Brookdale Senior Living’s (NYSE: BKD) operating margins ticked up in the second quarter of 2022 as the nation’s largest operator saw banner occupancy and move-in growth, but labor remains a hurdle for the future.
Occupancy gains and strength in the company’s revenue per available room (RevPAR) nudged the company’s senior housing operating margins up to 20.8% during the second quarter of 2022, according to the operator’s supplemental earnings report for the quarter. And, leadership sees a long runway in front of them to improve margins and NOI in the future.
Looking ahead, a slate of issues tied to labor and operational costs will remain an obstacle to future margin expansion. But the Brentwood, Tennessee-based operator made progress during the second quarter there, too, as its revenue growth outpaced “only a slight increase in facility operating expenses,” CEO Cindy Baier said during the company’s second-quarter earnings call Tuesday
And with the operator now in the third quarter — which is when Brookdale typically sees its highest demand for senior living services — CEO Cindy Baier is feeling optimistic that occupancy will continue to trend upward in the coming weeks and months, barring any more big spikes in Covid-19 outbreaks.
Even so, she also noted that the company is still “not where we want to be,” and that trimming contract labor and overtime usage will continue to be a pressure point in the future.
“We are making positive steps forward on our path to recovery, continuing to innovate and capitalizing on new opportunities in our evolving world,” Baier said during the company’s earnings call.
Brookdale manages over 674 communities nationwide, the majority of which offer assisted living and memory care.
While the company made progress in the second quarter as it related to revenue and occupancy, Jefferies Healthcare Services Equity Research Analyst Brian Tanquilut sees more work to be done.
“While Brookdale posted a 410 basis point year-over-year occupancy gain in Q2, the company is still meaningfully below its pre-Covid occupancy levels (~84%), and we see the path to recovery as a gradual one throughout 2023,” Tanquilut wrote in an Aug. 8 note to investors.
Brookdale’s stock price on Tuesday ended at $5.03, up 7.94%.
Occupancy, move-ins drive margin expansion
Despite labor headwinds eating into its bottom line, Brookdale Senior Living grew its senior living operating margins in the second quarter thanks to positive trends in occupancy and move-ins.
Same-store average occupancy in the second quarter grew to 74.6%, representing a420 basis point gain from the same period last year; and a gain of 120 basis points over the first quarter of 2022.
The company’s net move-ins to move-outs — a metric Baier has also referred to in the past as MIMO — also continued to trend in the right direction during the quarter. Earlier this year, the company reported 2,000 move-ins in the month of March alone — then a record, according to management — and its communities kept that pace up throughout the second quarter.
“We also exceeded our three-year, pre-pandemic average move-in performance by 9%,” Baier said. “This is evidence of both strong demand and the strength of Brookdale execution and brand.”
Senior housing resident fee revenue grew to $617.7 million during the second quarter, representing a 10.4% gain compared to the same period last year; and a 0.8% increase from the first quarter of this year..
RevPAR also grew 10.4% compared to 2Q21 and also was up 0.8% from 1Q22. Revenue per occupied room (RevPOR) increased 4.2% compared to the same period last year, and was up 0.6% from 1Q22.
As of the end of Q2, the company’s average RevPAR sat at $4,070 representing a slight increase over the last quarter; and RevPOR was $5,456, representing a slight decrease over the last quarter.
Several factors give Baier confidence that these trends will continue, and that the company will continue to have pricing power next year and beyond. In addition to occupancy gains, Baier also noted that an expected 10.5% increase in Social Security checks for older adults in 2023 will help with future rate growth.
Baier also noted that Brookdale would consider higher labor costs when conducting annual resident rate increases, adding that she was “optimistic” about the strong pricing power within senior living. She added the company will take hourly wage increases into account when approaching resident rate adjustments.
Looking ahead, Baier said Brookdale’s RevPAR expectations of posting total RevPAR growth of 10% to 12% for the year remain “unchanged.”
In the third quarter of this year, , Brookdale CFO and Executive Vice President Steve Swain expects the company to see sequential occupancy growth higher than the 120 basis points seen in 2Q22.
“In the second half [of 2022], we expect continued NOI growth due to increased occupancy as well as lower labor costs as we continue to reduce contract labor,” Swain noted during the call.
Looking ahead, Baier sees “a huge opportunity for occupancy recovery and revenue [growth].”
If the company were to return to its pre-pandemic occupancy of 84.5% but not increase rates from where they are today, it would still realize $350 million of incremental revenue. If Brookdale hit its historic occupancy high of 89%, that would drive at least $500 million in incremental revenue, management noted.
“So, there is tremendous, powerful upside built into our existing portfolio,” Baier said.
Addressing ongoing labor challenges
While Baier and the rest of the management team at Brookdale see upside ahead, that progress will partly hinge on their ability to control labor costs, agency usage and turnover.
Net hires in the second quarter were more than double what they were in the same period last year, with 3,000 new workers added to the company’s payroll since the start of the year.
To take a bite out of the contract labor apple, Baier said Brookdale implemented a digital scheduling tool for associates that would allow greater flexibility for staff to pick up shifts.
“Workers can pick up that shift that might have gone to overtime or contract labor,” Baier said. “That’s what we are really trying to do: Staff more shifts using regular wages.”
While the operator reported a 10% increase in its workforce since December of 2021 and a decrease of agency labor costs by 25% in the second quarter of this year, “we have not seen labor cost reduction, and therefore expect that improvement to begin later in the year.” Baier noted.
Brookdale reported a 14% increase in community labor costs in 2Q22 compared to the same period last year.
Still, Baier said she was confident Brookdale would overcome labor pressures “over time,” citing the issue as being “structural” in nature.
Operating expenses in the second quarter of 2022 increased to $492.9 million, representing an 11.8% increase compared to 2Q21 and an increase of 0.3% since 1Q22. That was due to contract labor, overtime costs and higher market wage adjustments, according to Swain. Higher food costs also added to the expense pressures.
Brookdale in August accepted an expected $60 million in federal provider relief funding, with the goal of putting it toward recouping revenue and labor costs.
Looking to the third quarter and remainder of the year, Swain said labor costs will be “higher than previously planned,” but could show improvements in the second-half of the year.
Agency labor costs two-to-three times as much compared to making a Brookdale permanent hire, Baier said, but she noted the back-end support and time needed to train employees before they can make an impact at their specific community can temporarily add overtime costs to a community’s labor expenses.
“As we continue to grow our workforce, we expect that we’re going to continue to reduce that most expensive labor source, which is contract labor, by two-to-three times,” Baier said.
New pilots ongoing
In addition to its goal to pare down agency labor and grow margins in the coming months, Brookdale also has several new pilots underway that could prove useful to the company’s operations in the future.
Baier highlighted a pilot program called HealthPlus where registered nurse care managers work to improve resident quality of life and reduce the cost of care. The program works in partnership with a resident’s health care providers and family, and Baier said the program is already paying off in the form of a longer length of stay and fewer ER and hospital visits for residents in communities where a HealthPlus pilot was underway.
In addition to expanding HealthPlus, Baier said Brookdale is expanding its usage of AI-driven fall prevention and detection tool to new communities, and the company also is piloting an artificial intelligence-driven analytics tool to “to accelerate residents’ socialization and engagement by connecting [them] based on common interests.”.
“In addition to winning the recovery through driving revenue growth, and appropriately controlling costs, we are pursuing incremental value creation through innovation,” Baier said.
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