comes from the line of Joanna Kajak from Bank of America. Joanna, please go ahead.

Hi, guys. This is Courtney Fonduce on the line for Joanna. Thanks for taking the question. So I guess just the first question, you know, you guys gave a lot of really helpful labor commentary and you were saying you made adjustments at the market level for the rates you were paying. What, you know, what was the underlying cost inflation that you saw when you made those adjustments? And I guess, what are you expecting for 2022?

Good morning, Courtney. It's good to hear from you. As we went through the labor rates, it varied by market and it varied by position. Certainly, as you would expect, we have seen more inflation in our nurses than our other positions. But then when you look at caregivers, med techs, CNAs, and dining staff, you've seen sort of more labor inflation there. I think we've seen more labor inflation at the hourly worker level than we have at the salaried worker level, but it has been something that we've paid attention to and it's a pretty dynamic market. So we're going to continue to keep our finger on the pulse during 2022. We are going to make adjustments as appropriate. And then, of course, we're going to focus on the things that we can control outside of wages, which is really the culture, the career development, the learning opportunities, so that our associates can really live their best life as well.

Okay, thanks. Super helpful. And then I guess, you know, on that line of rates, you know, you guys mentioned that you did introduce the rate increases in January and Q1. But did I hear correctly that you said you didn't get much pushback from residents? And could you speak to why?

The one thing I will say is that our executive directors have done just an amazing job about talking to our residents about the rationale for the rate increase. Our residents care very much about the associates who support them and want them to be paid a fair wage. So given that a lot of the rate increases is driven by inflation and labor costs, that was obviously part of the explanation to our residents. And we have not seen a material increase in attrition of our residents base as a result of the wage increase. So that has been very positive. And as you know, most of our in-place resident rate increases occurred in January and we had to give notice to them in the fourth quarter of 2021.

Okay, perfect, super helpful. And then last question for me, just one thing on the guide, You guys said you expect development capex to grow to 20 million. I think it was just 3 million in 2021. So just what, you know, what projects are you guys assuming in that guide?

Well, quite honestly, we have a large pipeline of program max, um, program, uh, projects that, uh, redevelop our communities. Often it's a conversion of units from assisted living to memory care or, um, repositioning the community within the marketplace. So there are a wide variety of projects that are teed up, not all of which we will get to in 2022.

Got it. Thank you so much. Thanks, Courtney.

Our final question comes from the line of Ben Hendricks from RBC Capital Markets. Ben, please proceed.

Thank you. Just a quick question back to the labor. Just wanted to get any indication or any data points you can provide around the magnitude of net new hires that you completed in December and January and kind of how do you expect that pace to continue through the first quarter? Mm-hmm.

Yes. So we had increasing progression on net new hires in October, November, and December. And in January, we did even better than the fourth quarter. So it's going to take us a few months to get our net hiring to where we want it to be. But needless to say, we're making great progress. And I'm incredibly proud of the work that the team is doing to attract, engage, develop, and retain all of our associates.

Appreciate that, but you can't offer like a percentage increase or otherwise in terms of magnitude?

You know, it's in the hundreds that we are net positive in terms of hires, in the hundreds.

Thank you very much.

Thanks, Ben. I want to thank you for your interest and for joining us this morning. This concludes our call.