Good morning, ladies and gentlemen. My name is Jerome 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 Release Call. All participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference will be recorded for replay purposes. I would now like to turn the call over to Kathy MacDonald of Investor Relations. Please go ahead.

Thank you and good morning, everyone. I'd like to welcome you to the second quarter 2020 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 filed with the SEC from time to time, including the risk factors contained in our Annual Report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the release for the full safe harbor statement. Also, please note that during this call we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brookdale.com/investor and was furnished on an 8-K yesterday. 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 second quarter earnings call. I want to start by saying thank you to everyone who is making a difference to fight COVID-19. Those on the front lines, fighting to protect and save lives, the researchers working on vaccines and to each of you who make a difference by doing your part against the greatest public health emergency in the past century. This includes our inspiring associates, who continue to work tirelessly to help ensure the health and well-being of our residents and patients. Before I talk about our operations, I want to discuss the most significant transaction we completed since the beginning of our turnaround. In July, we completed a new multi-part transaction with our largest landlord Ventas. We believe this transaction is a positive outcome for us, reducing our future lease payment by approximately $500 million over the remaining lease period through 2025, lowering our debt and improving our cash flow. Prior to the Ventas transaction, we built liquidity that enabled us to make an upfront payment with an approximately one-year cash flow payback. We believe this transaction improves Brookdale's financial foundation during an unprecedented time and better positions us to create long-term value for our shareholders. Turning to operations. Brookdale's top priority remains helping to protect the health and well-being of our residents, patients and associates and we will not let up on this diligence. Throughout this global pandemic, Brookdale has provided essential and high-quality care and services and we will continue to do so. Our commitment to health and well-being has required personal sacrifices that were unimaginable, just a few short months ago. And yet we continue to find inspiration and successes in our operations. The three I'd like to…

Thanks, Cindy. I'll start with a comment on reporting. We made the decision to include COVID-19-related income and expenses within all results. To make the impact of the pandemic clear, we added a summary page in the supplemental deck to provide COVID-19's financial impacts by segment and by financial line. Now, I'll go through a few financial highlights. In senior housing, the month-over-month occupancy declines slowed as we progressed through the second quarter. However, as new COVID-19 hotspots in the U.S. increased, in July our month-over-month occupancy trend stalled, due to move-outs returning to a normal level. Since April, we saw sequential progress in the Health Care Services segment, Home Health's revenue decline slowed, and Hospice's revenue returned to growth in the second quarter. Our June 30, liquidity improved to $600 million. Even with the expected uses of cash, we are comfortable with our liquidity position. And our recently announced transaction with Ventas also improved our capital structure by significantly increasing our lease coverage and long-term cash flow, eliminating all financial covenants from the Ventas arrangement and monetizing assets at an attractive valuation. Let me provide more color related to COVID-19 on a reported basis as summarized on page 4 of the supplemental. We included a line for estimated lost revenue to provide a perspective of the coronavirus impact. To provide further transparency, we are recognizing government grants on the other operating income line as we satisfy the conditions of the grants. In the second quarter, we recognized $27 million of grants income. The majority of the grants were related to our Medicare business, which is largely in our Health Care Services segment, and a small skilled nursing section and senior housing. Brookdale and the trade associations continue to advocate for the senior housing industry to be prioritized for future…

I am very proud of Brookdale's everyday heroes, our residents, patients, families and others who have rallied to focus on the things that matter most to our residents and patients as we take actions to help protect them. COVID-19 is a formidable enemy and the actions that each and every one of us take matter. Our residents, patients and families all play key roles by adhering to our high safety measures. We are stronger together and we've been eternally grateful for the encouragement that our residents and associates have received from residents families and other loved ones. As the country approaches a new normal, I believe there will be a better awareness that Brookdale is a leader in health protection protocols in senior housing. Families would want their loved ones in a community that they trust to provide high-quality care and Brookdale has demonstrated that we can do just that. We are operating from a leadership position and we believe we are taking the right actions to position Brookdale to create long-term value for all of our shareholders and other stakeholders.

Jerome, this is Kathy. Please open the line to questions. Thank you.

[Operator Instructions] Your first question comes from the line of Brian Tanquilut.

Hey good morning guys. Thank you for all the details you have provided today. So I guess my first question, Cindy. With the Ventas deal you highlighted at the beginning of your opening remarks, how are you thinking about the economics that you gave up to get the rent concessions? I mean you gave up warrants into Brookdale and some upfront cash payments. So just wanting to get the -- your perspective on making that decision to make that move to restructure the lease today in the way that it was restructured?

Good morning Brian, thank you for the question. We're very excited about the win-win transaction that we announced with Ventas and we're grateful for the Ventas' team working with us on this. There's no question that this transaction improves our financial position. The rent reductions that we received are significant and permanent and they total more than $500 million of rent reductions. Importantly, we eliminated the financial covenants and removed burdensome longer-term change in control provisions including extending an above market lease requiring additional CapEx funding and security deposits we do still have a $25 million change of control. Now given our liquidity position, we felt comfortable with providing an upfront cash payment in exchange for receiving a significantly longer-term cash benefit. Now if you know the transaction has roughly a 1-year cash payback. In addition, we sold five assets at a very attractive 6.5% cap rate with a G&A allocation and we continue to expect to manage the properties. The new debt that we assumed has a similar interest rate and yet it can now be repaid at par. And we think that the warrants are a nice alignment of interest with Ventas and Brookdale.

Got you. That makes sense. Then I guess turning to just the operational update that you gave. So obviously Texas and Florida have become hotspots. But how are you navigating that in terms of the closures that are actually happening operationally at the facility level - or I'm sorry at the community level? Is that more of market by market or is that facility by facility? And then how quickly are you able to ramp that up? I'm just trying to get a gauge of what the recovery is going to look like as we get to August and September and the back half of the year?

Yes. Brian it's a great question. There's no question that COVID-19 has created an unprecedented public health emergency. And our top priority has always been the health and well-being of our residents our patients and our associates. We're a learning organization and we're very nimble. I think that you'll see that our response is driven by a national framework with support and infrastructure that only Brookdale can provide, but the execution is at a community level. And so, if you look at Page 9 of the investor deck, we've done a really nice job of opening up our communities where there is less COVID exposure because we know it's critically important for residents to be able to see their families and loved ones. At the same time when there's a COVID exposure within the community we prevent additional residents from being exposed through our protocols. Now I'm excited about the proactive comprehensive effort we made test all residents and patients at our communities. We think will provide a very big long-term benefit to the communities because if you can identify asymptomatic people earlier you can prevent the spread. And over the long-term that will make your communities much safer and will protect the residents in a better way. But again, we will open our communities up one-by-one as it's safe to do so always in accordance with best practices and state and local guidelines.

Cindy, yeah, as I think about just the broader market, right? There's certainly a stigma against field nursing facilities right now. And rightly or wrongly some people bucket, senior housing, assisted living and independent in the senior housing -- in the skilled nursing or nursing home bucket. But how should I be thinking about the structural integrity of the business in terms of defensibility against this concern, right? I mean, I know you have a lot of memory care assets in there that are pretty stable and residents can't really -- or potential residents can't really avoid going there or delay it for so long. So how are you thinking about just any structural changes that have happened to the industry since COVID hit?

Yes. First, it's true that there was some very negative press around nursing homes. And I think there is a general confusion in the market about the difference between nursing homes and senior living. So I think the first element is education. We have had very strong infection control protocols within senior living and our outcomes across the industry are very good. Every time we talk about the infection rates with third-parties, they're always amazed at how effective we've been to help keep COVID-19 out of our communities and limit the spread within the communities. We've got a great sales team that cultivates relationships with future residents even while communities are closed to move-ins. And we've done a lot of market research really understanding sort of what residents and prospects want and how they think about senior living. And it's important to note that the vast majority of prospects are still interested in senior living. Now let's face it, independent living is a lifestyle decision. And so as you were thinking about moving into independent living as a prospective resident when the communities were closed down, a lot of the elements of the lifestyle that you were looking for weren't available. But we're very excited that now the vast majority of our communities have gone back to that quality of independent lifestyle. They have small group activities that are less generally. They open the dining rooms to small groups as well. And so we can offer that enhanced lifestyle to independent residents again. And if you think about our assisted living and our memory care that is really the product. It's an essential service that supports seniors who no longer have the ability to successfully age in place at home, and so that has always been an area where the lead flow has been very strong. And we expect that to continue and to recover to its pre-COVID levels over a period of time. The fact that we're an essential needs-driven service and we serve a growing demographic will be good for the long-term. But, of course, the short-term will have some choppiness.

Got you. All right. Thank you. Thanks, Brian.

Your next question comes from the line of Josh Raskin. You may now ask your question.

Good morning, Josh.

Thanks. Good morning. Cindy. Thank you. I guess, I want to understand a little bit more around the messaging to the market around Brookdale's care protocols and your outcomes and sort of the superior results that you're seeing versus the market. And I guess, do you think you're going to need sort of widespread comfort with the industry playing on the previous question? Or can Brookdale start bringing residents in where they believe that safety is better and sort of differentiate from the market? And then sort of part B would be when and if we get to a more normalized environment post this? Is it going to matter? Do you think that's going to resonate a year or two down the road?

So I think the important thing is that health care is local. And so the first and most important aspect is the reputation of our communities in their local markets. And so our sales and marketing team are prepared to answer questions about our protocol, our very strong safety protocol and they will do that with not just prospective residents, but families as well as other referral sources, including health care professionals. And so I think that is something that will be very important over the short-term. Now I think if we look out sort of a year or two years, once the world gets used to dealing with COVID-19, I think it will be less important. But I think what will be important and an important differentiator of Brookdale is the high-quality health services that we provide. Given our size and scale, we've got more nurses than anyone. We have been very aggressive at helping our residents help manage their health care conditions. And that's something that I think will be a differentiator for the long-term. And that's something that we'll go in. It gets down to being a relationship business and making sure that we can build those connections with prospects and families. And I think that the strongest thing for us has always been the satisfaction of our resident base and their willingness to refer us to their friends.

Got you. Got you. And then just on the selling side sort of two-parter as well. Can you tell us what the difference in closing rates in sort of move-ins on virtual visits versus the traditional in-person visits has been? And then does discounting have an effect in an environment like this is price really the gating factor at this point?

Let me start with saying virtual visits are not as effective as in-person visits, but they have been much more effective than not being able to do a visit at all. And we actually know that when we contact with certain prospects at least twice or more a virtual visit, their potential to move-in has increased substantially. But we're really excited about being able to open our communities back up to prospective residents because I think that gives them a better way to build relationships within the community. Now, discounting is a really interesting question. We strongly believe that we are selling quality services for a fair price. It's fair to say that an IL is more of a hospitality model. There was a little bit of softness in our IL, but we certainly held firm in AL and memory care. If you think about moving into the midst of a pandemic, do you want to move into the high-quality operator or the low-cost solution? I would want my mom protected. I think you probably would as well. But we'll continue to be nimble on a community-by-community basis and respond to local market conditions. But we always know that rate is a stronger driver to profitability which is why we protect the rate. We think that's the right thing to do for the high-quality services that we provide.

Okay. So, did you say -- I just want to make sure I understand on the IL side, there's a little softness, but I'm just trying to juxtapose that with residents wanting higher-quality operator versus low-cost provider?

Yes. No, if you think about sort of the difference between IL and AL and memory care, right? IL is more that hospitality model. There is less need for nursing services and other personal care services. So, it's not that the quality of the operator doesn't matter, but it's not quite as big of a factor as it is with AL and memory care. The same thing is during the last three months with IL, a lot of the hospitality like services that we were providing were different. Now, I will say that our residents who started in-room dining were very excited in the early days of in-room dining because that was a break in the routine and it was like being at a resort. But when you think about having in-room dining every day you miss the socialization aspect with other residents. So, it's one of the prime reasons that people choose senior living. And so that's something that's going to normalize. And I'm excited that because we've been able to get back to small group activities, small group dining in the dining room that's going to allow us to give more of a lifestyle choice back that once drew and always does draw prospects to our communities.

Perfect. Thanks.

Thank you so much.

Your next question comes from the line of Steven Valiquette. You may now ask your question.

Good morning Steven.

Hey good morning Cindy and Steve. Thanks for taking the questions here. So, a couple of things. First on page 11 of the investor presentation, you break out the stimulus that's either been paid out to Brookdale or is currently available. And basically, from my view, it's some smaller numbers that are mainly tied to skilled nursing in your other segment as you guys mentioned yourselves. So, I guess, I was curious to hear more about the latest updates around the potential for broader stimulus relief for the overall senior housing industry that may be part of the next federal package. And I think there was a $5 billion number that was proposed by at least one of the trade organizations. And also just any color on how this might be allocated since there's no real Medicare revenue, would it be done maybe on a per unit basis or some other method based on your insights? Thanks.

Yes. Thank you for the question. It's really a good one and a complicated issue. So, let me start by saying that we are incredibly grateful for the $34 million that we have already received for targeted skilled nursing for home health and hospice. I think this is an area where HHS was able to respond very quickly, and they were able to respond quickly because they were known providers, who are basically giving Medicare revenue. And so, when it came time to make the decision to support industries that were on the front lines protecting against the pandemic they had an easy way to do so. Now the second tranche of funding that was released under the Provider Fund was the Medicaid tranche. And we talked about that a little bit earlier on a public call. Now this was a little easier than private pay, because at least they have the Medicaid provider information and they could make fund -- funding available through those provider numbers. Where it gets more difficult for HHS is private pay. And the reason that it's difficult is, because every dollar that they defer, they have to make sure it goes to somebody who really deserves it. And our industry is one that has a wide variety of licensing types, and they really wanted to make sure that they were able to devote it to people, who are actually providing care, which is why it's now focused on assisted living and memory care. Now, based on our interpretation and all of the conversations that we've had with HHS and there have been a lot. We believe that the fund is intended to go to providers that are private pay. And in the initial tranche of Medicaid funding, that if you've got a Medicaid service…

Okay. That's helpful. Also just as a quicksandy check around this, if we do some quick back of the envelope math, for whatever dollar amounts that might come in the future, Brookdale seems to have maybe just over 3% market share of the overall senior housing industry based on units. So whatever number will come out, I mean for every $1 billion of relief, Brookdale might be in a position to receive $30 million about 3%. So, I'm curious if that's a good general way to think about it right now. And also maybe you have a different number for your market share of the industry versus that 3%, I just mentioned just wanted to do a quicksandy check around that? Thanks.

Well, the way that I would think about it first and foremost is the market share is going to depend based on the type of product. And my understanding today is that the relief is really driven towards assisted living, memory care and skilled nursing. And so that is where we would expect to see funding. And if you look at our consolidated market share, I think we've got about 5.6% or so, let's say, 5% to 6% of assisted living share. We've got about 5% on memory care and about 1% on SNF. So that's kind of how I think about it. And then IL is smaller for us it's about between 2% and 3% of consolidated market share on our consolidated portfolio. Of course, you've got other communities that we manage but what would primarily affect our financial results are the consolidated communities.

Okay. That’s extremely helpful. Thanks.

You're welcome. Thanks for the question.

Your last question comes from the line of Frank Morgan. You may now ask your question.

Good morning. I guess obviously a lot of focus on cost controls. And I'm just curious though is as we seen these early signs of recovering if we get this recovery through the second half, how much leverage do you think you'll be able to maintain on those lower costs? Or do you think you'll see your cost structure basically we have light back up with that growth in occupancy?

Well, let me start by saying I think our COVID costs are going to step down markedly, as we go into Q3 and Q4. As we mentioned in our prepared comments, certainly, we've built a supply of several months of PPE and that's something that we would expect use as the crisis continues. And now Steve can take you through the specifics for the rest of your question.

Yes, good morning, Frank. You're right. Between the first quarter and the second quarter our non-COVID-related expenses did drop around $24 million, which was about 50% of revenue and we did that by flexing labor, supplies, marketing and maintenance. So when you look at the third quarter some of the costs in the third quarter that are a little bit more variable in nature. You think of labor and food etcetera that will continue to -- we'll continue to see benefits in those expense lines. As the communities loosen restrictions, we will be marketing a little bit more and we'll have a little bit more in the repairs and maintenance lines. So that will be a partial offset. As well as I mentioned in my prepared remarks that the third quarter does have some seasonally higher expenses just driven by an extra workday, extra holiday and higher utilities in the third quarter. But the bottom line is we'll continue to see variable cost reductions associated with lower occupancy partially offset by marketing and repairs. The way I think about it as well is I think of total cash. And so when you look at the reduction in CapEx, we reduced CapEx by about $39 million $40 million between the first quarter and second quarter which is also a variable help, if you will in -- from lower occupancy. We had some fewer apartment refurbishes and that's driven by lower move-ins. So that help will continue. So on a cash basis the combination of lower expenses and lower CapEx from the first quarter to the second quarter really offset the revenue decline between the first and second quarter which I think is a good new story.

Okay. Understanding you're not giving guidance at this point. But obviously a little bit of an improvement you've seen on the occupancy side, would it be fair to as we're sort of mapping this thing out to have that weighted any notable improvement? Would you say that maybe you'd be more prudent to do that in the fourth quarter? Or how should we think about that?

I think it mostly depend on the COVID-19 resurgence. And so you can look at what we've told you about our progress through each month of the quarter. And I think that is going to be one of the things that you can use to draw your conclusion.

Got you. And then just one more question. Would you remind us in terms of just building economics as we look at this occupancy environment, what your cash breakeven occupancies were either on own or lease building?

Sure, Frank. It really depends on a lot of assumptions. And in the long-term, it's a little bit different than in the short-term as well as the amount of CARES relief and COVID expense. So we do, in order to drive profitability, see occupancy increasing. And some kind of turning, flattening and turning positive, without -- in the back of our minds always keeping the wellness of our residents in mind, really will drive profitability. But in the -- kind of in the short-term, we are absolutely focused on liquidity. We will spend the right amount of CapEx. And we will spend the right amount of expense. But the bottom line liquidity of the company is something that, I'm watching. And I'm very proactive about keeping under control. For instance, we recently -- we refinanced for instance all of our 2020 maturities, which I think is something the company did proactively. And I -- that's a long-winded answer of I'm not going to -- I can't explain -- or I can't tell you the breakeven community occupancy.

There are two things that are important to remember, Frank. In terms of our breakeven has improved because of the positive win-win transaction that we did with Ventas that will reduce our lease payments, by more than $500 million, over the remaining term of the lease. And second, because of the unprecedented low interest rate environment, our financing costs for our own portfolio, is significantly lower, because we have variable financing on a significant portion of the portfolio.

Okay. Thank you.

Thank you, Frank.

Cindy, would you like to provide closing remarks?

I would. Brian, Josh, Steve and Frank, thank you for your questions. For the rest of our listeners, I want to close by saying that, we have taken swift, data-driven and critically important actions to deliver strong clinical outcomes and navigate through a very difficult period, when the majority of the world was sheltering in place. Brookdale's everyday heroes were on the front line of the battle against COVID-19, working around the clock to support the health and well-being of our nation's seniors. The work has been hard, the near-term is challenging, but Brookdale provides critically important services to our nation's seniors. And the long-term demand drivers are strong. Thank you very much for your time. Stay safe and healthy. And we'll talk next quarter. You can disconnect now.

Thank you, ladies and gentlemen for joining us today. That concludes today's conference. Thank you all for joining. You may now disconnect.