Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Second Quarter Earnings Call. [Operator Instructions] Thank you. And Mr. Roadman, you may begin your conference.

Thank you, Jennifer. Good morning, everyone. I would like to welcome you all to the Second Quarter 2016 Earnings Call for Brookdale Senior Living. Joining us today are Andy Smith, our President and Chief Executive Officer and Cindy Baier, our Chief Financial Officer. I would like to point out that all statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement. With that, I'd like to turn the call over to Andy. Andy?

Thanks, Ross. Good morning and thanks for joining us. We appreciate your interest in Brookdale and I'm looking forward to our discussion this morning. It was a little over 10 weeks ago that we articulated our plan at our Investor Day. We were very pleased that the vast majority of our shareholders were able to participate in our Investor Day to hear about our plan in detail and to meet many members of our senior management team. We hope you walked away with clarity around our plan and confidence in our ability to execute on that plan. We have been very focused on execution and I'm pleased to share our progress over the quarter. Our plan is based on leveraging both the enormous market opportunity that exists for Brookdale and our unmatched platform for making the most of that opportunity. We know that the key to our success is simply how we leverage our platform and our scale. No one else has the size, the scale and depth of product offerings that we have, no one else has an organization with as much senior housing experience as we have and no one else has the resources to invest in creating best-in-class systems and customer facing programs as we have. Our primary focus is on operational excellence. Further developing our competitive advantages to improve performance in the fundamental drivers of our business. Operationally, we're focused on three key elements. First, consistently delivering a great resident and family experience. We have recently enhanced our resident experience programming, which we call the Brookdale Experience. This program includes operational and customer service standards, technology, training, programming and Net Promoter Score measurement. The goal of this program is to provide our associates with the tools for delivering a great resident and family experience, along with…

Thank you, Andy. I also want to thank everyone who has taken the time to listen to our earnings call today. As Andy described, at our Investor Day, we laid out our goal of growing the amount, quality and durability of our cash flow, improving adjusted EBITDA and strengthening our balance sheet. 2016 is an important rebuilding year for Brookdale where we expect to significantly improve the cash flow of our business and we are pleased to discuss our results with you. This morning, I'll take a few minutes to comment on our overall company results for second quarter 2016 and review our liquidity and balance sheet. I will also describe some adjustments that we have made in our reporting with respect to non-GAAP measures, taking into account some very recent guidance from the SEC on non-GAAP reporting. I want to be clear this is in no way a departure from our outlook or our original guidance for adjusted EBITDA or adjusted CFFO. We will also update our revenue guidance to address the expected impact on our senior housing and Ancillary Services revenue guidance, a planned closing of several disposition transaction. This reduction in revenue guidance does not have any impact on our adjusted EBITDA or adjusted CFFO guidance. I will close with comments about our guidance. First, we accomplished a lot during the quarter. Total second quarter 2016 revenue was $1.3 billion, a 1.7% year-over-year increase. This included a year-over-year resident fee revenue increase of 1%. Our second quarter 2016 average occupancy for the consolidated senior housing portfolio was 85.8% versus 86.1% in first quarter 2016, a 30 basis point sequential decrease. Normal seasonality in our business usually results in a second quarter average occupancy decline, but we were pleased that our average occupancy rose throughout the quarter and…

Great. Thanks, Cindy. As we get ready to take your questions now, let me summarize by saying we're encouraged by the progress we’re making. We have a solid execution plan to grow revenue and to build durable cash flow and we're continuing to execute on a rationalization initiative to simplify the business and strengthen our balance sheet. We're happy to answer your questions now.

[Operator Instructions] And our first question comes from the line of Frank Morgan with RBC Capital Markets.

It was interesting your commentary about those May and June occupancy numbers. I'm curious if you could comment maybe a little bit on what you're seeing so far in the current quarter, and it sounds like there's a good chance that you might actually show year-over-year occupancy growth in third quarter of '16 versus '15, just curious of your comments there first.

Yes, thanks, and good morning, Frank. Thanks for your question. I'll take that and then Cindy can add to it. So it's early in the quarter, obviously. Our July occupancy is right at actually just a little bit below what our June average occupancy was, which again is not unusual. We expect to build occupancy through the quarter and to keep the momentum up to that we talked about and began to see beginning in May.

And your next question comes from Joanna Gajuk with Bank of America.

So I just want to come back to the $10.8 million decrease in insurance expense that you mentioned, Cindy. And then, should we kind of look into this number as sort of the savings going forward? Or was there something unusual in the year-ago period that's why you are kind of stacking it out as being a decrease?

Joanna, thanks for your question. We're really happy with the performance of our legal and risk management teams in generating the $10.8 million reduction in insurance expense. From our perspective, adjustments to reserve for claims are a normal part of our business. We make those adjustments regularly. What was unusual about this adjustment, it was a larger adjustment than we normally see. So the way that I think about it is it's lumpy, it's bigger in the second quarter than we usually see but absolutely a part of our ongoing business.

And then on another - I guess, immediate cost item around labor costs. I appreciate the commentary that was up 3% - labor expense was up 2% on same-store basis. So can you give us sort of respective over the last 12 months and then where you see going forward? And then specifically, any color or any commentary about the potential impact of the overtime that will start to take effect later this year?

So Joanna, let me take that question. So let me start by saying that we've clearly seen wage pressure in our skilled wages as we've made a change of - our coverage to 24 hours and we've made market adjustments for our skilled clinical. We've also seen some increases in our wages for Executive Directors as we've experienced turnover in that business. We do expect to continue to see wage rate pressure in 2016 related both to the minimum wage requirements that you talked about as well as the competitive labor markets in some region. As a reminder, we always thought that our 2016 wage rate increase would be higher than 2015. We saw overall wages increase 2.5% last year. Our plan includes a 3.5% overall wage inflation for the year at the associate level, plus some add-on for changes to minimum wage rate increases in selected region market pressure. So the impact of the minimum wage increases is about $500,000 for 2017. Now with regards to the new overtime regulation, as a reminder, it is for about $47,000 and under associate. We have roughly 1,500 associates who are under the threshold and most of those people are in the field. We expect to have the final decisions on impacted jobs by mid-August in time for our 2017 budget. So we'll likely talk about that more with you in our third quarter call.

If I can squeeze just one last, I guess, quick question on the recurring CapEx. I appreciate the comment you made on the CapEx versus recurring guidance that's unchanged. But is there anything that's changing in terms of your outlook in the number you included in the CFO calculation because I guess the first half of the year so far was $27 million. So I'm trying to see whether this is a good run rate because I guess previously you talked about $65 million to $70 million range for the recurring CapEx.

Joanna, we have not made any changes whatsoever from the first quarter with regards to our CapEx guidance. The only thing that we did in our information is to combine sort of the three categories that will ultimately be called non-development CapEx. So you could see what that total is. Now the recurring CapEx that's in there is already adjusted from CFFO. The other two buckets aren't. So when we move to our new reporting next year, we'll show CFFO less non-development CapEx was a full amount deducted.

Are you saying that the recurring CapEx bucket did not change; there was not movement between the three buckets or anything like that?

That's correct.

Your next question comes from Chad Vanacore with Stifel.

So I just want to make sure I heard this part right on the move-ins. So it looks like May and June had trended up and were strong. Maybe you gave back some of that in July and August. Did I get that right?

Well, we don't know August, obviously. July was just a little - on an average basis, July's average occupancy was slightly below June's.

Okay. But I mean, overall, Andy, where the comments that maybe you get back to 3Q '15 levels by the end the quarter?

Well, look, what we're trying to do is to grow RevPAR. And therefore revenue. And again, I would underscore that we have maintained our revenue guidance for the full year. So I think, Chad, and as you know, and we said in the first quarter, our occupancy as an absolute, just looking at that measure, was slightly coming into the year, was slightly below our internal plan. It remained slightly below our internal plan. But what we're really focused on doing is not talking about occupancy in isolation but rather focusing on revenue, and that's what we're trying to do as a management team.

And then, one thing I noticed, ancillary bounced back pretty strongly from weak 1Q. Is there anything that you're doing to drive that? And are the bumps behind us and should we expect these margin levels that are good going forward as run rate?

So let me start by answering that. The first thing I'm really happy with is we did add great job sort of controlling labor and that was really the issue that we saw in the fourth quarter. [Indiscernible] and his team have done a great job of really controlling labor. As you know, we've been exiting certain markets in the Outpatient Therapy and we're actually trying to grow about our home health and hospice business. And so as you move forward with the changes that we're making in the underlying business and with the receipt of the licenses in the California, we do expect this business to continue to grow nicely with good margins.

And Cindy, as California institution, those have been a bit of a drag for a while, you’re trying to roll out and get license. Is that now all pretty much settled?

We have the vast majority of the licenses in California and as I mentioned in my prepared comments over the next 12 months, we expect that, that could create $5 million of revenue. Now it takes time as you would expect to build the caseload but we’ve cleared the first hurdle of getting the licenses so that we can start.

Our next question comes from Brian Tranquilut with Jefferies.

Andy, just a follow-up to your answer to Chad's question on RevPAR and growing revenue. How should we be thinking about the discounting environment right now? And how do you do that balancing act between driving occupancy and driving rate growth? I mean, what's your outlook there?

Yes. Well, obviously, the selling price and the marketing, the incentives, et cetera all of that is based on what’s going on in each community. And so it's a very particularized program that we try to implement based on what's happening on local, with respect to local markets and local market conditions. I think going through the year, we would expect to, again, we're focusing on the RevPAR, focusing on revenue. I would expect to see reasonably strong rate performance. And I would expect to build occupancy through the third quarter and into the fourth quarter in accordance with seasonal patterns. But again, to me, it's kind of a little bit of a mistake to focus on just one metric as opposed or one building block, one driver to what RevPAR really is. And so we're focusing on the topline and trying to drive through a blend of, selling better, as I said, in our prepared remarks using appropriate incentive and discounting programs where the local markets necessitated and also growing occupancy at the same time. To summarize, I’d say, we would expect to see occupancy grow through the back part of the year and we would expect to see our rate continue to remain pretty strong.

Got it. Then, as I think about the divestitures and your ongoing process in evaluating in future moves, so how should we think about the criteria that you run these assets through to make that decision? And then, also the consent requirement, I mean, are there any consents required for some of these divestitures and then, I guess last part to that, how should default through the metrics say in 12 months look whether its occupancy rate growth, CapEx or cash flows or CFFO?

Okay. I'll take a crack at that. There were a bunch of questions in there. So make sure - that's okay, I just want to make sure we remember to cover all of them. As we've said before, our criteria in terms of looking at dispositions would start with one of the performance of the assets when we think about the markets that they're in, that we want to be in those markets long-term. What are the capital expenditure requirements for those particular assets? Do we want to invest in them if a large CapEx, infusions are necessary? Or would we prefer not to? So it's a host - it's a multivaried factors that we look at to make a determination whether something is suitable for us to divest on it or not. And those are for assets that we own. There are no consent requirements for the assets that we own outright other than most of them have mortgage debt on them so we have to pay debt mortgage that often. As opposed to this and other factors too. If there are outsize prepayment premiums associated with fixed rate paper or fixed-rate mortgages on those assets, we will at least take that into account with respect to our viewpoint on what the underlying economics of the transaction would be. Separately, and I would call this a disposition activity, we are - as we've said, we have negotiations ongoing with HCP to terminate some of their leases for our benefit and for their benefit too. It's really is hoped to that we will get to a win-win situation. Transactions of that type, obviously, we need a mutual agreement with our landlord. So if you want to call that a consent, you could call it that.

And then let me take to flow-through on the metric. I’m going to adjust my comment only to the 60 assets that we had held for sale as we're still working to the disposition with HCT. On trailing 12 months basis, they have revenue of $138 million. They had CFFO of approximately $4 million. As you would expect their lower occupancy than the remainder of our portfolio. And we would expect to redeploy the proceeds in debt repayments and it will take some time to actually redeploy all the proceeds because we have to balance interest costs and prepayment penalties. But once we deploy the proceeds, we're probably somewhere between 4.34 - 4.75% and close to 5% on the return that we would have in terms of low interest expense from deploying of proceeds. Did I answer your question, Brian?

Yes, you did, yes, last question for me. One question that we've been getting this morning, given the $10.8 million kind of savings on the insurance side, how should we think about your view on guidance? Because obviously, that was probably bigger than expected and you're maintaining EBITDA guidance for the year. And the recurring nature of that savings that you're going to see from the insurance accrual.

What I would say is we're very comfortable with our guidance for the year. We hoped that we would have significant insurance savings during the year although you can never count on it. I think what surprised us is that Q2 but that doesn't mean that we would have hoped for at least that amount for the year.

Your next question comes from Ryan Halsted with Wells Fargo.

Just a couple of follow-ups. You've mentioned that the lease renegotiations. I was wondering if you can just give us an update on I guess the potential timing of that given that there's some change in management at your REIT partners.

Well, I can speak from our side of the equation. And I can tell you that we're working very cooperatively the negotiations with HCP are going well, and nothing is done until it's done. But our anticipation is that we would have that pen to paper in those agreements executed relatively quickly.

And then, you mentioned with the dispositions. CapEx requirements is one of the criteria you look at. So is it fair to assume that the communities you're disposing may have had higher than usual CapEx requirements that we could potentially look at sort of going forward when they are disposed of?

Ryan, that's a great question. I should have mentioned that. I'm sorry. You can think of that is having higher-than-average CapEx requirements on a historical basis and on an average historical basis, you can think about them using more CapEx that the CFFO they generated.

Last one, just going back to the question on guidance. So clearly, you have a good amount of confidence in the RevPAR growth, is that sort of the biggest swing factor? Or what gives you the biggest confidence of achieving your guidance over the course the year? Or are there other factors that you think are going to be important to hitting your numbers for the full year?

I'd say, basically, that we expect to continue to make progress on all the key drivers of our business. That includes making progress on RevPAR. But we also expect to tightly control our expenses. We expect synergies to continue to build, our cost synergies to continue to build through the balance the year. So I'd say it's a combination of all the key drivers of the business, Ryan, that we expect to continue to make progress on.

And I think timing of dispositions is another thing that's key, right? We've got 60 assets that we are looking to sell. We think we'll get it done by the end the year. But timing is one of the things that is never certain when you're dealing with licensure requirements.

And we have no other questions in queue at this time. I'd like to turn the call back over to Andy.

Okay. Thank you all very much for joining us this morning. We're very pleased to report to you about the progress we've made regarding our plan, and we look forward to periodically the point back to you as we continue to execute and continue to build shareholder value. Thanks for joining us this morning.

Thank you for your participation. This does conclude today's conference call, and you may now disconnect.