Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Brookdale Senior Living Inc (NYSE:BKD)
Q4 2019 Earnings Call
Feb 19, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Fourth Quarter Earnings Release Call. All lines have been placed on mute to prevent any background noise. We will open the lines for questions at the end of the call. [Operator Instructions]

I would now like to turn the call over to Kathy MacDonald of Investor Relations.

Kathy MacDonald -- Senior Vice President, Investor Relations

Thank you, and good morning, everyone. I'd like to welcome you to the fourth 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 filed with the SEC from time-to-time, including the risk factors contained in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. I direct you to 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. Welcome to our fourth quarter and year-end 2019 earnings call. We have made great progress on our strategic plan, which I introduced in early 2018. This morning, I will highlight some of the many milestones we achieved during 2019. I will also provide you with the highlights of our 2020 outlook.

Starting with 2019, we delivered results within or better than our original guidance range. In the fourth quarter, on a same community basis, we continued to see positive momentum of top line growth and improved cost control. Our strategy to win locally is working. Since we announced our turnaround strategy, we have consistently delivered on our guidance targets. We have successfully navigated transformational changes to reshape our business and better position Brookdale for positive senior demographics and anticipated industry tailwinds.

I will summarize 2019 in three sections; people, portfolio and performance. I will start with people. At our core, Brookdale's business depends on people taking care of people. I have enhanced the leadership team to make sure that we have the right team to drive near term and future growth.

Cindy Kent, Executive Vice President and President of Senior Living is our most recent addition to the team. Cindy has a proven track record of collaboration with payers, physician groups and hospitals to innovate and grow her business. She was most recently at 3M's Infection Prevention Division and before that she held global commercialization roles at Medtronic and Eli Lilly. Given the rapid change in the healthcare industry, Cindy's strategic insights will prove invaluable as we look to accelerate our growth. As healthcare systems continue to shift from a fee-for-service to a value-based outcome driven model, building deeper relationships with healthcare providers and payers will allow us to attract new residents more quickly and to improve the quality of our residents' lives. In her first month, Cindy has visited over 20 communities and has begun a deep immersion into our business. Her knowledge and skills will complement the deep bench strength of senior housing expertise.

Over the past year, we've also strategically added leaders with specific skills that are critical to drive long-term growth. Diane Johnson May, Executive Vice President of Human Resources, has a strong consumer focus and significant experience attracting and motivating a large workforce across many locations. Anna-Gene O'Neal, Division President of Health Care Services, a proven hospice leader, has brought an intense focus on patient-centered care to our healthcare services business. Rick Wigginton, Senior Vice President of Sales, has 14 years of demonstrated success in senior housing sales. Chris Bayham, Senior Vice President of Information Technology, has deep IT experience within the healthcare industry and a proven track record of change management. These leaders are part of our industry-leading team of 58,000 associates, who are devoted to taking care of residents and patients every day.

Despite the tightest labor market in 50 years, nearly 70% of our Executive Directors have been in their role for more than two years. They are choosing to stay with Brookdale. We are pleased because two years is a critical threshold for resident relationships and financial success of our communities. Our 2019 success extended beyond the top leaders of our communities. Over 3,000 former associates returned to Brookdale. In addition, Forbes named Brookdale as a Best in State Employer in Tennessee for our corporate offices located. These facts are proof that our culture and strategy of winning locally have taken hold. I am very proud of our associates and the progress we've made in building the best team in senior living.

In addition to having the right team driving the business forward, Brookdale's Board has gone through a significant transformation. In fact, over 60% of our Board members are new, since we established our current strategy in early 2018. The Board has added healthcare and hospitality experience to our strong base of real estate expertise and other skill sets. Together, our Board has the experience to provide valuable oversight as we execute our strategy and achieve strong returns for our shareholders. As you know, Vicki Freed and Guy Sansone are the most recent additions to our Board having joined us last fall. Guy now serves as our Non-Executive Chair, effective January 1st, 2020.

Turning to our real estate portfolio. We have significantly simplified our business and completed the vast majority of our portfolio restructuring. We have achieved our initial goal of monetizing assets netting $250 million of proceeds and went beyond expectations with the sale of our unconsolidated CCRC venture. In 2019, we reduced our community portfolio by 14%. Our portfolio is now a third smaller than it was after we completed the Emeritus merger in 2014. Our portfolio restructuring created numerous interim management agreements. In 2019, we reduced managed communities by over 50% as we successfully provided smooth transitions to new operators and reduced management agreements where they don't fit our business model.

In October, 2019, we announced an agreement with Healthpeak to unlock significant value through the sale of our interest in the unconsolidated

Entry fee CCRC venture. The deal closed at the end of January 2020. We will miss the long-term relationships we had with many of the residents. In particular, I want to thank Ken Garretson, who served as the Chairman of our National Resident Advisory Council. I also want to thank our entry fee associates for their dedicated service and wish them the best as they move forward serving the Healthpeak communities.

We successfully deployed a portion of the proceeds to convert leased assets to ownned communities, which improved our owned-to-leased portfolio mix. At the beginning of February 2020, 60% of our consolidated units are owned. The final update on our 2019 initiatives relates to our capital investment program to enhance the quality and protect the value of our portfolio, and further supports our long-term growth strategy. 2019 was the first year of a two-year incremental capex investment program. As a reminder, the incremental community level capex investments include major building infrastructure projects. We completed 742 major projects. In 2019, we invested a total of $236 million in non-development capex. As Steve will discuss in the 2020 outlook section, this year's investment will be smaller due to the significant progress we made in 2019.

Now let's turn to the performance of our ongoing operations in 2019. To provide you with some context, at the beginning of 2019, new community openings outpaced demand and drove top line pressure across senior living industry. A year ago, we predicted that, by the end of 2019, the industry would see supply demand equilibrium.

According to NIC, the industry equilibrium occurred in the second half of 2019. This is the first time independent and assisted living combined achieved equilibrium since the fourth quarter of 2015. Assisted living, is the largest part of our business. Therefore, we were pleased that in 2019, the industry's assisted living absorption hit a record high and outpaced supply for the first time in seven years. We expect this trend will continue in 2020. In addition, more baby boomers are entering senior living communities. The silver wave represents 9% of our residents and approximately 15% of our move-ins. For Brookdale, this represents a great opportunity for the next few years.

Focusing on the fourth quarter 2019, NIC's senior housing occupancy increased 20 basis points on a sequential basis. Brookdale again exceeded NIC by increasing 30 basis points on a same community basis. Brookdale's RevPAR on a same community basis increased 20 basis points sequentially. On a year-over-year basis, RevPAR grew 2.1% for the fourth quarter and 1.9% for the full year. This is strong evidence that our strategy to turnaround senior living operations drive top line growth and win locally has been and will continue to be successful.

Turning to operating expenses. We delivered on our commitment to enhance our underlying control of costs in the fourth quarter, especially over-time labor. Steve will provide the details, so I'll only share two financial highlights. Fourth quarter 2019 same community labor expense was 50 basis points lower than in the third quarter, which resulted in a full-year labor growth of 5.5%, coming back within our full-year expectations. As a result of our team's focus on operational efficiency, our same community operating income increased 7% in fourth quarter on a sequential basis.

Finally, while our healthcare services business continue to face headwinds in the fourth quarter, our new leadership team made crucial decisions to improve our business, prepare for the new PDGM model and set the foundation to return to growth.

In summary, for 2019, we have delivered positive sequential occupancy since the second quarter and outperformed the industry's occupancy for the second half of 2019. Our financial performance has improved accordingly.

And now I'll turn to the guidance for 2020 and a few summary comments about this year's expectations. We expect RevPAR growth of 3% to 4% on a same community basis, which is at a higher rate than last year. We expect adjusted EBITDA to grow on a year-over-year basis, the first time since the Emeritus merger. We plan to deliver significant improvement in adjusted free cash flow in 2020, even before the positive one-time $100 million benefit from the healthy transaction.

With that, I'll turn the call over to Steve.

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

Thank you, Cindy. Last year, we delivered on significant milestones. This momentum will set us up for EBITDA growth in 2020. I'll provide highlights as it relates to the fourth quarter and full-year 2019 financial results, then I'll provide you with the building blocks to deliver 2020 guidance.

Starting with 2019. We achieved a full-year financial results within or better than our original guidance ranges, despite a very competitive market. Annual same community revenue grew 1.9% year-over-year and fourth quarter revenue increased both sequentially and on a year-over-year basis. Brookdale delivered the best in-year occupancy improvement since before the Emeritus merger five years ago, as same community occupancy increased sequentially in the third and fourth quarters.

We obtained our real estate goal that was introduced in 2018. Over the past two years, we realized net proceeds of more than $250 million, most notably on the transaction front. In January 2020, we completed significant real estate deals. We sold our interest in the unconsolidated CCRC venture and acquired 18 formerly leased communities from Healthpeak, and continuing with our strategy to own a higher percentage of our community portfolio, we also acquired eight formerly leased properties from NHI.

Turning to the fourth quarter results. Since the beginning of the fourth quarter 2018 and through the end of 2019, we divested 66 consolidated communities through sales and lease terminations. To provide context to the financial results, for the fourth quarter 2019 compared to the prior-year quarter, these dispositions resulted in $36 million less resident fee revenue, $5 million less adjusted EBITDA and $2 million less adjusted free cash flow. Keeping the portfolio changes in mind, fourth quarter 2019 revenue, excluding reimbursed costs on behalf of managed communities, was $810 million compared to $825 million in the fourth quarter of 2018. This 1.8% decrease was the result of fewer communities due to planned asset sales and lease terminations.

I'll focus the rest of my senior housing fourth quarter and full-year 2019 comments on same community results, which exclude the impact of real estate transactions and the lease accounting change.

Starting with senior housing. Same community fourth quarter revenue improved 2.1% compared to the prior-year quarter, and for the full year improved 1.9%. Our focus on improving rate growth in 2019 drove stronger financial results. We passed through larger in-place rent increases by linking them to higher labor investments. We also maintained overall price discipline while flexing pricing in select markets when necessary to remain competitive. Because of these actions, 2019 annual RevPAR increased 2.9% compared to last year's annual increase of 1.2%.

For the segments, independent living revenue growth was 1.1% for the fourth quarter and 2.5% annually compared to the prior-year periods. This growth was largely driven by rate increases. For the full year, independent living occupancy increased 10 basis points. While it remains a tough competitive environment for independent living, we're excited that we were able to grow occupancy.

For assisted living and memory care, revenue growth was 2.9% in the fourth quarter and 2% annually compared to the prior-year periods, largely driven by rate increases. Fourth quarter occupancy increased 50 basis points on a sequential basis and outperformed NIC by 20 basis points. This demonstrates that our operational strategy is delivering results. The positive assisted living and memory care growth is especially important because this segment represents the majority of our portfolio. Notably, for the first time since the Emeritus merger, current quarter AL occupancy exceeded the prior-year quarter. This positive momentum supports our investment thesis, which is built on a return to growth. Assisted living has been under pressure over the last several years. We're looking forward to continued growth in capturing that value for shareholders in 2020.

Turning to same community operating expenses. In the fourth quarter, we took actions that resulted in a reduction of over time on a sequential basis. As a result, the full-year compensation-related expenses increased 5.5%, which was in line with initial expectations and slightly better than expectations discussed during the third quarter earnings call. I'm also pleased that during the quarter, voluntary turnover for full-time associates improved 400 basis points sequentially. The Executive Directors and Health and Wellness Directors trailing 12 month retention rates have also remained around 70% for nearly three years.

Other facility operating expense was approximately $10 million lower on a sequential basis. The main drivers were seasonally lower repairs, maintenance and utilities, along with intentionally timing marketing investments to avoid the cost inflation due to the typical holiday marketing blitz. For the full year, other facility operating expense increases were primarily due to higher property remediation, insurance premiums and investments in marketing and advertising to drive more leads. Looking at 2019 as a whole, our data-driven marketing investments successfully created a robust lead pipeline, drove efficient conversions of visits and move-ins, and enabled better connectivity with our sales organization.

Moving to the healthcare services segment. Revenue increased to 1.1% for the fourth quarter and 2.4% for the full year, compared to the prior-year periods. While healthcare services didn't meet our expectations, what stands out is the hospice business. Although less than a quarter of the segment's revenue, hospice growth was so significant that it drove the segment's positive overall revenue growth. For home health, our new leaders evaluated the best go-forward business model and executed a plan to reorganize the operations.

We've been taking action to match our infrastructure to the communities and agencies we operate. In 2019, we delivered annualized G&A savings of approximately $25 million prior to normal costs inflation. Fourth quarter 2019 adjusted EBITDA was $100 million compared to $115 million for the prior-year quarter. The primary drivers of lower adjusted EBITDA were the result of three non-core items; a $5 million decline related to dispositions, a $5 million reduction from eliminating management agreement, and the $4 million impact from the lease accounting standard change.

Adjusted free cash flow was $0.5 million in the fourth quarter compared to a negative $33 million in the prior-year quarter. The positive variance was driven by a $49 million change in working capital, partially offset by lower EBITDA of $15 million that I just described. The key drivers of the working capital change were the benefit from the 2019 lease accounting standard change, higher accrued insurance liabilities in the fourth quarter of 2019, and a decrease in receivables through improved collections.

As of December 31st, 2019, total liquidity, including the line of credit, was $481 million, an increase of $26 million from September 30th. Net proceeds from asset sales drove this increase. In the fourth quarter, we repurchased shares valued at approximately $5.6 million. This brought the full-year repurchase value to nearly $20 million. Over the five-year strategic planning horizon, we continued to have a steady debt maturities. Our total debt outstanding, approximately 95%, is non-recourse asset-backed mortgage debt.

After selling our interest in the unconsolidated CCRC venture and acquiring 18 formerly leased communities in January 2020, the net proceeds improved the Company's capital structure flexibility. We may use proceeds for increased opportunistic share repurchases to pursue potential lease restructuring opportunities and to make further investments to support our strategy.

Turning to our 2020 guidance. The turnaround efforts we made over the past two years have set the foundation to deliver growth in 2020. With the negotiated $100 million Healthpeak management termination fee we received on January 31st, adjusted EBITDA is expected to be $510 million to $540 million, significantly higher than 2019. We anticipate adjusted free cash flow, including a significant termination fee to be in the range of a positive $70 million to $90 million. Excluding the $100 million Healthpeak management termination fee, we expect adjusted EBITDA to be in the range of $410 million to $440 million, a growth of between 2% and 10% compared to 2019. This aligns with the expectations we established in the five-year outlook introduced late last year.

Excluding the Healthpeak management termination fee, adjusted free cash flow is expected to be in the range of negative $10 million to negative $30 million. The middle of the guidance range reflects an approximate $55 million improvement from 2019, which is better than the expected year-over-year capex reduction.

Now let me provide you the key building blocks that support our guidance. We listed more details on Page 10 of the current investor presentation, which you can find on our website. With significant real estate transactions completed in January 2020, the pro forma on Page 26 of our supplemental deck will also be important to reference. The pro forma shows the annual impact of announced transactions, which will help you understand continuing operations. Starting with senior housing revenue, we expect RevPAR to increase 3% to 4% on a same community basis. Our occupancy expectations incorporate normal seasonality with high seasonal move-outs occurring in first quarter. Our assumption is that the flu for our senior population will have a slightly higher impact compared to last year's season. This assumption is based on our recent experience, which is currently trending like the CDC data for the age 65-plus and 85-plus cohorts.

As referenced, our 4Q 2018 to 1Q 2019 occupancy declined 90 basis points on a same community basis. We expect to deliver RevPAR growth with strong rate increases. The majority of our in-place rent increases occur January 1st. Throughout the year, we plan to maintain our price discipline while responding appropriately to competition in select markets where we see pressure.

For our healthcare services segment, we expect to drive NOI growth through our hospice business and successfully implement PDGM in home health. As we rebuild our business, we expect healthcare services revenue growth of up to 3% and slight margin improvement, as the issues related to the centralized intake initiative will not repeat. With PDGM becoming effective January 1st for our home health business, we expect revenue growth to be back half weighted in 2020. There will be some noise in the first quarter with the implementation of a new reimbursement model with 30-day episodes and the recently announced organizational changes. As such, we expect segment NOI to decline sequentially from the fourth quarter.

As we move through the year, we expect to see the benefits of volume growth and higher operational efficiency. For management service revenue, in 2019, we transitioned over 100 managed communities. We expect to transition more communities to new operators in 2020, including the recently completed Healthpeak transaction. This will enable us to continue to reduce the operational complexity of our business.

Turning to operating expenses. We expect total labor costs, including benefits, to grow in the range of 4.75% to 5.25%. While the labor market continues to be tight, our cost expectations are better than our 2019 increase due to two factors; first, we had unusually high over time and contract labor in the third quarter of 2019; and second, 2019 was the final year of our three-year plan of making above industry investments in our community associates. We expect our 2020 G&A expenses to be at or slightly above 5% of resident fee revenue, including revenue under management. This expectation is based on normalized cost inflation plus bonus and investments for growth, partially offset by G&A rationalization initiated after the sale of our unconsolidated CCRC interest and other portfolio reductions. Sequentially, G&A will step up from the fourth quarter 2019 to the first quarter 2020, primarily due to a normalized bonus accrual.

I also want to highlight a few items that will affect our adjusted free cash flow. First, we expect to lower interest expense and lease amortization combined, primarily from our 2019 real estate transactions and those that occurred or are plan to occur in 2020, along with lower interest rates from refinancing. Second, working capital is expected to be a use of cash of approximately $10 million to $15 million. The $23 million one-time benefit from the lease accounting change in 2019 will not reoccur in 2020. In addition, PDGM is expected to negatively impact working capital. As a reminder of the phasing within the year, working capital is a significant use of cash in the first quarter due to the timing of payments.

The final significant part of our 2020 outlook is capex. As highlighted a year ago, 2019 capex was the high watermark, and we expected 2020 capex to be significantly lower. We are delivering on our capex commitment. In 2019, non-development capex was $236 million, and we expect 2020 to be roughly $45 million less at approximately $190 million. Because we started many projects in 2019 that will finish in the first quarter and due to the timing of capex reimbursements, we expect the first quarter capex spend to be the highest quarterly spend in 2020 and could be up to one-third of this year's total net spending. Looking forward to 2021, we continue to believe community level capex will further reduce and stabilize in the range of between $2,000 and $2,500 per unit.

It is exciting to see the great progress our team has made over the past two years. This momentum will set us up for EBITDA growth in 2020, the first time since the Emeritus merger.

I will now turn the call back over to Cindy.

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

We've had many successes in 2019 and saw positive operational momentum across the business. We are delivering on the targets that we have set for ourselves, and we believe that 2020 will be a strong year for our business.

Before leaving you today, I would also like to comment on the global health situation regarding the coronavirus outbreak. The safety of our seniors and associates will always be of the utmost importance at Brookdale. Our teams across the country have been put on high alert, have strong protocols for contagious viruses, like the flu and other viruses, and have been trained to look for the signs of infection early and take appropriate action.

I look forward to seeing you at our Investor Day on March 31st. Many of the new leadership team that I highlighted will share further insight into our business and on how we will execute our strategy.

Kathy MacDonald -- Senior Vice President, Investor Relations

Phyllis, this is Kathy. Please open the line for questions.

Questions and Answers:

Kathy MacDonald -- Senior Vice President, Investor Relations

[Operator Instructions] Your first question comes from the line of Frank Morgan with RBC Capital Markets.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. I guess, Steve mentioned -- commented on this about exploring additional lease restructuring opportunities. But, I guess, with most of your divestiture opportunities already done, how much do you see remaining on divestitures and then how much do you see available from lease restructuring?

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

Hi, Frank. It's Cindy. Thanks for the question. We are almost done with our asset sales. You can see that we just have a handful of assets held for sale on our balance sheet. So that's largely behind us. Now going forward, we will always do a little bit of capital recycling, where there is a small percentage of our portfolio that we place up for sale and we buy new communities to replace for that, but that's not going to be a significant portion of our strategy, especially when you put that in the context of the prior year.

And if you think about capital allocation, if I can just bridge to that for a minute, I'm really happy that we've successfully deployed a portion of our proceeds to convert leased communities to owned communities, which has improved our overall leased and owned portfolio mix. After the completion of the Healthpeak transaction at the end of January, we started February with over 60% of our consolidated units being owned. Now if you think about the proceeds from the Healthpeak transaction that gives us the chance to really improve our capital structure flexibility, and I think that will likely increase our opportunistic stock repurchases, but also to the extent that is possible. We are very interested in pursuing potential lease restructuring opportunities.

And then having the cash on the balance sheet naturally deleverages the business. Just an example, the NHI transaction is one example of a lease restructuring that was a strong use of capital. We bought eight assets from NHI through a purchase option, and the unlevered return on this transaction is greater than 12%. And if you look at the levered return, we're expecting a levered return in excess of 20% once the financing on these assets is complete.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. Obviously, in the near term, you're having some success relative to the market and growing your occupancies, but it seems like a lot of the growth has been driven on the rate side. What you're able to do there? Are you seeing much feedback from residents -- or pushback from residents, I should say, in terms of your ability to pass on those rate increase. I know you commented you attributed to labor, but how much room do you think you still have to go on the rate side in the year ahead?

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

So the first thing that I'll say is that we had a 20% improvement in our resident satisfaction scores, our net promoter score, since the last survey, and that is a strong foundation of being able to demonstrate the value that we provide to our customers. And we have had pretty good success with passing along rate to our residents. As you know, we believe that protecting the rate while responding appropriately to market competition is the best way to improve the bottom line. And we've really done a nice job of driving rate while also improving our occupancy performance.

Let me just share a few details with you that shows the momentum that we're building in our same-store portfolio. If you go back to our same-store portfolio in 2018, we had a RevPAR revenue per occupied room increase of 1.2%. If you fast forward a year to 2019, this increased our RevPAR, again revenue per occupied room, growth to 2.9%, so a nice increase. And at the same time, we were able to close the occupancy gap to the prior years. And I'm excited that we ended the fourth quarter within 20 basis points of Q4 of 2018. Then when you look into 2020, we're guiding to RevPAR, revenue per available room, growth of 3% to 4%, demonstrating the improved trajectory of our business.

Now we said that we really plan to lean heavily on rate to get there, and the way that we do that is by connecting the rate increase that we're passing along to our residents to the labor investments that we've made in the staff. And we prepare our Executive Directors with very strong talking points as to why the rate increase is necessary, and they get the value for the services.

Frank Morgan -- RBC Capital Markets -- Analyst

What about on the street rate side? So in-place rents -- what are you seeing and what are you doing on the street rates for new move-ins to drive occupancy?

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

No, it's fair to say that there is a little bit of a tale of two cities. You can see from our same-store results that independent living was more competitive for us in the fourth quarter then assisted living. But in the fourth quarter, we did see that move-in rates were 3.5% higher than move-out rates. We traditionally call that mark-to-market, and this is because we increased our selling rates in the fourth quarter. Now, clearly in the first quarter, that's going to come more in line, because what we try to do in Q4 is in November and December for those move-ins, we try to pull forward our 2020 rate increases.

Now, that strategy is important for us for two reasons. We know that there is going to be some impact on occupancy when we do that in Q4, but our primary driver of top line is passing along rate increases to our in-place residents. So if you're doing a lot of discounting, it's harder to hold the rates when you increase them on January 1st. So we've done a lot of analysis, we've looked at our strategy, we're convinced that protecting the rate has been a winning strategy for us when we compare the total impact of occupancy and rate. So it's a great question, Frank.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. I'll hop back in the queue. Thanks.

Operator

Your next question comes from the line of Josh Raskin with Nephron Research.

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

Hi, Josh.

Josh Raskin -- Nephron Research -- Analyst

Hi, thanks. Hi, good morning, Cindy. I know you guys don't give quarterly guidance, but I just want to make sure we're at least on the same page here as we look at the first quarter. I think the consensus is about $110 million. So clearly, some understanding that -- despite EBIT -- adjusted EBITDA being up year-over-year. For the full year, it's fair to say that EBITDA could be down, pick a number, 5%-ish or so because of home health changes and seasonality and flu year-over-year and things like that. I just want to make sure we're not, sort of, inconsistent with your messaging around what's going to happen early in the year.

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

Steve is going to take that for us.

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

Yeah, morning, Josh. You're right. There is seasonality in our phasing of the quarterly EBITDA. Three things on EBITDA. First, senior housing. RevPOR will be slightly or about the same as the 2019 -- 2018 to 2019 increase. But we will have seasonally high move-outs due to the flu. And as I mentioned already, we are pacing a little bit worse than last year. And then sequentially, expenses should increase about the same dollar amount as last year, plus, we do have a leap year, so that's another $3 million or so in expenses. We also are now starting to accrue a normalized bonus in the field as well as G&A. And lastly, as far as the senior housing goes, we're going to turn back on our marketing spend, because we didn't -- as already mentioned, the marketing was turned down a bit because we didn't want to compete with the holiday clutter. So that's for senior housing.

And healthcare services, I did mention that there was going to be some noise in the first quarter, phasing out the 60-day episodes. We did have lower volume also in December as more people took the last couple weeks of the -- of December off just because of the way the holidays fell. We are implementing the new reimbursement model with 30-day episodes, and that equilibrium won't reach equilibrium until March.

And then lastly, PDGM, we have made some organizational changes, announcements, but we won't see that in the numbers until the -- really, the second quarter. So as such, the NOI for the HCS unit will be down sequentially. And then lastly, G&A. G&A, we are expecting a step up, so we're going to be accruing for a normalized bonus in the first quarter. So absolute G&A spend might be in the same neighborhood as last year's first quarter.

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

And then just when you think about your adjusted free cash flow, remember that Q1 is usually a use of working capital. And then our capex, we will spend about a third of our capex or up to a third of our capex in Q1. And so there's a little bit of unusual cash activity that happens in Q1 as well.

Josh Raskin -- Nephron Research -- Analyst

Got you. Alright. So if we put all that together, the second question would be, if you're starting EBITDA, I'd say, as much as $10 million year-over-year in the whole in 1Q, that's implying $20 million to sort of $50 million of improvement in the next three quarters. So I heard a lot of the one timers, etc. But maybe you could just give us a little bit of further color on what you're thinking in terms of occupancy and some of the key metrics that are improving sort of once we get past the first quarter?

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

Yeah. So at a high level, we've given guidance on RevPAR growth of 3% to 4%. Most of that will come from rate. Now you followed the story for a long time, so you know that the first thing that you have to do is overcome the occupancy loss in the prior year. And the good news for us this year is that our occupancy was only down year-over-year by 20 basis points on a same-store basis in the fourth quarter. So I think it's fair to say that our occupancy will be better during the year than our year-over-year comparisons for 2019. But we haven't really given more guidance on that because we really want to focus on RevPAR growth, which is the combination of both availability and rate or occupancy and rate.

Josh Raskin -- Nephron Research -- Analyst

Got you. And then just a last one, could you just give us a little more color on the competition you spoke to on sort of the fourth quarter. What you were seeing in terms of discounting? Maybe how pervasive that was? Does it dissipate into the January time period? And -- so any other color on the competition?

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

Yeah. So on our investor presentation, on Page 7, we always put sort of the industry view as to what's happening in competition, as well as the Brookdale's view of what's happening in competition. And you can see that there was an increase in competitive new openings around our communities between the third quarter and the fourth quarter. And we know that when a new community opens, the largest impact is that lease up, which is most intense during the first 12 months.

Now when we look at it, it's important to note that our opens in Q4 were down 30% from the peak, which occurred in the second quarter of 2017. And the starts that we saw in the fourth quarter were down 71% from the peak that was in the second quarter of 2015. So that translates to a construction pipeline that's a full 20% lower than the first quarter 2018 peak. Now we have been in the center of the storm in assisted living, in particular, which is the vast majority of our portfolio. And I personally am very excited about the improving competitive environment for assisted living, in particular.

If you look at our supplement, you can see, on Page 11, our same-community results. And for us, our occupancy actually grew 20 basis points on our assisted living portfolio. This is important because it's the vast majority of our portfolio and will really be the engine for profit growth that will drive our performance higher. And so while I still think that there'll be some competition around our communities while communities lease-up, I expect it to be much better in 2020 than it was in 2019. And then just a reminder, for 2019 as a whole, NIC basically showed the back half of the year, absorption was in excess of supply, and we would expect that to continue into 2020.

Josh Raskin -- Nephron Research -- Analyst

Perfect, thank you.

Operator

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

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

Hi, Jason.

Jason Plagman -- Jefferies -- Analyst

Hey, good morning. Just wanted to ask about some of the metrics behind your sales effectiveness initiatives and productivity there. How are things trending as far as leads, visits, move-ins both in Q4? And how you're feeling about those -- your sales pipeline as we start 2020?

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

Yeah. It's a great question. So for 2019, we have delivered positive sequential occupancy since the second quarter, and we outperformed the industry for the second half of 2019. In addition, we have delivered the best in-year occupancy improvement since the Emeritus merger. As a result of this, we're confident that our strategy is taking hold, and you can see the results in our occupancy improvement.

Even though this is true, it's probably helpful to give you just a few comments on what happened with our leading indicators in the fourth quarter. In the fourth quarter, on a year-over-year basis, we saw higher leads, which has been consistent with our experience during the rest of the year. As expected, we saw seasonally lower move-ins, and we are also happy that our controllable move-outs returned to improvement, and so that has been very good for us.

And then with regard to our people statistics, our Executive Directors and Health and Wellness Directors trailing 12-month retention rates, they remained about 70%, and this is for the third year straight. What's important to note is that nearly 70% of our Executive Directors have been in their roles for more than two years, which is a critical threshold for resident relationships and the financial success of our communities. And these results are all consistent with us raising the performance bar on our team. So we're very excited that now the hard work that we put into our leading indicators is translating into metrics that you see in terms of occupancy.

Jason Plagman -- Jefferies -- Analyst

Great. That's helpful. And then it seems like we're seeing both Brookdale and the NIC data is showing a little bit more pressure on independent living occupancy relative to assisted living. So how are you feeling about the trajectory of occupancy and RevPAR for independent living in comparison to assisted living?

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

Well, there's no question that the RevPAR growth in independent living was lower than assisted living. For the fourth quarter, we drove RevPAR, which is revenue per available unit, of [Indecipherable] on independent living. And we drove RevPAR growth on assisting living at 2.9%. Now part of that is because we've been kind of at that 90%-ish level for a while. So there wasn't as much opportunity for us to grow occupancy in independent living. The other part of it is that independent living is one that can be much more rate-sensitive because you don't have much services wrapped around the resident. And so I think that we will focus on both of our communities. Our overall strategy, which is proven to be successful is to protect the rate, but we will discount selectively where necessary with our goal of being having every unit in service at the highest achievable rate.

Jason Plagman -- Jefferies -- Analyst

Got it. That's it for me. Thanks.

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

Thank you.

Operator

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

Joanna Gajuk -- Bank of America -- Analyst

Hi, good morning. Thanks for taking the questions. So in terms of the outlook for the year, just the EBITDA, the range kind of costs in terms of the comparable numbers like-for-like 0% to 7% growth. So can you talk us about the biggest seen factors that will bring you toward the lower or toward the higher end of the range in terms of the EBITDA?

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

Yeah. It's a really good question, Joanna. And the one thing that I'll say before Steve jumps in, is we have a revenue opportunity at Brookdale, which is why we've been so focused on quality whether it is quality within our healthcare services business or whether it's quality within our senior housing business, as demonstrated by our improvement in Net Promoter Score. And we're really expecting that 2020 will be an acceleration of our revenue growth so that we can make good progress on the successful strategic plan, well, the longer-term outlook that we announced.

But Steve, can you take Joanna through the detail?

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

Sure. Morning, Joanna. Three things, real quickly on EBITDA. First numbers that are essentially in the books. So you'll see a bridge on Slide 10 of the investor presentation. It shows transactions and accounting that move EBITDA from $401 million to $410 million. So that's Number 1. Number 2, is senior housing NOI. As we've mentioned now a few times, the RevPAR will increase 3% to 4%. Occupancy will improve versus the negative 80 basis points we saw in 2019. And again, one last time, occupancy is seasonal. We have -- because of our January 1 rate increase, we have seen a strong rate increase, and that should be as good or slightly better than last year's as we link labor growth to rent increases. So bottom line, occupancy is not projected to offset the rate increase, like we've seen in prior years nearly as much.

Turning to expense. Labor, I already mentioned is around 5%. The labor market continues to be tight. We think that 5% is reasonable versus our 5.5% in 2019. We have now finished our three-year plan of making above industry investments in our community associates. And generally, if you make middle of the road assumptions in the senior housing space, you'll get to kind of middle of the guidance. But for me, remember, 2020, it's a huge inflection for senior housing. We declined 4.6% last year, and we're projected to grow in 2020. So that's a pivot point that really can't go unnoticed.

Third, and then I'll stop. The healthcare services segment will return to NOI growth in 2020. Revenue growth of up to 3% with a slight margin improvement will lead to growth. Middle of the road assumptions lead to several million dollars in NOI growth, kind of depending on what you assume. Remember, PDGM noise in the first quarter? So expect NOI to decline slightly in the first quarter, but to grow throughout 2020 as the issues related to the centralized intake won't repeat and the new management team hits the ground and the improvements are seen in the results.

So what -- taking a step back, what I look at and what I see, 2020 is a big catalyst year as we pivot to growth. I already mentioned NOI growth. EBITDA growth of up to $30 million, and that's down from over $100 million in 2019. So that's another pivot point, inflection point that I look at and makes me excited about our valuation.

Joanna Gajuk -- Bank of America -- Analyst

Alright. Thanks for that. So just to summarize. So you say that growing organically, senior housing 4% will yield a 7% EBITDA growth essentially?

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

Yeah. That's the -- kind of the top end of the guidance range for senior housing, and that does generally put you in the top end of our guidance.

Joanna Gajuk -- Bank of America -- Analyst

Right. Because also, you assume that you will be able to more than offset the labor cost inflation at that level, right? So I guess, at the higher end, you assume much lower than 5% labor cost expense.

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

Well, just remember that, you're multiplying the 3% to 4% by a $2 billion-plus number, and you're multiplying the labor expense by something that's $1 billion. So...

Joanna Gajuk -- Bank of America -- Analyst

No, that's great. And on the services, so you'd shared the comments. Obviously, PDGM is a big change for the industry. And I didn't hear you mentioning anything about hospice rebasing. Does that have any impact on your rent -- sorry, on your pricing in 2020?

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

So the current thinking on that is less than a 1% impact on the hospice rebasing. So it's not big. And as you know, our hospice business has just been growing nicely, and we would expect that growth to continue. The one point that I would make on healthcare services in general, and I know this is obvious, but I'll feel better if I say it, the up to 3% annual growth that we're expecting, but for the change to PDGM, would be significantly higher. And the reason that's the case is because, in the first quarter, we're rolling off those 60-day TTS episodes, while we're building new episodes at 30 days. And so there's just a little bit of a lag in terms of getting to sort of a stabilized run rate, and so it would be much higher without the change to PDGM.

Joanna Gajuk -- Bank of America -- Analyst

And on this front, and I guess, Steve had mentioned that there is an impact to cash flow in Q1 because of the wrap or somewhat other changes that are happening in home health, correct? So we should expect even a bigger than usual drop in cash flow because of the timing of these prepayments, correct?

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

Yeah. The timing of free cash flow is a significant use of cash in the first quarter. If you look at our past two years of first quarter working capital uses, that -- averaging that is probably kind of a good ballpark.

Joanna Gajuk -- Bank of America -- Analyst

Great. I appreciate the color. Thank you.

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

Thanks, Joanna.

Operator

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

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

Hi, Chad.

Tao Qiu -- Stifel -- Analyst

Hi, good morning. This is Tao for Chad.

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

Hello, Tao.

Tao Qiu -- Stifel -- Analyst

Yeah. Good morning. I have two questions. The first one is about the independent living and assisted living divergence. You mentioned that you had a tough environment in the fourth quarter due to like newly opened communities. Are there any differences in your RevPAR assumption for the two segments in 2020? And what are you doing differently between the two?

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

We don't provide RevPAR guidance by segment. What you can be sure of is that our goal is to maximize RevPAR for our entire portfolio. And so we will look at each community, its market position, the new competition entering the market, where it stands in terms of occupancy and set an appropriate strategy at the community level.

Tao Qiu -- Stifel -- Analyst

So should we think that because IL has higher occupancy, you guys will be holding the rates steady, pushing the rate a little bit more? And for AL, the primary objective is to increase the occupancy and at the same time into RevPAR?

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

No. Tao, it's fair to say that when we have a community that has a low occupancy, we do more discounting, and we build occupancy before pushing rate, that's a given. Where we have a community that has a high occupancy, we are more aggressive on pushing rate because that's where the bigger opportunity is. So I think you can translate that into what it means for the aggregate of our portfolio, but it's definitely done on a community-by-community basis. And even within the community, assisted living, independent living and memory care are all priced separately.

Tao Qiu -- Stifel -- Analyst

Okay, got it. And my second question is about marketing spend. How much of an increase in marketing spend should we expect in the first quarter? And also full year 2020 compared to 2019? And then given the investment you have made so far to drive new leads and conversion, how much are you spending now? And how reliant are you still on third-party referral services such as A Place for Mom?

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

So third-party referral sources are a very important part of our business as it is for most senior living operators. As I mentioned earlier, we have a revenue opportunity in front of us. And so our biggest opportunity is to get every unit leased at the highest achievable rate. And so we are going to achieve that through a combination of driving our own internal marketing spend, which we did last year, and it was very effective as well as partnering closely with our large aggregators, which we know will be effective.

I don't think we've given specific guidance on any individual line of our P&L, but know that we evaluate our marketing using a very intense data-driven analysis. And our goal is to make sure that we've got a good ROI on our marketing spend, and the increased investment that we started last year worked well for us. And so that's the high level takeaway that you should have.

Tao Qiu -- Stifel -- Analyst

But would you characterize your -- the percentage of leads from third-party referral service as higher or lower than last year?

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

I think that we are expecting a strong referral source from our aggregators, and we expect that to continue. And so as we grow occupancy, we would love to see more leads from both our internal sources and from our aggregators.

Tao Qiu -- Stifel -- Analyst

Okay. That's it for me. Thank you.

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

Thanks, Tao.

Operator

Your next question comes from the line of Steven Valiquette with Barclays.

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

Hello.

Steven Valiquette -- Barclays -- Analyst

Hey, good morning, everybody. So I know we just touched on this topic a lot on this call. But just, again, I mean, there's always trade-offs on rate versus occupancy, as you discussed earlier. Just to summarize your view on Brookdale's expected occupancy improvement this year, is it, in your mind, driven more by Brookdale's Company-specific sales and marketing initiatives or is it driven more by an expectation that overall market conditions may improve as the year progresses?

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

It depends. And so I think that we have operated in very different, call it, macroeconomic environment for the last several years, we see that improving. But at the same time, we have worked very hard to make successful improvements in our operating model. We've done a lot of work on our sales and marketing. We've done a lot of work on our operations. We've invested a lot of capex in our communities to make sure that they are attractive to our current and new residents. And so all of that working together will build to that 3% to 4% expected improvement in RevPAR.

Steven Valiquette -- Barclays -- Analyst

Okay. And then just a quick question on the non-development capex for this year. Just curious if you can remind us again, which project areas, categorically, you're focusing that spend in 2020? And also, are there any strict ROI hurdles that you have built in around the spend?

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

Yeah, sure, Steve. The categories are similar to the ones in 2019, where we do major building systems, and we also do renovations. And both of those are projected to decrease into 2021. As I already mentioned on the call that we expect our long term, our equilibrium to be at about $2,000 to $2,500 of capex per unit once we get through this kind of this incremental spend. As far as the returns, we do look at the returns. We do a business case on the new economics projects as we call them, that bucket. And what projects that were approved for 2019, those numbers in that business case were added to that community's budget in 2020. So not only do we look at the returns, but we also change the factors that go into the budgeting process.

Steven Valiquette -- Barclays -- Analyst

Okay. Perfect. Thanks.

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

Thank you. At this time, I don't think we have any additional questions in the queue. So I just want to thank everyone for joining us today. I think we had solid performance in Q4. We demonstrated consistent progress on the execution of our strategic plan. We've introduced guidance for 2020 that will demonstrate significant improvement in our adjusted EBITDA as well as our cash flow, and we are on target to achieve that 7% long-term NOI growth.

Thank you, and I hope to see you at our Investor Day in March.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Kathy MacDonald -- Senior Vice President, Investor Relations

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

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

Frank Morgan -- RBC Capital Markets -- Analyst

Josh Raskin -- Nephron Research -- Analyst

Jason Plagman -- Jefferies -- Analyst

Joanna Gajuk -- Bank of America -- Analyst

Tao Qiu -- Stifel -- Analyst

Steven Valiquette -- Barclays -- Analyst

More BKD analysis

All earnings call transcripts

AlphaStreet Logo