Q4 2019 Earnings Call
This time I would like to welcome everyone to the Brookdale senior living fourth quarter earnings release called.
All lines have been placed on mute to prevent any background noise.
Well open the lines for questions at the end the call.
A reminder, this conference will be recorded for replay purposes.
I would now like to turn the call over to Kathy Mcdonald of Investor Relations.
Thank you and good morning, everyone I'd like to welcome you to the fourth quarter 2019 earnings call for Brookdale senior living joining us today are Cindy buyer, 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 state and we expressly disclaim any obligation to update these statements in the future.
Actual results or 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 filed with the FCC from time to time, including the risk factors contained in our annual report.
Form 10-K, and quarterly reports on form 10-Q.
I direct you to the release for the full Safe Harbor statement.
Also please note that during this call we will present non-GAAP financial measure.
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 a brookdale dotcom forward slash investor and was furnished on an 8-K yesterday, but that I would like to turn the call ever to Cindy.
Thank you Kathy good morning to all of our shareholders analysts and other participants welcome to our fourth quarter and year end 2019 earnings call. We have made great progress on our strategic plan, which I introduced in early 2018.
This morning, I will highlight some of the many milestones we achieved during 2019 I will also provide you with the highlight of our 2020 outlook.
Starting with 2019, we delivered results within or better than our original guidance range.
In the fourth quarter honest seemed community basis, we continued to see positive momentum topline growth and improved cost control our strategy to win locally is working.
Since we announced our turnaround strategy, we have consistently delivered on our guidance targets. We have successfully navigated transformational changes to reshape our business and better position Brookdale.
Positive senior demographics and anticipated industry Tailwinds.
I will summarize 2019 in three sections people.
Folio and performance.
Start with people and our core Brookfield business depends on people taking care of people.
I have enhance the leadership team to make sure that we have the right team to drive near term and future growth.
Cindy can executive Vice President and President Senior living is our most recent addition to the team.
Cindy has a proven track record of collaboration with payers physician groups and hospitals to innovate and grow our business. She was most recently at three am infection Prevention Division and before that she held global commercialization roles at Medtronic and Eli Lilly.
Given the rapid change in the healthcare industry, Cindy strategic insights will prove invaluable as we look to accelerate our growth.
As health care systems continue to shift from a fee for service to a value based outcome driven model building deeper relationships with health care providers and payers will allow us to attract new residents more quickly and to improve the quality of our residents lives.
In her first month, Cindy has visited over 20 communities and has begun deep immersion into our business, our knowledge and skills will complement the deep bench strength of senior housing expertise.
Over the past year Weve also strategically added leaders with specific skills that are critical to drive long term growth.
Brian Johnson Me Executive Vice President of Human resources has a strong consumer focus and significant experience, attracting and motivating a large workforce across many locations.
Energy O'neil Division President of Health care services, a prison hospice leader has brought an intense focus on patient centered care to our health care services business.
Rick Wigginton senior Vice President sales at 14 years of demonstrated success and senior housing sales.
Chris Bam Senior Vice President of information Technology has deep I T experience within the healthcare industry and a proven track record of change management.
These leaders are part of our industry, leading team 58000 associates, who are devoted to taking care of resident and patients every day.
Despite the tightest labor market in 50 years, nearly 70% of our executive directors have been in their role for more than two years. They are choosing to stay with Brookdale. We are pleased because well years is a critical threshold for resident relationships and financial success of arc.
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Our 2019 success extended be on the top leaders of our communities over 3000, former associates returned to Brookdale inhibition Forbes named Brookdale as a best in state employer in Tennessee, where our corporate offices located.
These facts are proof that our culture and strategy of winning locally have taken hold.
I am very proud of our associates and the progress we've made in building the best team and senior living.
In addition to having the right team driving the business forward.
Worked else Board has gone through a significant transformation in fact over 60% of our board members our new since we established our current strategy in early 2018.
The board has added healthcare and hospitality experience to our strong base of real estate expertise and other skill sets.
Together, our board has the experience to provide valuable oversight as we execute our strategy and achieve strong returns for our shareholders.
As you know Vicki freed and Guy Samsung are the most recent additions to our board having joined US last fall.
Guy now serves as our non executive chair effective January 1st 2020.
Turning to our real estate portfolio, we have significantly simplify our business and completed the vast majority of our portfolio restructuring. We have achieved our initial goal monetizing assets netting $250 million of proceeds and went beyond expectations with the sale of our unconsolidated CCRC venture.
All in 2019, we reduced our community portfolio by 14%.
Our portfolio is now a third smaller than it was after we completed the emeritus merger in 2014.
Our portfolio restructuring create numerous interim management agreements in 2019, we reduced managed communities by over 50% as we successfully provides news transitions to new operators and reduced management agreements, where they don't fit our business model.
In October 2019, we announced an agreement with health peak to unlock significant value through the sale of our interest in the unconsolidated entry fee CCRC venture.
The deal close at the end of January 2020, we will Miss the long term relationships, we had with many of the rather than.
In particular I want to thank Ken Gerritsen, who served as the chairman of our National Resident Advisory Council I also want to thank our entry fee associates for their dedicated service and wish them the best as they move forward serving the healthy communities.
We successfully deployed a portion of the proceeds to convert leased assets to owned communities, which improved our own to leased portfolio mix.
At the beginning of February 2020, 60% of our consolidated units our own.
The final update on our 2019 initiatives relates to our capital investment program to enhance the quality and protect the value of our portfolio and further supports our long term growth strategy 2019 was the first year other choose your incremental Capex investment program after him.
Minder, the incremental community level Capex investments include major building infrastructure projects.
We completed 742 major projects in 2019, we invested a total of $236 million in non development Capex.
Steve will discuss in the 2020 outlook section this years investment will be smaller due to the significant progress we made in 2019.
Now, let's turn to the performance of our ongoing operations and 29 team to provide you with some context at the beginning of 2019, new community openings outpaced demand and drove topline pressure across senior living industry.
A year ago, we predicted that by the end of 2019, the industry would see supply demand equilibrium.
According to and I see the industry equilibrium occurred in the second half of 2018.
This is the first time independent and assisted living combined.
She equilibrium since the fourth quarter of 2015.
Assisted living is the largest part of our business. Therefore, we were pleased that in 2019, the industry's assisted living absorption hit a record high and outpace supply for the first time in seven years.
We expect this trend will continue in 2020.
In addition, more baby boomers are entering senior living communities silver wave represents 9% of our residents and approximately 15% of our move ins.
For Brookdale. This represents a great opportunity for the next few years.
Focusing on the fourth quarter 2019, and I see senior housing occupancy increased 20 basis points on a sequential basis.
Brookdale again exceeded and I see by increasing 30 basis points on a same community basis.
Brookdales Revpar on a same community basis increased 20 basis points sequentially.
On a year over year basis, Revpar grew 2.1% for the fourth quarter and 1.9% for the full year.
This is strong evidence that our strategy to turn around senior living operations drive topline growth and when locally has been and we'll continue to be successful.
Turning to operating expenses, we delivered on our commitment to enhance our underlying control of cost in the fourth quarter, especially overtime labor.
Steve will provide the details so only share to financial highlights.
Fourth quarter 2019, same community labor expense was 50 basis points lower than in the third quarter, which resulted in a full year labor gross 5.5% coming back within our full your expectations.
As a result up our team's focus on operational efficiency, our same community operating income decreased 7% in the fourth quarter on a sequential basis.
Finally, well our health care services business continued to face headwinds in the fourth quarter, our new leadership team made crucial decisions to improve our business.
Pair for the new Pdgm model and set the foundation to return to growth.
In summary for 2019, we have delivered positive sequential occupancy since the second quarter and outperformed the industry occupancy for the second half of 2019.
Our financial performance has improved accordingly, and now I'll turn to the guidance for 2020 and a few summary comments about this year's expectation.
We expect revpar growth of 3% to 4% on a same community basis, which is at a higher rate than last year.
We expect adjusted EBITDA to grow on a year over year basis. The first time since the emeritus merger.
We plan to deliver significant improvement in adjusted free cash flow and 2020, even before the positive one time 100 million dollar benefit from the healthy transaction.
With that I'll turn the call over to Steve.
Thank you Sandy last year, we delivered on significant milestones this momentum will set us up for EBITDA growth in 2020.
I will provide highlights as they relate to the fourth quarter and full year 2019 financial results. Then I'll provide you with the building blocks to deliver 2020 guidance.
Starting were 29 team, we achieved full year financial results within or better than our original guidance ranges. Despite a very competitive market.
Annual same community revenue grew 1.9% year over year and fourth quarter revenue increased both sequentially and on a year over year basis.
Brookdale delivered the best in your occupancy improvements since before the emeritus merger five years ago as same community occupancy increased sequentially in the third and fourth quarters.
We attained our real estate goal that was introduced in 2018 over the past two years, we realized net proceeds of more than $250 million.
Most notably omni transaction fraud in January 2020, we completed significant real estate deals we sold our interest in unconsolidated CCRC adventure and acquired 18, formerly leased communities from health peak and continuing with our strategy to own a higher percentage of our community portfolio.
We also acquired aid formerly leased properties from any try.
Turning to the fourth quarter results.
Since the beginning of the fourth quarter 2018 that through the end of 2019, we divested 66 consolidated communities through sales and lease terminations.
To provide context to the financial results for the fourth quarter 2019 compare to the prior year quarter. These dispositions resulted in $36 million less resident fee revenue $5 million less adjusted EBITDA and $2 million last adjusted free cash flow.
Keeping the portfolio changes in mind to fourth quarter 2019 revenue, excluding reimbursed costs on behalf of managed communities was $810 million compared to $825 million in the fourth quarter of 2018.
This 1.8% decrease was the result of fewer communities due to planned asset sales and lease terminations.
Ill focus the rest of my senior housing fourth quarter and full year 2019 comments on same community result, which exclude the impact of real estate transactions and a lease accounting change.
Starting with senior housing same community fourth quarter revenue improved 2.1 per cent compared to the prior year quarter and for the full year improved 1.9%.
Our focus on improving rate growth in 2019 drove stronger financial results, we pass through and larger in place rent increases by linking them to higher labor investments. We also maintained overall price discipline, while flexing pricing in select markets when necessary to remain competitive.
Because of these actions have 29 team annual Rob poor increased 2.9% compared to last year's annual increase of 1.2%.
For the segments independent living revenue growth was 1.1% for the fourth quarter and 2.5% annually compared to the prior year periods. This growth was largely driven by rate increases for the full year independent living occupancy increased 10 basis points, while it remains a tough competitive environment for independently.
Moving we're excited we were able to grow occupancy for assisted living in memory care revenue growth was 2.9% in the fourth quarter and 2% annually compared to the prior year period, largely driven by rate increases.
Fourth quarter occupancy increased 50 basis points on a sequential bases and outperform snake by 20 basis points. This demonstrates that our operational strategy is delivering results the positive assisted living and memory care growth is especially important because this segment represents the majority of our portfolio.
Notably for the first time since the emeritus merger current quarter ale occupancy exceeded the prior year quarter. This positive momentum supports our investment thesis, which is built on a return to growth.
This is living has been under pressure over the last several years. We're looking forward to continued growth in capturing that value for shareholders and 2020.
Turning to same community operating expenses in the fourth quarter. We took actions that resulted in a reduction of overtime on a sequential basis. As a result, the for your compensation related expenses increased 5.5%, which was in line with initial expectations and slightly better than expectations discussed during.
Third quarter earnings call.
I'm also pleased about during the quarter voluntary turnover for full time associates improved to 400 basis points sequentially, the executive directors and health and wellness directors trailing 12 month retention rates have also remained around 70% for nearly three years.
Other facility operating expense was approximately $10 million lower on a sequential basis. The main drivers were seasonally lower repairs maintenance and utilities, along with intentionally timing marketing investments to avoid the cost inflation due to the typical holiday marketing Blitz.
For the full year other facility operating expense increases were primarily due to a higher property remediation insurance premiums and investments in marketing and advertising to drive more leads.
Looking at 2019 as a whole our data driven marketing investments successfully created a robust lead pipeline drove a fishing conversions of visits and move ins and enable better connectivity with our sales organization.
Moving to the health care services segment revenue increased 1.1% for the fourth quarter and 2.4% for the full year compared to prior year periods.
While health care services didn't meet our expectations what stands out is the hospice business, although less than a quarter of the segment's revenue hospice growth was so significant that it drove this segment's positive overall revenue growth.
For home health, our new leaders evaluated the best go forward business model and executed a plan to reorganize the operations.
We've been taking action to match our infrastructure to the communities and agencies. We operate in 2019, we delivered annualized gene a savings of approximately $25 million prior to normal cost inflation.
Fourth quarter 2019, adjusted EBITDA was $100 million compared to $115 million for the prior year quarter. The primary drivers of lower adjusted EBITDA were the result of three non core items, a $5 million decline related to dispositions of 5 million dollar reduction from eliminating.
The management agreement and the 4 million dollar impact from the lease accounting standard change.
Adjusted free cash flow was a half a million dollars in the fourth quarter compared to a negative $33 million in the prior year quarter. A positive variance was driven by a 49 million dollar change in working capital, partially offset by lower EBITDA of $15 million that I just described.
The key drivers of the working capital change where the benefit from the 29 team lease accounting standard change higher crude insurance liabilities in the fourth quarter of 29 team and a decrease in receivables through improved collections.
As of December 30, Onest 2019, total liquidity, including the line of credit was $481 million, an increase of $26 million from September Thirtyth net proceeds from asset sales drove this increase.
In the fourth quarter, we repurchased shares valued at approximately $5.6 million. This brought the full year repurchase value to nearly $20 million.
Over the five year strategic planning horizon, we continue to have a steady debt maturities.
Total debt outstanding approximately 95% is non recourse asset backed mortgage debt.
After selling our interest in the unconsolidated CCRC venture and acquiring 18, formerly leased communities in January 2020, the net proceeds improved the company's capital structure flexibility.
We may use proceeds for increased opportunistic share repurchases to pursue potential lease restructuring opportunities and to make further investment to support our strategy.
Turning to our 2020 guidance the turnaround efforts, we made over the past two years have set the foundation to deliver growth in 2020.
With the negotiated and 100 million dollar health peak management termination fee. We received on January 31st adjusted EBITDA is expected to be 500, then 10 into $540 million significantly higher than 2019, we anticipate adjusted free cash flow, including a significant termination fee to be in a row.
Range of a positive $70 million to $90 million.
Excluding the 100 million dollar health peak management termination fee, we expect adjusted EBITDA to be in the range of 400 intend to $440 million a growth of between two and 10% compared to 29 team.
This aligns with the expectations, we established in the five year outlook introduced late last year.
Excluding the health peak management termination fee adjusted free cash flow is expected to be in the range of negative 10 to negative $30 million. The middle of the guidance range reflects an approximate 55 million dollar improvement from 29 team, which is better than you expected year over year Capex reduction.
Now let me provide you the key building blocks that support our guidance. We listed more details on page 10 of the current Investor presentation, which you can find on our website.
Were significant real estate transactions completed in January 2020, the pro forma on page 26 of our supplemental dike will also be important to reference.
The pro forma shows the annual impact of announced transactions, which will help you understand continuing operations.
Starting with senior housing revenue, we expect to Revpar to increase 3% to 4% on a same community basis.
Our occupancy expectations incorporate normal seasonality with high seasonal move outs occurring in first quarter.
Our assumption is that the flu for our senior population will have a slightly higher impact compared to last year's season. This assumption is based on our recent experience, which is currently trending like the CDC data for the age 65, plus an 85 plus cohorts.
As referenced our Fourq you 18 to one Q 19 occupancy declined 90 basis points on the same community basis.
We expect to deliver Rev poor growth with strong rate increases the majority of our in place rent increases occurred January onest.
Throughout the year, we plan to maintain our price discipline, while responding appropriately to competition in select markets, where we see pressure.
For our health care services segment, we expect to drive an NOI growth through our hospice business and successfully implement pdgm in home health as we rebuild our business, we expect health care services revenue growth of up to 3% and slight margin improvement as the issues related to the centralized intake initiative.
I will not repeat.
With Pdgm, becoming effective January onest for our home health business, we expect revenue growth to be back half weighted in 2020.
There will be some noise in the first quarter with the implementation of a new reimbursement model with 30 day episodes and the recently announced organizational changes as such we expect to segment and a wide declined sequentially from the fourth quarter.
As we move through the year, we expect to see the benefits of volume growth and higher operational efficiency.
For management service revenue in 2019, we transitioned over 100 managed communities, we expect to transition more communities to new operators in 2020, including the recently completed health Bee transaction.
This will enable us to continue to reduce the operational complexity of our business.
Turning to operating expenses, we expect total labor costs, including benefits to grow in the range of foreign three quarters to five in the quarter percent.
Well the labor market continues to be tied our cost expectations are better than our 29 team increase due to two factors.
First we had unusually high overtime and contract labor in the third quarter of 2019, and second 2019 was the final year of our three year plan of making above industry investments in our community associates.
We expect to our 2020 gionee expenses to be at or slightly above 5% of resident fee revenue, including revenue under management.
This expectation is based on normalized cost inflation, plus bonus and investments for growth, partially offset by Gionee rationalization initiated after the sale of our unconsolidated CCRC interest and other portfolio reductions.
Sequentially Gionee will step up from the fourth quarter 2019 to the first quarter 2020, primarily due to a normalized bonus accrual.
I also want to highlight a few items I will affect our adjusted free cash flow.
First we expect to lower interest expense and lease amortization combined primarily from our 2019 real estate transactions and those that occurred or our plan to occur in 2020, along with lower interest rates from refinancing.
Second working capital is expected to be a use of cash of approximately $10 million to $15 million. The 23 million dollar onetime benefit from the lease accounting change in 2019 will not reoccur in 2020. In addition, pdgm is expected to negatively impact working capital as a reminder of the phasing within the year working cap.
But a lot is a significant use of cash in the first quarter due to the timing of payments.
The final significant part of our 2020 outlook is capex.
As highlighted a year ago 2900, Capex was the high watermark and we expected 2020 capex to be significantly lower.
We are delivering on our capex commitment and 29 team non development Capex was $236 million and we expect to 2020 to be roughly $45 million last at approximately $190 million.
Because we started many projects in 2019 I will finish in the first quarter and due to the timing of Capex reimbursements, we expect the first quarter capex spend to be the highest quarterly spend in 2020 and could be up to one third of this years total not spending.
Looking forward to 2021, we continue to believe community level Capex will further reduce and stabilize in the range of between 2020 $500 per unit.
It is exciting to see the great progress our team has made over the past two years. This momentum will set us up for EBITDA growth in 2020. The first time since the emeritus merger I will now turn the call back over to Sandy.
We've had many successes in 2019 and saw positive operational momentum across the business. We are delivering on the targets that we have set for ourselves and we believe that 2020 will be a strong year for our business.
Before leaving you today I would also like to comment on the global health situation regarding the Corona virus outbreak.
Safety of our seniors and associates will always be.
Most importantly at Brookdale.
Our teams across the country has been put on high alert have strong protocols for contagious viruses like the flu and other viruses and have been trained to look for the signs of infection early and take appropriate action.
I look forward to feel at our Investor day on March 31st many of the new leadership team that I highlighted well share further insight into our business and on how we will execute our strategy.
[noise] Philip this.
This is Kathy please open the lines for questions.
At this time, if he would like to ask a question. Please press star one on your telephone to withdraw your question press the pound key.
One moment, while we compile the Q1 a roster.
[noise]. Your first question comes from the line of Frank Morgan with RBC capital markets.
[noise] good morning, I guess, Steve mentioned all commented on this about exploring additional lease restructuring opportunities, but I guess with with most of your divestiture up up up up opportunities already done how much do you see remaining divestitures and then how much do you see available on lease.
Restructuring.
Hi, Brian it's Andy Thanks for the question.
Our almost done with our asset sale you can see that.
Handful of assets held for sale on our balance sheet. So that's largely behind US now going forward, we will always do a little bit of capital recycling, where there's a small percentage of our portfolio that we place up for sale and we buy new communities to replace for that but that's not going to be a significant portion of our strategy.
Actually when you put that in the context.
The prior year Nike.
Capital allocation, if I can just bridge to that for a minute I'm really happy that we successfully deployed a portion of our proceeds to convert leased communities to owned communities.
Has improved our overall.
And owned portfolio mix after the completion of the health peak transaction at the end of January we started February with over 60% of our consolidated unit being Oh.
Now if we think about the proceeds from the healthy transaction that gives us the chance to really improve our capital structure flexibility and I think that will likely increase our opportunistic stock repurchases.
So to the since it is possible, we're very interested in pursuing potential lease restructuring opportunities and then having that cash on the balance sheet naturally to leverage as the business. Just an example, the any type of transaction is one example of a lease restructuring that wasn't strong use of capital we bought.
Asset from NHL through a purchase option and the Unlevered return on this transaction is greater than 12% and if you look at the Levered return, we're expecting a leverage return in excess of 20% once the financing on these assets is complete.
Got you.
Obviously in the near term, you're you're having some success relative to the market and broaden your occupancy, but it seems like a lot of the growth has been driven on the rate side, what you're able to do there are you seeing much.
Feedback from a residence or push back from risk I should say in terms of your ability to pass on those rate increase I know you'd commented you attributed it to labor but.
How much how much.
When do you think you still have to go on the rate side.
And the you're ahead.
So the first thing that I'll say that we had a 20% improvement in our resident satisfaction scores our net promoter score our since the last survey and that is a strong foundation of being able to demonstrate the value that we provide to our customers and we have had pretty good success with passing along.
Great to our resident.
As you know we believe the protecting the rate while responding appropriately to market competition is the best way to improve the bottom.
And we've really done a nice job driving rate, while also improving our occupancy for format.
Sure a few details with you that shows the momentum that we're building in our same store portfolio.
You go back to our same store portfolio in 2018, we had a rough core revenue per occupied room increase of 1.2%. If you fast forward a year to 2019 increased our rep core again revenue per occupied room growth to 2.9%. So.
Nice increase and at the same time, we were able to close the occupancy gap to the prior years and I'm excited we ended the fourth quarter within 20 basis points of Q4 of 20 team. Then when you look into 2020, we're guiding to rail car revenue per available.
Growth of 3% to 4% demonstrating the improve trajectory of our business now we said that we really plan lean heavily on rate suggest there.
We do that is by connecting rate increased passing along to our residents to the labor investments. We've made in the staff and we prepare our executive directors with very strong talking points as to why the rate increase is necessary and they get the value.
What about on the street rates at so in place rents what are you seeing and what are you doing on the.
On the street rates pardon me movie is to drive occupancy.
No it's fair to say that.
There's a little bit of a tale of two cities.
The from our same store independent living was more competitive for us in the.
This quarter than assisted living.
But in the fourth quarter, we did see that move in rates were 3.5% higher then move out we've traditionally called the mark to market and this is because we increased our selling rate in the fourth quarter now clearly in the first quarter.
It's going to come more in line because what we try to do in Q4 is in November December for those New then we try to pull for our 2020 rate increases.
Now that strategy is important for us for two reasons.
We know that there's going to be some impact on occupancy when we do that in Q4, but our primary driver of top line is passing along rate increases to our in place rather.
So if you're doing a lot of discount thing it's harder to hold the rate when you increase some on January 1st So we've done a lot of analysis, we've looked at our strategy, we're convinced that protecting the rate.
A winning strategy for when we compare the total impact occupancy and rate. So it's great question Frank.
Okay I'll hop back in the queue. Thanks.
Your next question comes from the line of Josh Raskin wouldn't that foreign research.
Hi, Josh Hi, Thanks, Hi, good morning, Cindy.
I know you guys don't give quarterly guidance, but I just want to make sure you know where at least on the same page here as we look at the first quarter I think the consensus about 110 million. So clearly some understanding that though despite EBIT adjusted EBITDA being up year over year. After the full year fair to say that you know EBITDA could be down you know pick a number fiveish percent.
Sure. So because of you know home health changes and seasonality and flew year over year and things like that I just want to make sure. We're not you know sort of.
In consistent with your messaging around what's been happening early in the air.
You are going to take that Laura.
Hi, good morning, Josh.
You're you're right there is seasonality in.
Our phasing of all the quarterly EBITDA of three things on EBITDA first senior housing.
Revenue for poor I will be slightly or about the same as is the 2019 2018 to 2019 increase but we will have seasonally high move outs due to the flu and as I mentioned already we are pieces.
A little bit.
Worse.
And then last year.
And then sequentially I'm expenses I should increase about the same dollar amount is last year, plus we do have a leap year. So that's another $3 million or so in expenses.
We also are now starting to accrue a normalized bonus in the in the field as well as Gionee.
And lastly, as far as a senior housing goes we're going to turn back on our marketing spend.
Because we didnt as as already mentioned the the marketing was terrific turned down a bit because we didn't want to compete with the holiday clutter.
So.
That's a that's for senior housing.
And health care services I did mention that.
The there was going to be some noise in the in the first quarter phasing out the 60 day episodes.
We did have lower volume also in in December.
As a more more people took the last couple of weeks of the of December off just just because of the way the holidays fell.
We are implementing the new reimbursement model with 30 day episodes and do that equilibrium won't reach equilibrium on until March and then lastly, pdgm. We have made some organizational changes announcements, but we won't see that in the numbers.
Until the is really the second quarter, so as such the NOI for.
The HCS.
Unit will be down sequentially.
And then lastly, DNA Gionee we are.
Expecting a step up so we're going to be accruing for a normalized bonus.
And.
In the first quarter, so absolute DNA spans might be in the same neighborhood as last year's first quarter.
And then when you think about your adjusted free cash flow remember that you want us usually our use of working capital and then our Capex, we will spend about a third of our capex or up to a third of our capex in Q1, and so there's there's a little bit unusual cash activity that happens in Q1.
Wow.
Got you all right. So if we put all that together.
The second question would be if you're starting EBITDA up say, you know as much $10 million year over year in the whole in one Q now that's implying you know 20 to sort of 50 million of improvement in the next three quarters. So.
I heard a lot of the one timers et cetera, but maybe you could just give us a little bit of.
Further color on what's your thinking in terms of occupancy in yesterday. The key metrics that are improving sort of once we get passed the first quarter.
Yeah. So at a high level, we've given guidance on revpar growth of 3% to 4% most of that will come from right. Now you follow the story for a long time. So you know that the first thing that you have to do is overcome the occupancy loss in the prior year and the good news for US. This year is that our occupancy was only.
Year over year by 20 basis points on a same store basis in the fourth quarter. So I think it's fair to say that our occupancy will be better during the year then.
Then our year over year comparisons for 2019, we haven't really you then or.
Because they really want to focus on revpar growth, which is the combination of both availability and rate or occupancy and rate.
Gotcha Gotcha, and then just the last one could you just give us a little more color on the competition you spoke to on you know in sort of the fourth quarter. What you were saying in terms of discounting maybe how pervasive that was just dissipate into the into the January time period and.
Any other color on the competition yet so.
Your presentation on page seven we always.
Sort of the industry view as to what's happening in competition as well as the Brookdale view, what's happening in competition and you can see that there was an increase in competitive new openings around our communities between the third quarter in the fourth quarter, and we know that when a new community openings the largest impact is that Lisa.
Which is most intense during the first 12 months.
Now when we look at it it's important to note that our open in Q4 were down 30% from the peak, which occurred in the second quarter up 2017, and the starts that we saw in the fourth quarter were down 71% from the peak that within the second quarter of 2015.
So that translates to a construction pipeline, that's a full 20% lower than the first quarter 2018.
Now we have been in the center of the storm in assisted living in particular, which is the vast majority of our portfolio.
And I personally and very excited about improving.
Competitive environment for assisted living in particular, if you look at our supplement you can see on page 11, our same community result and for us.
Our occupancy actually grew 20 basis points on our assisted living portfolio. This is important because it's the vast majority of our portfolio and will really be the engine for profit growth that will drive.
Our performance higher and so while I still think that there'll be some competition around our communities well.
Communities lease up I expected to be much better and 2020 that it wasn't 2019 and then just a reminder for 2019 as a whole.
And I see basically showed the back half of year absorption was in excess of supply and we would expect that to continue into 2020.
Thank you.
Your next question comes from the line of Jason Plagman with Jefferies.
Hi, Jason Ed Good morning, I, just want to ask about.
Some of the metrics behind you know your sales effectiveness initiative and productivity there our how are things trending as far as lead visit.
Move in both in Q4, and how you're feeling about those yourself pipeline.
Start 2020.
Yeah. So great question. So for 2019, we have delivered positive sequential occupancy since the second quarter and we outperformed the industry for the second half of 2019. In addition, we have delivered the best in your occupancy improvement since emeritus merger.
Most of this we're confident that our strategy is taking hold and you can see the results in our occupancy improvement even though.
This is true it's probably helpful to give you just a few comments on what happened with our leading indicators in the fourth quarter.
The fourth quarter on a year over year basis, we saw higher lead which has been consistent with our experience during the rest of the year as expected we saw seasonally lower move them.
And our also happy that our controllable move out return.
Yes, Matt and so that it's.
Very good FRE and then with regard to our people statistics, our executive director and health and wellness directors trailing 12 month retention rates. They remain about 70% and this is for the third year straight.
What's important to note is that nearly 70% of our executive directors have been in their roles for more than two years, which is a critical threshold for radnet relationship and the financial success of our community and these results are all consistent with us raising the performance for our team.
So we're very excited that now the hard work that we put into our leading indicator is translating into metrics that you see in terms of occupancy.
Great that's helpful and then.
It seems like we're seeing a bull brookdale and.
He data showing a little bit more pressure on independent living occupancy.
You know relative.
Living so Harry filling out the trajectory of occupancy and rent for for independent living in comparison to assisted living.
Well, there's no question that revpar growth in independent living with lower than.
Thing for a fourth quarter, we drove revpar revenue per available yet of one point.
On independent living and we drove Revpar growth on at this thing at 2.9% now part of that is because we've been kind of at that 90% ish level.
Level for awhile, so there wasn't as much opportunity for us to grow let's see dependent living.
The other part of it is that into leaving is one that can be much more rate sensitive.
Because you don't have much services wrapped around that.
So I think that we will.
Focus on both of our community our overall strategy, which has proven to be successful is to protect the rate, but we will just how selectively where necessary with our goal is being having every unit in service at the highest cheap.
Got it that's it for me thanks.
Thank you.
Your next question comes from the line of Joanna Gajuk with Bank of America.
Hey, good morning, Thanks for taking the questions. So.
So in terms of the outlook for for the year I.
Adjusted EBITDA, you know the French kinda calls.
They'll comparable numbers, so like for like Seo to 7% growth. So could you talk less about that because few factors that will thing here towards the lower towards the higher and off their branch in terms of the EBITDA [noise].
Yes, it's a really good question Joanna and the one thing that I'll say before Steve jump that we have a revenue opportunity at Brookdale, which is why we've been so focused on quality, whether it is quality within our health care services business or whether its quality within our senior housing business as demonstrated by our improvement in net promoter score.
And we're really expecting that 2020 will be an acceleration of our revenue growth. So that we can make good progress.
On the successful strategic plan longer term outlook that we.
And now that they can you take two industries that detail.
Sure I'm wondering Joanna three things real quickly on on EBITDA of a first.
Numbers that are essentially in the books, so you'll see a bridge on slide 10 of the Investor presentation. It it shows transactions and accounting that move EBITDA from for one to four times. So that's that's number one number two is a senior housing and Hawaii as we've mentioned a few times Rev par.
We will increase 3% to 4% occupancy will improve versus the negative 80 basis points. We saw in 2019 and again one one last time.
You can see a seasonal.
We have because of our January one rate increase we have.
Seen a strong rate increase and that should be.
As good or slightly better than last years, as we link labor growth to rent increases so bottom line occupancy is now projected to offset.
The the rate increase like we've seen in prior years nearly as much.
Turning to expense the labor I already mentioned is around 5% saw the labor market continues to be tight.
We we think that 5% is reasonable versus our 5.5% in 29 team.
We.
I have.
Now finished our three year plan and making above industry investments in our community associates.
And generally if you make middle of the road assumptions in the senior housing space, you'll get to kind of middle of the guidance, but for me remember 2020, it's a huge inflection for senior housing we declined 4.6% last year and were.
Projected to grow in 2020.
So that's a that's a pivot point that's that really can't go on notice.
Third and and then I'll stop the healthcare services segments I will return to analyze growth in 2020 revenue growth of up to 3% with a slight margin improvement will lead to will lead to growth middle of the road assumptions.
Right.
The two.
Several several million dollars in a in an NOI growth kinda, depending on on what you assume.
Remember Pdm PV gem noise in the first quarter.
So expect a in a wide to decline slightly in the first quarter, but grow throughout 2020 as the issues related to the centralized intake won't repeat and a new management team.
It's it's the ground and so on the improvements.
Our scene in the result, so what taking a step back what I look at and what I see I'm 2020 is a big catalyst year as we pivot to growth.
Already mentioned NOI growth EBITDA growth of up to $30 million and that's down from over $100 million and 29 team I'm. So.
That's that's another pivot point some inflection point. So that's that I look at makes me I'm excited about our valuation.
Right. Thanks for that so just due to summer. So so you say that Oh growing organically senior housing for upside will.
He'll to 7%.
With that growth essentially.
Yeah, that's the kind of the top end of the of the guidance range for senior housing and that does generally puts you in the top end of our guidance right. Because also you assume that you will be able to.
More than offset the labor cost inflation at that level right. So so I guess the higher end you assume a much lower than five for some labor cost expense well.
Remember that Youre multiplying the.
3% to 4% by a 2 billion plus number and your multiplying the labor expense by you know something that's a billion.
So.
No that's great and on the services. So that she had a comments obviously picky GM is a big.
For the industry.
And I didn't hear you mentioning anything about hospice, we're basing does that have any impact on.
On your rent.
Well its concern that pricing.
First thing in 2020.
So the current thinking on that it's less than a 1% impact on the hospice rebasing. So it's.
And as you know our hospice business has just been growing nicely.
And we would expect that growth to continue the one point that I was made on health care services in general and I know this is obvious but I feel better if I say it.
The up to 3% annual growth that we're expecting but for the chase at IGI would be significantly higher and the reason that hey is because in the first quarter, we're rolling off those 60 days.
So what we're building new episodes that 30 day, and so there's just a little bit of alone.
Getting to sort of a stabilized run rate and so it would be much higher without a change Cynthia.
And on that front I guess as Pete mentioned that there's an impact to Oh gosh, though in Q1 because of that Rob.
Someone other changes that are happening in home health correct. So so we wish we should expect even a bigger.
Than usual dropping in cash flow because of the timing off of these.
Prepayments correct.
Yes, the the timing of free cash flow is a.
Significant use of cash in the late in the first quarter. If you look at our past two years of first quarter.
Working capital our uses that probably averaging that is probably I'm kind of a a good good ballpark.
Great I appreciate that color. Thank you.
Thanks, John Huh.
Your next question comes from the line of Chad banner Cool with Stifel.
[noise] Yeah, Hi, good morning, This is Tom from Oh, Chad.
Well I have two yeah, hi, good morning, I've two questions. The first choice about the independent living assisted living divergence you mentioned data you had a tough environment the fourth quarter due to like newly opened communities.
Are there any difference fishing youre Rev par assumption for the two segments during 2020 and hot what are you doing differently between the two.
We don't provide revpar guidance by segment.
What you can be sure.
But our goal is to maximize revpar for our tire portfolio and so we will look at each community its market position.
Entering the market, where it stands in terms of occupancy and set an appropriate strategy at the community level.
So should we think that because no IR has higher occupancy you guys will be holding the race study pushing their relative anymore and for a or no.
The primary objectives to increased occupancy and at the same time and Revpar.
So how it's fair to say that when we have a community that has a low occupancy we do more discounting and we.
Build occupancy before pushing rate that.
Where we have community that has a high occupancy we are more aggressive on pushing rate.
Because that's where the bigger opportunity is so I think you can translate that into what it means that the aggregate if our portfolio, but it's definitely done on a community by community basis, and even within the community assisted living independent living and memory care all priced separately.
Okay got it and my second question is about marketing spend how much of an increasing marketing spend should we expecting the first quarter and also full year 2020 compared to 29 chain and then given the investment you hadn't made so far to drive new leads and conversion how much as they are you spending now and how are you.
Hi related are you still on third party referral sources, such as a place woman.
So third party referral sources are very important part of our business as it is for most senior living operators as I mentioned earlier, we have a revenue opportunity in front of and so our biggest opportunity is to get everything at least at the highest achievable right and so we're going to achieve that true.
Our nation of driving our own internal marketing spend which we did last year and very effective as well as partnering closely with our large aggregators, which we've now will be affected I don't think we've given specific guidance on any individual one of our personnel, but know that we evaluate our marketing using a very intense.
Data driven analysis and our goal is to make sure that we've got a good ROI on our marketing spend and the increased investment that we started last year worked well for us and so.
That's the high level takeaway.
But would you characterize your the percentage of leads from third party refer service as higher or lower than.
Then last year.
I think that we are expecting a strong referral source from our Aggregators and we expect that continue and so as we grow occupancy we would love to see more leads from both our internal sources that.
Yes.
Okay. That's it for me thank you.
Okay.
Your next question comes from the line of Steven Valiquette with Barclays.
Yeah, Hi, good morning, everybody.
So now we just the touched on this topic a lot on this call, but just a.
Again, I mean, there's always tradeoffs on rate versus occupancy is you discussed earlier just to summarize your view on Brookdale and expect the occupancy improvement. This year is it in your mind driven more by Brookdales company specific sales and marketing initiative through its driven more by an expectation that overall market condition.
I may improve as the your progress.
Yeah.
So I think that we have operated in very different called macroeconomic environment.
For the last several years, we see that improving but the same time, we've worked very hard to make successful improvements in our operating model. We've done a lot of work on our sales and marketing we've done a lot of work on our operations. We've invested a lot of capex in our communities to make sure that they are attracted to our current and new rest of that.
And so all of that working together will build to that 3% to 4% expected improvement in revpar.
Okay and I'm just a quick question on the non development Capex for this year.
If you can remind us again, which project areas categorically, you're focusing less than 2020 and also are there any strict ROI hurdles that you have built in.
[noise] Yep sure Steve.
The categories are similar to the the ones in a 29 team where we do major building systems.
And so and we also do.
Renovations and both of those are.
Projected to to decrease on into 2021 as a as already mentioned on the on the call that we expect our our long term our equilibrium to be at about 2000 to do $2500 of Capex per hour per unit. Once we get through this kind of this incremental spend.
As far as the a the returns we do look I'm at the returns and we do a business case on on the new economics projects as a as we call them on that that bucket.
And.
What what projects that were approved for 29 team those numbers in that business case were added to that communities budget and 2020, so not only do we look at the the returns but we also.
Change the the factors that go into the budgeting process.
Okay perfect.
Thank you.
At this time I don't think we have any additional questions and acute so I just want to thank everyone for joining us today I think we had solid performance in Q4, we demonstrated consistent progress on the execution of our strategic plan. We've introduced guidance for 2020 that will demonstrate significant improvement.
And our adjusted EBITDA as well as our cash flow and we are on target to achieve that 7% long term and a white growth. Thank you and I hope to see you at our Investor day in March.
Thank you that does conclude todays conference you may now disconnect.
[noise].