Good morning ladies and gentlemen, my name is Lee and I will be your conference operator for today. At this time, I would like to welcome everyone to the Brookdale Senior Living Third Quarter Earnings Release Call. All lines are on mute. We will open the line for questions at the end of the call. As a reminder this conference will be recorded for replay purposes. I would now like to turn the call over to Kathy MacDonald, Investor Relations. Ma'am, you may proceed.

Thank you and good morning everyone. I'd like to welcome you to the third quarter 2019 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 these factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as in the reports we file with the SEC from time-to-time including the risk factors contained in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. I direct you to the release for the full Safe Harbor Statement. Also please note that during this call, we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brookdale.com/investor and was furnished on an 8-K yesterday. Also, in today's call, when we reference same community, this refers to consolidated senior housing same community information. 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. This morning I'll provide an update on our ongoing strategic plan, third quarter results, and will introduce our five year outlook. Before I speak about our operations, I'd like to address some changes on our Board and start by thanking our two retiring Board members, Jackie Clegg and Jim Seward. Jackie Clegg was instrumental in the numerous governance changes we made over the past few years and our Director search processes, through which stellar new Directors were identified and have joined our Board. Jim Seward's strong financial acumen and his strategic oversight helped us evaluate many deals to reshape our community portfolio. As a result, we have a stronger foundation for long-term growth. During their tenure, both Jackie and Jim demonstrated exceptional leadership and expertise to guide Brookdale through significant change and provided wise counsel during a period of rapid transformation in the senior housing industry. We appreciate their time and dedication to Brookdale. Next, we are excited to welcome Vicky Freed and Guy Sansone to our Board of Directors. Both Vicki and Guy have a skill and experience which we believe will help Brookdale drive enhanced shareholder value in this time of continuing rapid change. Vicki has decades of Executive leadership in sales and marketing, a critical skillset not previously represented on our Board. Guy brings extensive healthcare and senior housing industry expertise and has advised many companies in their efforts to optimize performance. We look forward to their input and oversight as we continue a successful execution of our company's strategic plan. We also look forward to working with Guy as he assumes the Non-Executive Chairman role at the beginning of 2020. Finally, I want to thank Lee Wielansky for his leadership of the…

Thanks, Cindy. We made a significant progress in the turn around initiated last year. We are beginning to see the result through the acceleration of our same community occupancy improvement, with nearly double the sequential increase in occupancy compared to 2018. Highlights for the third quarter were, same community, senior housing revenue and RevPAR year-over-year growth continued. With a strong third quarter same community sequential occupancy improvement, our expectations remain within initial guidance ranges. Healthcare Services revenue grew year-over-year. We continued our strategic investment to enhance the quality and competitiveness of our communities, as demonstrated by the year over year increase in CapEx which is consistent with our plan. Sequentially non development CapEx was a lower due to lessor reimbursements. From a real estate perspective, in the third quarter, there were no changes and they owned or leased portfolios. 15 managed communities transition to new operators, most of which were under interim arrangements. To provide a context to the 2019 year-over-year financial results, since the beginning of the third quarter of 2018, we have transitioned 77 communities through asset sales and least terminations. These transactions negatively impacted revenue by $64 million and adjusted EBITDA by $13 million, but positively impacted adjusted free cash flow by $5 million and have the benefit of simplifying operations. As you know, subsequent to the quarter end, real estate activity picked up. In October, we announced a series of transactions with HCP. The net effect is to further simplify our real estate portfolio, unlock value and improve our financial position. Calling out some of the specifics under the definitive agreement, we will realize value from the sale of our interest in the unconsolidated CCRC Venture by generating approximately $291 million of net cash proceeds, after giving effect to debt and customary working capital preparation. Together…

Throughout Steve's and my discussion this morning, we referenced our agreements with HCP rather than health peak properties. We wish Tom and his team continued success as peak. To summarize our financial results, I'm extremely pleased with our occupancy and revenue results. Our first priority was to drive top line improvement and we are delivering on that commitment and our sequential occupancy growth was better than the industry. The challenges we faced this quarter with higher labor costs and rate pressure in select markets were similar to the industry. And importantly, we are delivering results within our original guidance range. I am confident that the positive momentum, we've seen over the past few quarters will continue. We have made a monumental shift in improving the culture over the last 20 months. Our progress is evidenced by the nearly 2,600 associates returning to Brookdale this year. I am grateful for the amazing and dedicated team of associates that take care of our residents and patients everyday, during ordinary days and extraordinary days like those that we spent protecting our residents during the hurricanes and California wildfires. I know that, we will succeed because the work we do is so important. We are Brookdale and we are taking care of America seniors. Operator, please open the line for questions.

Operator: Before we get into live Q&A, I'd like to give a few more details to address a theme that came up in emails from investors last night about how we will achieve full year guidance, which implies at least a $20 million dollar sequential improvement in EBITDA. First, we expect sequential top line growth. Occupancy momentum is a big part of our expectations. Occupancy grew each month in the third quarter and also grew in October. Given us momentum, we expect occupancy growth in the fourth quarter. In addition, we expect rate to stabilize as many of our new residents will receive 2020 rates when they move into our communities. For the most part in place, residents will receive their rent increase on January 1. Secondly, senior housing operating expenses will improve sequentially. Third quarter, expenses were impacted by seasonality. This is due to higher utility and maintenance costs associated with warmer weather. There were also some items that impacted our 3Q results that we do not expect to recur in 4Q. First, our third quarter included about $1.5 million of costs associated with the hurricane season. Second, we intentionally increased our internal marketing spend in the second quarter to drive move-ins. We are pleased with our lead funnel and will reduce this cost in Q4. Finally, we incurred higher than expected compensation expenses. From our operational perspective, we are actively taking steps to proactively manage over time and contract labor costs. And we're expecting improvement in Q4. And lastly, we expect that our health care services margin will improve from an unusually low quarter. During the third quarter, we had to work through some issues related to a backlog of receivables that was caused by the central intake initiative. This distracted our sales team and we lost some revenue as a result. We also saw some disruption in visits due to the hurricane. Operator, we will now open up the line for questions.

[Operator Instructions] Your first question is from Jason Plagman. Your line is now open.

Hey, good morning. Thanks for – Steve for the additional color on the bridge to Q4. As far as – it sounds like the revenue contribution is a key portion of that bridge. Are you willing to share with us where you ended the quarter from an occupancy standpoint? You know, I'm assuming that was higher than the average occupancy throughout the quarter if it was increasing each month, that would help us just you know, kind of model where – what the trajectory as you enter Q4?

So Jason, we traditionally don't share our ending occupancy, but it's important to know that we did increase occupancy every single month during Q3. So it is fair to assume that our ending occupancy exceeded our average occupancy and we're very pleased that that occupancy growth continued into the fourth quarter with occupancy in October further building momentum, which is why we feel confident in saying that our fourth quarter occupancy will actually show occupancy growth. That's unlike most of the prior years. In three of the last four years, we saw a bit of an occupancy decline in Q4, but because of the strong momentum, we have going into Q4, because of a lead funnel, because of the improvement and in proving our sales conversion, we believe that will grow occupancy in Q4.

Okay, fair enough. And then, on the cost side, you know, what initiatives are you focused on in the near-term to offset the wage pressure that you're seeing with overtime and premium labor? And then kind of longer term what gives you the confidence that that the wage growth will moderate next year given you know, the low employment unemployment environment that you did mention?

Let me take the second question first, and then I'll go to the first question with regard to why we believe that we will be able to moderate our labor growth in 2020 and beyond. Remember, the 2019 was the third year of an -- industry investment in wages. And so we do expect wage rates to increase in 2020. And I don't think it'll be either 2.5% to 3% that usually you saw merit increases. But we believe that our increases will be more in line with the industry. Just a reminder, NIC showed that wage rates in Q3 were up 5.9%. Now that is a delay. They actually report in Q3 the results through Q2. So the industry is seeing significant pressure. But we're taking that into consideration when we set our rights for 2020. And as we've demonstrated in 2019, we have very strong success, when it comes to passing rate increases through to our resident base, particularly when they are driven by labor cost increases. Now turning your first question of what do we -- what are we doing to deal with the wage pressures. However, the first and most important thing is a true focus on controlling overtime and contract labor. Now we have to get to the root cause of what drove this up and in 2019, and in Q3 in particular. One of the things that we've seen is it's the tightest labor market in the last 50 years. And so making sure that we've got appropriate staff in our communities is the most important thing that we can do. So in two large markets, we've already hired recruiters to help staff, the communities that takes some of the pressure off of our community associates. And when you've got an appropriate pool of talent, then you don't have to go to overtime, which remember, it's 1.5 or 2 agencies, which build a profit margin into the labor costs. So that's the first thing that we've done. The second thing that we've done is we've reassigned some of our corporate recruiting resources to assist additional communities in achieving their appropriate staffing. The third thing that we have done is we have our division presidents, our regional vice presidents, our DDOs actively managing overtime in contract labor, so that they can see communities that have increasing trend. And they can take additional action by supporting them above community level to control that over time. The most important thing that we can do is make sure that we improve our retention rate of our associates. Because if we keep the same workforce, it's more efficient, you don't have all the hiring costs. And we are making great progress in that. So those are some of the things that we're doing. Certainly there's more but that was just a sample of what we're doing.

Thanks. That's helpful.

Your next question is from Josh Raskin. Your line is now open.

Thank you. Good morning. Just want to talk more broad strokes on 2020 and, you know, understanding the just the free cash flow commentary and sort of juxtaposing that with the pro forma presentation, the slides that you guys always give as well, but, you know, should we be thinking about total revenues up a little bit, even in light of some of the portfolio changes that have occurred year-to-date? And then any views on adjusted EBITDA, you know, just seems like the divestitures and changes on a pro forma basis don't really impact EBITDA time. So is it is it fair to say, yeah, revenue up adjusted EBITDA up just at least directionally.

Yes, morning, Josh. The -- if you look at same community, certainly we expect revenue and adjusted EBITDA to be to be up. As you indicated on a total reported basis, the impact of dispositions will be less in 2020 verses 2019. But even factoring in dispositions, we still expect EBITDA to be up on a year-over-year basis. The -- as Cindy mentioned, we expect similar rate increases in 2020. And we have occupancy momentum, so that's going to drive the top-line even with incremental expenses, if you drive rate at 4%, and you as an example of just illustrative, and you drive expense at 4%, and you grow occupancy that delivers 67% NOI growth. So that puts it in perspective as an example of a year-over- year math to get to growth. The EBITDA -- the transaction, we did with peak will be a slight headwind associated with EBITDA. But will – that is going to be more than offset by the good guide. The other impacts on EBITDA, we alluded to them in the investor presentation it’s about $65 million of net cash proceeds, the $100 million these are all driven by one timers -- $100 million of fee termination revenue that we will receive. That's a one-time EBITDA impacting good guide offset by one-time loss of the management revenue associated with the peak transaction, and then estimated transaction fees of $13 million.

And just, I want to discuss what Steve said. It's important to note that we think the competitive environment is significantly better in 2020 than it is 2019. We have always said the new openings affect us for about a year after a competitor opens, and in the third quarter, our opens were 53% lower than the peak in the second quarter of 2017. And they were actually down sequentially 26% from the second quarter of 2019. So the backdrop of having an improving industry is critical to our success in 2020. The second thing that's really critical to the success is improving occupancy momentum. As you know, one of the biggest challenges that we've had in our turnaround was really getting our top-line moving in the right direction, because occupancy is really the engine that's going to fuel the long-term growth that we have for the company. And we have a huge opportunity, more than $100 million to capture over the next several years. The progress that we made in the second quarter and the third quarter, and the progress that we expect to make in the fourth quarter will set us up for improvement in 2020. I just want to reiterate that move-in in the second quarter were up 6% year-over-year, in the third quarter that accelerated to 8% year-over-year. And so showing that we can actually improve occupancy in the communities will give us much more confidence in the 2020. Now certainly we are not happy with our expense performance in this quarter. We do think we understand the unusual things that affected the quarter and the areas where we just need more operating discipline. But the hardest part of the turnaround is really getting the top-line moving. And that gives us confidence going into going into 2020.

That's helpful and actually a good segue. So the other question I have is just around this five-year plan, and I guess the two questions would be, how much of this plan is based on the environment getting better and what you're seeing from NIC data and anecdotal data around supply versus demand versus sort of things in control of Brookdale? And then from a timing perspective, why now? I think typically, we see these at the start of the year with a new budget process when operations are much more settled, certainly not coming off of a quarter like we just saw. So what was the catalyst to introduce the plan today relative to beginning of next year, et cetera?

That's a really good question. We sat down with our board in the summer and went through our strategic plan for the next five years. And that was really important many things that were coming together, at the same time, our portfolio restructuring is largely complete. The HCP transaction was something that looked like. We were going to get it across the finish line. We were happy to announce that October 1. So we had more certainty around what our portfolio would look. I think the other thing that we had been waiting for to announce our outlook is we wanted to make sure that we saw inflection in the supply demand macroeconomic condition, because the one thing that we know for sure is, it's hard to grow occupancy when you're in the midst of a full fledged competitive headwind. And so, we've been looking at our proprietary analysis, all around our communities for the last 20 months, trying to figure out exactly when was the competitive environment going to turn. We called that it was going to turn in 2019. We now have objective evidence both in the industry and around fulfilled communities that it has turned. So that was one of the factors that that gave us the confidence to sort of set it forward. I think the second thing is we recognize that not having a long-term outlook, make it difficult for investors to know what to expect from us. And so, as soon as we could see our way forward to having the right team in place to drive the success, and having the backdrop work, we wanted to get it out as quickly as possible. Now, as you would expect, we'll give you more details as time passes, including an Investor Day next year. But we wanted to share as much information as soon as we can, because we know the value of our company is based on what you think we will do over the long-term.

All right, perfect. Thank you.

Thanks so much, Josh.

Your next question is from Joanna Gajuk. Your line is now open.

Good morning. Thank you. So, two topics. So first, the commentary around the healthcare services segment. So, sounds like there's some of the things that were occurring in third quarter, you view them temporary. So can you -- is there way -- is there any way to set it up because margins are clearly very 4% in Q3, just to kind of, help with the bridge from Q3 to Q4 in terms of how quickly you think the margins could improve in that segment. I guess if this improvement you expect sequentially between the two quarters.

Joanna, that's a very fair question. There is no question that we were disappointed with the performance of our healthcare services segment in Q3. Having said that, we think that a lot of the issues related to decentralized intake initiative, which allowed receivable to grow over the last year roughly, and during the third quarter, Anna-Gene and the team with significant efforts to really bring those receivables down and to build that. Unfortunately, what that meant is that sales people we had a sense on collecting documentation with the bill prior receivable instead of selling they had an impact. Also, when we got into some of the services, we realized that we didn't have all the documentation with the bill, so we lost some revenue. So, I think that part of it will certainly go away in Q4, because we've worked so much of the backlog into three. Now, the part that also impacted that is our home health centers was down, largely related to organizational turnover, but there was some hurricane effect, as we had a big presence in Florida. And patients were reluctant to schedule a visit when they weren't sure, if they were going to get hit by a hurricane or not. So, we have pretty good. We have pretty good confidence going into Q4, and we're thinking that that will be more streamlined. Our first two quarters of the year that for margin than for Q3.

Okay.

And then maintaining -- we're maintaining our full year revenue guidance at the low-end for its healthcare services.

Okay. Now that's helpful there. And the other topic you mentioned, for the -- you have been part of the business, the pricing was pretty good. But I guess you mentioned that there was still some discounting in the quarter that was happening. So, any color there, and I guess, going forward, it sounds like you were implying up this. You do not expect. Well, you haven't been signing much of a discounting in the rest of the year.

Yes, Joanna, there was some discounting in select markets, particularly in the south coast. There competition was pretty aggressive, particularly around all inclusive care. Now, having said that, we still believe that we have very strong pricing power on nationwide basis. And we're still very pleased with our year-over-year RevPAR growth. The fact that we got 2.8% RevPAR, that's actually rates that we received, not our asking rates. Sometimes there's some confusion about NIC. And they're asking rates, not realized rates. So we felt like we had strong rate pressure. And we've done a great job over here at convincing our residents of the value of the services that we provide, as well as the need to increase rates due to higher labor costs, and we think that will continue into the year.

So what's the magnitude of the rate increases you expect for in-place residents?

We haven't shared that yet. But certainly, they will be significant.

Right. Because you made it sound like you expect the labor going to inflation overall, to be above maybe the long term averages. So maybe the price, it sounds like you will try to push a little bit higher pricing.

Our expectation is that the labor rate increase will be less than the rate increase that we pass through to our revenue.

Okay. That's great call. Thank you.

Thanks, Joanna.

Your next question is from Chad Vanacore. Your line is now open.

Good morning.

Good morning, Chad.

All right. If you'll allow me, I'm going to retread some territory here. In Steve's commentary, you said he expects supply demand equilibrium to be maintained through 2020. Given that new supply still exceeds demand, there's an overhang from inventory and lease up. What gives you that confidence and if you could be a little more granular, that will be equilibrium in 2020.

Yeah. So what we do is we look at our proprietary data analysis that is around the Brookdale specific communities. And if you look at page six of our investor deck, you can see a few things. First of all, if you look at the construction pipeline around our communities, it is 14% lower than the first quarter 2018 peak. That's pretty important. If you look at the opens around our community, and remember that opens affect us for 12 months, opens in Q3 were 53% lower than the second quarter 2017 peak. And sequentially, they came down 26% from the second quarter of -- I'm sorry, 35% from the second quarter of this year. So we are seeing around our communities, the number of opens really come down. So what that tells me is, we've got much less competitive pressure around our communities. And that gives us great confidence in 2020. Now, I'm going to be honest, there are very different perspective based on where your portfolio is located. And if you look at some of the public information, Welltower was the first to come out, with having less competitive pressure around their communities and there are other REITs who are saying that they are going to continue to have competitive pressure longer than most. Now remember, that because we have so much assisted living, we have been in the piece of the storm longer than anyone else. And so, the fact that we're now coming out of it makes us feel just great about the future.

All right. And then I just want to take a look here at your long term growth outlook. So given your RevPAR assumptions and that five-year outlook, that looks like about a 4% CAGR. How does that compare with what you expect 2020 rate increases be? And then, what timeframe do you think it takes you to get to the midpoint of that long term outlook?

Sure. You're right about 3.5% to 4% CAGR on the five-year plan. And we're not really detailing the RevPAR or the rate growth? You've heard commentary that it's going to be significant and it's going to be -- we're expecting it to be greater than the wage rate increases. And the EBITDA --

Hey, Steve, just for clarity, you mean, in-place residence or on all total residence?

I was talking mostly in place residents, the price increases that's going into effect, generally speaking, in January.

Okay. Sorry and maybe Steve if you go for that?

Sure. And then, the plan for the EBITDA growth is accelerates over the next several years. So it's and that's, that's really all. I'll comment on that. As Cindy mentioned, will have an investor day and will give more insights, including insights into some of our long-term initiatives like healthcare, integrated healthcare, had some at the investor day next year.

All right, but for our purposes, should we be thinking about like a normal distribution of improvement over that five year period? Or should we be thinking more hockey stick like?

Well, I wouldn't say hockey stick, I would say continued improvement. Remember that, it takes a while for authenticity to build that, builds on itself and so, as occupancy grows, so its, profitability.

All right, that's it for me. Thanks.

Thanks, Chad.

Your next question is from Steve Valiquette. Your line is now open.

Great, thanks. Good morning, Cindy and Steve. So I just want to come back to the 4Q 2019 outlook for a moment. I guess two questions around that, you know, first the color you that you gave on what will drive some of the sequential EBITDA improvement is definitely helpful. Because I'm curious within all the factors that you've mentioned, you know, whether it's the rate updates, or higher occupancy, or expense control, or better health care services resolved. And which of these do you think is the lowest hanging fruit that should be the easiest to achieve? And then the second question is, when do we look at the last three, four years or so, in the adjusted EBITDA actually did trend down in the fourth quarter versus the third quarter. So I don't know, if there's anything worth pointing out just seasonally or other factors that, you know, drove that in the last three years or so, that you'd have to overcome over and above the things you're talking about the drive the sequential improvement in EBITDA from 3Q to 4Q this year. But just wanted to sort of pick your brain and what happen in the last three years in terms of why EBITDA went down sequentially in 4Q verses 3Q?. Thanks.

Yeah, those are really good questions. So the first thing I'll say is that, the pattern of occupancy growth in the third quarter has a lot to do with what happens in the fourth quarter. And because we sequentially built occupancy each month during Q3, as well as October, that helps us a lot with regard to the fourth quarter being up or down. And so we're feeling very good about the fact that it's going to be up, with regard to occupancy. With regard to the things that are the easiest to bridge from Q3 to Q4, the first thing is the things that we had to clean up that impacted Q3 this market is fat. So in energy -- and the team have worked a lot of the backlog of AR caused by the central intake project. And so that is behind us and won't happen. The Hurricane expenses of a million and a half that behind us, that won't happen. Every third quarter, we have higher electricity and water costs, as a result of hot summer weather that won't happen in Q4. So, all those things aren't really something that we actually have to do to the business to make Q4 better. They are just unusual expenses that we have in Q3. That won't repeat. With regard to Q4, getting our hands around as labor is the most important thing. That's going to drive our operating expense improvement, that 65% of our costs. And our teams are all over it. It's something that they are focusing on, on a daily basis. And it's been a tough labor environment. But we are, having to, just be much more conscious and to put additional recruiting resources to make sure that we're staffed in the communities. And then, with regard to marketing services, we are very happy that we made the marketing investments that we did our moving look great. Our lead funnel looks great. But we also recognize that between Thanksgiving and Christmas, people are worried about Christmas gifts, and the holiday mail is just overwhelming. So rather than to compete with that, holiday clutter, we are going to work the pipeline that we have, and do a more normal investment in marketing spend. So I think all of those things together will help us with Q4. And then add on, that we start selling our 2020 rates to new residents during Q4, particularly November and December that will help our rate as well.

Okay. That's definitely helpful color. Thanks.

Thanks a lot.

Your next question is from Frank Morgan. Your line is now open.

Good morning. Apologize. If it has already been asked, I hop down late. But just curious, I did hear your commentary about – with all the divestitures and scaling down the size of the company that would be at an opportunity to sort of re-scale, corporate G&A, but just curious about what type of opportunity it is and what kind of timing or magnitude might be involved there and how that might contribute to EBITDA growth over the longer term? Thanks.

It's a great question, Frank. And we have been pretty successful historically on scaling G&A, we've usually says that it takes 6 to 12 months after the adjustments in the portfolio to get cost out of the business and given that we are targeting having the transaction with peak in the first quarter, we put $5 million into the pro forma and what that reflects is that we are going to transition a number of our G&A associates to a new operator to support the community and maintain continuity for both the associates that are out there. So that is faith. At the same time, Diane Johnson May, our EVP of HR, Steve, and the operators are spending a lot of time to redesign our organization. Given the massive, massive reduction and complexity associated with the sales, the entry fee communities and some of the other changes that we've made in the portfolio, it gives us a chance to really think about what is the most streamlined and efficient operation that will get the best support to our communities. And we're excited about that work. Now, my guess is that'll be more in the back half of 2020, then the front half, but it's something that we're focused on working on today.

Thank you.

Go ahead, Cindy.

It looks like we are out of questions. And so let me just end by saying that we are so very pleased with our top line growth. It remains strong, and we expect to deliver results that are within our initial guidance range. Our third quarter was impacted by elevated costs in a few areas that we don't expect to occur in the fourth quarter. In addition, we are very focused on actions that will help mitigate the impact of a tight labor market. We have made significant progress in our strategy that we initiated last year. Driving strong top line growth is the most important and difficult part of our strategy. And we couldn't be more pleased with our industry leading occupancy growth and strong rate performance. We will build on this while focusing on improving our expense control. We have great confidence in the five year plan which we introduced today because of the powerful upside for senior living and the progress we're making to improve our operation. Thank you for joining us today,

Operator, you can now close the call.

This concludes today's conference call. Thank you everyone for participating. You may now disconnect.