Hello and welcome to the Brookdale Senior Living Fourth Quarter and Full Year 2022 Earnings Release and Conference Call. My name is Elliott and I will be coordinating your call today. I would now like to hand over to Jessica Hazel, Vice President of Investor Relations. The floor is yours, please go ahead.

Thank you and good morning. I’d like to welcome you to the fourth quarter 2022 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Dawn Kussow, our Incoming Executive Vice President and Chief Financial Officer. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. These statements are made as of today’s date and we expressly disclaim any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of the factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as in the reports we file with the SEC from time to time, including the risk factors contained in our Annual Report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the release for the full Safe Harbor Statement. Also, please note that during this call, we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information which may be found at brookdaleinvestors.com and was furnished on an 8-K yesterday. Now, I will turn the call over to Cindy.

Thank you, Jessica. We are pleased to have you join our Brookdale team. Good morning to all of our shareholders, analysts, and other call participants. I hope you and your loved ones are well. Welcome to our fourth quarter and year-end earnings call. Dawn will speak to some of the fourth quarter performance drivers but given our January release which included an outlook revision, I believe our reported results should be largely in line with any updated Street expectations. Reflecting on the past year I believe 2022 was a year of growth and continued recovery for Brookdale in several areas of the business, even so we have remaining opportunities to improve. At the beginning of 2022 I outlined three strategic priorities that would guide us over the course of the year. As you recall I have consistently spoken about these in our communications. They include attract, engage, develop, and retain the best associates, get every available room in service at the best profitable rate and earn resident and family trust and satisfaction by providing valued, high quality care and personalized service. While the health and well-being of residents and associates is always our overarching goal, these priorities have been our compass as we have navigated unprecedented macroeconomic challenges in highly competitive labor markets. Within Brookdale we have aligned our 2023 plans in support of the same key strategic priorities, but with an even tighter focus on all three areas. You think this is a guide, I'll summarize 2022 highlights and 2023 plans, beginning first with our priority to get every available room in service at the best profitable rate. During 2022, the number of seniors moving into our communities accelerated significantly resulting in same community movement volume that exceeded the three-year pre-pandemic average by 7%. Additionally, we continued positive occupancy growth momentum and Brookdale’s fourth quarter weighted average occupancy was up 770 basis points from the start of the recovery in March of 2021. When compared to NIC quarterly reporting, Brookdale’s independent living occupancy increased 570 basis points versus NIC's 360 basis point increase since their 2021 low. Over the same period Brookdale assisted living occupancy increased 740 basis points versus NIC's 670 basis point increase. We believe this performance is evidence of both increasingly strong demand and the strength of Brookdale's execution and brand. 2022 RevPOR or rate was 4.5% higher than the prior year. We are pleased with the progress we made on occupancy and rate. While expense management was also a priority, the challenging labor markets disrupted our efforts in 2022. That said, in 2023 we had the opportunity to significantly improve expense management and we have dedicated teams in place to help us best pinpoint areas of opportunity. During 2022, we focused intently on reducing contract labor by increasing the number of shifts filled by Brookdale Associates. From its peak in December 2021 to December 2022, we dramatically decreased contract labor by 80% while maintaining focus on resident satisfaction and providing high quality care. We had meaningful sequential reduction in contract labor each quarter in 2022, but unfortunately the continuation of an intensely competitive labor market caused our progress to be slower than we expected. As we look to 2023, we believe there are three sizable opportunities to deliver more occupied rooms at the best profitable rate. First, Brookdale's biggest opportunity to drive profitability is through occupancy growth at an attractive rate. In addition to recent pricing actions, we are evolving the Executive Director role to emphasize a stronger growth mindset underscoring strong sales acumen for the incumbents and future community leaders. During the pandemic, the day-to-day care and safety of our residents and associates required extraordinary efforts from our Executive Directors as they led their teams' heroic efforts to help protect those living and working in our communities from COVID-19. As we emerge from the pandemic, we believe that targeting and developing successful leaders with both operational and financial acumen is another way we can deliver further occupancy increases within our communities. Second, we realigned operational support functions including financial planning and analysis to further support our community leaders. This realignment will assist communities in their continued efforts to recover from the impact of COVID-19 and to return to pre-pandemic labor productivity levels where appropriate. Much of the anticipated productivity improvements will come from the growth and occupancy that I just spoke to and as associate turnover stabilizes and new team members become more established and efficient. While we are focused on labor expense improvements, we are clear that we must continue to meet our residents' needs, offer high quality care and services, and remain in compliance with applicable regulations. The third opportunity community leaders are focused on is further reducing premium labor spend. As I shared, we made significant progress in 2022, but premium labor spend remains too high. Contract labor is the highest premium labor cost and we have made progress in reducing labor costs by replacing contract labor shifts with overtime hours. Communities are dedicated to increasing the number of shifts that are filled by Brookdale Associates working on regular time as opposed to contract labor or overtime, which leads me to the second strategic priority to attract, engage, develop and retain the best associates. This is vital to Brookdale because our business is about people serving people, and because we build our business one relationship at a time, it is important to recruit and retain full and part-time associates to minimize dependence on premium labor and to preserve and improve upon our resident satisfaction through consistency of associates and in operations. During 2022, we increased our internal workforce by approximately 15% with nearly 5000 net hires, which supported more shifts being filled by our own Brookdale Associates. Though we've begun to see the pace of net hiring slow as more communities have the right number and mix of associates, we continue to confront elevated turnover resulting in lower labor productivity as we diligently work to successfully onboard new associates. Looking to 2023, our focus is on reducing turnover and extending the length of service of our associates and community leaders. We are building upon the actions we took in 2022 and expanding some of our successful pilot programs including educational and career development opportunities for associates, diversification of recruiting programs to attract and engage the right people, and improving training and onboarding. We believe these are the right plans to ensure we are attracting and retaining the best talent while improving our labor productivity. I look forward to sharing some of the details of these plans with you as the year progresses. Our third and final priority is to earn resident and family trust and satisfaction by providing valued high-quality care and personalized service. In 2022 this priority was reflected in our strong survey engagement, which allowed us to gain meaningful insights from residents and their families through multiple internal and external studies. For example, we received more than 22,000 responses to the U.S. News and World Report Survey and we were honored for having the most communities recognized in independent living, assisted living, and memory care. Then recently J.D. Power and Associates announced that Brookdale ranked highest in customer satisfaction for assisted living, memory care communities as highlighted in the investor presentation. While we believe our customer focus is strong and that belief is reinforced by the recognition we received in 2022, we are a learning organization and in 2023 we seek to raise the bar even higher. Every positive encounter with a resident, family member, or community leader can lead to future referrals and high resident satisfaction helps drive sustainable occupancy growth. Therefore, we remain focused on continuous improvement for our residents and associates. Turning to our 2023 financial expectations, we received a good deal of valuable shareholder feedback in 2022, including on the tangible equity units offering. I know that we need to improve shareholder confidence and we plan to do so quarter-by-quarter. Given this and the continued volatility in the macroeconomic environment, we have decided that for 2023 we will move to quarterly guidance to provide more transparency over the short term while continuing to also have a longer-term focus on growth opportunities. Additionally, we believe this approach appropriately balances the continued uncertainty in the macro environment and the resulting difficulty that causes for predicting what's ahead. Dawn will speak to first quarter guidance, but first I would like to provide some context for how we are thinking about full year expectations. We believe our 2022 efforts and the plans I just outlined for each of our strategic priorities set the foundation for Brookdale to deliver meaningful growth in 2023. We anticipate our positive occupancy growth momentum will continue and we were pleased to report that January marked the 15th consecutive month of year-over-year occupancy growth. January movements were strong, we believe this will support a first quarter sequential occupancy change that is better than our normal pre-pandemic seasonal trend. We believe 2023 RevPOR will be higher than 2022 driven largely by the annual in-place resident rate increase which was effective for most residents on January 1st. While, this was larger than historical increases, it incorporated the significant labor and inflationary cost pressures we faced. It will continue to support our strong standards of service and our ability to continue to provide high quality care to residents. We have seen a favorable impact to January RevPAR which increased approximately 13% on a year-over-year basis. Appropriate labor expense management remains a critical focus area for 2023 to improve margin and we expect the initiatives I outlined will deliver meaningful progress on this front. Moreover, as our permanent workforce stabilizes and we improve occupancy, we anticipate further reductions in premium labor and improved productivity. Lastly, we are constantly evaluating how to match our organizational structure with our business priorities. We anticipate the organizational changes we made in January, particularly through Brookdale’s leadership team will better streamline our decision-making and drive improved financial performance and operational efficiency in 2023. While the underlying decision for these organizational changes was not driven by a G&A reduction target, we do expect they will contribute approximately $10 million in favorable adjusted EBITDA this fiscal year, the majority of which is in G&A, which will partially offset the impact of a normalized incentive compensation expense in 2023. I am grateful for Steve’s support and partnership over the last four years and believe Dawn will successfully step into the CFO role with new and unique insights to drive financial planning processes forward. I also believe Ben Ricci and Laura Fischer will lead efforts to deliver accelerated operations performance improvement in their communities and Rick Wigginton will build upon the significant progress he's made on sales transformation through additional process improvements across the organization. I will now turn the call over to Dawn and welcome her to her first earnings call.

Thank you, Cindy. I'm pleased to be here today and appreciate everyone taking the time to join the call. As Cindy shared, Brookdale accomplished a lot in 2022, particularly on the top line, but there were areas of the business where we didn't meet expectations, which caused 2022 adjusted EBITDA results to fall below guidance as reported in our January press release. Cindy spoke in detail about plans for 2023, including the actions we're taking to support significant adjusted EBITDA growth this fiscal year. I'll provide additional color on fourth quarter results and then I'll speak to the first quarter guidance we provided. Beginning with fourth quarter performance, specifically total revenue and other operating income. On a same community basis, fourth quarter RevPAR grew 10% versus the prior year fourth quarter, which included strong move in results at increased rates that began for new residents in October. The forward rates helped drive a trend change in RevPOR from sequential quarterly declines through the third quarter in 2022 to a modest positive uptick in the fourth quarter. On a year-over-year basis, RevPOR increased 4.5%. Weighted average occupancy increased by 370 basis points versus the prior year quarter and December represented our 14th consecutive month of year-over-year occupancy gains. Also thanks to the diligence of our teams, we recognized approximately $5 million of grants and other operating income. For the full year, RevPAR increased 10%, achieving guidance and total revenue and other operating income exceeded expectations. Turning to fourth quarter expenses. On a reported basis, facility operating expense increased 1% sequentially. We were disappointed with this result as we had anticipated a sequential reduction in reported facility operating expense versus the third quarter. The variance to expectation was driven by two things; first, labor expense improvement below what we had anticipated and second, the unforeseen expense impact from Winter Storm Elliott. First, labor hours including overtime were more than expected due in part to continued overlapping costs driven by ongoing elevated new associate turnover. Many of the pandemic-related challenges our communities have faced have eased. But Labor has remained the most persistent headwind for the entire healthcare industry. We've been diligent in attracting the best associates and have delivered growth in our workforce. We've actively adjusted wages to remain competitive in the market and we've made positive strides to reduce premium labor costs. Despite these accomplishments and a very challenging labor market where the unemployment rate reached a half a century low, we did not deliver the level of progress we expected in the fourth quarter, which had been assumed in our previous guidance. Second, the impact of Winter Storm Elliott was widespread, affecting over half of Brookdale's 41 state footprint. This storm was unique because it brought sub-zero temperatures to regions that traditionally don't experience such cold weather and spent multiple days during the Christmas holiday weekend. The company estimates the impact of Winter Storm Elliott was nearly $4 million, including repair costs below our insurance deductible and indirect costs such as utilities and ground maintenance. On the same community basis adjusting for grant income and normalizing for natural disaster expense, adjusted operating income increased 7.7% or almost $10 million sequentially from the third quarter. As shown on Slide 8 in the supplemental deck, this sequential performance was the largest operating income step up in the past six quarters. Turning to adjusted EBITDA and adjusted free cash flow, fourth quarter adjusted EBITDA was $47 million, which represents a 30% increase compared to the prior year fourth quarter. And for the full year 2022 total adjusted EBITDA was $241 million, an increase of 74% year-over-year. Excluding Federal and State grants reported as other operating income, the increase was approximately 25% over the prior year. Fourth quarter adjusted free cash flow included two unique uses of cash; first, we made a final Cares Act government repayment of approximately $32 million. And second, we hedged the October refinancing with an interest rate swap, which had a one-time impact of $6 million. Other drivers of fourth quarter adjusted free cash flow were interest expense of $56 million and non-development capital expenditures of $39 million. Non-development CAPEX for 2022 of approximately $170 million met our full year expectations. Turning to liquidity as of December 31st, total liquidity was $453 million, compared to $396 million at the end of the third quarter, an increase of $57 million, which included net proceeds from the November tangible equity units offering. As of December 31st, our GAAP net worth reported as stockholder’s equity or equity was $583 million, compared to $491 million at the end of the third quarter, an increase of $92 million. The tangible equity units offering increased equity by $113 million, as did a one-time $74 million non-cash gain as a result of an amended lease agreement. Those unique items offset the reduction in equity due to operations, including impairment charges related to natural disasters. As mentioned during the third quarter call, we refinanced all 2023 debt maturities in October, with the exception of one highly covered loan secured by an Asset Plan for sale. The next agency debt maturity is September of 2024. We believe the actions we took in 2022, coupled with recent price increases and the 2023 strategies for driving further operational growth that Cindy spoke to will result in ongoing compliance with the financial covenants in our debt, and long-term lease agreements. Additionally, over the short term, we expect stockholder’s equity to benefit from the closing of an asset planned for sale. Turning to guidance, in 2023 we will offer quarterly guidance to support increased visibility into our forecasts and expectations. In addition to providing a first quarter outlook, this quarter I will share specific details of the demonstrable results already achieved in January, including the impact of our annual rate increase. The seasonality table in the appendix of our investor presentation provides details regarding normal seasonal drivers of anticipated variances in quarterly financial results. In the press release, you will see that we guided to first quarter year-over-year RevPAR growth of 11% to 12% and first quarter adjusted EBITDA in the range of $70 million to $75 million. As Cindy shared, the January 1st in place resident rate increases, which were higher than in prior years, are expected to address higher labor costs, which is the most significant portion of community operating expense, as well as inflationary increases on food, supplies, and utilities as well as rising interest rates. We've already seen the benefit of these rate increases in our January RevPAR results. January weighted average occupancy was 76.6%, a seasonal decrease of 40 basis points compared to December weighted average occupancy. As a reminder, pre-pandemic the first quarter generally declined sequentially by approximately 80 basis points. Regarding labor, January contract labor as well as other premium labor modestly declined versus December. We are diligently working to decrease turnover which will reduce the amount of overlapping costs. Primarily due to the rate increase, same community adjusted operating income increased to mid-20% in January from 21% in the fourth quarter. This rate represents the best actual operating income performance since the pandemic started three years ago. As a reminder, we generally increase in-place resident rent rates annually, effective January 1st, while cost inflation occurs throughout the year. The first quarter adjusted EBITDA guidance of $70 million to $75 million that we provided contemplates all of the performance considerations I just provided. This guidance does not consider the potential impact of a significant increase in Flu and COVID-19 cases compared to our year-to-date trend, nor any severe weather events that may occur. Lastly, as I mentioned earlier, we amended an existing lease in the fourth quarter, which resulted in a non-cash gain. The amendment triggered an accounting change which reclassified the lease from financing to operating treatment. This change will impact adjusted EBITDA in the future. Specifically, on the adjusted EBITDA and adjusted free cash flow slide in the supplemental deck, beginning in the first quarter of 2023 cash facility operating lease payments will increase approximately $5.5 million quarterly, lowering adjusted EBITDA with an equal and offsetting quarterly interest expense net decrease. These two financial impacts will offset one another and will result in no impact on adjusted free cash flow. While this lease accounting change will decrease adjusted EBITDA, it is important to note it will have no impact on adjusted EBITDAR, a standard and widely used valuation metric. In closing, I'd like to say that I am proud to be part of the already strong Brookdale executive team. I believe we are off to a very good start in 2023, which gives me confidence that when we execute the company plans Cindy and I shared, we will drive sustained growth and end the year even stronger than we started supporting long term shareholder value creation. I'll now turn the call back to Cindy.

There is a significant amount of change happening at Brookdale, in healthcare and with the global economy. And while it takes time to process change, I am confident the plans we are executing will improve Brookdale’s outcomes and position us to further grow RevPAR, appropriately control expenses while continuing to provide high-quality care, personalized service, and earn residents trust and satisfaction. I remain completely dedicated to our mission and optimistic about our future. And with that, operator, we will now open up the call for questions.

Thank you. Our first question today comes from Ben Hendrix from RBC Capital Markets. Your line is open.

Thank you and welcome Dawn and Jessica and others. I just had a question on guidance. The first quarter guidance seems to suggest that in 1Q you might realize that some of that sequential improvement in facility operating expenses that you had previously been expecting for 4Q 2022, so I was wondering if you could talk about the elements giving you confidence in that improvement in prior years and you touched on having to incur both the residual contract labor and new hire onboarding costs in the wake of turnover, and to what extent do you see that or how much visibility do you have into that and proving to the balance of this quarter? Thanks. Bye.

That’s a really good question. Thank you so much for asking. And Dawn will start with an answer and then I might provide some commentary.

Hi Ben, this is Dawn. Thanks for the question. I think what we would expect in our facility operating expenses is that we would have improvement from continued labor productivity reductions in the premium labors. I think in my prepared remarks we talked about that already moderating in January and then some favorable flow through from our pricing. And so in general, I'd say we would expect our facility operating expense as a percentage of our senior housing revenue to improve significantly from Q4.

And there's just a couple of things that I would add for context. Contract labor is something that we talked a lot about all through 2022. And if you look at January, and you look at the contract labor there, it is down 25% from the average of the fourth quarter, that's one thing that gives me confidence. The other thing that I'm really proud of is our 15% increase in our community workforce during 2022, that's almost 5000 people. And if you think about that, we're better positioned to staff more and more shifts, with workers working regular wages, as opposed to overtime. And when you hire people, the highest turnover is in sort of the first 90 days. And so given that, we have to hire fewer people in 2023, that should really help us with our overlapping labor costs. And then the third point that I would make is a little over half of our hourly community associates has been with us less than a year. So as they continue to extend their length of service with Brookdale, they'll gain the residents trust and know their preferences more, and they will improve their productivity in serving the residents.

Thank you, and pardon me if I missed it, but did you provide a turnover rate and can you kind of talk about how that's gone from 4Q to 1Q and that'll be all? Thank you.

We haven't provided the exact turnover rate but our turnover rate has improved between the fourth quarter and the first quarter. And we would expect to see continued improvements, largely because of the initiatives that we have around retention, as well as the fact that we are slowing the growth of our net hiring initiatives because more of our communities have the right balance of workers to meet our residents’ needs.

Our next question comes from Tao Qiu from Stifel. Your line is open.

Thank you and good morning, everyone. Hi. Cindy, I really appreciate the remark of winning shareholder confidence back quarter-by-quarter. So I think I've heard that 13% RevPAR growth in January. I think you've guided 11% to 12% for the first quarter. So for the rest of the year I assume we will see an offsetting trend of continued occupancy gain and the sequential attrition of RevPOR. Do you think that RevPAR can accelerate from the guided range for the first quarter or do you think it should drift lower throughout the year very similar to 2022?

Dawn.

Yes, so as I think about the RevPAR guidance that we gave and the 13% in January, generally, what we see is really a step down in the rate month over month in the first quarter, as you mentioned due to discounting. And then also the number of days in February because we have revenue streams that we build by day. And so that will also impact our RevPAR in the first quarter. And then typically we'll see in quarter monthly decline in occupancy with just attrition and then the flu season as well in the first quarter. And so Tao what Dawn is talking about through the first quarter that's really because of sort of our Smith census, which we get paid on a per-day basis and our Medicaid census. But as we look for sort of the rest of the full year, Dawn, why don't you give a few comments on just our full year guidance overall. Sure. So if I think about our full year guidance, and I'll point you to the investor presentation, Slide 19, where we've tried to lay out our normal seasonality trends. If I think about our full year guidance, I'll start with revenue. A recent pricing increase is expected to support RevPOR growth in 2023 that is really above the 2022 growth rate. Regarding occupancy for the full year we expect to return to more seasonality, which is outlined on Slide 19 of the investor presentation. And then there's a couple of things I would add to that. First, we have a higher than normal rate increase in Q1 and then second, we expect overall performance for the year to be above our seasonal trends. So you'll see a majority of the occupancy growth that we have is in the third quarter during our summer selling season. So remember, our census has grown though over the past couple of years, the number of move outs has naturally increased even at the same attrition rates. So if I look at the full year 2023, it's probably not unreasonable to assume a slightly less year-over-year occupancy growth compared to 2022's performance of 390 basis points. Second, I'll touch on labor. In 2022 we had a staffing as our persistent headwind, as Cindy had been talking about. We did deliver growth in the workforce, as Cindy just mentioned and we made positive strides reducing our premium labor costs. But as we said, in our prepared remarks, we still saw more labor hours than we expected and that was due in part to overlapping costs from elevated new associate turnover. So if we look at 2023, we will be looking at reducing our premium labor and our turnover rate. And that'll reduce those overlapping costs as well as positively impact hiring cost and resident satisfaction. And finally, a look at our seasonality, from quarter-to-quarter, we expect typical seasonal items. We have merit the number of workdays, holidays in the quarter, and then of course seasonal fluctuations on our utility costs, all of which we've outlined in Slide 19 for you to look at. So I believe, in my prepared remarks with our January results that we are off to a very good start in 2023, which gives me confidence that when we execute these company plans, we are going to drive sustained growth and the year even stronger than we started.

And when I think about the 2022, overall, we're going to continue our focus on appropriately having the right mix of labor in the communities for our associates. The labor market pressures have been intense and we do expect that we'll have incremental labor associated with increased occupancy. But I think that the cost of the shifts will come down as we reduce our premium labor by contract labor and overtime, but of course, we'll have normal merit market wage increases.

Got you, great color there. With COVID years we almost forgot about the seasonal nature of the care business. So really appreciate that slide and the explanations. My follow-up question is on the LTC lease; I think the new window is up at the end of February. I think you extended by one-year last year, what's your plan for that portfolio? And if you don't renew, what's the impact on EBITDA?

So what I'll say is with LTC, we're always looking for sort of a win-win scenario as it relates to our leases. But it's also fair to say that regardless of what happens with the lease, it will improve the position for Brookdale. And so you're always prepared to walk away from a lease if we can't get something that makes sense for us. But we do like the assets and we value a long-term relationship with LTC. And so I'm hopeful that we'll get to a win-win.

Thank you.

Thanks, Tao.

We now turn to Brian Tanquilut from Jeffries. Your line is open.

Hey, good morning. I guess Cindy, my question for you, obviously your RevPOR or the rate outlook for this year is pretty good. So maybe any color you can share in terms of what you're seeing or how you view the elasticity of demand for your business, obviously pretty significant rate growth here, so just what you're seeing in terms of new residents and existing resident’s reaction to the rates?

Yeah, Brian, it's a good question. And what I'll say is that we began selling sort of the new market rates on October 1st of last year. And if you look at our investor deck, on Page 6, you can see that our year-over-year movements for November, December and January were higher than they were in the prior year. And for the full year of 2022, we had more movements, 7% more movements than our three-year pre-pandemic average. So we're seeing just strong demand from that large, resilient, and growing 80 plus population. And with regard to in-place resident increases, it's fair to say that the most important thing for our residents is to know that we are providing them affordable care and services. And so we talked to our residents about the pressure in the labor market, rising interest rates, we explain the rationale for the rate increases, and we've been pleased with the reaction so far. I do think that we've had a little bit of an elevation in financial move out set to be expected. We modeled it in when we created our budget. But if you think about the results that we achieved in January, a 13% year-over-year growth in RevPAR is something that we're quite proud of. And we believe that that will be a key driver in our post-pandemic recovery.

Got it. And then in your prepared remarks, you talked about changing the role or enhancing the role of ED at the community level. Just curious, maybe if you can share a little more details on that and any changes to the incentive package for those EDs and also, if there's anything related to employee retention, in terms of new responsibilities or new goals for those EDs?

Absolutely. We have focused on ensuring our team is centered around growth and adopting a growth mindset, and I credit Rick Wigginton for instilling this in our sales associates. I've mentioned how our Executive Directors need to act as the CEOs of their communities, emphasizing the significance of a growth mindset. One of our initial steps was helping them recognize the value of apartments that are not currently in service and the opportunities this presents. We have also tested some specialized compensation programs in select communities for 2023, and we plan to expand those in the future. Additionally, we have revised the job descriptions to clearly highlight what is essential for success as an Executive Director. We are developing training programs and cohorts to aid EDs in their growth as leaders. Regarding retention, we believe a more measured approach to workforce expansion will be beneficial compared to the aggressive hiring we undertook in 2022. New recruits need time to acclimate to our culture and to grasp what makes Brookdale a unique employer. Therefore, we will implement a more normalized hiring process. We are also actively showing potential for growth within our organization. Last year, we launched programs for caregivers to transition to med techs or CNAs, providing them with opportunities for significant pay increases and improving their families' lives. Building on these initiatives will be advantageous. Furthermore, we have created leadership development programs for our departmental managers to prepare them for Executive Director roles. We believe that by emphasizing an appropriate associate value proposition and helping employees recognize the value of their contributions, along with providing avenues for improving their lives through skills acquired at Brookdale, we will enhance retention. We are highly optimistic about this, as our business is fundamentally about people serving people.

That makes sense. Thank you.

Thanks Brian.

Our next question comes from Joshua Raskin from Nephron Research. Your line is open.

Hi, thank you very much. I would like to clarify the rate increase from January. How are you, Cindy? I want to focus on that rate increase. You mentioned that move outs have been somewhat elevated; could you provide insight into resident behavior, particularly regarding move outs, and how that data compares to trends before the pandemic? Should we expect a notable reduction in move outs now that the new rates are implemented?

Yeah, the guidance that we're giving, our formal guidance is to sort of an occupancy change in the first quarter that's consistent with our pre-pandemic levels in a range. Now, of course, we're hoping that it's going to be better than that. What we normally see after a rate increase is we give the rate increase 30, 60, 90 days ahead of time. And so certainly in the month of December, residents knew what the rate increase was coming and so we saw a tiny increase in financial movements there. In January, we expect that we would have seen the bulk of the increases, we do expect a slowing as the first quarter progresses and that is something that's truly normal. But as you can imagine, it's important to us to make sure that each resident understands the rationale for the rate increase and to have discussions with them about the rate that makes sense. And that's something that does continue.

Got you. And are you seeing competitors I'm talking about, competitors within say couple of miles of these facilities. Where are you seeing rates, were you seeing pretty consistent rate increases from the competition in your local markets, I know you guys could sort of track that better than we can?

Yeah, 95% of our competitors operate five or fewer communities. So it's fair to say with the almost 700 communities we have, we see just about everything. But what has been consistent and a constant theme is that senior living operators recognize the need to charge higher rates for the services that we provide because of macroeconomic conditions, including historically low unemployment, significant increases in compensation at that lower hourly wage worker, pressures on nurses in the workforce, and raising interest rates. So I think that everybody sees the need to factor that into their pricing. So we have seen less discounting and higher price increases pretty much across the industry.

Got you. And then just last one for me. I think that you mentioned this, the tangible equity unit issuance took a few people by surprise. And so how are you thinking about leverage, not necessarily short-term debt needs, but just your leverage overall, your capital position, is there any anticipation of additional equity type instruments being issued and then would you consider asset sales, I don't know if that's instead or as well?

Well, the first thing I'll say, and then Dawn will provide a little bit of additional color on it. If you think about the debt that we have, it's not an issue that we have too much debt. It's an issue that our adjusted EBITDA has been impacted by the pandemic. And you can see that we are in the first quarter, expecting a very material increase in adjusted EBITDA, and then that will have a positive impact on leverage. Dawn, do you want to give just a little more color?

Thank you, Cindy. When I consider leverage, it's primarily an adjusted EBITDA concern. Looking at our guidance, if I take the midpoint and annualize it, I'm observing nearly a 30% improvement in our leverage ratio compared to last year. That's how we perceive our leverage.

I guess I meant more sustainably long-term, right, you're probably not looking at double-digit leverage ratios and you guys don't give annual guidance now. So just trying to figure out, I understand you think it's more of an EBITDA issue, but either in denominator or numerator right, and so like what's the timeframe to think about something sub-8, sub-7?

Well, I think that our leverage will materially improve in 2023, and continue to improve in 2024. And I think that we will get back to a leverage ratio that makes sense. In a window that’s not all that far away.

Okay, perfect.

Our next question comes from Joanna Gajuk from Bank of America. Your line is open.

Good morning. Hi, thanks so much for taking the questions. So a couple of follow-ups. So on the contract labor, you talk about reducing and you told us you reduced about 80%, December to December, and I guess January some reductions there too. So that's good but can you give us a sense of like, the magnitude of things we are talking about, like what is this contract labor percent of revenues, or percent of your facility costs? And also, do you expect this to completely go to zero or you expect this to kind of normalize at a higher level, given how labor market is very competitive?

Hey Joanna, this is Dawn. I would say, in the context of our contract labor, really it's low single digits as a percentage of our revenue. And as Cindy mentioned, it came down almost 25%. If you look at the average of the fourth quarter monthly contract labor in over January now, what I'll say is we continue to focus on that and continue to try to reduce our premium labor. And I would expect that we would more normalize towards the end of 2023.

Yeah, and I think that it's low single digits as a percentage comp, I think is what you meant to say, Dawn, instead of revenue, is that correct?

Yes, that's correct.

And what I would say is, it's important to know that the vast majority of our communities are not using contract labor, right. The vast majority are not using contract labor. And where our contract labor is concentrated right now is in skilled nursing. And so we're working on getting that down pre-pandemic one didn't use a significant amount of contract labor in our communities and we're expecting that we will get back to there even given the very difficult labor markets, we've made such great progress with increasing the size of our workforce, and we'll focus on stabilizing that workforce during 2023.

Yeah because that was my other follow-up. So it sounds like with the labor costs are improving but at a slower and you mention the turnover vice because that sounds like that's where I guess things are slowing to improve this new associate turnover was higher, so what is the cost for that and then what exactly are you doing to lower this turnover for the new hires?

Yeah. So if you think about it, Joanna, the cost of a new hire is not just the recruiting costs, the pre-employment costs, but also the training of a new associate. And while the new associate is training, someone has to take care of the residents. So you've got a little bit of overlapping costs that doubles up. And as you would expect sort of as somebody changes jobs, the turnover is highest in sort of the first 90 days. So the most important thing that we can do is to make sure that that onboarding experience in the first 90 days is as seamless as possible so they understand how our culture works. They are getting embedded into relationships that work with the residents and associates. So they've got friends at work and they just become part of the culture. And so as I said, the biggest thing that is going to make a difference in our turnover rates is the fact that we're not trying to grow our workforce by 15% because you just have to hire so many people to do that. But also for those people we hire, being selective in who we do hire and then being careful in creating a red carpet experience when we onboard new associates.

Thank you. If I May another topic I guess that wasn't brought up so far I believe was CAPEX. So in the slides you talk about non-development CAPEX was $200 million for the full year. So and it's higher than I guess what you did this year. So do you expect to continue to ramp up CAPEX over the next couple of years and what kind of level are we thinking about say, couple of years out? And outside of non-development CAPEX what are your expectations for growth CAPEX this year and going forward and how you are funding these needs?

So as you might imagine, we're not giving guidance for CAPEX and out the years, but we have had years in our history where we have temporarily increased CAPEX and then we brought it back down. It's also important to note that our landlord reimbursements for CAPEX was down between 2022 and what we're expecting for 2023. So we're kind of constantly evaluating what is the right decision for our communities. We do have CAPEX that's required for unit turns and to replace end-of-life systems. But we look at every dollar that we spend whether it's a CAPEX dollar or expense dollar and make sure that we're spending our residents' dollars wisely and we'll continue to do that. I will say that we're not expecting any material development CAPEX in 2023. We may have some tiny dollars that sort of spill over from 2022, but nothing at all big.

Alright, thank you. Thanks for the questions.

Thanks, Joanna.

Our next question comes from Steven Valiquette from Barclays. Your line is open.

Great, thanks. Good morning everyone. I have a question regarding the first quarter 2023 guidance for occupancy. We've touched on this a bit during the call, but in the slide deck, it was mentioned that the first quarter 2023 might align with the three-year pandemic average of a negative 80 basis points compared to the fourth quarter. However, Cindy, in your prepared remarks, you mentioned the strong January performance, which you believe will support Brookdale's first quarter sequential occupancy change to be better than the normal pre-pandemic seasonal trend. I just want to ensure that we fully understand the overall message today in light of those two points. I also have a follow-up question, which I will ask afterwards.

Let me start with that. Look, we're expecting a range, right. And at the end of the day when we look at guidance, we're trying to make sure that we have guidance that we can meet or exceed. When you're talking about my prepared remarks, we're talking about the full range and that's the way to reconcile sort of those two statements.

Okay, got it. And then just to follow up kind of on the same subject, but I was just curious to hear a little more color on with this. Much earlier peak of the flu prevalence this season versus historical trends I was just curious how that may have impacted occupancy in the fourth quarter if at all and then also how you're thinking about the flu impact if any within the 1Q 2023 guidance just given the pretty dramatic falloff and prevalence so far this quarter? Thanks.

I'm really proud of our strong infection control protocols. We did not have a significant flu impact in the fourth quarter nor have we had one in the first quarter. We haven't had a single flu-related closure this year. So that's very good. Now as you know, flu can impact senior housing later than it does the general population. So we will remain vigilant through April, which is kind of the latest that we've really seen flu impact on the community. So it's too early to say that we are past the flu season, but it's one of the things that we do maintain vigilance on. We had flu clinics, vaccination clinics in 100% of our communities and we do focus on infection prevention and control.

Okay, alright. Appreciate the extra color. Thanks.

Thanks, Steve. I want to thank everyone for joining our call today. We are looking forward to 2023 being a strong year of execution for us and look forward to reporting our progress as the year progresses. This concludes our call.

This call has now concluded. We'd like to thank for your participation. You may now disconnect your lines.