Good morning. My name is Tania and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Second Quarter 2015 Earnings Conference 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. I will now turn the call over to Mr. Ross Roadman, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Tania, and good morning, everyone. Thank you for joining us for the second quarter 2015 earnings call for Brookdale Senior Living. With us today are Andy Smith, our Chief Executive Officer; and Mark Ohlendorf, our President and Chief Financial Officer. I would like to point out that all statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living’s expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living’s earnings release for the full Safe Harbor statement. With that, I’d like to turn the call over to Andy. Andy?

Good morning and thank you for being with us. Our experience continues to underscore our belief in the long-term growth potential of our company. However, our near term operating performance was below our expectations. I’m disappointed that as a result we need to revise our guidance for the balance of 2015. We wanted to tail the reasons for this revision on this call together with a ways we are addressing our integration challenges. Before doing so, I want to reiterate that we are confident that this is a near term situation. And in ultimately, we will achieve our expectations with respect to the Emeritus merger. Our original conviction of long-term potential of the Emeritus transactions remains as strong as ever. We have made and we continue to make substantial progress in integrating Emeritus into our operations. This is allowed us to identify meaningful property level operating expense statements and we expect to significantly seed our aggregate third year cost savings synergy target. However, the integration process has also been disruptive and needed to driver of our two primary challenges during the second quarter. First, our occupancy loss and second, to a lesser degree our ancillary services rollout. We experienced to 90 basis points sequential decline in occupancy during the second quarter. This partly reflects the Q2 softness for the industry in general as evidenced by industry data. The industry showed a sequential decline of 30 basis points compared to our 90 basis points decline. Consistent with the balance of the industry, we experienced the continued elevated level of flu related move outs during the first part of the quarter. However, while we did see our typical seasonal pattern with net move-ins turning positive in June. Our overall result was lighter and was more muted than normal. This time from the…

Thanks, Andy. Beginning with the results for the second quarter, we produced $0.60 of CFFO per share excluding certain integration and other costs below our internal expectations. While occupancy declined, rate held strong and costs decreased as a result of costs management and the emergence of synergy savings. During the second quarter, we saw continued pricing strength. Looking at senior living same community rate growth, the combined portfolio produced the 2.8% year-over-year increase in average monthly rates. The Brookdale same community portfolio produced a 3.8% year-over-year increase in senior living revenue per unit, while the Emeritus same community portfolio experienced a 1.6% year-over-year increase in that metric. We are using in certain markets incentives and discounts to rebuild occupancy which are more than offset by positive mark-to-market and in place rate increases. Our combined average occupancy for the second quarter declined sequentially by 90 basis points from the first quarter of 2015. We did see the typical seasonal rebounce start during the quarter. April experienced to decline as we continue to experience a higher flu-related mortality rate than average. May showed nearly flat in that move-ins as we began to turn the corner and June was net positive with move-ins, exceeding move-outs for that month. As a result, average monthly occupancy declined through May, than it was roughly flat in June. Average occupancy in July is up approximately 20 basis points from June and July like June showed positive net move-ins. Same community expenses evidenced both our focus on managing costs as well as achieving cost synergy savings. Salaries and wages grew 2.3%, primarily due to wage increases and an increase in FDEs largely in the Emeritus communities. We saw decreases in food, insurance and supplies, as procurement savings were realized. We did experience an increase in bad debt expense…

[Operator Instructions] Your first question comes from .

Good morning, guys and thanks for the question. Just wanted to touch base on Emeritus. It seems like the integration has gone, I would say much worse than I expected at this point. As we look into the 3Q, which is typically strong, do you feel like you’re getting over the hump? With respect to that, we think you mentioned vacancies filled to the point where you’re ready to actually go out and actually increase move-ins in 3Q?

Yes, Stephan. Thank you. This is Andy. Thanks for your question. Obviously, as I said in my prepared remarks, the Emeritus merger has been more challenging than we originally anticipated and certainly at this point in time, but we do see progress. We feel like we’re turning the ship around. As we – as Mark and I both mentioned, we saw positive net move ins in June. We have an increase in July occupancy of about 20 basis points and we saw positive net move-ins roughly commensurate with June and July. And so, we think we’re making steady progress and we think we’re at a point where an inflection point that we will turn positive on an occupancy-basis through balance of the year.

Got it. And you guys mentioned 60 basis points to 70 basis points through the balance of the year, but you are about 300 basis points below the industry average. I guess is there a possibility or ability to catch up to the industry average overtime? If so, what will it take to get there and how long do you think it could take to close that gap?

Yes. Certainly, we expect to close the absolute performance metrics with the industry over time. There are a lot of activities underway right now across the company and particularly in the Emeritus portfolio. For example, we’re refurbishing a 150 of those locations this year, we’ll continue at a relatively high CapEx rate for an extended period of time there. We’re rolling out the ancillary services platform across the Emeritus portfolio which gives us another differentiating factor. So over time, we certainly expect to close those gaps. The guidance that the 60 basis points or 70 basis points just to be sure we are clear on that. That is our expectation for the month of December, average occupancy above the average occupancy for the month of June. So it’s our expected occupancy growth trajectory for the second half of the year.

Got it. Thanks for the questions.

Thank you.

Your next question comes from the line of Brian Tanquilut with Jefferies.

Hey, good morning, guys. Mark, reading the press release, there is a comment here you guys made about realizing high than anticipated cost synergies for Emeritus. So can you remind us giving us concrete examples of that and how we should think about your views and how much you can squeeze how the Emeritus transactions over the next – the cost side at least over the next two, three years?

Sure. So at putting aside G&A cost for a second here and just focusing on a discussion around community level costs, community level costs structure is roughly two-thirds labor and benefits, one-third other cost items, utilities, food, other forms of supply cost and the like. We’ve been able to focus a lot of activity over the last 12 months or 18 months, particularly in the non-labor cost area identifying new opportunities to save costs. Again, utilities is a big area there, and we can say on utility costs both in terms of how the utilities are priced particularly in non-regulated markets, but also around energy saving opportunities. For example, the kind of light bulbs we use in the communities can result in a fair amount of savings overtime. Obviously, food and other suppliers are also big cost area there. There are hundreds of categories procurement there. And our team has worked on sort of a rationalizing what we buy and how we buy it in that area. And quite honestly, the savings we see in the non-labor part of the cost structure are, as Andy said I think substantially higher than we initially underwrote. Now, that we’ve had an opportunity to get into a lot of details and looking at those costs. On the labor and benefit side of cost structure, we have just – are in the process of completing the fourth wave of the integration which involves assessing all of the residents in the Emeritus portfolio, as we do in the Brookdale portfolio, which gives us the baseline to quantify labor demand and a better sense of how we would staff those communities overtime based on different acuity profiles and different occupancy levels. That process is ongoing on the labor side to quantify where we believe that it’s – I think you’ll recall we provided our initial guidance on the merger. We did assume that we did providing some additional staffing in those Emeritus communities over two or three-year time period. And that we’d also achieve some higher revenue realization, out of those communities as we quantify this demand in that portfolio. So that part of things has not yet quantified on the benefit side. But we know enough at this point based on the programs we put in place on the non-labor sides that the savings there will be substantially higher again then what we had originally forecast.

Okay. And then Mark just on the guidance in terms of – thank you for the detail giving us. What you guys think will happen in the cost side and netting everything out, but how do you think or how do you feel in terms of the visibility into these numbers at this point. I mean how confident are you in your ability to get to these targets, occupancy rates and kind of on the cost structure side?

Well, and the primary driver here is building the occupancy and the senior housing portfolio. And again, we are forecasting occupancy growth 60 basis points to 70 basis points measured on a monthly average between June and December. Our average occupancy in July was up roughly 20 basis points. Based on the admission performance we had in July, we should expect similar average occupancy growth in August. So we’ve already picked up somewhere between 30 basis points and 40 basis points of occupancy growth in July and August. Now, historically if the seasonal patterns hold, we’ll continue to build occupancy through September, October, and that things will flatten in November and December. But we are well along the way on the occupancy growth numbers to getting where we need to be.

Okay. And then one question has come up a lot for us is why is it that the legacy Brookdale assets – that group of assets, why is the occupancy worst is that set of assets versus the Emeritus portfolio?

Again, there is a number of factors here around different markets, different product mix and so forth. For example, there is a higher percentage of skilled nursing in the Brookdale portfolio. We had very strong skilled nursing occupancy in Q1. It’s kind of the built-in hedge we have in the severe flu season. And that occupancy was relatively soft in the second quarter. Adjusting for that I don’t think you would see a significant difference than occupancy in the two legacy portfolios.

Again, and then last question from me, Andy any change in their updates and what the Board is doing is it relates to the strategic review?

Well. Brian, as I said in my prepared remarks, our newly constituted the investment committee is hard at work doing that work, doing that analysis to net evaluation. I mean they are earnestly engaged. We are committed to that process, but I don’t have anything more definitive than that to say.

Got it, all right. Thank you, guys.

Thanks, Brian.

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

Good morning. You made reference to softer industry backdrop in the second quarter, as you look at where you are today and you kind of evaluate and assess your business, how much waiting are you attribute to company specific issues versus industry issues.

Well. I would say Frank, we have underperformed the industry in the second quarter and while I think that industry trends generally are a factor. The majority of our missed to our expectations in the second quarter are related to Brookdale and they are directly correlated to all of this integration activity that we’ve had in the disruptions that it has caused. So there hasn’t general softness in the industry but again, the industry was down 30 basis points and we were down 9 basis points.

Okay.

Now as I said, Frank, we are confident that these vacant units that we have here are both an asset and an opportunity for us. We now we are going to fill them up. It simply a matter of time and how quickly we can do it, we are confident. They were on the right path and we’ve turned – we’ve reached an inflection point in our turning it around.

Got you. And I think Mark made referenced to already seeing about a 20 basis points improvement in occupancies from the June level. So it is I think about the continual ramp up is I’m sitting here in the outside, if I’m looking for benchmarks of how you open and we get up to that, that extra 60 bits to 70 bits of occupancy by the end of the year. What are the kind of milestones we should be looking at, is it just now that you’ve got or now that you are filling these vacancies with executive directors at the field level, is it something going on in the marketing staff, is it that the adjustment of your referral sources to this national branding. I mean like what would be the sequence of events that need to get better and what are the once they are most likely to get better first, so that you get to this 60 bits to 70 bits our occupancy and then go higher from there.

Well. There are number of factors at play obviously. Again as I mentioned, we did suffer some elevated turnover at the community level key management positions, but we think we are filling those – what we know we are filling those vacancies and we think we are doing that with and enhanced set of team members and our attrition levels are returning to normal. We think we have made appropriate adjustments in the sales and marketing area, but the primary thing, I think we have to look at as all those factors have put together. And I mean, I think you have to look for steady progress on the absolute move-ins, the exceeding move out. In other words that we continue to grow about 20 basis points, 30 basis points a month. And again, we expect to do that. As Mark said, throughout the balance of the summer and then sort of flattened out in November and December is just typically the case for both Brookdale and for the industry.

Got you. Yes, and I guess I was trying to just some specific milestones absolutely understand that the occupancy – we are definitely watching the occupancy. In terms of the improvement you’ve seen so far I know I think either you or Mark mentioned some limited discounting you’re using out there in the marketplace. Could you maybe comment on what effect that is had in more detail?

Yes. We have – we’ve always used discount where we felt like we needed to in order to stimulate occupancy. We haven’t loss that discipline and we are using discounts, in some cases pretty significant discounts for communities where we feel like pricing is the issue to increase the occupancy rate.

And is this more – I’m assuming this is on the emeritus side predominantly.

I would say it’s true. I’d say probably more predominant on the a Emeritus side of things, but it’s – there are select number of legacy Brookdale communities where we feel like we need stimulative pricing programs in order to Payson move-in activity. So it’s across the portfolio.

Okay. One final one in hot and let somebody else to ask. In terms of the slow build that you are referenced on the Emeritus side with the ancillaries. Is there any precedent there as you were building ancillaries they were on the Brookdale portfolio over the years, did you ever see periods where you ran into the sort of we are also – we’re rolled out implementation was slower and how long that take to recover from. Thanks.

Thanks, thanks. Thank you, Frank for your questions. Yes, of course, historically, we’ve seen sort of pick ups in our plans with respect to the rollout of our ancillary programs. We – yes, this delay with the State of California in terms of getting licenses which again we believe we’re entitle to as a matter of right, not only our management team that also our attorneys. That’s been frustratingly slow and has been a little bit more length season we would have anticipated obviously. So sure we’ve seen ups and downs and how rapidly these programs rollout. And again...

This is a somewhat different situation though in that there are a large number of Emeritus communities in a single state where we’re running into some delays. I think many of the other rollouts we’ve done, historically Frank, were a little more diversified in terms of the geography. So, if we ran into a snag in one area, it didn’t have quite as much of an impact on the overall activity.

That’s fair. Thanks.

Your next question comes from the line of Daniel Bernstein with Stifel.

Hi, good morning.

Good morning, Dan.

I wanted to go back a little bit more on the discounting. In terms of – are you going to change or how do you think about the rate growth going forward, particularly and say the legacy Brookdale assets where you’ve had rate growth of about [indiscernible] was 3.8% year-over-year. Do you think rate growth – overall growth rate now is going to slow down until you can build occupancy back to something close to the industry average?

Well, again, we can have some dynamics in the rates particularly on the Brookdale side depending on what happens with CMS and the skilled nursing rates. So putting that aside, for just a second, I don’t think our ambitions in terms of rate growth in the Brookdale portfolio are really all that changed. I mean from a macro standpoint, I think what we would expect to see is sort of a gradual improvement in the rate growth in the Emeritus legacy portfolio, as we complete the physical plan improvements, as the impact of the brand takes hold, as the Brookdale programming is implemented in those communities. Now, it’s certainly the case that, our same-store rate growth can bump up and down 20 basis points, 30 basis points, 40 basis points quarter-to-quarter, it just depending on what’s happening in the business from the standpoint of seasonal patterns. A big bunch of our in-place rent growth occurs on January 1, when we raise a lot of our assisted living rents for example. So, it certainly not going to be an exact straight line as we quarter-to-quarter over time, but I don’t think our general ambitions are really all that changed.

And Dan I would add to that, if implicit in your question is, are we sacrificing occupancy to grow right, we do not believe that we’re doing that.

Okay.

In other word, we think we’re pricing at the levels that we can in order to grow occupancy and we don’t think that we’ve by virtue of our right performance that we are – again as I say sacrificing occupancy for rate. We don’t believe that to be the case.

Okay. And just so I understand of the occupancy loss year-over-year and the legacy Brookdale assets, how much of that attributable to changes in still nursing occupancy and how much of its attributable to the private pay side?

I don’t have those number right in front of me here. If there is an impact in both cases the skill nursing portfolio is about 6% of our capacity I believe.

It’s about 2000 units on the consolidated out of 83,000 right now.

Right. So it’s across the portfolio products type stand.

Okay. And then on the rehiring of management, I guess the executive director of sales level at the property, you say that’s mainly done, is there training that needs to be done? Is there still going to be delay on your efficiency relative to the second quarter? Just trying to get a better grasp of, are there still impacts that are occurring in the portfolio – negative impacts occurring in the portfolio today from not having proper management at the executive director of sales level at the property?

Well, we’re gradually coming out of this integration tunnel that we’re in. And so, as the process winds down, we think all of this is getting better. We’re very proud of a whole host of new training tools and on-boarding programs that we have and we feel like we are really improving our ability to on-board – first you hire the right people and on-board them correctly to get them up to speed as rapidly as possible, and to continue to cause them to develop in their careers. Now there is still, however, a lot of new faces inside of Brookdale and there will be some time. And by the way that is a constant in this business where there is turnover at the community level. We just happen to have seen an elevated level of it over the past four months, five months that we’ve had to deal with. But again, we feel like we got our arms around it. We feel like we’ve got the right team on board. We are – feel like we’ve onboarded them correctly and we’ve given them the appropriate training tools that it will take them a little bit of time to get up to speed, of course it does and that’s taken into account with regards to the guidance that we’ve given you all for the balance of this year.

Okay. I’ll hop off for now…

Thank you, Dan.

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

Good morning. Thank you so much for taking the question. So just a comment around the guidance cut and I guess the talk that you expect occupancy to improve December versus June. And then you already – you talked about the costs seasonally high in Q3. So, could it just feels like a – the guidance assumes that the cost will still creep up in Q3 and Q4. Is that the right characterization and the reasons for it? And on that front, any color around the wage pressure that we’re seeing in some other markets?

Okay. I think Q3 is clearly a higher cost quarter. It’s a 92 day quarter, it’s – at the end of the summer. So, utility costs are kind of at their peak. So, I think that’s really all we were trying to say around quarterly sequencing as we go through the year. On the wage question, there are some sort of concentrated parts of the labor market, therapist for example, nurses in certain markets, where there really has always been a little more wage pressure, and we continue to see that today. We have not seen across the portfolio significant changes in terms of wage growth. Clearly, we are adjusting wages for inflation a bit more today than we would have in 2008 or 2009, when the labor market was extremely soft. But that’s a relatively small increase, maybe a quarter or a half a point more today than we would have been. Now, as we look further forward, as we have more states look at minimum wage implementation, as we have more large national employers look at adjusting their wage scales, in some of our markets that can certainly cause some issues and that’s something that we pay very close attention to

And then on the cost front, did you quantify any synergies you achieved this quarter or what do you assume the synergy number will be this year?

We did not quantify that. I suspect once we get to year end, we’ll be able to look back and do a little bit of a retrospective on the cost synergies, but we did not talk about those specifically for the quarter.

So, then when you mentioned that you expect G&A cost to be lower than the original guidance by $10 million this year, so is it because of the synergies or some other things?

Joanna to be honest with you, as time goes on, particularly in the overhead structure and the management organization. It becomes difficult to identify exactly what the change relates to. We’re seeking to be as efficient as we can, yet manage the business as best as we can. So, it could probably get through a pretty good argument either way on the G&A side.

All right. And just lastly quickly on the – for the turnover that you experienced in the Q2, it sounded like this was kind of a new issue that did not feel – at least did not [indiscernible] in Q1. So can you just tell us, why it happened now versus right after the deal closed? Thanks.

Yeah. On the turnover issue, we began to see that in the sort of mid first quarter-ish timeframe and that’s when people of course, they pay their bonuses and so forth, but the root cause of it is, I would say two-fold. First, it’s integration related, I mean this effort is very difficult on people. They have to do their day jobs and they have a whole lot of additional work on top of them. We’re asking them to learn new systems and new programs. Some of them are unwilling to do so, resulting in an involuntary terminations, but others get burnt out or decide it’s not for them or are simply tired and move on. And then, there has been a lot of noise in the industry around new construction, which is a sort of a marginal factor for all of us in the industry to have to participate in, but the critical point part of that is, is not so much with respect to the effect on occupancy our rate have gone communities that are facing new construction. It’s true that, that is a disruption and a dislocation that we have handled in the local marketplace. But it can have a consequence on people trying to where other competitors trying to approach our people and that’s probably a lesser contributing factor to that enhanced turnover. Again, the good news is as we feel like, we are back to normal levels of attrition and that we’ve got – we filled many of these vacant positions, but it was a problem for us coming out of the first quarter and going through the second quarter.

Great. Thanks.

Thank you.

Your next question comes from the line of Ryan Halsted with Wells Fargo.

Thanks. Good morning. So, you brought up the new supply and concerns around new supply driving down occupancy. I was hoping you could comment specifically, what gives you the confidence that new supply is having less of an impact on the occupancy declines that you’ve experienced so far. And specifically, I’m trying to reconcile the comments made about using incentives to try to stimulate occupancy. So, I’m just wondering why do you feel the need to do that, if it’s more integration-related issues you’ve seen and not so much softness in occupancy industry wide?

Well, the use of incentives or discounting programs are not directly related to the integration effort. Those were based on local market conditioned, which could be a new competition. It could be the fact that the building needs to be refurbished and refreshed that we have not yet done so – therefore, we need to price the products and services at a lower level until we can do so. There’re whole host of factors they go into our pricing decisions and those are not driven by integration concerns, at least as a general rule. With respect to new competition, I’m not saying that’s a non-problem, we just do not believe it is the major cause being frank with our occupancy softness in the second quarter. Again, we attribute the vast majority of that to integration, dislocations and disruption in change management. That having been said, whether it’s truly competitive new construction or new openings, that can cause local market dislocations we always put into place very carefully planned to deal with that. And that start with trying to protect our people as best as we can to preclude them from being poached away. Sometimes it causes us to adjust our capital expenditure programs to invest money more quickly in a particular communities that’s going to face new competition and over to be successful in the marketplace. And then when you look across our portfolio, you can see some cities, where there has been a host of new competition, where our occupancy may have dropped, but then you can see other communities where we’ve been very successful, for example, Houston, which people always talk about is being heavy new construction and our occupancies actually gone up a 120 basis points in that market, in that phase of that new competition. So, it’s very difficult to precisely correlate new competition to our performance. Again, we would love to have no new competition anywhere. And, that would be a fantastic thing, because it is a negative factor, but we do not believe that, that is the driving factor to our performance.

Okay. That’s helpful. So, are you seeing new competition, I guess continuing to grow, I mean, are you seeing sort of more ground being broken in your markets or was it sort of just a temporary blip and it’s being absorbed or is it continuing to accelerate?

Bryan as we look at our footprints and identify communities that have opened in our footprint over the last couple of years that are in some way directly competitive with our portfolio, the number of those new communities has been pretty consistent, somewhere between 20 and 25 directly competitive communities a quarter for the last two years or so. Now obviously openings change a little bit depending on the weather and those kinds of things, but the number of new communities opening in our markets has been pretty stable. So when you see the next data change from new construction at 3% of existing capacity and go to 4% – 4.5%, we don’t really see that in our portfolio and in our competitive set as much of a change to be honest with you.

And our projection Bryan – our projection is for construction to continue – new openings to continue at roughly that level for the next year or so.

Okay. That’s good. Then maybe a last one from me, on your occupancy guidance. So, it sounds like you mentioned kind of a flattening by 4Q with maybe half of the 60 basis points to 70 basis points maybe already – you are already experiencing. I guess I’m just curious, is there – do you feel pretty comfortable with kind of that fourth quarter outlook? I mean looking back last year, you did call out a decent amount of occupancy challenge related to the integration maybe 40 basis points that I would think you would benefit from as an easier comp. So I’m just curious if fourth quarter, are you kind of giving yourselves the benefit of that easier comp and less occupancy build from 3Q into 4Q or is there a potential maybe for even more?

Well, the way we’re calculating our guidance is, we are projecting our performance for the balance of the year. So we’re projecting occupancy off of where we started in June. So it is true that on the same-store comps for the fourth quarter, some of that impact we’re describing may come into play, but we’re simply trying to explain how much occupancy growth from here to there, we have assumed in our guidance.

Okay. All right. Thank you.

Thanks, Bryan.

There are no further questions at this time. Do you have any closing remarks?

I just wanted to thank everyone for joining us and management will be around today for follow-up questions. So with that, thank you for your participation.

This concludes today’s conference call. You may now disconnect.