Good morning. My name is Jamie and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. MacDonald you may begin your conference.

Thank you, and good morning, everyone. I would like to welcome all of you to the first quarter 2018 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer, and Teresa Sparks, our Interim Chief Financial Officer. I would 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 our any obligation to update earlier statements. Certain other 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 filed with the SEC from time-to-time including the risk factors contained in our annual report on Form 10-K and quarterly report on Form 10-Q. When considering forward-looking statements you should keep in mind those factors and the other risks factors and cautionary statements in such SEC filings. I direct you to Brookdale Senior Living's 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 and was furnished on our 8-K yesterday. For important information regarding the company's use of non-GAAP measures 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 Cindy.

Thank you, Kathy. Good morning to all of our shareholders, analysts and other participants. Welcome to our first quarter of 2018 earnings call. As always, we appreciate your interest in Brookdale. This morning we will discuss our progress around our turnaround strategy, the first quarter results, our annual guidance, and expectations for the next few years. In our last earnings call I said that I would continue to study the business in a thoughtful manner to meet with our key partners and to further assign our near term plans. We already met with several of our top REIT partners to explore win-win alternatives. One important outcome was the Ventas Master Lease agreement that we announced two weeks ago. This agreement reflects improvements to our long term relationship with Ventas while simplifying our lease structure. We will receive rent concession over the course of the contract, have the ability to remove select communities from the lease and jointly invest in appropriate capital expenditures. Also significant, we continue to work collaboratively with HCP and have acquired the six assets we announced late last year along with continuing lease transitions. While we have made significant progress there is still more work to do and we are continuing our work with our REIT partners. I am now been in the CEO seat for just over two months and want you to know that our strategy is consistent with what I announced in late February. Our top priority remains the operational turnaround based on three strategic priorities. First, attract, engage, develop and retain the best associates. Second, earn resident and family trust and endorsement by providing valued high quality care and personalized service, which in turn will lead us to our third priority to drive attractive long-term returns for our shareholders. Let me start first…

Thank you, Cindy. It is a pleasure to be a part of Brookdale in the early innings of our turnaround strategy. As discussed on the yearend call 2018 will be a challenging year. However, it is an exciting time to share in our associates passion to win locally. We have an incredibly mission minded leadership team with an understanding of the balance we must achieve with respect to the mission and the margin. My remarks today will focus on three primary topics. First, given the importance of our portfolio optimization strategy, I'll provide an update on our progress. Second, I will highlight our first quarter 2018 financial results. Lastly, I will expand on Cindy's comments related to our outlook for the remainder of the year. From a portfolio optimization perspective, we are delivering on this initiative and over the mid-term we expect to improve the positioning of our communities by simplifying our lease structure while improving our cash flow. As you may remember, for the full year 2017 our lease portfolio underperformed as now we continue to focus our efforts on improving our REIT partnerships. In general, our preference is to own our assets. As it relates to the HCP transaction, we continue to make progress on the previously announced agreements. In the first quarter of 2018, we completed the sale of our interest in the remaining unconsolidated RIDEA venture. We terminated management's agreement for 10 communities and we acquired one community. While not included in the quarter, during April, we completed the acquisition of the remaining five communities from HCP. We expect the remaining triple net lease management agreement terminations to occur throughout the balance of 2018. However, they remain subject to various closing conditions and regulatory approvals. In total, the HCP transaction has generated proceeds of $94.4 million…

Thank you, Teresa. Our management team is committed to our turnaround strategy and improving our operation performance for the benefit of the company and for our shareholders. I want to say thank you for our associates for focusing on what matters most, taking care of our residents. I'm happy to answer questions now. Operator, please open the line for questions.

Thank you [Operator Instructions] Our first question comes from the line of Brian Tanquilut with Jefferies.

Good morning. I guess for Cindy or Teresa, as I think about the EBITDA and cash flow trends throughout the year factoring in seasonality and all the other initiatives that you're working through, I mean, just if you don't just mind walking us through how you view the cadence as we progress through Q2, Q3 and Q4?

Brian. Hi, it's Cindy. Thank you so much for your question. So as I said in the call in my prepared remarks, we were really pleased with the sequential improvement in Q1 where we saw our RevPOR increase 2.5% and our same community operating income improve by 2.0%. Now the first quarter is always a quarter where occupancy dips, as a result of the low seasonal point. We would expect that the normal occupancy turn occurs in May or June and our guidance this year is really no different than that. We would expect our GAAP to our 2017 performance to narrow as the year progresses and by the end of the year we would expect our year-over-year results to be favorable to 2017.

Got it. And then Cindy shifting gears, last week obviously, we saw the Ventas agreement that you guys co-announced with them. It seems like it's a pretty big deal. If you don't mind just walking us through your thoughts on what it really does for the company in terms of the flexibility that it provides and also the divestitures that they're planning with additional units that you're putting up for sale together?

That's another good question Brian. Thanks for it. So first let me say thank you to Debbie Cafaro and the Ventas team. They are very strong partners and we are very grateful for their support. I believe that this is truly a win, win transaction for Ventas and Brookdale. As a reminder, we have 128 communities that we released from Ventas, and what the agreement allows us to do is first it improves our near term cash flow and that is through the rent credits that Ventas is providing us to bridge us to the operational turnaround of the business. The second thing that it does is, it jointly aligns our interest to fund CapEx and that's something again that will support our operational turnaround. Third, it allows us the ability to streamline the portfolio. Now between 15% and 17% of the portfolio can be optimized over the next year or two and that is roughly $30 million of base rent for us. We will work collaboratively with Ventas to identify the communities that may be better positioned with another operator and that would allow us to get a rent credit equal to 6.25% of the sales price of those communities reducing our rent by up to $30 million under the agreement. And what I will say about this is, while it doesn't reduce our coverage issue all at once, it does allow us to improve our coverage over time and it gives us the ability to take advantage of the operational turnaround that we have in the business. So we think it's a fantastic transaction for both Ventas and for Brookdale.

Cindy last question for me. As I think about the leading indicators in your business, I know we've talked about employee retention all these things, where is your confidence going from that these will translate into P&L benefits as we get into '19 and even through '20?

I feel great about it and I have very high confidence. One of the things that really makes me feel good about the first quarter is we had improved retention in both our Executive Directors and our Health and Wellness Directors and that retention improved by 4% year-over-year. We also improved the retention of our sales director by 4% year-over-year. We've always known that stability in those top three community positions is critical to the success of our communities. Then if you look over on the operational side, if you look at the improvement in lease [ph] we had a double-digit improvement in lease year-over-year. If you look at visits, we had a low single digit improvement year-over-year in visits. If you look at move-ins, we had a low single-digit improvement in move-ins year-over-year. Our controllable move-outs also improved. And so if you think about better move-ins and fewer controllable move-outs that translates into higher occupancy which translates into more revenue and higher RevPAR which improves the performance of our communities. We believe that by having the best people in the industry, we will absolutely drive better returns for our shareholders.

All right. Sounds good. Thank you.

Bryan.

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

Hi, Joanna,

Hi. How are you? Thank you so much for taking the question here. So actually quickly on the Ventas transaction, how do these new escalators compare to your prior escalators?

So Joanna this is Cindy. What I will say is that escalators that are in the lease are lower than the escalators that we traditionally had in the Ventas leases. Now you can't look at in the aggregate because we have rent credits and we also have given Ventas additional churn, which we didn't have before. For Ventas, what they got is better credit quality and a longer term lease. What we got was a healthier portfolio in the short and midterm, which will also allow us to capture on a silver wave of seniors aging.

All right. I mean I assumed that it would be better otherwise. I guess, you've would have flag those numbers in the press release, I just want to ask whether there is a specific number you can give to better understand and you might not want to talk about that. But an overall I guess what you said now with the lease portfolio what's the weighted average of your lease escalators, how should we think about that going forward?

We haven't really published the weighted average of lease escalators. But what I can say is the Ventas is more of a CPI multiple or 2.25% and that is lower than some of the escalators that we have in our other leases. Again, I think what is good about this transaction for both Ventas and Brookdale is aligned our interest. So Brookdale gets the ability to in a short term and for this operating cash flow we get a longer term lease maturity. We align our capital interests. And what Ventas gets is more security and they get a very healthy portfolio for the long-term. So we think overall this is an improvement to our lease portfolio and something that's good for both our shareholders and the Ventas shareholders.

Great. Thank you. And then on the other topic in terms of the guidance and what's reflected in the outlook there that you talk about it also reflects the pending or planned sale of 30 assets. So what timing you assume there is it sort of towards the end of the year so should we assume that this happens by maybe the end of third quarter and some of the EBITDA will come out in fourth quarter. Is that the right way to think about it? Because also I appreciate this slide on the - I guess the size of the asset the $30 million annually EBITDA, so that's what I'm trying to get. How much of the $30 million EBITDA you assume is coming out in '18?

Joanna, it's a really good question. We would expect that to come out near the end of the year given that we just announced the asset sales as part of our strategy in our yearend call. It takes a little while to market those. We are working aggressively and we would expect to close hopefully by the end of the year.

All right. And then lastly quickly follow-up on the comment around the occupancy for the year. Do you still expect us to be down obviously grow with some seasonality there. We heard from some peers talking about the new asset openings. So is there something you see there may be in your market as well where there still as coming online, but it just takes longer. So what I'm getting at, how should we think about 2019 sort of occupancy progression I guess as you exit 2018?

Yes. So what I will say in 2017 and 2018, certainly the supply has been heaviest in Assisted Living. That's where it's been most intent. And our inventory growth is up 4.7% which was the second highest growth since the fourth quarter of 2016. Now there are signs that AL construction as a percentage of the inventory has peaked and the construction as a percentage of inventory is improving, which we think is good for the longer term. And our AL construction as a percentage of inventory is actually down 60 basis points from the Q4 of 2017. So what I will say is we think that we will be down slightly in occupancy in 2018. We expect to build in 2019 and then by 2020, we are going to capture the full benefits of having a more normalized operating environment and having our full operational turnaround plan executed.

Great. Thank you so much.

Thanks, Joanna.

[Operator Instructions] Your next question comes from the line of Chad Vanacore with Stifel.

Hi, Chad.

Good morning, Cindy. So you had mentioned that you expect same store occupancy to be slightly down in the year. What kind of occupancy range is encompassed in that slightly number? And then can we assume that occupancy drops from our first quarter, second quarter then improve sequentially in third quarter. I think you covered part of this, but I just want to make it explicit.

What I will say is slightly, is slightly that is much guidance as we'll give on that and normal seasonality is down first quarter, down to flat second quarter with improvement in the back half of the year. And that's that we've modeled our year to be.

All right. Forgive me for trying.

It was a good try Chad.

You also made a comment that you expect the end of the year could be higher year-over-year basis. Can I take that to mean that you meant fourth quarter of '18 should be higher than the fourth quarter of '17? And is that on as reported basis or is that on as adjusted basis?

Chad, what I will say is cash flow, adjusted free cash flow on an as reported basis should be higher than adjusted free cash flow on an as reported basis for Q1 2017. Thanks for asking that clarifying question. I think it's a good clarification for everyone and I should have been more clear in my comments.

Okay. And then just, the Ventas agreement, it stipulates a $7 a unit per year of CapEx with Ventas picking up whatever's on above 1800, is that right?

It is. And what I will say is, traditionally we've spent over $2,000 a year on CapEx. And so our intention is not to transfer the normal operational maintenance type CapEx from Ventas to Brookdale. What we're trying to do is to align our interests, so that when we want to improve the portfolio in the community and get a better positioning that we're partnering with went Ventas to get that CapEx into the communities, so they operate at their best possible level, and that again, is good for Brookdale and good for Ventas.

Okay. So in your assumptions this doesn't mean that you're expecting any and much increase in 2019 on a per bed basis, would that be right?

No, not at all. Not at all.

So is there a way we should think about 2019 CapEx with the dispositions, total CapEx should be going down?

So total CapEx should be doing down as a result of dispositions. Now, we've got to look at our per-unit CapEx, and one of the things that we have been doing is really spending a lot of time looking at our communities. Once we get our final real estate strategy defined and we know exactly what's in our communities, we want to make sure that each community is best positioned in the community. And so we're still looking at what CapEx we might spend to make sure that our communities are best matched with the community they operate in for the best chance for a nice return for shareholders.

All right. And then just one last one. So you mention home health, it continues to be a challenge. And then, you also intimate somewhere in the press release that you would like to expend parts of the ancillary platform. So can you parse out how you expect that business to improve and expand?

Yeah. Let me start with the last part of the question first. Our hospice business is a fabulous business and it's something that our residents really benefit from. So what I will say is, we are investing in expanding that business. And as you buy new licenses, what happens is you've got to build your case load. And so, as you do that, there's a bit of a margin drag, but it definitely creates value over the long term. So that is something that creates a little margin compression. We'll continue to invest in that business. Now during the first quarter, we saw a decrease in our home health episodes and that decrease was attributable to a few things. Lower inside the walls penetration, as well as a change in our mix where we are operating fewer therapy visits than we traditionally have, which affected our rates as well. Now we would expect our BHS business to grow year-over-year, and that's reflected in our guidance. But our first quarter was a bit softer than we wanted it to be.

All right. I'm just going to sneak one more in here, because I can't remember if we got - if we did this. So could you quantify the flu season impact that I assume investors going to want to know?

Chad, it's a great question. So we believe that the flu season had a 50 basis point impact. And now, what we believe, based on our experience, is that, when you have an elevated death rate as a result of the flu that impact follows you all year long. And so we've estimated that, for the full year 2018 the higher than normal death are about $11.4 million of revenue impact, about $7.5 million of adjusted EBITDA and cash flow impact. And that compare to a more normal flu season, for reference, probably 2016 was a normal flu season, 2017 was a little elevated.

All right. That's if for me. Thanks.

Thanks, Chad.

Your next question comes from the line of Frank Morgan with RBC Capital Markets.

Hi, Frank.

Good morning. Hey, I wanted to follow-up on the question on the home health care and hospice business. We certainly can't ignore some of the valuations that are going on out in the marketplace right now anywhere from 13 times to 15 times EBITDA for hospice assets and even some home healthcare mixed in there with it. So I guess, does that in any way those kind of valuations in any way weigh with you in terms of decisions about, mean obviously, seems like this is an area you want to grow, but at the same time you can fetch a lot of value for that business today. So I guess I'm just curious considering the options given where valuations are the ready buyers, does that in any way concentration or are we absolutely positively going on this path to grow and develop hospice and home health?

Franks, thanks for pointing that out. It's good to know that hospice is a very good business and it's very valuable, and so we believe that providing those services to our residents is really important for shareholders and that's why we want to continue to grow the hospice business. And the most important to me is making sure that our residents have the right services and so that's what I would focus on.

Okay. And then in terms of the improvement you expect the momentum you saw early in the second quarter. I'm just curious is that - would you characterize that being driven more by just the market overall, or is it specifically in terms of your sales strategies? Any kind of color where you're seeing the most improvement by service line or any color there would we appreciate it? And then just on the issue of concessions to hopefully drive volume growth what kind of programs, and how aggressively are you involved in that concessions? Thanks.

Thank you, Frank. Let me start with sort of the momentum. I actually think our operations strategy is starting to take hold, and the reason that I think that is driving improved results since we've got better retention of our top community leadership. We have more leads, more visits, more move-ins than in prior year. That translates into occupancy. At the same time controllable move outs are improving, which also drives occupancy. So despite operating in a very difficult macro-economic environment, I think the things that we are doing are moving the business forward and I feel really good about that. Now with regard to concessions, one of the things that we've looked very careful about is how we're selling into the market and how we're translating that into value for our shareholders. If you go all the way back to the third quarter of 2017, our mark-to-market was negative 6% in terms of what a new resident would pay compared to what the prior resident of that particular unit paid. Now in the fourth quarter, we improved that to between 2.5% and 3% so we made some progress in Q4. In Q1, we improved that further with the mark-to-market was only a negative slightly over 2%. So I think we're continuing to focus on selling the value that Brookdale delivers to its residents. It's a very competitive environment. But we're making good progress with regard to price.

Thank you.

Thanks, Frank.

Ladies and gentlemen, we have reached the allotted time for question and answers. Are there any closing remarks?

I want to thank everyone for joining us on our call this morning. We very much appreciate your interest in Brookdale and look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.