Secure Analyst here at RBC Capital Markets. Thank you all for joining us. Very pleased to have management from Brookdale Senior Living joining us again this year. We're hosting Don Cadorette, Executive Vice President and Chief Financial Officer, and Jessica Hazel, Vice President, Investor Relations. Thank you guys for joining us today.
Thank you for having us. Thank you, Ben.
Yeah, so significant momentum in 1Q25 and a dynamic time for you guys. Occupancy growth was surpassing typical seasonal trends. Maybe you can kind of tell us a little bit more about the key drivers and kind of how you're viewing this strong start to the year.
Thank you, Ben. Yes, we were really happy with our first quarter occupancy growth. We had a favorable growth trend that accelerated from the fourth quarter. If you look at our year-over-year growth every month in the year, it continued into April, where we had that acceleration of that year-over-year growth. I think it was driven by the fact that our move-ins were higher. We had 3% higher move-ins over the prior year and 12% higher move-ins over our historical average. We also saw some favorability in our move-outs. We had 3% lower move-outs over the prior year and our historical average. The one thing that we talked about on our earnings call was our same-store occupancy of 80% that was flat sequentially from the fourth quarter of 2024. That is important for a couple of reasons. Typically, we see our first quarter occupancy decline.
We typically then start to rebuild from that decline. With flat occupancy from fourth quarter into first quarter, we already started to build our occupancy. We were pleased with that. The 80% occupancy marker is a big marker for us because we said at the low 80% occupancy is kind of where we are covering our fixed costs. We have a high fixed cost business. That 80% occupancy is a good milestone for us. As you saw, we were adjusted free cash flow positive in the first quarter. That was good to get to that 80% occupancy. I think another driver is we talked about some high-performing communities that we had focused on that lifted our consolidated portfolio. There are about 65 communities in there, and we saw some nice progress with those communities. I think that was great progress.
We expect that to continue through 2025.
Maybe you can talk a little bit more about the occupancy trends you're seeing versus the broader industry and kind of how you differentiate your performance versus what you're seeing more broadly.
For sure. If you think about 2024, there's no doubt that that third-party referral source, lead source, had an impact on our occupancy trajectory. Our first quarter of 2024 occupancy was 160 basis points growth year over year. We saw the lead disruptions. We started to see it in March. We really identified that in the second quarter of 2024. That is when we pivoted our marketing spend. More towards our internal, getting to drive that lead source with our internal marketing spend. We saw that progress with that internal spend, but we really did not see that progress until the fourth quarter where we saw our move-ins grow year over year. I think that that certainly impacted the trajectory of our occupancy. As we just talked about, our first quarter occupancy of 140 basis points year over year growth, we were really pleased with that.
We were pleased to see our April occupancy continuing on with that trend.
Great. Now, we've already discussed kind of the magic of the 80% level of occupancy. Maybe you can talk a little bit about the levers you're pulling at the local level to get to that level. I know you mentioned having some that were still kind of in the 70s. What are the efforts there to bring that around to the overall rest of the business?
Sure. We talked about pricing on our call quite a bit. Maybe to put a finer point on what we're looking at doing, I'll break our communities into two groups, kind of the above 80% occupancy and then the below 70% occupancy. If you think about communities at that 80% occupancy, we're covering our fixed costs. What we're doing there is kind of looking at our lead bank, looking at how those communities are performing, and seeing in those communities where we can push price simply because the flow-through is higher as you get to that 80% level. On the below 70% occupied communities, I broke them into three groups on our earnings call.
First, it would be owned or leased assets that we do not expect to be operating by the end of the year, either through lease disposition, and Denise talked about some owned dispositions that we are doing. We also have some of the below 70% occupied communities in our high-performing communities, our focus group, the 65 that I just talked about. The third group is about 25 or 30 communities that we need one, two, or three units at in order to get above that 70% occupancy level. From a pricing standpoint, we will look at do we need to adjust our pricing there to get those one, two, or three units. It is very strategic.
It's very focused on just trying to make sure that we can kind of get that flywheel moving on the occupancy so those 70% can get and more so cover their fixed costs than they're currently doing.
Josh Hewan, we talked in, I know, a lot in fourth quarter and on this past call about the plans to exit the 55 Vintos communities. And you talked about another 14 non-core assets you expect to exit by the end of 2025. Could you speak broadly about your portfolio optimization strategy, kind of where we are and where we're going in terms of nailing down our core, the core platform?
Yeah, that's a great question, Denise. I think Denise did a great job talking about this on our earnings call. We've made significant progress on streamlining the operations of our business, simplifying our business, and then rationalizing our lease portfolio over the last several years. We're always evaluating at the community level what can we do to improve performance. How can we improve operations? We're evaluating whether the community itself would be better suited to be with another operator, be due to size, performance, location. There's a variety of reasons. I think we're kind of on the onset of looking at the dispositions. I feel that it would be a modest group that we'd be looking at.
Denise talked a lot about how she's thinking about whether we would be looking at individual communities, whether we'd be grouping communities into a cluster, maybe some lower performing, maybe some higher performing communities. I think it's too early to talk about right now, but I do feel like it would be more of a modest group.
Josh Hewan, then with what is on the slate now, you've mentioned that you're going to get to about 75% owned by the end of the year. Maybe kind of think about how you're thinking about the ideal target for the ownership structure and maybe the benefits of having the majority-owned portfolio.
Yeah, it's a great question. We've been focusing a lot on optimizing our real estate and the real estate strategy. Maybe if I think about it, I would point to three things that we've done over the last year or so. Most recently, the 41 leased acquisitions or 41 properties that we acquired from leased portfolios. We went in and essentially refinanced them by replacing a high and escalating lease payment with a lower fixed cost mortgage payment and effectively getting a guaranteed return on those assets. It also gave us the strategic flexibility to dispose of what we just talked about, dispose of some underperforming assets or assets that were better suited by a different operator. That gave us that flexibility. There are some of those assets that are in the 14 assets we talked about publicly that we'll dispose of.
Of course, the Ventos non-renewal properties. There are 55 properties that we do not expect to renew by the end of the year. We have come out to say that their performance metrics, from a RevPAR and occupancy perspective, are all under our consolidated performance metrics and are underperforming the consolidated portfolio. We certainly do not expect to renew those assets by the end of the year. The disposition, when we are looking at the 14 owned assets that we will dispose of, and then we will look at this other modest group of assets that we potentially will also dispose of, we will see benefits across adjusted EBITDA and adjusted free cash flow as we execute on that strategy.
Maybe that brings me up to my next question. It seems like we really turned a point in the lease portfolio reaching cash flow positive in this last quarter. What's the runway from here in terms of lease renegotiations and optimizations that we can do here in the future?
Yeah, I would say, I mean, I think we've made significant improvement from the lease portfolio perspective. We've walked away from underperforming assets. We have negotiated landlord funding. We have over $140 million of landlord funding for CapEx, which is significant from a cash flow perspective for us and favorable terms on the leases that we've renewed. Substantially all of our leases have fixed escalators. We really only have six communities that are maturing and have lease maturity dates before 2028. We will evaluate those kind of as they come up.
If we kind of move over to the pricing side, one of the aspects that you've talked about that's helping your underlying rent growth is the Health Plus initiative. Maybe you can kind of give us some color on that program, the timeline for rolling it out to additional communities, and the benefits you're seeing there.
Yeah. I'm very pleased to talk about Health Plus. It's really differentiated within the senior living industry. What it does is it redefines assisted living to care for the residents holistically. That's through technology-enabled evidence-based care coordination. That's care coordination of chronic conditions that is working across your residents, their family members, their external care providers to ensure that they're getting the best possible care. It is showing really tremendous results. We will be rolling it out to 58 communities this year, probably in the back half of the year. We rolled it out to 80 communities last summer. We're approaching a year of results with those communities. From a benefit standpoint, you guys have probably heard a lot of the benefits that we've spoken to.
Some of the most recent ones that we've looked at, we've seen the better move-ins within our Health Plus communities. In the first quarter, those communities were significantly better year-over-year occupancy growth than our non-Health Plus communities. Really, the communities that have now had Health Plus for almost a year are really gaining traction in that. Also, our associate turnover is lower in Health Plus communities than it is in non, particularly when you look at those healthcare positions. That could be your nurses, your med techs, your caregivers. In Health Plus communities, that group of associates is actually 20 percentage points lower turnover than in non-Health Plus communities. It is just reiterating that associates are really excited about the positive resident outcomes that they're seeing with Health Plus.
They are engaged, and they want to be involved, and they want to work at the top of their skill level, and they are able to do that through that program. Very excited about it and would expect continued rollouts.
We've heard more from some of your competitors, both on the private and public side, talk about the integration of more capabilities into senior living like personal care, home health, and hospice. How is Health Plus integrated with those types of capabilities?
If you think about that, really, the residents, our communities are their home. We are able to provide that type of care within the communities and really leverage their external healthcare providers to support that. Again, working very closely, keeping fantastic records of conditions as they potentially grow worse with those residents so that we can identify them early, reach out to their healthcare professionals. What it is going to do is it is going to prevent mom getting a call or, I am sorry, daughter getting a call. Let me correct that. Daughter getting a call saying, "Mom needs to go to the emergency room.
We think that she has a UTI, and then she goes to the emergency room, they send her right back and just say, "You have to treat it." We're able to help identify those earlier, reach out to their own healthcare professionals, and really reduce those urgent care or emergency room visits that our residents shouldn't have to go to.
I know you've talked about Health Plus supporting being a value element in your rent growth, but is there an element of government reimbursement that could come out of this in the future or that you're realizing now?
It's more of the reimbursement sharing through we have payers who are receiving benefits for the care that they are providing, and they are sharing in those benefits with us. It's definitely covering the cost of introducing Health Plus to the communities. When you compare that revenue stream to an annual resident rate increase, it's not going to be at the same magnitude, but it does provide us that benefit. We are seeing the Health Plus communities are more positive NOI growth than non-Health Plus communities. Definitely covering the cost and getting the ancillary benefits of the higher occupancy, of the lower turnover, and other metrics like that.
Great. I want to shift gears a little bit. Clearly, we've had some management change, and you guys are embarked on a new CEO search. Maybe we can talk a little bit about what skills and attributes are highest on the board's priority list as it surges for the next permanent CEO. How should shareholders interpret the transition within the context of the long-term strategy?
Yeah, Ben, it's a great question. The strategy and the objective of the company has not changed. It remains unchanged. I think where we'll see some more challenges is we'll challenge the teams to grow our profitable occupancy quicker. I am very focused on that. We talked about over the last several years, we've simplified the business, we've streamlined the business, we've rationalized the lease portfolio, and we've taken care of the balance sheet. We've proactively refinanced our debt. We are really in a great position, again, getting to that 80% occupancy level to grow our adjusted EBITDA and have some compelling returns on our business.
I think, as Denise shared on the call, they're looking for someone, the board's looking for someone with proven experience, somebody that has the ability and the skill to push operational improvements quickly, and then somebody with a strategic vision that can kind of take the company to the next level.
As we're facing this supply and demand imbalance, such a favorable demographic tailwind to senior housing operators, what do you see over the next several years as giving Brookdale the right to win in terms of it seems like investors are very eager to see Brookdale hit the accelerator at this point. Just kind of how do we get there from here?
We are very excited to see Brookdale hit the accelerator at this point. Yeah, I mean, there's no doubt that the industry is poised for powerful growth over the coming years. We not only have that unparalleled demographic demand, we also have the new supply constraints, right, that everyone is speaking to. We are very optimistic about that. Our strategy is specific to demonstrating that we are able to help support the clinical challenges, the loneliness challenges that the aging population is facing, and we can help the residents with that, and we can help their families with that. That is through programs like Health Plus, like Engagement Plus. When we think about our customer acquisition strategy, it always goes back to providing valued, high-quality care and services and making those personalized to the residents so that they have a really strong quality of life.
We think that that type of plan and approach is reflected in the recognition that we receive. This year, 2025, is actually our fourth consecutive year of being recognized by U.S. News and World Report Best of Senior Living and having the most communities within the industry recognized as Best of within their local markets. Our marketing teams are using unique content, whether it's social, digital, mailings, are really highlighting that and other unique aspects of each community on the community-level websites. Our sales teams are continuing to engage with prospects, meet with new potential residents and their families, and really highlight where we can add value to support the residents throughout the aging process.
Thank you for that. It brings up a good point. In recent quarters, we've discussed a lot about the marketing strategy. Maybe you could provide us some more information on kind of how that's evolved over the last, actually, the last year or so, and then kind of what incremental changes you're making to marketing in order to get more move-ins.
Yeah, I would say that just as Jessica said, I think the third-party lead disruption last year, when we shifted our marketing spend to more internal spend, it challenged us to think about how do we spend and how do we pivot quickly in order to generate those leads. I think we learned a lot going through 2024. I think as we're thinking about and we've gotten some of those third-party lead referral sources back, one of them we got back and the other one to a lesser extent. We are certainly looking at that marketing spend and whether it is direct mail marketing, marketing through our call center, upgrades on our website, where are people going, where are the residents going.
We're leading them to our website, so making sure that that is putting our best foot forward on making sure that we can exhibit the quality care and the quality product that we have.
Just with cash flow improving as we get to that 80% occupancy mark and considering that we've got these investments on the marketing front, and also you've discussed the goal of reducing leverage ahead of the 2027 refinancing cycle, maybe you can talk about overall capital allocation priorities and what specific goals you have around capital allocation.
Yeah, I think what I would say is if you look at our leverage over the last several years, we've made significant progress on reducing our leverage. If we think about our guidance range for this year, we'll be in the low nine times on our leverage. Certainly a lot of progress, but certainly not enough progress. I think as we've gotten to that 80% occupancy and we would expect to continue to grow adjusted EBITDA, we'll certainly think or that will certainly impact our leverage calculation and bringing our leverage down. I think also the sale communities that we talked about on our call will also impact our leverage.
Excited to make sure that we continue that growth, to continue to reduce our leverage and think about as we identify those sale communities and even more sale communities, that modest group, it will also bring our leverage down as well.
I know that you've also talked about in the past, you've talked about maybe some strategic acquisitions to build up certain markets. Kind of how is that in the priority spectrum and any movement there that you can call out?
Nothing that I would call out at this point. We certainly are always looking to create value, create shareholder returns. We are always looking at different opportunities from an acquisition, a disposition fund, and then also performance of the communities. We talked a lot about the leases today. I think that we have done a really nice job on streamlining those, but always open to looking at opportunities, but really nothing to talk about at this point.
Just maybe in close, just your quick comments on Brookdale's positioning amid some of the macro funding and policy trends that we're seeing, whether it be exposure to tariffs or whether it be just the healthcare policy in Washington. Any thoughts there on Brookdale's positioning?
Yeah, I would say as we're thinking about the macroeconomic backdrop, we're certainly cautious. We talked about that on our earnings call quite a bit. The tariff exposure, we would expect to level off, but as you know, 65% of our cost is labor. As we think about the labor market and the supply and the demand, I think is more normalizing in the labor market. We are very pleased to see that. I think from a tariff perspective, if you think about our other cost structure, like I said, we have some opportunity with our food and costs there that we can do some substitution in order to mitigate any impact. Certainly cautious with the backdrop of the macroeconomic environment. We certainly think that we're seeing some positive trends.
I would weigh in and say, given that we're 94% private pay, that insulates us from a lot of the impact, whether it's the government funding or changes there. This population is probably the wealthiest population. There is a level of whether it's from their passive income, whether it's from pension funds, whether it's from their investments that they've made throughout their lifetime in 401(k) or the equity value in their homes, whatever they choose, there is a definite ability to afford our product. When you look at particularly assisted living versus a lot of home healthcare, which can be quite expensive as those needs grow, it is a product that is much more affordable for seniors who need that additional care with whether it's their activities of daily living or their chronic conditions. Really pleased that we're 94% private pay.
Great. Thanks, guys. I think that brings us to time, and we'll wrap it there. Thank you all for joining us today.
Thank you, Ben.
Thank you.
Appreciate it.