Kathy MacDonald - Investor Relations Cindy Baier - President and Chief Executive Officer Steven Swain - Executive Vice President and Chief Financial Officer.

Mary Shang - Nephron Research Chad Vanacore - Stifel Brian Tanquilut - Jefferies Joanna Gajuk - Bank of America Dana Hambly - Stephens.

Thank you, and good morning, everyone. I would like to welcome you to the Third Quarter 2018 Earnings Call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer, and Steve Swain, our Executive Vice President and Chief Financial Officer.

I would like to point out that all statements today, which are not historical facts including our earnings guidance may be deemed to be forward-looking statements within the meaning of the Federal Securities laws. These statements are made as of today's date and we expressly disclaim any obligation to update these statements in the future.

Actual results and performance may differ materially from forward-looking statements.

Certain other 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 SEC 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 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.

For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to our earnings release and supplemental information, which may be found at brookdale.com/investor and was furnished on our 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, welcome to our third quarter 2018 earnings call. This morning, I will provide an update on our turnaround strategy and early thought about 2019 and Steve will provide our third quarter results and 2018 guidance.

Before I speak about the three pillars of our strategy, I'd like to welcome Steve Swain, our new Executive Vice President and Chief Financial Officer. Steve joins us from Dish Network ranked number 203 on the Fortune 500. He is a great fit for Brookdale because he's passionate about our mission and has a strong consumer focus.

In fact, within his first 60 days, Steve has already served in communities within each of our three division. He wanted to walk in our associates’ shoes and learn the business from the community level up. Steve's finance expertise within large, complex, asset intensive businesses makes him a great addition to our leadership team.

In addition to welcoming Steve, I want to welcome Denise Warren to our Board of Directors and to thank Jeff Leeds for his service to the board. Jeff retired after 13 years on our Board. He joined at the time of the IPO, served as Chairman for several years and saw our company grow from 380 communities to our current 900-plus footprint.

I will personally miss his advice. Brookdale's top priority is the turnaround strategy to drive operational improvement. I will now share the progress we're making to turn around our business by winning locally. Let me remind you of our three strategic priorities.

Drive attractive long term returns to our shareholders, by attracting and retaining the best associates, and earning resident and family trust by delivering high quality care and services, which creates Brookdale advocates and generates future resident referrals. Let me start with our associates priority.

Our associates are critical to our success because we take care of residents 24 hours a day, every day of the year. We are in a service business where people are what matter most and the quality and dedication of our teams were clear as we protected our seniors during hurricanes Florence and Michael.

These two hurricanes are also a good reminder of how Brookdale’s scale allows us to provide the best support to our residents and patients. During the two recent hurricanes, we had 240 communities and 34 agencies that could have been in harm's way. We evacuated 9 communities with most of our residents moving to sister communities.

Associates from our evacuated communities traveled and stayed with our residents. We came together as a family, and the spirit of team work, associates from neighboring states formed relief teams to support our staff from both the evacuating and host communities.

Our corporate and field teams mobilized to make sure that we had all the food, medications, and supplies that our residents would need. Our asset management teams deployed to ensure that we would be able to repair any storm-related damage as quickly as possible.

Our ancillary services team also worked hard to ensure that our patients had the support that they needed throughout the storms, and the work goes beyond what is needed to support our residents. We kept our residents’ families and friends informed about what was happening with their loved ones.

Our regional and corporate associates were proactive and extremely successful in keeping communication flowing and community website updated.

I'm incredibly grateful to our associates for protecting our residents during the hurricanes, working with our residents' families to ensure that we had the best plan in place and keeping our residents’ loved ones informed. Over the last several months, we've been very focused on our turnaround strategy.

We initiated major field organizational realignments in the second quarter of 2018, including improving span of control at the district level, changing the sales associates reporting above the community level to report directly to sales leadership, and expanding our contact center hours. This is a lot of change within a short period of time.

Making these changes in the early stage of the turnaround was critical to our success. We are seeing some early traction from these efforts but it will take time to reap the benefits from these initiatives.

To reestablish our culture and solidify the understanding of what it takes to win locally, we held a national leadership meeting that brought together our operations, sales, and clinical leaders above the community and our corporate and ancillary services leadership. This is the first time that we’ve had everyone from across the nation together.

Our goal was to ensure that everyone understands our strategy that we are clear on where the decision-making guardrails are and that we have removed as many barriers to success as we can.

After the meeting, these leaders returned to their regions energized with greater partnerships across functions and ready to share what they learned with our community leaders. Turning to our key associate metrics.

Our Executive Directors and health and wellness directors' retention rate has remained over 70% for five quarters on a trailing 12 month year-over-year basis. Internal research shows us that our communities perform better when an Executive Director has been in their role for over two years.

Over 60% of our current the EDs have achieved this two-year milestone. We look forward to continuing this positive momentum team. For the sales organization, the third quarter was our first full quarter under the sales transformation plan.

For sales directors, as we continue to refine our sales program and set clear, individual community expectations, there is turnover. We are working to more quickly fill the open positions, and with the improving span of control, district sales leaders are able to spend more time coaching the community sales associate.

This brings me to the leading indicators and our second strategic priority of driving RevPAR and occupancy by providing quality care to our residents and obtaining future referrals. In the third quarter of 2018, we continued to improve in three of our four leading indicators on a same community basis.

Leads were up 7% compared to the third quarter of 2017. First visits showed similar year-over-year improvement. When you look at leads and first visit in conjunction, we drew a line between 2017 and 2018. This is one of the 2017 learnings that we put into action. While 2017 leads were positive, they weren't converted into higher first visit.

After refining the plan, you can see our 2018 improvement. We plan to implement a similar improvement plan for our conversion from visits to move-ins, which were lower in the third quarter.

We are enhancing our process and coaching to help our sales associates focus on the highest quality lead sources and potential residents, improving dashboards to help communities prioritize and plan for the highest quality lead development.

The lower year-over-year move-ins were also due to a tough comparison since we drove occupancy through deeper discounts in the third quarter 2017. I’ve previously referenced the negative 6% mark-to-market that occurred in the third quarter 2017.

We've made significant strides to enhance our price discipline over the past year, and for the third quarter of 2018, mark-to-market was within 1% of our existing residence rate. Controllable move outs improved 4% on a year-over-year basis. This was the third consecutive quarter that we saw a significant improvement.

Here's an example of how our associates are making a positive difference in their community. Our operations team implemented the fresh impressions program this year to provide consistently clean and comfortable environments for our residents.

We've made the right work easier to do for our associate, resulting in great feedback and improvements in our internal quality assurance program scores. While the movements in isolation are lower than we would like, let me put that in the context. Together, move in and move out drive occupancy.

During the third quarter, Brookdale same community occupancy improve 20 basis points sequentially from the prior quarter. We're pleased that our performance was better than the sequential NIC results for the third quarter. Turning to the final strategic priority, our shareholders. Our real estate strategy has continued to progress well.

In August, we announced the agreement to sell Brookdale Battery Park to Ventas for a price that represented an approximate 5% cap rate. As an additional benefit after the agreement was signed, we were pleased that Ventas wanted us to continue to operate the community.

By the end of the third quarter, we had reached agreements to sell 18 more portfolio optimization assets and these are in assets held for sale. We have 7 remaining communities that are being marketed. We expect a significant portion of the asset sales will soon be finalized and the proceeds realized.

Collectively, we still expect to generate proceeds in excess of $250 million net of associated debt and transaction costs. In addition to making good progress on our own real estate, we have reduced our lease community portfolio by 22% since the beginning of third quarter of 2017.

And as we negotiated agreements with our REIT partners this year, we have aligned our interest in respect to capital investment. I'll provide you an update on the uses of cash after sharing early thoughts on 2019. For 2019, we expect the competitive landscape will continue to be difficult, but there are early indications for improvement.

As previously reported by NIC, construction as a percentage of senior housing inventory remains near historical highs, yet it is starting to abate. The numbers starts and opens has been and continues to be on a downward trend this year. Through our custom data analysis, we determined that new open are taking longer to fill up or stabilize.

This may put additional pressure on underwriting future new construction. While the slower fillip may put some pressure on rate, we have not seen widespread discounting. Our current due is the supply headwinds will persist for the vast majority of 2019 before improvement.

While it's too soon to get guidance for 2019, I want to provide some early thought on our expectations for next year. For Brookdale, we expect occupancy to be slightly down year-over-year but to grow within the year.

Despite the challenging macroeconomic factors, as we continue to accelerate our turnaround improvements, we expect to gain occupancy compared to industry peers. Given the large investments that we've made in labor, as well as normal cost inflation, we expect the pass through larger in place rent increases than we did in 2018.

Regarding community labor costs, I previously mentioned the 2018 was the second of a three year investment plan to bring our product line associates up to our goal threshold. Our 2018 labor cost growth compared to 2017 is expected to commence lately lower than 5.5% which was the low end of our previous range.

The labor market continues to be tight and we expect our labor investments will continue into 2019. The final significant part of our 2019 outlook is related to CapEx. As previously mentioned, I initiated a review of our community CapEx needs immediately after I became CEO.

The team recently completed this discipline, bottoms up review for our 700 plus community consolidated portfolio with a focus on ensuring that our communities are inappropriate physical condition to support our turnaround strategy. As part of the review, we also determined what additional investments are needed to protect the value of our portfolio.

As a result of that review and based on our preliminary 2019 due, we now anticipate additional near term investment in our communities including for 2019 increased spend on our community level CapEx primarily attributable to major building infrastructure projects. We expect the portion of this increased CapEx will be reimbursed by our REIT partners.

And net of such reimbursement we currently anticipate that our non-development CapEx for 2019 to be up to $75 million higher than our 2018 spend. We intend to find this anticipated increase with a portion of the net proceeds from the asset sale and our fourth quarter financing and refinancing plan.

We've reviewed these key factors and our outlook with the board in order to assess capital allocation option. We are certainly committed to reassessing share repurchases. I'll turn the call over to Steve..

Thanks for the introduction Cindy. I was first attracted to Brookdale because of its mission to enrich the lives of the seniors we serve. In my first couple months, I have been impressed with the passion I see in our associates.

I believe we have the right strategy to win locally while leveraging our industry leading scale and expertise and I'm excited to be part of it. Moving to the quarter, I will start with a few highlights before I discuss the financial details and 2018 outlook. In the third quarter on a same community basis, we saw revenue improved year-over-year.

Occupancy improved 20 basis points sequentially, which was slightly better than the industry as reported by NIC. Independent living occupancy improved every month of the quarter, resulting in a weighted average occupancy of nearly 90%.

To provide context for the financial results, let me start with our real estate strategy, which is to improve long term cash flow by streamlining our at least portfolio and opportunistically monetizing select, owned real estate properties. In the third quarter 2018, we made good progress on both owned and leased transactions.

Starting with owned assets. We signed an agreement to sell Brookdale Battery Park and another agreement to sell at 18 additional communities. These properties are reported as assets held for sale. We continue to market for sale seven more assets as part of our 2018 real estate program.

We are pleased that the sale of Brookdale Battery Park has already closed. This was a quick close and shows the great collaboration between Ventas and Brookdale. For the owned asset strategy, the outlook has not changed since the beginning of the year.

We still expect to generate proceeds in excess of $250 million net of associated debt in transaction costs of which we realized $144 million with the sale of Battery Park. Turning now to our least portfolio. We have reduced this portfolio by 16% since the beginning of 2018.

In the third quarter as planned, we continue to make progress with HCP in line with our November 27th announcement.

We have terminated leases and management agreements for several communities and already in the fourth quarter, we have terminated leases on an additional 17 communities, which completes the terminations from the November 2017 agreement with a HCP. Specific to Welltower, we terminated two master leases for 11 communities in September.

In addition, following the quarter end, Brookdale and Welltower agreed to renew the Sallie master lease for the next 8 years. This mutually beneficial agreement results in a greater alignment of interests. For example Welltower will fund the pool of first dollar capital investments which will improve our near term cash flow.

To provide you a larger view since the beginning of the third quarter 2017 and through the end of third quarter 2018, we have disposed of 104 communities through sales and lease terminations.

For the third quarter 2018 financials compared to the prior year, these real estate activities resulted in $91.9 million less residential fee revenue and $11.7 million less adjusted EBITDA, but increased adjusted free cash flow by 1.4 million.

With the significant changes in our portfolio in mind for the third quarter 2018, reported revenue was $1.12 billion compared to $1.18 billion in the third quarter of 2017. This 4.9% decrease reflects the disposal of communities through sales and lease terminations, as well as lower occupancy which was experienced industry wide.

I will first address senior housing and then ancillary services. For our senior housing communities, the best way to analyze the operations is to use consolidated same community results because the execution of our real estate strategy impacted reported comparability. Same community revenue improved 0.2% compared to the prior year quarter.

Existing resident rate increases taken earlier this year and lower mark-to-market adjustment mitigated the decline in occupancy. The third quarter 2018 same community weighted average occupancy was 84.5%, a decline of 90 basis points compared to the prior year. This decline is essentially the same as NIC industry year-over-year averages.

The good news is that even with that rate discipline, we delivered a 20 basic point sequential improvement in the second quarter 2018. We were especially pleased with this result in the context of the industry as a NIC reported third quarter 2018 occupancy flat sequentially.

And after adjusting for the difference in product mix, we were also pleased with our better than industry Q3 year-over-year occupancy performance. In looking at our occupancy bands which are provided in the supplement, we were pleased with results of the top three community bands.

Our third quarter same community RevPOR growth of 130 basis points over the prior year reflects positively in place resident rent growth. As a reminder, the use of incentives to manage occupancy in a very competitive environment was especially high in the third quarter of 2017. Last year, our mark-to-market was approximately minus 6%.

I'm pleased that we have improved our pricing discipline and for the third quarter 2018, the mark-to-market was within 1% of our existing residence rate which is an indication that we do not view price incentives as a long term viable strategy to increase occupancy.

Our third quarter 2018 consolidated same community operating expenses increased 4.5% compared to prior year quarter. Same community total compensation increased 5.5% for the third quarter and 5.1% year-to-date compared to the prior year periods.

This reflects a wage pressure due to a tight labor market plus our intentional above industry investments in key resident facing associate salaries along with more robust benefits to improve our ability to recruit and retain the best associates in the industry.

With increased investments and compensation and because facility operating expense does not scale perfectly with lower occupancy, our community operating expense increased faster than our revenue growth, leading to a same community operating income decline of 8.2% compared to the third quarter 2017. Moving to ancillary services.

We earned $9.5 million of segment operating income for the third quarter. Our third quarter revenue decreased 2.1% on a year-over-year basis.

The change to revenue recognition which resulted from the adoption of the new revenue standard contributed approximately two thirds of this decrease and the remainder was primarily driven by home health performance. Lower Medicare reimbursement rates continue to impact the industry.

With a potential 2020 CMS patient driven grouping model changes in mind, we are shifting our therapy case mix towards normalized industry trends gradually to address proposed changes over the next several years. From an expense perspective, we mitigated the impact of lower revenue by consolidating several agencies and reducing G&A.

Our hospice business continues to grow strongly. For the third quarter 2018, revenue increased by 5% on a sequential basis and 19% on a year-over-year basis. General and administration expenses were $57.3 million for the third quarter 2018, 10% below the prior year quarter. This is mainly due to the G&A rationalization we made earlier this year.

We are on track to deliver on our $25 million of targeted G&A savings as previously discussed. We generated adjusted EBITDA $128.1 million excluding transaction and organizational restructuring costs of $3.2 million.

This compares to the third quarter 2017 adjusted EBITDA of $144.7 million excluding transaction and strategic project cost of $2.8 million.

The key drivers of the lower year-over-year adjusted EBITDA were approximately a $13 million decline related to the disposal of communities through asset sales and determination of leases and management agreement and a net $20 million of increased same community operating expenses mainly driven by our intentional above industry investments in community leadership salaries along with more robust benefits.

Partially offsetting these increases were in the third quarter 2017, hurricanes Harvey and Irma had a $9.1 million impact on adjusted EBITDA. In the current year Hurricane Florence had a $1.7 million impact on adjusted EBITDA and we had lower G&A of $6 million as I already described.

Our adjusted free cash flow of $6.2 million for the third quarter 2018 compared to $16.4 million in the prior year quarter. Beyond the factors I described that impacted adjusted EBITDA, disposition related interest expense and lease financing, debt amortization positively impacted adjusted free cash flow.

Our proportionate share of adjusted free cash flow of unconsolidated ventures was $8.4 million in the third quarter 2018 compared to the prior year quarter of $6.7 million. The improvement was driven by net entry fee growth. As of September 30th, total liquidity including that line of credit availability was $458.6 million.

We have reasonable debt maturities over the next 5 years. Our total debt outstanding 94% is non-recourse asset backed mortgage debt. While the current credit facility is not due for renewal until the beginning of 2020, we are proactively revising our secured facility due to fixed charge coverage limitations.

We anticipate that this new or amended facility will have a reduced revolving credit line. We are also actively working to complete mortgage financing and refinancing transactions in the fourth quarter. We anticipate that the credit facility and financing transactions will have a minimal net impact on total company liquidate.

I will wrap up my prepared remarks with our 2018 guidance. As we tighten our previous guidance for the full year 2018 were targeting adjusted EBITDA, excluding transaction and organizational restructuring cost be in the range of 535 million to 550 million and adjusted free cash flow to be in the range of 10 million to 20 million.

The current expectations for both metrics are within our previously disclosed guidance range. We are pleased that we delivered sequential occupancy growth ahead of the industry this quarter. However it was in the low end of our expectations.

Rate continues to be in line with our expectations and we are making good progress on our labor investment as I mentioned earlier. Transaction and organizational restructuring costs are expected to be approximately 35 million. Our turnaround plan is taking shape. In 2018, we will be within guidance in a year with significant macroeconomic headwinds.

For 2019 in the context of continuing competitive pressures and a tight labor market, we will execute on operational improvements and CapEx initiatives with disciplined rate tactics.

As the industry's demographic tailwinds develop, we have the right strategy to win locally while leveraging our industry leading scale to drive long term shareholder value. I'll now turn the call back over to Cindy..

Thank you, Steve. We believe in the positive demographic trend and we are committed to our turnaround strategy in order to capitalize on the future silver wave and deliver long term value to our shareholders.

In October at our second annual Celebrate Aging Film Festival, our resident provided important reminders about the critical role that Brookdale plays in the lives of our 93,000 residents and countless ancillary patients. The event was established to help change the perception of aging.

Brookdale residents and associates were invited to make and submit a movie short. There was much excitement and many tears of joy among the nominations and all who attended the event.

And it warmed our hearts to hear President John Robb in his acceptance speech, thanks Brookdale for creating as he put it and organization that allows us to participate for the rest of our lives. That is what our mission is all about, enriching the lives of those we serve.

We are company providing health care and services, so that our country seniors possibly your mom or dad can live the best life that is possible for them. We are a company that believes in the balance of mission and margin. And I imagine if you are an investor that you also believe in both. Steve and I are happy to answer your questions now.

Operator, please open up the line for questions..

Thank you so much. [Operator Instructions] And we have our first question from the line of Joshua Raskin from Nephron Research. Your line is now open..

Good morning. This is Mary Shang for Josh this morning.

So just starting with the dispositions and lease terminations, could you just give us an idea of what inning are we on the asset sales, it's an ongoing process, so do you think you guys have identified the majority of assets to sell?.

A baseball question Mary, you are testing me. I would say that we're probably in the [indiscernible] of our strategy. I feel great about the leases that we have restructured. And let me just recap that for you pretty quickly. So with Ventas, we announced a significant lease restructuring.

We had the ability to prune $30 million of rent and for Ventas to sell those assets and Brookdale to get a lease credit. We've identified many of those assets in connection with Ventas, and I would expect those properties to be sold during 2019.

With Welltower, we have extended our Sallie lease for an additional 8 years, that's a well performing lease, and we're very excited about the continued partnership with Welltower on that.

As we previously announced in our Welltower transaction, we terminated 11 leases at the end of the quarter, and I feel like our Welltower portfolio is in great shape as well. With HCP, we completed many of the transactions that we announced almost a year ago, and HCP announced at the same time and that is almost behind us.

With regard to our real estate sales, we've had a great transaction with the sale of Battery Park. We're very pleased with the price that we received. It will be a fantastic asset for Ventas, and we're pleased that we will continue to operate the property. This quarter, we announced our 18 additional portfolio optimization assets are under contract.

You will see that they moved into assets held for sale, which gave us some additional current debt and also some additional assets held for sale.

I will say that if you're looking at our investor presentation in the pro forma, you'll also notice that now we have moved those assets up to the pro forma, so you'll get a better model of what the business looks like going forward.

We of course will continue to review our assets to see whether there are additional assets that need to be sold or monetized, but that is all dependent on our credit line restructuring as we've talked to in the last two calls.

We're still on pace to get that restructuring done before the end of the year; and once it is done, we'll step back and re-evaluate whether there's more work to do, but I'd say, all in all inning seven..

All right, great. Sounds like you're through the majority of large sales. And then just turning over to occupancy for 2019, I know you've previously expected occupancy growth in '19, but now the outlook is slightly down.

So, I am just curious does the landscape appear incrementally worse today or is it just simply a function of where occupancy is today, just curious what the primary drivers of the change in outlook are?.

So Mary, we as well as the industry have been studying the competitive market pretty intensely. I think virtually everyone sees a lot of new supply being delivered in 2019, and that that supply delivery will add growth in 2019. So when we look at that, we basically say we're going to be in a very difficult headwind.

Now we do expect to make occupancy improvements throughout the year, but our outlook for 2019 reflects where we are in 2018. As we’ve talked about many times on this call, to build occupancy in a given year, when you’ve had a year of occupancy decline like we have this year, you have to regain every unit of occupancy you’ve lost before you can grow.

So I don't want anyone to walk away with the fact that we are not confident on our turnaround plan, because we are. We believe that we will continue to improve.

We have some refinements that we need to make in our sales and marketing to improve the conversion of our visits and to move in, but we think we know what those actions are, and we will adjust our strategy and execution accordingly..

Alright, great. Thank you..

Thank you so much. And your next question comes from the line of Chad Vanacore from Stifel. Your line is now open..

Thank you. So I was hoping that you’d just help me out with the guidance, so you ran adjusted EBITDA this quarter and how you look at 125 million or 128 million. Your full year guidance implied that fourth quarter would be closer to 147 million.

Can you bridge that gap for me, I know you've got 25 million of restructuring costs, is that the delta there or is there something else you’re expecting a big jump from 3Q to 4Q?.

So if you look at our investor deck, the investor presentation, I think that will give you some view of kind of where we look at it. If I look at the sort of adjusted EBITDA for transactions after all of the transaction that are expected to be completed, it's about $109 million for the quarter.

But of course, we are not having all the transactions on the dispositions done at the beginning of the quarter, so they'll be part of a quarter of those operations, and that's really the difference between where we are year-to-date and where our guidance is for the year. Now I'm really happy that we have tightened our guidance.

We did not go outside of the initial guidance that we’ve provided, and I think that demonstrates that we've been very realistic about our turnaround strategy, and I'm pleased that we are within the original guidance that we gave..

Alright.

No but that implies a pretty big jump in fourth quarter over 3Q, is that correct?.

I think that it reflects the continued investments in labor costs, it also reflects the mark-to-market that we've seen throughout the year. Those are the biggest factors in addition to the continued portfolio optimization..

Alright.

Can you give us an idea of what kind of synergies you are expecting on the cost side?.

Sure. We've been very public about the fact that, as we shrink our portfolio, it's critical to right size our portfolio to match the scale of what we operate. And we said that we would reduce our G&A by about 3% to 4% of the revenues of the communities that we dispose of, that's still our plan.

We haven't finalized our budget for 2019 yet, but suffice it to say we will make sure that we're very disciplined on our expenses as we recognize that every dollar of revenue that we get comes for our residents, and we want to make sure that we're investing it where appropriate..

Alright, so that bridge is - that G&A bridge right there say that 3% to 4% on 250 dispositions and it's close to almost 9 million or so.

Is there another 9 million to 10 million or so of cost synergies that you are expecting somewhere?.

So Chad, I think the 250 that you're referencing is a net proceeds as opposed to the revenue of the properties that were disposing off. Our G&A it's higher than 9 million..

Okay. Alright, I'll leave somebody else ask some questions. Thanks..

Thank you for your questions Chad..

Thank you so much. Your next question comes from the line of Brian Tanquilut from Jefferies. Your line is now open..

Yeah, good morning, guys.

So just to follow-up on Chad's question here the clarification, I think if we add back transaction costs, I mean your Q4 guidance essentially implies flat to down by about 15 million, is that the right way of thinking about that?.

So it will include the portfolio optimization, so it will be down as a result of that. And certainly the occupancy in the fourth quarter is normally flat to slightly down. So I don't think that you're saying anything that's inconsistent with our views..

Okay, cool. So we're not expecting it, alright, cool.

And then second, just to confirm the Welltower lease terminations in the press release that was part of your previous announcement right?.

That's correct. It's nothing new, we've just completed the transaction that we announced earlier this quarter, actually last quarter..

Okay.

And then the other one you know obviously you've had some good success with lease exits and modifications, so when do you expect cash flows from the lease portfolio to start improving in a quarter-over-quarter basis, because it was kind of interesting to see that the losses from the lease portfolio actually increased this quarter, when you've done some lease exits and terminations.

If you don't mind just giving some color on how you are thinking about that?.

Yeah, it's a really good question. So as I think about our lease portfolio, I think there are two things that are required to turn around the portfolio that have hadn't happened yet. I think the restructuring with the landlord has happened and we basically have assets that we're comfortable going forward with.

We have made significant investments in labor which we think are necessary to drive topline. And so what's really going to improve the topline is improved occupancy growth and rate. As we talked about for next year, we certainly have to grow occupancy in year and we are going to lean on rate to sort of improve the performance of the portfolio.

We do however recognize that our capital expenditures that are required which are reflected. So I think one thing behind us, we would expect our lease portfolio to improve. And it's important to note that we are making our capital investments lightly.

We have done a very comprehensive review of every single portfolio from a ground level up and we are balancing that against other capital allocation options we have. As a reminder, we have an existing share repurchase plan and we could use it opportunistically based on the market conditions.

And we also have a variety of other capital allocation options. So we're being very thoughtful about how to improve that lease portfolio but also how to make sure that we're allocating capital appropriately..

And then last question from me, Cindy.

Is there, do you see any more opportunities at exit or modified underperforming lease over the next 12 month or is that mostly behind us at this point?.

Well, we have the $30 million of assets that we can sell the Ventas lease, the $30 million represents our rent payment. We have $5 million of assets that represent our rent payment on the Welltower leases. There are going to be some things on them, but overall I think we're pretty happy with what we have to operate.

I believe that all of our assets are assets where we have right to win. I think that we've got the portfolio appropriate size to manage effectively from Brookdale.

And I think there's a big benefit to getting some stability in our portfolio, so that we are always focused on improving the performance of the assets that we have as opposed to some of the distractions caused by all the lease restructurings and asset sale..

Awesome, thank you..

Thank you very much..

Thank you so much. [Operator Instructions] Your next question comes from the line of Joanna Gajuk from Bank of America. Your line is now open..

Good morning. Thanks so much for taking the question.

So first on the quarter and the guidance, so would you characterize the quarter and I guess the guidance tightening of it I guess at the midpoint is mostly because the occupancy also reflected labor cost were actually tracking maybe slightly better for the year, so is that the right characterization or it's mostly occupancy that's driven in the 2018 guidance?.

So certainly if you look at our guidance for the year that we're tightening our guidance within our existing guidance range. But if we look at occupancy, well we're pleased with our sequential growth. It is at the lower end of our expectation. And so our guidance really is reflecting the fact that we're within the range but the lower end of the range.

We're very happy with rate. At the beginning of the year, we did our in place rate increases those held very nicely and we have improved our mark-to-market. Now I do want to say that we're pretty pleased with our performance as it relates to NIC.

While we're at the low end of our occupancy expectation, we are better than the industry and we have been for the last two quarters. So it feel like our operational turnaround plan is really starting to take hold. And then finally on community labor, we gave guidance of 5.5% to 6% and our outlook is that really slightly below that range.

Now year-to-date, we are at 5.1% on our labor cost increases with a 5.5% increase in the quarter. There are a few other things net out in our guidance for instance, we certainly didn't expect two hurricanes again this year and we've got about $2 million of EBITDA impact reflected in our guidance. But the primary driver really is occupancy..

And then on your comment on pricing which you saying that you know it's tracking and I guess it's slagging the mark-to-markets thereby shrinking.

So what has been you in place resident increases and should we think about that number actually being able to play out next year?.

Yeah, so we have about a 4% in place resident rate increase this year sort of averaged out across all of our portfolio. Now we think that rate will be higher than that for in place resident increases for 2018 or for 2019.

And really if you think about our strategy, our strategy is to make sure that our communities are appropriately positioned, and we've got the best people in the industry in place, but we have to drive rate and we have to drive occupancy for that strategy to translate into higher facility operating income and better return for our shareholders..

So you're saying that in place rate addressed than rents, you think you can push even more than 4% and then so am I reading it right about your comments around I guess you are not really thinking that the incentives are the way to go, so should we assume that you are not doing much of incentives currently?.

So I think incentives over the long term are not the way to go. That's not to say that they aren't a helpful tool in a market that has a lot of new competition with a very competitive market, but they should be used selectively and appropriately.

And we think that our local leadership is well equipped to decide when they have to reduce the rate, to get a new move.

But I'll tell you that in the industry and Brookdale in particular has found that when we go out with an aggressive program, what happens is that you pull moving forward but you don't actually win the long term game of increasing RevPAR or revenue per available unit. So it's a tool and it's a tool that needs to be selectively.

But we have been very successful in protecting the rate, while delivering above industry performance on occupancy gains and that's what we'll continue to do..

Last one a quick one on the guidance piece because you talk about obviously EBITDA slightly lower and then adjusted free cash flow guidance lower but then the cash flow from JV, actually that outlook was increased, so what's driving that? That you..

So, we have been able to do a couple of things on our JV cash flows. First, you have to recognize that year-to-date, we've had strong performance there. Second, we were able to sell JV interest that was losing cash flow and it reflects the fact that we will expect good performance in this portfolio..

Great, thank you..

Thanks Joanna..

Thanks so much. And your next question comes from the line of Dana Hambly from Stephens. Your line is now open..

Hi Dana..

Good morning. Just couple of questions on G&A.

You mentioned the 3% to 4% reduction on dispose of revenue, what's the general timing on that Cindy, is that two or three ago?.

I think we need to get it in place as soon as we possibly can. We've always said six months after the dispositions, but my objective is to do drive that. So you'll hear something about that in the next call or two..

Okay.

And then there's nothing in the pro forma break you gave, there is nothing in that to - you're not giving yourself any benefit in the pro forma for the G&A reduction, is that correct?.

So we're not. We recognize that as we adjust our portfolio, we have to adjust G&A, but we try to keep the pro forma to just the facts, where it's like these are the communities that are going away, this is P&L for the communities that are going away..

Okay.

And a couple of clarifications on the 2019 outlook, the occupancy, understand the pricing, the labor expenses, is the labor inflation you expect at similar level so the 5.5% to 6% you experience this year will continue in the next year, is that correct?.

I think it will be slightly below that. We're still working on our budget including looking at whether we may want to add some incremental capabilities to our team. But for the core business, I think it'll be slightly below that..

Okay.

And then just on the non-development CapEx, you mentioned you'd expect an incremental 75 million next year, is that on top of the 180 million you expect this year or should we subtract the 25 million in the hurricane related and generator expenses?.

It's on top of the 180 million. And when we thought about how to present it, we thought most people would probably go to the actual cash flow number or the CapEx number, so that's the way we presented it.

Certainly we have a lot of major building infrastructure work to do and that's our priority for next year to make sure that our communities are appropriately positioned for the markets at their end..

Okay, thanks very much..

Thank you..

Thank you. Your next question comes from the line of Chad Vanacore from Stifel. Please ask your question..

Alright, hey there. Just have a follow-up. Just thinking about the rate, you got 4% expectations in place and that's year-to-date and then next year occupancy be a little bit lower.

So how does all that translate into your RevPAR expectations for next year?.

You're a little ahead of it. And the 4% was the 2018 in place rent increases given that it's November, we certainly know that those rate increases held. But when we come back for our yearend call, we will certainly provide more detail about what our guidance is for the year. But let us finish our plans and assume if we do that we'll come back to you..

Alright, I'll do that. Thanks..

Thank you so much..

Thank you so much. And presenters, we don't have any further questions over the phone, you may continue..

So I just want to thank everyone for joining us this morning. We look forward to talking to you again soon. Thank you very much..

Thank you, presenters and thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect. Have a good day..