Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Jessica Hazel, Vice President of Investor Relations. You may begin.

Thank you, and good morning. I'd like to welcome you to the third quarter 2024 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Dawn Kussow, 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 the 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 brookdaleinvestors.com and was furnished on an 8-K yesterday. Now, I'll turn the call over to Cindy.

Thank you, Jessica. Good morning to all of our shareholders, analysts and other call participants. Welcome to our third quarter 2024 earnings call. At Brookdale, we are deeply committed to creating value for our shareholders by providing high-quality care and services to our residents, ensuring that we are an attractive place for employees to work and improving both our capital structure and our capital allocation. Before getting into details of the third quarter, I would like to briefly highlight a number of recent accomplishments that reflect this commitment. We delivered 80 basis points of sequential quarterly occupancy growth, which was better than the broader industry average and reflected continued weakness in paid third-party referral sources. We generated $14 million of adjusted free cash flow in the third quarter, improving our cash flow significantly over the prior year. We more than doubled the number of communities operating with our industry-leading Brookdale HealthPlus program, and we received a third-party validation that our clinical outcomes are even stronger than last year. We worked to ensure the health and well-being of our residents throughout multiple hurricanes, including successfully evacuating 13 communities during Hurricane Milton. We were pleased with our team's emergency response and are pleased that our residents are back home. We were named by Newsweek to the top 200 Most Loved Workplaces list. We executed purchase agreements for accretive acquisitions of 41 currently leased communities that will provide meaningful benefits to Brookdale, both in the immediate term and over the longer term. We issued new convertible debt while extending a majority of an existing convertible to 2029, which, in combination with expected mortgage financings and cash on hand, enables us to fund these acquisitions. We successfully refinanced the vast majority of our debt maturities without extension options through 2026. And at every level…

Thank you, Cindy. Good morning, and thank you for being here today. I'm proud of our many accomplishments that Cindy spoke to, and would like to provide additional color on several items, including our third quarter results and fourth quarter expectations. Beginning with third quarter revenue. Resident fee revenue grew 3.7% over the prior year quarter. This revenue increase was despite a 2.3% or approximately 1,200-unit reduction in capacity since the beginning of the prior year quarter as a result of community dispositions, primarily through lease terminations. Consolidated RevPAR grew 5.9%, including a 130-basis point increase in weighted average occupancy and 4.3% RevPOR growth over the prior year. This marked our 11th consecutive quarter of triple-digit year-over-year occupancy increases and compared to the second quarter, occupancy grew 80 basis points sequentially. As Cindy shared, our move-ins remain pressured in the third quarter, but we were very pleased that our third quarter move-out volume was better than both prior year and the second quarter, driven by continued favorable, controllable move-outs. On a dollar basis, our sequential RevPOR declined moderately as we continue to see the normal RevPOR impact of newer residents generally moving in with lower acuity, and therefore, having a lower care rate than existing residents. Specific to our same community portfolio, third quarter RevPAR increased 5.6% over the prior year, driven by 100 basis points of occupancy growth and a 4.2% increase in RevPOR. We were pleased that our year-over-year same-community RevPOR growth accelerated 10 basis points from the second quarter growth, while the industry asking rent growth over the prior year period decelerated between the second and third quarters. Moving to expenses. Same-community labor expense as a percent of revenue improved 140 basis points compared to the prior year third quarter. This positive performance versus the prior year…

Let me close by expressing my deep gratitude to our associates in our communities, our field leadership and at our community support centers. I am so proud of the way that they unite to support our residents, one another and our shareholders. I am especially grateful for their focus on ensuring that throughout the 4 major hurricanes we faced over the past 4 months, the safety and well-being of our residents remained the top priority. With countless stories of devastation caused by these storms, including with our own Brookdale associates and the families of our residents, we successfully evacuated more than 1,000 residents and their pets during Hurricane Milton, and we were pleased to be able to bring them home within days of the storm. The success of these efforts is a result of our industry-leading emergency response team and our community and field associates for the meticulous planning, exceptional crisis management and commitment to our residents. Every day, I am proud to be one of Brookdale's 36,000 associates dedicated to serving our mission and working to ensure a long and purpose-driven future for our residents and teams of associates. Great. Thank you so much. At this time we will open it up for questions.

[Operator Instructions] And we will take the first question from Ben Hendrix with RBC Capital Markets. Your line is open.

This is Mike Murray for Ben. So a lot of moving pieces with these recent transactions. So just so we understand, could you kind of walk us through the income statement? It sounds like the lease reclassification is kind of a onetime benefit of $8 million in 4Q EBITDA with a corresponding increase in interest expense, and you don't expect that to impact 2025 numbers? And then separately, in 2025, do you expect a $25 million increase in EBITDA and a $10 million increase in interest expense related to the acquisition of currently leased assets and then subsequent financing? Is this the right way to think about it?

This is Dawn. Thank you for the question. And as it relates to Q4, that's exactly right. The $8 million is kind of a timing difference of a benefit to adjusted EBITDA with a corresponding increase in our interest expense. Now, as we said in our prepared remarks, if you look at 2025, what we would expect is a $33 million increase in adjusted EBITDA as those rent payments go away. And then we would expect to see an adjusted free cash flow pickup of $15 million kind of replacing those lease payments with the interest expense from the debt that we would use to finance the acquisitions from.

And that's compared to the amounts pre-agreement.

Okay. All right. That's helpful. And just shifting gears, could you dive into the competitive dynamics for the third-party referral sources that were pressured? Was this primarily a cost thing? Are you bidding against other competitors for these referrals?

Mike, this is Cindy. That's a good question. And no, it's not a cost thing. Just to give your perspective, we talked about in our second quarter call and again in our third quarter call, the fact that our move-ins associated with our third-party paid referral sources, two of them in particular, were relatively soft relative to our historical trend. And once we identified this trend, we took action to launch incremental sales initiatives, increasing our internal planned marketing spend, and those actions have begun to yield results. While our move-ins during the third quarter were still down relative to last year, the performance did improve sequentially. And if you think about this on a year-to-date basis, our move-ins are consistent with our pre-pandemic averages despite the weakness in the two large third-party paid referral sources. Just to give you some context, we get a few hundred move-ins every month from two large paid referral sources. Through the third quarter, we had seen a year-over-year decline of several hundred move-ins, which we've been working hard to offset. I'm really pleased that during the month of October, our move-ins from these two large third-party referral sources were roughly flat to last year. And just one other piece of context is one of the two third-party referral sources, their volume is just down and every person is impacted. And with the second, we did actually improve our position within the third quarter. And -- so we're pleased with that.

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

Hey, good morning. Maybe, Cindy, just to follow-up on that. So how should we be thinking about the strategy with these third-party referral sources? Clearly, you're spending more money on marketing here. So is that kind of a shift in strategy? Or is this more temporary with the marketing spend? And then, what sort of time line are you thinking in terms of the ability to return back to more normalized referral patterns?

I was pleased that in the month of October, we actually were essentially flat year-over-year with our paid third-party referral sources in the aggregate. So I think that was a good thing. And I do want to be clear that we're not spending more cash because we pay for a move-in from a third-party paid referral source when the resident moves in, there's a difference in timing. When we do our own internal marketing, we have to spend the money and then work the lead and get the move-in which lags. So it's the same cash. It's just different accounting. The marketing spend on internal is expensed when you incur the marketing and for an actual move-in from a paid third party, it gets amortized over 1 year. Our strategy is to get every one of our rooms in service at the best profitable rate. So we want to get more referrals from paid third-parties, and we want to have those residents move into our communities. So it's both end. Our strategy to try to recover is because we're seeing less volume than we had wanted or expected or historically seen. And so we're responding to a third-party environment.

Got it. And then maybe shifting gears. As I think about your RevPAR guidance, 5-ish percent for Q4, curious what you're seeing in terms of the competitive environment or the pricing environment? And then how are you thinking about rate increases, rate bumps for 2025?

Thank you, Brian. This is Dawn. When you think about our RevPAR guidance, it is -- like I said in my prepared remarks, our expectations for occupancy is that we're going to increase that sequentially. And kind of in the normal course, our RevPOR is expected to decline sequentially. We typically will see that as you have a higher acuity resident move out and then you have a lower acuity resident moving in. And then in addition, we've been looking at kind of doing re-pricings in certain markets as we've been looking at remaining competitive throughout the year. So that is the expectation for our RevPAR guidance. Now, as far as 2025, we aren't giving guidance for 2025 yet. So I think we've -- Cindy said in her prepared remarks, we'll come out next quarter with our guidance for 2025.

And just to be clear, when Dawn is talking about Q4, we're expecting to hold that 4.3% year-over-year RevPOR growth. And I'm really proud of the fact that when the industry decelerated their RevPOR in Q3, we improved our RevPOR growth year-over-year.

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

Hi, good morning. Thanks so much for taking the question. Sorry I jumped, so I wasn't sure whether this was discussed already when it comes to the Q4 guidance, right? And if you adjust out the $3 million hurricane cuts, but then there's also the $8 million change in lease expense. I don't know if you guys discussed -- because if you adjust that, the guidance implies EBITDA would actually decline sequential $2 million. So what's driving that sequential decline versus historically Q4 EBITDA would increase from Q3?

Yes. Thank you, Joanna. This is Dawn. I appreciate the question. And you're exactly right. What we are very proud of is, if you take a step back, is our 15% year-over-year adjusted EBITDA growth and the fact that we're within 5% of pre-pandemic adjusted EBITDA, and we've delivered 31% adjusted free cash flow growth this year. And as we think about the fourth quarter guidance, we just talked through kind of the RevPAR growth that we expect. And at the midpoint, our RevPAR would be flat sequentially. It's driving kind of the top line flat and pressured with the move-in Cindy had talked about in her prepared remarks. Now on the expense side, what I would say is, there's always this level of variability and timing that we have on our expenses as it relates to things such as incentive and insurance and other estimates that are going to impact our expense run rate. But taking one step back, our total operating expense is $548 million for the quarter and 1% of that is about $5 million. So that level of variability as you think about sequentially during the quarters is, it's just not that material. What we're most proud of is, if you look at our same-store operating margin, we've delivered 140 basis points of operating margin growth year-over-year.

Okay. So I guess you're saying that there's just variability. So historically, EBITDA would increase fourth quarter from third quarter, but this year, you're kind of giving us sort of more room? Or is there something else to call out that would explain that kind of lower seasonality versus history?

Yes. I think one of the things that I would point to that we look at our expenses across and estimate with the variability, but we have higher insurance and some employee health costs that have been running higher this year over last year. And so -- just for maybe a little bit of context around that variability.

Okay. And I don't know maybe you mentioned this before, but what does the guidance assume for occupancy growth? Last year, I guess occupancy grew about 80 bps sequentially. So do you expect similar growth or probably not?

Yes. What we said about occupancy is we expect it to increase sequentially. And so I would just -- what I would think about is, Cindy just mentioned it, is that our year-to-date RevPOR growth, we expect it to be in line with year-to-date year-over-year growth. So if you look at our supplement on Page three that, you'll see our year-to-date growth has been 4.3%. And so kind of triangulating into -- from the RevPOR and then triangulating into occupancy, you'll see -- you can kind of get to how we're thinking about occupancy growth.

If I may, last question. So thinking about next year, I know you don't give a guidance, but just staying on [ occupancy ]. So far this way -- this year, occupancy has been growing above historical seasonality. So is it fair to assume a similar trend next year? And what could drive it higher or lower from here?

Yes, Joanna, we aren't giving guidance for 2025 at this point. But what I would say high level about 2025 is our expectation would be, we would be continuing steady and sustainable occupancy growth while all trying to kind of balance affordability and cost. We've delivered adjusted free cash flow growth of 15% -- excuse me, adjusted EBITDA growth of 15% and adjusted free cash flow growth of 30%. We would expect to continue to deliver growth, but not giving guidance at this time.

[Operator Instructions] Your next question comes from the line of Josh Raskin with Nephron Research. Your line is open.

Hi, thanks. I appreciate you taking the call. Good morning. So just back on to these two third-party marketing firms, it sounds like they're getting less referrals. Is there something changing industry-wide or competitors doing more internally? Or is it just harder for them? I'm just curious what's going on with these two major aggregators?

So big picture, one of the things that happened was there was a Google algorithm change that deprioritizes third-party content. So we think that they are getting less leads just organically, which is one of the things. And that is affecting one of the two very significantly. The other not as much.

Okay. The other one, just not -- maybe just simply not seeing the same level of referrals?

Yes, they have reduced some of their marketing spend.

And so, where are these people getting -- where do these leads end up? Are these people self-finding, are they finding your communities on their own using this new -- with the change in the Google algorithm? Or do you think there's just fewer move-ins industry-wide because of this disruption?

No, I think absorption in the industry is strong. And I would say that the vast majority of our move-ins do come from internal sources, whether it is residents who live in a community and refer a friend to move in with us, whether it is our own internal marketing campaigns or local community outreach. That's where the majority of move-ins come from. But as I mentioned earlier, we did historically get several hundred move-ins a month from these two third-party referral sources. So we're really just resetting our strategy to capture that. I think over the longer term, at the end of the day, the more people who come to us directly, the better off it is for the relationship with us and the residents and prospects.

Yes. Sure, sure. And then just separately, can you speak to the competition and maybe the discounting environment and how that compares to what you were seeing last year as you headed into year-end?

No, I'll say that the discounting has been -- it's been a little heavier sort of, I would say, in the third quarter than, quite honestly, we expected. And I do think that the presidential election maybe had something to do with it. One of the things that our Chief Sales Officer tells us regularly is when there's uncertainty, prospects, older Americans, in particular, are more reluctant to make decisions. So I do think there might have been some additional last-minute discounting in the third quarter leading up to the presidential election. The good news is the election is over now, and there's more certainty about the direction of the country. And so that should bode well for us and others in the industry moving forward.

And your next question comes from the line of Tao Qiu with Macquarie. Your line is open.

Thank you. Good morning. I appreciate the earlier details on the guidance. I appreciate the earlier details on the guidance. I want to drill down on the adjusted free cash flow number, which was very strong in the third quarter. So looking forward, Cindy, it sounds like you expect significant free cash flow improvement next year. I want to make sure I have all the moving pieces in order. I think you mentioned the $50 million free cash flow contribution from the acquisitions. I think you've got some lease restructuring down allowing to lean into your landlord partners on the CapEx side, maybe some additional CapEx -- cash flow upside from the Ventas transaction. Any other additional tailwind or headwind we should expect for cash flow? And then what is your confidence level that Brookdale will be kind of firmly in positive free cash flow territory on an annual basis going forward?

So let me start, and then Dawn can jump in. So we are committed to the Ventas assets through the end of December 31, 2025. So unless there is a mutually agreed transaction, we would continue to operate the assets under the existing lease through then. So I wouldn't necessarily model that into your thoughts for 2025. One thing that could potentially have an impact is variable rate changes in interest rates. And so that is something that is about -- one point goes $13 million. So that's something that could have an impact. Dawn, are there other things that you might want to highlight?

No. I think you've captured all of them. I would just say, remember, our rate increase goes into effect January 1st, and we're confident in kind of the rollout of that rate increase. But other than that, I think the largest shifts that we're thinking about are in line with what you have.

That's great. So I want to go back to the comment earlier regarding the strong clinical outcome you saw in the HealthPlus and Clare Bridge performance. I know this is something that Brookdale excel versus your competitors. At this point, I think the PMPM contribution is still negligible. Given the growing scale this quarter, are you seeing additional evidence that you have been successful in leveraging that into a sales pitch or premium pricing? Any way you could quantify the impact for us? And what do you think the threshold you need to clear for you to drive meaningful growth in the -- with your managed care partners, either in membership base, clinical stats, anything else you need to call out here?

It's a great question. I am so proud of the fact that Brookdale residents in a HealthPlus community get better clinical outcomes than residents living at home or in competitive senior living communities, seeing that 80% reduction in urgent care or emergency room visits and the 66% reduction in hospitalizations is something that we are incredibly proud of. Brookdale HealthPlus was always built on the understanding that if you have a better product for your residents, that you will have higher occupancy in the communities, and that will translate into stronger cash flow. So that's how we built the program. The icing on the cake has always been the PMPMs that we receive from certain Medicare Advantage plans. It's something that is -- at this point is -- something that essentially covers the incremental costs of a Brookdale HealthPlus program. But I do think that continuing to strengthen the value proposition will allow us to continue to grow profitably. And so, that's what we're really focused on.

Great. And if I may sneak in one more. On the 41 acquisitions you did, are the performance consistent across the three portfolios? Or are there any assets you don't necessarily see fit with your current strategy that you could potentially dispose off at some point?

It's a really good question. The performance is different across the assets. Some of the assets we acquired under a very attractive favorable purchase option. They are in incredibly high-quality market. Some of the assets that we acquired are smaller communities that may not fit exactly within our strategy. So one of the things that we were excited by is the fact that being able to have more flexibility with the portfolio and the ability to recycle capital would give us improved opportunities going forward. So you'll hear more from us about that over the coming quarters. But the important thing to know is the transaction on its terms is a very solid financial return. And anything we might do with the portfolio structure after that would be attractive and additive to those strong cash flow improvements that we talked about.

And there are no further questions at this time. This does conclude today's conference call. You may now disconnect.