Brookdale Senior Living Inc (BKDT) 2018 Q1 法說會逐字稿

Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living First Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you. Ms. MacDonald, you may begin your conference.

Thank you, and good morning, everyone. I would like to welcome all of you to the First Quarter 2018 Earnings Call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer; and Teresa Sparks, our Interim Chief Financial Officer.

I would like to point out that all statements today, which are not historical facts, including all statements regarding our earnings guidance, may be deemed to be forward-looking statements, within the meaning of the federal securities law. 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 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 report on Form 10-Q. When considering forward-looking statements, you should keep in mind those factors and the other risk 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 measure. I direct you to our earnings release and our supplemental information, which may be found on the Investor Relations page at brookdale.com and was furnished on an 8-K yesterday 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 Cindy.

Thank you, Kathy. Good morning to all of our shareholders, analysts and other participants. Welcome to our First Quarter of 2018 Earnings Call. As always, we appreciate your interest in Brookdale.

This morning, we will discuss our progress around our turnaround strategy, the first quarter results, our annual guidance and expectations for the next few years. In our last earnings call, I said that I would continue to study the business in a thoughtful manner, to meet with our key partners and to further refine our near-term plans. We've already met with several of our top REIT partners to explore win-win alternatives. One important outcome was the Ventas master lease agreement that we announced 2 weeks ago. This agreement reflects improvements to our long-term relationship with Ventas while simplifying our lease structure. We will receive rent concessions over the course of the contract, have the ability to remove select communities from the lease and jointly invest in appropriate capital expenditures.

Also significant, we continue to work collaboratively with HCP and have acquired the 6 assets we announced late last year along with continuing lease transitions. While we've made significant progress, there's still more work to do, and we're continuing our work with our REIT partners.

I've now been in the CEO seat for just over 2 months and want you to know that our strategy is consistent with what I announced in late February. Our top priority remains the operational turnaround based on 3 strategic priorities: First, attract, engage, develop and retain the best associates; second, earn resident and family trust and endorsement by providing valued, high-quality care and personalized service, which, in turn, will lead us to our third priority, to drive attractive, long-term returns for our shareholders.

Let me start first with our associates. Our goal is to win locally. Therefore, it's critical that we have the right leadership in our communities and that our field teams provide appropriate support to our community leaderships. Effective April 1, we've organized our operations team into 3 geographic regions. Within these regions, we designed our districts so that a District Director of Operations would oversee an average of 11 communities. This includes the span of control for our District Director of Operations from a 15:1 average to an 11:1 average. During April, we also announced a planned realignment of our sales organization. We're moving towards a dedicated sales force and above the community level, sales leadership will report to sales leadership rather than reporting to operations. We believe that both of these actions will enable our field leaders to ensure the best support, mentoring and coaching for our community leaders. Our executive directors have been empowered to be the CEO of their communities. This includes driving community performance, allocating resources within given guardrails and building the community culture. I am excited by some of the creative ideas implemented to improve move-ins and reduce controllable move-outs. Our community leaders are energized by the ability to make more decisions locally and it's starting to make a difference. We have created a dedicated team to oversee communities that are going through significant transformation, including transition to new company. As these communities progress through their transition, they will have incremental priorities beyond the communities we will continue to own or operate. Accordingly, we have created this team to focus on what matters most for these communities.

We are on the right track with our initiatives around our community leadership, and we are making progress. Our investments in our Executive Directors and Health and Wellness Directors are resulting in better retention. In first quarter 2018, our retention rate improved 4% on a year-over-year basis. The rates were down slightly from fourth quarter 2017, so we continue to focus our efforts. We're also investing in Sales Directors for our communities. This includes expanding our Brookdale School of Sales curriculum. While starting at a lower baseline retention rate, we saw similar first quarter year-over-year improvement. We've added a graph in our investor deck to show the 12-month rolling-average trend for Sale Director voluntary turnover. To be transparent, we expect Sales Director retention percentages and voluntary turnover will be somewhat volatile due to the nature of the position, but we are seeing good progress.

In addition to the investments in the top 3 community positions, we're selectively expanding our investments in other associates in our community organizations, but it's too early to see the benefits. Given the importance of people in our strategy, the most important thing is attracting the best associates. As a result, it will sometimes take us longer to recruit than we might like. We're implementing a program to begin external recruiting for select positions before we have a vacancy and developing a more robust internal succession plan for each Executive Director position, both of which should reduce our time to fill while ensuring that we're consistently attracting the best people.

In our corporate headquarters, we also have news to share. Two highly experienced leaders recently joined Brookdale and bring strength that will support the company during this important time. Bill Sheriff has rejoined Brookdale as a consultant. To complete our turnaround strategy, it is critical that we have the best people in the business. Bill is the preeminent leader in senior living. He has received lifetime achievement awards from both ASHA and Argentum and built a strong culture at Brookdale. With his wealth of senior living business experience, he is a great resource to provide insights about the industry and our operations. Bill cares deeply about Brookdale and its culture, and by working together, I believe that we will re-energize our strong foundation, which will lead to recapturing our success.

I'm also pleased that Teresa Sparks has joined as our Interim Chief Financial Officer, while we continue to search for a permanent CFO. Teresa's experience and accomplishments in the health care industry make her a natural fit. I'm so excited about how quickly she is getting up to speed on our business, and you'll have a chance to hear from her in this call.

Turning to our second strategic priority. We believe that providing quality care to our residents will improve RevPAR. As covered widely by the media, this was an extremely difficult flu season, especially for more frail seniors. While you can't directly correlate to flu specific deaths, in the first quarter 2018, death rates were up compared to a more normal flu season. Teresa will provide more details in the financial section.

Taking care of our residents is paramount. Because Brookdale is the leader, we have robust and industry-leading protocols to appropriately protect our residents. This includes infection control processes, vaccination programs, containment of illnesses when they occur and temporarily stopping visits and new move-ins if there is a concern in a community. Our teams work diligently to maintain [leaves] during this time and went out to future resident homes to do the initial assessment. This is an example of how we focus on what we control, which leads me to our sales and marketing efforts.

Over the past few months, I've seen better coordinated effort between sales and marketing as they pursue the focus on what matters most. One tangible example is their joint decision to redistribute funds into increasing capacity in the contact center so that we can extend our hours of operation 7 days a week without increasing overall cost. We would expect this will improve our lead capture and speed to lead. After this is implemented and the team finds the right balance, I look forward to sharing their progress. As a follow-up to our last earnings call, I committed to providing leading indicators based on our internal operational metrics. The associate and resident metrics that we have included in this quarter's investor deck will be shared consistently going forward.

This quarter, we added 4 statistics in the investor deck related to the sales and operations team. It shows that from the first quarter of 2017, we're seeing improvement in our sales leads and our leads to visit, which are the first 2 statistics. Our third statistic is move-ins. Despite the severe flu season, move-ins in the first quarter of 2018 were positive. The final statistic is controllable move-outs, which is a term to exclude events like death. In summary, we were pleased that we generated more first quarter move-ins and fewer controllable move-outs on a year-over-year basis, but recognized that a significant driver of occupancy declines was deaths.

I'll now turn to some drivers to reduce controllable move-outs. Our goal is to make decisions as close to the customer as we can, while capturing the benefits of scale. Our operations leadership team is empowering our Executive Directors with more local decision [rights] so that they can take care of the community as if they owned it. For example, they're reallocating resources during low-contact time periods to look at ways to enhance our facility's focus. I'm committed to spending time in our communities every month to ensure that our communities have what they need to succeed. During my visits, I've seen evidence that our culture of winning locally is starting to be revitalized with a focus on differentiating Brookdale, based on caring, quality, personalized service to our residents. The Brookdale team is actively pursuing all 3 of our strategic priorities. So let me provide the highlights for the third priority, our shareholders.

I want to update you on our real estate strategy of opportunistically creating value from asset sales. I'd previously announced our intention to sell approximately 30 owned assets. A majority of these assets are part of the portfolio optimization grouping, while several are high-performing communities. We're pleased that as of April, we already have a letter of intent for approximately 20 of these assets, and we're working towards the definitive agreement. Given the large size of the portfolio, we expect that it will take a while to close the transactions, but we'll move as quickly as reasonably possible. We're also pleased that we've started to receive bids on our high-performing assets and are working to conclude the marketing period soon.

I would like to close my remarks with a few comments on the first quarter financial results and our 2018 guidance. On a sequential basis, I am pleased that we have been able to improve our same-store revenue and operating income. I'm also pleased that we've been able to accrue adjusted free cash flow sequentially and report positive cash flow in the first quarter. Our first quarter financial results, when compared to the first quarter of 2017, reflect that we have and continue to make significant changes in both our owned and leased asset portfolio.

From a revenue standpoint, occupancy is down for the well-publicized industry themes of seasonal declines, a higher death rate with an intense flu season and competitive new openings impacting both occupancy and rate growth. Labor expenses are higher due to our intentional above-industry investments to improve retention.

So with this, let me provide a few highlights on our 2018 guidance before I turn the call over to Teresa to provide more detail. In our last earnings call, I said that our senior housing business was in the midst of a perfect storm and 2018 will continue to be a challenge with longer-term improvement. I highlighted 3 points; industry pressures, tight labor market and the pressure of lease escalators.

First, industry-wide circumstances make 2018 difficult. Higher deaths from the intense flu season resulted in a lower occupancy starting point to start growing from. Competitive new openings and lower industry absorption of recent deliveries will continue to create occupancy pressure throughout the year. NIC reported that there may be some early signs that new construction starts could be beginning to decline, and we'll watch that trend carefully over the coming quarters. That said, new competition is part of any business, and we control our own results, and we will continue to refine our ability to respond appropriately to openings when they occur.

Second, the tight labor market. We feel good about the investments we're making in our associates. The metrics I shared already shows these investments are improving retention. This will prepare us to be in a better position to grow occupancy in 2019 and 2020, when there is less new supply.

The final point was about lease escalators. We've had a better outcome than I could've committed to in February. Ventas has helped set us up for success. The new master lease agreement and especially, the higher rent credit in the first 3 years will enable us to invest appropriately to drive operational improvement. As we improve these communities' results, this is good for both the companies.

Frankly, Brookdale is not where I want us to be. I continue to believe that we're making the right investments and starting to see positive operational progress, but we have a significant amount of work ahead of us. We're only in the first inning of this turnaround. We're fixing what we can control now so that we are all ready to take advantage of the silver wave of senior housing demographics and the long-term positives in the industry.

I'll turn the call over to Teresa.

Thank you, Cindy. It is a pleasure to be a part of Brookdale in the early innings of our turnaround strategy. As discussed on the year-end call, 2018 will be a challenging year. However, it is an exciting time to share in our associates' passion to win locally. We have an incredibly mission-minded senior leadership team with an understanding of the balance we must achieve with respect to the mission and the margin. My remarks today will focus on 3 primary topics: First, given the importance of our portfolio optimization strategy, I'll provide an update on our progress; second, I will highlight our first quarter 2018 financial results; lastly, I will expand on Cindy's comments related to our outlook for the remainder of the year.

From a portfolio optimization perspective, we're delivering on this initiative and over the mid-term, we expect to improve the positioning of our communities by simplifying our lease structure while improving our cash flow. As you may remember, for the full year 2017, our lease portfolio underperformed, and while we continue to focus our efforts on improving our REIT partnerships, in general, our preference is to own our assets. As it relates to the HCP transaction, we continue to make progress on the previously announced agreements. In the first quarter of 2018, we completed the sale of our interests in the remaining unconsolidated RIDEA venture. We terminated management agreements for 10 communities, and we acquired 1 community. While not included in the quarter, during April, we completed the acquisition of the remaining 5 communities from HCP. We expect the remaining triple-net lease and management agreement terminations to occur throughout the balance of 2018. However, they remain subject to various closing conditions and regulatory approvals. In total, the HCP transaction has generated proceeds of $94.4 million from the sale of our interests in the unconsolidated RIDEA joint ventures, and we acquired 6 properties for a purchase price of approximately $275 million.

Exiting the quarter, we have 14 communities classified as assets held for sale. In addition, the majority of the approximate 30 assets we announced for sale in February, as part of the portfolio optimization group, are under a letter of intent and the remaining assets are being actively marketed. These assets are not classified as assets held for sale because they're not yet under contract. In summary, since the beginning of 2017 and through the first quarter of 2018, we have disposed of 111 communities through sales and lease terminations. This activity resulted in $105.4 million less in resident revenue and $78.9 million less in facility operating expenses for the first quarter of 2018 compared to the prior year, resulting in a $19.2 million reduction in adjusted EBITDA and a $0.7 million improvement in adjusted free cash flow.

Slide 16, in our most recent investor presentation posted on our website, is a helpful tool in understanding this activity on a full year basis. This slide provides a pro forma view of our 2017 results after reflecting the impact of transactions that have been completed since the beginning of 2017 through May 1, 2018, or are in process, as if these transactions had closed on December 31, 2016. Since the portfolio of approximately 30 assets are not yet under contract, we have provided approximate amounts of revenue and expenses on Slide 13.

Turning to the first quarter 2018 financial results. Our results were generally in line with our expectations. As discussed, our first quarter financial results, when compared to the first quarter of 2017, reflect significant changes in both our owned and leased asset portfolios. We also provided a pro forma view of our first quarter 2018 results in our investor presentation on Slide 17. For the quarter, total revenue was $1.19 billion compared to $1.22 billion in first quarter of 2017. This 2.4% decrease reflects the disposal of communities through sales and lease terminations and reflects the industry headwinds related to the flu season and competitive new openings.

As we drill down into the quarter, I'll provide details about senior housing and then I will discuss our Ancillary Services. For our senior housing communities, the best way to analyze the business is to use consolidated same community results. This is due to the portfolio optimization initiatives impacting reported comparability. Same community revenues declined 60 basis points compared to the prior year. RevPOR growth was 1%, which mitigated some of the 130 basis points decline in occupancy. As a reminder, occupancy seasonally drops in the first quarter. However, this year's decline was exasperated by several inclement weather events impacting the East Coast and a nationwide severe and lengthy flu season.

For the first quarter of 2018, our communities were closed for visits and new move-ins approximately 33% more days than the same quarter last year. As Cindy mentioned, in the first quarter 2018, death rates were up compared to the first quarter of 2016, which is representative of a normalized flu season. The difference of death represents an approximate 50 basis point reduction in occupancy. As a result, the first quarter 2018 same community senior housing portfolio weighted average occupancy was 84.8%, a decline of 130 basis points compared to the first quarter of 2017 and sequentially lower by 90 basis points from the fourth quarter of 2017. The most recent NIC data reported a 50 basis point sequential decline in occupancy. The NIC data is based on a lower mix of assisted living communities at 36% as compared to our 49%. If we weighed our occupancy and based on the NIC [blend] of communities, our comparable decline in occupancy is 64 basis points versus the 90 basis points we're reporting.

Our first quarter RevPOR growth of only 1% over the prior year reflects the use of our incentives to manage occupancy through 2017 due to a competitive environment. Sequentially, from the fourth quarter, RevPOR on a same community basis increased 2.5% largely from in-place resident rate increases, which took place at the beginning of the year.

Our first quarter 2018 consolidated same community senior housing operating expenses increased 5.8% year-over-year. As expected, the largest driver was labor cost. Total compensation increased 6.2%. This reflects wage pressure due to a tight labor market plus our intentional above-industry investments in salaries and wages along with more robust benefits to improve our ability to recruit and retain the best associates in the industry.

On the fourth quarter call, Cindy discussed our expectations for labor costs this year with an increase in the range of 5.5% to 6%. We believe our full year results will be in line with this range, and I will discuss our outlook in more detail later in my remarks.

Other operating expenses increased 5.2% year-over-year. The inclement weather events during the quarter caused higher-than-normal repairs and maintenance, including snow removal, resulting in a $2.8 million year-over-year increase. In addition, during the first quarter of 2017, we had a favorable insurance adjustment of $4.6 million that did not reoccur this year. As a result of lower revenue and increased investments in our key leadership at our communities, along with the increased operating expenses, our same community operating income decreased 11.2%.

Moving to Ancillary Services. We earned $8.3 million of segment operating income during the quarter. Our first quarter revenue decreased $1.5 million or 1.3% on a year-over-year basis. The decline was primarily driven by Home Health. The Home Health sector continues to be a challenge and is below our expectations. Similar to senior housing, there was pressure on Home Health visits during the quarter. In addition, the first quarter reflected a slight negative impact from lower Medicare reimbursement rates. From an operating expense perspective, we continue to focus on reducing the use of higher cost labor solutions, such as contract labor, to improve our operating margin.

On the positive side, during the quarter, hospice revenue increased by 45% on a year-over-year basis. As a reminder, on a

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During the quarter, we recorded approximately $430.4 million of noncash impairment charges, which primarily related to goodwill in our Assisted Living segment. We performed an impairment analysis as a result of the significant reduction in our stock price and market capitalization. The announcements revealed that the estimated fair market value was less than the carrying value. As of March 31, 2018, we're no longer carrying goodwill on our books related to the Assisted Living segment.

Our adjusted free cash flow was $5.5 million for the first quarter 2018. In addition to the factors impacting adjusted EBITDA year-over-year, changes are due to planned increase of capital investments and lower cash late payments due to the impact of community lease terminations. Our proportionate share of adjusted free cash flow of unconsolidated interests was $5.8 million in the first quarter of 2018 and lower than the prior year from lower occupancy and higher operating expense consistent with our senior housing segment as previously discussed along with disposition activity.

I want to briefly highlight 2 technical accounting changes: First, with the adoption of the new accounting pronouncement on the presentation of certain transactions within the statement of cash flows. We will now classify debt repayment extinguishment costs as financing activities instead of operating activity. For the year ended December 31, 2017, we have $11.7 million, which was retrospectively classified as cash flows from financing activities. As a result, the amount of adjusted free cash flow for the year ended December 31, 2017, will be increased by $11.7 million to align with the accounting and future presentations of adjusted free cash flow. The retrospective application for the first quarter 2017 was immaterial, with the most significant change of $10.6 million to be applied to the third quarter of 2017 results.

Second, the company adopted the new accounting standard for revenue as of January 1, 2018. During the first quarter, the changes include a $1.1 million reduction of revenue with an offsetting decrease in bad debt expense related to our skilled nursing and Ancillary Services, along with a $12.4 million P&L change for reimbursed costs incurred on behalf of managed community.

As of the end of the first quarter of 2018, our total liquidity, including our line of credit availability, was $868.2 million, which was more than double than March 31, 2017, amount.

In the second quarter of 2018, we plan to pay off the $316.3 million convertible senior notes that mature in June. Taking this into consideration, we will have reasonable debt maturities over the next 5 years and the remainder of our [indemnity] will be comprised of approximately $3.3 billion of nonrecourse property level mortgage financing or 93% of our total debt outstanding.

To summarize the first quarter results. While a tough quarter, we continue to focus on winning locally and improving our operational results. While we don't provide monthly results, we did see improvement in March and believe there is momentum for the balance of the year from a rate and occupancy perspective. Our balance sheet is well positioned to provide sufficient flexibility, as we continue to optimize the portfolio and improve the positioning of our communities. We're encouraged by the willingness of the organizations to embrace the challenges we've outlined on this call.

Next, I'll pivot to the 2018 guidance and provide details on our assumptions. Our full year outlook reflects the execution of our turnaround strategy along with the continued challenges from a broader industry perspective. Our guidance for 2018 reflects the decline in our key metrics compared to 2017 when combined with the impact of dispositions and terminations. For 2018, including the expected impact of the previously announced pending or planned dispositions of communities and the targeted real estate transactions, we expect adjusted EBITDA, excluding transaction and organizational restructuring costs, to be in the range of $545 million to $575 million; adjusted free cash flow, including transaction and organizational restructuring costs, to be in the range of $10 million to $30 million and our proportionate share of adjusted free cash flows from our unconsolidated joint ventures to be in the range of $10 million to $20 million.

Next, I'll highlight some of the assumptions underlying our guidance. We have listed our major assumptions on Slide 18 of our current investor presentation, which can be found on our website. First, one of the most significant items impacting our outlook is our portfolio optimization strategy. Again, Slide 17 in our investor deck is a pro forma view of our 2017 results after reflecting the impact of transactions that are in process. While we will have partial year results for the 2018 transactions, it will help you in understanding the results of our continuing operations. Second, we expect modest revenue growth from our continuing operations. However, because of the impact of dispositions, our consolidated revenue will decline. For senior housing, we expect to produce improvements in occupancy during the year, although not sufficient to recapture all of 2017 occupancy losses. Therefore, 2018 occupancy will be lower than 2017 for the reasons Cindy discussed in her remarks. At the same time, we expect to demonstrate a slight rate improvement compared to 2017 with positive in-place rent growth somewhat offset by mark-to-market. In our Ancillary Services business, we expect our performance to be as or slightly favorable compared to 2017 with continued Home Health pressures in growth largely coming from hospice.

Next, we expect our operating margins to remain under pressure during the year. We expect total labor, including benefits, to grow by 5.5% to 6%. Given the improvements in retention that resulted from our 2017 investments, we're selectively expanding those investments within the community. While we don't expect immediate returns from these investments in 2018, we do expect them to create improvement in late 2019 and beyond.

Lastly, we expect our 2017 G&A expenses, including transaction and organizational restructuring costs and noncash stock-based compensation, to remain in line with the prior year.

I also want to highlight a few items which will impact our adjusted free cash flow. First, we expect lower interest expense and lease amortization combined primarily from our 2017 transactions and those that occurred or are planned for 2018 somewhat offset by rising interest cost. Second, we expect our transaction and organizational restructuring costs to be approximately $40 million in 2018. Third, we expect our 2018 nondevelopment CapEx to be in the range of $170 million to $180 million. Within this range, we do not expect to collect the nearly $9 million of insurance proceeds that we did in 2017, which offset hurricane-related CapEx and other losses. As a result, the 2018 capital expenditures related to last year's hurricane, including the new Florida generator requirements, are estimated to be approximately $25 million.

The guidance provided today includes the completed and pending portfolio optimization transaction as well as the targeted real estate transactions as described. We certainly appreciate the complexities involved in a year of transition as we execute upon our turnaround strategy. However, we believe this strategy positions us well to capture the future trends in our industry and to fulfill our commitment to being the nation's first choice in senior living.

I'd now like to turn the call back over to Cindy.

Thank you, Teresa. Our management team is committed to our turnaround strategy and improving our operation performance for the benefit of the company and for our shareholders. I want to say thank you for our associates for focusing on what matters most: Taking care of our residents.

I'm happy to answer questions now. Operator, please open the line for questions.

(Operator Instructions) Our first question comes from the line of Brian Tanquilut with Jefferies.

I guess, for Cindy or Teresa, as I think about the EBITDA and cash flow trends throughout the year factoring in seasonality and all the other initiatives that you're working through, I mean, just -- if you don't mind just walking us through how you view the cadence as we progress through Q2, Q3 and Q4.

Brian, it's Cindy. Thank you so much for your question. So as I said in the call, in my prepared remarks, we're really pleased with the sequential improvement in Q1, where we saw our RevPOR increased 2.5% and our same community operating income improved by 2.0%. Now the first quarter is always a quarter where occupancy dips as a result of the low seasonal point. We would expect that the normal occupancy turn occurs in May or June, and our guidance this year is really no different than that. We would expect our gap to our 2017 performance to narrow as the year progresses, and by the end of the year, we would expect our year-over-year results to be favorable to 2017.

Got you. And then, Cindy, shifting gears -- last week, obviously, we saw the Ventas agreement that you guys co-announced with them. It seems like it's a pretty big deal. If you don't mind just walking us through your thoughts on what it really does for the company in terms of the flexibility that it provides and also the divestitures that they're planning with the -- with additional units that you're putting up for sale together.

That's another good question, Brian. Thanks for it. So first, let me say thank you to Debbie Cafaro and the Ventas team. They are very strong partners, and we're very grateful for their support. I believe that this is truly a win-win transaction for Ventas and Brookdale. As a reminder, we have 128 communities that we lease from Ventas. And what the agreement allows us to do is first, it improves our near-term cash flow and that is through the rent credits that Ventas is providing us to bridge us to the operational turnaround of the business. The second thing that it does is that it jointly aligns our interest to fund CapEx and that's something again that will support our operational turnaround. Third, it allows us the ability to streamline the portfolio. Now, between 15% and 17% of the portfolio can be optimized over the next year or 2 and that is roughly $30 million of base rent for us. We will work collaboratively with Ventas to identify the communities that may be better positioned with another operator and that would allow us to get a rent credit equal to 6.25% of the sale price of those communities, reducing our rent by up to $30 million under the agreement. And what I will say about this is, while it doesn't reduce our coverage issue all at once, it does allow us to improve our coverage over time and it gives us the ability to take advantage of the operational turnaround that we have in the business. So we think it's a fantastic transaction for both Ventas and for Brookdale.

Cindy, last question for me. As I think about the leading indicators in your business, I know, we've talked about employee retention and all these things, where is your confidence coming from that these will translate into P&L benefits as we get into '19 and even through '20?

I feel great about it, and I have very high confidence. One of the things that really makes me feel good about the first quarter is we had improved retention in both our Executive Directors and our Health and Wellness Directors and that retention improved by 4% year-over-year. We also improved the retention of our Sales Directors by 4% year-over-year. We've always known that stability in those top 3 community positions is critical to the success of our communities. Then, if you look over on the operational side, if you look at the improvement in leads, we had a double-digit improvement in leads year-over-year; if you look at visits, we had a low single-digit improvement year-over-year in visits; if you look at move-ins, we had a low single-digit improvement in move-ins year-over-year; our controllable move-outs also improved. And so, if you think about better move-ins and fewer controllable move-outs, that translates into higher occupancy, which translates into more revenue and higher RevPAR, which improves the performance of our communities. We believe that by having the best people in the industry, we will absolutely drive better returns for our shareholders.

Your next question comes from the line of Joanna Gajuk with Bank of America.

So actually, quickly on the Ventas transaction. How do these new escalators compare to your prior escalators?

So Joanna, this is Cindy. What I will say is the escalators that are in the lease are lower than the escalators that we traditionally had in the Ventas leases. Now you can't look at it in the aggregate, because we have rent credits and we also have given Ventas additional term, which we didn't have before. For Ventas, what they got is better credit quality and a longer-term lease. What we got was a healthier portfolio in the short and midterm, which will also allow us to capture on the silver wave of seniors aging.

All right. I mean, I assume that it would be better, otherwise, I guess, you would have flagged those numbers in the press release. I just want to ask whether there is a specific number you can give? I understand that you might not want to talk about that. But on overall, I guess, where you stand now with your lease portfolio, what's the weighted average of your lease escalators? How should we think about that going forward?

We haven't really published the weighted average of lease escalators. But what I can say is the Ventas is [more] of a CPI multiple or 2.25% and that is lower than some of the escalators that we have in our other leases. But again, I think what is good about this transaction for both Ventas and Brookdale is it aligns our interest. So Brookdale gets the ability to, in a short term, [enter this] operating cash flow, we get a longer-term lease maturity, we align our capital interests. And what Ventas gets is more security and they get a very healthy portfolio for the long term. So we think overall, this is an improvement to our lease portfolio and something that's good for both our shareholders and the Ventas shareholders.

Great. And then on the other topic, in terms of the guidance and what's reflected in the outlook there that you talk about -- also reflects the pending or planned sale of 30 assets. So what timing you assume there? Is it sort of towards the end of the year? So should we assume that this happens by maybe the end of third quarter and some of the EBITDA will come out in fourth quarter? Is that the right way to think about it? Because also I appreciate this slide on the -- I guess, the size of the asset, the $30 million annual EBITDA so that's what I'm trying to get. How much of the $30 million EBITDA you assume is coming out in '18?

Joanna, it's a really good question. We would expect that to come out near the end of the year, given we just announced the asset sales as part of our strategy in our year-end call. It takes a little while to market those. We're working aggressively, and we would expect to close, hopefully, by the end of the year.

All right. And then if I -- just my -- lastly, quickly follow-up on the comment around the occupancy for the year. Do you still expect this to be down [obviously, grow] with some seasonality? There -- we heard from some peers talking about delays in new asset openings. So is there something you see there maybe in your market as well where there's still assets coming online but it just takes longer. So what I'm getting at, how should we think about 2019, sort of, occupancy progression, I guess, as you exit '18?

Yes, so what I will say in 2017 and 2018, certainly, the supply has been heaviest in Assisted Living. That's where it's been most intense. And our inventory growth is about 4.7%, which was the second highest growth since the fourth quarter of 2016. Now there are signs that AL construction as a percentage of the inventory has peaked and the construction as a percentage of inventory is improving, which we think is good for the longer term. And our AL construction as a percentage of inventory is actually down 60 basis points from the Q4 of 2017. So what I will say is, we think that we will be down slightly in occupancy in 2018. We expect to build in 2019, and then by 2020, we're going to capture the full benefits of having a more normalized operating environment and having our full operational turnaround plan executed.

(Operator Instructions) Your next question comes from the line of Chad Vanacore with Stifel.

So you had mentioned that you expect same-store occupancy to be slightly down in the year. So what kind of occupancy range you've encompassed in that [slightly] number? And then, can we assume that occupancy drops a bit from first quarter to second quarter, then improve sequentially in third quarter? I think, you covered part of this, but I just want to make this explicit.

What I will say is slightly is slightly, that's as much guidance as we'll give on that and normal seasonality is down first quarter, down-to-flat second quarter with improvement in the back half of the year, and that's what we've modeled our year to be.

All right. Forgive me for trying.

It was a good try, Chad.

You also made comment that you expect the end of the year to be higher on a year-over-year basis. Can I take that to mean that you meant fourth quarter of '18 should be higher than the fourth quarter of '17? And is that on as-reported basis? Or is that on an as-adjusted basis?

Chad, what I will say is cash flow -- adjusted free cash flow on an as-reported basis should be higher than adjusted free cash flow on an as-reported basis for Q1 2017. Thanks for asking that clarifying question. I think it's a good clarification for everyone, and I should've been more clear in my comments.

Okay. And then just the Ventas agreement, it stipulates $1,000 a unit per year CapEx with Ventas picking up whatever is on above $1,800, is that right?

It is. And what I'll say is traditionally, we've spent over $2,000 a year on CapEx. And so, our intention is not to transfer the normal operational maintenance type CapEx from Ventas to Brookdale. What we're trying to do is to align our interest so that when we want to improve the portfolio in the community and get a better positioning that we're partnering with Ventas to get that CapEx into the communities so they operate at their best possible level. And that again is good for Brookdale and good for Ventas.

Okay. So in your assumptions, this doesn't mean that you're expecting any much increase in 2019 on a per bed basis? Would that be right?

Not at all. Not at all.

So the way we should think about 2019 CapEx with the dispositions, total CapEx should be going down?

So total CapEx should be doing down as a result of dispositions. Now we've got to look at our per unit CapEx and one of the things that we have been doing is really spending a lot of time looking at our communities. Once we get our final real estate strategy defined and we know exactly what's in our communities, we want to make sure that each community is best positioned in the community and we're still looking at what CapEx we might spend to make sure that our communities are best matched with the community they operate in for the best chance for a nice return for shareholders.

All right. And then just one last one. So you mentioned Home Health, it continues to be a challenge and you also (inaudible) somewhere in the press release that you would like to expand parts of ancillary platform. So can you parse out how you expect that business to improve and expand?

Yes, let me start with the last part of the question first. Our hospice business is a fabulous business and it's something that our residents really benefit from. So what I will say is we are investing in expanding that business, and as you buy new licenses, what happens is you got to build your case load. And so, as you do that, there is a little bit of a margin drag, but it definitely creates value over the long term. So that is something that's created a little margin compression, we'll continue to invest in that business. Now during the first quarter, we saw a decrease in our Home Health [episodes] and that decrease was attributable to a few things. Lower Inside The Walls penetration as well as a change in our mix where we are operating fewer therapy visits than we traditionally have, which affected our rates as well. Now we would expect our BHS business to grow year-over-year and that's reflected in our guidance, but our first quarter was a bit softer than we wanted it to be.

All right. I'm just going to sneak one more in here, because I can't remember if we got -- if we did this. Could you quantify the flu season impact that I assume investors are going to want to know?

Chad, it's a great question. So we believe that the flu season had a 50 basis point impact and now what we believe, based on our experience, is that when you have an elevated death rate as a result of the flu, that impact follows you all year long and so we've estimated that for full year 2018, the higher-than-normal deaths are about $11.4 million of revenue impact, about $7.5 million of adjusted EBITDA and cash flow impact and that's compared to a more normal flu season, for reference probably 2016 was a normal flu season, 2017 was a little elevated.

Your next question comes from the line of Frank Morgan with RBC Capital Markets.

I wanted to follow-up on the question on the Home Health Care and hospice business. We certainly can't ignore some of the valuations that are going on out in the marketplace, right? They're anywhere from 13x to 15x EBITDA for hospice assets and even some Home Health Care mixed in there with it. So, I guess, does that, in any way -- those kind of valuations in any way weigh with you in terms of decisions about, I mean obviously, it sounds like this is the area you want to grow but at the same time, you can fetch a lot of value for that business today. So, I guess, just curious, considering the options given where valuations are, the ready buyers here, does that, in any way, a consideration? Or are we absolutely positively going on this path to grow and develop hospice and Home Health?

Frank, thanks for pointing it out. It's good to know that hospice is a very good business and it's very valuable. And so, we believe that providing those services to our residents is really important for shareholders and that's why we want to continue to grow the hospice business. And the most important thing to me is making sure that our residents have the right services and so that's what I would focus on.

Okay. And then, in terms of the improvement, you expect the momentum you saw early in the second quarter. I'm just curious, is that -- would you characterize that being driven more by just the market overall? Or is it specifically, in terms of your sales strategies? Any kind of color where you're seeing the most improvement by service line or any color there would be appreciated. And then just on the issue of concessions to, hopefully, drive volume growth, what kind of programs and how aggressively are you involved in concessions?

Thank you, Frank. Let me start with sort of the momentum. I actually think our operational strategy is starting to take hold, and the reason that I think that is driving improved results is we've got better retention of our top community leadership, we have more leads, more visits, more move-ins than in prior year, that translates into occupancy. At the same time, controllable move-outs are improving, which also drives occupancy. So despite operating in a very difficult macro-economic environment, I think, the things that we are doing are moving the business forward and I feel really good about that. Now with regard to concessions, one of the things that we've looked very careful about is how are we selling into the market and how are we translating that into value for our shareholders. If you go all the way back to the third quarter of 2017, our mark-to-market was a negative 6% in terms of what a new resident would pay compared to what the prior resident of that particular unit paid. Now in the fourth quarter, we improved that to -- between 2.5% and 3%, so we made some progress in Q4. In Q1, we improved that further where the mark-to-market was only a negative, slightly over 2%. So I think, we're continuing to focus on selling the value that Brookdale delivers to its residents. It's a very competitive environment, but we're making good progress with regard to price.

Ladies and gentlemen, we have reached the allotted time for question-and-answers. Are there any closing remarks?

I want to thank everyone for joining us on our call this morning. We very much appreciate your interest in Brookdale and look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.