Brookdale Senior Living Inc.

Welcome to the Brookdale Senior Living third quarter 2022 earnings call. My name is Harry and I'll be coordinating your call today. If you would like to ask a question during the Q&A, you may do so by pressing star 1 on your telephone keypad. I'll now like to hand over to Cathy McDonald to begin. Cathy, please go ahead.

Thank you and good morning. I'd like to welcome you to the third quarter 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 report 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 you and your loved ones are healthy and happy. Welcome to our third quarter 2022 earnings call. We appreciate you joining us today. We are pleased to report that we saw a number of operational improvements during the third quarter despite numerous challenges from Hurricane Ian. Our senior housing revenue growth was strong for the third quarter, as RevPAR increased 10% for the quarter and year-to-date compared to the prior year periods. Weighted average occupancy grew at nearly the same sequential rate as last year, even with Hurricane Ian impacting the last week of the quarter. Year-to-date, RevPAR was 4.5% better than last year, which helped mitigate the continuing impacts of inflation and the challenging labor markets. Adjusted EBITDA, excluding government grants, increased 16% compared to the prior year quarter. In addition, we recognized Phase IV provider relief funds in the third quarter. Sequentially, the other operating income increase of $58 million helped deliver a 111% increase to adjusted EBITDA, and the grants resulted in positive adjusted free cash flow. We are pleased that the contract labor declined more than 40% from the second to third quarter and offset nearly all of the sequential incremental costs, most notably the extra calendar day, which was also a holiday. That said, with the impacts from the extended labor recovery, Hurricane Ian expenses, and higher general repair and maintenance costs, we find it necessary to revise and tighten our adjusted EBITDA guidance for the year. Let me turn to our third quarter financial highlights. REVPAR increased 10% compared to the prior year quarter, and we continued on the strong path of occupancy recovery. The third quarter's weighted average occupancy increased 390 basis points compared to the prior year period, and September marked the 11th consecutive month of year-over-year growth. Move-ins were 7% higher than in the third quarter of 2021. In fact, On a same community basis, the third quarter saw the most quarterly move-ins in the company's history. As reported by Nick, the industry's third quarter senior housing occupancy increased 110 basis points on a sequential basis. We are delighted that Brookdale again exceeded industry growth by increasing sequential occupancy by 180 basis points. Our strong top line execution plus the benefit of both supply and demand tailwinds is reflected in our higher move-in volume. Turning to labor, our third quarter total labor costs were nearly flat on a sequential basis. The contract labor reduction mitigated the incremental sequential cost, most notably the extra calendar day, which was also a holiday. As we continue to increase net hires to resolve contract labor, we saw an increase in training hours for the new associates, which resulted in some overlapping hours. Quarter by quarter, we worked hard to dramatically reduce contract labor from the peak in December 2021 by filling more shifts with dedicated Brookdale associates while maintaining strong standards of service and providing high quality care. Sequentially, contract labor declined more than 40% for the third quarter. As mentioned earlier, we are continuing our successful program of increasing net hires and decreasing our reliance on contract labor. Despite ongoing challenges in the U.S. labor market, we achieved 11 consecutive months of positive net hires through September. Year to date, our net hires exceeded 4,500, increasing our employed workforce by 14% since year end. A large and consistent Brookdale workforce is good for our residents because the culture of caring and relationships between residents and our associates are part of the many benefits of senior living. While we continue to make steady progress, we are not where we want to be with labor. Contract labor usage is declining, but our progress is slower than expected. Associate turnover remains elevated, and we are working to reduce it, which will decrease training costs and improve workforce productivity. Competition for community associates remains fierce and wage pressure continues as a result of the highly competitive labor market. Although other industries are reporting some stabilization in the labor market, the senior living industry has yet to experience stabilization. With the steady progress we've made and the U.S. job openings shrinking, we do expect less labor pressure in 2023. Our pricing actions for 2023 will incorporate expected labor and inflationary costs. As we ended the quarter, Hurricane Ian, the fifth most powerful storm ever to make landfall in the US, impacted our operations. It was a slow-moving storm, which caused widespread destruction. Given that Brookdale had 77 communities within the projected path of the storm, I am grateful that we were able to help protect our residents and associates as well as our communities. It's important to take a moment to thank our many dedicated associates who cared passionately and acted courageously to help protect our residents and each other during and after Hurricane Ian. We evacuated nine communities and 85% of the residents who chose to relocate with us were welcomed by other Brookdale communities within Florida. I want to express deep appreciation for our associates from evacuated communities who traveled with our residents during the evacuation and stayed to care for them. I also want to say a special thank you to our associates at host communities who worked hard to make sure that evacuated residents would continue to feel a sense of normalcy during the evacuation. With Brookdale's size and scale, I'm also grateful for our corporate and field teams who mobilized to help make sure that our residents would have beds to sleep in and nutritious food to eat. Our associates worked hard to make a difficult time easier for residents by assisting with obtaining medication and personal items, as well as helping care for residents' pets. Planning and execution are critical to success. Our asset management teams pre-staged supplies and worked closely with fuel and water vendors. Where appropriate, maintenance teams stayed in our communities to accelerate the recovery. We know residents want to return home as quickly as possible after the storm passes. At the same time, we have a robust process to ensure the community is safe and comfortable so we can provide a positive resident welcome home experience. I'm happy to share that residents have returned home to all nine previously evacuated communities. Turning to our 2022 annual guidance, in our press release, you will see that we have updated and tightened our guidance range. We expect double-digit REVPAR growth for the full year as we continue to make occupancy gains combined with the existing strong annual rate increase. We incorporated third quarter operating results and updated our fourth quarter expectations due to an extended labor recovery as well as Hurricane Ian costs. We are taking many steps to manage labor costs appropriately. In the fourth quarter, barring a significant disruptive COVID-19 variant surge, we expect to continue reducing premium labor, have a larger Brookdale workforce, and as occupancy continues to increase, expect to see more efficiencies in our operations. As interest rates increase and the overheated labor market cools, we expect less wage pressure. Reflecting on the aftermath of Hurricane Ian, most of the communities in the past had some level of damage, and we, along with our trusted partners, are working tirelessly to complete repairs. We bear hurricane expenses below the deductible limits. In summary, Even though we reduced guidance, the middle of our range will deliver a sizable year-over-year adjusted EBITDA increase. We are still in the early stages of what we expect to be a long and prosperous tailwind. We have strong occupancy momentum, and our 2023 pricing will incorporate inflationary impacts. The demographic demand and need for our services are indisputable, And with tight capital markets, the current benefit from low news supply will extend for several years. I will now turn the call over to Steve.

Thanks, Cindy. I'm glad to be back from medical leave and sincerely grateful for all the thoughtful wishes, as well as the outstanding Brookdale team who stepped up in my absence. Let me now provide three key takeaways for the quarter. First, RevPAR increased 10%. in the third quarter compared to the prior year quarter. Second, expenses. On a sequential basis, facility operating expenses increased about 2.5%, along with broad inflationary pressure. The most notable items included seasonally higher utilities and labor expenses from an additional calendar day, which was also a holiday. Third, sequentially we recognized an incremental $58 million of other operating income primarily driven by provider relief funding, received in August. As of September 30th, our total liquidity was nearly $400 million. Now, let me provide context for these highlights on the same community basis, starting with revenue. Occupancy increased 400 basis points compared to the prior year quarter and sequentially increased 190 basis points. REVPOR, or rate, improved 4% compared to the prior year quarter On a sequential basis, rev pour was lower by 40 basis points. This was about half of the first to second quarter's change due to the benefit of stronger third quarter move-in rates. With positive demographic tailwinds, pricing power, and only 2% of our communities currently exposed to new construction starts, we see a long runway for revenue growth. Turning to operating expenses. Starting with labor, the third quarter labor expenses increased 1% on a sequential basis. We reduced contract labor by more than 40%, which mitigated increases for an additional calendar day, which was also a holiday, and direct labor and overlapping costs due to training new associates. As our permanent workforce stabilizes, we expect further reductions in contract labor, lower overtime, and improved productivity. Other facility operating expenses increased 6% sequentially. Four factors were the primary drivers of this change. Broad inflationary pressure accelerated to a new multi-decade high in September. Utility repairs and maintenance expenses were also higher due to seasonality and record heat waves. An extra day in the quarter drove incremental food and supply costs. And COVID-19 related expenses were higher as BA-5 cases peaked in the third quarter. The fourth quarter other OPEX is expected to be less sequentially due to lower seasonal expenses such as utilities, supplies, and repairs, partially offset by Hurricane Ian, remediation, and evacuation costs. Sequentially, adjusted EBITDA increased 111%. Excluding the benefit of government grants, adjusted EBITDA increased 16% compared to the prior year quarter. adjusted free cash flow turned positive in the quarter. This $53 million sequential improvement was primarily driven by our acceptance of provider relief funds, partially offset by higher interest expense due to rising interest rates. Turning to liquidity, as of September 30th, total liquidity was $396 million, compared to $412 million at the end of the second quarter. In October, we refinanced all of our 2023 debt maturities with the exception of one highly covered loan secured by an asset plan for sale. The maturity runway has now been cleared for nearly two years, considering that our next agency debt maturity is September 2024. Throughout the pandemic and recovery period, we have successfully executed plans to support liquidity. Cash flow and liquidity are a priority, and they will continue to be. Now, let me summarize our revised 2022 guidance. We expect annual REVPAR growth to be approximately 10%. While historically, the fourth quarter sequential occupancy trend was flat, this year we expect to deliver over 50 basis points of sequential growth. On a year-over-year basis, we expect the fourth quarter to be well over a 300 basis point improvement. The impact of Hurricane Ian is included in our updated guidance. We currently expect approximately $8 million of expense, net of expected insurance recovery, and $10 million of non-development capex. We bear hurricane costs below deductible limits on a community-by-community basis. Because the storm had such a wide breadth, it impacted 70 communities, each with a separate deductible. Barring a significant disruptive flu or COVID-19 variant surge, The fourth quarter facility operating expenses are expected to be lower than the third quarter due to a continued reduction of premium labor, lower seasonal utilities, along with more efficiency in our operational workforce. We expect annual adjusted EBITDA to be in the range of $250 to $260 million. Annual non-development CAPEX is now expected to be around $170 million, including hurricane-related investments. This increase is expected to be offset by lower development at CapEx. Aligned with our previous guidance, we expect net interest expense to be $6 million higher than the third quarter 2022. There are two unique working capital uses of cash in the fourth quarter. We have a final CARES Act government repayment of $32 million, and we hedged the October refinancing with an interest rate swap, which will have at one time net impact of $6 million in the fourth quarter. As we are in November, I'll provide a few early 2023 indicators. We believe we will see another strong year of occupancy growth. With higher operational expenses this year, we expect 2023 rate increases will be greater than 2022. The new in-place residence rates are effective January 1st and will incorporate expected labor and inflationary cost increases. As Cindy noted, With U.S. job openings falling, we expect the 2023 labor market pressure to improve. From a cash flow perspective, we have no debt maturities in 2023 except for one highly covered loan secured by an asset plan for sale. Over the past two years, we have demonstrated our ability to grow occupancy. Additionally, the senior population is growing rapidly, and new construction has slowed significantly. where our communities will see minimal competition from new builds. With these trends combined with pricing power, Brookdale's growth outlook is strong. I'll now turn the call back over to Cindy.

To summarize Steve's remarks, we believe continued occupancy growth in 2023, coupled with a strong in-place resident rate increase on January 1st, will drive significant EBITDA and adjusted free cash flow growth. We've seen move-in success with our AI-driven analytics pilot, which accelerates resident socialization and engagement by connecting new and existing residents with common interests. Our overarching focus is the health and well-being of our residents and associates, and we are continuing to innovate. As an example, we are seeing improved outcomes in our Health Plus communities, such as lower emergency room or urgent care use. and lower hospitalization rates when compared to similar populations. Our innovation is another way to differentiate our services, and we look forward to expanding this program to additional communities in 2023. As we close our prepared remarks, I want to thank all of our associates, both corporate and field, for their commitment to enriching the lives of the seniors we serve. Operator, we will now open up the call for questions.

If you would like to ask a question, please dial star, followed by one on your telephone keypad now. And please ensure you are unmuted locally when preparing to ask your question. Our first question is from the line of Brian Sankula of Jefferies. Please go ahead.

Hey, good morning. Good morning. So I guess my first question is for Steve first. As I think about the guidance adjustment for the year, and your Q3 performance. Maybe if you can just walk me through how you're bridging sequentially and how you're thinking about the EBITDA progression.

Thanks. Sure. Thanks. And morning, Brian. The middle of the guidance implies $60 million of EBITDA in the fourth quarter. I'll start with third quarter's EBITDA run rate of about $40 million without grants. and bridge the $20 million to Q4 EBITDA. Really three components. First, revenue. We expect fourth quarter occupancy growth to be over 50 basis points on a sequential basis. That's well over 300 basis points on a year-over-year basis. So that math is pretty straightforward. Second is labor. We have and expect to continue reducing premium labor, have a larger Brookdale workforce, and see more efficiencies in our operational workforce, thereby reducing overlapping expenses. And third, other facility op-eds. We expect lower seasonal utilities and repairs, to generally be offset by Hurricane Ian, which is in the neighborhood of $7 million of net impact. So these components should bridge you to the fourth quarter guide.

Got it. And then, Steve, as I think about 2023, I know it's early to think about guidance, but given what you just gave us on the bridge from Q3 to Q4, maybe adjusting for that 7 million hurricane Ian number. So let's just say 67 million. Is that the right baseline to sequentially build earnings off of? As I think about 2023, I mean, is that the right ballpark for like annualizing and putting in some growth expectations in there?

So, uh, I don't want to get too far, uh, ahead of my skis. Uh, so I'll give you a little color on, uh, 2023. Um, It appears we're at the beginning of somewhat of a super cycle, meaning we believe occupancy growth, coupled with strong rate increases, will drive EBITDA in 2023. So, by way of example, let me connect a couple dots for a sharper picture of Q1. I stated that our 2023 rate increase will be greater than 2022. For perspective, 2022's average in-place resident rate was in the high single digits. And for perspective, that led to a sequential rev pour increase of 5.4%. Over the past couple months, our 60-day and 90-day rate notification letters were mailed out to residents and our 30-day letters will be mailed on or before December 1st. This year, 2023's average in-place resident rate increases will be over 10%. So this, of course, will have a significant benefit to the bottom line.

Got it. Okay. And then the last question for me, as I think about labor, it sounds like things on the macro level should be driving some improvement In terms of what's left, in terms of opportunity to bring contract labor down and maybe just overall facility operating expenses on a dollar basis, maybe if you can just walk us through what's left and what are the initiatives that you're putting in place to drive that? I mean, very impressive 40% decline in contract labor in Q3, but how much juice is left on that factor?

There's a lot of opportunity. And our goal has been to attract, engage, develop, and retain the best associates. That's been pretty consistent at Brookdale. But it's fair to say that our contract labor peaked in December of last year. And on a monthly basis, we've now brought our contract labor down by 75% from the peak. The most effective thing that we've done to drive that improvement is our focus on net hires. And we've hired more than 4,500 new Brookdale associates this year. And that's a 14% increase in our workforce. The reason that focusing on net hires is so important is because if you think about just the cost of premium labor, and if you compare it to the cost of a full-time Brookdale associate, contract labor can be two to three X. Overtime is one and a half times. So what we need to do is keep increasing our full-time Brookdale associates and our part-time Brookdale associates too, so that we can work more hours on that standard hourly rate. The second thing that we need to do is we need to improve our turnover. One of the realities that we face is the pandemic has been particularly hard on healthcare and senior living. And so we have seen an elevated turnover rate. And what we need to do is bring that back down. So we're very focused on that. We have increased compensation to make sure that we're paying appropriate market rates. We're looking at our benefits. We are giving career passing opportunities that are unmatched in our history to our associates by prepaying training costs for CNAs and med techs so that people can grow their career with us. And we need to make sure that people understand that they can have a good life with Brookdale and they can live the quality of life they want to while still serving our seniors and being united by our mission. We'll keep our focus on that.

Thank you.

Thanks.

Our next question is from the line of Josh Raskin of Nefron Research. Please go ahead.

Good morning, Josh.

Hey, good morning. Jack Shevmarko here. I'm for Josh. Thanks for taking the question. If you look at slide eight of the investor deck, you note that there's $275 million in annual incremental revenue if the business is able to get back to that pre-pandemic occupancy level of 84.5% and $430 million if you're able to get back to the peak occupancy of 89%. So I was just wondering if you could provide some general thoughts on how we should think about the timing of getting back to those occupancy levels when those revenues will flow through to the reported results. Thanks.

It's good to hear from you. I'm sorry that we missed Josh, but it's great to have you on the call. If I think about the road to recovery, there's no question that we're firmly on the road to recovery. And I think that the last two years are indicative of the progress that we can make. I'm really pleased about the fact that we've had such strong occupancy growth since we inflected in March of 2021 We've seen 780 basis points of occupancy improvement. And we have, in the third quarter, seen the strongest move-ins in our company's history. So I do think that we're at a time now where supply and demand are tailwinds as opposed to headwinds with that aging baby girl demographic and the constricted supply as a result of both COVID-19 as well as rising interest rates. So our expectation is that we will keep pushing to see move-ins increase. And if you think about sort of move-outs, I think we've worked through the vast majority of our higher acuity move-outs as a result of the pandemic. That's one of the things that tempered our progress in 2022 because people moved in with us when they had higher acuity. Therefore, the time before they needed additional services or they passed, was shorter than we've seen historically. So I think that will be something that is more normal for us moving forward.

Great. Thank you. And then if I could just squeeze one more quick one in. Just wondering if you could give some thoughts on how you view the current market for divestitures and whether you're seeing any inbound interest. I know it would also be helpful if you could speak to Brookdale's appetite for reducing debt in light of the lower EBITDA levels. Thank you.

I think that the biggest opportunity that we have in front of us is the huge opportunity that is in front of us. And if you think about slide eight, that shows the revenue opportunity at today's market rates. And as Steve mentioned, we're expecting to pass through a stronger than average and a stronger than 2022 market rate increase in 2023. Now, that's not to say that we will never sell real estate. There may be a community here or there that doesn't fit with our strategy and that we choose to dispose of, but it's not as big a part of our future as it was of our past. And I think that if you think about leverage levels, the real issue with the leverage is the level of our adjusted EBITDA, not the level of our debt. So as we improve our adjusted EBITDA, our leverage ratios will drop just by the improved performance. And we do see a path to strong improvements in profitability and cash flow.

Okay, great.

Thanks very much.

Thanks, Marco.

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

Great. Thanks. Good morning, everybody.

Hi, Steve.

Hi, good morning. Just a few questions here. First, just to kind of clarify around the hurricane impact, does any of that from just an EBITDA perspective flow into 2023, or does all that sort of normalize as you're exiting the fourth quarter? I just want to confirm yes or no. Does hurricane impact bleed into next year or not? And then the other question, it's kind of more of a semantics question, but I guess I was curious, the way you described the rate increases for 2023, Do the actual end resident lease contracts actually show specific rate increase components for either inflation adjustments or labor? I don't want to call it a surcharge. Does it show components like that, or is it just sort of one rate with an overall percent increase without really much explanation for why it's going up the level it's going up? I'm just curious on the semantics or the components around the verbiage and the contracts themselves. Thanks.

So I'm going to take the rate question first, and then we'll go to the hurricane question. We set each and every resident's rate individually. And as you might imagine, it's important to us that our residents understand the rationale for our rate increases. So our executive directors will sit down with our residents and explain sort of the pressure that we've seen in labor costs, the other inflationary costs that we're bearing. and we'll share with them their individual rate increase. Now, usually there's two components to a resident's rate, and that's rent and care. Care, as you might imagine, changes more regularly as a resident's support needs increase, but there are one-on-one discussions at the individual resident level. Unlike some of our competitors, the vast majority of our resident rate increases are January 1st, And so virtually all of our in-place resident rent increases occur there. We do start selling market rates in October 1st, so that'll give us a benefit for the fourth quarter. Now, if you think about the hurricane costs, and Steve can correct me on this, with regard to OPX, we would expect most of that, virtually all of that. There might be something tiny that goes into 2023, but virtually all of it should be in 2022, because really what that is, the incremental labor and the repairs and maintenance, Now, as it relates to CapEx, that might not all occur sort of in 2023. Sometimes that trails, 2022, sometimes that trails into the following year. And Steve, is there anything you want to add to that?

No, that's it. It's really CapEx that might bleed into 2023. We have 70 communities impacted, so there might be a handful that still have CapEx costs.

Would there be any loss of revenue, though, into 23 as far as hurricane impact? Or does insurance sort of make you whole on that?

So we have business interruption insurance. And as we said in the prepared comments, all nine of our communities have residents who have returned home from the hurricane. Now, as we think about it, we probably lost about 40 move-ins at the end of September from... you know, people who are in the process but didn't move in that last week of September. And then when you relocate residents or when families have personal catastrophes, you may lose some residents because their family has moved away. And that's, you know, I don't think that's something that's material, but I also won't say the number is absolutely zero.

Got it. Okay. Thanks.

Thanks. I should also say we are seeing strong movement activity in the state of Florida, so I want to make sure that I leave on the positive, and we usually do see that after a hurricane.

Thank you. Our next question is from the line of Tao Chu of Stifel. Please go ahead.

Hey, good morning. Good morning, Tao. Welcome back, Steve. So my first question is really a clarification on the re-question earlier. You mentioned the two pieces there where you see higher rent growth on January 1st. And I think third quarter, you can look at the care revenue that was kind of affected by the normalizing acuity. So how should we think about, you know, the care portion of the rate, you know, in terms of that progression throughout the year and next year? And secondarily, you know, thinking about discounts moving, you know, how has that evolved over the year? And maybe your outlook for next year as well.

Yeah, let me just start by saying care revenue is generally between 15 and 20% of our overall revenue. And we did see during 2022 our resident acuity at the end of the third quarter was consistent with our pre-pandemic acuity of our residents. So we think that is an impact that we've really already experienced in 2022. And I'll leave the rest of the question to Steve.

You bet. Like Cindy mentioned, We have seen some lower care revenue due to the higher acuity residents that moved in during the pandemic that are now moving out, but we expect these needs-based move-outs to stabilize as recent move-ins have reflected residents with lower acuity kind of back to the pre-pandemic level. So as lower acuity residents move in, we should see longer length of stay and a kind of a stabilized care revenue. As far as the kind of the year-over-year dollar amount on rates, I mentioned that rent is going to be over 10% in 2023. And generally speaking, that's a weighted average number. That includes what I just gave you, both rent and care.

The second part of that question is really about discounts on the moving. So now that we see a little bit of deceleration on the occupancy side, do you feel like you need to do more discounting in order to boost that occupancy?

Well, I think it's important to know that, like, October 1st, we started selling at a higher rate And so what that means is that the new move-ins are higher relative to our existing residents than they've been previously. Now, we are seeing generally an improvement in the discounting across sort of the country, but there's always a community or a market where there may be a new competitor where discounting is both necessary and appropriate. But our goal is to always maximize rev farms to balance growing occupancy and rate. And I think that we've demonstrated in our history that we have done that well by only taking discounts where it's necessary to get a better growth of REVPAR.

Yeah, throughout the year, we have seen sequential improvement in release rates, which we've seen particular strength compared to in-place resident rates in AL, for instance. So we do think that we are at the beginning of a super cycle, if you will, where we have occupancy growth and strong rate performance.

Great. Super cycle. I like that word. So my second question is on labor. You know, Cindy, you mentioned the 14% growth in full-time employees this year. I don't know if it is possible to quantify you know, any additional hiring you anticipate for next year to replace contract labor and also, you know, anticipate additional outcomes recovery?

Yeah, it's a really good question. What I will say is I want to keep hiring associates until we're able to staff as many hours using regular wages as possible. And the reason that that is not an absolute number of people is because the workforce has changed compared to the pre-pandemic. And people want to work when they want to work, where they want to work, and how they want to work. So even if you've got the same number of associates, they may not work as many hours if they're part-time. And there's always a little bit of friction in terms of when your schedule is open and when somebody wants to fill that particular schedule. The other thing that's different from pre-pandemic is we have more people who need to quarantine so that we can sort of keep them away from residents when they may be infectious from infection. And so it will take more workers to sort of staff our communities, but that doesn't mean more costs, right? What we should have as we stabilize is we should have a lower cost per hour because we're working to eliminate that premium labor And that's the play that we're trying to make. So I think we'll be hiring for a little bit. And we will, you know, constantly make sure that we've got the right mix of employees in the right location.

Great. And last one, if I may, you know, Cindy, look at 20.2 so far. You know, just as we thought COVID was getting better compared to prior years, you know, we had another unprecedented year in terms of Omicron, hurricane inflation, which certainly makes forecasting very difficult. As you think about next year, what is your guidance philosophy and do you expect to provide a three-year guidance since many of your peers are still guiding quarter to quarter?

You know, I will say that I have never experienced, you know, 100-year pandemic, 40-year inflation, fifth worst hurricane in the United States, unprecedented labor market pressures. And it has really challenged our ability to provide guidance that's been helpful. If I could get in a time machine and go back, I probably would have given guidance for the quarter as opposed to the year. Having said that, we will evaluate what the right position is for guidance in February, and we'll try to make the best decision for our shareholders. Our goal is to try to share with you what we know or what we think we know. And there's no question that this year's operating environment was a lot harder than we expected.

Great. Thank you, everyone.

Thanks.

Our next question is from the line of Joanna of Bank of America. Please go ahead now.

Good morning. Thank you so much for taking the questions here. If I missed the discussion around pricing into next year, I know previously we were talking about you expect the increases to be higher than this year. We heard some other operators talking about raising rents by 10% and I guess pulling it forward. It's increasing, pulling them forward into this year actually. So how should we think about what Brookdale is planning to do in terms of the magnitude of the rent increases next year and any potential for timing change of these increases? Thank you.

Yeah, I think the first thing to address is timing. And what's different about Brookdale is the vast majority of the rate increase are January 1st. So if I had anniversary increases that weren't going to take place until June or July of next year, I might think about whether putting a mid-year rate increase was the right thing to do. When we evaluated that internally, we thought that there was more trust from our residents by maintaining our rate for the year. and then to pass through an appropriate and fair price increase in January 1st of next year. As I said earlier, our expectation is that we will set rates at the individual resident level, taking into consideration the pricing plans that they have. But on average, we do expect that our rate increases will be double digits.

Yeah, that makes sense. And I guess another topic, sorry if I missed that, in terms of a flu activity, so we see, you know, earlier start of the flu season. So any commentary there in terms of what you see in your communities? Have you instituted any admission bands in your communities? And, you know, is there anything in building into your guidance for Q4? Is it more a Q1 sort of event if it continues to be at this high level? Thank you.

I am grateful that all of our communities are open and we do not have any flu closures. Now, traditionally, the flu season is a Q1 issue for senior living. But if you look at the CDC statistics, there's no question that there's elevated flu activity in the United States. And so what we're focused on is trying to make sure that our residents and associates are vaccinated. for both the flu and for COVID-19 to minimize any impact on the residents if they do happen to get infected. We have not specifically reflected increased flu-related guidance into our fourth quarter, but it is something that we are very focused on to make sure that we're maintaining our strong infection prevention protocols. And this is just a point to go back to the pandemic when both prospects and healthcare providers alike recognized Brookdale's clinical leadership during COVID. So we're going to keep strong infection prevention protocols, and that's going to be our focus because our top priority is always the health and well-being of our residents and associates.

It definitely makes sense. And I guess if I may squeeze the last one. So you mentioned contract labor expenses. Obviously, a very good job there in terms of reducing and reliance on contract labor. But As we think about, I guess, both your clinical labor and the unskilled labor, how should we think about wage growth going forward? There's some contract labor expenses coming down, but then I guess we're still in a very high inflationary environment. So how should we think about wage inflation in those two buckets, the skilled and unskilled labor going forward into next year? Thank you.

Yeah, our same community labor expense was up 11% sort of year over year in the third quarter. Part of that was rate, part of that was occupancy. I think that we made significant wage increases as have others in our industry during the fourth quarter of 2021 and throughout 2022. I do think that the rate of increase will be less in 2023 than it is in 2022. But we're still working on setting our budgets and we have to respond to the labor market as appropriate. Unlike other healthcare settings, we don't really have the option of shutting a wing, reducing beds. Our residents live with us. So we need to make sure that our communities are appropriately staffed. And the most efficient way to do that is with full-time and part-time Brookdale associates working regular hours. So our focus is going to be on attracting those associates, retaining them, engaging them, And hopefully, the reduction in contract labor and overtime will more than offset some of the pressures that we see in wages. Or at least partially offset. I shouldn't say more than offset. I don't want you to think our rates are going down. Thank you.

Right. I appreciate the occupancy. Thank you so much for the call.

And our next question is from the line of Ben Hendricks of RBC. Ben, please go ahead.

Thank you, guys. Just a – sorry to harp on rates, but just a two-part quick follow-up on the double-digit in-place rent increase. If we isolate the street rents that went into effect in October, were they kind of in that double-digit range as well? Just wanted to get an idea of how they compared or if there was a discount there. to what you're putting in place for the in-place rent. And then given the magnitude of that rate growth year over year, how do we think about the degree to which that might temper occupancy growth in 2023 versus this year? Thanks.

Yeah, the rate increases that we put in place were generally the same for the market rate increases and the in-place rate increases. Now, it's important to know that there's a toolkit that our sales associates have. to get people to move in, and so that toolkit is always available to our sales associates. I do want to make sure that you know that even if we say that we're going for a double-digit rate increase, it doesn't net down to a double-digit increase in rev pour, and I think Steve tried to take you through that at the beginning of the call. Steve, do you want to add?

No, that's exactly it. We start in the fourth quarter to pre-price for the rate increases. And the rev pour that we're going to see next year, I gave you the example of 2021 fourth quarter into 2022, rev pour being up 5.4% on a slightly less than double digit rate increase. in place rate increase.

Thanks guys and then just any thoughts on how occupancy might progress given these rent increases versus this year?

We're always balancing occupancy and rate and our belief is that if we charge a fair rate for our services that will not be a barrier to growing occupancy particularly in a setting where there is limited new supply growth. The silver lining of the pandemic is that people have put less new units under construction, and that is very positive for us. At the same time, there's unprecedented demand for the seniors who need the care that we provide, and we think those two things going together will help us continue to grow our REVPAR and ultimately translate into improved adjusted EBITDA and better cash flow.

That's great, guys. Thank you very much.

Thanks so much.

We have reached the end of the question and answer session, and I'll now hand the call back over to Cindy for closing remarks.

Thank you so much, Harry. I want to thank everyone for joining us today, and I am very optimistic about our prospects for the future. We've done two things incredibly well this year. We have grown occupancy, and we've protected the rate. That will continue to be a focus. We're making progress on our labor, and we will continue to stay focused on that. With that, I'm going to ask you to close the call, Harry. Thank you so much.

Certainly. Thank you for everyone who has joined us today. This concludes Brookdale Senior Living third quarter 2022 earnings call and you may now disconnect your lines.