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Edited Transcript of BKD earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q3 2019 Brookdale Senior Living Inc Earnings Call

BRENTWOOD Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Brookdale Senior Living Inc earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kathy Ann MacDonald

Brookdale Senior Living Inc. - SVP of IR

* Lucinda M. Baier

Brookdale Senior Living Inc. - President, CEO & Director

* Steven E. Swain

Brookdale Senior Living Inc. - Executive VP & CFO

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Frank George Morgan

RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research

* Jason Michael Plagman

Jefferies LLC, Research Division - Equity Associate

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

* Joshua Richard Raskin

Nephron Research LLC - Research Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. My name is [Lee], and I'll be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Third Quarter Earnings Release call. (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 on Investor Relations. Ma'am, you may proceed.

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Kathy Ann MacDonald, Brookdale Senior Living Inc. - SVP of IR [2]

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Thank you, and good morning, everyone. I'd like to welcome you to the third quarter 2019 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Steve Swain, our Executive Vice President and Chief Financial Officer.

All statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and we expressly disclaim any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as in the reports we file with the SEC from time to time, including the risk factors contained in the 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 present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brookdale.com/investor and was furnished on an 8-K yesterday.

Also, in today's call, when we reference “same community,” this refers to consolidated senior housing same-community information.

Wilt that, I would like to turn the call over to Cindy.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [3]

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Thank you, Kathy. Good morning to all of our shareholders, analysts, and other participants. This morning, I'll provide an update on our ongoing strategic plan, third quarter results, and we'll introduce our 5-year outlook.

Before I speak about our operations, I'd like to address some changes on our Board and start by thanking our 2 retiring Board members, Jackie Clegg and Jim Seward. Jackie Clegg was instrumental in the numerous governance changes we made over the past few years and our Director search processes, through which stellar new Directors were identified and have joined our Board. Jim Seward's strong financial acumen and his strategic oversight helped us evaluate many deals to reshape our community portfolio. As a result, we have a stronger foundation for long-term growth.

During their tenure, both Jackie and Jim demonstrated exceptional leadership and expertise to guide Brookdale through significant change and provided wise counsel during a period of rapid transformation in the senior housing industry. We appreciate their time and dedication to Brookdale.

Next, we are excited to welcome Vicki Freed and Guy Sansone to our Board of Directors. Both Vicki and Guy have the skills and experience which we believe will help Brookdale drive enhanced shareholder value in this time of continuing rapid change. Vicki has decades of executive leadership in sales and marketing, a critical skill set not previously represented on our Board. Guy brings extensive healthcare and senior housing industry expertise and has advised many companies in their efforts to optimize performance. We look forward to their input and oversight as we continue a successful execution of the company's strategic plan. We also look forward to working with Guy as he assumes the non-Executive Chairman role at the beginning of 2020.

Finally, I want to thank Lee Wielansky for his leadership of the Board as Brookdale's non-Executive Chairman since the conclusion of our strategic review last year. Lee has been instrumental in helping us achieve our lease renegotiations, and we are pleased that he will continue to provide guidance and oversight as an Independent Director.

Turning to our operations, let me set the stage by reminding you of the key tenets of our strategy. We set a path to improve our operations to better position Brookdale for positive senior demographics and the industry tailwinds. We also announced our plan to reduce our community count through an enhanced real estate strategy so our remaining communities have the highest future potential.

So, how are we doing? Put simply, the transformation we initiated last year is working. This quarter's performance and the recently announced transactions with HCP provide further evidence of the progress we are making with our strategic plan. I'll discuss the HCP transactions later. So first, turning to operations, let me provide the industry backdrop to frame how Brookdale's results exceeded the market in the third quarter.

Conditions are improving for the senior living industry. According to NIC's third quarter report, absorption slightly exceeded inventory growth for both independent and assisted living in the third quarter. This is the first time since 2016 that both industry segments hit this inflection point. This is in line with our previously-stated view that the supply-demand equilibrium would occur by the end of 2019.

The industry's inventory growth of 2.9% was the lowest since 2016. Occupancy for the industry improved 30 basis points on a sequential basis. At Brookdale, we are pleased to report same community sequential occupancy improvement was more than double the industry, achieving 70 basis points growth.

On a same-community basis, our occupancy growth for the quarter exceeded the industry by 20 basis points for independent living and by 80 basis points for assisted living. Not only are the results great compared to the industry, but they are also strong compared to our company's historical trend. Year-to-date, this is the best in-year same-community occupancy growth since the Emeritus merger in 2014. Our October occupancy continues this positive growth trend.

Our first priority was to drive top line growth, and I'm extremely pleased that the investments that we've made in associates, marketing, and CapEx drove this great occupancy growth and translated into strong senior housing revenue. For the third quarter, year-over-year senior housing revenue grew 1.8% for both the quarter and year-to-date on a same-community basis. Year-over-year RevPOR growth was 2.8% for the quarter and 3.1% year-to-date. Similar to the industry, we saw some pressure on rate during the quarter. Even so, we still believe in our continued pricing power based on delivering high-quality care and services to our residents.

While accomplishing top line growth, we continue to focus on our associates and on the operational leading indicators to drive future growth. Trailing 12-month retention rates have remained around 70% for 9 consecutive quarters for our Executive Directors and Health and Wellness Directors. These are 2 of our 3 cornerstone leaders in our communities.

The retention rate for sales professionals remains around 66% over the past 4 quarters and continues to be a key focus area. I'm pleased that our voluntary turnover has improved. At the same time, we have been very focused on coaching, mentoring, and accountability. With this focus, our involuntary turnover has increased.

Year-to-date, nearly 2,600 former associates have returned to work at Brookdale, demonstrating that our focus on our associates and our win locally culture is creating thriving communities where people want to live and work. We have had significant success with our leading indicators in the third quarter, with leads and first visits returning to growth. Compared to the prior year quarter, on a consolidated same-community basis, total company leads increased 18%, driven by continued strength and momentum of internally-generated leads.

In addition, for the third quarter, aggregator lead volume returned to a positive contribution on a year-over-year basis. With our marketing investments, we are building a robust lead pipeline, resulting in visit growth that can be effectively managed by sales to drive strong move-in growth. We are filling our lead pipeline with a mix of prospects who either have a near-term need or are planning ahead for senior living. This helps our sales organization be more effective with conducting quality visits with prospects.

As a result, first visits increased 4% from internal sources. With overall move-ins increasing 8%, we were able to see our lead funnel in action. As we have invested more in our internal marketing programs, we are seeing longer-term benefits of building a lead pipeline, with move-ins occurring in both the month in which the lead occurred as well as months after the initial inquiry. I couldn't be more excited with our move-in progress, 2 quarters in a row.

Move-outs are not where we wanted them to be. We faced a tough comparison to last year, and we are pleased with the sequential improvement. The net of move-ins and move-outs resulted in strong sequential occupancy improvement. When we introduced these leading indicators last year, they were intended to demonstrate the operational improvement before you could see our progress in our financial results. You can see the positive impact in sale-community year-over-year RevPAR growth of 1.8% and sequential occupancy growth.

Importantly, the recent positive growth in leading indicators should deliver future benefits over the next few years. I'm pleased with these accomplishments and continue to encourage our operational teams remain focused on the occupancy momentum while protecting rate.

While we saw great success in occupancy, operating expenses presented some challenges. I want to address 2 areas where we are focused on improvement - first, our senior housing operating expenses; and second, our healthcare services business. About 65% of community operating expense is labor-related. Year-over-year, same-community labor expense increased 6.8% for the quarter, resulting in a 5.3% increase year-to-date. This is within our initial guidance expectations range of 5% to 5.5%, but with the tightest labor market in 50 years, we expect to be at or slightly above the top end of our range for the full year.

We do know that the entire industry is facing these same pressures. NIC recently reported a significant increase in wage rates within the industry. The key drivers of the other facility operating expense increase were marketing and advertising investments, property remediation, and higher insurance premiums. Given the top line success we've driven with our internal marketing efforts, we expect to continue these investments in the fourth quarter.

Turning to our healthcare services segment, in the third quarter, our revenue increased 3% for both the quarter and the year-over-year compared to the prior year. The growth was driven by our hospice business. We were disappointed with the third quarter revenue performance of the home health business, which declined by 1% compared to the prior year. This was a direct result of turnover within our sales organization and the time the sales organization needed to spend on issues related to the centralized intake initiative. We have taken action to improve home health revenue growth in the fourth quarter, but with this temporary impact, we now expect to deliver toward the low end of our healthcare services revenue range for the full year.

With that said, I'm extremely pleased with the strong momentum of our hospice business. While a smaller part of our healthcare services segment, it has a long runway of growth. We've opened 3 new agencies this year, and now operate 22 locations across the U.S. In future years, we see significant opportunities to continue expanding in other major markets.

Before I conclude by discussing our outlook and guidance, I would like to make some comments on the recently-announced transactions with HCP. I am thrilled that, in October, we announced significant transactions with HCP. Since I became CEO, I've been focused on how to unlock the value of the entry fee continuing care retirement community, or CCRC venture. And Tom Herzog and I discussed a number of ways to create a win-win for Brookdale and HCP. We believe we have done just that with these transactions.

I'm pleased that, when the transactions are completed, 14 of the CCRC communities will be owned within the HCP portfolio. This includes 1 additional CCRC that was agreed on after the October 1 announcement. Our CCRC associates will continue to care for the CCRC residents after the communities transition to the new operator. We worked hard to create a transaction that delivers value for our shareholders while also ensuring continuity for our residents and associates.

In addition, the HCP transactions will significantly reduce the size of our HCP leased portfolio as we acquire communities that would currently lease from HCP, allowing us to increase our own real estate portfolio. Since the beginning of 2018, giving effect to the recent HCP transactions, we will have restructured leases with our 3 largest REIT partners, reducing our leased portfolio by 27%, and we'll have increased our own communities to be the majority of our consolidated portfolio. This sets the foundation for a bright future.

To summarize our third quarter, I'm extremely pleased with our occupancy and revenue results. Our first priority was to drive top line improvement, and we are delivering on that commitment. While our operating expenses present a challenge, we do expect to deliver results within the guidance range initially introduced in February.

Because our business is large and complex, we are introducing some early perspectives on 2020. These can be found in the investor presentation located on our website. We have outlined key factors to build into your 2020 expectations. As usual, we will provide the financial guidance with our year-end earnings call, but the bottom line is that we expect significant improvement in adjusted free cash flow in 2020 even before the one-time positive benefit from the HCP transactions.

For further transparency, we're also introducing our 5-year company outlook with a 7% NOI CAGR. We believe this will deliver above-industry results and will be significantly driven by capturing our top line occupancy and rate growth opportunities.

In addition, we expect both to further improve margins and to generate income by offering incremental new services to our residents and expanding our addressable market outside our communities.

I'll turn the call over to Steve to provide you further details.

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Steven E. Swain, Brookdale Senior Living Inc. - Executive VP & CFO [4]

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Thanks, Cindy. We made significant progress in the turnaround initiated last year. We are beginning to see the results through the acceleration of our same-community occupancy improvement, with nearly double the sequential increase in occupancy compared to 2018.

Highlights for the third quarter were same-community senior housing revenue and RevPOR year-over-year growth continued. With a strong third quarter same-community sequential occupancy improvement, our expectations remain within initial guidance ranges.

Healthcare services revenue grew year-over-year. We continued our strategic investment to enhance the quality and competitiveness of our communities, as demonstrated by the year-over-year increase in CapEx, which is consistent with our plan.

Sequentially, non-development CapEx was lower due to lessor reimbursements. From a real estate perspective, in the third quarter, there were no changes in the owned or leased portfolios. 15 managed communities transitioned to new operators, most of which were under interim arrangements. To provide context to the 2019 year-over-year financial results, since the beginning of the third quarter of 2018, we have transitioned 77 communities through asset sales and lease terminations. These transactions negatively impacted revenue by $64 million and adjusted EBITDA by $13 million, but positively impacted adjusted free cash flow by $5 million and have the benefit of simplifying operations.

As you know, subsequent to the quarter-end, real estate activity picked up. In October, we announced a series of transactions with HCP. The net effect is to further simplify our real estate portfolio, unlock value, and improve our financial position. Calling out some of the specifics under the definitive agreement, we will realize value from the sale of our interest in the unconsolidated CCRC venture by generating approximately $291 million of net cash proceeds after giving effect to debt and customary working capital proration. Together with HCP, we are now jointly marketing the sale of the remaining 2 unconsolidated entry fee CCRC communities for which we'll receive 51% of the net cash proceeds, and HCP will pay Brookdale a negotiated $100 million management termination fee at the closing of HCPs acquisition of our interest in the venture.

We also entered into an agreement with HCP to restructure our current portfolio of triple-net leased communities. Subsequent to these HCP transactions, Brookdale will own 60% of its consolidated units, will have reduced annual cash lease payments to HCP by approximately $34 million, and we will have improved the remaining HCP lease coverage to approximately 1.1X.

I will focus my third quarter comments on same-community results, which exclude the impact of the transactions and the 2019 lease accounting change. Starting with senior housing, same-community revenue growth was 1.8% compared to the prior year quarter. RevPOR increased 2.8% on a year-over-year basis, with rate increases more than offsetting lower occupancy. Similar to the industry, we saw more pressure on rate during the quarter. However, we continued to exercise rate discipline while driving incremental move-ins and RevPAR.

Looking at the senior housing segments on a same-community basis, independent living occupancy remained around 90% for the fifth consecutive quarter and increased 40 basis points sequentially, which was double the industry improvement. For assisted living and memory care, occupancy increased 11 basis points on a sequential basis and outperformed NIC by 80 basis points. And the recent increase in move-ins sets the stage for the occupancy momentum to continue into the fourth quarter.

Turning to same-community operating expenses, compensation-related expense increased 6.8% compared to the third quarter of 2018, mainly from wage rate increases and higher benefits expense. The year-to-date increase was 5.3%. As Cindy mentioned, unemployment is at a 50-year low, which is causing significant wage pressure, but we're pleased with our ability to retain employees. And for context, the industry's assisted living hourly labor rate increased 5.9% year-over-year to an all-time high since NIC started reporting in 2007.

Other facility operating expense increased to 7.4% compared to the third quarter of 2018. During the quarter, we incurred higher expenses for property remediation and higher insurance premiums. We believe that long-term value chain will be achieved by driving top-line revenue. Accordingly, we have made marketing investments to capture share, which is also increasing facility operating expense. It is important to note that we expect years of revenue growth from higher occupancy, and we recognize that now is the time to make marketing investments to realize this revenue opportunity.

Moving to the healthcare services segment, healthcare services revenue improved 3.2% year-over-year. The increase was driven by the strong performance of our hospice business, which posted double-digit increases for both revenue and average daily census year-over-year. Home health revenue declined sequentially due to sales force turnover and temporary customer relations issues related to the centralized intake initiative.

Third quarter 2019 adjusted EBITDA was $80 million compared to $128 million for the prior year quarter. The primary driver of the lower adjusted EBITDA was the result of 2 noncore items - a $13 million decline related to dispositions and a $6 million impact from the new lease accounting standard, along with higher labor and marketing-related investments and the temporary healthcare services impact as noted earlier.

Adjusted free cash flow was negative $14 million for the third quarter. When compared to the prior year quarter, adjusted free cash flow decreased by $23 million. The key variances were lower adjusted EBITDA as outlined and increased year-over-year non-development CapEx, partially offset by working capital improvement and a reduction in interest and financing lease payments due to disposition and refinancing activities.

For the third quarter 2019, Brookdale's proportionate share of unconsolidated ventures delivered $10 million of adjusted EBITDA. The decrease from the prior year quarter was primarily due to the sale of our equity interest in ventures last year. Adjusted free cash flow of $6 million was higher than the prior year quarter due to an increase in cash proceeds from entrance fee sales.

In August, we refinanced the majority of our first-half 2020 maturities, replacing a blended interest rate of 5.5% with new (inaudible) at 3.6%. This is expected to reduce annual interest expense by approximately $2.5 million. The balance sheet remains strong and well-positioned to provide flexibility to effectively implement the operational turnaround, and we will continue to look at opportunistic share repurchases.

For the discussion on guidance, 2020 early perspectives and the 5-year outlook, I will refer to slides in the current investor presentation. The presentation can be found on the Investor page of the Brookdale website. Slide 9 is our initial guidance. Since some of our current expectations are at the high end and others are at the low end of their respective ranges, let me summarize the impact of what Cindy and I highlighted today.

For the consolidated business, we expect adjusted EBITDA to be near the low end of the $400 million to $425 million range. There are 3 main drivers. Similar to the industry, we are seeing more rate pressure in select markets. Nationwide, we still believe we have pricing power and continue to expect a significant price increase next year. OpEx will be higher. Labor and benefits expense will be at or slightly above the top of our initial expectations, along with higher marketing costs. Some of the higher marketing investments are being offset by lower G&A costs. And finally, healthcare services revenue is now expected to be at the low end of expectations, but within our initial guidance range due to third quarter results.

We expect adjusted free cash flow to be in the mid to high end of the guidance range. This expectation is driven by refinancing, resulting in lower interest expense and lower LIBOR. And non-development CapEx will be slightly less than expected due to favorable insurance recovery.

Our proportionate share of the unconsolidated ventures, adjusted EBITDA and adjusted free cash flow will be at or slightly above the top end of the range based on year-to-date results. Slide 10 outlines early perspectives on tailwinds and headwinds that will impact 2020. Even with the recent new supply coming into the market, we expect supply-demand equilibrium to be maintained throughout 2020, which will be a significant industry improvement over 2019. As usual, our formal 2020 financial guidance will be provided during the fourth quarter earnings call. The bottom line is, even after excluding positive one-time items, we expect a significant improvement in adjusted free cash flow in 2020.

In the second quarter, the Board and senior management team engaged in long-term strategic planning. I will share some key elements of the plan. Slide 11 summarize relevant metrics that build the foundation for the strategic plan, which include operational improvements in both move-ins and occupancy, and supply and demand charts that show the favorable industry backdrop. Slide 12 shows our consolidated same-community 5-year outlook with building blocks to deliver a 7% NOI CAGR through 2024, with growth accelerating over the 5-year period. Operating performance improvement, in combination with the demographic tailwinds and improving industry fundamentals, will result in outsized growth.

The plan is driven by 3 key elements - inflect and build positive momentum, grow the core business as the macroeconomic picture improves, and capture upside opportunities. First, the operational momentum. Top line growth will be driven by increased occupancy in addition to rate. We are seeing this key inflection point already. We delivered significant sequential occupancy growth in the third quarter. Year-to-date, this is the best in-year same-community occupancy growth since the Emeritus merger in 2014.

Moving to facility operating expenses, labor investments that have outpaced the industry will align to industry increases. For G&A, as significant owned and leased dispositions are nearing completion and after the HCP venture transition, we will scale further and look at operational redesign.

Secondly, we will take advantage of demographic tailwinds and improving industry fundamentals to drive results. For example, on the demand side, 15% of our new residents are baby boomers. The boomer generation, or Silver Wave, is 50% larger than the silent generation, which is the generation that makes up the bulk of our move-ins today. Between operational improvement and supply-demand tailwinds, over the next 5 years, we expect occupancy will increase to 89% or 90%, returning to our past achievement. This still leaves an opportunity beyond 2024 to increase above 90%.

By 2024, we expect RevPOR to increase $1,000 per month when compared to 2019. This RevPOR increase averages to approximately $200 per year. The third element of the strategic plan leverages opportunities unique to Brookdale. Initiatives from increased labor efficiency through technology to improved outcomes through an integrated healthcare platform. We'll be excited to share additional details of the strategic plan at our Investor Day next year.

I'll now turn the call back over to Cindy.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [5]

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Throughout Steve's and my discussion this morning, we referenced our agreements with HCP rather than Health Peak Properties. We wish Tom and his team continued success as Peak.

To summarize our financial results, I'm extremely pleased with our occupancy and revenue results. Our first priority was to drive top line improvement, and we are delivering on that commitment, and our sequential occupancy growth was better than the industry.

The challenges we faced this quarter was higher labor costs and rate pressure in select markets were similar to the industry. And importantly, we are delivering results within our original guidance range. I am confident that the positive momentum we've seen over the past few quarters will continue. We have made a monumental shift in improving the culture over the last 20 months. Our progress is evidenced by the nearly 2,600 associates returning to Brookdale this year. I am grateful for the amazing and dedicated team of associates that take care of our residents and patients every day during ordinary days and extraordinary days, like those that we spent protecting our residents during the hurricanes and California wildfires.

I know that we will succeed because the work we do is so important. We are Brookdale, and we are taking care of America's seniors.

Operator, please open the line for questions.

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Steven E. Swain, Brookdale Senior Living Inc. - Executive VP & CFO [6]

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Before we get into live Q&A, I'd like to give a few more details to address a theme that came up in e-mails from investors last night about how we will achieve full-year guidance, which implies at least a $20 million sequential improvement in EBITDA. First, we expect sequential top line growth. Occupancy momentum is a big part of our expectations. Occupancy grew each month in the third quarter and also grew in October. Given this momentum, we expect occupancy growth in the fourth quarter. In addition, we expect rate to stabilize as many of our new residents will receive 2020 rates when they move into our communities. For the most part, in-place residents will receive their rent increase on January 1.

Secondly, senior housing operating expenses will improve sequentially. Third quarter expenses were impacted by seasonality. This is due to higher utility and maintenance costs associated with warmer weather. There were also some items that impacted our 3Q results that we do not expect to recur in 4Q. First, our third quarter included about $1.5 million of costs associated with the hurricane season. Second, we intentionally, increased our internal marketing spend in the second quarter to drive move-ins. We are pleased with our lead funnel and will reduce this cost in Q4.

Finally, we incurred higher-than-expected compensation expenses from our operational perspective, we are actively taking steps to proactively manage overtime and contract labor costs, and we are expecting improvement in Q4. And lastly, we expect that our healthcare services margin will improve from an unusually low quarter. During the third quarter, we had to work through some issues related to a backlog of receivables that was caused by the central intake initiative. This distracted our sales team, and we lost some revenue as a result. We also saw some disruption in visits due to the hurricane.

Operator, we will now open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Jason Plagman.

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Jason Michael Plagman, Jefferies LLC, Research Division - Equity Associate [2]

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

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [3]

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So, Jason, we traditionally don't share our ending occupancy, but it's important to know that we did increase occupancy every single month during Q3, so it is fair to assume that our ending occupancy exceeded our average occupancy. And we're very pleased that that occupancy growth continued into the fourth quarter with occupancy in October further building momentum, which is why we feel confident in saying that our fourth quarter occupancy will actually show occupancy growth.

That's unlike most of the prior years. In 3 of the last 4 years, we saw a bit of an occupancy decline in Q4, but because of the strong momentum we have going into Q4, because of a lead funnel, because of the improvement in proving our sales conversion, we believe that we'll grow occupancy in Q4.

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Jason Michael Plagman, Jefferies LLC, Research Division - Equity Associate [4]

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

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [5]

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Let me take the second question first, and then I'll go to the first question.

With regard to why we believe that we will be able to moderate our labor growth in 2020 and beyond, remember that 2019 was the third year of an (inaudible) industry investment in wages. And so we do expect wage rates to increase in 2020. And I don't think it'll be the 2.5% to 3% that usually you saw in merit increases, but we believe that our increases will be more in line with the industry.

Just a reminder, NIC showed that wage rates in Q3 were up 5.9%. Now, that is a delay. They actually report in Q3 the results through Q2. So the industry is seeing significant pressure. But we're taking that into consideration when we set our rates for 2020. And as we've demonstrated in 2019, we have very strong success when it comes to passing rate increases through to our resident base, particularly when they are driven by labor cost increases.

Now, turning to your first question, what are we doing to deal with the wage pressure, probably the first and most important thing is a true focus on controlling overtime and contract labor. Now, we have to get to the root cause of what drove this up in 2019 and in Q3 in particular. One of the things that we've seen is it's the tightest labor market in the last 50 years. And so, making sure that we've got appropriate staff in our communities is the most important thing that we can do.

So in 2 large markets, we've already hired recruiters to help staff the communities. That takes some of the pressure off of our community associates. And when you've got an appropriate pool of talent, then you don't have to go to overtime, which, remember, is time-and-a-half or to agencies, which build profit margin into the labor cost. So that's the first thing that we've done.

The second thing that we've done is we have reassigned some of our corporate recruiting resources to assist additional communities in achieving their appropriate staffing. The third thing that we have done is we have our division Presidents, our regional Vice President, our DDOs, actively managing overtime and contract labor so that they can see communities that have increasing trends, and they can take additional action by supporting them (inaudible) community level to control that overtime.

The most important thing that we can do is make sure that we improve our retention rate of our associates because if we keep the same workforce, it's more efficient. You don't have all the hiring costs. And we are making great progress in that. So those are some of the things that we're doing. Certainly there's more, but that was just a sample of what we're doing.

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Operator [6]

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Your next question is from Josh Raskin.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [7]

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

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Steven E. Swain, Brookdale Senior Living Inc. - Executive VP & CFO [8]

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If you look at same community, certainly we expect revenue and adjusted EBITDA to be up. As you indicated, on a total reported basis, the impact of dispositions will be less in 2020 versus 2019. But even factoring in dispositions, we still expect EBITDA to be up on a year-over-year basis.

As Cindy mentioned, we expect similar rate increases in 2020, and we have occupancy momentum, so that's going to drive the top line. Even with incremental expenses, if you drive rate at 4% and you -- as an example, just illustrative -- and you drive expense at 4% and you grow occupancy, that delivers 6% to 7% NOI growth. So that puts it in perspective as an example of year-over-year math to get to growth.

The EBITDA, the transaction we did with Peak will be a slight headwind associated with the EBITDA, but that is going to be more than offset by the good guys. The other impacts on EBITDA, we alluded to them in the investor presentation. It's about $65 million of net cash proceeds. The $100 million -- these are all driven by one-timers -- $100 million of fee termination revenue that we will receive, that's a one-time EBITDA impacting good guy offset by a one-time loss of the management revenue associated with the Peak transaction, and then estimated transaction fees of $13 million.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [9]

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And Josh, just to pile onto the [stuff] that Steve said, it's important to note that we think the competitive environment is significantly better in 2020 than it is in 2019. We have always said that new openings affect us for about a year after a competitor opens. And then, in the third quarter, our opens were 53% lower than the peak in the second quarter of 2017, and they were actually down sequentially 26% from the second quarter of 2019. So the backdrop of having an improving industry is critical to our success in 2020.

The second thing that's really critical to the success is the improving occupancy momentum. As you know, one of the biggest challenges that we've had in our turnaround was really getting our top line moving in the right direction, because occupancy is really the engine that's going to fuel the long-term growth that we have for the company. And we have a huge opportunity, more than $100 million to capture over the next several years. The progress that we made in the second quarter and the third quarter, and the progress that we expect to make in the fourth quarter, will set us up for improvement in 2020.

I just want to reiterate that move-in in the second quarter were up 6% year-over-year. In the third quarter, that accelerated to 8% year-over-year, and so showing that we can actually improve occupancy in the communities will give us much more confidence into 2020.

Now, certainly, we are not happy with our expense performance in this quarter. We do think we understand sort of the unusual things that affected the quarter and the areas where we just need more operating discipline. But the hardest part of the turnaround is really getting the top line moving, and that gives us confidence going into 2020.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [10]

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So the other question I have is just around this 5-year plan, and I guess 2 questions would be how much of this plan is based on the environment getting better and what you're seeing from NIC data and anecdotal data around supply versus demand versus sort of things in control of Brookdale?

And then, from a timing perspective, sort of why now? I think typically we see these at the start of the year with a new budget process when operations are much more settled, certainly not coming off of a quarter like we just saw. So what was the catalyst to introduce the plan today relative to beginning of next year, [et cetera]?

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [11]

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Josh, it's a really good question. We sat down with our Board in the summer and went through our strategic plan for the next 5 years, and that was really (inaudible) by many things that were coming together at the same time. Our portfolio restructuring is largely complete. The ACP transaction was something that looked like we were going to get it across the finish line, and we were happy to announce that October 1. So we had more certainty around what our portfolio would look like.

I think the other thing that we had been waiting for to announce our outlook is we wanted to make sure that we saw inflection in the supply-demand macroeconomic condition because the one thing that we know for sure is it's hard to grow occupancy when you're in the midst of a full-fledged competitive headwind. And so we've been looking at our proprietary analysis, all around our communities, for the last 20 months trying to figure out exactly when was the competitive environment going to turn. We called that it was going to turn in 2019. We now have objective evidence, both in the industry and around Brookdale's communities that it has turned, so that was one of the factors that gave us the confidence to sort of set it forward.

I think the second thing is we recognize that not having a long-term outlook makes it difficult for investors to know what to expect from us. And so, as soon as we could see our way forward to having the right team in place to drive the success and having the backdrop work, we wanted to get it out as quickly as possible. Now, as you would expect, we'll give you more details as time passes, including an Investor Day next year. But we wanted to share as much information as soon as we can because we know the value of our company is based on what you think we will do over the long-term.

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Operator [12]

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Your next question is from Joanna Gajuk.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [13]

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So, first, the commentary around the healthcare services segment, so sounds like there's some of the things that were occurring in third quarter you view them as temporary. So is there any way to size it up? Because margins were clearly very -- 4% in Q3, just to kind of help with the bridge from Q3 to Q4 in terms of how quickly you think the margins could improve in that segment, the magnitude I guess of this improvement you expect sequentially between the 2 quarters.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [14]

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Joanna, that's a very fair question. There is no question that we were disappointed with the performance of our healthcare services segment in Q3. Having said that, we think that a lot of the issues related to the centralized intake initiative, which allowed receivable to grow over last year roughly and during the third quarter, and [Jean] and the team took significant efforts to really bring those receivables down and to build that.

Unfortunately, what that meant is that our salespeople who had to spend time collecting documentation so that we could bill prior receivables instead of [selling] had an impact. Also, when we got into some of the services, we realized that we didn't have all the documentation (inaudible) bill, so we lost the revenue. So I think that part of it will certainly go away in Q4 because we've worked so much of the backlog in Q3.

Now, for the part that also impacted the [results] is our (inaudible) was down largely related to organizational turnover, but there were some hurricane effect as we have a big presence in Florida. And patients were reluctant to schedule their visits when they weren't sure if they were going to get hit by a hurricane or not. So we have pretty good confidence going into Q4, and we're thinking that that will be more similar to (inaudible) our first 2 quarters of the year for margin than for Q3.

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Steven E. Swain, Brookdale Senior Living Inc. - Executive VP & CFO [15]

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

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [16]

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And the other topic, you mentioned for the senior housing part of the business, the pricing was pretty good, but I guess you mentioned that there was still some discounting in the quarter that was happening, so any color there? And I guess, going forward, it sound like you were implying that you do not expect, or you haven't been planning much of a discounting in the rest of the year.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [17]

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

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [18]

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

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [19]

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

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [20]

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Right, because you made it sound like you expect the labor inflation overall to be about maybe the long-term [averages], so maybe the pricing, it sounds like you will try to push a little bit higher pricing.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [21]

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Our expectation is that the labor rate increase will be less than the pricing increase that we passed through to our residents.

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Operator [22]

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Your next question is from Chad Vanacore.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [23]

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In Steve's commentary, you said he expects supply-demand equilibrium to be maintained through 2020. Given that new supply still exceeds demand, there's an overhang from inventory and lease-up. What gives you that confidence? And if you can be a little more granular, there will be equilibrium in 2020?

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [24]

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Yes. So what we do is we look at our proprietary data analysis that is around the Brookdale-specific communities. And if you look at Page 6 of our Investor Deck, you can see a few things.

First of all, if you look at the construction pipeline around our communities, it is 14% lower than the first quarter 2018 peak. That's pretty important. If you look at the opens around our community, and remember that opens affect us for 12 months, opens in Q3 were 53% lower than the second quarter '17 peak. And sequentially, they came down 26% from the second quarter of -- I'm sorry, 35% from the second quarter of this year. So we are seeing around our communities the number of opens really come down. So what that tells me is we've got much less competitive pressure around our communities, and that gives us great confidence in 2020.

Now, I'm going to be honest. There are very different perspectives based on where your portfolio is located. And if you look at some of the public information, Well Tower was the first to come out with having less competitive pressure around their communities, and there are other REITs who are saying that they are going to continue to have competitive pressure longer than most.

Now, remember, that because we have so much assisted living, we have been in the teeth of the storm longer than anyone else. And so the fact that we're now coming out of it makes us feel just great about the future.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [25]

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And then, I just want to take a look at your long-term growth outlook. So, given your RevPOR assumptions and that 5-year outlook, that looks like about a 4% CAGR. How does that compare with what you expect 2020 rate increases to be? And then, what timeframe do you think it takes you to get to the midpoint of that long-term outlook?

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Steven E. Swain, Brookdale Senior Living Inc. - Executive VP & CFO [26]

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Sure. You're right, about 3.5% to 4% CAGR on the 5-year plan. And we're not really detailing the RevPOR or the rate growth. You've heard commentary that it's going to be significant, and it's going to be -- we're expecting it to be greater than the wage rate increases.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [27]

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

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Steven E. Swain, Brookdale Senior Living Inc. - Executive VP & CFO [28]

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

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

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [29]

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But for our purposes, should we be thinking about a normal distribution of improvement over that 5-year period? Or should we be thinking more hockey stick-like?

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [30]

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

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Operator [31]

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Your next question is from Steven Valiquette.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [32]

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So I just wanted to come back to the 4Q '19 outlook for a moment. I guess 2 questions around that. First, the color that you gave on what will drive some of the sequential EBITDA improvement is definitely helpful. I guess I'm curious, within all the factors that you've mentioned, whether it's the rate updates or higher occupancy or expense control or better healthcare services results, in which of these do you think is the lowest-hanging fruit that should be the easiest to achieve?

And then the second question is, when [you would] look at the last 3, 4 years or so, and the adjusted EBITDA actually did trend down in the fourth quarter versus the third quarter, so I don't know if there's anything worth pointing out just seasonally, or other factors that drove that over the last 3 years or so that you'd have to overcome over and above the things you're talking about, the drive, the sequential improvement in EBITDA from 3Q to 4Q this year, but just wanted to pick your brain on what happened the last 3 years in terms of why EBITDA went down sequentially in 4Q versus 3Q. Thanks.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [33]

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Yes, those are really good questions. So the first thing I'll say is that the pattern of occupancy growth in the third quarter has a lot to do with what happens in the fourth quarter. And because we sequentially built occupancy each month during Q3, as well as October, that helps us a lot with regard to the fourth quarter being up or down. And so we're feeling very good about the fact that it's going to be up with regard to occupancy.

With regard to the things that are the easiest to bridge from Q3 to Q4, the first thing is the things that we had to clean up that impacted Q3 that (inaudible). So [Innajean] and the team have worked a lot of backlog of AR caused by the central intake project. And so that is behind us and won't happen.

The hurricane expenses of $1.5 million, that's behind us. That won't happen. Every third quarter, we have higher electricity and water costs as a result of hot summer weather. That won't happen in Q4. So all those things aren't really something that we actually have to do to the business to make Q4 better. They are just unusual expenses that we had in Q3 that won't repeat.

With regard to Q4, getting our hands around this labor is the most important thing that's going to drive our operating expense improvement. That's 65% of our costs, and our teams are all over it. It's something that they are focusing on, on a daily basis. And it's been a tough labor environment, but we are having to just be much more conscious and put additional recruiting resources to make sure that we're staffed in the community.

And then, with regard to marketing expenses, we are very happy that we made the marketing investments that we did. Our move-ins look great. Our lead funnel looks great. But we also recognize that, between Thanksgiving and Christmas, people are worried about Christmas gifts, and the holiday mail is just overwhelming. So, rather than to compete with that holiday clutter, we are going to work the pipeline that we have and do a more normal investment in marketing spend. So I think all of those things together will help us with Q4 and then add on that we start selling our 2020 rates to new residents during Q4, particularly November and December. That will help our rate, as well.

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Operator [34]

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Your next question is from Frank Morgan.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research [35]

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

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [36]

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It's a great question, Frank. And we have (inaudible) to be successful historically on scaling G&A. We've usually said that it takes 6 to 12 months after the adjustments in the portfolio to get the cost out of the business. And given that we are targeting having the transaction with Peak in the first quarter, we've put $5 million in the pro forma. And what that reflects is that we are going to transition a number of our G&A associates to a new operator to support the communities and maintain continuity for both the associates and the residents. So that is baked.

At the same time, Diane Johnson May, our EVP of HR, Steve and the operators are spending a lot of time to redesign our organization. Given the massive, massive reduction in complexity associated with the sales, the entry fee, communities and some of the other changes that we've made to the portfolio, it gives us a chance to really think about what is the most streamlined and efficient operation that will give the best support to our communities. And we're excited about that work.

Now, my guess is that'll be more in the back half of 2020 than the front half, but it's something that we're focused on working on today.

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Kathy Ann MacDonald, Brookdale Senior Living Inc. - SVP of IR [37]

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Go ahead, Cindy.

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Lucinda M. Baier, Brookdale Senior Living Inc. - President, CEO & Director [38]

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So it looks like we are out of questions, and so let me just end by saying that we are so very pleased with our top line growth. It remains strong, and we expect to deliver results that are within our initial guidance range. Our third quarter was impacted by elevated costs in a few areas that we don't expect to recur in the fourth quarter.

In addition, we are very focused on actions that will help mitigate the impact of a tight labor market. We have made significant progress in our strategy that we initiated last year, drawing strong top line growth is the most important and difficult part of our strategy, and we couldn't be more pleased with our industry-leading occupancy growth and strong rate performance. We will build on this while focusing on improving our expense control. We have great confidence in the 5-year plan which we introduced today because of the powerful upside for senior living and the progress we're making to improve our operations.

Thank you for joining us today.

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Kathy Ann MacDonald, Brookdale Senior Living Inc. - SVP of IR [39]

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Operator, you can now close the call.

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Operator [40]

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