Okay, great. We're gonna get started with our next session. I'm Scott Fidel. I am the healthcare services analyst for Stephens. We're really pleased to have Brookdale with us. Brookdale is the largest provider of senior housing and hospitality in the US We've got the management team here with us, Cindy Baier, President and CEO, Dawn Kussow, who's the Executive Vice President and Chief Financial Officer, and then also Jessica Hansen, who's Vice President of Investor Relations. So, first of all, thanks for joining us. It's great to have you here again this year.
Scott, thanks so much for having us. We are so grateful to be part of your conference, and it looks like you just have a wonderful event scheduled.
Well, thanks so much, Cindy. Cindy, I thought, I think maybe you have some initial just comments you wanted to make, maybe sort of, about Brookdale. Bring us up to speed a little bit, and then we can get into the Q&A.
Great. Scott, thanks so much. So Brookdale is the nation's largest senior housing provider, as you mentioned, and we've got about 670 communities in 41 states, and that offers a broad continuum of care, everything from independent living to assisted living, memory care, and skilled nursing. But what's really special about Brookdale is the combination of our operational and our clinical expertise. We absolutely lead the industry there, and we're very proud of that.
What is unique about Brookdale is that about 70% of our portfolio is assisted living and memory care, and the remainder is largely independent living. What's important about that mix is assisted living and memory care is needs-based care, and so that provides us with a lot of insulation in difficult macroeconomic conditions.
What we do is we provide seniors with care, with personal connections and services, in an environment that feels like home. We've got about 36,000 associates who are all so committed to our mission of the residents and enriching the lives of those we serve. I wanna just take a minute and step back to COVID, because I think that it's helpful to understand the perspective of what we're coming from.
Before I get into COVID, I'd like to talk about just our recent performance has been incredible. The reason I wanna go back to COVID is so that you understand sort of how much opportunity there is in front of us as a company, just getting back to performance that we've historically had.
So, if you think about Brookdale and its North Star, we're a business of people serving people, and our North Star has always been the health and wellbeing of our residents and our associates. Despite a strong response to the pandemic, the pandemic had a very big impact on our business. We had an estimated revenue loss of about $1 billion, and that created a large occupancy gap to our pre-pandemic levels at a business that has very high fixed costs. As you would expect, that put a lot of significant pressure on our margins.
But now, as we're putting the pandemic in our rearview mirror, we're relentlessly focused on taking care of our residents, providing quality services, but really rebuilding our occupancy, and as that occupancy is rebuilt, we're rebuilding our cash flows. We are very focused on our operational and our financial recovery, and Dawn will talk a little bit about the progress that we've made on that. Dawn?
Yeah. Thank you, Cindy. We are really proud of the results. As Cindy said, we came out of COVID. We have been in our recovery strategy as we're coming through. In 2023, we've really gained a lot of traction from the execution of that recovery strategy, and that strategy really prioritizes profitability and sustainable growth, all while we meet the needs of our residents, and we are providing high-quality care, and we're in compliance with regulatory. So,
if you think about our year-to-date results, our RevPAR, which balances rate and occupancy, is 11.9% up over the prior year, and that includes 210 basis points of occupancy growth. This is our third consecutive quarter of same-community adjusted operating income growth over the prior year. So, we've delivered 600 basis points of margin expansion, and our adjusted free cash flow, which has been negative kind of coming through the pandemic, has grown 73%. In the third quarter, we flipped over to, for a brief moment, into positive adjusted free cash flow. We're really proud about that.
So, we're making great progress on our road to recovery, and we're so optimistic about the future because we see what we can accomplish pre-pandemic, and we're looking at even going beyond that. So, there is so much opportunity from that powerful pandemic recovery, and the foundation that we've really laid in 2023 sets the stage for 2024 to be a great year.
And if you think about the future, what excites us about the future is the silver lining of the pandemic, is there's really limited new supply coming into our market to compete with us, at the same time, that there is an incredible surge in the number of seniors who are aging into our target population. If you think about it, the target population is expected to grow by 58% between 2023 and 2028. 58%.
That is just huge growth at a time when there is so little new supply coming into the market. If you think about Brookdale being the leader in the industry, if you think about our unique differentiators, we are prepared to meet the growing demand, and we provide such a valued service to the aging population.
All right, great. Well, thanks for that. That really sort of covers some of the topics that we wanted to drill into. Maybe just to start with, and you talked about sort of continuing momentum into 2024. I'm sure you're deep into your planning process right now. Maybe sort of talk to us just from the high level, some of the strategic priorities that you have for 2024, and how we should be thinking about some of the key headwinds and tailwinds against those objectives.
So, if I think about 2024, it's a continuation of what we've been focused on in 2023 so successfully. We're looking to expand that operational and financial success that we've had. There are three things that we'll focus on.
We will attract, engage, develop, and retain the best associates, because our business is about people serving people. We will try to get every room in service at the best profitable rate, and that's something that's been really successful for us sort of in 2023. Then we will focus on providing high quality, valued services to our residents. The reason that we wanna do that is because our residents are great referral sources, and we also want them to increase their length of stay with us.
As we go into 2024, what I would expect is we'll continue the success that we've had in 2023, and what that means is that we'll see occupancy growth, continue rebuilding the census back to pre-pandemic levels. Not all in 2024, but that's something that we're focused on. And then also making sure that we are very thoughtful about the rate increase that we give our residents.
We wanna make sure it's affordable for them, but we also see, as we're able to increase our occupancy, we'll get margin expansion, we think, in 2024, while we make sure that we provide quality care for our residents, we maintain regulatory compliance, and we provide great customer service. And the reason that we're able to get that margin expansion is because we are better leveraging our fixed costs.
We're a relatively high fixed cost business, so as you have more residents that you serve, you're able to get margin expansion. And also, because we've made such great progress with our retention of our workforce, we're able to get rid of some of the costs that are frictional when you change employees, like extra training costs and people not being as familiar with how to do their jobs efficiently. So, those things we're looking forward to, that should improve Adjusted EBITDA and also translate into improving cash flows.
All right. Well, that sounds, that sounds encouraging. Wanted to talk just about sort of how the industry is evolving, and it feels like we've seen some evidence of the industry, you know, moving more towards a more of a traditional focus on hospitality, towards evolving more towards a focus on healthcare and sort of clinical services that can be offered in the communities.
First of all, I want to ask you whether you would agree with that thesis, and then if so, maybe talk about the key initiatives that Brookdale is implementing, and to sort of take advantage of some of the clinical opportunities and how that ultimately could sort of play into the financials.
Absolutely. So senior living sits at the intersection of real estate, hospitality, and healthcare, and depending on where you are in the care continuum, you may be more closer to healthcare or more closer to hospitality. And if you think about the fact that Brookdale has 70% of our portfolio that's needs-based, that is Assisted Living and Memory Care, healthcare is an even more important concept to pay attention to. And then if you think about what's happening in the broader healthcare market, there's a transition to Value-Based Care.
So, what you need is, you have seniors who have more chronic conditions than they've ever had. In fact, about two-thirds of seniors who live in Assisted Living and Memory Care have some sort of chronic condition, usually two or more chronic conditions, and so they need help sort of managing those conditions.
So, what I'm really excited about is Brookdale's leading clinical expertise. We have a program that we call Brookdale HealthPlus, where we have an RN care coordinator who uses state-of-the-art tools and technologies to help our residents better manage their chronic conditions. And what we're trying to do is reduce the care gaps that they have in taking care of themselves.
And what is particularly exciting about that, for the benefit of our residents, is it has reduced our ER visits by 78%, compared to a senior who has the same chronic conditions and age and other things like that, living outside of our communities, and it reduces hospitalizations by 66%. If you think about what we can do for the benefit of the seniors that we serve, allowing them to manage their health in the best way that they possibly can, and at the same time avoid these negative health outcomes, that is something that's really exciting, both for our residents and we think ultimately for our shareholders.
Great. And, and when we think about sort of adding on all these additional clinical services, through HealthPlus, how would you sort of describe how that impacts the financial opportunity in terms of, you know, the difference maybe in the revenue yields or, or profitability, when you're adding these services in, compared to, let's call it more of a baseline type of service profile?
So, the exciting thing about Health Plus is when you offer these services in the community, you attract more residents to the community. It's always good to have more residents, because we have a high fixed cost business. It also increases the length of stay or the length of service of our associates.
And so, if you think about the things that create friction in the business, it's turnover with your associate base, because those training costs are expensive, and if you can get your associates to stay longer, that's very good. And then there is also some payments that we receive from value-based care providers who see the benefit that our residents have by living in our communities.
Okay, great. So, it sounds like there's some volume benefit, get some expense benefit and then some incremental rate related to that as well?
Yes.
Okay, great. Maybe let's just sort of delve in a bit to just some of the recent trends. And you just recently reported your third quarter results, and one of the dynamics that you talked about was your move-in conversions exceeding pre-pandemic levels by around 5%, and then you also saw a 6% decline in move-outs during the quarter.
So interested maybe in terms of how you can talk about those types of trends relative to how you're sort of interpreting what's going on in the broader industry. And ultimately thinking about, you know, do you feel like you're gaining some market share at this point with some of these trends, or do you feel like you're sort of tracking online with the industry recovery?
Look, I am really incredibly proud of the recovery that we made in the third quarter, and if you compare us to the competition, I think we look very nice. So let me just say that. If you think about sort of the fact that our move-ins were 105% of our pre-pandemic average, I think that's a demonstration of the strong clinical, operational, sales, and marketing talent that we have at Brookdale. But I also think it is where our company is positioned. We are 70% Assisted Living and Memory Care. That was very intentional positioning for us.
And then if you think about the supply-demand that we talked about, the silver lining of the pandemic is there's less new supply entering the marketplace. So that is good for people who have communities that have the availability to serve more residents.
If you think about just the number of seniors who are entering into our target population, that's all coming together. The nice thing is, we've had an incredible year in 2023, but this is the beginning. Because it takes so long to build a new community, we have a multi-year period where the supply-demand macroeconomic conditions are so very favorable, and at the same time, we invested early in healthcare, so we're right where the market needs us to be at the time when it needs us most.
Okay, great. Wanted to delve in a little bit just into some of the supply dynamics that you were talking about. And, you know, clearly we've seen a substantial slowdown in that rate of construction relative to several years ago, where it was clearly a meaningful level of supply was coming on into the market and affecting overall fundamentals. Can you talk about, just in terms of as you delve in, obviously you're in a lot of different markets, but how much variability you're seeing around, you know, sort of the slowdown...
Yes
In supply across these markets, and, and then sort of how you think about sort of your prioritization of different markets against that particular theme?
Okay. So when I think about Brookdale, I think about a company that has about 670 communities in 41 different states. So we are in a lot of different markets. And when I think about the competition, basically 90% of the industry is made up of 2,500 registered operators who operate five or fewer communities. So there's a lot of different little competitors all over the country. And when I think about sort of where we're positioned, I think we're positioned exactly where we need to be.
I think that we are able to benefit from the fact that there's less construction around our communities than there has been in the past. There's fewer starts and opens, so that gives us a tailwind. But what I'm particularly excited about is when you compare Brookdale to the competition, we have made a differentiated effort in quality of operations and in quality of clinical care, and I think that that gives us an incredible opportunity as we look to the future.
In the similar context, just when sort of thinking about the high cost of capital, currently the high interest rate environment, and sort of thinking about your traditional competitors and sort of the source of that competition and the sources of where that capital come from, what would you observe in terms of, you know, sort of evolution of that, let's say, over the last, you know, 12, 18 months as we've seen, you know, the cost of capital rise?
So, I mean, have you seen... How is private equity, for example, you know, sort of responding to that in terms of the level of capital they're putting into the industry, potentially compared to, let's call it when we were in a much lower, you know, interest rate environment?
So when I think about that question, I think it's great for Brookdale because you're right, there's a very high cost of capital right now. Interest rates are much higher than they've historically been. There is an increase in construction costs. There's an issue with the availability of labor, and also there's been a tightening of sort of new credit.
So that basically tells you that it's very difficult for new money to basically back the construction of any new community, and if you think about the price points that we compete at, it's very difficult to figure out how somebody could build a new building or a new community that's gonna come into our markets and compete at our price point. I think there's probably less focus on new builds and new construction, and I think where people are focused is how can they capitalize on the inventory that's already been in the market and take advantage of that?
Okay. Wanted to shift over to pricing, and certainly, you know, across a very broad expanse of different verticals across healthcare services that we monitor, the pricing environment has probably hardened about as firmly in senior living as we've seen pretty much, you know, anywhere. And we've certainly seen that in Brookdale's financials with 10%+ types of rate yields. And at the same time, more recently, you've seen some of the operating expense inflation trends starting to moderate, so you certainly had a healthy spread, you know, between rate and expense trends in the third quarter.
Can you sort of talk about, you know, from this vantage point, maybe sort of first in terms of, you know, walk us through your schedule of sort of rate increases when those go into effect, and how you're thinking about rate increases, you know, looking out into the 2024 cycle against what's obviously been a pretty big year of catch-up, you know, that we've seen in sort of pricing in 2023?
Yeah, I'll start. And I think what, you know, what we're most proud of is if you look at our... If you look at our pricing, and you mentioned this, is our same-community RevPAR grew in the third quarter 10.8% over the, over the prior year, and that included 140 basis points of occupancy growth. And, and if you think about it, our labor costs only grew 1%, and our other operating expenses, just under 6% growth. And so, we had a lot of margin expansion as we were focusing on getting our contract labor out and normalizing our premium labor and just really controlling our costs and understanding.
So, as we think about 2024, our price increase process is a little bit different than others. Our rate increase process happens 1 January 2024, so we kinda look at what our historical inflation has been, what we're expecting for the future, whether it's labor and other costs, interest rates, and we're trying to bake that into our 1 January 2024 increase. Other operators will put their price increase throughout the year, so they don't have to kinda do that look back and that look forward on the expectation for the following year.
As we go through our rate increase process, what we've said publicly is, we have to notify our residents 30, 60, and 90 days in advance, and so we're doing that currently. So, what we have publicly said is our rate increase next year will not be as high as what we took in 2023.
If you think about the 2022 labor environment and coming out of COVID and kind of the recession and the recovery, we really saw that increase in the labor costs, and we were looking at what that contract labor and the labor market was gonna do. And so, we took that into account in the 2023. And with everything kind of moderating and stabilizing, we're expecting to do a little bit lower, but probably still a little bit higher than what pre-pandemic labor rates were. So, we do expect to continue with margin expansion, as what Cindy said.
As we've gotten our costs, we're continue to control our costs and, particularly looking at where our opportunity is on some of our overtime and premium labor costs there, as well as the fact, as you grow occupancy in the high fixed cost business, you naturally get some of that efficiency or productivity on the labor side.
Oh.
And just to add a couple of things to what Dawn said, is we do do our in-place resident rate increases on 1 January 2024, but we start in October with our new residents who move in. We adjust our market rates there. And what we're always trying to balance is the affordability for the resident with the cost of providing quality care, because it's important to us that we meet resident needs, we provide high-quality care and maintain regulatory compliance. But what is exciting for us is that usually when you do that rate increase sort of 1 January 2024, you do see a nice step up in terms of the profitability.
Just remind us, what was your historical sort of average pre-pandemic rate increase, just to sort of level set?
Yeah, I think how we think about it is just, we look at, like our CPI, and we will try to increase low, mid-low, low single digits, but a little bit over what that CPI increase is.
And you talked about how one of the inputs clearly is your expectations for, for interest rates, and obviously there's, sort of that's, not an easy forecast right now, right? Given just the.
Correct.
sort of the ramp we've been on, but even in the last couple of days, obviously, the market thinking that potentially maybe we've hit a peak here with the CPI print that just came out this week. So obviously it's probably a sort of range, right, that you're building into the assumptions, but maybe can you give us some insights into sort of how you're thinking about interest rates in your planning for next year?
Right. Right. I'd say the last 24 hours, we've seen some changes...
Right.
I n the interest rates, right? And so, you know, as we think about, rates into next year, it's certainly been elevated, and higher for longer has been the narrative. And so, we have our debt is 60% fixed cost debt, and then the other 40% is variable rate, which we have 89% of that variable rate that we have caps on. And so, as we think about that, we take all of that into consideration.
We're looking at. We have some short-term, we've, we said this on our public call, short-term debt that's coming due that we expect to refinance in the normal course, in the short term here. But certainly, that higher for longer is kind of how we're thinking about given our debt structure.
Okay, and you did talk about how you in the third quarter you did inflect to slight Adjusted Free Cash Flow. You know, can you also talk about sort of what... First of all, what's embedded into your assumptions to close out the year, and then how you see that trajectory for FCF, you know, sort of from an early view? You know, do you expect that to be able to to sort of show growth in 2024 as business fundamentals are expected to continue to improve?
Yes, we are very excited to kind of inflect into the third quarter with the positive cash flow. Now, one of the things in our adjusted free cash flow metric is working capital, which isn't always easy when you have things like insurance receipts that are coming through. We had some benefit from employee retention credits that came through, the receipt of those. But you know, in the normal course, we have, and we've added a slide in our supplement that shows seasonality, so it's the last page of our investor presentation.
And the working capital normal seasonality is generally the first quarter, you'll see large payments for incentive compensation, as you would expect, before 15 March 2024. And then, in the fourth quarter, we're a real estate company in that we own a bunch of our real estate as well as healthcare. And so, we have a lot of real estate tax payments that happen in the fourth quarter. So, kind of those two quarters are where we see normal course, higher cash outflows.
And so, with those inflections, we would expect, you know, to, with our—that to impact our Adjusted Free Cash Flow. So, if we think about the outyears in 2024 and the outyears, is what we've said is that we would expect to get to a more consistent Adjusted Free Cash Flow positive in the near term. And so as we continue to grow occupancy, as we continue to have margin expansion, you know, hopefully, as we see inflation, interest rates come down, we would, in the near term, look at Adjusted Free Cash Flow positive.
Okay, great. Maybe wanted to pivot back over to occupancy, and it, it's been a favorable year of sort of consistent recovery. We haven't seen much seasonality either, you know, throughout the year. It's just been sort of this steady sort of COVID type of, of sort of post-pandemic recovery. Cindy, as you mentioned, there still is a lot of opportunity even from here to recover to historical levels.
Eighty-four-point five percent, I think, before the pandemic. The historical high of even substantially higher at around eighty-nine percent. You know, from, I guess, this sort of early midpoint on 2024, how are you sort of anticipating that trend in occupancy? Should we sort of think about 2023 representing a reasonably good sort of trend line that continues next year, or do you think there sort of more acceleration, moderation against sort of the trend line that we've been seeing this year?
Yeah, and I'll start with, if you look at our investor presentation, we really wanted to... We added two slides, I think it's slide 16 and 17, that show kind of that long-term growth opportunity, both on the revenue top line side and on the margin side. And so, like you had mentioned, we're, we're at 77.6% occupancy right now.
Pre-pandemic, we hit an, as Cindy had mentioned in our opening comments, under 70%, as our occupancy fell during the pandemic. But pre-pandemic, we were at 84.5% occupancy. And so- and, and our historical high was 89%.
And so as you think about how we have really protected our rate as we've grown our occupancy throughout 2023, and really trying to balance that on the RevPAR side, there's significant opportunity to get back to that, you know, that pre-pandemic occupancy on the top line as we continue to balance rate and occupancy. The second slide in the investor presentation is really showing that margin impact. And so we're at about a 25% margin right now, and historically, we were in the thirties.
And so, as we think about getting back to that additional revenue growth and the flow through of that margin with the high fixed cost business, we have a significant amount of opportunity in front of us. Now, in 2024, we would expect to grow occupancy in the... Just as we were in 2023. I don't know that it'll be the exact footprint of the occupancy growth, but we expect to continue to grow occupancy every quarter throughout the year.
Okay. Do you have a general rule of thumb where, you know, each 100 basis points of occupancy drives a particular level of margin expansion, or is it not that simple?
I don't know that we've publicly said how much that is. But I would just say, as you think about, it gets a little more complicated because of the fixed cost nature of the business. So if you have communities that are low, low occupied, and you get a basis point of occupancy, it might not drive as much margin as if you've covered all of your fixed costs, and you would get more from a flow-through. But certainly, also product type will drive that as well.
Like, as you can imagine, your independent living, product type is going to have less variable costs related to an additional as you get through to covering those fixed costs. You know, typically in independent living, it might just be your food costs as opposed to more labor.
Okay, let me just pause here and just see if there's any questions?
Can you talk about your debt coming up? Can you tell me how much that is and when it matures?
Sure. We have $257 million of agency debt that matures in September 2024, and so that's just, that has just become current on our balance sheet. As you can imagine, the communities are recovering, and so we expect to address that with an agency refinancing. But because the communities are still recovering, we would expect to also use cash on hand to pay down some of that debt as well.
You said agency on that?
Fannie or Freddie.
Oh, okay.
Yeah.
So they're actually at the actual facility then, that would be like secure financing for mortgage, I guess. Okay.
Correct.
Mm-hmm.
So, one of the things I wanna do, just as we are pausing questions, I did misspeak, when we were talking about Health Plus. Our hospitalizations are down 36%, and our urgent care visits are down 78%. So, I wanted to correct that, before we went to the next question.
Any other questions?
As far as like, a run rate, CapEx, like a maintenance CapEx, is there a number?
Sure. Well, before this year, we generally spend 2,000-2,500 a unit, which is what our historical spend has been. We've increased that to $3,200 per unit this year, and that's because, as you can imagine, during COVID, we shut our communities down to protect our residents, and so it was really challenging to get into the community.
So now we're focused in the recovery on making sure that we're continuing to invest, particularly in the projects, like a roofing project or a parking lot resurfacing. So, we have increased spend in order to address some of those, you know, costs that come maybe once every 10 years or so.
Yeah, and just what Dawn means by shutting them down is we didn't want to have anybody in the community that didn't need to be in the community because of the risk to the residents. So, some of the CapEx that we might have done normally, we deferred that. And a lot of our CapEx runs on either a 7- or a 10-year cycle. And so, if you think about having a couple of years where the communities just didn't have as many visitors, including people who were doing building and contracting work, that's how to think about it.
Do you envision ever being able to get back to, like, 18 EBITDA run rate? And...
What I think about is, I think about the fact that with a lower occupancy than we've ever had before, we've had five sort of quarters of RevPAR above sort of our pre-pandemic levels. And if you think about the fact that some of our expenses have been elevated at... Because of sort of partially the occupancy level, I'm pretty optimistic about what we can do with Adjusted EBITDA.
And we've got a presentation in sort of the investor deck that talks about what the revenue recovery is, what our historical margins are, and I'm confident that over time we can get back to those historical margins. And with, you know, the right supply and demand, we might even get beyond that.
What's the payer mix, and is it...
94% private pay, which is, which is fabulous. And if you think about why that's so important is, we're able to charge a rate that our residents find value, right? So if you think about the historic rate increase that we took this year, the fact that that allowed us to sort of cover the elevated costs that we had.
We don't have some of the same pressures that other healthcare companies have. About 3% of our business is skilled nursing, and so there we've got the exposure to Medicaid, Medicare, as well as commercial insurance. And then in our senior housing business, we do have a small portion of our business that's Medicaid, but the 94% private pay is really gonna be something that will serve us well as we go into the future.
Okay, thanks. I want to talk just about seasonality and maybe bring us up to speed. I mean, you talked about sort of expecting sort of continued occupancy growth each quarter. How much does seasonality typically affect, you know, the business from an occupancy perspective? Obviously, thinking mostly about the fourth quarter, given that we're in the fourth quarter right now.
Sure, sure. Again, I'll refer to our last page on our investor presentation, because that really lays out, particularly as we've given quarterly guidance this year, we wanted to make sure people understand seasonality trends, including occupancy. And if you really think through, fourth quarter coming into first quarter, you've got the flu season, you've got the holiday season, and we typically see a little bit of a decline in our occupancy coming through into the first quarter. That'll recover in the second quarter, and the third quarter will be our strongest with our summer selling season.
And then, as we look from third quarter to fourth quarter, it will generally be relatively flat or slightly up, just as you're coming off of that selling season and coming into the holidays. That's what we'd expect for this year as well.
Okay, all right. You had talked about seeing improvements on the contract labor front. Maybe if we can get an update on sort of where contract labor trends have sort of progressed to from a utilization and rate perspective, how those have evolved over the course of the year, and from your planning perspective, how you expect contract labor, labor to continue to evolve looking out, you know, into 2024?
Yeah, we were very focused on contract labor. It hit its peak in December of 2021, and since that time, we've reduced our contract labor by only almost 95%. And so, from second quarter to third quarter, there was a 35% reduction in our contract labor. We've said publicly that our contract labor was mid-single digits, and so we've now gotten that down to low single digits. And we would expect that right now we're running at more of an inflation-adjusted pre-pandemic level. It's really more of where we're focused on the premium labors on the overtime side.
Yeah, and if I go all the way back to December 2021, I think, in that particular month, it was even higher than mid-single digits as a % of our labor cost. But what is important is that if you think about serving residents, our business is a relationship business, and the most important thing is giving the residents consistent care by the same associates. And, and if you think about contract labor being 2-3 times as expensive, you get the direct benefit there of the kind of expense reduction, and hopefully we will be able to maintain sort of the level that we're at.... sort of going forward for contract labor.
But the really important thing is that you build the relationships, and that allows you to provide a higher quality of service, and you have a better relationship with your residents. So, there's so many factors that help the P&L other than just the direct difference in cost of contract labor.
Great, and, maybe just on the wage side, you talked about having very low wage inflation in the third quarter. How are you thinking about associate wage increases, you know, looking out into next year? And then also, sort of the cycle in terms of when you typically do sort of update your wages for your employees.
Yep, and so if you think about the third quarter, we certainly saw elevated wage inflation. Certainly not as elevated as what we saw in 2022. We've seen that labor inflation come down, and I would expect there wouldn't be a material change kind of in the fourth quarter here. And then, as we think about 2022, I think that moderated labor. We've seen a moderated labor market, and that's kind of how we're thinking about it for 2024.
In the first half or the first quarter of 2024, our wage inflation or our wage rate merit increases generally come through in March, and then early in the second quarter, as we get the full impact of that merit that comes through.
Now, what'll be different next year is we won't have the tailwind of the contract labor reductions, and so that allowed us to really control our labor costs sort of this year, year over year. But I do think that if you think about just the relationship with the residents and having that continuity of associates caring for them, that's gonna be very helpful for us.
So that 1% print, that includes the improvement in the contract labor, right?
Correct.
Have you disclosed sort of what, how that breaks down between contract labor and ex-contract labor?
We have not. We've talked about it, I think, in the context of, you know, the high single digits, above the high single digits, mid-single digits, low single digits, as a percentage of our compensation costs.
Okay, great. And then, in terms of, you know, walk us through again, I mean, it's... The economy has clearly sort of kept on pace, you know, with sort of expectations that we'd have seen more slowdown, you know, at this point than we have. I guess maybe talk about sort of how you're thinking about the economic environment for next year in terms of your baseline assumptions, and then remind us sort of if we did tip into recession, what are the key historical sort of impacts that Brookdale typically sees on the business?
So let me start with the back part of the question first, and that's recession. And if you go back to the fact that 70% of Brookdale's business is assisted living and memory care, those are needs-driven business, so that tends to be insulated during more difficult economic environments, and so I think that's, that's important.
If I think about the macroeconomic conditions, I'm excited about the fact that wage inflation is moderating because about 65% of our expenses are labor costs, and so having that be in a more normalized level is something that is helpful. And then, you know, the interest rates have had a big impact on our business. You've seen that in our P&L, and cash flow sort of in 2022 and 2023, and we are expecting higher for longer, but we are looking forward to the end of the hiking cycle.
Okay, great. And then I just had one more question from my end. Just as you sort of look at the policy environment, you know, both at the federal level, at the state level, anything out there that you're particularly monitoring as potentially impactful to the business, either from a positive or negative perspective?
I think there's a couple of things that I focus on. One is something I mentioned earlier in our talk, and that's the transition to Value-Based Care. And if you think about making sure that people have the care that they need in the setting that they want to have it in, that is incredibly good for our business because we provide so many things that allow residents to have a lower healthcare utilization. We have nutritious meals, we have exercise programs, we have housing and support, medication management, those sorts of things.
But also, you see a shift of care to the home, and if you think about our communities, they are the homes that our seniors live in. Seeing the increase in telehealth is good for the residents because they're able to get healthcare that they might need without having to leave the comfort of the community. If you have to go to a hospital and you're in your eighties or nineties, it's challenging for you.
So, I'm excited about the things that are allowing healthcare to be delivered in settings that you may not have thought of as traditional healthcare settings because it's good for patients and residents. I think that is something that also, because we were so focused on our clinical capabilities, it is something that will help differentiate us.
All right, great. Well, I'll just check one more time if there is any additional questions in the audience.
Yeah, on HealthPlus initiative, is it just in Assisted Living and Memory Care, or is it also in...
So it is primarily in assisted living and memory care, and that is because of the licensing that you have in various states. Our business has state-by-state rules and regulations as to what we can do in different levels of care, and so we're limited to the clinical services that we could provide to independent living residents.
Could you flesh it out further? Like, when was it rolled out? Is it all 555...
So...
AL and MC?
Yeah. So, we rolled it out in January 2020. Going back, I don't know that I would've started something right before the pandemic. We rolled it out in the state of Ohio, and we kind of watched it bake for a few years, and then we rolled it out to additional communities in Texas and Florida this year, and we are looking to continue the rollout over the next few years.
Have you seen a lift in sort of, Net Promoter Score or like...
Yes. Our, our Health+ communities have a higher customer satisfaction than our non-HealthPlus communities, and if you think about it, it makes sense, right? If you can help people manage their wellness in a way that they can do the things that they want to do, they're gonna have a higher satisfaction. And as I said at the beginning, it's also given us more new residents who wanna come into the communities.
And for our associates, they work for us longer because they're working with cutting-edge technology that isn't available anywhere else in our industry, and so that's very attractive to them. We also redesigned the entire workflow of the community to simplify it, so that we could really focus on the things that matter most for our residents, and that's exciting.
All right. Well, I wanna thank the Brookdale team for joining us, and I hope you have a great rest of the day.