Brookdale Faces Tough But Viable Path to Big 2022 Gains

At a time when the senior living industry still faces much uncertainty, Brookdale Senior Living (NYSE: BKD) executives are bold and bullish in their outlook for 2022.

The Brentwood, Tennessee-based provider last week issued its first annual guidance since the start of the Covid-19 pandemic. Brookdale’s FY22 adjusted EBITDA expectations of $240 million to $260 million came in just above analysts’ consensus estimate of $239 million, Stifel analysts noted.

I think that Brookdale’s guidance reflects some deserved confidence from the executive team, given the company’s strong performance throughout the pandemic. And, I think the guidance is a positive sign that the industry as a whole could reach an inflection point in 2022, after the last two years of momentous struggle.


However, Brookdale’s ability to achieve its guidance remains an open question, and some analysts are skeptical about the company’s optimistic outlook.

I think that ultimately, Brookdale’s success in achieving guidance will depend on the company’s ability to execute well in every area that they can control, given improving but challenging and unpredictable market fundamentals.

In this week’s exclusive, members-only SHN+ Update I analyze and offer key takeaways on the three areas that Brookdale has identified as key to achieving their guidance:


— Managing expenses and stabilizing workforce amid continuing labor market disruption

— Achieving maximal pricing power while driving occupancy growth

— Elevating the customer experience, including through greater personalization

Ongoing labor pressure

On a same-community basis, Brookdale’s labor expense was up 6.4% year-over-year in Q4 2021. On a sequential basis, the company’s operating expenses overall increased 2.4% in the fourth quarter.

These increases were driven largely by usage of contract labor that ramped up in the midst of the omicron-driven surge in Covid-19 infections among staff.

The good news is that Brookdale’s use of contract labor improved from December 2021 to January 2022, and presumably will continue to decline as the omicron wave recedes. However, labor remains a major challenge and an area of considerable uncertainty for the remainder of the year.

That uncertainty is so great, it is preventing some other large companies in the senior living sector from issuing their own annual guidance. The potential for another variant to create a spike in costs is “probably the biggest reason” why Welltower COO John Burkart does not want to venture a longer-term forecast on how labor will play out this year, he said on the REIT’s earnings call.

And also contributing to uncertainty are the labor market disruptions that preceded the rise of omicron, including the so-called “Great Resignation.” Between January 2021 and January 2022, nursing and residential care facilities lost 120,000 workers, according to Bureau of Labor Statistics data.

Given that companies across various industries are struggling with these labor market pressures, Brookdale’s confidence in being able to keep OpEx to a 5% year-over-year increase in 2022 might appear questionable. Analysts with Jefferies distilled these doubts in their note on Brookdale’s earnings and guidance:

“… We remain concerned about the normalization of the labor market, particularly for lower-skill, hourly type of employees, such as those BKD employs in their communities. And while [management] noted modest uptick in net hires, we see the utilization of contract labor … remaining elevated, which could prevent BKD from hitting margin targets implied in their guidance ranges.”

For their part, Brookdale executives identified “attracting, engaging, developing and retaining the best associates” as the top strategic priority in 2022, and they detailed some steps they have taken or are planning.

The company reviewed wages across all its markets in 2021 and made “appropriate adjustments,” CEO Cindy Baier said. Continual monitoring and adjusting will occur in 2022. Recruiting has been “modified” and has led to an “increasing progression” on net hires for each month between October 2021 and January 2022, with the number of new net hires in the hundreds.

“Of course, we’re going to focus on the things that we can control outside of wages, which is really the culture, the career development, the learning opportunities so that our associates can really live their best lives as well,” Baier said.

In these efforts, Brookdale should benefit from having Kevin Bowman bring a “micro-focus” to on-the-ground operations. Brookdale’s recent efforts to revamp its sales process also instill some confidence that the company can improve operating practices across its sizable portfolio, to achieve the goal of reducing contract labor and overtime by filling open positions with full-time employees.

And while another Covid wave could scuttle all expectations, a surge similar to omicron that comes later in the year might not have such an outsized effect on labor. That’s because the omicron pressures were exacerbated by a large number of senior living workers who were taking well-deserved vacation around the holidays.

Baier is confident that Brookdale has gotten a handle on how to effectively manage the ebbs and flows of Covid. When asked by Stifel analyst Qui Tao what gives her confidence to provide 2022 guidance, she began her reply by stating: “We have now been operating in a pandemic for the third year. And so we have a lot of experience in what happens during a Covid wave.”

Occupancy and pricing power

Brookdale’s “sales transformation” paid off in Q4 2021, with the company’s highest inquiry to move-in conversion rate since 2017. And the sales revamp helped propel 10 consecutive months of occupancy growth through Dec. 2021.

Of course, the occupancy gains have also been driven by strong consumer demand, which contributed to pricing power. On a year-over-year basis, Brookdale’s revenue per available room (RevPAR) increased nearly 4%.

Executives with Brookdale expect these trends to accelerate in 2022, to achieve annual RevPAR growth of 10% to 12% from occupancy and rate increases. Most rate increases for existing residents took effect on Jan. 1 and should “far outpace” the 3% rate growth of 2021, Stifel analysts noted.

So far, the rate hikes have not led to a “material increase” in resident attrition, Baier said. That’s in large part because executive directors have done a good job of explaining that higher rates are tied to caregiver wages.

“Our residents care very much about the associates who support them and want them to be paid a fair wage,” Baier said.

Brookdale is not alone in reporting that occupancy is climbing even as rates rise, with Welltower and other companies describing similar trends. How long this can be sustained is another source of uncertainty, however, and Jefferies analysts are cautious.

“Our view is that BKD will be hard-pressed to drive occupancy growth above 4.4% Y/Y, especially given the sequential decline already seen in Jan and the expected seasonality trend over the course of the year,” they wrote.

Indeed, these expectations are one reason why the analysts are forecasting FY22 EBITDA at $215 million, below Brookdale’s guidance.

I believe the sequential decline in January occupancy can be attributed in large part to omicron. LCS, Juniper and other providers reported to SHN that tours were canceled as infection rates rose, but sales leaders with these companies were optimistic that this created short-term pent-up demand that would manifest in move-ins later this quarter.

And Brookdale bucked seasonal trends to realize a 100 basis point increase in occupancy between Q3 2021 and Q4 2021. Seasonality could return to more normal patterns in 2022, but there are some reasons to be optimistic about sustained occupancy growth throughout the year. Notably, new construction has been suppressed during the pandemic; the second half of 2021 saw the fewest units under construction since 2015, according to NIC.

And then there are the demographic tailwinds, which are improving each year.

“In 2022, the baby boomer demographics are finally at a point Brookdale dreamed about more than 15 years ago,” Baier said on last week’s earnings call. “There is a rapidly growing senior population that requires high-quality needs-based services. Starting this year, we expect more than one million new seniors will enter our target market every year for the rest of this decade.”

I believe that Brookdale’s leaders can make good on their occupancy and revenue expectations for 2022, but they will not only need to benefit from the supply and demographic tailwinds, but keep elevating the value that consumers see in senior living — which is the focus of their third strategic priority.

Enhancing the customer experience

Brookdale’s third priority for 2022 is “earn resident and family trust and satisfaction by providing valued, high-quality care and personalized service.”

On the one hand, this sounds like table stakes for any senior living operator — particularly “high-quality care.” On the other hand, I think that Brookdale executives are right to focus on providing “value” and personalization.

The focus on value ties back to the issue of rising rates. Consumers appear willing to pay a premium for senior living, but they will not be satisfied, will not refer friends, and likely will move out if they do not perceive they are receiving value commensurate with their bills.

More personalized services are an increasingly important way to deliver value to residents. Providers such as Juniper, Mather and Discovery Senior Living are placing personalization at the heart of their operating models, recognizing that the rising generation of consumers is large but diverse — and used to the personalization that technology can facilitate, from creating curated music playlists to recommending products and services.

Brookdale’s $20 million in development CapEx — up from $3 million in 2021 — also should play a role in driving residents’ satisfaction and their perception of value. The company has a “large pipeline” of projects dubbed Program Max, Baier explained, and these range from conversion of units to larger community repositionings.

In addition to supporting higher rates, the focus on resident and family satisfaction will support occupancy momentum.

“Every positive encounter with a resident, family member or customer advocate can lead to future referrals,” Baier said. “ … While we believe we already have a strong customer focus, we’re a learning organization and we will continue to raise the bar higher.”

If Brookdale’s leaders can succeed in raising the bar, I believe they will be in a good position to meet their guidance — and insofar as the industry’s largest provider is a bellwether for the sector as a whole, I think there are reasons to be optimistic about 2022. As the Stifel analysts put it:

“We think 2022 will be a year of recognition of senior housing’s resilience navigating through the pandemic, strong pricing power in an inflationary economy and significant operating leverage to demand growth.”

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