Good morning. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Fourth Quarter and Full Year 2017 Earnings Call. [Operator Instructions].

Mr. Ross Roadman, Senior Vice President of Investor Relations, you may begin your conference. .

Thank you, Ginger, and good morning, everyone. I'd like to welcome you all to the fourth quarter and full year 2017 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our Chief Financial Officer; and Lee Wielansky, a member of our Board of Directors..

As we announced this morning, our Board of Directors appointed Cindy as our President and Chief Executive Officer and as a Director effective February 28, to succeed Andy Smith. We also announced that Lee has been elected to serve as Non-Executive Chair.

I'd also like to introduce Kathy MacDonald, who is taking over as our Senior Vice President of Investor Relations. Kathy is an experienced Investor Relations professional who came to us from Mead Johnson Nutrition and has been working with me here for several months.

I am transitioning to another position within the company, with the goal of helping to advance the plan that Cindy will talk about today. .

I would like to point out that 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 are subject to various risks and uncertainties. Forward-looking statements are not guarantees of future performance.

Actual results and performance may differ materially from the estimates or expectations expressed in those statements. Future events could render the forward-looking statements untrue, and we expressly disclaim any obligation to update earlier statements.

Certain other factors that could cause actual results to differ materially from our expectations are detailed in the earnings release we issued this morning, as well as in the reports we filed with the SEC from time to time, including the risk factors contained in our annual report on Form 10-K that we filed earlier today.

When considering forward-looking statements, you should keep in mind those factors and the other risks factors and cautionary statements in such SEC filings. I direct you to Brookdale Senior Living's earnings release for the full safe harbor statement. .

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

I direct you to our earnings release and our supplemental information, which may be found on the Investor Relations page at brookdale.com for important information regarding the company's use of non-GAAP measures, including the definitions of each of these non-GAAP measures and a reconciliation of each such measure from the most comparable GAAP measure..

With that, I would like to turn the call over to Lee.

Lee?.

Good morning to all our shareholders, analysts and other participants, and welcome to the Brookdale's Fourth Quarter and Full Year 2017 Earnings Call. As you are most likely aware by now, we made several significant announcements this morning, regarding a turnaround of Brookdale.

I will discuss the details of the strategic review and leadership changes and then turn the call over to Cindy to describe our path forward. As we announced this morning, we have formally ended our strategic review, and as we promised in previous earnings calls, I will give you insights into the process.

We announced to kick off our strategic review in February 2017. The board and management, assisted by our legal and financial advisers, explored multiple options and alternatives to create and enhance shareholder value.

Throughout this process, we stated that Brookdale would enter into a transaction only under terms that our board concluded will be in the best interest of the company and its shareholders. It was a long and robust process. We received interest from numerous potential counterparties.

We reviewed a number of proposals, and we had in-depth discussions with multiple foreign and domestic parties regarding various strategic alternatives, including but not limited to the sale of the company. We went through multiple iterations and negotiations with several of these counterparties. .

As we noted before, the process was complicated by the need to incorporate certain third-party consents, and we were conducting parallel negotiations to seek those consents throughout the process. An important outcome of the strategic review process was the HCP transaction that we announced in the fourth quarter 2017.

This improved the change of control provisions in some of our lease agreements and provides the company with more transactional flexibility. .

At the end of the strategic review, the board ultimately rejected an indication of interest to acquire the company for $9 per share in cash, which purported to range up to $11 per share in cash subject to conditions that the board did not believe were likely to be satisfied.

The board did not believe this offer was acceptable and believes that company can ultimately create more value for shareholders by driving higher performance as a public company under new leadership.

The board also believes the rejected offer and our current share price was significantly below the company's intrinsic value and below our net asset value. Prior to receiving and rejecting the final indication of interest, we had other interest at higher prices, and we've pursued each vigorously.

However, for a variety of reasons, including the necessary consents that would have enabled us to transact, none resulted in firm offers. As we disclosed in today's press release, we have now concluded our strategic review.

Although the formal process has concluded, as always, we are committed to evaluating all opportunities to enhance shareholder value and we'll continue to do so. .

Now let me comment on the leadership changes we announced this morning. Andy Smith will step down as President, CEO and Board member. I want to personally thank Andy for his contributions to Brookdale for over a decade. Dan Decker has also fulfilled his commitment to lead Brookdale as it determined the best path forward.

Now that we have set our course, Dan has completed that commitment and has chosen to retire from the board effective March 1, 2018. Bill Petty has also retired from the board. I worked closely with Dan and Bill, and on behalf of the board, want to express our appreciation for their leadership. .

improving Brookdale's liquidity, rationalizing our corporate overhead structure, improving the quality and lowering the cost of support services provided to our residents and communities and improving our visibility into the key drivers of business success.

When Cindy joined Brookdale, we knew she was a proven, change-oriented executive who has demonstrated her abilities across multiple industries and leadership roles.

Beyond the breadth of her current and prior company's CFO roles, Cindy has had multi-billion-dollar P&L responsibility, has served as an executive officer, reporting to the Chairman of a Fortune 30 company, was a CEO for a publicly traded retailer and has served for more than a decade as a board member of public and private companies.

The board has full confidence in Cindy. Over the past months, we've tasked her with additional responsibilities, including to begin formulating a turnaround strategy. She has been working directly with our operational sales, marketing and other leadership teams to plan and begin implementing tactics to improve our results.

I look forward to working with Cindy, as the company create shareholder value by improving our execution, taking additional actions to return to growth and increase margins as the industry rebounds over time. .

Cindy, I'll turn the call over to you now. .

Thank you, Lee. Let me add my good wishes to Andy, Dan, Bill and Bryan Richardson, who is also leaving the company. On behalf of the leadership team and our associates, I want to thank them for their years of service to Brookdale. I'm honored to take on this new role, and I'm excited by the opportunity.

Although Brookdale has underperformed, we have a strong foundation and tens of thousands associates who are committed to our mission and to the residents we serve.

I look forward, with the help of the company's associates, to restore the company to our previous success by shifting our focus to winning locally, while leveraging our industry-leading scale. With the changes that I will describe today, we intend to drive attractive, long-term return for our shareholders.

In the past few months, by working shoulder to shoulder with the key operational leaders, we have analyzed our operations to determine what is working and what is not. We developed a concrete plan to focus on the key value drivers of our business model to improve the performance of the company.

We will measure our progress against preestablished metrics. We will be intentional about what we're going to focus on. We have a robust road map to achieve Brookdale's long-term growth potential. I'll share the details with you shortly. At the same time, we know that our real estate philosophy is a critical value driver.

Our goal is to optimize our portfolio, while opportunistically creating value from owned real estate. .

Let me review our history and highlight the decisions that we've made about real estate. After integrating Emeritus communities in 2015, we undertook a comprehensive review of our portfolio. In 2016, we began our portfolio optimization initiatives. Since then, we have sold or terminated leases for 165 communities.

These have typically been challenged assets in declining markets or community in need of significant resources. This was a step towards simplifying our operations. However, the net financial impact to shareholders was not significant. .

During the strategic review process, we identified assets we can monetize, including several high-end communities, by taking advantage of the market where stable assets are in high demand and can command high multiples.

This may include some of our highest performing communities, where we don't see the same future growth potential as we see in other parts of our portfolio. We also expect to continue pruning disadvantaged assets from our portfolio. .

In 2018, we expect to market and sell approximately 30 communities, in addition to the asset dispositions we have announced previously. This is likely to generate proceeds in excess of $250 million, net of associated debt and transaction costs. In the coming quarter, we will assess our capital allocation strategy for these proceeds.

We will continue to look for opportunities to create value from our real estate, while we pursue our turnaround plan to improve our operating performance and financial results. .

first, attract, engage, develop and retain the best associates. Second, our resident and family trust and endorsement by providing valued, high-quality care and personalized service, which in turn leaves us to our third tenet, which is to drive attractive long-term returns for our shareholders.

We plan to return to our strong foundation, while we will differentiate ourselves based on caring associates who create passionate advocates and generate referrals. It's about winning locally while leveraging our industry-leading scale and experience. .

On the surface, you may not see this as a big change from what we said in the past, but the reality is, our focus is very different. We will make decisions closer to our customers by empowering our executive directors with more local decision rights. We are also changing how we allocate our resources.

This is about improving our ability to operate by narrowing our focus. You can't be the best of anything when you're trying to do everything. But we will stop trying to do so much and we will eliminate anything that distracts us from our mission. We will make sure that our associates are able to focus only on what matters most, our residents. .

associates, residents and shareholders. First, we will invest appropriately in our associates. We are on the right track with our initiatives around key leadership. In 2017, we took the first step to invest more in the top roles in our communities.

We made good progress with our efforts to improve the retention of our executive directors and our health and wellness directors. Because of this success, we are expanding this program deeper in our community organization. And it's more than just increasing compensation.

For example, we are improving how we recruit and onboard our new associates into their role. This is already begun to favorably impact turnover by reducing churns in the first year. We will ensure that our associates' interests are closely aligned with the work they do.

That they know that the work they do is meaningful and that they receive the proper rewards for their efforts. At the same time, we will invest in technology to remove routine tasks so the associate can center their attention on the work they enjoy most, taking care of our residents.

By building a workforce that is valued and supported, we can better attract, retain and develop an excellent team. .

Second, our strategy improved our focus on our residents and patients. Our unwavering commitment is to our customers. We will continue our work on enhancing our customer value proposition, differentiating based on quality, choice, personalized services and associates who care.

We will raise Brookdale's profile on a local level with potential customers and their adult children. We will concentrate on customer satisfaction because we know through improving Net Promoter Score, work that delighted our residents, correlates with higher performance.

We've identified the need to change our sales and marketing national versus local mix and intend to implement other changes we've identified to improve our performance.

For example, we have initiatives to improve our lead management, pursuing the most productive channels, improving our initial response and follow up on those leads and marketing in a local targeted manner. At the same time, we are discontinuing well-meaning initiatives that distract from the things that matter most. .

Third, and finally, from the operational standpoint, we will continue to optimize our business model to strengthen our financial proposition. We will execute on our new real estate initiatives that I outlined earlier. Over the past several years, we have taken incremental steps with divestitures and G&A cuts.

We are committed taking additional actions to return this company to the great leadership position that it had in the past. .

This week, we are implementing additional G&A cuts. This includes eliminating projects outside of our key focus areas, consolidating our operating divisions and flattening the organization in order to get better economies of scale in our back office.

In total, we are targeting $25 million of G&A savings, before normal cost inflation and normalized bonuses. These cuts are meaningful to cash flow. We are continuing to assess our operating expenses to ensure that the costs are supporting our most important initiatives.

We are cutting costs in order to invest in the areas that we believe will have a lasting, positive impact on our competitive positioning. .

I would like to close my remarks with a few comments about what we experienced in 2017 and what we expect to see in 2018. 2017 was a difficult year. We experienced competitive new openings across many of our markets, and our teams were proactive with actions regarding marketing, pricing and capital expenditures to meet those pressures.

Our occupancies seasonally declined in the first half, exacerbated by a flu season that extended into the second quarter. During the second half of the year, we improved occupancy and achieved a positive rate growth, though subdued as we fought for market share.

Our labor cost increased during the year, due to both the competition for new associates and our intentional investments to improve retention. Our portfolio optimization reduced revenue and adjusted EBITDA in the short run, while shedding owned and leased assets that we did not feel strengthened our platform in the long term.

We responded well to significant natural disasters in Florida, Texas and California to protect our residents and patients, but these events did have a financial impact on us. The growth of our key metrics was also impacted by the positive reserve adjustments made in 2016 that did not recur in 2017.

During 2017, we made good progress with our balance sheet. We built a significant amount of liquidity and refinanced on major 2018 mortgage debt maturities. Taking the cash on hand to pay off the convert in 2018 into account, we have a very reasonable debt maturities over the next 5 years.

As of year-end 2017, we have $873 million liquidity, including $515 million of cash and marketable securities and $358 million of availability on our line of credit. .

Looking quickly at our quarterly results, we were pleased with our fourth quarter 2017 business performance. There was really no change in the macro environment from the prior quarter, with elevated competition and material labor cost pressures. .

Our occupancy performance for the fourth quarter was good -- for fourth quarter, producing a 40 basis point sequential increase. This was in spite of a difficult December, which experienced an adverse weather impact and a flu season that was more severe than normal and, which started earlier than usual. .

Our aggregate rate growth remains steady even as we built occupancy. We remain proactive with our pricing actions and saw a negative mark-to-market on new move-ins, which went from minus 6% to minus 3% in the fourth quarter.

On the expense side, our labor costs continue to increase, due to tightness in the labor market, wage inflations and company-initiated investments, as I mentioned before. .

In the fourth quarter, we continue to see specific, positive impact of our initiatives to improve our operating performance. For example, we saw voluntary turnover of our top 3 community leader positions declined 19% year-over-year in our consolidated portfolio for both the quarter and the full year..

Let's turn to 2018. As we look at 2018, our senior housing business is in the midst of a perfect storm of heavy pressure from new supply, wage pressure from a tight labor market, the constant pressure of lease escalators and the relatively recent pressure of rising interest rates.

We expect competitive new openings to remain elevated through 2018 and absorption of new deliveries to create occupancy pressure throughout the year. Additionally, we have seen a difficult start to the year, with impacts from harsh weather and a flu outbreak that began in December.

We do expect, based on the strategy described earlier and the investments we're making, that we will begin to demonstrate improvement as we prepare to return to year-over-year growth in 2019.

With my appointment as CEO this week, I will take the time to continue to study the business in a thoughtful manner, to meet with our REIT and other key partners and to further refine our near-term plan before issuing formal guidance for 2018. However, I will provide some color about 2018.

Year-over-year comparisons will continue to be negatively impacted by the impact of our announced dispositions either due to the full year effect of 2017 closed transactions or those that we close in 2018. However, these real estate initiatives will position us for creating long-term shareholder value.

Slide 21 in our current investor presentation, which is on our website, is helpful to understand the impacts of our portfolio optimization initiative.

This slide is a pro forma of our 2017 result, after reflecting the impact of transactions that are complete or in process but does not include the approximately 30 additional asset sales that we announced today.

While some of these transactions will only be reflected for part of 2018, this slide will help you understand the results of our continuing operation.

There is no doubt that 2018 will be challenging, but with the operational changes and investments we're making coupled with a focus on execution, I am confident we will begin the process of improving our results and performance and position Brookdale for future growth and success.

Our strategy is built on growing the top line, in spite of the challenges we face in our market. We expect same-store occupancy to be slightly down for the full year.

It's important to note that our portfolio differs from the REIT because we are starting from a lower occupancy base and we have more communities in secondary markets, where we project fewer openings in 2018 than primary markets.

It's also important to note that because our occupancy declined during 2017, we have to recapture the occupancy loss during 2017, before we can grow in 2018. We do expect our occupancy to be impacted by the flu season. Based on what we know today, this is the worst flu season in 20 years as it relates to seniors.

Our first obligation is to protect the seniors we serve and so as a result, we have closed our communities to new admissions for over 1,000 days in the first 45 days of the quarter. This compares to closing our communities for 800 days during the entire first quarter of last year.

When our communities are closed, we can't conduct tours or move new residents in, which has an adverse impact on occupancy. At the same time, we are seeing an elevated death rate. We expect same-store total labor costs, including benefit, to continue to grow beyond customary inflationary increases.

In 2018, we expect a 5.5% to 6% increase on a year-over-year basis as we invest deeper into the organization to improve retention that creates growth. Finally, we expect to somewhat reduce per-unit spend on capital expenditures, but remain committed to spend appropriately to support the business. .

So as I wrap up these prepared remarks, let me be clear. 2018 will be a very tough year. The changes I outlined will be painful, but necessary. And we will adapt as we learn. We need to fix and invest in operations to get back on the right long-term path.

While those investments will impact year-over-year comparisons, it will ultimately lead to higher occupancy, stronger rate growth and greater, more sustainable adjusted EBITDA and cash flow. .

Finally, I want to close by saying that I believe strongly in the growth opportunities for Brookdale. In late 2017, we started to demonstrate progress in key areas. Continuing the momentum will allow us to overcome the near-term headwinds and lay the foundation for success.

In the future, the demographics will become a tremendous tailwind for the industry. Health care spending continues to increase as the population ages and senior housing will play an important part in caring for this country's seniors.

Our readers are working diligently to execute our new strategies to drive improved operating performance and create shareholder value..

I'm happy to answer your questions now. .

[Operator Instructions] Your first question comes from Brian Tanquilut from Jefferies. .

This is Jason Plagman on for Brian.

So Cindy, just -- I know you touched on this in your prepared comments, but can you just comment on kind of your key areas of focus for the first -- your first 90 days in the CEO role then even 365 days kind of what are your top 2 or 3 priorities that you'll be spending the most time on?.

Thanks for the question. Our top priority is to turnaround our company performance. We're focused on winning locally. This was very successful for us in the past, and we're confident that our new plans will work. We've already identified and started initiating changes.

We're holding ourselves accountable just like we know you will, not only to make the changes, but also to measure and report on key operational metrics. We plan to execute on a wide range of initiatives to create long-term sustainable value for our shareholders. .

And then, I think you mentioned ongoing discussions with your real estate partners. How are you thinking through that? And that was big area of focus during strategic review process.

Are you still working towards reducing the barriers related to those consent processes?.

We are looking for win-win relationships with our REIT partners. We value those relationships. .

Okay. That makes sense.

And then just on the numbers, I don't know if I missed it, but did you mention on your outlook for month -- annual rent increases, both in-place and the improved mark-to-market place? How are you thinking about where rent increases will shake out for 2018?.

So we didn't provide specific guidance for our rent increases, but we do expect to see normal in-place rent increases. And we expect to see continued pressure on mark-to-market on our same-store communities. .

Your next question is from Joanna Gajuk from Bank of America. .

Cindy, congratulations. So actually, on the last question partially, because on the Slide 18, I guess, you talk about the expect -- margin expansion in 2019.

So should I read into this, so you're trying to say that, I guess, and your comments kind of suggested because you said '18 will be a challenging year, so we should think about sort of not seeing margin expansion in 2018?.

That's correct. It will be a difficult year, but we expect to return to year-over-year growth in 2019. .

And did I hear it right, so you talk about the labor cost outlook for '18, 5.5% to 6%? So was it for the full year '17?.

We are close to 6% in the fourth quarter and over 5% for the full year. So if you think about 2018, we're expecting to see similar labor growth and that is total compensation, including benefit on our same communities. .

All right. And then, you also said that in also the -- one of the slides, talk about reducing or rather realigning how you spend your CapEx, right? So you have this metric here when you kind of talk about, it seems the recurring CapEx or the community level CapEx.

So can you maybe flesh out your view in terms of the different buckets for your total CapEx? Also Program Max and EBITDA, enhancing CapEx and any piece of corporate versus recurring, how can you -- so how should we think about it for next year or maybe the next couple of years in terms of changes versus Q4, for example?.

So Joanna, we're not giving formal guidance in this call, but what I can say with regard to our community level CapEx, on a same-store basis, it's not going to be terribly different than 2017. We are expecting to increase our Program Max investments. And as you know, we think Program Max is something that drives a lot of value for our shareholders.

We normally see double-digit returns on those projects and so we want to invest more there.

I will also say that in 2018, we will have hurricane-related Capex as we finished cleaning up the damage in Florida, primarily from the hurricanes that hit their last year and some extra onetime CapEx potentially to respond to the new legislation that's in process for Florida generators. .

Right. So I guess, on that front, so you said it -- you plan to increase the Program Max because that's where you see the highest returns. So what are the some of the examples of projects that you mentioned that you will try to, I guess, walk away from, so to speak, or refocus this spending.

So is it the cap exposure? Or is it something also that's could on the operating expenses? So any kind of examples you can give us in terms of things you -- as of now, you decided to kind of reduce exposure because what I'm getting at is, is there something where you kind of considering maybe reducing your Ancillary Services business at all?.

So let me take that question. I think there are a few questions in there. So first with regard to CapEx, we are not reducing the number of CapEx projects we have by any mean.

In fact, with Program Max, we're increasing the number of projects that we have underway, but as you think about the impact of projects on the community, our objective is to reduce well-meaning initiatives that are impacting our communities.

So if you think about it, there has been numerous, numerous department-driven pilot projects that consume the time of our community leaders. We have and will continue to eliminate many of these. Regarding streamlining, one example that we significantly abbreviated was a 600-item questionnaire that previously each community had to complete.

We're also improving our decision rights. And so one of the focus areas that we have is we want our decisions to be as close to the customer as they can be. So we're empowering our executive directors and that's something that's a pretty big focus for us.

With regard to our Ancillary Services business, we think that's a critical part of our business and we think that it provides a differentiation for our customers as they're able to get additional care within the same company. .

Your next question comes from Chad Vanacore from Stifel. .

So Cindy, you mentioned occupancy, you're in a difficult December, but also we look at occupancy, it had been up 40 basis points sequentially in the fourth quarter.

So how did that occupancy trend by month?.

the first was it was an unseasonably harsh weather pattern and the second was that the flu season started much earlier this year than it normally does. Normally, we don't see a flu impact until the first quarter, but we did see the flu hit our communities in Q4, particularly in Northeast.

Now as I've mentioned, when there is flu in a community, we basically close the community. And we do that to protect our residents. We also do that to make sure that we're protecting everyone. So when that happened, we can't give tours, we can't move new residents in and so because of that you have an impact on occupancy. .

Right. And it seems like that occupancy is bleeding into the fourth quarter, and you had mentioned that the flu had really closed to -- down for about 1,000 days in that first 45 days in a month.

So how has -- how's that occupancy trended in January? Can you put a number to it?.

I won't put a number to it, but what I will say is that in Q1, we normally experienced a seasonal decline. So Q1 is always, almost always lower than sort of Q4 and 2018 is no different than that. As you did mention, we are having a flu impact. It's the worst flu season for seniors as it's been in 20 years.

And so that has an effect not only on our move-ins, but also in having an increased death rate. .

So to the best of your estimate, what would you say the actual flu impact is over, what would be normal seasonality?.

It's too soon to say. As far as we know, the flu impact hasn't peaked yet. It normally peaks about this time, but we're still seeing pretty elevated path. When we get together on our next call, we'll be able to provide additional clarity on that for you. .

All right. Well, I guess, I will change gears a little bit.

And then just thinking about the strategic review process, what were some of the terms in that indicated offer that you mentioned that the board felt was unachievable or untenable?.

Lee, do you want to take that one?.

As we said in our previous comments, the offer was $9 a share and... .

All right.

So really price basically?.

Say it again. .

If it's -- if that was really the -- if price consideration was the -- was a stumbling block?.

Yes. .

All right. And then, just one... Go ahead. .

Just -- I mean, to comment -- I mean, we look at the net asset value of the company, and we felt like that for shareholders that it's -- it's worth a whole lot more than $9 per share. .

All right. Then just switching gears one more time. The G&A cut that you expect to happen in 2018.

You are looking at a run rate at $25 million once fully enacted, when do you expect to get to that full run rate?.

So the $25 million is the impact for 2018. An annualized impact of that is over $30 million. And I will say that we've already taken a large number of the actions this week, in fact. Just to remind our G&A. Now a quick reminder, the $25 million is before normal cost inflation and before normalized bonuses.

Because we underperformed last year, we paid much lower than normal bonuses and our expectation is that we will perform in 2018 and so we will pay normalized bonuses. .

All right.

But to get $25 million, how should that trend through the year?.

You should expect to see most of the impact by Q2 and Q3, but you'll see a significant impact in the last part of Q1 as well. .

There are no further questions at this time.

Cindy, do you have any closing remarks?.

So I would like to thank everyone for joining us on the call today. And I look forward to talking to you more. .

Ladies and gentlemen, thank you for participating in today's call. At this time, you may now disconnect..