Brookdale Senior Living Inc (BKDT) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Brookdale Second Quarter 2022 Earnings Call. My name is Irene, and I will be coordinating this event. (Operator Instructions)

I would now like to turn the conference over to our host, Kathy MacDonald, Senior Vice President of Investor Relations. Kathy, please go ahead.

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 filed 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.

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 tough labor environment. Margins expanded and we delivered a meaningful sequential adjusted EBITDA increase. We had significant success of increasing net hire 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 more than 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 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 3-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 8 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 5 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 1st 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 and senior living is critically important, given the acuity of the population we serve. Our goal at Brookdale is to help our residents improve their health spans. 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 health plus 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 a resident's 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 and Brookdale like residence in private housing. Importantly, we are seeing longer lengths of stay in health plus communities, as our residents are improving their health span. These longer lengths of stay also help drive our occupancy rates. Health Plus 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 a 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 continue 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.

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 inflicted 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 grants 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 residents move-in. 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 least 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 an additional day and holiday in the quarter, and a full quarters 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 costs. As our permanent workforce stabilizes, we expect further reductions in contract labor for the balance of the year. Other facility operating expenses increase approximately $1 million or 60 basis points sequentially.

Higher marketing investments 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 in organizational restructuring costs and non-cash stock based comp was lower on a sequential basis to reflect quarterly incentive compensation true-ops. 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 to $5 million sequentially. The adjusted EBITDA improvement was partially offset by 2 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 30th, total liquidity was $412 million compared to $476 million at the end of the first quarter. The phase 4 funding received in August will strengthen our liquidity. With rising Fed rates we expect annual debt interest expense to be approximately $15 million higher than 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 the third quarter sequential occupancy growth to exceed the second quarters growth, which was 120 basis points. This seasonally high occupancy growth in the third quarter will drive NOI and margin expansion. Annual labor costs 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 they 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 a 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.

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 6 to 8 weeks. Steve is so important to all of us here at Brookdale, and we wish him all the best and look forward to his 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.

As a 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 start resulting in a meaningful improvement in the 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.

Thank you. (Operator Instructions) Our first question comes from Tao Qiu from Stifel Financial Corporation.

Cindy, you made great strides in net hire already over 2,000. I think you added 2,000 full-time employees in the second quarter, which helps drive down agency labor by 25%. I was looking at the employee count versus the occupy units pre-pandemic and today. I think in the first quarter of 2020, you had 50,000 employees on 45,000 occupied units. Today, you have 36,000 employees on 39,000 occupied units. So the employee unit current ratio is still depressed. So the first part of my question is how should we think about the number of employees that you need to add each quarter to keep up with the current pace of occupancy growth? And the second part is, what kind of productivity gain should we expect from the various pilot program and the IT deployment you alluded to in the prepare remarks?

Tao, great question and thank you for noticing our progress on net hires. We're very pleased with the progress that we're making. If you go back a year ago, we sold our healthcare services business on July 1st of last year, that was about 4,200 people associates. And so we would not expect to increase those associates.

But if I sit there and just think about big picture labor costs, there's really 4 things that I think about in terms of labor costs, all of which will improve our continued focus on net hires. If you think about contract labor, it's 2 to 3 times the cost of our Brookdale associates at regular time. If you think about overtime, it's generally at least one and a half times as expensive as an associate who is working a regular shift.

If you think about the number of new associates that we hire, before they can have their very first productive hour, they have to be trained. And then if you think about where we'd like to get, if we'd like to get to our associates who are staffing our shifts using regular full-time and part-time shifts. And so our goal really is to appropriately staff our communities to meet resident needs with our Brookdale associates who are working regular full or part-time shifts. And as we have reduced the most expensive source of labor, which is contract labor, a portion of that labor was from overtime.

Further, as we significantly increased our new hires, as you noted, this temporarily increased our training cost. So as we continue to grow our workforce, we expect that we're going to continue to reduce that most expensive labor source, which is contract labor. Again, 2 to 3 X the cost of the normal associate and overtime, which is at least one and a half X. And once we get to a stabilized workforce, we expect to see an improvement in labor costs as our training costs normalize.

There's one additional point to think about when you're thinking about what the right size of our workforce is. As COVID-19 waves roll throughout the us, it's important to note that our associates spend the majority of their time outside of our communities. Like all Americans, they have the risk of contracting COVID-19.

And so when they must quarantine, we have to continue to serve our residents. We're working to build a larger workforce so that we have associates who if they can't work for whatever reason, we can staff our communities with associates who are working shifts paying regular wages. And this is a really significant opportunity for improvement.

So we're making good progress as evidenced by our 25%- more than 25% reduction in contract labor. But it's going to take some time to get our workforce fully stabilized. And I can't tell you the exact number of associates that we're going to need, but we are making great progress. Looking forward, we expect to reduce contract labor and premium hours resulting in lower labor costs while appropriately staffing our communities. And with regard to the productivity point of your question, what that allows us to do is to shift more of our shifts to regular time because workers can go in and they can see when they want to work and they can pick up that shift that might have gone to overtime or contract labor. So that's really what we're looking to do is staff more shifts using regular wages.

Thanks for the detail color. That's very helpful. My second question is about the rate outlook for next year. You mentioned that you're factoring some of the structural higher labor costs in your rate decision for 2023. Do you think you'll be able to pass through the full hire in operating expenses next year in terms of a rate growth to offset that?

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 2 pieces. There is an increase in the normal hourly wage for our associates, and that's something that will price in. But I do think as we go through 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.

Good luck, Steve.

Thanks Tao.

Our next question comes from Josh Raskin from Nepron Research.

It is actually Marco. I was just wondering if you could provide a little more detail on the specific components striving that incremental labor pressure that's contemplating 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 stabilized a little bit? Thanks.

Yes, I think the biggest factor really is that contract labor has come down a little more slowly than we expected. And as is the case often is it's shifting- a piece of it is shifting into overtime, which is still at a premium. So that's really the biggest factor that I see. Steve, is there anything that you want to add to that?

I agree that it's the rate at which contract labor is leaving the system, is slower than what we had originally projected.

That makes sense. 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?

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 like 8 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 rates, 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 lease portfolio, however, it's important to look at the optionality that is built into our lease 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 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.

And best wishes to Steve.

Thanks, Marco.

Our next question comes from Steven Valiquette from Barclays.

Great, thanks. Good morning, everybody. 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, 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 and assisted living maybe happening at a little bit slower pace versus independent living for the remainder of '22 and also into 2023? Thanks.

Steven, if you look at our supplement on page 9, we basically break down our same community operations between IL, AL, and our CCRCs. 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 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.

Yes, that was going to be the follow-up question. In some ways, is it easier to make the ask when you think about the end resident rate updates for next year? Is it easier to make the ask in AL because it's just higher visibility and the higher waiver costs and pressure, and maybe there -- is there resistance on the independent living side or do you find that you're able to push through what you want on end resident rates there too in terms of how that's flowing right now?

I think the difference between AL and memory care is AL and memory care are needs driven product 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.

Got it. Okay. All right. Great. Thanks.

Thanks so much.

The next question comes from Joanna Gajuk from Bank of America.

So I guess a couple of follow-ups here on the contract labor. Understand definitely were able to reduce sequentially, but it sounds like things are slower to the kind that you originally had expected. So any guesses or I guess, observations in terms of what's driving this contract labor decline being- declining but slower than expected?

Sure. Joanna. Just remember that generally between the first quarter and second quarter, we see labor costs increase. This quarter, the labor costs were flat because we did cut contract labor 25%. And now about half the savings were offset by direct labor costs as we built the Brookdale associate base and the other half was savings- was offset by kind of seasonal increases in calendar items like an extra day, an extra holiday and the full impact of the field merit increase. Now, that said, it just has taken us a little bit more time than what we had originally projected on reducing the amount of contract labor and back filling with Brookdale associates. We want to get the right associate in the right job at the right time. And those factors have led to a little bit longer timeline.

There's one other thing that I want to just highlight, Joanna. If you think about the COVID waves, sort of in the United States, they're incredibly difficult to predict, but our associates spend most of the time outside of the communities. 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 COVID-19 labor costs doesn't include the incremental costs of associates who may need to quarantine and therefore the incremental contract labor over time 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 are 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 states 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 this.

No, definitely makes sense to get the clients. So when you're still seeing disruption like you mentioned from the virus. The other followup I had, definitely, good to see the net hiring. But I think, I want to say you mentioned earlier in the call, something about the turnover still being high. So I don't know if there's anything to flash that out in terms of the turnover being higher. But I guess the net hiring numbers are pretty good. So I just want to clarify those 2 things.

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 CNA 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're doing just that.

No, that's definitely helping, I guess, with the net hiring members being pretty good. So that was the follow-up. And I have a question on the pricing, which I guess, naturally up year-over-year obviously, but I guess a slight decline quarter over quarter, and you mentioned -- I guess, there was question before on the lower acuity, but you also mentioned discounting. So how widespread, I guess, was this discounting? And I guess on the lower acuity, what should we expect going forward? Thank you.

Yes. Just let me step back and start with the lower acuity and what that means. 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're 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's a little bit of pressure on our care revenue, but in the long term, what that should mean is we should have a longer length of stay because the residents are moving in when they're 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.

Our next question comes from Brian Tanquilut from Jefferies.

And Steve, best wishes. Good luck with that. So Cindy, I guess my question, as I think about the guidance and just going back to Joanna's questions, I mean, you did a really good job bringing down contract labor in Q2. So maybe if you guys can help us think through the level of improvement in contract labor and occupancy that needs to happen in the back half of the year to get the guidance given what adjustments you made in Q2.

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?

Sure. So on the guidance, you hit on the 2 big levers, both occupancy and labor. On the occupancy side, as you noted, the RevPAR guidance hasn't changed. So it's still 10% to 12%increase year over year. And so you can kind of estimate the significant growth that we're going to see an 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 kind of the same step down in the third quarter and then higher step down kind of in the fourth quarter for contract labor.

You mentioned seasonality in your prepared remark. 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're thinking of the seasonality factor for the rest of the year.

Yes. I think the most important thing to think about is that revenue, we build revenue monthly, but expenses we pay daily. And so if you think about sort of Q1 to Q2, we basically pick up an extra day and we pick up an extra holiday. And then if you go from Q2- well, if you go from first half to second half, we have 3 additional days in the second half, and we have 5 holidays in the second half compared to one holiday in the first half.

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

Irene, can I check if Ben Hendricks is line? I thought I saw him earlier call in.

Yes. Mr. Hendricks. I think he withdrew his question as he's no longer in the question queue, but he is active on the call.

Okay, great. Thanks. Over to Cindy.

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.

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.

Thank you. Bye.