Q2 2019 Earnings Call

At this time I would like to welcome everyone to the Brookdale earnings Conference call.

All lines have been placed on mute to prevent any background noise. You know the answer to these presentation well have a question and answer session.

If you would like to ask a question.

The press Star then the number one on your telephone keypad.

And if you would like to withdraw your question press the town key.

Thank you.

It is now my pleasure to during todays program over to Scott Im adult the floor is yours.

Thank you and good morning, everyone I'd like to welcome you to the second quarter 2019 earnings calls for Brookdale senior living.

Joining us today are Cindy Baier, our president and Chief Executive Officer, and Steve Swain, Our executive Vice President and Chief Financial Officer.

All statements today, which are not historical facts may be deemed to be forward looking statements within the meaning of the federal securities laws.

These statements are made as of today's date and we expressly disclaim any obligation to update these statements in the future.

Actual results 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 on Form 10-K , and quarterly reports on Form 10-Q .

I direct you to the release for the full Safe Harbor statement.

Also please note that during this call we will present non-GAAP financial measures.

For reconciliations of each non-GAAP measure from the most comparable GAAP measure I direct you to the release and supplemental information, which may be found at Brookdale dotcom forward Slash investor.

And was furnished on an 8-K yesterday with that I would like to turn the call over to Cindy.

Thank you Kathy good morning to all of our shareholders analysts and other participants. This morning, I'll provide an update on our strategy the industry outlook and our second quarter results.

I'll start with our strategy.

Our second quarter results continue to demonstrate that our turnaround strategy is working we are laser focused on improving our top line growth.

Revenue grew for all three of our senior housing segments on a same store basis and also for health care services.

We accomplished this by making significant strides on our operational leading indicators.

Same community move ins showed positive year over year growth for the first time since third quarter of 2017.

In addition, our same community occupancy grew in May seasonally one to two months earlier than in the past several years and continue to trend upward in June and July setting us up for expected sequential occupancy growth in the third quarter.

At Brookdale, there is simply no substitute for great people, who genuinely care do the right thing and serve our residents and patients with high quality care.

Our associates do extraordinary things every single day.

That is why the foundation of our strategy is to win locally which relies on having a talented team of associates dedicated to providing high quality care and services to our residents and patients were pleased that we continue to see positive associate metrics showing our strategy is working as we focus first on retaining our high quality group of associates.

Trailing 12 month retention rates have remained around 70% for eight consecutive quarters for executive directors, who are the Ceos of our local communities and for health and wellness directors, who lead our clinical efforts and oversee all aspects of our residents care.

Also the retention rate for sales professionals improved for the second sequential quarter.

Retention of our sales professionals is central to continuing the positive sales cycle momentum we are now experiencing.

Year to date over 2100, former associates have returned to work at Brookdale, highlighting our reputation within the industry as an organization that empowers its community leaders to implement a personalized when locally culture.

It also speaks to what a great place Brookdale is for associates.

To that end, our total associate turnover has improved 5% in the second quarter 2019 compared to a year ago.

We view this very positively given the current tight labor market.

The organizations leaders at all levels are focused on associate engagement development retention and hiring ahead and these associate focused initiatives are clearly taking hold.

Not only do our leaders and associates feel the momentum of positive change within Brookdale validated by our retention and rehire rates, but our resident also have recognized the improvements we've made.

The changes we've made have not happened overnight, but rather they offend the result of a clear focus on operations and understanding our residence needs on a deeper level.

As such one of our top priorities has been to take actions that enhance a resident and family experience.

To do so in the most transparent fashion, we measure our success and enhancing our customer experience through the net promoter score or NPS and objective scoring system.

With over 50000 surveys completed this year by residents and their families. Our NPS has increased over 20% since our last survey.

These efforts across the business have resulted in significantly less same community controllable move outs over the past two years and it had a direct positive impact on occupancy.

We recognized in this business that resident and family experience is everything.

And while we're pleased with our progress to date, we will remain focused on continuing to drive incremental and long term improvement.

Next I'll provide the industry backdrop, and summarize brookdale financial results, while headwinds remain in a senior housing industry with elevated openings and occupancy pressure. The construction pipeline in starts continue to shrink.

And I see continues to show a supply demand equilibrium in late 2019, even with the recent new supply coming into the market industry supply and demand appeared to stay balanced for the rest of 2019 into 2020.

According to Nic second quarter occupancy for the industry dropped 30 basis points on a sequential basis and assisted living occupancy declined 40 basis points.

For Brookdale on a same community basis independent living occupancy remained around 90% for the fourth consecutive quarter.

On a year over year basis occupancy grew 50 basis points for the second quarter and 100 basis points year to date.

Assisted living occupancy declined 10 basis points on a sequential basis, you outperformed the industry with our assisted living segment being proportionately larger than and I see we are excited to be close to turning occupancy positive.

Senior housing occupancy declined 40 basis points sequentially, just slightly more than the industry.

Lastly, we grew our move in rate higher and welcomed more new residents into our communities than the industry.

For the second quarter, our same community Revpar increased 3.3% on a year over year basis.

Driving rate is a key part of our strategy.

To wrap up on senior housing revenue same community Revpar improved 1.9% on a year over year basis, and every product line delivered revenue growth.

Im pleased that were improving execution and demonstrating success against our strategic plan.

Turning to our healthcare services segment in the second quarter, our revenue improved 4.2% on a year over year basis, and 2.6% on a sequential basis. In addition, the segment operating margin improved for the second consecutive quarter.

The team under new leadership is developing a plan to continue improving our financial results by focusing on patient care excellence accountability recruiting high quality leaders and expanding our services.

As announced in July we are pleased that the second new Hospice agency. We opened this year is fully operational and we look forward to announcing another agency opening later this year.

This quarter, we had wins in associate retention.

Market improvement in resident satisfaction.

Positive move in growth.

And health care services revenue and margin growth.

The efforts of over 60000 associates are paying off.

As you know we've recently welcome several passionate dedicated leaders with industry expertise and proven operational track records to our leadership team.

Diane Johnson May our head of human resources, Rick Winton, our head of sales and and then Jean O'neill, our head of hospice business are off to a great start and are ready to take us to even a higher level of performance.

And speaking of managing soon after she joined Brookdale as our hospice leader she agreed to lead our entire healthcare services group on an interim basis and now reports directly to me.

Today, approximately 40% of my direct reports are women and as you know half of our board members are women.

Gender diversity in leadership is important in any industry, but it's even more critical in health care approximately 65% of care recipients are female.

75% of caregivers are female and 80% of health care decisions are made by women.

Today, our leadership better reflects our mix of associates residence patients and their families and we will strive to continue to improve the overall diversity of the entire brookdale team.

Today I'm excited to announce another new member of our C suite.

Chris Bay him joined Brookdale, as our Chief Information Officer reporting to Steve Swain.

Chris has over 20 years of experience in IP leadership.

Specializing in the health care industry.

He will lead our great organization, which has continued to drive innovation such as the implementation of a proprietary sales and marketing system electronic residency agreements and improvements in services provided to residence.

We are pleased that our third party monitor scored our program in the top 10% of the healthcare and wellness industry.

We believe strongly in the foundation of our culture and are optimistic that we will continue to attract top talent to brookdale in the months and years ahead.

As I wrap up my comments about the second quarter results I'd like to emphasize that not only are we a leading senior living and healthcare, operator, but an internal and value generating component of our business is the autonomy and ownership we have over our real estate assets.

In regard to our real estate strategy since the first quarter of 2018, our total net proceeds from community sales is over 230 million, bringing us close to our goal.

We have intentionally built a diversified portfolio that has tremendous opportunity and operating leverage we are well positioned to benefit from the positive demographic trends ahead, especially with a dramatically increasing number of seniors who need our services every day to live the best life possible.

In fact, the oldest baby boomers are within a couple of years of the typical age when seniors consider improving their lives through senior housing.

This is important because over 30% of our move in a current age 80 or younger.

Equally important the silver wave is quickly approaching with baby boomers aging into senior housing, which will accelerate for the foreseeable future.

We are delivering on our commitment to turnaround brookdale. So that we can deliver an attractive return to our shareholders and we reiterate our 2019 annual guidance.

I'll turn the call over to Steve.

Thanks, Andy we're pleased to show continued progress on our strategy to win locally.

Highlights of the second quarter were same community senior housing revenue growth was 1.9% year over year with continued strong revpar growth of 3.3%.

The same community occupancy change from the first quarter to the second quarter was better in 2019 had done last year and this year occupancy growth turned positive in may a month earlier than 2018, and two months earlier than 2017 health care services revenue growth was 4% year over year. This marks the second consecutive quarter of improved revenue and operating income for this segment.

Consistent with our increased investment plan Capex ramped up in the second quarter. This investment will better attract and retain residents and we'll protect the long term value of our portfolio.

Also we continued to Opportunistically repurchase shares under the program, we purchased 1.3 million shares at an average price of $6.38 in the second quarter.

For a more detailed review of the quarter, let me start with real estate initiatives since first announced in February of last year, a strategy of enhancing our real estate portfolio has remained a key priority for brookdale, we identify the assets to monetize it in order to focus on and invest in the communities, where we see the highest future growth potential.

To that end, we again made significant progress successfully transitioning 35 communities to new owners or operators in the second quarter.

We transitioned 26 managed communities to new operators for our year to date total of 67, most of which were managed under interim arrangement.

We expect additional managed communities to be transitioned in the back half of the year.

In the quarter Ventas sold five of the approximately 20 leased communities that are being marketed the communities are removed from the master lease as they are sold over the next 12 months. The benefit of these asset removals is expected to have a slightly positive impact on adjusted EBITDA and adjusted free cash flow.

Estimated divestiture timing was previously included in annual guidance. So there is no change we also transitioned to leased communities and completed the sale of two owned communities from the ended the first quarter 2018 total net proceeds from community sales has been over $230 million as we approach our net proceeds target.

While real estate discussions center around divestitures, we recently celebrated two openings first a newly constructed assisted living and memory care building in our Williamsburg, Virginia campus and second a new dementia care campus at Brookdale Skyline in Colorado.

Brookdales Clearbridge crossings model is designed specifically for individuals with early stage Alzheimer's disease, and other Dementias and provides programs and services and a comfortable home like study.

To provide context to the 2019 year over year financial result, since the beginning of the second quarter 2018, 124 communities were transitioned through asset sales and lease terminations. These negatively impacted revenue by $117 million and adjusted EBITDA by 21 million, but positively impacted adjusted free cash flow by $4 million.

I will focus my comments on the quarter same community results, which excludes the impact of both transactions and the 2019 at lease accounting change.

Starting with senior housing has mentioned same community revenue grew 1.9% compared to the prior year quarter rate increases more than offset lower occupancy Rev. Poor increased to 3.3% on a year over year basis.

As you look at the segments. We are pleased that same community independent living occupancy remains strong at around 90% for the fourth consecutive quarter and increased 50 basis points when compared to the prior year quarter.

We stemmed the sequential decline in assisted living and memory care occupancy to have reduction of only 10 basis points outperforming Nick in this regard.

For all three senior housing segments revenue increased on a year over year basis by driving rate, which is a key part of our strategy.

Importantly, same community move ins that showed positive growth for the first time since Q3 2017.

We are pleased that we've been able to maintain very discipline, while also driving move ins and we've seen a significantly less controllable move out since we began our operational turnaround.

While leads in first visits were lower this quarter, we are seeing improvement in conversion rates and believe the positive sales associate retention trends will also improve conversion rates in the future.

In the second quarter, we ran several pilots to accelerate improvements in the sales cycle. A couple examples follow we identified about 30 high potential communities, where local leaders were assisted by a focused executive team with a mission to break down all barriers that impeded success, we have already seen at very good occupancy progress and we'll expand the pilot to approximately 20 more community soon.

For another project, we utilized data analytics to a targeted digital marketing investments in select cities based on the positive uptake in move ins. We will extend this success by continuing our digital marketing investments in the third quarter.

Turning to same community operating expenses compensation related expense increased to 5.2% compared to the second quarter of 2018 and was within annual guidance of 85% to 5.5% increase over 2018 other facility operating expense increased to 6.3% compared to the second quarter of 2018. The increase was primarily due to strategic investments to drive more move ins, including increased internally driven marketing along with property remediation and higher insurance premiums.

Moving to our healthcare services segment.

Revenue in the second quarter improved 4.2% on a year over year basis, and 2.6% sequentially on a year over year basis home health revenue was driven by a nearly 5% increase in average daily census, but was partially offset by changes in case mix and the impact of community dispositions.

The hospice business posted double digit increases for both revenue and average daily census year over year, we hit an average daily census milestone a 1500 for the second quarter and we continue to grow rapidly with July exceeding 1600.

Health care services operating margin improved sequentially from 7.3% to 8% positive financial trends are expected to build through the balance of 2019, and we continue to expect annual health care services revenue to be between 450 and $475 million.

We reported second quarter 2019, adjusted EBITDA of $104 million compared to $147 million for the prior year quarter. The primary driver of the lower adjusted EBITDA was the result of two noncore items, a $24 million decline related to transactions and a 7 million dollar impact from the new lease accounting standard.

The other main driver was higher labor investments as I noted earlier.

Adjusted free cash flow was negative $16 million for the second quarter 2019, when compared to the prior year quarter adjusted free cash flow decreased by $50 million.

The key variances were lower adjusted EBITDA, primarily driven by non core items changes in working capital primarily due to an increase in insurance claims in the quarter on a sequential basis. However, working capital turn positive from the first quarter.

And an increase in non development Capex, which is consistent with our investment plan, we are making positive progress on deploying capex into our communities with over 500 projects started this year.

Partially offsetting the prior drivers was a reduction in the financing lease payments due to disposition activity.

For the second quarter 2019, our proportionate share of unconsolidated ventures delivered $11 billion of adjusted EBITDA and $7 billion of adjusted free cash flow.

The year over year decrease was primarily due to the sale of our equity interest in ventures last year.

Our balance sheet remains in a strong position to provide sufficient flexibility as we continue to effectively implement the operational turnaround of the business.

We are reiterating our 2019 guidance with occupancy growth turning positive in May the second quarter's a good representation of the remaining six months consolidated business adjusted for the following considerations.

There will be continued wage pressure as we fill more open positions.

With the success of our data driven marketing pilot, we will increase digital investments.

Utilities are seasonally higher in the third quarter.

And lastly, DNA the full quarter impact of higher Merritt will also occur in the third quarter.

To wrap up beyond the positive key metrics of retention and move ins that shareholder C. I want to share a couple of observations.

Over the past few months there has been a notable transformation inside brookdale from delivering more wins the when the locally attitude is taking hold and our company culture and momentum is tangible.

Based on the early positive turn in occupancy and with increasing demand moderating supply and strong execution. We're at the beginning of our powerful operating leverage cycle I'll now turn the call back over to Cindy I'm very grateful for all of our residents and associates are safe after the California earthquakes and Hurricane Barry.

I'm very proud of our emergency response team seamlessly moving into action to prepare for various natural disasters scenarios and our community associates for the amazing work they do to put our residents first sometimes even before their own families.

Our team does extraordinary work to enhance the lives of our residents and patients even on ordinary days.

I'd like to close by saying that I strongly believe in Brookdales growth opportunity. The quarter is continuing evidence that we are building positive momentum and we are making progress on our strategy to turn around Brookdale, we are improving our operations in advance of the approaching demographic tailwinds and I'm confident that we will provide brookdale shareholders with long term value.

Before we take your questions I want to touch on the recent public letters from one of our shareholders land and buildings that you might have seen.

I'd like to reiterate that Brookdale, we're always open to constructive feedback from all of our shareholders and appreciate engaging in a dialog towards a common goal of value creation.

Earlier this year the investment committee of the board made up of three independent directors, one of whom was appointed as part of a prior agreement with land and buildings carefully evaluated land and buildings ideas with the assistance of B of a Merrill Lynch, which was the independent advisory firm suggested by land and buildings.

Based on that review and as discussed in our February 2019 earnings call. We determined at the unanimous recommendation of the investment committee after consultation with B of a Merrill Lynch not to proceed with actions advocated by land and buildings as they would be unlikely to generate additional shareholder value.

More recently the board asked B of a Merrill Lynch to assist with the boards further evaluation of land and buildings proposal and also asked a second independent financial advisor Morgan Stanley to evaluate a range of potential propco opco structures.

Following that review and discussions with each of the advisors. The board concluded that pursuing a propco opco transaction would be imprudent at this time.

And that there were fundamental flaws in Green Street advisors theoretical assessment of a propco opco structure.

Those flaws include disregard of numerous critical practical and market considerations and execution risk and the use of unrealistic assumptions.

There is no question that we have tremendous value in our owned real estate portfolio.

At this time, we believe there are sizable upside to the portfolio by maximizing net operating income and with our operational turnaround and increased capital investments, we are making strides to realize that value.

We don't intend to say anything more on this matter today as the purpose of this call is to discuss our strong results and the progress we are demonstrating with our turnaround plan.

To that end as we move into Q in a Stephen I would be happy to answer any questions you might have on our second quarter results and the ongoing actions. We are taking to execute this comprehensive turnaround to the benefit of Brookdale shareholders.

Operator, please open the line for questions.

At this time, if you would like to ask a question. You are then the number one on your telephone keypad again depth bar one on your telephone keypad loss for a moment to compile the kidney roster.

Our first question comes from the line of Josh Raskin from research Sir Your line is open.

Good morning, everyone.

First question just around lead generation and.

And and the first visits and don't want to pick on the two metrics out of everything that looks good I want to pick on the two that didn't look as good but is there some sort of you know.

No, it's not necessary seasonality, but was there sort of a.

Tougher comp from the first half of last year.

Is there something that sort of read into that and maybe give us a little bit more color on why that was and then how does that link directly to occupancy in terms of future periods. What have you seen in the past I mean, obviously I understand.

The correlation but I'm curious if that's been a good leading indicator around occupancy for you.

So Josh its a great question. Thanks, Cindy So let me start with the second half of your question first so we look very carefully at move in and move out during a month because that usually reflects an occupancy for the following month. So when I look at the quarter I'm very excited that we had a positive 6% increase in that move into the third quarter compared to the same quarter of last year, what I look for the quarter at move out.

Our total move outs were favorable by 1% now looking at controllable move out we had a really difficult comp on controllable move outs in the second quarter because last year, we increased our controllable moved up by over 7% and if you look on a year to date, they say Oh, our goal was really to keep our controllable me that's consistent and were within 1% of the controllable move out number from last year. Despite the fact that we decided to really push rate and we knew that could increase our financial move out we did that because we know that he is the stronger driver availability and our primary focus is on driving sort of revpar as oppose to either occupancy or rate independently.

Now when I look at least there's a few things to remember last year, you'll note that we shifted some of our marketing investments into our call center, because we recognize that answering inquiries quickly, what's really important to delivering more value than and so that's one factor that you see when you're looking at least year over year. The second factor and we've been talking about this since the third quarter of 2000 8-K is that there is some disruption in the lead volume from a large aggregator now we've made significant progress in the last three quarter and we're building momentum there, but theres no question that we're not getting the same number of leads from that aggregator that we did in the past.

And when you look at first visit that's also something that has reflected in our first says that in addition to.

The shift in some of our marketing program that generated.

But were less successful it actually getting people to move into our communities. So as we continue our operational turnaround work data driven and we're always looking at the decisions that we've made we're looking at whether they're getting the financial benefit that we expect them to we are doubling down on the things that are working which is why you expect what should expect us to continue our.

Marketing investment as we go into the third quarter and I'm really really proud of the positive conversion that we have on our sales cycle.

I told you last year that we always had the right sales strategy. What we have added this year is great execution, and so I want to get married to attach to the operations team great credit for that and I'm very excited with Rick within 10, joining that we're going to be able to build on that success to deliver our mission to more senior.

Got you that's great. That's very helpful. Just one quick follow up on that the city. If you excluded that large online aggregator do you think you know first visits would have been more sort of flattish as opposed to kind of down 5%. If you could exclude them from both periods that that sounds reasonable.

Oh that is at a very reasonable to conclude.

Okay, and then just a second question around right interest just seems like you know rates down stocks are up for them.

The investment cycle seems to be heating up a little bit for.

The health care Reits are you seeing more interest from them.

In terms of senior housing or do you feel like that the rates are still kind of more focused on non senior housing.

Asset classes.

I think there really are very well publicized and it's easy to look at their investment and their earnings transcripts kind of see where their focus so I would allow them to speak for themselves.

But I meant more sort of directly to brookdale like are you seeing direct interest from the reads change now I think the last year or so its been obviously about divestitures and sales process is there is there any interest around development or new products et cetera for them.

I think that we have had very positive constructive discussions with all of our partners and I'm very happy that Weve announced several win win transaction. We continue to look at transaction that will improve both our financial results and our financial results as we go forward.

Really excited that our rates are partnering with us by delivering capital into our communities and like.

Like every one of our primary focus really at the operation because that is what is going to deliver value for our shareholders to improved operation.

Okay. Thanks again.

Thank you.

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

Thanks, and good morning.

So just thinking about the management contract transitions.

You've done quite a bit year to date am I reading it correctly that you expect another 3 million quarterly revenue reduction from now until the end of the year and then what's the impact potential timing, which thinking about.

Yes. Thanks for the question good morning, Steve will answer that question for you.

Yes, Chad.

There is a $1.5 million reduction in revenue from transactions, we completed already in the second quarter and about 1.7 million or transactions that we contemplate in the future primarily go in a 2019.

The important thing about our management transition is a lot of these management agreements for interim arrangements. You know that we did a lot of restructuring work on our portfolio last year as part of exiting the leases. We wanted to ensure that there was a good transition the communities to operator and so this transition is something that was planned as part of the overall restructuring and we're delighted with the progress that we're making on the.

All right and then since you made some mention in recent past about same store NOI are expected to turn positive in 2020 can you give us some more color on how you think you get there from here.

Sure.

The first thing is it's really a revenue question and so with our positive trajectory on move and the expectation that we'll continue to have occupancy progress during the third quarter. That's the first thing we need to drive rate, we need to drive occupancy that will drive revpar. Most important thing for Brookdale turnaround. The second thing is that 29 Hain is the third and final year of our above market investments in labor and so that is something that will normalize.

More next year as we go forward and then third we made some pretty significant investments in driving our own internally that this year and we do that through a data driven approach because we know that its successful because we have ramped up marketing spend this year, we haven't yet seen the full benefit of that and so we'll get more benefit from next year on this year's investment next year. So those are the primary things that will drive improvement in 2020.

Okay.

And just one more question just on your JV contribution EBITDA run rate is higher than guidance level. At this point does that imply some decline in the second half and then why would that be.

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

Okay is there any contemplated sales of properties in that JV within that guidance.

Because you've been running around 11 million EBITDA per quarter, and first and second quarter, but guidance would.

I would assume a pretty significant drop in that.

Hi, Chad.

We're.

No specific.

Changes in the in the guidance.

So and in the guidance, we didn't have any contemplated changes in the communities, where we're always so investigating.

Ways to increase shareholder value as Sunny mentioned, a few minutes ago.

All right I'll leave it there and I'll hop back in queue. Thanks.

Thanks, Chad.

Next question comes from the line of Jason segment of Jefferies. Your line is open.

Hey, good morning.

Just.

Cindy just wanted if you could comment a little bit further on.

The competitive environment that you're seeing.

You know with.

New supply and new construction start flowing.

Just how are you feeling.

No versus three months ago about how things are trending in your market from a competitive standpoint.

Jason that is a really insightful question because the competitive environment has been a key factor in Brookdale performance over the last three years. So we have a proprietary.

Analysis that we use at Brookdale and if you're looking in our investor deck on page five you can see graph that shows that it starts it opens around our communities. The let me start with starts because that isn't really a powerful story. If you look at the new starts in the second quarter, New starts are down 74% within 20 minutes of a brookdale community compared to the second quarter of 2015, which was the peak if you compare them to two years ago. They are down 60%. If you compare them to the same quarter last year, they're down 51%. So what that tells me is that over the next two years, our competitive environment to be significantly improved.

Now there's no question that opens around Brookdale increased sequentially from Q1 to Q2 that was expected we've been talking about that for several quarters now, but what's really powerful is that if you look at this compare to see which was two years ago in the second quarter of 2017 open are down 33% from the peak.

If you compare it to.

Last year open are down 12% from the peak now the reason that this is critically important is because we are affected by a new competitors opening for about a year. After the new competition open. So what that tells me is that the future competitive outlook for Brookdale is much better than the past, which when combined with the positive momentum that we have from our operational turnaround that gives me great confidence that the strategy that we have is the right strategy and they will deliver positive value for our shareholder.

Thanks, that's helpful and then.

On the.

Maybe for Steve on the operation operational expense side.

You mentioned some.

Items that would be trending higher in Q3, I think you mentioned.

Utilities and continued wage inflation and some other items can you just.

Walk us through your expectations for facility operating margin in Q3 and in the in the second half.

In comparison to where you came in any in Q2.

Yes, sure. So we do expect.

Continuing.

<unk> expense pressure on me as we go from the second quarter into the third quarter as you mentioned some labor.

Marketing.

As we had.

Had positive results from our second quarter pilots and we're going to continue our marketing spend into the third quarter and as.

As Cindy mentioned this is a.

And marketing dollars for future move ins as opposed to some of the previous ways, we had gotten.

Occupancy also we are signaling that you're increasing occupancy in the third quarter that will also have a.

An expense associated with that revenue increase and as you already mentioned utilities show.

Between the first and second quarter, we had a a margin decline and between the second and third.

You can assume probably around the same margin.

Decline, but as we move.

On the third into the fourth quarter really we are starting the.

The turnaround phase, where we have significant.

Operational leverage and that flywheel is starting to spin on into the third into the fourth quarter and then into 2028, where are our occupancy growth and in the first quarter our rate growth in 2020, well would fall to the bottom line omission you mentioned she she gave you the.

The steps to get to same store NOI growth I'm, just a few minutes ago.

Got it thanks for that color.

Thank you again, if you would like half a question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of Frank Morgan RBC Capital. Your line is open.

Good morning.

With regard to the faster than normal ramp up in occupancy is in the second quarter I'm just curious.

Do you have any specific color around what drove that was that unique to you or do you see that from competitors in your market as well.

I think that we are doing a fabulous job, Craig, particularly in assisted living where our sequential improvement was better than the data reported by the industry. So we have been working very hard on our turnaround strategy. It all starts with people as you know we've been building the best team in the business.

And the fact that we have had at a 5% improvement and.

Associate turnover is critical to our success. The second thing that we have been very focused on delighting our residents.

And the fact that we had a 20% 20, 20% improvement and our customer satisfaction as objective late measured by our net promoter score is a critical part of our turnaround strategy and then the third part of our strategy is really getting our sales and marketing optimized and we have done a lot of work a lot of heavy lifting over the last year and a half to get our marketing.

Optimized and spend it appropriately we've got our sales strategy set and we've really improved our execution. That's why I'm. So excited about the results that we have for our.

Operational turnaround and the momentum that weve seen an occupancy it looks like we're off to a really really great start thanks, Brian .

Sure second question any particular markets you might want to call out where you're seeing sort of above market recovery.

In the end.

The second part of that would just be any color around the behavior of any of your new competitors you called out there is like a one year impact from them.

The time of opening but what kind of strategies or are they pursuing in terms of pricing promotion and the like thanks.

You know we have so many different competitors in fact, the vast majority of the industry over 90% of our competitors operate five or fewer communities within our company our size, it's not really.

Helpful to look at the.

Individual competitors and what they're doing we have a very local market centric strategy that focused but I will say that we focused on 20 high opportunity communities and those communities are delivering outside rich outsized returns and they're in various markets throughout the U.S.. So it's less about the market and more about the communities, where we have the most opportunity. We've got some exciting new marketing programs, we've got great execution and we've been working at the senior leadership team terminal every barrier to success for those communities to win.

Thank you.

Thanks Frank.

Thank you there are no for your question at this time.

Yes.

I would like to turn the call over to Cindy.

Yes, the floor is yours.

Thank you very much this quarter is further evidence that our turnaround initiatives continue to take hold and we achieved important operational milestones.

As we've demonstrated we are content, we are committed to continually improving our performance and working to drive long term sustainable shareholder value the company's business and operating performance is improving as evidenced by our 6% year over year improvement in New then and we are providing quality service and care to our residents and patients.

Our turnaround strategy is driving results. Thank you. So much this ends our call.

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

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