Good day, my name is Jay and I will be your conference operator for today. At this time, I would like to welcome everyone to the Brookdale Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And at the end of today's presentation we will have a question-and-answer session. [Operator Instructions]. Thank you. It is now my pleasure to turn today's program over to Ms. Kathy MacDonald. The floor is yours.

Thank you and good morning everyone. I would like to welcome you to the second 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. 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 strategy, the industry outlook, and our second quarter. I'll start with our strategy. Our second quarter results continue to demonstrate that our turnaround strategy is working. We are laser focused on improving our top line growth. Revenue grew for all three of our senior housing segments on a same store basis and also for our healthcare services. We accomplished this by making significant strides on our operational leading indicators. Same community move-in showed positive year-over-year growth for the first time since third quarter of 2017. In addition, our same community occupancy grew in May, seasonally one to two months earlier than in the past several years and continued to trend upward in June and July setting us up for expected sequential occupancy growth in the third quarter. At Brookdale, there is simply no substitute for great people who genuinely care, do the right thing, and serve our residents and patients with high quality care. Our associates do extraordinary things every single day, that is why the foundation of our strategy is to win locally, which relies on having a talented team of associates dedicated to providing high quality care and services to our residents and patients. We're pleased that we continue to see positive associate metrics showing our strategy is working as we focus first on retaining our high-quality group of associates. Trailing 12-month retention rates have remained around 70% for eight consecutive quarters for our Executive Directors, who are the CEOs of our local communities and for our Health and Wellness Directors who lead our clinical efforts and oversee all aspects of our residents care. Also, the retention rate for sales professionals improved for the second sequential…

Thanks Cindy. We are pleased to show continued progress on our strategy to win locally. Highlights of the second quarter were same community senior housing revenue growth was 1.9% year-over-year with continued strong RevPAR growth of 3.3%. The same community occupancy change from the first quarter to the second quarter was better in 2019 than last year and this year occupancy growth turned positive in May, a month earlier than 2018 and two months earlier than 2017. Healthcare services revenue growth was 4% year-over-year. This marks a second consecutive quarter of improved revenue and operating income for this segment. Consistent with our increased investment plan CAPEX ramped up in the second quarter. This investment will better attract and retain residents and will protect the long-term value of our portfolio. Also we continued to opportunistically repurchase shares. Under the program we purchased 1.3 million shares at an average price of $6.38 in the second quarter. For a more detailed review of the quarter let me start with real estate initiatives. Since first announced in February of last year a strategy of enhancing our real estate portfolio has remained a key priority for Brookdale. We identified assets to monetize in order to focus on and invest in the communities where we see the highest future growth potential. To that end we again made significant progress successfully transitioning 35 communities to new owners or operators in the second quarter. We transitioned 26 managed communities to new operators for our year-to-date total of 67, most of which were managed under interim arrangements. We expect additional managed communities to be transitioned in the back half of the year. In the quarter Ventas sold five of the approximately 20 leased communities that are being marketed. The communities are removed from the master lease as they are…

I'm very grateful all of our residents and associates are safe after the California earthquakes and Hurricane Barry. I'm very proud of our emergency response team seamlessly moving into action to prepare for various natural disaster scenarios and our community associates for the amazing work they do to put our residents first sometimes even before their own families. Our team does extraordinary work to enhance the lives of our residents and patients even on ordinary days. I'd like to close by saying that I strongly believe in Brookdale's growth opportunity. The quarter is continuing evidence that we are building positive momentum and we are making progress on our strategy to turnaround Brookdale. We are improving our operations in advance of the approaching demographic tailwind and I'm confident that we will provide Brookdale shareholders with long-term value. Before we take your questions I want to touch on the recent public letters from one of our shareholders Land & Buildings that you might have seen. I'd like to reiterate that at Brookdale we are always open to constructive feedback from all of our shareholders and appreciate engaging in a dialogue towards a common goal of value creation. Earlier this year the Investment Committee of the Board made up of three independent directors one of whom was appointed as part of a prior agreement with Land & Buildings carefully evaluated Land & Buildings ideas with the assistance of BoA Merrill Lynch which was the independent advisory firm suggested by Land & Buildings. Based on that review and as discussed in our February 2019 earnings call, we determined at the unanimous recommendation of the investment committee after consultation with BoA Merrill Lynch not to proceed with actions advocated by Land & Buildings as they would be unlikely to generate additional shareholder value. More recently…

[Operator Instructions]. Our first question comes from the line Josh Raskin of Nephron Research. Sir, your line is open.

Good morning everyone. First question just around lead generation and the first business and don't want to pick on the two metrics out of everything that looks good, don’t want to pick on the two that didn't look as good. But is there some sort of -- it's not necessarily seasonality but was there sort of a tougher comp from the first half of last year, is there something that sort of read into that and maybe you give us a little bit more color on why that was? And then how did that link directly to occupancy in terms of future periods, what have you seen in the past, I mean obviously I understand the correlation, but I'm curious if that's been a good leading indicator around occupancy for you?

So Josh it's a great question. Thanks so much. This is Cindy. So let me start with the second half of your question first. So we look very carefully at move-ins and move-outs during a month, because that usually reflects an occupancy for the following month. So, when I look at the quarter, I'm very excited that we had a positive 6% increase in net move-ins in the third quarter compared to the same quarter of last year. When I look for the quarter at move out, our total move out were favorable by 1%. Now looking at controllable move outs, we had a really difficult comp on controllable move outs in the second quarter, because last year we improved our controllable move outs by over 7%. And if you look on a year-to-date basis, our goal was really to keep our controllable move outs consistent, and we're within 1% of the controllable move out number from last year despite the fact that we decided to really push rate and we knew that could increase our financial move out. We did that because we know that rate is the stronger driver of profitability and our primary focus is on driving sort of RevPAR as opposed to either occupancy or rate independently. Now when I look at leads, there's a few things to remember, last year you'll note that we shifted some of our marketing investments into our call center because we recognized that answering inquiries quickly was really important to delivering more move-ins. And so, that's one factor that you see when you're looking at leads year-over-year. The second factor and we've been talking about this since the third quarter of 2018 is that there is some disruption in the lead volume from a large aggregator. Now we've made significant…

Got you, that's very helpful. Just one quick follow-up on that though Cindy, if you excluded that large online aggregator, you think first visits would have been more sort of flattish as opposed to kind of down 5%, if you could exclude them from both periods does that sound feasible?

That is very reasonable to conclude.

Okay, and then just a second question around REIT interest, just seems like rate is down, stocks are up for them, the investment cycle seems to be heating up a little bit for the healthcare REITs. Are you seeing more interest from them in terms of senior housing or do you feel like that -- the REITs are still kind of more focused on non-senior housing asset classes?

I think REITs are very well publicized, and it's easy to look at their investments and their earnings transcripts and see where they're focused. So, I would allow them to speak for themselves.

But I meant more sort of directly to Brookdale, like are you seeing direct interest from the REITs change now. I think the last year or so, it's been obviously about divestitures and sales process, is there any interest around developments or new products, etc. from them?

I think that we have had very positive constructive discussions with all of our REIT partners, and I'm very happy that we've announced several win-win transactions. We continue to look at transactions that will improve both our financial results and our REIT financial results as we go forward. We are really excited that our REITs are partnering with us by delivering capital into our communities. And like everyone, our primary focus really is on operations because that is what's going to deliver the value for our shareholders with improved operations.

Okay, thanks again.

Thank you.

Thank you. Our next question comes from the line of Chad Vanacore of Stifel. Your line is open.

Thanks and good morning. So, just thinking about the management contract transitions, you've done quite a bit year-to-date. Am I reading it correctly that you expect another 3 million quarterly revenue reduction from now until the end of the year, and then what's the impact and potential timing we should be thinking about?

Chad, thanks for the question. Good morning. Steve will answer that question for you.

Yes Chad. There is a $1.5 million reduction in revenue from transactions we completed already in the second quarter and about $1.7 million for transactions that we contemplate in the future primarily though in 2019.

The important thing to remember about our management transitions is a lot of these management agreements were interim arrangements, you know that we did a lot of restructuring work on our portfolio last year; and as part of exiting the leases, we wanted to ensure that there was a good transition of the communities to new operators. And so, this transition is something that was planned as part of the overall restructuring, and we're delighted with the progress that we're making on this.

Alright, and then Cindy you've made some mention in the recent past about same store NOI expected to turn positive in 2020, can you give us some more color on how you think you can get there from here?

Sure, the first thing is it's really a revenue question and so with our positive trajectory on move-ins and the expectation that we'll continue to have occupancy progress during the third quarter that's the first thing. We need to drive rate, we need to drive occupancy that will drive RevPAR, most important thing for Brookdale's turnaround. The second thing is that 2019 is the third and final year of our above market investments in labor and so that is something that will normalize more next year as we go forward. And then third we've made some pretty significant investments in driving our own internal movements this year and we do that through a data driven approach because we know that it's successful. Because we have ramped up marketing spend this year we haven't yet seen the full benefit of that and so we'll get more benefit from next year's -- or from this year's investments next year. So those are the primary things that will drive improvement in 2020.

Okay, and just one more question just on your JV contribution, EBITDA run rate is higher than guidance level at this point, does that imply some decline in second half now and why would that be?

Well, we've maintained our guidance, all of our guidance for the full year. I think it probably signals that will be near the top end of our guidance and certainly will have some CAPEX that will go into the communities in the back half of the year for the JV.

Okay, is there any contemplated sales of properties in that JV within that guidance, you've been running around 11 million EBITDA per quarter in first quarter and second quarter but guidance would assume a pretty significant drop in that?

Chad, no specific changes in the guidance so -- and in the guidance we didn't have any contemplated changes in the communities. We're always investigating ways to increase shareholder value as Cindy mentioned a few minutes ago.

Alright, I will leave it there and hop back in queue, thanks.

Thanks Chad.

Next question comes from the line of Jason Plagman of Jeffries. Your line is open.

Hey, good morning. Just -- Cindy just wondered if you could comment a little bit further on the competitive environment that you're seeing with new supply and new construction starts slowing, just how are you feeling versus three months ago about how things are trending in your market from a competitive standpoint?

Jason that is a really insightful question because the competitive environment has been a key factor in Brookdale's performance over the last three years. So we have a proprietary analysis that we use at Brookdale and if you're looking in our investor deck on page 5 you can see a graph that shows the new starts and opens around our communities. So let me start with Starts because that is really a powerful story. If you look at the news starts in the second quarter new starts are down 74% within 20 minutes of a Brookdale community compared to the second quarter of 2015 which was the peak. If you compare them to two years ago they're down 60% and if you compare them to the same quarter last year they are down 51%. So what that tells me is that over the next two years our competitive environment should be significantly improved. Now there's no question that opens around Brookdale increase sequentially from Q1 to Q2, that was expected, we've been talking about that for several quarters now. But what's really powerful is that if you look at this compared to the peak which was two years ago in the second quarter of 2017 opens are down 33% from the peak. If you compare it to last year opens are down 12% from the peak. Now the reason that this is critically important is because we are affected by a new competitors opening for about a year after the new competition opens. So what that tells me is that the future competitive outlook for Brookdale is much better than the past which when combined with the positive momentum that we have from our operational turnaround that gives me great confidence that the strategy that we have is the right strategy and that will deliver positive value for our shareholders.

Thanks, that's helpful. And then on the -- maybe for Steve on the operational expense side. You mentioned some items that would be trending higher in Q2 I think, you mentioned utilities and continued weight inflation and some other items, can you just walk us through your expectations for facility operating margins in Q3 and then in the second half in comparison to where you came in, in Q2?

Yes, sure. So we do expect continuing expense pressure as we go from the second quarter into the third quarter. As you mentioned some labor and marketing as we had positive results from our second quarter pilots. We're going to continue our marketing spend into the third quarter and as Cindy mentioned this is a spend marketing dollars for future movements as opposed to some of the previous ways we had gotten move-in. Occupancy also we are signaling that we are increasing occupancy in the third quarter that will also have an expense associated with that revenue increase and as you already mentioned utilities. So, between the first and second quarter we had a margin decline and between the second and third quarter you can assume probably around the same margin decline. But as we move out from the third into the fourth quarter really we are starting the turnaround phase where we have significant operational leverage. And that flywheel is starting to spin into the third -- into the fourth quarter and then into 2020 where our occupancy growth and in the first quarter our rate growth in 2020 would fall to the bottom line. As Cindy mentioned to you, she gave you the steps to get to same store NOI growth just a few minutes ago.

Got it, thanks for that color.

[Operator Instructions]. Our next question comes from the line of Frank Morgan with RBC Capital. Your line is open.

Good morning. With regard to the faster than normal ramp up in [indiscernible] in the second quarter, I'm just curious do you have any specific color around what drove that, was that unique to you or did you see that from competitors in your market as well?

I think that we are doing a fabulous job Frank particularly in assisted living where our sequential improvement was better than the data reported by the industry. So we've been working very hard on our turnaround strategy. It all starts with people. As you know we've been building the best team in the business and the fact that we have had a 5% improvement in associate turnover is critical to our success. The second thing that we have been very focused on is delighting our residents and the fact that we had a 20%, 20% improvement in our customer satisfaction as objectively measured by our promoter score is a critical part of our turnaround strategy. And then the third part of our strategy is really getting our sales and marketing optimized and we have done a lot of work, a lot of heavy lifting over the last year and a half to get our marketing optimized and spend it appropriately. We've got our sales strategy set, and we've really improved our execution. That's why I'm so excited about the results that we have for our operational turnaround and the momentum that we've seen in occupancy. It looks like we're off to a really, really great start. Thanks Frank.

Sure, second question, any particular markets you might want to call out what you're seeing sort of above market recovery? In the end the second part of that would just be any color around the behavior of any of your new competitors, you called out there's like a one year impact on them from the time of opening but what kind of strategies are they pursuing in terms of pricing promotion and the likes? Thanks.

You know we have so many different competitors. In fact the vast majority in the industry over 90% of our competitors operate five or fewer communities. So in a company our size it's not really helpful to look at the individual competitors and what they're doing. We have a very local market centric strategy that's focused but I will say that we focused on 20 high opportunity communities and those communities are delivering outside with outsized returns. And they're in various markets throughout the U.S. so it's less about the markets and more about the communities where we have the most opportunity. We've got some exciting new marketing programs, we've got great execution, and we've been working as a senior leadership team to remove every barrier to see success for those communities to win.

Thank you.

Thanks Frank.

Thank you. There are no further questions at this time. I would like to turn the call over to Cindy. Ma'am the floor is yours.

Thank you very much. This quarter is further evidence that our turnaround initiatives continue to take hold and we have achieved important operational milestones. As we've demonstrated we are committed to continually improving our performance and working to drive long-term sustainable shareholder value. The company's business and operating performance is improving as evidenced by our 6% year-over-year improvement in move-ins and we are providing quality service and care to our residents and patients. Our turnaround strategy is driving results. Thank you so much, this ends our call.

Thank you again for joining us today. This concludes today's conference call. You may now disconnect. Have a great day.