Great. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I cover managed care and facilities here at Barclays, and I'm pleased to welcome Jessica Hazel, Vice President of Investor Relations. Jessica, welcome.
Thank you.
Great to have you here. Maybe just to start, the cash-based nature of the business, senior housing pricing post-COVID has been a major theme. Can you maybe elaborate on the in-place resident rate updates that you're implementing in 2024?
Yeah. So just to give you a little bit of background, pre-pandemic, our pricing actions were generally tied to a targeted spread to the cost of living expectations for that particular year. Then with the impact of the pandemic and its follow-on effects, including that full force of the disrupted labor market and the broad and significant inflationary pressures that we were all facing, the cost to continue to deliver high-quality care and services to our residents increased dramatically. So in 2023, we took a historic high pricing increase to appropriately address those elevated expenses, mainly labor, which is the largest portion of our community operating expense, but also other areas of the business like supplies, food utilities, etc., and the elevated interest rates. And that pricing increase, combined with our occupancy growth in 2023, supported a same-community RevPAR increase of 11.4% over the prior year.
So we were very pleased with that decision and the resulting outcome. Now, moving to 2024 and your specific question, we took a lower pricing increase on January 1st than in the prior year, but it was still elevated above our historic norms. Through this, we remained focused on ensuring appropriate pricing for the services that we deliver in our communities while also remaining affordable for our residents. And we believe that our pricing this year appropriately addresses our cost. I will have to say our community leaders are very diligent and have done a great job in conveying the rationale of our pricing increases to the residents. And in our quarter-to-date results, we have seen strong move-ins and move-outs below the prior year. So we've been very pleased with the pricing action.
All right. Given that balancing act between pricing and occupancy that you just described, how do you think the pricing evolves over the next 2-3 years beyond 2024?
Our first strategic priority is to get every available room and service at the best profitable rate. It's going to be through that balance of occupancy and rate that we'll continue to deliver RevPAR growth as well as support profitable occupancy increases. Not only that, but with the supply and demand dynamics providing a tailwind to senior housing for many years to come, we believe that there will be continued opportunity beyond 2024 to continue to grow both occupancy as well as rates.
Great. And you mentioned the competitive environment as a factor to some of those January 1 increases that you put through on your 4Q earnings call. Could you give more color on that broader competitive dynamic in the market? What specifically are you seeing that prompted those actions?
Yeah. I think specific to our comments on that earnings call, just as for many years, we have taken our market rate increase for new residents at the beginning of October. And then in 2023, what we saw are more competitors utilizing discounts and sales incentive programs, particularly within that month of October. So it was more isolated as opposed to very broad. And it was also in particular markets. So our community leaders leaned in where appropriate on their competitive response to that environment in their local markets. And that was related to the comments we made. Now, I would caveat by saying that with about 90% of operators in our industry having five or fewer communities that they operate, there can be a lot of variability in what we see from market to market.
Great. Maybe specifically on the 2024 outlook, do you want to elaborate a little bit more on the occupancy and momentum that you have for 2024?
Yeah. I would say that since the start of our recovery from the pandemic, our annual occupancy growth has been stronger than in a normal year. We would expect that same thing to continue in 2024 as a result of the supply and demand dynamics, as a result of our solid operational plans, and the momentum that we built with our success in 2023, and as a result of continued strong execution. Now, specific to 2024, we believe that we'll see that normal quarterly cadence of occupancy change.
What we would expect is to continue to have those annual occupancy increases as we work towards not only that pre-pandemic average of 84.5, but also grow to our peak level, and then ultimately, given all of the dynamics, grow beyond that level over the longer term.
Got it. So you still think there's a pretty big runway here to recover a lot of this occupancy from pre-pandemic?
Yes. We believe that there is significant runway for a multitude of reasons.
Okay. Great. Maybe shifting to demographic factors. Baby boomers are now aging into that 75+ age cohort. How significant is that for the underlying fundamentals and demand of your business? What are your expectations over the next five years given the level of growth that we might see in this age cohort?
Yeah. I think that there is going to be significant demand for senior living from that Baby boomer population. Currently, at Brookdale, about 19% of our residents are Baby boomers. And for the 75+ age cohort, that population specifically is expected to grow more than 30% between now and 2030. So we are seeing from the data an expectation for about 1 million new seniors entering our target age cohort each year, more than. So we think that the demand, particularly from this Baby boomer group, will support these year-over-year occupancy growths not only in our current year, but also for many years to come. And again, that's exactly what we're seeing is that seasonal trend plus. Our February occupancy results were 160 basis points above the prior year, February.
It's just continuing to deliver that strong growth and grow over time until we're back to those occupancy levels that we discussed.
Great. Maybe on the other side of occupancy, labor costs have generally been coming down across the industry over the last 18 months or so. How are you managing labor costs at your properties? And can you comment on how much contract labor you use and what sort of tailwinds that might have presented to you over the last 15 months? And what's your outlook from here on labor?
So our goal at Brookdale is to match our labor with the needs of our residents while providing high-quality care and services and remaining in compliance with all applicable regulations. That's our target. Specific to contract labor, that for us peaked in December of 2021 and remained elevated throughout 2022. Now, thanks to the efforts of our teams, we made remarkable progress on reducing contract labor in 2023 and filling more shifts with full-time and part-time Brookdale associates. So what we would say now is that our contract labor is largely back in line with that pre-pandemic inflation-adjusted level. While we'll continue to monitor contract labor closely, where we think that there is the most opportunity for labor improvements in the near and the long term is through further improvements in overtime and premium labor, the opportunity that comes from incremental occupancy growth, and further improvements in associate turnover.
Those are the areas that we will continue to focus to see those labor improvements.
Great. When I think about just broader margin expansion opportunities, where else would be a potential area to improve? It sounds like that just the occupancy in general would leverage the cost basis. But I'm just curious to hear your perspective on potential margin improvement opportunities.
I think we've touched on the main factors already. So it's from higher occupancy, from appropriate pricing, and from continued improvements in retention and turnover. Those are going to be some of the primary drivers of our future margin growth and expansion. So when you think about it, senior living is a high-fixed-cost business. So as we grow occupancy, as we grow rate, we have the ability to leverage those higher fixed costs. Then as we further improve our retention and turnover, our Brookdale associates naturally become more productive. And so we would expect this productivity to support additional margin improvement while remaining in compliance with applicable regulations. So one thing I will say about margin growth, in 2023, we demonstrated our ability.
Great on that.
Believe is that it. Leader in value-based care. It's through evidence-based preventative care coordination. Each HealthPlus community has access to an RN care manager who uses the latest tools, the latest technology to enable responsive and effective care coordination. We've been very pleased with the results, not only that we've measured, but also we had a third-party company measure our Brookdale HealthPlus results. What they found is residents living in Brookdale HealthPlus communities had 78% fewer urgent care and emergency room visits and 36% fewer hospitalizations than similar individuals living in private homes. Within our own data, we're also seeing higher resident retention, more move-ins, higher associate retention.
So we expect that the program overall will continue to improve resident satisfaction, deliver resident quality of life, and support favorable costs to not only our residents and our families, but also to the broader healthcare system. Now, specific to what the economics look like, health plans are provided to our residents at no incremental cost. The costs specific to Brookdale are largely related to the robust electronic medical records and that shared RN care manager. From a revenue standpoint, we currently have one payer who is providing quality-based PMPMs for the positive outcomes that they're seeing in our communities. We're in discussions with other potential payers for that. When you consider all of the factors that we are seeing favorable outcomes from Brookdale HealthPlus, we believe that it leads to more profitable communities and will support more profitable communities at Brookdale over time.
Great. Speaking of more opportunities, with respect to the portfolio expansion, where do you see the greatest opportunity there?
Yeah. I would almost address this in two ways, our real estate portfolio and our product mix. So over the last several years, specific to our real estate portfolio, we have consciously shifted our portfolio by increasing our concentration of owned assets. Currently, about 55% of our consolidated portfolio are owned communities. And we think that owned communities allow us to fully capitalize on the powerful industry recovery that lies ahead. So we would anticipate over time continuing to have a focus on a higher mix of owned communities. Specific to our product mix, we are more heavily concentrated in needs-based businesses, including assisted living and memory care. We are about 74% needs-based product offerings.
We think just given the fact that there are more seniors entering the target age demographic, that those seniors are facing more chronic conditions, whether that be Alzheimer's, dementia, diabetes, high blood pressure, which is going to lead to higher acuity needs, that being in these needs-based product offerings best positions us for all of that growth opportunity that is providing that strong runway. We've grown our needs-based concentration of our portfolio by about 10 percentage points since 2017. We would expect to maintain this higher level just given the macro factors that are going to support the largest growth opportunity in that area.
Great. And this is healthcare, so it wouldn't be a proper chat without bringing up regulations. Curious, what regulations should we be on the lookout for? What's on the potential horizon? What could impact and help to evolve the business?
Nothing specific to talk about right now, but there is no question that the pandemic heightened the importance of our entire senior living industry. So unsurprisingly, the regulatory environment is increasing. We at Brookdale, we will just continue to respond appropriately through an intense focus on quality and ensuring that we are in compliance with all regulations in the industry.
Great. Well, let's wrap it there. Jessica, thank you so much for joining us today. Please enjoy the rest of your conference.
Thank you so much, Andrew.
Thank you.