Brookdale Senior Living Inc (BKD) Q1 2019 Earnings Call Transcript

BKD earnings call for the period ending March 31, 2019.

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Brookdale Senior Living Inc (NYSE:BKD)
Q1 2019 Earnings Call
May. 7, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Lance, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living First Quarter Earnings Call. All participants are in a listen-only mode. We will open the lines for questions at the end of the call and instructions will follow at that time. As a reminder, this conference will be recorded for replay purposes.

I would now like to turn the call over to Kathy MacDonald with Investor Relation. Kathy, you may begin.

Kathy Ann MacDonald -- Investor Relations

Thank you, and good morning, everyone. I'd like to welcome you to the first quarter 2019 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.

All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the Federal Securities laws. These statements are made as of today's date, and we expressly disclaim any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements.

Certain of these factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as in the reports we file 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 the release for the full safe harbor statement.

Also, please note that during this call, we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brookdale.com/investor, and was furnished on an 8-K yesterday.

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

Lucinda M. Baier -- President, Chief Executive Officer and Director

Thank you, Kathy. Good morning to all of our shareholders, analysts and other participants. This morning I'll provide an update on our first quarter results, our strategy, and leadership additions. Let me start with the industry outlook. The senior housing industry will continue to have headwinds with elevated openings and new deliveries in 2019, making for a difficult competitive landscape. According to NIC, first quarter occupancy for the industry was largely unchanged on a sequential basis. For assisted living, improvement was from properties in the lease-up period while stabilized properties' occupancy declined. The industry starts and opens dropped sequentially by around 35% in the first quarter. Within 20 minutes of Brookdale's communities, the reduction was even better.

The industry's construction pipeline continues to shrink quarter by quarter. Within 20 minutes of Brookdale's communities, we saw over a 10% drop in early 2017 but construction in the pipeline has remained stubbornly high since then. This is because the largest construction pressure is in the Assisted Living and Memory Care sectors where we have a larger concentration. The good news is that many industry experts are expecting supply/demand equilibrium within the next 12 months. In fact, NIC projects that assisted living absorption will overtake inventory growth in the second half of 2019.

Let me now focus specifically on Brookdale's operations. For the first quarter, our same community RevPOR increased 3.1% on a year-over-year basis. We intentionally increased rates at levels higher than prior years to mitigate lower occupancy and higher labor investment. When combining the impact of in-place rate increases with occupancy changes, we outperformed the industry. Our results are consistent with our plan. This is the right strategy for our portfolio based on our proprietary analysis. When we look at rate and care pricing upon move-in, our rates are better than our competitors and move-ins improved sequentially by nearly 3%.

We are pleased that our independent living occupancy remained at 90% on a sequential basis, a 150 basis point improvement versus first quarter 2018 on a same community basis. We have demonstrated that we can be successful and return to growth. We've updated our new supply chart, so that it's easier to understand our Top 20 markets. As a group, these markets are performing better than our overall portfolio. We are in the last year of our three-year program of making above industry investments in labor and we are seeing the benefit in our retention rates. For the Executive Directors and Health and Wellness Directors, trailing 12 month retention was above 70% for the seventh consecutive quarter.

In addition, the investments we are making in our associates especially resident facing roles resulted in a 360 basis point improvement in voluntary turnover compared to the first quarter of 2018. We also started to improve the retention rate for our sales professionals as our initiatives are beginning to take hold. The initial sign of sales retention rates improving is the first step on our important and urgent sales cycle improvement.

Turning to our leading indicators, improving our sales cycle is one of our top priorities, and we are pleased with the sequential improvement in leads, first visits and move-ins. Compared to a year ago, leads were softer from our aggregators and our fourth quarter sales professional retention rate impacted our move-ins. Our highest priority continues to be improving the sales pipeline to pivot to growth. The month of March and April showed early signs that the changes we made within our organization are taking hold. For controllable move-outs, our goal for 2019 is to maintain the excellent results we delivered in 2018. So, I'm pleased with our team's strength to exceed our goal for the first quarter with a 50 basis point improvement compared to the first quarter of 2018.

Briefly, turning to our Health Care Services segment. In the first quarter, our revenue improved 1% on a year-over-year basis and 3% on a sequential basis. In addition, our segment operating margin returned to near the first quarter 2018 level. As I wrap up our first quarter results, let me say we are proud to be the leading senior living healthcare operator that intentionally owns real estate and our associates are the key to Brookdale's turnaround. I'm pleased to announce that we have made significant progress on enhancing our leadership team with three amazing additions.

This week, Diane Johnson May joined Brookdale as our Executive Vice President of Human Resources. She had over 30 years of experience with Kraft Foods including serving as the Executive Vice President and Chief Human Resources Officer. Diane brings a strong consumer focus and significant experience in attracting and motivating a large distributed workforce. I know, Diane will help us drive our strategic priority of attracting, engaging, developing and retaining the best associates. Next, Rick Wigginton will join Brookdale, as our Senior Vice President of Sales. He will join us at the end of May. Senior living is a unique industry and it's critically important that our sales leader has deep industry expertise and a proven track record. Rick has over a decade of success in our industry and will be extremely valuable to improve our sales cycle, which is critical to our turnaround strategy. I'm very excited that we have recruited an energetic sales leader who will partner well with our operations team.

In June, Anna-Gene O'Neal will join us as Vice President of our Hospice Business. She joins us from a Alive Hospice, where she has been President and CEO for the past seven years. Anna-Gene has phenomenal experience and we are thrilled that she brings her expertise and compassionate end of life care to Brookdale. We are proud of our growth in hospice and we believe, Anna-Gene and the team will be able to accelerate our hospice growth. I'm extremely excited about these three new leaders joining Brookdale because there is no substitute for passionate dedicated leaders with a proven track record of success, serving in key operational roles. Brookdale was able to attract these talented leaders because they see the long-term opportunity of our business and want to be part of our success as a mission-driven company devoted to serving seniors.

In summary, we are bringing in high-quality leaders with strong industry expertise to fill key positions, so that we can improve our execution and build on the areas where we are already successful. We are making progress on all of our strategic priorities and we reiterate our 2019 annual guidance. I'm excited that our industry is approaching the positive demand curve for senior housing and that we at Brookdale are working on turning around our company to be ready for the positive demographic growth.

I'll turn the call over to Steve.

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Thanks, Cindy. Let me start with a few highlights. We executed on moving previously identified communities to new operators. On average, we transitioned to one community every other day. When we set annual guidance, we understood first quarter seasonality, we expected occupancy would be lower sequentially due to winter related factors, the cyclical supply/demand trends Cindy mentioned and we knew we needed to rebuild from December's occupancy rate, which was lower than the fourth quarter average. With known occupancy pressure, we drove higher rate increases, which was the right strategic decision. We delivered same community revenue growth of 1.5% on a year-over-year basis and 2.5% on a sequential basis. Even with the rate increases, we continue to improve controllable move-outs and our same community independent living occupancy remained at 90%. This is 150 basis points of growth from the first quarter of 2018.

In our Health Care Services segment, we saw 3% sequential revenue growth, driven by strong home health census. In the quarter, we continued to opportunistically repurchase shares. Under our repurchase program, we purchased $6 million of shares at an average price of $6.43. We will continue to evaluate repurchases based on market conditions and liquidity and will consider additional repurchases as opportunistic conditions arise.

My final upfront comment. The new lease accounting standard and asset transactions affected year-over-year comparability on a reported basis. We have provided same community results which normalizes these impacts and will be helpful in your analysis. Let me talk about our real estate initiatives, starting with the managed portfolio. In the first quarter, we made significant progress in transitioning managed communities. We transitioned over 40 communities to new operators, most of which were being managed under interim arrangements. We expect additional managed communities to be transitioned throughout the balance of the year.

Also, we continue to make a meaningful progress on selling assets. In the quarter, we completed the sale of six communities. Since the first quarter of 2018, our total net proceeds from community sales has been over $220 million. We expect the remaining seven identified assets to be sold within a year. To provide context to the 2019 year-over-year financial results,

the 118 communities transitioned through asset sales and lease terminations negatively impacted revenue by $120 million and adjusted EBITDA by $23 million but positively impacted adjusted free cash flow by $4 million. In 2019, the company adopted the new lease accounting standard. To help with year-over-year comparability, we excluded this one-time impact from our same community analysis and our RevPAR and RevPOR metrics.

I will focus my comments on the quarter's same community results, which excludes the impact of both transactions and the new lease accounting standard. Starting with senior housing, same community revenue grew 1.5% compared to the prior year quarter and 2.5% on a sequential basis where rate increases more than offset occupancy. We are pleased that same community independent living occupancy remained strong at 90% in the first quarter and increased 150 basis points when compared to the prior year quarter. However, our assisted living and memory care occupancy declined 220 basis points and continues to be impacted by cyclical oversupply pressures. Same community RevPOR increased 3.1% on a year-over-year basis and grew 3.7% sequentially. This was primarily driven by in-place resident rent increases. We performed an in-depth price analysis using proprietary data. Year-over-year, our new resident move-in rates increased more than that NIC industry data.

In addition, we outperformed the industry would combining the impact of in-place rate increases with occupancy changes. Higher resident rates support the investments we're making in our community associates. Same community compensation-related expenses increased 4% for the first quarter. Community level merit increases occurred in March. So we continue to expect total annual labor costs, including benefits to grow 5% to 5.5% above the full-year 2018. Other facility operating expense increased 5% compared to the first quarter of 2018. The increase is primarily due to investments in marketing and advertising, property remediation and higher insurance premiums.

In total, increases in operating expenses were partially offset by revenue growth and resulted in a 4% decline in the same community operating income on a year-over-year basis. However, we saw a positive sequential operating income, which grew 6% with operating margin expansion to 32%. Beginning in 2020, we expect our labor cost increases will be in line with the industry. Again with supply/demand equilibrium, occupancy is expected to grow. As occupancy grows, senior housing has the potential to drive significant shareholder value through operational leverage.

Moving to our Health Care Services segment. Revenue in the first quarter improved 1% on a year-over-year basis and 3% on a sequential basis. The sequential increase in home health revenue was driven by an increase in average daily census but was partially offset by changes in the case mix and community dispositions. The hospice business continues to grow average daily census and we've recently expanded into a few more markets. Health Care Services' operating margin returned to nearly the first quarter of 2018 level as the one-time cost to consolidate and centralize the intake function is now complete. After we transition a Brookdale community to another operator, we generally lose some market share. Excluding the impact of the transition to senior housing communities, Health Care Services' average daily census grew over 6%.

We reported first quarter 2019 adjusted EBITDA of $117 million compared to $147 million for the prior year quarter. The lower year-over-year, adjusted EBITDA was primarily the result of two non-core operational items, a $23 million decline related to transactions and a $6 million impact from the new lease accounting standard. As a reminder, the accounting standard accelerates revenue and facility expense in 2019, but has no impact next year. We are on track with our $250 million non-development CapEx investments for 2019 over 20% was completed in the first quarter. During our prior earnings call, we were asked for the long-term view of CapEx and we committed to providing insights. After discussions with various stakeholders, we felt the most relevant CapEx metric, was a per unit estimate. In 2021, we expect our non-development community level CapEx to be in the range of $2,000 to $2,500 per unit after accounting for inflation.

Adjusted free cash flow was negative $47 million for the first quarter, of which $43 million was due to working capital's seasonally high use of cash. For the balance of 2019, we expect working capital to be a source of cash. When comparing the first quarter 2019 to the prior year quarter, adjusted free cash flow decreased by $41 million. Stepping through the variances. Lower adjusted EBITDA was primarily driven by non-core items. A $32 million change in working capital was driven by lower prepaid rent due to quarter-end timing and an increase in accounts receivable due to hospice expansion and the centralized intake conversion. Non-development CapEx was $30 million higher, consistent with our increased investment plan. These drivers were partially offset by a $16 million reduction in financing lease payments due to disposition activity.

For the first quarter 2019, our proportionate share of unconsolidated ventures delivered $11 million of adjusted EBITDA and $5 million of adjusted free cash flow. The year-over-year decrease was primarily due to the sale of our equity interest in ventures last year. As of March 31, total liquidity, including the line of credit was $530 million, a decrease of $63 million from year-end 2018. The decrease in liquidity was primarily the result of first quarter's adjusted free cash flow. Our balance sheet remains in a strong position to provide sufficient flexibility as we continue to turnaround the business.

As Cindy mentioned, we are reiterating our 2019 guidance. Retention rate of the Top 3 community leader positions are moving in the right direction. The industry's construction metrics continue to show positive trends. Many industry experts are predicting that supply/demand equilibrium should occur within the next 12 months. In the first quarter, we saw sequential improvement in move-ins, occupancy was within the range of our full year expectations. And looking at the last few years, occupancy has turned positive in June or July. Working capital is expected to turn positive. And again, as the industry supply and demand balance, we have the potential to drive occupancy growth and significant shareholder value through operational leverage.

I'll now turn the call back over to Cindy.

Lucinda M. Baier -- President, Chief Executive Officer and Director

Brookdale will succeed by building our business one relationship at a time. Accordingly, it is critically important that we fully understand what is important to the residents we serve. Recently, we created a National Resident Advisory Council that includes representatives from the communities in our largest markets to provide insights to our leadership team. During our first meeting, we received a significant amount of positive feedback about how we help our residents live their best lives every day. What was important to me was the creative ideas they had to make Brookdale even better.

Residents are a great sounding board for where we should focus and I look forward to our continued dialog. We're making investments that are critical to our long-term success. We are making operational progress and the industry supply/demand is approaching equilibrium. We are pleased with the sequential improvement in leads, first visits and move-ins, and our team is building momentum. I am confident that our turnaround will allow Brookdale to provide shareholders with long-term value.

Steve and I are happy to answer questions now. Operator, please open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Josh Raskin from Nephron Research. Your line is open.

Joshua Raskin -- Nephron Research -- Analyst

Hi, thanks, and good morning. First question, just your 1Q adjusted EBITDA of $117 million, could you just give us some color as to where that came in relative to your internal projections?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Josh, thanks, really appreciate the question. We actually had our results that were in line with our projection. We were very pleased that we were able to drive a combination of rate and occupancy that was better than the industry and we had focused on really driving rate sort of in the first quarter. So we're pleased that our results came in consistent with our plan.

Joshua Raskin -- Nephron Research -- Analyst

Okay. All right. So more in line with yours, obviously a little bit better than the consensus. And then the labor cost, I just want to make sure I got the labor story right. It sounded like trending in the 4-ish percent range for the first quarter, but still expecting 5% to 5.5% because it sounds like the merit increases didn't start until March. And so obviously that implies a little bit over 5.5% for the rest of the year. Is that -- am I thinking about that all right?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Josh, you're thinking about it exactly correct. So we generally have our rate increases late in the first quarter. And so we would expect our labor increases to ramp up during the year. That's very consistent to what happened last year in 2018 as we built our labor increases throughout the year, but we are not changing our guidance for labor cost growth. But at the same time, we're pleased with our results in the first quarter.

Joshua Raskin -- Nephron Research -- Analyst

Okay. And then just a last question on the rate versus occupancy dynamic and I certainly understand the strategy. It seems like it's working a little bit better now. But do you feel any pressure at some of the facilities where the rate increases, I assume that having the intended effect obviously in terms of overall RevPOR. But if -- is occupancy, are you guys in a situation in certain facilities where you kind of got to cover fixed costs, etc., you got to keep occupancy up? Or do you feel like the portfolio, generally speaking, can handle this level of rate increase?

Lucinda M. Baier -- President, Chief Executive Officer and Director

It's very much a local market business and we make our rate decisions one community one resident at a time where we have stable occupancy and the opportunity to push rate, we absolutely do so. And we're very conscious of the fact that our seniors are paying every dollar that we earn. So we want to make sure that we're thoughtful about the balance between our rate increases than our labor investments. But last year we spent a lot of money, trying to make sure that we are building the best team in the industry.

We know from our Resident Advisory Council that our residents want us to actually pay our workers more so that's consistent with what they want. Even though there are some markets that have a heavy amount of oversupply. And in those cases, you have to use rate to increase occupancy, but on balance we feel like the longer-term success is really driven by being very disciplined with rate increases and making sure you're thoughtful about charging an appropriate amount for the seniors that we serve.

Joshua Raskin -- Nephron Research -- Analyst

Okay, perfect. Thanks.

Operator

Your next question comes from the line of Jason Plagman from Jefferies. Your line is open.

Jason Plagman -- Jefferies -- Analyst

Hey, good morning. Just continuing on that discussion, a little bit. So obviously strong performance on the in-place rate increases, but I believe Steve gave some comments on the mark-to-market, but just wanted to make sure if those -- he could repeat those are, I know that mark-to-market on new move-ins had turned positive late last year. Just wondering if you expect that to continue in 2019?

Lucinda M. Baier -- President, Chief Executive Officer and Director

So, Jason, before Steve jumps in, let me just say that I am very pleased that this is the second consecutive quarter that we've had positive mark-to-market. And if you go all the way back to the third quarter of 2017, remember where we started with a negative 6% mark-to-market. And so for the last several quarters, we've showed consistent positive improvement in our mark-to-market. And that's really driving the focus that we had on rates because we know that is what's going to matter most. Now, Steve, if you want to jump in?

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Sure, Jason. The -- like Cindy said, that we're pleased with the mark-to-market. I certainly look at it as a RevPAR where I'm trying to optimize the total RevPAR whether it's coming from occupancy rate. And there are markets where we have a little bit of opportunity left going forward.

Jason Plagman -- Jefferies -- Analyst

Got it. And switching gears a little bit on capital deployment. You've got a substantial cash balance on your balance sheet and I know you're investing significantly this year in CapEx, in your communities. But any further color you can give us on, thoughts on deployment of capital over the next year or two toward M&A debt reduction and buybacks?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Yes, let me start by saying that the first priority that we have is the operational turnaround of the business. And so this year we have certainly prioritized the CapEx that we think is necessary to position our assets to support our strategy. I'll also highlight that we've been opportunistic with regard to share repurchases. We've heard from a lot of our shareholders that share repurchases are attractive and we have been disciplined about doing some share repurchases, both in Q4 and Q1. We do know that share repurchases are highly accretive. We also know that paying down debt also has the opportunity to sort of improve the value for our shareholders. At the same time we want to make sure that we are maintaining appropriate liquidity until we see the industry fully turned in terms of supply/demand equilibrium and our operational turnaround having a consecutive track record of a few quarters of positive growth. Anything you want to add, Steve?

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Really it's -- I'm being diligent about the liquidity position that we have like Cindy mentioned, the best way to create shareholder value. And in the future is to execute on our operational turnaround plan and that's what we're doing.

Jason Plagman -- Jefferies -- Analyst

Got it. And then last one from me. There's been lots of discussion recently about Medicare for All and the potential impact on healthcare providers. I know you guys are primarily a private pay, but Cindy, any thoughts on how Medicare for All could impact Brookdale?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Jason, thanks so much for asking that question. I think it's been overhang on the entire healthcare industry with regard to stock. I will say that over 80% of our residents have private pay revenue and virtually all of our senior housing comes from private pay. This segment of our business, our Health Care Services segment that does accept Medicare is a very small driver of our EBITDA. So it's a really insightful question, thanks for asking it.

Jason Plagman -- Jefferies -- Analyst

You're welcome. Thanks.

Lucinda M. Baier -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Chad Vanacore -- Stifel Nicolaus -- Analyst

All right. Thanks and good morning all.

Lucinda M. Baier -- President, Chief Executive Officer and Director

Good morning, Chad.

Chad Vanacore -- Stifel Nicolaus -- Analyst

Hi, there. So, Cindy, I think you mentioned further managed contract transitions in this year. How many interim managed -- management contracts remain at the end of the quarter? And then, are there any additional managed contract transitions we should expect throughout the year and what the impact of potential timing, we should be thinking about?

Lucinda M. Baier -- President, Chief Executive Officer and Director

So we don't necessarily talk specifically about timing. But if you can think about the changes that we've made to our portfolio over the last few years, certainly we have a number of transitions from Welltower when we exited the leases at the end of last year. We still have some of those communities that we're managing. In total, as of the end of March, we managed 146 properties from third parties. Many of those management contracts are either as the result of lease dispositions or lease restructurings. And so that's something that needs to be taken into consideration. Many of these managed contracts we thought were interim just because when we terminated the leases the -- practically expedient way to do it is for us to manage until they could replace with the first quarter operator. Now one of the things that I'll direct you to is the pro forma that we have included in our supplement and that gives you some of the specific details of that. That's on Page 26 of our supplement.

Steven E. Swain -- Executive Vice President and Chief Financial Officer

So, if you look, Chad, in the first quarter we transitioned $1 million of revenue out of the management services line. And in future quarters, we're expecting to transition $1.9 million of revenue.

Chad Vanacore -- Stifel Nicolaus -- Analyst

All right. Thanks, Steve. And then just thinking about 2019 expectations, I think when you originally put out the 2019 guidance, you had said that supply headwinds should persist, it's going to be difficult landscape and competitive. But today you also made some comments that, that maybe were a little bit more positive in the second half on supply. Can you give us an idea of how you're thinking about it? And then how one should expect occupancy to trend through the year?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Okay. There's a lot in that question. So let me see if I can start with the macro condition. If you look at NIC, basically they are expecting to have absorption exceed new supplies in the back half of the year. When I look specifically at our own portfolio, we had a sequential reduction in opens between Q4 and Q1 of 43% -- 43% fewer opens in our first quarter of this year than they were in the fourth quarter of last year. Now if you look back a ago, we did see sequential reduction in opens as well between Q4 and Q1, but it was significantly larger this year. I also note that if I look at our portfolio, specifically, there is a 57% sequential reduction in starts. And if you look at our total construction pipeline, there's been a 10% reduction in the construction pipeline since the first quarter of 2017. That's a long way of saying, we do expect that the economic conditions will get better.

But I do want to remind you that we are impacted by new competition for 12 months after a new competitor opens, at least the largest impact is the first 12 months. So the deliveries that hit us during 2018 and the new deliveries that we see in 2019 will be with us for 12 months. But then we see strong evidence that around the Brookdale communities, our competitive environment continues. Now, if I look back to our history -- I'll do the history, and then I'll let Steve do the forward looking piece of it.

We normally see our occupancy decline in the second quarter. Last year, I think our occupancy was down 50 basis points between Q1 and Q2. That's normal seasonality. Over the last several years, we have seen our occupancy first turn positive in that June or July timeframe. Now, what I'm not sure about is we had a longer and later flu season this year, while we were happy that our death rate was down year-over-year. I do think that the flu could have some impact on Q2. And now I'll turn it to Steve to add any comments he might have about expectations for the rest of the year.

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Yes. So, like Cindy mentioned, a factor of historically where we've turned positive in the longer flu season. We are generally looking at slightly down in the second quarter, but we again are reiterating our guidance that we will be within 100 basis points over last year's occupancy.

Chad Vanacore -- Stifel Nicolaus -- Analyst

All right. Thanks. And then just one more quick one for me. So, Ventas on their call, they said that they now expect to sell 20 BKD leased properties with a total of $15 million annual base rent that's about half of what the original -- what was originally contemplated. Can you confirm that lower expectation. How do you think that affects your -- and your expectations for rent and the year?

Lucinda M. Baier -- President, Chief Executive Officer and Director

So the first thing I'll say is that when we set the Ventas lease termination, we had a $30 million potential rent credit that we could get from assets that would be sold. Now, as you would expect, we wanted to make sure that we set it in the maximum for all the assets that we would want to look at. And I will acknowledge that we have at least 20 assets that are in the process of being sold. For us, what will happen is Ventas will sell the asset, and when they sell the asset, that will lock-in the sales price. We will get an rent credit equal to 6.25% of the sale price. Now, it was never intended to be something that's materially going to change the operational performance because we spread the rent when we did the lease renegotiation. But what is really intended to do is to make sure that we have a portfolio that we are comfortable in Brookdale structure we can win with going forward. And so we wouldn't expect the exit to have a significant impact on our 2019 guidance but we do have the impact built in.

Chad Vanacore -- Stifel Nicolaus -- Analyst

All right. That's it from me. Thanks.

Lucinda M. Baier -- President, Chief Executive Officer and Director

Thanks, Chad.

Operator

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

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Good morning. Thanks for taking the question. So just coming back to this discussion that happened just a few minutes ago on the seasonality and I guess that your -- and your view for the rest of the year. So you said Q1 was in line with your internal expectations, you still expect the same level of EBITDA in terms of the range for the year. So it seems like labor cost will accelerate in Q2 versus Q1. And it seems like occupancy, you expect to be down in line with seasonal trends. So, any other items, we should think about seasonality as the quarters will progress. I mean, there's obviously also the portfolio changes which you outlined in one of the slides in the handout. So anything else you can flag for us in terms of the seasonality progression of EBITDA for the rest of the year from the Q1, which seems to be the high point for the year for the quality in EBITDA?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Joanna, thank you for the question. So first let me say that I'm very happy with our first quarter results. They are consistent with our internal expectations and we are very pleased with the operational improvements that we're making in the business. If you turn to Page 26 of the supplement, that gives you our pro forma of the first quarter 2019 results. Anything that you see in LMB (ph) are the transactions that we already completed during the first quarter. So what that means is that we earned $1.152 million -- not billion, EBITDA in the first quarter for assets that we no longer own or operate, so that goes away. And then we also have transactions in process that generated $2.875 million of adjusted EBITDA in the first quarter. Now, you have to make your assumption about what that means for the rest of the year. If you think about some of the things that you might think about in terms of your modeling, normal seasonality is one. Last year we were down 50 basis points between Q1 and Q2. We normally have our occupancy turn in June or July. And so we would expect to have similar trends this year.

The second thing is our labor increases in the field, those are primarily a Q2 event. And like last year, you saw labor year-over-year build throughout the year, I think that's a reasonable expectation. And then I would also say that when you think about our first quarter -- think about some of the things that normally happen in the first quarter. From a calendar basis, there's always one fewer day in Q1 than there is in Q2 beyond and that's normally, about a $3 million impact or so. And then there's always a tiny impact of reversal of prior year bonus accruals. As you finish out the compensation cycle, there are always typically you believe that's where bonuses are paid or some small impact of not making strategic objectives, and that's small couple of million, $3 million maybe. Those are the things that come to my mind. Steve, do you want to add to anything?

Steven E. Swain -- Executive Vice President and Chief Financial Officer

No, Cindy, you've covered it all.

Lucinda M. Baier -- President, Chief Executive Officer and Director

(multiple speakers) one that (ph) if you can probably just to say Joanna is CapEx. Remember, we normally get a little slower start to CapEx in the year. We had about 20% of our CapEx in the first quarter, that will ramp throughout the year, particularly in Q2 and Q3.

Steven E. Swain -- Executive Vice President and Chief Financial Officer

And if you're looking at free cash flow, remember that working capital will be a source of cash for the balance of the year.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Right, that was helpful. So the CapEx was my other question, but just to follow up on that on the EBITDA line. It would -- inside the G&A any unusual seasonality or anything about that because I guess you had a pretty nice improvement there for G&A. So anything there for the rest of the year, we should think about?

Lucinda M. Baier -- President, Chief Executive Officer and Director

So let me start by saying, I'm really happy that we have been able to keep our G&A at 5% of our managed revenues despite the fact that we have made massive shifts in our portfolio. And 2018 we took out $25 million of G&A, and then we took out additional G&A so that we could be at this run rate, sort of for 2019. I think Steve might have some thoughts, he wants to make on G&A?

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Yes, Joanna, in the second quarter, we traditionally at Brookdale have implemented our merit increases. So you will see a bump up in expense in the second quarter from the first quarter. And then once that's in the run rate and you can further it out through the rest of the year.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

All right. And if I may squeeze I guess a bigger picture question on Hospice. So clearly you are very focused on growing that part of the Health Services segment. And congratulations on the new hire there. But in terms of the outlook there, so recently CMS proposed rebasing for Hospice and the Medicare reimbursement side of things. That implies a reduction for the routine Home Care payment. So I assume that's the -- the first majority of your payments. So how do you think about 2020 outlook in that respect. I mean obviously there is a market basket that's pretty good that CMS proposed but it seems like they're cutting some payments there in terms of the rebasing. So you have a view in terms of how would that impact Brookdale payments?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Yes. So let me start by saying that we are very excited about Anna-Gene joining us as the new Vice President of our Hospice Business. She brings a very strong track record from Alive Hospice, where she was President and CEO for the last seven years. We're also excited that we are doing de novo development of Hospice. One of the benefits that Brookdale has that other companies do not have, is we have a resident base who regularly need hospice services. And so we are able to start up new hospices in a way that others can't because we have a engine to generate sort of new patients. And as I think about the hospice model impact for CMS, our current thinking is that less than a 1% negative impact to us. And certainly we'll have to rebase our agencies, because we do, do a lot of routine Home Care. But there is certainly an opportunity for us as we transition our sales team to focus on short-term length of stay patients to provide more continuous care or GIP care which can help offset these rate changes.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Great. That's super helpful. Thank you so much. I'll go back to the queue.

Lucinda M. Baier -- President, Chief Executive Officer and Director

Thanks, Joanna.

Operator

Your next question comes from the line of Dana Hambly from Stephens. Your line is open.

Jacob Johnson -- Stephens -- Analyst

Hey, thanks. This is Jacob on for Dana this morning. Cindy, it's good to see supply starting to tick down in your markets, but maybe looking at the demand side of the equation, is awareness of senior housing growing? And then could you also touch on affordability. I think NIC had a study out last month that suggested maybe half of seniors don't have enough resources to afford senior housing?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Those are really good questions, Jacob. So for us, we basically see sort of strong demand. And, if you go back to the NIC data, you will see that absorption continues to tick up as more and more seniors need senior housing. It's not ever been a question that there is not sufficient demand, it has really been a mismatch of timing between the supply that's been delivered and the demand for the senior housing product, particularly in Memory Care where supply as a percentage of inventory was up to 15%. It's now dropped back to about 9%. But there still are significant numbers of units that have to be absorbed in Memory Care.

If you look at affordability, one of the reasons that we've always provided aged and income-qualified is our target customer has $50,000 or more of income in retirement. So we do recognize that affordability is an issue in senior housing. But we think with the industry penetration between 10% and 11%, we are not targeting 100% of seniors. We are targeting seniors about $50,000 or more income. Now we, like others in the industry, will continue to explore whether there is more that Brookdale can do as the leader in the industry to look at solutions for affordable housing. But for our core business, we think that we are well positioned for the growing demographics.

Jacob Johnson -- Stephens -- Analyst

Got it. And then, Cindy, you also mentioned in your comments a headwind from an aggregator. I think you also called it out last quarter. Can you just give some more color on the impact from this on some of your leading indicators and maybe an update on just what's going on there?

Lucinda M. Baier -- President, Chief Executive Officer and Director

Well, there's no question that we have seen a reduction in leads from our largest aggregator and it's something that we talked about on our fourth quarter call and our first quarter call. Now we understand from other folks in the industry that they're seeing some disruption as well. What I'm pleased though is despite the fact that we had disruption in lead flow from an aggregator like others in the industry, on a sequential basis, we were able to grow leads, first visit and move-ins, and we will continue to partner very closely with all of our aggregator partners. Because, as you all know, our mission is really to serve seniors and we do that by building relationships one senior at a time and we want to do that with all of our partners.

Jacob Johnson -- Stephens -- Analyst

Okay. And then just a couple of quick modeling questions for Steve. Steve, working capital will be a source of capital for the rest of the year. Should we think about that is sort of spread evenly through the last three quarters or any seasonality we need to be aware of there? And then I think you talked about $10 million of transaction costs, I think it was maybe $500,000 or so in the first quarter. Just any additional color on the timing of those?

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Sure. On the timing of the transaction costs, we're not really giving incremental guidance on that. We're still saying $10 million for the year. And then on the timing on the working capital, about even is probably a decent assumption for the rest of the year. It will ramp slowly. So the lowest in the second quarter and then ramping up in the third and fourth quarter. As I mentioned in my remarks, we had a working capital use in the first quarter due to calendar timing. We bill about $200 million of revenue a month and some of our residents pay us ahead of time. And that's called prepaid rent.

When the quarter ends on a Sunday, we don't get as much prepaid rent. And so that was actually a change in working capital in the first quarter. And as it turns out, the second quarter also ends on a Sunday, and believe it or not, that is a sizable impact to working capital in the quarter. Again, because we bill over $200 million a month. And so a fair amount comes in a few days early.

Jacob Johnson -- Stephens -- Analyst

Great. Thanks for taking the questions.

Kathy Ann MacDonald -- Investor Relations

Great. Cindy?

Lucinda M. Baier -- President, Chief Executive Officer and Director

So, thank you. I think that's all the questions that we have in the queue. But we are very grateful for your interest in Brookdale that you took the time to listen to our call. And we welcome for each dialog.

Kathy Ann MacDonald -- Investor Relations

Thank you, operator. You can now close the call.

Operator

Thank you for joining. This concludes today's conference call. You may now disconnect.

Duration: 48 minutes

Call participants:

Kathy Ann MacDonald -- Investor Relations

Lucinda M. Baier -- President, Chief Executive Officer and Director

Steven E. Swain -- Executive Vice President and Chief Financial Officer

Joshua Raskin -- Nephron Research -- Analyst

Jason Plagman -- Jefferies -- Analyst

Chad Vanacore -- Stifel Nicolaus -- Analyst

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Jacob Johnson -- Stephens -- Analyst

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