Q3 2020 Brookdale Senior Living Inc Earnings Call

And good morning, everyone I'd like to welcome you to the third quarter 2020, <unk> earnings call for Brookdale senior living.

Joining us today, our Cindy Baier, 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.

Certain of the factors that could cause actual results to differ are detailed in the earnings release, we issued yesterday as.

As well as in the reports we file with the SEC from time to time, including the risk factors contained in the 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, our 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 dotcom forward Slash investor and was furnished on an 8-K yesterday.

With that I would like to turn the call over to Cindy.

Thank you Kathy good morning to all of our shareholders analysts and other participants welcome to our third quarter earnings call.

Balance between actions that help keep our residents safe and actions that promote their emotional and social wellbeing.

We created solutions and trained our people to begin this new chapter.

Since the early days of a pandemic, we had been a clinical and operational leader in our industry with unmatched centers of excellence. This enabled us to overcome enormous challenges evolve quickly and share our knowledge to help as many people as we could.

We took decisive actions to help protect the seniors in our care.

Strong protocols are working as demonstrated in our testing results on October 31st around 1% of our residents had a current positive COVID-19 test result.

We are proud of these test results. However life is about more than just protection.

Each of us wants to see here and hold our loved ones.

Brookdale is making this a reality for our residents and their families were allowed by state and local regulations family and friends can now visit residents in apartments or an open air spaces after screening and with appropriate P. P E C.

Socializing among our residents is slowly returning to a new normal with small group dining exercise classes activities and in house offerings with proper social distancing in many communities.

Had timely insights into the steps, we can take to improve residents' experience of life in our communities.

In addition to acting on feedback from our existing residents. We are focused on how to make life easier during the pandemic for prospects or as we call them future neighbors.

We developed multiple solutions to ease restrictions and make our move in process more welcoming.

Increased 35% on a sequential basis with fewer restrictions on move ins.

On average move in volume at communities with fewer restrictions third 22% better than those with higher restrictions.

As we anticipated after seeing lower controllable move outs last quarter from resident sheltering in place in the third quarter, we return to the normal trend with the combined trailing 12 months control will move out being slightly favorable on.

On October 31st 95% of our communities where accepting move in.

I am very pleased that our executive director and health and wellness director retention rate remains over 70%.

While maintaining high quality standards during the pandemic are teens made a huge effort to protect our residents from hurricanes and wildfires, including evacuating residents and their pets when necessary.

Our brookdale everyday heroes are continually scanning for threats to our residents and uniting to help protect them.

This is an incredible testament to the resilience and dedication of our leaders.

[noise] they have made countless sacrifices to successfully lead through the largest global health crisis in our lifetimes and an economic crisis, while serving those most vulnerable to the Corona virus.

[noise] My gratitude continues for the Brookdale everyday heroes and the personal sacrifices they make to help ensure the health and wellbeing of our residents 24 hours a day.

Every single day.

[noise] turning to our government advocacy efforts I'm pleased with the progress we've made to ensure Washington fully understands the critical role the senior living industry serves and the health care continuum to fight COVID-19.

September 1st was a monumental day when the government acknowledge the importance of assisted living by announcing private pay assisted living's eligibility to participate in phase two provider relief grants.

Brookdale was the only assisted living provider H H S. Specifically mentioned by name due to our extensive efforts to help assist H H as in obtaining the information necessary to make this distribution.

We estimate the phase two grant will provide more than $1 billion four are critically important industry.

We are expecting our phase two grant funds in the very near future.

Quarter.

Our quality has improved to an industry, leading overall star average at 4.7 out of five which we expect will drive future growth.

While lower occupancy in our communities affects health care services census home health inside our communities continues to perform at a strong rate out.

Outside of the COVID-19 hot spot of Florida.

Our non Brookdale community home health business referral growth and new case starts increased faster than prior to COVID-19 and improved relative to last year.

This is an early indicator of the home health business recovery.

Hospice third quarter revenue was 9% lower than the prior year.

Colors of cash and marketable securities at quarter and.

[noise] with that I'll turn the call over to Steve.

Thanks to build on Cindy's last statement of having a strong liquidity position, let me start with highlights for the third quarter.

First I am pleased that we completed two significant financing transactions as a result, we have no significant debt maturities until 2022.

Second we will recognize nearly $1 billion a future lease savings based primarily on year to date completed transactions.

Fly a pea in the second quarter COVID-19 costs declined approximately 60% in the third quarter.

While we are incredibly grateful for the government grants that we have received the COVID-19 impact on our business has far exceeded the value of the grants we recognized $37 million of government grants, which compares to an estimated loss revenue of $161 million and COVID-19 costs of 95 million.

Collars through the end of September we are pleased to be included in phase three funding. We are very interested in learning more about the methodology HHS will use to disperse additional funds turning to operations starting with senior housing I will focus my comments on same community results senior housing revenue was seven.

0.7% lower compared to the third quarter, 2019, and 4% lower on a sequential basis.

We estimate the impact of COVID-19 was nearly $71 million of lost revenue for the quarter.

Detailing the revenue components, our sequential occupancy decline has slowed in the third quarter, which is impressive considering how many communities are located in metropolitan areas that were considered code red hot spots the.

The sequential occupancy trend for independent living was slightly better than assisted living this is partially because independent living has a longer length of stay and assisted living generally has a more frail population.

Right or revenue for for the third quarter was 3.5% higher on a year over year basis, and 60 basis points higher on a sequential basis.

We maintained rate discipline and are pleased that our ability to increase move ins demonstrates that we were able to show the value that we provide.

The senior living industry is highly fragmented and it is critical for each of our communities to win locally.

While our goal is to maintain rate the market remains very dynamic and we will continue to actively monitor and respond to select market conditions.

Same community compensation related expenses decreased 2% on a sequential basis. The favorability was driven by scaling variable labor in relation to lower occupancy and matching bonuses to performance, partially offset by the additional holiday in the third quarter.

Other facility operating expenses decreased $22 million compared to the second quarter, driven by lower non labor COVID-19 costs of $29 million somewhat offset.

By marketing investments seasonally higher utilities, and repairs and several million dollars of natural disaster expenses as Cindy mentioned, numerous hurricanes and wildfires created additional demand on our brookdale everyday heroes as they mobilize to help protect our residents while there was a sizable damage to several communities and some.

Dollar damage across other communities in affected regions property insurance will cover the majority of the cost.

Same community operating income decreased 25% compared to the prior year quarter on a sequential basis, despite lower revenue with opex reductions at the third quarter operating margin improved 120 basis points.

Without question, we are operating in the most difficult environment in the history of our industry and we're taking actions to reduce that impact.

Moving to the healthcare services segment revenue was 20% lower compared to the third quarter 2019, while nearly flat on a sequential basis, we estimate the impact due to COVID-19 resulted in $15 million of lost revenue in the third quarter healthcare services operating expense was 12% lower than.

The prior year quarter, and 3% lower on a sequential basis, we continue to see the benefits of structural changes made earlier this year and scaling operations to better match expenses to revenue.

Lastly, in the third quarter, we recognized $6 million of government grants for health care services turning.

Turning to Gionee, excluding transaction costs and noncash stock based comp third quarter Gionee was 10% favorable to the prior year quarter. This benefit is from workforce scaling completed at the beginning of the year as we aligned our infrastructure to our go forward business needs incrementally we tightened gene.

They spending further with the onset of the pandemic.

Unique for this quarter I want to highlight cash operating lease payments as we successfully completed the ventas transaction in July.

As a reminder, our cash flow significantly improves by a half a billion dollars through permanent rent reductions over the next five plus years.

As part of the transaction in the third quarter, we made a one time cash payment of $119 million, which we recorded as an operating lease payment. The one time impact was partially mitigated by a permanent step down in Ventas rent that started in the third quarter after.

After completing the Ventas transaction that third quarter cash lease obligations are down 30% compared to the prior year quarter and our pro forma lease coverage improved to about one times.

Excluding the one time ventas cash lease payments that third quarter, adjusted EBITDA was $55 million compared to $80 million for the prior year quarter.

Adjusted free cash flow was negative $114 million for the third quarter compared to negative $14 million for the prior year quarter.

Without the onetime ventas payment the year over year improvement would have been approximately $20 million and summarized in three highlights.

The adjusted EBITDA declined of $25 million was more than offset by favorable non development, capex, which was $36 million lower than the prior year quarter. So.

Similar to the last quarter because community access was highly restricted for the wellness of our residents, we delayed or canceled many elective capex projects.

And interest expense, which was $11 million lower reflects lower interest rates, along with lower financing lease costs related to the health peak transaction completed in January.

Turning to liquidity, which is my top priority as of September Thirtyth total liquidity was $491 million a decrease of $109 million from June Thirtyth. The decrease in liquidity was primarily due to the one time ventas payment of $119 million.

Now, let me share what we're seeing for the fourth quarter.

Tobar, our month over month occupancy trend softened, while our controllable move outs stabilized we believe potential residents and their families delayed move ins to see what will happen within new resurgence.

We are monitoring the current outbreak carefully and barring a severe resurgence we still expect quarterly occupancy declines will continue to improve.

We expect to receive up to approximately $50 million of additional grants from phase two relief, we expect non development capex to be approximately $35 million in the fourth quarter or $140 million for the year, which is another $10 million reduction from our prior outlook for a total of $50 million reduction.

In non development Capex from our original 2020 plan.

And lastly, working capital is expected to be approximately a 25 million dollar use of cash primarily due to an extra payroll cycle in 2020.

While the Corona virus is unpredictable, we have been proactive in strengthening our operational and financial position.

With approximately $500 million of liquidity at the end of the third quarter and plans to remain judicious with investments. We believe we have a strong liquidity position.

I will now turn the call back over to Cindy.

Our business is built one relationship that a time my people taking care of people.

I am incredibly proud of the actions we've taken to support our associates residents and patients to ensure this business is strong for the long term we.

We have listened to the feedback we've received from the people that are part of our community and that has made us better we.

We are going to keep doing that.

From a financial perspective, we.

We have taken far reaching action to reduce our rent expense.

Lower debt improve.

Improved cash flow and enhance our overall financial flexibility.

As an industry leader, we remain focused on being a trusted partner to deliver quality care in an environment that helped keep associates right.

Residents and patient say during this pandemic.

We are also committed to sharing our expertise with others outside of Brookdale look.

Looking ahead.

It remains undeniable that the silver wave of the baby Boomer demographic growth is approaching.

Nearly 1 million new potential residents a year starting in 2022, the demand for senior care will increase.

Well I'm increasingly optimistic about the near term availability of the vaccine to accelerate our recovery, we will continue to manage our business.

Operate our communities and serve our residents and patients in the best way possible in today's environment.

Thank you.

Barry This is Cathy we are ready for the Q and a.

Thank you Kathy Wendy.

Doesn't that and say am I know that's a question you will need to press star one on your telephone.

Three questions. Its best apparently again, if you would like to ask a question just Chris sorry, one on your telephone.

Your first question is from Brian Tanquilut. Your line is open.

Hey, good morning, guys.

I guess my first question Steve.

For the color that you gave on Q.

Q4 occupancy trends and your expectations, but just wanted to ask how are you thinking about the blending of typical seasonality for Q4 as well as you guys are reopening the facility there the communities too.

Yes to visit and added.

People coming into checked plays out.

And then what do you think the catalyst are would be for recovery you know back too.

Recall that level.

Sure Brian.

So the occupancy question.

As you know the virus is unpredictable.

We expect to see a sequential decline in occupancy, but we do expect that to moderate again in the fourth quarter, it's important to keep in mind that.

Some of the key drivers for occupancy and recovery, 95% of our communities are open and accepting residents the low infection rates that we currently have in our communities is a certainly a plus.

And.

Our survey our that Cindy mentioned on the call states that the majority of our residents say that our cobot response is on target.

So looking long term that that focus on the well being of our residents certainly is the right strategy. In addition, we're continuing to make marketing investments we added marketing in the third quarter and also into the fourth quarter and then lastly, as Cindy mentioned.

We see an increasing likelihood of a vaccine.

And so we think that senior living communities being raped and prioritized to receive the vaccine will certainly help occupancy in the in the future.

Great.

Just a couple of things to Steve's answer he did a great job teeing it up but it's important to remember that at the beginning of the third quarter, we had our communities largely closed to visitors as we were.

Leading our baseline testing and also within the community there were a lot more restrictions that we are today than we have today and we know that being able to have visitors is important to our residents and so that is something that as we look at the fourth quarter that should be better for us.

Then the third quarter I think another thing that's important to remember is brookdale the industry and the regulators have gotten a lot more experience and working through the night team and initially in the pandemic. If you had a single positive COVID-19 case, you could not do any went into the community now that we've done.

In straitened, the strength of our infection control protocol in some cases not in every case, we're able to continue to move residents and even if there is a single positive comp.

19 resident in the community and then I think the vaccine is an important fuel for our recovery and it's great that senior living is prioritized at the beginning of that both our residents and staff and then I just want to ask our mention the rate we have been very very disciplined about the rate.

Right.

During the entire year of 2020, and the fact that our revenue or increased sequentially 60 basis points.

And that actually helped us improve our.

Income on a same store basis 70 basis point, I think thats something that is important because it's really not just about occupancy it's about getting the most revenue from your available room and maximizing revpar. So just balancing occupancy rate is always something that we're going to do to to accelerate our recovery.

That makes a lot of sense and then Cindy.

Obviously did some refinancing or restructuring of the leases during the quarter are you thinking about incremental opportunities to do that and then how are you thinking also about the health peak announcement I think it was yesterday or earlier. This week that they are trying to reduce their exposure to senior housing and just stay with the CCRC.

Well I think the one thing that Brookdale is demonstrated is that we will be nimble and that we will respond to current market condition and we have been incredibly successful over the last few years, creating win win transaction now it's impossible to know when the opportunities will arise, but whenever possible, we'll look to create additional value for our share of.

Her through lease rate renegotiations.

As for the healthy transaction I think that it's important to know that help he has been an important partner for Brookdale and we are grateful for their support we do lease a number of communities from them and we expect that.

And if the transition the properties that we would have a strong relationship with the new owner of the properties and importantly continue to receive the capex funding that healthy committed to under the lease and of course, we will continue to make.

Our rent payments are due under the lease.

Got it and then last question for me, Steve just as I think about your debt maturity.

Thinking about the cash flows that you're generating.

Given the occupancy trends how are you thinking about that.

Back.

Upcoming maturities and how you're thinking about funding.

You know those payments thanks.

You bet Brian.

With continued access to credit we were really pleased with our execution of two important financing track transactions in the third quarter.

Following those transactions, we have no large maturities in 2020 or in 2021 and the important part also is that.

Like 98% of our dad. These financings were non recourse property backed mortgages and effectively free of operating performance covenants.

With a an initial rate of approximately 3% combined with a third of our debt structure, having a variable rate we lowered interest expense in the third quarter by $7 million on a year over year basis. So.

Suffice it to say that we were very pleased with his proactive steps to strengthen our financial position.

I think the financings are good evidence of strong financial and operating actions that brookdale decisively taken throughout 2020 and during this pandemic. Thank you so much for the questions Brian.

Thanks.

Again, if you would like to ask a question simply press star followed by the number one on your telephone keypad. Your next question is from Steven Valiquette. Your line is open.

Great. Thanks, good morning, everybody.

A couple of questions here.

One just on the cobot vaccines that you just kind of brought that up I guess I'm curious whether in that Brookdale is completed any sort of marketing surveys just to assess the sensitivity perspective residence to enter senior housing with or without a vaccine or in other words would you expect the cobot vaccine to have an immediate notable impact on let's say your.

Monthly and quarterly occupancy or would this take maybe several quarters, maybe even a year or more before would lead to a.

What we would call maybe a material move back up in your occupancy trends, we see it right now.

Yes, Steve we regularly conduct market research in our markets and one of the things that we see is that consumer sentiment changes every time, we do the survey. The good news is that we are seeing the majority of residents and prospects still think that senior living is a safe solution and what we have seen.

It is improvement and health care professionals and their willingness to recognize.

Senior living is an important way to help their patients live a better life and that's actually improved since the early stages of the pandemic with regard to a vaccine I think that what everyone is trying to figure out or at least the vast majority of people are trying to figure out how to reduce risk and so while we havent conducted.

Consumer research on the vaccine it is something that we're watching the research that's available to us and we do know that there is a focus on on reducing risks.

Okay. The other quick one.

You touched on the success of your resident rates strategy and we've all seen that the revpar growth as either held steady or actually improved. This years, that's worked out pretty well it's regarding the rate strategy for 2021.

I did mentioned in the prepared remarks that youre monitor and respond to certain local market conditions when necessary, but I guess overall should investors still expect revenue for to continue to grow year over year for Brookdale next year, we see it right now.

So the important thing to remember is for our in place residents. We do a rate increase on January one of each year and so normally you see that impact in our first quarter results.

With regard to market rate, which are for new residents moving in we continue to focus on the quality of our care and the services that we provide however in some cases, where appropriate because of local market conditions. We may respond to what we see in the market.

So net net I think there is.

More good news and bad news, but it's a pretty dynamic environment.

If you want to add to that.

No that that sums it up our goals Steve is to maximize revpar, so thats profitable occupancy it is not too.

Face Chase occupancy, we do have pricing discipline and like Sunny mentioned in certain certain very competitive markets.

We are adjusting some.

Some discounting to to match those rates.

But our focus is to win locally and really assess market.

By market community by community.

Okay, all right I appreciate the color. Thanks, Thanks, Steve.

Hey, Larry this is Kathy.

Other analysts that cover our company shared that our earnings call was at the same time as other companies. So they might be late to the Q M&A do you see anybody else in the queue.

Is there no one else wants to queue at this time.

Okay, then I think that we will follow up with them later.

Thank you very much Cindy do you want to sell last comment certainly I just want to thank everyone for joining the conference call. Today, we are very focused on the health and safety of our residents our patients our associates I'm very proud of the fact that year to date, we've conducted over 185000.

To keep our communities are helped keep our communities as safe as possible and there is no question that during the pandemic weve taken swift and robust actions to strengthen our operations and our financial position as well as to capitalize on the growing demand for senior housing, which we are expecting.

Nearly a million new potential residents a year are available starting in 2020. So we are playing a game to maximize our financial flexibility in the short term and prepare to win in the long term. Thank you very much.

Very good gentlemen.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining you may now disconnect.

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