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 Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I'd like to turn the conference over to Mr. Ross Roadman, Senior Vice President of Investor Relations. Sir, you may begin.

Thank you, Jennifer, and good morning, everyone. I would like to welcome all of you to the third quarter 2017 earnings call for Brookdale Senior Living. Joining us today are Andy Smith, our President and Chief Executive Officer; Cindy Baier, our Chief Financial Officer; and Dan Decker, our Executive Chairman of the Board. I'd like to point out that all statements today, which are not historical facts, including all statements regarding our earnings guidance, 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 are subject to various risks and uncertainties. Forward-looking statements are not guarantees of future performance. Actual results and performance may differ materially from the estimates or expectations expressed in those statements. Future events could render the forward-looking statements untrue, and we expressly disclaim any obligation to update earlier statements. Certain of the factors that could cause actual results to differ materially from our expectations 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 our annual report on Form 10-K and quarterly reports on Form 10-Q. When considering forward-looking statements, you should keep in mind those factors and the other risk factors and cautionary statements in such SEC filings. I direct you to Brookdale Senior Living earnings release for the full Safe Harbor statement. Also please note that during this call, we will present both GAAP and non-GAAP financial measures. I direct you to our earnings release and our supplemental information, which may be found on the Investor Relations page at brookdale.com for important information regarding the company's use of non-GAAP measures, and including the definitions of each of these non-GAAP measures and a reconciliation of each such measure from the most comparable GAAP measure. With that, I would like to turn the call over to Andy. Andy?

Thanks, Ross. Good morning to all of our shareholders, equity analysts and other participants and welcome to the Brookdale third quarter earnings call. I will make some brief comments about the third quarter, our outlook for new competition and then discuss the progress we're making with the underlying foundation of the business. Before I do that, I'd like to ask Dan to make a few comments. Dan?

Great, thank you, Andy, and good morning to everyone. I'm excited about the recent transaction with HCP. I want to thank both the HCP and the Brookdale teams for their hard work and creativity in bringing this agreement to the finish line. The underlying goal of our company is to increase the durability of our cash flow and increase its growth trajectory. With the [Blackstone] having stronger control of the ownership of our assets and reducing lease leverage over the long-term, the HCP transactions fit perfectly with that goal. Along with improving the underlying capital structure of the company, we're focused on improving our operating performance. As Andy will describe, we're seeing progress in some important operational metrics, key is operational excellence, providing high quality of care for our residents. Our operational initiatives are having a positive impact and we're seeing a significant improvement in our customer satisfaction, in key associate retention metrics. We don't accept the difficult competitive environment as an excuse for not improving, we're pushing hard to improve our results. I would like to now comment on our ongoing process to explore options and alternatives available to us to create and enhance shareholder value. We acknowledge that it has been a long process and that we have been limited in what we can publically say about the status. We know that many of our shareholders would like for us to provide more transparency regarding the process and we certainly appreciate that. However for a variety of reasons there are limits to what we can say, while the process is ongoing and it wouldn't be in our company's or shareholders' best interest to provide more detailed information at the present time. But know that we're working as expeditiously as possible to bring the review to a conclusion. As evidenced by the transaction we've announced with HCP last week, which in itself was a byproduct of the review process in our portfolio optimization initiative. We have been working to improve the change of controlled provisions in our lease agreements, and to provide the company with more transactional flexibility. Let me assure you that the review process continues to be active and a very high priority for the company. Our Board in conjunction with management and our financial and legal advisors remains hard at work on the ongoing review. As previously indicated there can be no assurance that this review will result in any specific action or transaction. I want to reiterate that no decision has been made to any transaction at this time other than the HCP transaction and I want to confirm that Brookdale will only enter into a transaction or transactions if it can do so under terms that our Board concludes are in the best interest of the company and its shareholders. Andy, I'll turn it back to you.

Thanks, Dan. Before returning to the quarter, I'd like to make a few comments about the transactions we just completed with HCP. I want to start by first thanking Tom Herzog, Kendall Young and their team at HCP for diligently working with us to create a set of transactions that met the goals of both organizations. We really believe this was a win-win deal. HCP has been very public about their goal of reducing their Brookdale concentration. We also have been public about our desire to reduce the burden of underwater leases, to continue to rationalize our portfolio, to simplify our business, and to improve the change of controlled provisions in our lease agreements. These transactions met the respective goals of both parties with a fair and balanced economic outcome for both. For us, we are reducing our lease leverage by terminating leases on 34 communities with coverage a bit below 1.0 without paying any termination fees. This also resulted in a much healthier lease coverage for our remaining leases with HCP. We also effectively swapped our minority position in the two joint ventures for 100% ownership in six communities, all at fair market value. The net effect on our cash flow is roughly neutral, when you balance all elements of the deal. Ultimately, the transactions will reduce our footprint by 69 communities, which allows us to continue to simplify our business. And we modified our agreement with HCP to allow Brookdale to engage in certain change of control and other transactions without HCP's consent. Turning now to the quarter; we saw Texas and Florida face devastation that two large hurricanes can bring. I'm so incredibly proud of the way that Brookdale responded to these challenges to keep our residents safe and to assist our associates who were also harmed…

Thank you, Andy. And thanks, everyone, for joining us today. I will discuss three topics, our current capital structure, our third quarter 2017 results and our 2017 outlook. I'd like to start by highlighting the progress that we've made on our balance sheet and liquidity. During the quarter, we successfully refinanced four mortgage loan portfolios. The aggregate $1.2 billion of proceeds were used to repay $821 million of outstanding mortgage debt principal, including $578 million of 2018 maturities. We were very pleased with the resulting fixed variable mix of debt as well as the maturities schedule. Excluding the convert, we don't have a year with more than $500 million of mortgage maturities until after 2021. We've made really good progress on our near-term maturities. In addition to the $316 million of convertible note, we have $95 million of mortgage debt coming due in 2018. As we have previously stated, our intention is to repay our converts with cash. We've built a significant amount of liquidity. At the end of the third quarter of 2017, we'd $899 million of liquidity including $538 million of cash and marketable securities and $361 million of availability on our line of credit. Now before we get into the details of the quarter, let me cover four items that impacted our financial results and the comparability to prior period. Our portfolio optimization initiatives, some large favorable reserve adjustments that we book last year, the financial impact of Hurricanes Harvey and Irma and the goodwill asset impairments totaling $359 million. Understanding these items will [evaluate] our results in the context. As expected our portfolio optimization initiatives dramatically impacted our year-over-year result, particularly revenue and adjusted EBITDA. We have dispose of 136 communities since the beginning of third quarter 2016. As a result of these dispositions we generated…

Thanks, Cindy. Our management team is focused on improving our operating performance. We are making progress in key areas to overcome the near-term headwinds and we believe that we are laying the foundation for success in 2018 and beyond. We're happy to answer your questions now.

[Operator Instructions] And our first question comes from the line of Brian Tanquilut with Jefferies.

Good morning. This is Jason Plagman on for Brian. Just first off on the kind of the key performance indicators on the operations side, you talked about the increase in Net Promoter Scores and reduction in executive turnover. Have you done any analysis on how that drives performance over time in the business?

Yes, absolutely. Thanks for your question, Jason. Both of those factors, both of those metrics are directly correlated very tightly to success in our communities, success in terms of occupancy, success in terms of rate, and so they are very, very tightly correlated which is why we focus so intently on them.

And most importantly they improve profitability.

Great that's helpful. And HCP last week on their same store NOI recorded 5.3% and you guys managed most of that, any color on why that performance is so much different than the same store results that you reported for Q3?

Well, you're right that we do manage the vast majority of HCP's ready exposure. Its hard -- those [pull back] for a particular portfolio first, I believe it was affected by some accounting adjustments between the two years and how rebates were calculated and I believe that HCP was clear about that, so that's part of it. The other part of it is that -- again it's -- you have to look at performance by a portfolio and by markets and in the case of HCP's portfolio a lot of that's Independent Living, which has sort of better market characteristics at the moment, so that's part of it. But really it's just -- it boils down to the difference between what's going on in particular communities and particular markets.

Your question comes from the line of Chad Vanacore with Stifel.

Hey, guys, can you hear me?

We hear now, Chad.

So if occupancy trended up each month in the quarter and average occupancy was up 20 basis points, what was the monthly progression? I mean, where did occupancy end in the quarter?

So we don't break it out Chad, by -- with that level of precision. What I can tell you is that our net move-ins -- again later this year than we would normally see, but measured at in the end of the month net move-ins against net move-outs were positive beginning in the month of June that continued through each month in the quarter and it continued in the month of October. But we don't really quantify by month what those changes look like.

All right. But if net move-ins have improved and presumably you ended the quarter at a higher level than you began the quarter, what makes you think that the fourth quarter occupancy you expect it to be flat to down?

Well you're right on your assumptions, generally speaking and virtually every year November is a challenging month. There are very few actually selling days when you take into account the Thanksgiving holiday at the end of month. So it is generally speaking challenging and that affects occupancy in the month of December which is why as a rule, we see flat to slightly lower occupancy in the fourth quarter.

All right. And then just aside from the hurricane impact that you outlined that you expect to continue in the fourth quarter, so what are your assumptions for occupancy rate in fourth here that factor into your guidance?

So Chad this is Cindy, thanks for the question. We're expecting to see rate pressure continuing into Q4 and we're expecting normal seasonality. But the one thing that I do want to remind you as you think about our guidance for the full year, in both our first and second quarter calls we talked about the fact that debt was elevated. In Q3 we're happy that our debt returned to a more of a normal level but that doesn't affect our annual outlook for our guidance as we entered the third quarter with lower occupancy as a result of debt.

So when you think about pressures on rate, typically we would expect you to get 3% rate increases on in-place in the New Year. Should we not expect something like that going into 2018 given you have already experienced pressures?

I think we are expecting to see the normal increase in our in-place residents, where we are seeing the pressure on rate is really in the mark-to-market for our [new residents]. So we are seeing in areas of how competitive pressures discounting to get those people to move into our communities.

And what kind of discounts are you giving?

Mid-single-digits are the average across the portfolio, when you compare the discounts that we gave in Q3 compared to the in-place resident and for Q1. So that's really in-place resident to a new move-in. And it can be a combination of a lower market rate, an incentive or a discount, it's not necessarily discount per se, but if you look at sort of the difference between the rates that we receive, it's a mid-single-digit difference.

Okay. And then just thinking about your HCP transaction, are there any other potential transactions like that that you can execute with other landlords to rid yourself of underperforming leases?

Yes. As we've talked about before. First, one way to get out of underperforming leases or underwater leases is as you get to maturities, you can either renegotiate the terms of those instruments or you can walk away from those leased assets. And as you can see in our supplement, we have a number of near-term maturities that are forthcoming. I'd also say that we are in constant dialog with all of our REIT partners to try to search for transactions or restructurings or amendments to leaseholds that work for them and to work for us. And so again, we are constantly dialoging with those folks as part of our optimization and simplification efforts and as part of the strategic review process that we are undertaking.

Just one more for me. Cindy, you mentioned tough comps in the fourth quarter. Are there any one-time items that we should note there?

Good question. We do have about $7 million of favorable insurance reserve adjustments that we booked in the fourth quarter of 2016. So that will create a tough comp for us.

And our next question comes from the line of Joanna Gajuk with Bank of America.

In terms of the labor costs, so Cindy, you talked about, I guess all-in compensation increases in the 6% range, right? So is that still sort of the same outlook for the year that you had before and also how do you think about next year in terms of your labor costs all-in and maybe also wage increase for next year?

Our labor and wage increase for the year is unchanged. We are still expecting a year-over-year increase of 5.5% to 6% for the full year of 2017. That's the combination of our average wage rate increase, the increase in our benefits and other costs associated with our employees and an increase in hours per resident day. As we look into 2018 we continue to see that there will be wage pressure particularly in areas that have low unemployment. We as -- as we looked at our portfolio this year, we see that we have higher wage increases while the employment is lower, we also see wage pressure in our Skilled Nursing. So those are the areas where we would expect to see pressure in 2018.

Great. And in terms of the Ancillary segment, you mentioned you added one agency, I think in Chicago, so to me it sounds like you're expanding that business but at the same time from the metrics it looks like maybe you are [stepping] down home health, is that correct?

With the agency that we have added in Chicago, the Hospice agency in Chicago and throughout our Hospice business we are growing very, very nicely. That business is just very needed by our residents and its growing nicely. Home health has been impacted by the hurricanes, we posted $3 million to $4 million of revenue in Q3 and there will be a tailing effect in Q4. We were also impacted by the competitive intrusions that we talked about in earlier call. So I think that business will be healthy for the long-term but it has had some headwinds in 2017.

So in terms of this competition you mentioned in the home health, so it's the continuation of the situation that we talked about before right and then with that is there any way to spend there and do you plan to continue with this business or you plan to exit that all?

It's the same issue that we have talked about before, it's not a new issue and it is getting better over time. I will let Andy address that.

As the -- it's pretty basic. When you lose a lot of sale -- when people competitively intrude and take sales folks and clinicians it simply takes a while to re-hire, train, get onboard new sales folks, new clinicians and allow them time to rebuild the census that you lost because again of this competitive intrusion. So this is no different than what we've talked about before. In terms of staying in the home health business, yes that's our current intention, from where we sit today.

And we have no other questions, thank you at this time. And I would like to turn the conference back over to Andy. End of Q&A:

Thank you all for joining us this morning. We'll be around today, if you have supplemental questions. Thank you.