Earnings Call Transcript - BKD Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for being here. Welcome to the Brookdale Second Quarter 2022 Earnings Call. My name is Irene, and I will be coordinating this event today. I would now like to turn the conference over to our host, Kathy MacDonald, Senior Vice President of Investor Relations to begin. Kathy, please proceed.

Kathy MacDonald, Senior Vice President of Investor Relations

Thank you, and good morning. I'd like to welcome you to the second quarter 2022 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Steve Swain, our 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 brookdale.com/investor and was furnished on an 8-K yesterday. Now, I will turn the call over to Cindy.

Cindy Baier, CEO

Thank you, Kathy. Good morning to all of our shareholders, analysts, and other participants. I hope you and your loved ones are healthy and happy. Welcome to our second quarter 2022 earnings call. We are pleased to report that, with strong sequential occupancy gains, revenue growth outpaced only a slight increase in facility operating expenses, even with a challenging labor environment. Margins expanded, and we delivered a meaningful sequential adjusted EBITDA increase. We had significant success of increasing that higher substantially. In addition, we decreased our reliance on contract labor on a sequential basis. Even so, we have not seen labor cost reduction, and therefore expect that improvement to begin later in the year. Because of the continued challenging labor environment, we revised our operational adjusted EBITDA guidance for the balance of this year. At the same time, we are pleased that, last week, we received additional Provider Relief Funds, which is included in our updated guidance. We are very thankful for federal and state grants that support our important efforts to help protect our residents and associates. Let me turn to our second quarter highlights. We are pleased that RevPAR increased more than 10% compared to the prior-year quarter. We continued on the strong path of occupancy recovery. The second quarter's year-over-year weighted average occupancy increased 420 basis points on a same community basis. We delivered the best second quarter sequential weighted average occupancy growth in over 10 years. We achieved 2,000 move-ins in March, which at that time was the highest month for move-ins since the beginning of the pandemic. For the second quarter, we sustained this rate, averaging more than 2,000 move-ins per month. As reported by NIC, the industry's second quarter senior housing occupancy increased 80 basis points on a sequential basis. We are pleased that Brookdale exceeded industry growth by increasing occupancy 120 basis points on a same community basis. We also exceeded our three-year pre-pandemic average move-in performance by 9%. This is evidence of both strong demand and the strength of Brookdale's execution and brand. Our lead funnel remains strong, with second quarter inquiries and visits that exceeded pre-pandemic levels. As we enter the third quarter, which is normally the best selling season, we are well-positioned for occupancy acceleration barring a significant disruptive COVID-19 variant surge. Turning to labor, our turnover is higher than our historical norms, and we are focused on taking actions to improve associate retention. Throughout the pandemic, our team managed through numerous challenging situations, and remained focused on providing high-quality care to our residents. For this, I want to thank our associates across the country for their dedication and hard work. Despite ongoing challenges in the U.S. labor market, we achieved eight consecutive months of net hires. We significantly accelerated our hiring in the second quarter, where net hires were more than 2.5 times those of the first quarter, and five times better than the fourth quarter of 2021. We increased our workforce by 10% since year-end, with more than 3,000 net hires on a year-to-date basis, allowing us to fill more shifts with Brookdale associates. These efforts contributed to our ability to markedly reduce contract labor in the second quarter while continuing to ensure that we meet the needs of our residents and provide high-quality care. Not only are we rebuilding our workforce, we are creating a stronger team. While we are proud of this progress, we are not where we want to be. Contract labor usage is declining, but at a slower pace than desired, and we are experiencing some increase in overtime usage. At the same time, given the currently highly competitive nature of the labor market, we are seeing wage pressure and higher sign-on coverage and retention bonuses. Through continued focus and discipline, I am confident we will overcome the current U.S. labor pressures over time. As our labor pressure is a structural issue, inflationary adjustments we are seeing will be factored into the determination of our 2023 revenue rates. For new residents, we historically increase rates on October 1, with the majority of our in-place residents receiving new rates effective at the beginning of each year. In addition to winning the recovery through driving revenue growth and appropriately controlling costs, we are pursuing incremental value creation through innovation. Healthcare in senior living is critically important given the acuity of the population we serve. Our goal at Brookdale is to help our residents improve their healthspans. With the growing trend of more healthcare services being provided at home, we are building on the knowledge we gained throughout the pandemic to continue to evolve our service offering to residents in their Brookdale homes, especially with the support of our nurses who make up 10% of our workforce. Our HealthPlus program, which we have been piloting in certain communities, involves registered nurse care managers working to help improve residents' quality of life and helping prevent avoidable emergency room visits or hospitalizations. We do this in partnership with our residents' family and their healthcare providers. In communities that rolled out this pilot program, the data revealed that residents had fewer urgent care or emergency room visits, and fewer hospitalizations than Brookdale-like residents in private housing. Importantly, we are seeing longer lengths of stay in HealthPlus communities as our residents are improving their healthspans. These longer lengths of stay also help drive our occupancy rates. HealthPlus isn't the only innovative project in our pipeline. We are expanding a technology-based falls prevention and detection program to additional communities after successfully completing a pilot to improve health outcomes. In addition, we are currently piloting AI-driven analytics to accelerate resident socialization and engagement by connecting new and existing residents based on common interests. Moving to technology innovations that support our associates, we now offer flexibility via digital scheduling for our hourly associates. Turning to our 2022 guidance, we are pleased with the progress we are making with our net move-ins and move-outs, and our occupancy. Although we have been able to pass through some of our inflationary costs to our residents via rate increases, we continue to be challenged by the U.S. labor environment. We remain highly focused on addressing labor costs within the realities of the current labor markets and overall conditions in the U.S. economy. We look forward to providing updates on our progress in the coming quarters. Our RevPAR growth expectation, of 10% to 12%, remains unchanged as we continue to make occupancy gains combined with the strong annual rate increase. While the COVID-19 variants continue to evolve and are becoming an ever-present part of our operating environment, I am incredibly proud of the leaders at Brookdale who have risen to the challenges and continued to learn and innovate for the benefit of our residents, associates, and shareholders. We are making positive steps forward on our path to recovery. Continuing to innovate and capitalize on new opportunities in our evolving world, our residents show us every day the importance of lifelong learning, growth, and the power of fortitude. A team of dedicated individuals working together can accomplish incredible things. We have that team at Brookdale. I will now turn the call over to Steve.

Steve Swain, CFO

Thanks, Cindy. Let me start with key takeaways. First, RevPAR increased more than 10% in the second quarter compared to the prior-year quarter. Occupancy inflected positive earlier than usual. And we are entering the third quarter which normally is the strongest quarter of sequential occupancy growth. RevPOR was slightly lower on a sequential basis. Second, expenses, on a sequential basis facility operating expenses were flat, including labor. Third, in August we accepted the long-awaited Phase 4 grant under the Provider Relief Fund of approximately $60 million. We updated guidance to reflect this income and higher labor expense. Now let me provide context for these highlights on a same community basis starting with revenue. Occupancy increased 420 basis points compared to the prior-year quarter and sequentially increased 120 basis points. Our sequential second quarter increase was significantly better than historical growth. RevPOR or rate improved more than 4% compared to the prior-year quarter and was 80 basis points lower on a sequential basis. The sequential change was due to strategic discounting in certain low occupancy communities to drive more move-ins along with lower resident acuity. During the pandemic, we had higher acuity resident move-ins. We are now seeing move-ins return to more normal acuity levels. This, along with the sheer volume of new move-ins, is reflected in our care revenue. With the leased senior housing units under construction since 2015 according to NIC and positive demographic tailwinds, we see a long runway for top-line growth. Turning to operating expense, starting with labor, the second-quarter labor expense remained flat sequentially. We reduced contract labor by more than 25% and COVID-related labor moderated. These expense reductions mitigated increases in staff wages due to our sizable net hires in the quarter and additional day and holiday in the quarter and a full quarter's impact of merit increases, which were implemented in mid-March. As expected, the change in occupancy only had a minor impact on labor expense due to our current levels of fixed cost. As our permanent workforce stabilizes, we expect further reductions in contract labor for the balance of the year. Other facility operating expenses increased approximately $1 million or 60 basis points sequentially. Higher marketing investment to support the strong move-in season and food expenses were partially offset by lower COVID-19 related expenses. The second quarter G&A expense excluding transaction and organizational restructuring cost and non-cash stock-based compensation was lower on a sequential basis to reflect quarterly incentive compensation. The 20% year-over-year reduction was primarily due to reducing expenses following the sale of our healthcare services business in 2021. Adjusted EBITDA for the second quarter increased meaningfully on a sequential basis and compared to second quarter 2021. The second quarter's adjusted free cash flow improved by $5 million sequentially. The adjusted EBITDA improvement was partially offset by two drivers. Net interest expense which increased approximately $2 million this quarter due to rising interest rates and CapEx which increased more than $6 million primarily with more unit remodeling as we had higher move-ins. Turning to liquidity, as of June 30, total liquidity was $412 million compared to $467 million at the end of the first quarter. The Phase 4 funding received in August will strengthen our liquidity. With the rising Fed rate, we expect annual net interest expense to be approximately $15 million higher in 2021. In addition, we expect to start refinancing our 2023 debt maturities later this year. Now, let me summarize the key considerations of our revised guidance. Our annual RevPAR growth remains in the range of 10% to 12%. We expect third-quarter sequential occupancy growth to exceed the second quarter's growth which was 120 basis points. This seasonally-high occupancy growth in the third quarter will drive NOI and margin expansion. Annual labor cost will be higher than previously planned. However, we expect to see improvements in the second half of the year. Occupancy-driven cost increases are projected to be more than offset by further contract labor reductions as we fill openings in our permanent workforce. We have factored these updates into our community operating expenses and expect the annual expense increases to be slightly higher than the previously stated mid-single-digit range. Remember, we will also factor the impact of expense inflation into our 2023 revenue rates. In the second half, we expect continued NOI growth due to increased occupancy as well as lower labor costs as we continue to reduce contract labor. The financial benefit of recognizing approximately $60 million of Phase 4 funding is also incorporated into our guidance range. Our revised adjusted EBITDA is expected to be in the range of $270 million to $290 million. I remain enthusiastic about Brookdale's growth opportunities. The slowdown in new construction and the increase in demand for our growing senior demographic are fueling the occupancy trajectory. Combine this positive occupancy opportunity with strong rate potential and we see a compelling long-term growth thesis. I will now turn the call back over to Cindy.

Cindy Baier, CEO

As we close out our prepared remarks, I want to let you know that we expect Steve will be taking a medical leave of absence starting next week, and we expect he'll be back in six to eight weeks. Steve is so important to all of us here at Brookdale, and we wish him all the best and look forward to a speedy and full recovery. Dawn Kussow, our Chief Accounting Officer and Steve's close colleague, will be stepping in as our interim Chief Financial Officer during Steve's absence. Dawn has been with Brookdale for over 15 years, and I'm confident that she will provide excellent leadership of the finance function in the interim. And the team, we are focused on capitalizing on the opportunities in front of us. To help you monitor our progress, we added a new slide in the investor presentation that shows you the progress we've made in the pandemic recovery and the opportunities we are focused on. Our first goal is to achieve our pre-pandemic occupancy levels, which was nearly 85%. And then, accelerate growth to return to our historically high occupancy level of 89%. There is vast opportunity for Brookdale and our stakeholders. With lower construction starts resulting in a meaningful improvement in a new supply outlook, with the acceleration of demand through demographic growth, and with Brookdale's powerful top-line growth and operational leadership, we are entering an extraordinary new era in senior living.

Operator, Operator

Thank you. Our first question comes from Tao Qiu from Stifel Financial Corporation. Tao, your line is open.

Tao Qiu, Analyst

Good morning, everyone. Cindy, you made significant progress, adding over 2,000 full-time employees in the second quarter, which helped reduce agency labor by 25%. I compared the employee compensation to the occupied units before the pandemic and now. In the first quarter of 2020, you had 50,000 employees and 45,000 occupied units. Currently, you have 36,000 employees and approximately 39,000 occupied units, so the employee unit coverage is still low. My first question is, how many employees do you need to add each quarter to keep up with the current occupancy growth? The second question is, what productivity gains should we anticipate from the various pilot programs and the IT deployment you mentioned in the prepared remarks? Thank you.

Cindy Baier, CEO

Thank you for your question, and I appreciate your recognition of our progress with net hires. We are very happy with how we are advancing. A year ago, we sold our healthcare services business, which involved about 4,200 associates, and we do not anticipate increasing that number. However, when I think about labor costs, there are four aspects that are crucial and will benefit from our focus on net hires. Contract labor costs us two to three times more than our Brookdale associates at regular pay. Overtime is typically at least one and a half times the cost of a regular shift associate. New associates need training before they can start working productively. Our aim is to ensure that shifts are staffed by Brookdale associates working full-time and part-time hours. We are striving to properly staff our communities to match resident needs with our regular associates. As we reduce the reliance on contract labor, which is the most expensive source of labor, some of that labor was from overtime. Although our increase in new hires, as you noted, has temporarily raised training costs, we believe that by continuing to grow our workforce, we will further decrease the reliance on the more expensive labor sources like contract labor and overtime. Once our workforce stabilizes, we anticipate improvements in labor costs as training expenses return to normal levels. It is also important to consider the right workforce size given the ongoing COVID-19 situation. Our associates spend much of their time outside the communities, and like everyone else, they are at risk of contracting COVID-19. If they need to quarantine, we must continue supporting our residents. Therefore, we are working to expand our workforce to ensure we have associates available to cover shifts at regular wages if others cannot work for any reason. This offers a significant opportunity for improvement. We have made good strides, as reflected in a reduction of over 25% in contract labor, but achieving a fully stabilized workforce will take time. While I can't specify the exact number of associates we will need, we are progressing well. Moving forward, we plan to reduce both contract labor and premium hours, which will lead to lower labor costs while effectively staffing our communities. Regarding the productivity aspect, this change enables us to allocate more shifts to regular hours since employees can choose their shifts, allowing us to reduce reliance on overtime and contract labor. This is our objective: to increase the use of regular wages for staffing shifts.

Tao Qiu, Analyst

Thanks for the detailed information, it's very helpful. My second question is about the rate outlook for next year. You mentioned that you're considering some of the higher labor costs in your rate decisions for 2023. Do you think you will be able to fully pass on the increased operating expenses next year in terms of rate growth to offset that?

Cindy Baier, CEO

I'm really optimistic about the strong pricing power in senior living. We have to make sure that our product is affordable, but we provide incredible value for the services that we provide. If I look at the social security rates that we're expecting to see next year, we're expecting to see a 10.5% increase in social security checks, so I think that's important. And then when I think about our labor costs, I really break it down into two pieces. There is an increase in the normal hourly wage for our associates, and that's something we'll price in. But I do think as we go to the back half of the year, we are going to make significant progress on that premium labor by reducing contract labor and by reducing overtime, so the cost per associate hour should go down as we make that progress. And we will price that piece into rates for next year.

Tao Qiu, Analyst

Thank you. Thanks, everyone, and good luck, Steve.

Marco Criscuolo, Analyst

Hi, good morning. This is Marco on for Josh.

Cindy Baier, CEO

Good morning, Josh. Hi, Mark.

Marco Criscuolo, Analyst

Hi, this is actually Marco, Cindy. Thanks for taking the question. I was just wondering if you could provide a little more detail on the specific components driving that incremental labor pressure that's contemplated in guidance for the year. So, how much of that pressure is related to the increase in hiring you're seeing versus the increase in base wages or the slower-than-expected moderation in contract labor? And are you still seeing wage inflation into July and August or have you started to see that stabilize a little bit? Thanks.

Cindy Baier, CEO

Yes, I believe the main issue is that contract labor has decreased at a slower pace than anticipated. Additionally, some of that work is being converted to overtime, which remains expensive. That's the primary concern I see. Steve, do you have anything to add?

Steve Swain, CFO

No, I agree that it's the rate at which contract labor is leaving the system, is slower than what we had originally projected.

Marco Criscuolo, Analyst

Got it, thanks.

Cindy Baier, CEO

Thanks, Marco.

Marco Criscuolo, Analyst

Thanks for that, makes sense. Yes, and then just one quick follow-up here, so just taking a step back, I was wondering if you could provide a little detail on how you're thinking about the overall portfolio. So, do you think there's still areas for potential community sales in the future or how do you think about that going forward?

Cindy Baier, CEO

When I think about our portfolio, I think we've got a huge opportunity for occupancy recovery and the revenue that that drives. And one of the things that we added to our investor presentation was a slide; slide eight of the investor presentation that really shows the revenue opportunity. And if you think about sort of where we are now on a consolidated basis, our occupancy is 74.6%, and if you get back to sort of that pre-pandemic occupancy of 84.5%, without affecting any rates, just based on today's rate, that's at least $350 million of incremental revenue. And, of course, if we can get back to our historic occupancy high of 89%, that would drive at least $500 million of incremental revenue. So, there's tremendous, powerful upside built into our existing portfolio. Having said that, we always look at our portfolio to see if there are assets where they may not be the right assets for us. I think on the sale perspective, that's a smaller impact. On our leased portfolio, however, it's important to look at the optionality that is built into our leased portfolio. And if you look at the supplement, you can see sort of the leases that we have and when they're scheduled to roll out. Assuming our portfolio recovers nicely, then we will extend those leases, and that will continue to drive our profitability. If, for whatever reason, the portfolio doesn't improve, then we have the ability to improve our operating income by cutting those assets. So, that's how I think about the portfolio, but I'm really happy with the portfolio we have today, and optimistic about the significant opportunity that we have in front of us.

Marco Criscuolo, Analyst

Great, thanks again, and best wishes to Steve.

Steve Swain, CFO

Thanks.

Steven Valiquette, Analyst

Great, thanks, and then, good morning, everybody.

Cindy Baier, CEO

Hi, Steve.

Steven Valiquette, Analyst

So, I guess, here, as we think about the elevated labor expense, I just wanted to revisit the breakdown of these dynamics between Assisted Living versus Independent Living, here in mid-'22. I mean, it just seems intuitive you would still have more cost pressure on the Assisted Living and Memory Care sides of the business due to higher acuity. So, I guess just in light of that, should we think about the margin recovery in Assisted Living maybe happening at a little bit slower pace versus Independent Living for the remainder of '22, and also into 2023? Thanks.

Cindy Baier, CEO

Steve, if you look at our supplement, on page nine, we basically break down our same community operations between IL, AL, and our CCRC. And you can see our labor expense is up sort of 5.7% year-over-year on Independent Living, and it's up 16.2% on Assisted Living and Memory Care. You're exactly right, the higher acuity parts of our portfolio have had more labor pressure, but that also gives us more opportunity. It's also important to note that our RevPOR is much stronger in Assisted Living and Memory Care.

Steven Valiquette, Analyst

Yes, that was going to be the follow-up question. In some ways, is it easier to make the ask when considering the resident rate updates for next year? Is it simpler to make the ask in Assisted Living because of the higher visibility and increased labor costs and pressures? Is there resistance on the Independent Living side, or are you finding that you can also effectively push for what you want in resident rates there, based on how things are flowing right now?

Cindy Baier, CEO

I think the difference between AL and Memory Care is AL and Memory Care are needs-driven products, and the higher the acuity the higher the need for the product. Whereas Independent Living is more of a lifestyle choice, and so that has been something that's come back a little bit slower sort of post-pandemic as needs-driven purchases have always been necessary.

Joanna Gajuk, Analyst

Hi, good morning. Thank you for taking my question. I have a couple of follow-ups regarding contract labor. I understand that there has been a sequential reduction, but it appears that the decline is happening more slowly than initially expected. Can you provide any insights or observations on the reasons behind this slower-than-expected decline in contract labor?

Steve Swain, CFO

Sure, Joanna. Generally, we see labor costs increase between the first and second quarters. This quarter, labor costs were flat because we reduced contract labor by 25%. About half of the savings were offset by direct labor costs as we expand the Brookdale associate base. The other half was impacted by seasonal increases due to factors like an extra day, an additional holiday, and the full effect of the field merit increase. It is taking us a bit longer than we initially projected to reduce contract labor and replace it with Brookdale associates. We want to ensure that we have the right associate in the right job at the right time, and these factors have contributed to the extended timeline.

Cindy Baier, CEO

There's one other thing that I want to just highlight, Joanna, if you think about the COVID wave sort of in the United States, they're incredibly difficult to predict. But our associates spend most of the time outside of the community. So, if an associate has to quarantine because of COVID, then what's going to happen is they can't work their shift at regular wages, and so we might need to use either contract labor or overtime to fill that shift. And if you look at the COVID-19 summary that we have in our supplement, on page 20, it's important to note that that COVID-19 labor cost doesn't include the incremental cost of associates who may need to quarantine, and therefore the incremental contract labor overtime that comes from that, which really kind of takes me to my next point on sort of the COVID-19 costs, if you think about just the extra labor expense that we've had during the first-half of the year and the other COVID costs, our COVID costs were about $12.3 million in the first-half of the year. Now, we've been lucky that this year, we've been able to offset those costs by $8.8 million of other operating income, which is roughly similar to what we reported last year. And so, again, I'm grateful that we've gotten some funding from the state to offset those incremental labor costs and other COVID costs. But it is important to sort of make sure that we're matching operating income and the COVID costs that go along with it.

Joanna Gajuk, Analyst

No, it definitely makes sense to acquire clients. You are still experiencing disruption from the virus as you mentioned. However, I also want to address something you stated earlier in the call regarding the high turnover rates. I’m not sure if there’s more you can share about the reasons behind the increased turnover. The net hiring numbers look promising, so I just want to clarify those two points.

Cindy Baier, CEO

Yes, absolutely. The labor markets are very dynamic, and there is a lot of elevated turnover, not just at Brookdale, but across all industries. And so, we're doing a great job recruiting. We still want to make progress with our retention, getting that back down to the levels that we had pre-pandemic. And we're making progress, but not as quickly as I would like. And it's something that we are very focused on as a team. We want to make sure that we've got the right value proposition for our associates. We have enhanced some of the training that we offer. So, our caregivers, for instance, can take advantage of Brookdale provided funding to get their C.N.A. or Med Tech certification so they can grow with us and we can help them build a better life through higher wages. And we want to give people as many opportunities to grow with Brookdale as possible. And we are doing just that.

Joanna Gajuk, Analyst

That's definitely helping with the net hiring numbers being pretty good. I have a question regarding the debt situation, which I understand has slightly declined quarter-over-quarter. You previously mentioned questions about lower acuity, but also talked about discounting. How widespread was this discounting? And regarding lower acuity, what should we expect moving forward? Thank you.

Cindy Baier, CEO

Yes. Let me step back and start with lower acuity and what that means, right? So, we have residents who live with us and live with us for quite a while. And so, during the pandemic, what we saw is that more higher acuity residents moved in during the pandemic. And that makes sense, right? Because it was a very needs-driven purpose or needs-driven purchase. And as we've come out of the pandemic, what we are really grateful for is that we're returning to a more normal level of acuity of our new residents. And because there are more new residents relative to the existing base of residents, that brings our overall acuity down because usually acuity increases the longer that you stay with us. So, in the short term, what that means is there is a little bit pressure on our care revenue. But in a long term, what that should mean is we should have a longer length of stay because the residents are moving in when they are healthier. So, that's the care revenue piece and the compression there. We view it as a very good long-term trend for the business. If you look at discounting, we have always had an objective of getting the highest revenue per available room, which is a combination of occupancy growth and rate. And in certain markets in certain communities, we basically have recognized the opportunity to accelerate our RevPAR growth by strategic discounting. And so, we've done that. And as you can see, it's allowed us to deliver outsized occupancy growth compared to the industry. So, we think it's working and driving higher RevPAR.

Joanna Gajuk, Analyst

Thank you. Thanks for the color.

Cindy Baier, CEO

Of course, thank you, Joanna.

Brian Tanquilut, Analyst

Good morning, and best wishes to you, Steve. Cindy, my question relates to the guidance. Reflecting on Joanna's question, you effectively reduced contract labor in the second quarter. Could you help us understand what level of improvement in contract labor and occupancy is necessary in the second half of the year to meet the adjusted guidance provided in Q2?

Cindy Baier, CEO

Yes, Brian. Thanks so much for recognizing the improvement in Q2. It was great that we were able to keep labor relatively flat that offset our merit that offset the additional day that we had in Q2 plus the additional holiday. So, that really was something that offset a lot of sequential seasonal pressure. Steve, do you want to talk about moving forward?

Steve Swain, CFO

Sure. So, on the guidance, you hit on the two big levers, both occupancy and labor. On the occupancy side, as you noted, the RevPAR guidance hasn't changed. So, it's still a 10% to 12% increase year-over-year. And so, you can kind of estimate the significant growth that we are going to see in occupancy later on in the second half as we go into the third quarter which has historically been our highest growth quarter due to seasonality. And then, secondly on the labor improvement, overall we expect the occupancy-driven cost increases to be more than offset by further contract labor reduction. So, it will be same step down in the third quarter and then a higher step down kind of in the fourth quarter for contract labor.

Brian Tanquilut, Analyst

Got it, okay. And then, Steve.

Steve Swain, CFO

Sorry, go ahead, okay.

Brian Tanquilut, Analyst

Yes. You mentioned seasonality in your prepared remarks. So, maybe if you can just help us or maybe remind us how seasonality works for you guys month to month. I know we start hitting the Q4 holidays piece, so just any reminder you can share with us? And how you are thinking of the seasonality factor for the rest of the year?

Cindy Baier, CEO

Yes. The key point to consider is our revenue structure. We invoice our revenue on a monthly basis, while our expenses are incurred daily. In terms of the transition from the first quarter to the second quarter, we effectively gain an extra day and an additional holiday. When moving from the first half to the second half of the year, we gain three extra days and have five holidays in the second half compared to just one holiday in the first half.

Brian Tanquilut, Analyst

Got it. Okay, awesome. Thank you, guys.

Cindy Baier, CEO

Thanks, Brian.

Operator, Operator

Ladies and gentlemen, currently we have no further questions. Therefore, I would like to hand back to Cindy Baier, CEO of the company for any closing remarks. Cindy, please go ahead.

Cindy Baier, CEO

I want to thank everyone who took the time to listen today. We had really good questions. And as you can imagine, we are very excited about the opportunity in front of us not just from the occupancy recovery and maintaining strong rate growth but also from the improvement in contract labor and overtime. With that, this concludes our call.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.