Q3 2019 Earnings Call
This time I'll like to welcome everyone to the Brookdale senior living third quarter earnings release calls.
All lines are on you.
We will open the lines for questions at the end of because as a reminder, this conference will be recorded for replay purposes.
I'd now like to turn the call over to Kathy Mcdonald, an investor relations.
You mean you May proceed.
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 buyer or 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, 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.
Well listen the reports, we filed with the FCC 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.
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 Dot com forward Slash investor and was furnished on an 8-K yesterday.
Also in today's call when we referenced same community. This refers to consolidated senior housing same community information.
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 ongoing strategic plan third quarter results and we'll introduce our five year outlook.
Before I speak about our operations I'd like to address some changes on our board and start by thanking our two retiring board members, Jackie Clegg and Jim Zorn.
Jackie Clegg was instrumental in the numerous governance changes we made over the past few years and our directors 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 10 year, 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 a senior housing industry. We appreciate their time and dedication to brookdale.
Next we are excited to welcome Vicki freed and Guy Centsone to our board of directors.
Both Vicki and Guy had the skills and experience, which we believe will help brookdale drive to enhance 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 health care 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 continued successful execution of the company's strategic plan.
We also look forward to working with Guy as he assumes a non executive chairman role at the beginning of 2020.
Finally, I want to think leaving landscape for his leadership of the board as Brookdale Nonexecutive chairman since the conclusion of our strategic review last year.
He has been instrumental in helping us achieve our lease renegotiations and we're 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 tenants 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 meaning communities at 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 H.C.P. transactions later, so first turning to operations, let me provide the industry backdrop to frame how brookdales results exceeded the market in the third quarter.
Conditions are improving for the senior living industry.
According to and I see third quarter report absorption slightly exceeded inventory growth for both independent and assisted living in a third quarter.
The first time since 2016, that's both industry segment 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 industrys 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're pleased to report same community sequential occupancy improvement was more than double the industry, achieving 70 basis points grow.
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're also strong compared to our company's historical trend.
Year to date. This is the best in your same community occupancy growth since he meritas merger in 2014.
October occupancy continues this positive growth trend.
Our first priority was to drive topline 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, Revpar 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.
Well accomplishing topline 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 nine consecutive quarters for executive directors and health and wellness directors.
These are two of our three cornerstone leaders in our communities.
The retention rate per sales professionals remains around 66% over the past four quarters and continues to be a key focus area.
I'm pleased that our voluntary turnover has improved at the same time, we've been very focused on coaching.
Mentoring and accountability with this focus our involuntary turnover has increased.
Year to date nearly 2600, former associates have returned to work at Brookdale.
Demonstrating that our focus on our associates and our when locally culture is creating thriving communities where people want to live and work.
We've had significant success with our leading indicators in a third quarter with leads and first visit returning to growth.
Parents are 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're building a robust lead pipeline, resulting in visit growth. It can be effectively managed by sales to drive strong move and growth.
We are filling or lead pipeline with a mix of prospects, who either have a near term need for our 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 final an action.
As we have invested more in our internal marketing programs, we are seeing longer term benefits of building a lead pipeline with moving 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 or move in progress two quarters in a row.
Move outs are not where we wanted them to be we faced a tough comparison to last year and we're pleased with the sequential improvement.
The net move ins and move outs resulted in strong sequential occupancy improvement.
When we introduce 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 same 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.
Well, we saw great success and occupancy operating expenses presented some challenges.
I want to address to areas, where we are focused on improvement.
First our senior housing operating expenses and second our health care 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, a 5% to 5.5%, but with the tightest labor market 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 the same pressures.
And I see recently reported a significant increase in wage rates within the industry.
The key drivers of the other facility operating expense increase we're marketing and advertising investments property remediation and higher insurance premiums.
Given the topline success, we've driven with our internal marketing efforts, we expect to continue these investments in the fourth quarter.
Turning to our health care services segment in the third quarter, our revenue increased 3% for both the corridor and the year to date compared to the prior year. The growth was driven by our hospice business. We were disappointed with third quarter revenue performance of the home health business, which declined by 1% compared the prior year.
Sure.
This was a direct result of turnover within our sales organization and the time the field 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 health care services revenue range for the full year.
With that said I'm extremely pleased with the strong momentum of our hospice business.
Well, a smaller part of our health care services segment. It has a long runway of growth.
We opened three new agencies this year and now operate 22 locations across the U.S. in future years, we see significant opportunities to continue expanding and 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'm thrilled, but 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.
We'll be owned within the HCP portfolio.
This includes one additional CCRC that was agreed on after the October Onest announcement.
Our CCRC associates will continue to care for the CCRC residence after the communities transition to a new operator.
We worked hard to create a transaction that delivers value for our shareholders. While also ensuring continuity for residents and associates.
In addition, the HCP transactions will significantly reduce the size of our HCP leased portfolio as we acquire communities that we currently leased from HCP.
Allowing us to increase our owned real estate portfolio.
Since the beginning of 2018, giving effect to the recent HCP transactions, we will have restructured leases with her three largest riet partners, reducing our lease portfolio by 27% and we'll have increased our owned 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 in revenue results.
Our first priority was to drive top line improvement and we are delivering on that commitment.
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 outline key factors to build into your 2020 expectations as usual, we will provide the financial guidance with our yearend 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.
CP transactions.
For further transparency, we're also introducing our five year company outlook with a 7% and Hawaii Cagar.
We believe this will deliver above industry results and will be significantly driven by capturing our topline 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. Thanks, Andy we made significant progress and 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 be senior housing revenue and Ralph poor year over year growth continued.
With a strong third quarter same community sequential occupancy improvement our expectations remain within an initial guidance ranges.
Health care 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, increasing capex, which is consistent with our plan sequentially non development Capex was lower due to the bus or reimbursements.
From a real estate perspective in a third quarter. There were no changes in me owned or leased portfolios 15 managed communities transition to new operators, most of which were under interim arrangement.
To provide the context to the 2019 year over year financial results since the beginning of the third quarter of 2018, we have transitioned to 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 and 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 died and customary working capital peroration.
Together with HCP, where now jointly marketing the sale over the remaining two unconsolidated entry fee CCRC communities for which will receive 51% of the net cash proceeds and HCP will pay brookdale and negotiated 100 million dollar management termination fee at the closing of HCP is.
Acquisition of our interest in the venture.
We also entered into an agreement with HCP to restructure our current portfolio or triple net leased communities. Subsequent to do you see bee 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 1.1 times.
I will focus my third quarter comments on same community result.
Which exclude the impact on the transactions and the 29 peanut lease accounting change starting with senior housing same community revenue growth was 1.8 per cent compared to the prior year quarter rough poor increased 2.8% on a year over year basis with rate increases more than offsetting lower occupancy similar to the end.
History, we saw more pressure on rate during the quarter. However, we continue 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 100 basis points on a sequential basis and.
Outperformed Nick 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.
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 Nick 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 creation will be achieved by driving topline 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.
As revenue opportunity.
Moving to the health care services segment Health care 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 to two salesforce 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 two noncore items, a 13 million dollar decline related to dispositions and 6 million dollar impact from the new lease accounting standard.
Along with higher labor and marketing related investments and the temporary health care 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 the reduction and.
Trust and financing lease payments due to disposition and refinancing activities.
For the third quarter 2019, Brookdales proportionate share of unconsolidated ventures delivered $10 million of adjusted EBITDA decrease from the prior year quarter was primarily due to the sale of our equity interests and ventures last year adjusted free cash flow of $6 million was higher than the prior year quarter due to an increase in cash pro.
Seeds from entrance fee sales.
In August we refinance the majority of our first half 2020 maturities, replacing a blended interest rate of 5.5 or signed with new died 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.
And flexibility to effectively implemented the operational turnaround and we will continue to look at opportunistic share repurchases.
For the discussion on guidance 2020 early perspectives and the five year, although I will refer to slides in the current investor presentation. The presentation can be found on the investor page of the Brookdale Web site slide nine as our initial guidance since some of our current expectations are at the high end and others are at the low end of their research.
Active ranges, let me summarize the impact of whats, Andy and I highlighted today.
For the consolidated business, we expect adjusted EBITDA to be near the low end of the U $400 million to $425 million range. There are three 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 hiring marketing investments are being offset by lower DNA costs, and finally health care 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 Libra 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 here today 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 to supply demand equilibrium to be maintained throughout 2020, which will be a significant industry improvement over 29 team.
As usual our formal 2020 financial guidance will be provided and during the fourth quarter earnings call. The bottom line is even after excluding positive onetime 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 showed a favorable industry backdrop.
Slide 12 shows our consolidated same community five your outlook with building blocks to deliver a 7% and Hawaii CAGR through 2024 with growth accelerating over the five 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 three key elements inflecting build positive momentum grow the core business as the macroeconomic picture improves and capture upside opportunities first the operational momentum topline growth will be driven by increased occupancy. In addition to rate. We are seeing this key inflection point.
No radio we delivered significant sequential occupancy growth in the third quarter year to date and this is the best in your 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 DNA 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 down 15% of our new residents are baby boomers 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 bid.
Tween operational improvement and supply demand tailwinds over the next five 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 Rev poor to increase $1000 per month, when compared to 2019. This rev poor 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 health care platform will be excited to share additional details on the strategic plan at our Investor Day next year I'll now turn the call back over to Sandy.
Throughout Steve's in 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 face this quarter with 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.
I am confident that the positive momentum we've seen over the past few quarters will continue we have made a monumental shift and improving the culture over the last 20 months.
Our progress is evidenced by the nearly 2600 associates returning to Brookdale this year.
I'm 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 at work we do is so important.
We are brookdale and we are taking care of America seniors operator, please open the line for questions.
Before we get into live today I'd like to give a few more details to address a theme that came up and emails 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 crew each month in the third quarter and also grew in October .
Given the momentum we expect occupancy growth in the fourth quarter. In addition, we expect rate to stabilize as many of our new residents well received 2020 rates when they move into our communities for the most part in place residents will receive their rent increase on January 1st.
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 threeq you results that we do not expect to recur in Fourq you first our third quarter included about $1.5 million costs associated with 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.
We are expecting improvement in Q4.
And lastly, we expect that our health care 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.
Revenue as a result, we also saw some disruption envisage due to the hurricane.
Operator, we will now open up the line for questions.
At this time I'll like to remind everyone in order to ask the question.
Prestart is number one on your telephone keypad.
Coffers of just a moment to go public interest for I get you asked the question press started at number one on your telephone keypad.
Your first question is from Jason Plagman here lightest fell open.
Hey, good morning, Thanks for the for the additional color on the bridge to Q4.
As far as it sounds like the Oh no revenue contribution is a key portion of that bridge.
I wanted to share with US where you ended the quarter from an occupancy standpoint, you know I'm, assuming that was higher than the average occupancy throughout the quarter. If it was increasing each month.
That would help lets just kind of model, where the trajectory as he entered Q4.
So Jason we traditionally don't share ending occupancy, but it's important to note that we did increased occupancy every single month. During Q3. So it's fair to assume that are ending occupancy exceeded our average occupancy and we're very pleased that occupancy growth continued into the fourth quarter.
You can see at October further building momentum, which is why we feel confident in saying that our fourth quarter occupancy will actually show occupancy growth.
Like most of the prior years in three of the last four years, we saw a bit of occupancy declined in Q4, but because of the strong momentum we have going into Q4, because I believe all because of the improvement and proving our sales conversion, we believe that will grow occupancy in Q4.
Sure.
Okay Fair enough and then.
On the.
Cost side.
She is very are focused on in the near term to offset the wage pressure that you're seeing with the overtime and premium labor and then kind of longer term, what what gives me confidence that the wage growth will moderate.
Our next year, given the low employment unemployment environment. They did did mention.
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.
2020 beyond remember that 2019 was the third year of an industry investment and wages and so we do expect wage rates to increase in 2020, and I don't think it'll be the to an after 3% that usually you start merit increases, but we believe that our increases will be more in line.
The industry, just a reminder, and I see show that wage rate in Q3 were up 5.9% now that is a delay they actually report in Q3. The results through Q2, so the industry anything significant pressure, but we're taking that into consideration when we set our rights for 2020.
And as we've demonstrated in 2019, we had very strong success when it comes to pending rate increases through to our resident base, particularly when they are driven by labor cost increases now turning to your first question what do we what are we doing too.
Deal with the wage pressures.
First and most important thing is a true focused on controlling overtime and contract labor now we have to get the root cause what drove that.
In 2019 and in Q3 in particular, what are the things that we've seen.
It's labor market in Alaska.
Sure.
So making sure that we've got an appropriate staff in our communities is the most important thing that we can do so into large markets weve already hired.
Recruiters to help staff the communities that take some of the pressure off our community associate and when you've got an appropriate pool of talent. Then you don't have to go to overtime, which remember it's hard to half or two agencies, which fill the profit margin into labor costs. So that's.
The first thing that we've done the second thing that we've done as we refined our corporate recruiting resources to assist additional communities.
Cheating there appropriate staffing the third thing that we have done is we had our division presidents are regional Vice presidents are 80.
Actively managing over time in contract labor. So they can see communities that have.
Increasing trend and they can take additional action by supporting them community level to control that overtime.
Most important thing we can do is make sure that we improve our retention rate our associates because if we keep the same workforce. It's more efficient you don't have all the hiring.
And we are making great progress on that so those are some of the things that we're doing certainly there's more.
Just a sample of what we're doing.
Thanks, that's helpful.
Your next question is from Josh Raskin through lightest, though.
Thank you good morning.
Just wanted 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 you know 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 and adjusted EBITDA, you know just seems like that.
Divestitures and changes on a pro forma basis don't really impact EBITDA tighten. So is it is it fair to say, yes revenue up adjusted EBITDA up just at least Directionally.
Yes, good morning, Josh.
The if you look at.
Same community.
Certainly, we expect revenue and adjusted EBITDA to be to be up.
As you indicated on a.
Total reported basis.
The impact of dispositions will be less in 2020 versus 29 team, but even factoring in dispositions, we still expect EBITDA.
To be up on a year over year basis.
The.
As Tony mentioned.
We expect.
Similar rate increases in in 2020, and we have occupancy momentum so that's going to drive b.
The topline.
Even with.
Incremental expenses.
If you drive.
Right at 4% and you as an example, just illustrative and you drive expense at 4% and you grow occupancy that delivers six 7%.
Oh I growth so that puts it in perspective.
As.
As an example of a year over year.
Matt to get too.
Growth the the EBITDA.
Transaction, we did with peak will be a slight headwind associated with EBITDA.
But we will.
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 or 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 onetime 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 third $13 million.
And Josh.
And.
He said it's important to note that we think the competitive environment is significantly better and 2020 that it is 29 team. We have always said that new openings affect us for about a year. After a competitor opened and the third quarter our open.
It's worth 53% lower than the peak in the second quarter 2017, and they were actually down sequentially, 26% from the second quarter 2019, so the backdrop of having an improving industry is critical to our success in 2020.
Second thing that's really critical to the success get the improving occupancy momentum as you know what are the biggest challenges that we've had in our turnaround was really getting our top line moving into right direction, because occupancy is really the engine thats going to fuel the long term growth that we have the company and we have a huge opportunity more than 100.
$8 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 well set up.
For improvement in 2020.
To reiterate that move than 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 for.
Format and this quarter, we do think we understand sort of.
Unusual.
Things that affected the quarter any areas, where we just need more operating discipline, but the hardest part of the turnaround is really getting a top line moving and that gives us confidence going it going into 2020.
That's helpful and actually good segue so.
The other question I have is just around this five year plan and I guess Cup two questions would be.
How much of this plan is based on the environment getting better and what you're seeing from Nic data and you know 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 you know what the started 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 a catalyst to introduce the plan today relative to beginning of next year et cetera.
It really good question, we sat down with our board in the summer and went through our strategic plan for the next five years and that was really informed by many things that were coming together at the same time our portfolio restructuring is largely complete.
The HCP transaction was.
Something that looks like we were going to get it across the finish line and we were happy to announce that October 1st. So we had more certainty around what our portfolio would look I.
I think the other thing that we had been waiting for to announce our outlook is we want it to make sure that we saw inflection in the supply demand macroeconomic condition because the one thing that we know for sure it's hard to grow occupancy when you're in as many of us full fledged competitive headwinds and so we've been looking at our proprietary announced.
This all around our communities for the last 20 months trying to figure out exactly when it was competitive environment going to turn we called that it was going to turn in 2019. We now have objective evidence both in the industry at around Brookdale communities that it has turned so that was one of the factors.
Okay.
Gave us the confidence to sort of set 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.
The backdrop work, we wanted to get it out as quickly as possible.
That will give you more detailed as time passes including an investor day next year.
But we wanted to share as much information as soon as you can because we know the value of our company is based on what you think we will do over the long term.
Alright, perfect. Thank you.
Josh.
[noise] hearing next question is from your Joanna Gajuk. Your line is still open.
Good morning. Thank you so two topics the first [noise].
The commentary around healthcare services segment.
So sounds like.
Theres some of that I think said were occurring in third quarter. You. If you don't Scampers. So can you is there way is there any weight decides it out because margins will create fairly 4% in in Q3.
Just to kind of help with the switch from Q3, two Q4 in terms of how quickly you are thinking the margins could.
Improving that segment.
I guess, if this improvement you expect you know sequentially between the two quarters.
So.
Your question. There is no question that we were disappointed.
Our health care services segment in Q3, having said that we think there's a lot of the issues related to the centralized intake initiative, which allowed receivable to grow.
Last year, roughly and during the third quarter and Egina teams with significant efforts to really bring those receivables down built back.
Really what that meant salespeople.
Fine collecting documentation, we could bill.
Our receivable instead of selling had an impact also when we got into some of that.
Services.
Have all the documentation sorry, bill so we lost some revenue so I think that part of it will certainly.
Go away in Q4, because we work so much of the backlog into three now the part that also calculated.
Our home Health Center closed down largely related to organizational chart that thought hurricane effect as we have a big presence in Florida and patients were reluctant to scheduled visits when they weren't sure if they were going to hit by hurricane or not.
So we have pretty good.
Pretty good confidence going into Q4, and you're speaking that will be more streamlined our first two courses the air that for margin than for Q3.
Okay, and we are maintaining.
We're maintaining our full year revenue guidance at the low end for.
It's healthcare services.
Okay No that's.
That's helpful. There.
And the other topic you mentioned.
For that for senior housing part of the business up.
The pricing was pretty good, but I guess mentioned that there was still some discounting in the quarter to what's happening so any color there and I guess going forward. It sounds like you eat it.
We're implying a piece that you do not exactly you haven't been planning much of a discounting in the rest up there.
Yes.
There was some discounting in select markets, particularly in the South coast Air competition was pretty aggressive, particularly around all inclusive care now having said that we still believe that we have very strong pricing pressure.
Pricing power.
Nation wide basis, and we're still very pleased with our year over year Rescore approach.
The fact that we got 2.8% report that actual rates that we received not are asking rate, sometimes theres some confusion about Nick.
Asking rates not react right. So we felt like we had strong rate pressure and we've done a great job all year at conducting 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.
Yes.
So what's the magnitude of.
It increases you expect for in place residents.
We haven't shared that yet, but certainly there will be.
Significant.
Right because you made it sound like you expect the labor.
I'm going to inflation overall to be about maybe that long term average so.
Maybe to the pricing it sounds like it it will try to push a little bit higher pricing.
Expectation is that labor rate increase will be less.
And Craig let me pass through to our Rep.
Okay, that's great color. Thank you.
Thanks, John .
[noise] through next question is from Chad that a car your line is open.
Oh good morning.
Good morning fan.
All right. If you allow me I'm going to retread some territory here.
And Steve commentary, you said, you expect supply demand equilibrium to be maintained through 2020.
Yes, given that new supply still exceeds demand, there's an overhang from inventory and lease up.
Gives you that confidence and if you could be a little more granular at that will be equilibrium in 2020.
So what we do as we look at our proprietary data analysis that is around the brookdale specific communities and if you look at page six of our Investor deck. You can you can see a few say.
First of all if you look under construction pipeline around our communities. It is 14% lower than the first quarter 2018 peak that pretty important.
If you look at the open around our community and remember that opens effect for 12 months open in Q3 were 53% lower second quarter.
17 peak and sequentially they came down 26%.
The second quarter.
I'm, sorry, 35% from the second quarter. This year. So we are seeing around our communities that number opened its 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 perspective based on where your portfolios located and if you look at.
Some of the public information Welltower with the first to come out with having less competitive pressure around their communities and their other rates are saying 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 a piece of the store.
Longer than anyone else. After the fact that we're now coming out of it makes us feel this great about the future.
Alright, and then I just wanted to take a look your long term growth outlook. So given your rep poor assumptions and a five year outlook that looks like about a 4% CAGR.
How does that compare with what you expect 2020 rate increases the and then what timeframe do you think it takes you to get to the mid point of that long term outlook.
[noise] sure the.
You're right about 3% to 4% Cagar on the.
Five year plan and said, we're not really detailing the rough or are they 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 and the the EBITDA.
Hey, just said just for clarity you mean on in place for offense or on all total residents.
But.
The I was talking mostly in place residence on the price increase that is going.
Into effect generally speaking in January .
Okay.
All right and then I forgot.
Sure.
And then the the planned for the EBITDA growth is.
Accelerates over the next.
Several years so it's.
And that's that's really all.
Ill comment on that as Cindy mentioned, we'll have an investor day, and we'll get more insight, including insights into some of our.
Long term initiatives.
Like.
Take care integrated health care.
At some.
At the Investor Day next year.
All right, but for our purposes should we be thinking about like a normal distribution.
The improvement over that five year period, or should we be thinking more hockey stick like.
Well I wouldn't say hockey stick I would say continued improvement remember that it takes a while proxy to build that builds on itself and so.
At occupancy growth so its profitability.
[noise] alright, that's it for me thanks.
Yeah.
Your next question from Stephens Illiquid. Your line is now open.
Great. Thanks, Good morning, Funny, and Steve just wanted to come back to before Q1 9 outlook for a moment.
I guess two questions around that your first the color you 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 mentioned, you know whether to the rate updates or higher occupancy or expense control or better health care services resolved in which of these do you think is the lowest hanging fruit that should be the easiest to achieve.
And then second question is when do look at the last three four years or so.
The adjusted EBITDA actually did trend down in the fourth quarter versus the third quarter.
I don't know Thursday, I think worth pointing out just seasonally or other factors that drove that over the last three 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 Threeq to Fourq you this year, but just wanted to.
Pick your brain and what happened last three years in terms of while EBITDA went down sequentially in Fourq versus Threeq you. Thanks.
Yes, it doesn't 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 happened in the fourth quarter and because we sequentially Phil occupancy each month during Q3 as well at October that helps us a lot with regard.
To the fourth quarter.
Being up or down and so we're feeling very good about 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 small kicks back so entertain and the team has worked a lot.
Yes.
Backlog a are caused by the central intake project and so that is behind that and won't happen.
The hurricane expenses of 1 million I have got behind us that won't happen.
Every third quarter, we have.
Higher electricity and water cost as a result of hot summer weather that will happen in Q4.
All those things aren't really something that we actually have to due 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 65% of our costs at our teams are all over it it's something that they.
We are focusing on a daily basis, and it's been tough labor environment, but we are having to just be much more conscious and put additional recruiting resources to make sure that were staffed in the community and then with regard to marketing expenses, we're very happy that we made the marketing investments that we did our.
Look great.
I'll looks great.
But we also recognize that between Thanksgiving and Christmas people are worried about Christmas.
Holiday Mail is just overwhelming so rather than to compete with that holiday clutter. We are going to work pipeline that we have and do a more normal investment in marketing spend so I think all of those things together will help with Q4 and add on that we start selling.
2020 rates to new rather that during Q4, particularly November December that will help our rate as well.
Okay. That's definitely helpful color. Thanks.
Thanks, a lot.
[noise]. Your next question is from Frank Morgan. Your line is now open.
Good morning.
Polish as it has already been after 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 at an opportunity to sort of re skill.
Corporate gionee, but.
Just curious about.
What type of opportunity at isn't what kind of.
Timing or magnitude might be involved there and how that might contribute to.
EBITDA growth over the longer term thanks.
It's a great question, Frank and we had that.
Asphalt historically on scaling Shannay, we've usually said that it takes six to 12 month after.
The adjustments in the portfolio it against cost out of the business and given that we are targeting having the transaction.
Okay.
In the first quarter.
We put $5 million into the pro forma and what that reflects is that we're going to transition a number of arching associates to an operator to support the communities and maintain continuity for both the associates and the right. So that is say at the same time, Diane Johnson may VP of HR the.
Any operators are spending a lot of time to redesign our organization.
Then massive massive reduction in complexity associated with the sales the entry see community and some of the other changes that we've made the portfolio. It gives us a chance it really think about what is the most streamlined and efficient operation that will get the bat support to our community and we're excited about that.
Now my guess is that will be more in the back half of 2020, then the crop.
But.
It's something that we're focused on working on today.
Thank you.
Go ahead.
It looks like we are out of questions. 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.
Back to occur in the fourth quarter.
In addition, we are very focused on action that will help mitigate the impact of a tight labor market. We have made significant progress in our strategy that we initiated last year driving strong topline growth is the most important and difficult part of our strategy and we couldn't be more please.
With our industry, leading occupancy growth and strong rate for format, we will build on the while focusing on improving our expense control we have great confidence in the five year plan, which we introduced today because of the powerful upside for senior living and the progress we're making to improve.
Our operation Thank you for joining us today.
Operator, you can now close the call.
This concludes today's conference call. Thank everyone for participating even now disconnect.