Brookdale Senior Living Inc.

2024 Earnings Call for Brookdale Senior Living. Joining us today are Cindy Beyer, our President and Chief Executive Officer, and Don Cusseau, 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 follow with the SEC from time to time, including the risk factors contained in our annual report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the release for the full safe harbor statement. Also, please note that during this call, we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brickdaleinvestors.com and was furnished on an 8K yesterday. Now, I will turn the call over to Cindy.

Thank you, Jessica. Good morning to all of our shareholders, analysts, and other call participants. Welcome to our fourth quarter and 2024 year-end earnings call. We are pleased to close the year by reporting fourth quarter REVPAR at the top and adjusted EBITDA above our previously provided guidance ranges. Dawn will cover the details of these fourth quarter results, while I will focus on our 2024 accomplishments and takeaways, as well as our 2025 expectations. We began last year with a steadfast commitment to our key strategic priorities and an expectation that through these, we would grow profitable occupancy in RevPAR, deliver meaningful adjusted EBITDA growth, and materially improve our adjusted free cash flow all while remaining uncompromising in our dedication to the health and well-being of our residents and associates. Reflecting on these 2024 financial priorities, weighted average occupancy grew 140 basis points. RESPAR increased 6.1%. Adjusted EBITDA grew over 15%. And adjusted free cash flow improved nearly 40%. turning positive for the back half of 2024 in the aggregate. Together, these results demonstrate continued progress towards achieving our ultimate potential and have set the stage for growth momentum in 2025 and beyond. Even so, we have further to go. As we have shared previously, beginning in the second quarter, occupancy fell below our expectations, which impacted our annual financial results. 2024 move-outs, particularly controllable move-outs, were much improved to their 2023 level and our move-ins remained above their pre-pandemic average. Yet, due primarily to a persistent disruption in lead flow from our two largest third-party paid referral partners, 2024 move-ins were below our expectations in the prior year. While we generate the majority of our movements internally, lower volume from these third parties meaningfully impacted occupancy beginning in the second quarter. As such, we immediately took action to redeploy marketing spend to internal marketing and advertising channels. We also strengthened our connections with regional and hyperlocal paid referral sources to help offset the impact. At the same time, we increased our efforts with the largest of our paid referral partners, and saw it achieve a promising rebound in performance. Through extraordinary efforts, our fourth quarter move-ins were above the prior year, were 8% above our pre-pandemic average, and were the strongest fourth quarter move-in volume we've delivered since 2016. It has taken time, and I remain cautiously optimistic, but I am incredibly proud of these fourth quarter results which reflect our unwavering dedication to delivering profitable occupancy growth. While our 2024 financial results reflect significant progress, they are only a small part of what we've accomplished. Brookdale is a business of people serving people. We build our business one relationship at a time, so it is vital that we attract, engage, develop, and retain the best associates. I could not be more pleased with the success of our efforts on this key strategic priority. In each of the last seven quarters, we have attained a year-over-year improvement in our trailing 12-month associate turnover. This supported more than 13 percentage points of improvement in 2024 compared to 2023. Additionally, retention of our key three leadership positions, which includes our executive director, health and wellness director and sales director also improved meaningfully in 2024. Leading this improvement was the executive director role where we achieved retention growth in every quarter of 2024 compared to the prior year quarters. This is so impactful as executive directors who are in place at least two years typically achieve improved operational results lower associate turnover, and higher resident and family satisfaction. I am grateful for the hard work at the community support centers and in the field, and I believe that their efforts on this critical priority are not only reflected in these metrics, but also in our being named as a top 200 most loved workplace by Newsweek in 2024. Our workplace isn't the only thing that differentiates Brookdale. I am incredibly proud of the positive outcomes our Brookdale Health Plus program continues to achieve. Health Plus, which was recognized as a 2024 Argentum Best of the Best Award winner, is an innovative care delivery model designed to support an enhanced quality of life for our residents through technology-enabled, evidence-based preventive care coordination. It focuses on addressing the unique needs of older adults particularly those with chronic conditions, by coordinating care and minimizing gaps, which are unfortunately common in the aging population. In 2024, we not only converted 80 additional assisted living communities to Health Plus communities, but also we received extremely favorable results from an expanded third-party analysis that measured our Health Plus resident outcomes. In fact, The independent analysis determined that residents living in HealthPlus communities had 80% fewer emergency room and urgent care visits and 66% fewer hospitalizations compared to seniors with comparable conditions living at home. HealthPlus is not only supporting positive resident outcomes, its success also can be measured in the operational results and resident satisfaction ratings of Brookdale HealthPlus communities. In 2024, we once again receive strong survey engagement from our residents and their families. There is always room for continued improvement, but I'm proud to share that across the vast majority of our customer satisfaction metrics, we achieved higher ratings compared to 2023. I am incredibly grateful that 94% of our residents shared that our associates treat them with courtesy and respect and that they feel safe and secure making a Brookdale community their home. This same level of trust and satisfaction was reflected in Brookdale being recognized once again in 2024 with the most communities on US News and World Report best of senior living listings. Even more recently, we received an inaugural WTWH Healthcare Prism Award for our strong social stewardship. This award recognized Brookdale for our unwavering commitment to advancing Alzheimer's research, support services, and care standards through advocacy, public awareness campaigns, and fundraising. I feel a deep sense of pride in this award, and I believe that each of the recognitions I've mentioned is a testament to the trust placed in us the quality of the care we provide, and the unique Brookdale programs that we believe support improved resident and family outcomes and associate engagement. Also, in 2024, we announced several strategic transactions as part of our ongoing efforts to optimize our portfolio and proactively manage our capital structure. The first of these transactions was a lease amendment with Omega Healthcare Investors, which beneficially extended the lease term for a high-quality portfolio of assets while securing $80 million in landlord-funded capital expenditures, including $30 million rent-free. We then announced the execution of purchase agreements to acquire 41 communities in three lease portfolios at a mid-8% cap rate on their combined operating income performance and total purchase price. By transitioning these communities from lease obligations to more favorable ownership structures at a lower cost, we are able to increase cash flow, reduce exposure to escalating lease costs, better capture long-term value creation opportunities, and achieve greater strategic flexibility to manage our portfolio effectively. We have successfully closed on the first acquisition with the remaining two transactions expected to close in the next few weeks. Most recently, We announced the favorable lease amendment involving a 120 community Ventas portfolio, which was set to mature at the end of 2025. As part of the agreement, we've extended the lease for 65 high performing communities through 2035. We will receive a landlord funded capex pool of 35M dollars. and we will be exiting 55 underperforming communities that lost $31 million of Brookdale cash flow over the four quarters prior to the lease restructuring. I am very pleased that we have solved the single largest capital structure issue that Brookdale has faced in the last decade. These 2024 portfolio management transactions are expected to drive meaningful improvements in cash flow and liquidity, increase the proportion of our own real estate portfolio to over 75% of consolidated units by year end, and support meaningful value creation for our shareholders. Turning to our capital structure activity, over the past 12 months, we have successfully addressed more than $1 billion of future maturities. As part of this significant achievement, We eliminated all 2025 debt maturities and reduced our 2026 maturities without extension options to just $44 million. This accomplishment is particularly meaningful given the $10 billion in 2025 senior housing industry loan maturities as reported by NIC. Our teams have already begun addressing 2027 maturities and thanks to the strong relationships we have cultivated with Fannie Mae, Freddie Mac, and multiple lending partners, we remain confident in our ability to successfully address these loans well before their maturity dates. Looking now to 2025 and beyond, I am filled with optimism about the future of Brookdale Senior Living. The senior living industry is experiencing a favorable and growing supply-demand gap, creating strong potential for future occupancy growth for many years. Inventory growth is near record lows with construction starts at levels last seen during the Great Recession. In the fourth quarter, less than 2% of our communities faced new construction within 20 minutes. High interest rates, elevated construction and labor costs, and lengthy development timelines suggest constrained supply will remain for the foreseeable future. Meanwhile, Demand is surging as the U.S. population ages at an unprecedented rate. More than 1 million new seniors will enter the market annually through 2036, with the first baby boomers turning 80 this year. Challenges including older adults living alone and having multiple chronic conditions, as well as the loneliness epidemic, are driving a greater need for senior living services, particularly programs like Brookdale Health Plus and Engagement Plus. to not just support seniors with activities of daily living, but to support improved outcomes and quality of life for residents. Our scale, clinical expertise, strong market presence, and concentration of needs-based services set us apart from others in our industry and make us uniquely positioned to meet this demand. We have built a strong foundation for success in an industry with tremendous long-term growth potential. Additionally, with 94% of revenue coming from private pay sources, Brookdale is less affected by fluctuations in Medicare and Medicaid programs compared to the broader industry. We expect our dedicated focus on steady and sustainable growth will enable us to return to generating positive adjusted free cash flow in 2025 while preserving tremendous future growth potential. By remaining steadfast in our commitment to our three strategic priorities, we will build upon our already strong foundation. Beginning first with our priority to get every available room in service at the best profitable rate. To overcome the disruption in the paid third-party lead flow during 2024, we dedicated ourselves fully and were successful in addressing the challenge through a multi-pronged response, which provided us with valuable insights and proven techniques, which we believe will support our 2025 occupancy growth. As with previous years, we are committed to achieving profitable occupancy growth, which will be supported in 2025 by our annual and continued appropriate expense management while meeting our resident needs, providing high-quality care and personalized service, and remaining in compliance with applicable regulations. To appropriately balance affordability for our services with covering the necessary costs to provide high-quality care and services, our January 1st in-place pricing increase was lower than the prior year increase but above the pre-pandemic average rate increase. Fourth quarter move-in volume provided positive momentum entering 2025, and when combined with the plans I just spoke to and the expected positive outcomes of our second and third strategic priorities, we expect to successfully deliver against this key strategic priority. Next, to attract, engage, develop, and retain the best associates, we will continue to prioritize programs that foster engagement and attract a mission-dedicated workforce are able to collaborate effectively to provide a high-quality resident experience. Our efforts remain centered on programs that allow associates to grow and develop with us and focus on extending the length of employment of our Brookdale community leaders and hourly associates. This will enable us to further strengthen our teams, ultimately benefiting our residents and shareholders. Our third priority is to earn resident and family trust and satisfaction through operational excellence and continual improvements in our high quality care and personalized service offerings. Our efforts are centered on creating tools to improve the skills of our leaders and the consistency of our operations through new processes and training programs, as well as through programs like Brookdale Health Plus, which we plan to expand to additional communities in 2025. and Brookdale Engagement Plus, which I am excited to share more details of on future calls. Additionally, with further enhancements to our quality and experiential dining, we will raise the bar higher for our residents and associates. I am confident that we are on the right path to deliver value for our shareholders through our commitment to providing our residents with a differentiated, high-quality experience and by providing our associates with a company where they can be rewarded and achieve their growth potential. With the progress that we have made on our capital structure, the simplification of our business, and the positive macroeconomic conditions providing a tailwind for our industry, our dedicated efforts in 2025 will center on operational excellence and driving profitable growth. we move forward with purpose and determination. And as a result, I am filled with tremendous optimism for Brookdale's future.

Thank you, Cindy. Good morning, and thank you for being here today. This morning, I'll walk you through our fourth quarter results, speak to our recent transactions, and then provide commentary for our 2025 financial expectations. I'll begin with our fourth quarter revenue. Residency revenue grew 3.9% over the prior year quarter. This revenue increase was despite a 2.2% or approximately 1,100 unit reduction in capacity since the beginning of the prior year quarter, as we have selectively disposed of certain communities. Consolidated REVPAR grew 5.5%, which was at the top end of our previously provided guidance range. This year-over-year REVPAR growth was driven by a 100 basis point increase in weighted average occupancy and a 4.2% increase in REVPOR compared to the prior year fourth quarter. This marked our 12th consecutive quarter of triple-digit year-over-year occupancy increases. Compared to the third quarter, occupancy increased 50 basis points sequentially which is ahead of the normal pre-pandemic seasonality for this period. Both move-ins and move-outs were better than their prior year levels. And as Cindy shared, we had more fourth quarter move-ins than in any of the last eight years for the comparable group. This not only benefited the fourth quarter, but provides us with a more favorable starting point for 2025. Our fourth quarter REVPOR growth was relatively in line with our year-to-date trend and reflected continued occupancy growth from lower acuity move-ins. These residents generally have a lower care rate at move-in, but have longer lengths of stay, which benefits occupancy meaningfully over the long term. Specific to the same community portfolio, fourth quarter REV PAR increased 5.2% over the prior year, driven by 90 basis points of occupancy growth and a 4% increase in rev pour. Moving to fourth quarter expenses, same community labor expense as a percent of revenue improved 40 basis points compared to the prior year fourth quarter. In fact, in every quarter of 2024, we delivered favorable labor results while continuing to remain focused on supporting resident satisfaction, meeting our residents' needs, providing high quality care and personalized service, and remaining in compliance with applicable regulations. Contributing to these favorable labor results were the benefit of sustainable occupancy growth, further reductions in premium labor, and the improved turnover Cindy spoke to, which results in longer tenured associates who become naturally more proficient in their roles. As a percent of revenue, fourth quarter same community other facility operating expense increased 50 basis points year over year. As this expense line has been higher than prior year in each quarter of 2024, in addition to normal inflationary pressures and annual premium resets, I think it's important to note again the impact of outsourcing our data centers, which changed the character of the spend from capital to expense. For the full year, this was a $6 million increase to same community other facility operating expense, but will be neutral from a cash flow perspective. Without the change in the characterization of spend, same community other facility operating expense as a percent of revenue would have been flat in 2024 compared to 2023. Fourth quarter same community operating income increased 4.4% year over year. Now moving beyond same community level results. In the fourth quarter, we incurred approximately $3.5 million of natural disaster expense, primarily related to Hurricanes Helene and Milton. This compared to approximately $1 million in the third quarter and no natural disaster expense in the prior year fourth quarter. Fourth quarter general and administrative expense, excluding transaction, legal, and organizational restructuring costs, and non-cash stock-based compensation, was 4.7% of revenue, a 30 basis point improvement from the prior year quarter. Lastly, cash operating lease payments were $56 million, which is in line with our previously provided expectations. These financial results culminated in fourth quarter adjusted EBITDA of approximately $99 million, which I am proud to say was above the top end of our guidance range once again. Compared to the prior year fourth quarter, adjusted EBITDA grew 15%. Contributing to this meaningful growth was our year-over-year operating income increase, favorable general and administrative expense, and improved cash operating lease payments. Adjusted free cash flow was approximately $12 million negative for the fourth quarter. Working capital timing, primarily related to the seasonal real estate tax payments was the main driver when comparing these fourth quarter results sequentially to the positive adjusted free cash flow we delivered in the third quarter. Importantly, and a key indicator for 2025 expectations, we achieved positive adjusted free cash flow in the second half of 2024. Fourth quarter non-development capital expenditures net which is net of both insurance proceeds and landlord reimbursements, were $40 million. Through beneficial lease terms that we successfully negotiated in our last several lease amendments, we received $17 million of landlord CapEx reimbursements in 2024, 9 million of which was reimbursed in the fourth quarter. As of December 31st, total liquidity was $389 million, We ended the year with annualized leverage of 10.4 times, which includes the timing impact of the lease portfolio we acquired in December. When you normalize for the impact of the trailing 12-month cash facility lease payments associated with these communities, annualized leverage would have been 9.9 times. For the next several quarters, as we previewed in our September 2024 investor materials, our annualized leverage calculation will have a timing difference reflecting both the trailing 12-month cash facility lease payments and the debt associated with the acquisitions. Importantly, and as we've shared before, on a forward 12-month basis, the annualized leverage impact from our beneficial acquisitions of previously leased communities is not expected to be material, and we expect continued adjusted EBITDA growth to improve annualized leverage. In addition to these acquisitions, we completed several other capital structure transactions, which are expected to provide meaningful benefits both in the immediate term and over the longer term. Cindy spoke to our recent Bent House lease amendment, which resolved our largest long-term capital structure issue and results in ongoing benefits to Brookdale. Regarding the amendment, we are pleased to have renewed our lease for 65 high-quality communities in existing Brookdale markets whose occupancy REVPOR, REVPAR, and operating income margin exceed the non-renewal portfolio. The lease for the 55 remaining communities will terminate no later than December 31, 2025. Of the 55 communities, 44 of those are expected to transition to new operators no earlier than September 1, 2025. At the time of transition, we will receive a corresponding cash rent reduction. The remaining 11 communities are expected to be sold by Ventas with the sale dates to be determined. Given the non-renewal of the 55 communities and the uncertainty of their disposition timing, we deemed it appropriate to remove the communities from our same community portfolio effective January 1st, 2025 to provide the most effective information for forecasting purposes. You will see the same community group change in our first quarter reporting. As part of the lease amendment, VENTAS agreed to make available a pool of $35 million for landlord-funded CapEx investments, up to $15 million per year. We believe this capital reimbursement and the financial benefit we expect to achieve from disposing of the negative cash flow group of communities will benefit our adjusted free cash flow beginning in 2025 with incremental adjusted free cash flow upside in 2026. Cindy also highlighted the continued proactive management of our debt structure. Notably, over the last several months, we refinanced two large agency loans, securing interest-only terms for the first two years and at rates lower than those in place at the time of closing. Additionally, we extend the maturities of two bank loans from 2025 to 2026, retaining one additional one-year extension option for each. And we also executed a strategic exchange of a substantial portion of our convertible senior notes, extending their maturity from 2026 to 2029. As a result of these efforts, we eliminated all 2025 debt maturities and reduced our 2026 maturities without extension options to just $44 million. We are very pleased with each of these transactions, which strengthen our position for 2025 and beyond. Turning to our 2025 expectations, in yesterday's press release, we guided to 2025 REVPAR growth of 4.75% to 5.75% over the prior year and adjusted EBITDA in the range of $430 million to $445 million. Each of these guidance ranges includes a number of assumptions, several of which I will speak to, But first, I'll address our 2025 portfolio expectations, particularly as it relates to the planned VENTAS community dispositions. Solely for the purpose of establishing guidance, we have assumed an October 1, 2025 disposition date for the 55 VENTAS non-renewal communities to be transitioned or sold. If the timing of these community dispositions varies from this guidance assumption, there may be variability in actual or future expected results, and we will provide updates as appropriate. More specifically, as of December 31st, 2024, we had 50,839 consolidated units as shown on page three of our financial supplement. Our guidance assumes that total average units will remain relatively in line with this volume through the third quarter of 2025. We then assume a step down in units to approximately 44,500 for the fourth quarter. These capacity expectations reflect only the dispositions and acquisitions that have previously been communicated. Specific to our REVPAR guidance range, we are pleased with recent improvements in move-in volume, which supported strong January occupancy, providing solid momentum entering 2025. and when coupled with the anticipated continued progress on our strategic priorities, we believe that 2025 in-year weighted average occupancy growth will accelerate from 2024 on improved move-in volume. Regarding rate, while higher than historic norms, we implemented a lower January 1st in-place resident rate increase than in the prior year. As a result of this and the lower acuity move-in trend that I spoke to earlier, we expect year-over-year REVPOR growth in 2025 to moderate from the 2024 growth level. Lastly, from a 2025 quarterly trend, we believe that both weighted average occupancy and REVPAR growth compared to the respective prior year quarters will be stronger in the fourth quarter than the first quarter as we lap the lead flow disruption from the paid third-party referral partners. Moving to our adjusted EBITDA guidance range. As Cindy said, we have remained diligent in ensuring profitable occupancy growth, and as a result, we expect favorable flow through of our 2025 revenue increase, given the high fixed cost component of our business. Additionally, we are in the process of implementing a new ERP system, which is expected to provide long-term benefits to our associates and increase back office efficiencies. Previously, we own the related on-premise software license, which was largely capitalized, thus incurring minimal annual expense. With the introduction of the new ERP system, we have incorporated approximately $3 million of incremental facility operating expense into our 2025 guidance range. We expect our 2025 general and administrative expense to increase over 2024 generally attributable to the annual merit increase and a normalized incentive compensation expense. Lastly, regarding cash facility lease payments, we expect the first through third quarters of 2025 each to be approximately $57 million. Assuming an October 1st disposition of the 55 VENTAS communities, We then expect these payments to step down sequentially in the fourth quarter. We are pleased with our 2025 adjusted EBITDA expectations, which would result in 11% to 15% year-over-year growth. Through continued and sustainable adjusted EBITDA growth and proactive and favorable portfolio and capital structure management, We believe we have positioned Brookdale to deliver meaningfully positive adjusted free cash flow in 2025. Let me close by saying we are optimistic for our continued forward momentum and very confident that our disciplined approach to growth will deliver favorable results in 2025. I'll now turn the call back over to Cindy.