Brookdale Senior Living (NYSE:BKD) Q3 2026 Earnings Call

0:00 Hello, everyone. Thank you for joining us and welcome to the Brookdale Senior Living third quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Mike Grant, Brookdale's Vice President of Investor Relations. Mike, please go ahead.

0:28 Good morning, everyone, and thank you for joining us on Brookdale Senior Living's third quarter 2026 earnings call. Participating on today's call are Nik Stengle, Brookdale's chief executive officer, Dawn Kussow, our executive vice president and chief financial officer, and Chad White, our executive vice president, general counsel, and secretary. On today's call, we will discuss third quarter 2026 results as well as our financial guidance for the 2026 year. We'll also provide other general business updates. During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. These statements are made as of today's date, and we expressly disclaim any obligation to update these statements in the future.

1:18 Actual results and performance may differ materially from forward-looking statements. Certain of the factors that could cause actual results to differ are detailed in the earnings release we issued aftermarket yesterday, as well as in our Securities and Exchange Commission filings, including the risk factors described in our annual report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the earnings release for the full Safe Harbor Statement. Also, please note that during this call, management will discuss non-gap financial measures. For reconciliations of each non-gap measure to the most comparable gap measure, I direct you to the earnings release and to the company's quarterly supplemental financial information, which may be found at brookdaleinvestors.com and was furnished on an 8K yesterday.

2:05 With that, I'll turn the call over to our CEO, Nik Stengle.

2:09 Thanks, Mike, and thank you all for joining us today and for your interest in Brookdale. I joined Brookdale a little over a year ago because I saw the compelling opportunity of the senior living industry as it enters the early stage of a highly favorable supply-demand imbalance. Coupled with this, I saw a company with a strong reputation for providing exceptional care but with significant room for operating improvement alongside a stock that was depressed relative to its peers. In short, I joined Brookdale for the same reasons that many of you are shareholders, a compelling multi-year equity opportunity. During this past year, we have made numerous changes to Brookdale, both structurally and organizationally, and those have impacted nearly all parts of the company, the operations, the portfolio, and most importantly, the culture.

2:57 These changes have been absolutely critical to position the company to take full advantage of the industry tailwind that is behind us, and these changes are now beginning to bear fruit. That said, in any large organization, in our case an organization with over 500 communities and 28,000 employees, progress is never linear or across the board. Third quarter adjusted EBITDA met our expectations, while REVPAR growth fell short, directly reflecting slower occupancy growth. That weaker-than-expected occupancy growth during the summer selling season will negatively impact our fourth quarter and full-year performance. We now expect full-year, 2026 adjusted EBITDA of $495 to $502 million and are lowering our REVPAR growth guidance to a range of 7.4% to 7.9%.

3:52 In her remarks, Dawn will discuss the revised guidance and underlying assumptions. As we will describe in greater depth later in this call, the primary shortfall in our results during the third quarter has been on occupancy, which has created a headwind on census and revenue which, in turn, impacts our fourth quarter expectations. Our revised guidance also includes a strategic decision to increase our marketing investment in the fourth quarter as well as the revenue and expense impact of the fire at our Clinton, Mississippi community in October. From a broader perspective, we have continued to make strong progress on every element of the five-point strategy we laid out at our investor day in late January of this year. At a high level, Brookdale's five-point strategy is to, number one, improve operating performance, number two, optimize our real estate portfolio, number three, reinvest capital into our communities, number four, reduce leverage, and number five, elevate quality for residents and associates.

4:54 On the first point of improving operating performance, Brookdale's occupancy improved sequentially by 70 basis points on both a consolidated and a same community basis. While this was our sharpest improvement this year, it was lower than our internal expectations for reasons I will discuss in a moment. At the same time, we were able to drive significantly improved performance within our community occupancy bands as the number of Brookdale communities above 90% occupancy increased to 186 communities from 167 in the prior quarter and the count of communities below 70% occupancy decreased to 69 communities from 85 in the prior quarter. Concurrently, we took actions during the third quarter to bolster our labor management discipline that had steadily eroded through the COVID recovery. This effort, which was specifically focused on administrative roles, alongside our renewed emphasis on operational performance, allowed us to achieve our adjusted EBITDA expectations for the quarter. We also expanded our adjusted EBITDA margin by over 300 basis points compared to the prior year quarter.

6:02 Although the implementation of these actions was another meaningful disruption to the company, it was a critical change in order to allow us to operate each of our communities more effectively going forward and acknowledging the variability we have within our portfolio around building size, building and care types, census, and overall resident needs. Beyond the labor productivity improvements, we have made significant changes this past year across our entire company, which, while disruptive in the moment, are critical in enabling the operational pivot we have embarked on. First, we named the Chief Operating Officer, a key position for any operating company, a role that previously did not exist. We have a new Chief Sales Officer who joined us in June 2026 after having a gap in this role since February.

6:48 We also added a Senior Vice President of Strategic Operations who is squarely focused on pricing, community CapEx deployment, and labor. We realigned our entire organizational structure to create a single and clear line of enablement, empowerment, and accountability from me, through the COO, and into each of our communities. For our second strategic priority, since the start of 2025, we have exited 60 leased communities. And, starting last year and continuing into this year, our leased portfolio is solidly accretive to EBITDA and cash flow while also having annual rent escalators of 3% or less. We have also largely exited the third-party managed business and we are down to just four remaining managed communities. Concurrently, of the 42 communities we announced that we would sell, only five remain, and all are under contract with closings expected by year-end. With these remaining sales, we will have substantially completed our previously announced disposition program, concentrating Brookdale in geographies and communities where we can compete most effectively.

7:55 The other side of optimizing our real estate portfolio are the deliberate actions we have taken to increase the owned proportion of our consolidated community count. At the end of the third quarter we completed the previously announced acquisition of 17 communities that we had leased. Furthermore, we recently announced that we have entered into a definitive agreement to acquire 30 communities that we currently lease. Upon completion, we will own approximately 80% of our consolidated portfolio. Finally, we also agreed to amend a master lease to extend the term and accelerate our ability to exercise the option to acquire an additional 39 currently leased communities. Increasing ownership reduces lease expense and renewal uncertainty, increases cash flow and gives us greater participation in our community's future economic upside.

8:47 We firmly believe ownership of our communities adds long-term value to our shareholders as we own the full future cash flow generation of a community rather than splitting the gains with a lessor or REIT owner. From this base of a stronger portfolio across both owned and leased communities, we have the latitude to further assess future portfolio optimization opportunities. Brookdale's revenue-enhancing investment into our communities has also increased both in total dollar spend and, more importantly, in concentration. Brookdale's previous CAPEX approach had been tied mostly to an allocation methodology based on community size. We have changed our approach, so rather than allocating smaller amounts to all communities, enough to make modest improvements, we now concentrate our investment into communities where we see the greatest opportunity to transform and comprehensively upgrade the community. We are investing more in community CAPEX this year than previously, and you will note that third quarter community capex rose to $47 million, our highest quarterly investment level in several years, and the majority of this is designed to drive significant returns through improved revenue and adjusted EBITDA.

10:00 Finally, Brookdale continues to elevate the resident experience, which is central to the value we create as a company. We diligently assess our resident experience using a Net Promoter Score methodology, or NPS, a measure of residents' overall satisfaction. NPS has increased every year since 2022, and NPS continued to increase through the end of the third quarter of 2026 versus the same period of 2025. So, even as we made significant and temporarily disruptive changes to our business, we continue delivering an outstanding resident experience. The metrics and changes I have just shared are proof points of the progress we are making as a team, as well as the scope and pace of change here at Brookdale. Compared to where we were a year ago, the changes are profound and we are a better company because of these changes. Now I want to return to occupancy.

10:53 Occupancy growth remains our greatest operating challenge and the primary reason for our lower full-year outlook. Brookdale's occupancy growth in July and August improved from earlier in the year, but that growth decelerated in September and fell short of our expectation for the quarter. During the quarter, our move-ins were higher than in the prior year on a same community basis, but still fell short of our expectations associated with the summer selling season. Concurrently, third quarter move outs, including for mortality and other reasons, were slightly higher than both our expectation and our run rate from earlier in the year. There are several factors at work. Some are Brookdale specific and others may relate to the overall macro environment. The many changes we have implemented this year to Brookdale's operations structure, including in sales, have undoubtedly caused disruption.

11:46 And that disruption has impacted our occupancy performance. Those substantive changes are nearly complete. We now have the right portfolio of communities with the right leaders and organizational structure in place. Lead volume during the quarter was below where it needed to be, particularly during the key selling months of August and September. Our sales leads come from multiple channels, both internal and external. During the COVID pandemic years, Brookdale's internal lead generation muscle atrophied as we became more dependent on external sources. Recently, and in relation to the shift from traditional web search to AI-powered search, the lead volume from external sources has declined across the industry, a change that impacts Brookdale more heavily given the weight of external sources within our lead mix.

12:33 Conversely, internal leads coming direct to our call center and communities are steadily increasing as we benefit from the AI transition and our own deliberate and renewed strategic focus on internal lead generation that has been launched by Margaret Cabell, our new Chief Sales Officer. Under her leadership, we are rebuilding our internal lead generation muscle. Thank you for joining us. In the near term, we have recently taken action to modestly increase our marketing investment in order to drive additional internal lead volume in the fourth quarter.

13:30 Longer term, we are excited for this transition as internally sourced leads have higher conversion rates, lower customer acquisition costs, and typically longer lengths of stay. Even while our lead volume has been strained, one very meaningful silver lining in sales performance is that our third quarter lead to move-in conversion rate was near a record high level as compared to performance over the past few years and significantly ahead of industry conversion benchmarks. This success is directly attributed to our improved sales leadership and operating structure. While we are not pleased with our occupancy, our 70 basis point sequential improvement in same community occupancy during the third quarter exceeded that of the overall industry, as measured by the National Investment Center for Seniors Housing and Care, or NIC.

14:20 These slowing occupancy growth trends from NIC and some of our peers may suggest that other temporary macro effects are impacting lead volume within the broader senior living industry. but the reality is that we own our lead generation. After many months of near constant change across all facets of our company, we are now structured to make occupancy our clear number one operational focus for everyone with minimal distraction. In short, our third quarter performance achieved most of our internal goals specifically around our five strategic objectives, but fell short of expectations on occupancy growth, which impacts guidance for the fourth quarter and for the year. Through this year we have made meaningful progress in strengthening Brookdale and our focus is now on translating this organizational strength into more consistent occupancy growth, which will drive even stronger adjusted EBITDA and cash flow growth in the quarters and years to come. Despite some near-term headwinds, we believe Brookdale is now a stronger, and many more.

15:39 Thank you, Nick. In my prepared remarks, I'll review four key topics. Brookdale's third quarter financial results, recent balance sheet improvements, progress we're making on our portfolio optimization initiatives, and our revised outlook for 2026. Let's first look at our financial performance during the quarter. Adjusted EBITDA for the third quarter was $124.3 million, up 12% versus the prior year quarters and in line with our suggested pacing of low double-digit growth. REV PAR for the quarter increased 7.5% over the prior year, which is less than the approximate 8.2% level we anticipated for the quarter. RevPoor year-over-year growth, on the same community basis, accelerated over the first half of the year.

16:30 On the same community basis, labor as a percentage of revenue improved 120 basis points year-over-year, reflecting the actions we took during the quarter to bolster productivity. and same community operating income growth accelerated to 7.4% year over year. As Nick described, occupancy increased 70 basis points sequentially, but fell short of our expectations during the third quarter. Traditionally, our peak summer selling season. On a consolidated basis, occupancy increased 130 basis points year-over-year to 83.1%. On a same community basis, occupancy grew 50 basis points over last year to 83.6%.

17:16 Also impacting our REVPAR year-over-year growth compared to expectations was timing around our expected dispositions and a higher level of incentive programs in the quarter. As we reported in our earnings release this morning, occupancy growth remained subdued in October. For October, consolidated occupancy was 83.5% and same community occupancy was 83.9%, representing a monthly sequential growth rate of 10 basis points, both on a same community and consolidated basis. Based on current occupancy trends, we now expect full-year consolidated occupancy to come in below 83%. I'll circle back to guidance later in my remarks.

18:03 Brookdale resident fees for the third quarter were $707 million, a decline of 8.7% from the third quarter of 2025. The year-over-year revenue decline reflected a 15.3% reduction in consolidated average units driven by our portfolio optimization activities, partially offset by a 7.5% increase in rev par. On a same community basis, which excludes the impact of changes in our portfolio, REVPAR increased 5.4%. Third quarter revenue per occupied unit, or REVPOR, improved 5.8% versus last year on a consolidated basis and 4.8% on a same community basis. Improved REVPOR reflects the strong in-place rate increase we took in January of this year, as well as tighter pricing discipline in the ensuing quarters, Sequentially, third quarter REVPOR improved five basis points on a consolidated basis, but weakened by 20 basis points on the same community basis, driven by incentive programs we implemented in September to help drive additional move-in activity. As anticipated, our consolidated REVPOR year-over-year growth accelerated sequentially, and occupancy and REVPOR are both running positive compared with last year.

19:27 However, we do not expect to achieve the 8-9% REVPAR growth we had originally anticipated for 2026, mainly due to our lower occupancy achievement. Now, let's turn to expenses, where we saw improvement in the quarter. On a consolidated basis, third quarter expense per occupied unit, or ex-poor, increased 2.9% over the third quarter of 2025, resulting in a positive rev-poor over ex-poor spread of 290 basis points. On a same community basis, ex-poor increased 3.9%, generating a 90 basis point positive rev-poor, ex-poor spread. On a same community basis, our operating margin for the quarter was 29.2%, an improvement of 50 basis points over the prior year.

20:16 Same community labor expense performed favorably as our labor as a percentage of revenue improved 120 basis points year over year. As Nick mentioned, during the third quarter, we took actions to bolster our labor management discipline, specifically in administrative roles, and these labor productivity improvements are beginning to be visible in our results. For the fourth quarter, we expect to realize more year-over-year improvement to labor as a percentage of senior housing revenue, as the impact of these actions will benefit the full quarter. Notably, these labor productivity improvements will be a tailwind for 2027, as they only have a partial year impact in 2026. We expect our fourth quarter labor as a percentage of revenue to slightly improve from the third quarter level, and we would generally expect that percentage to hold steady or improve in 2027 with further rate and occupancy growth.

21:13 Against that, the increase in other facility operating expenses on a same community basis, although slightly improved from the second quarter, remained elevated in the third quarter and increased 70 basis points as a percent of revenue from the third quarter of last year. A number of different expenses are grouped together in other facility operating expenses, and for some, like marketing and repairs and maintenance, the level of spending is within our control, while others, like utilities, insurance, and property taxes, are not as directly in our control. We're making progress on managing our other facility operating expense and anticipate slightly less of a headwind in the fourth quarter, Followed by more meaningful improvement in 2027. Other facility operating expense increased 9% year over year in the second quarter and 8% year over year in the third quarter.

22:06 We expect that improving trend to continue into the fourth quarter and we anticipate a reversion to the longer term mean Starting next year. This year, we've seen an overage from a few specific areas which we have been intensely focused on. Repairs and maintenance and ongoing costs stemming from the ERP implementation. First, repairs and maintenance or R&M. R&M expense was elevated in the third quarter, but somewhat improved versus the second quarter. During the quarter, we began to drive changes in capital decision-making, essentially whether to repair or to replace, down to the district and community levels. In recent years, communities have emphasized repairs, whereas today we are taking a more proactive approach to emphasize the longer-term cost-benefit analysis of replacement instead of repair. We believe several million dollars of annual R&M expense could be reduced through our tightened capital decision-making process.

23:04 Second, we've experienced ongoing costs stemming from the 2025 ERP implementation. We've incurred elevated consulting and operating costs as we continue to improve the system's efficiency and manage the transition to the new platform. We expect this period of elevated implementation-related expenses to end by early 2027. General and administrative expense, excluding non-cash stock-based compensation expense, and transaction, legal, and organizational restructuring costs declined 15% year-over-year to $36.6 million for the third quarter. The G&A expense reduction for the third quarter results in part from the actions we took in the second quarter to scale our G&A cost base to reflect both disposition activity and the reduction of our managed community portfolio.

23:56 We now expect our full year G&A cost to be approximately $154 million. Cash facility operating lease payments during the third quarter of 2026 were $43.2 million, down $13.4 million year-over-year, primarily due to the Ventas lease dispositions, which occurred in the second half of last year, coupled with the contractual step-up on lease payments on the retained Ventas leases. We also received a modest initial benefit from our recently completed acquisition of 17 previously leased communities. Now let's turn to the balance sheet. During the third quarter, our adjusted annualized leverage improved to 8.3 times from annualized leverage of 8.4 times at mid-year.

24:42 Total liquidity declined slightly to $524 million as of September 30, 2026, down from $566 million at the end of last quarter, reflecting lower cash balances resulting from the net of cash used for acquisitions and sourced from dispositions proceeds. At the end of the third quarter, we obtained $108 million of debt secured by first priority mortgages on the 17 previously leased communities that we acquired. The loan bears interest at a variable rate and has an initial five-year term and two one-year extension options. Additionally, in July, we obtained $249 million of fixed rate debt secured by non-recourse first mortgages on 45 communities, which effectively refinanced $244 million of existing debt. As a result, Brookdale has no mortgage debt maturities until 2028.

25:40 Next, I want to discuss our continued portfolio optimization progress. During the quarter, we continue to execute on our capital recycling strategy, which includes the disposition of non-strategic or underperforming owned and leased communities. As a reminder, we entered 2026 with the expectation of selling 29 communities comprising approximately 2,400 units this year. Through September 30, 2026, we have sold 23 owned communities comprising 1,767 units for proceeds of $169 million net of transaction costs. And we also exited two leased communities with 152 units. Since the end of the quarter, we've continued to close transactions, and as of November 6, we have closed on the sale of an additional one community with 197 units for net proceeds of $10 million. Today, just five of the planned 29 communities identified for disposition remain, and those are all under contracts, expected to close by year-end. These sales will bring our previously announced disposition program to completion.

26:52 In total, we expect proceeds for 2026 community dispositions, including completed transactions, to generate net proceeds of approximately $190 million. In addition to our disposition activities during the quarter, we also continue taking steps to increase the own proportion of our portfolio. As a reminder, as recently as 2017, Brookdale owned only 49% of its consolidated units. Following the transactions I will highlight, we expect to own about 80% of our consolidated units. At the end of the third quarter, we completed the acquisition of 17 communities that were previously leased by the company for a purchase price of $160 million, including the transaction costs. We funded this acquisition through proceeds from non-recourse mortgage financings and cash on hand.

27:46 After the quarter, we entered into a definitive agreement to acquire 30 communities that we currently lease for a purchase price of $290 million. We expect to complete the acquisition in the fourth quarter of 2026 and expect to fund it through proceeds from non-recourse mortgage financing and cash on hand. The 2027 annual triple net lease cash rent for these 30 communities would have been approximately $18 million. The communities are subject to an existing lease that expires in 2032. Contingent upon the close of that 30 community acquisition, we also entered into a four-year lease extension for an existing 39 community lease through June 2036.

28:32 Notably, via the lease amendment, the lease's existing fair market value purchase option would become exercisable at any time at our election, rather than only in connection with the lease's maturity, subject to a floor of 6.5% yield on in-place rent. We believe these acquisitions are priced significantly below replacement cost, and we expect them to improve our immediate and longer-term adjusted EBITDA and cash flow. Let's turn to our financial outlook for the remainder of 2026. We now expect full-year adjusted EBITDA of $495 to $502 million and full-year consolidated REV PAR year-over-year growth of 7.4% to 7.9%.

29:18 On a consolidated basis, this implies fourth-quarter REV PAR growth in the high 6% range. Factors included in this assumption are that occupancy growth remains muted during the fourth quarter, and the impact of the remaining dispositions will be minimal. Adjusted EBITDA of $495 to $502 million implies a low double-digit to mid-teen year-over-year growth rate for the fourth quarter. Included in this assumption is the aforementioned REV PAR growth, Continued labor expense improvement, including the full quarter realization of our labor actions taken in the mid-third quarter Slightly elevated other facility operating expenses, though we expect to see continued improvement in repairs and maintenance in other areas General and administrative expense for the full year of approximately $154 million dollars cash facility operating lease payments of $172 million for the full year and approximately $7 million of management fees for the full year.

30:24 Please note that the updated guidance includes our current estimates of the fourth quarter revenue and expense impact of the recent fire at our 97-unit Clinton, Mississippi community, which is currently vacant, though those estimates are subject to change as we continue to evaluate operational plans for that community. Now to close out our prepared remarks. Third quarter adjusted EBITDA met our expectations, but occupancy and REVPAR growth fell short. Our fourth quarter outlook carries that lower occupancy forward, which is reflected in our guidance range, as well as the impact of the modestly increased digital marketing investment to help further drive additional occupancy improvement. As well as the impact of the recent fire at our Clinton community.

31:12 As we look ahead to 2027, I want to reiterate a few points I made earlier. First, the labor productivity actions taken mid-quarter will provide a tailwind to 2027. Secondly, other facility operating expenses year-over-year growth has been high this year due to a number of resolvable short-term factors, and we would expect a reversion to the historical mean over the next year. Finally, other 2026 activities, including the purchase of previously leased communities and reductions in G&A, will also benefit growth in 2027. For these reasons, and to reiterate what Nick said earlier, we remain confident in our ability to create durable mid-teens adjusted EBITDA growth in 2027 and beyond. Operator, we will now open the call for questions.

32:08 We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question from the line of Brian Tanqueat from Jefferies. Brian, your line is open. Please go ahead.

32:44 Hey, good morning, and sorry to hear about the facility that burned down, but also thank you for adjusting the guidance as most people had expected. So maybe with that in mind, Nick, I'll start first by asking on occupancy. I appreciate all the color that you shared. It's hard to think about it. Given the trend that we've seen all year where it's been relatively softer, softer than you had expected, how do we think about number one, the occupancy path or cadence into next year? And then the other maybe more fundamental question of this is why do you think that is? I mean, is this structural in terms of the assets or is this more just industry?

33:29 or is there anything you can do lever-wise pulling levers to drive occupancy acceleration? Thanks.

33:36 Hey, good morning, Brian. Thanks for the question and appreciate the kind words. Yeah, so for sure, as we mentioned both Dawn and I in the prepared remarks, Q3 definitely came below expectations when it came to occupancy growth, specifically in light of kind of the peak summer selling season. But as you mentioned, it's been kind of touch and go even prior to that, you know, some great months and then some softer months. and I think there are two things really going on here and one you know for sure very internal and we want to own that because we also own the solution but we have gone through a lot of changes. We have not had a Chief Sales Officer from basically the month of February through June. New Chief Sales Officer came in and has already been implementing a lot of changes but change is disruptive even if you feel it is the right decision and we definitely feel it is the right decision.

34:26 concurrently, I think there is, it'd be hard pressed not to say that there's some macro economic, you know, drag that potentially is impacting people making life changing decisions, whether they're going to move into senior living or not. And as you can imagine, when you're contemplating those choices, and you're seeing, you know, 30-year fixed mortgage rates of over 7%, and you're seeing $6, $7 gas depending on where you live. Those types of things do create a drag. Now, the good thing in our industry is we are in the needs-based side of the equation, potentially deferring the decision to go to senior living, but the alternatives are not any better. So if anything, there could be some pent-up demand that will slowly unlock as these overall macroeconomic environmental things started going further behind us.

35:16 The other part of this is, and again, I mentioned this, but I'm happy that you asked the question so we can talk about even more detail. As a company, Brookdale specifically, we over the last several years have steadily had to rely on external sources for our lead generation. Now, the majority of our leads do come from internal sources. So I want to be clear, it's not a massive number, but a meaningful minority do come from external sources. And really, I'm describing all the third-party aggregators that exist out there. And it's very obvious that their business model has been upended a little bit and they've been pretty vocal about it as well within our trade publications that AI has changed consumer behavior and the strength that they had with their marketing spend has been truly diluted.

36:04 And unfortunately, it's showing up Overall in the overall industry. So leads coming from external sources in general are down this year. They were also down last year and that trend continues. And for us, again, unfortunately, over index. And now the good thing is we've fully acknowledged it. And we're leaning in with Margaret Cabell as our chief sales officer to really push hard in changing behaviors within our communities, changing our own behaviors to drive those internal leads. In fact, part of our guide down for Q4 is this idea that we're going to spend a bit more money on marketing to continue nurturing these internal leads, which we have to do. And by the way, it's a better lead. So overall, I think this year has been kind of defined by some internal, all the changes we've gone through has been defined by a macro external environment.

36:57 But if anything, it strengthens who we are today to set us up for the remainder of the year and going into 2027.

37:03 I appreciate that. Maybe I'll use that, Nick, as a segue to my second question, which is, as we think about increased marketing expenses, I know you said probably temporary here and also on the other side of that, the labor adjustments that you guys have made. I mean, investors are asking us the question in terms of the sustainability of the labor spending levels as we look into next year and maybe the carryover impact of that marketing expense adjustment. You know, just how do we think about these expense levels?

37:35 Thanks. Yeah, let me tackle the labor side of it and then Dawn will probably chime in on the marketing. So for the labor, we implemented kind of a re- bolstering a re-disciplined approach to our existing approach with our staffing model and our labor management. And again, I sort of alluded to this, but I'm glad we're talking about it in more detail here. Through COVID, so coming out of 2020, we had allowed that discipline to erode ever so slightly year after year after year. and so in effect became kind of the new norm. In some ways for us, you know, COVID kind of never ended and never, there was no definitive line to say, look, our staffing model now needs to reflect what life was like before COVID. And we, because of the strength of our new operating structure, because of the strength of our operational team, we have the structure, we have the fortitude, we have the wherewithal to first identify and then do second, do something about it.

38:32 And we very, Deliberately adjusted our labor and it is enduring, it is sustainable and it is going to be kind of the way forward starting in Q3 into Q4 and into next year. And really it's just this idea that we have a fixed, mostly fixed cost We set that fixed cost base specifically around administrative roles. That's where a lot of that lack of discipline had grown. So that's a long way me saying, Brian, this is an enduring kind of way forward as opposed to a one-off thing that we will allow to erode again, again, because of the team we have and the focus that we have.

39:16 Brian, a couple of comments around our marketing expense. But first, I'll point you to our supplemental slide eight. We did add some bar graphs in that slide that really kind of showed or the charts in that slide that show where our labor costs were, where other expenses were. And you can really kind of see, as I said in my prepared remarks, that we're seeing a higher other expense, but you can see that improvement in the labor most notably in that table and that was added this quarter. As it relates to your question around our marketing expense, what I would say is it is really a nominal dollar amount to the year overall. It is impactful to the quarter as we thought about the occupancy miss, In relation to our guide, we also said in our prepared remarks that the fire at our Clinton facility impacted our guide. And then these marketing expenses kind of on top of that all coupled together is the impact to our guide, most notably the occupancy.

40:22 But I wouldn't expect our marketing costs are not the largest dollar amount on our expense base. So as we're increasing that more moderately, I wouldn't think about that coming into and impacting 2027 significantly, but we'll add more color when we give our 2027 guide next call.

40:42 Let me add one more comment. A lot of kind of going back to this idea of external versus internal generated leads. Some of it does come from marketing to do that shift that we are on. And by the way, we had a remarkably strong internal lead generation performance this year, unfortunately, did not offset fully the external drop. But a lot of it is not more spend. It's more just changing behaviors and expectations of our sales force within communities. So it's more of a go out there and actively nurture and build relationships and build those leads. There's no incremental dollars associated with that. And really, it's just a behavior change from being a bit more passive, waiting for the lead to come to you from an external source but rather go build your lead and generate more internal leads, which again, no incremental costs other than a behavior change, a change in expectation of our Salesforce and really our entire, all our community leaders.

41:43 All right, thank you guys. Your next question from the line of Andrew Mock with Barclays. Andrew, your line is open. Please go ahead.

41:56 Hi, good morning. There's a few moving pieces in the updated guidance. Can you walk us through the $10.5 million reduction at the midpoint, including the impact on the Mississippi buyer, continuing performance, as well as the offset you're assuming from the 4Q transactions? Thanks.

42:12 Yes, Andrew, absolutely. We brought down our guide mainly due to the pull-through of the third quarter occupancy. That is the largest piece of the guide bring-down. The fire impacted our occupancy. It wasn't meaningful for the full year, but it is a few million dollars in the fourth quarter. And that few million dollars is inclusive of the fact that we had a 97 unit AL memory care that was highly occupied and well performing. And so the NOI that will come out of our fourth quarter, as well as our current view on the insurance expense related to that fire, Now I will say that we're, you know, we are adequately insured, but we do have things like self-insured retention that we're thinking about.

43:02 And so that's going to be a few million dollars and then the additional marketing spend. But really, I'll point back to the most impactful is the occupancy and the fact that we didn't grow our occupancy as well as we had expected during the peak summer selling season.

43:23 Got it. That's helpful. And then you called out some of the macro and affordability concerns potentially impacting your softer occupancy results. How does that influence your pricing strategy for next year? Do you need to reconsider pricing and contemplate lower increases in response to that environment? Thanks.

43:40 Yeah, good question, Andrew. So the short answer is no. We feel very strongly that our pricing power In fact, if anything, maybe a little bit stronger this year than it was last year. Now, we will be monitoring. We are in the process of figuring that out. But the reality is the environment, the overall environment is improving steadily. So we are anticipating another meaningful in-place rate increase. And we'll talk through more details when we have our next call. and again let me in fact let me say one more point uh we and hopefully it shows you can see it in our rev pour numbers 5.8 percent up year over year in the third quarter uh we we are continuing this very strong and deliberate focus on threading the needle and it's not an either or It's an and conversation where we're concurrently driving occupancy and concurrently driving rate and in effect taking a bifurcated approach between our lower occupied communities and our higher occupied communities, the pricing decisions we make.

44:46 and as I shared and shows up in our numbers, the number of communities that are more highly occupied increasing, the number of communities that are more lowly occupied decreasing. So, in effect, that also helps inform what type of in-place rate increase we can achieve as we thread the needle to truly drive REF PAR at the end of the day, but balancing both rates and occupancy.

45:10 Great. Thank you. Your next question from the line of Raj Kumar with Stevens. Raj, your line is open. Please go ahead.

45:21 Hi, good morning. Maybe just kind of on the occupancy commentary, you know, you called out the increasing number of over 90% occupied communities and same for the, you know, coming from the lower 70% occupancy band as well. So as I kind of think about, you know, your expectations at the onset of the year, I guess is the is the weakness across all three occupancy bands or is it more so on the lower and just any additional color that would be helpful?

45:52 Raj, it's more weakness on the pacing of the growth. I mean, in isolation, third quarter occupancy growth, was fine. I'll use that word. It was 70 basis points sequentially, actually even a slight beat to the overall market, and we look at our peers' results very closely. Missed against some peers, did very well against other peers. So overall, you know, a fine quarter and it showed up in our more highly occupied buildings. So we continue to grow it. I think we're up to greater than a third or over 90% occupied. We continue decreasing our more lowly occupied. We're down to 69. I think it was 84, 85 the prior quarter. It was like at 147 a year and a half ago back at the beginning of 2025.

46:39 So that improvement, that momentum is real. It's just third quarter came short of our expectations. We were expecting the summer selling season to be just far stronger than what we actually performed for all the reasons that I described.

46:56 Got it. And then as I kind of think about your investment strategy and CapEx strategy, I think you've kind of highlighted, you know, more emphasis on, you know, maybe common area investments rather than the entire building all at once to kind of drive, you know, a near-term ROI. that can give some immediate boost. But as I kind of think about that pipeline, just any kind of thinking around 2027 and kind of in terms of the target number of buildings and overall spend would be helpful.

47:33 Yeah, so we, and again, a bit premature to be talking about 2027 numbers specifically, but in general, we like our CapEx pacing, the spend that we've deployed and the results of that spend. Again, it's under a new strategy that is quite different from how it's been done in the past. And a lot of it is led by a new focus with a specific leader, our new Clark Jones, our new Senior Vice President of Strategic Operations that is leading the team where we have a prioritized list. and no surprise, it's rank ordered by return expectations with a very specific pro forma. So we feel good about the pace, in fact, that we even highlighted. We spent $47 million, I believe I got that number correct, in the third quarter, which is meaningfully higher than last year and meaningfully higher than the run weight. But we will still be within kind of the expectation that we laid out several months ago. And I would expect 2027 to look similar again.

48:30 We'll provide more specifics. on what that looks like as we look at the opportunities and as we look at our rank order prioritization of where we can get the real value with CapEx, but we're definitely seeing it. Thank you. Your next question from the line of Joanna Gajuk with Bank of America. Joanna, your line is open. Please go ahead.

48:57 Good morning. Thanks so much for taking the question. So if I may, I guess on this part of the question around the occupancy bands, and as you indicated, you are able to continue to move more assets into this 90-plus occupancy band, so that's good. As this happens, as you move further into this sort of 90-plus occupancy range, What are you saying in terms of street rates and move-in rates and how we should think about this translating into restful growth into, you know, next year versus, you know, what the growth was this year?

49:36 Yeah, thanks for the question, Yana. Fundamentally, our strategy, in fact, if anything, we're even feeling stronger about our strategy around driving REF PAR with a very finely tuned, balanced approach between occupancy and rate. And the in-place rate increases are very much a big part of that. And again, I sort of alluded to it in an earlier question, where we feel just as strongly at this moment as we're contemplating what we're going to do on January 1st as we did last year. In fact, if anything, the overall environment, again, the overall occupancy of our industry, of our own and many more. We will always talk about the one headline number, and even though we won't give the specific number, we'll often give it the range.

50:31 The reality is where we're more highly occupied, we do drive a higher rate increase, both in-place rate increase, and then even market rate increases. New move-ins replace move-outs. We can drive a higher rate for that move-in as compared to the move-out, specifically around the base rate of the room itself. Conversely, when we're more lowly occupied, we will continue driving discount because we want to achieve the overall REF PAR and get the occupancy moving in those more lowly occupied bands, as we have shown that we can do and have been doing steadily over the last several quarters in a row. So I guess we'll provide more details kind of on the overall number next time we chat. But I will tell you from our position as it stands right now, we feel really good about the overall pricing power that our industry has.

51:21 So it's very much a Brookdale thing, but it's also an industry thing.

51:27 Thank you. And I guess the other piece of that equation, right, is the occupancy. Like you said, in terms of just sort of how we should think about the potential for occupancy growth going forward, maybe without pointing to specific years, you're not providing 27 guidance, but sort of how we should think about your ability to grow occupancy on average per year for the next couple of years. Thank you.

51:53 Yeah, I'm glad you're not asking for a specific number because it would be hard to share one. So 2025 was a great year. 2026 was a slightly softer year. Oh, by the way, 2026, a lot of internal changes. And again, I've spent a lot of time on calls like this. sharing all the disruption, all the changes. But we now feel we have the table set. We have the right people in place for sure on the sales side, for sure on the operations side, for sure organizationally. We feel we have the right strategy in place. And I didn't mention this, our conversion rate from lead to move-in is as high as it's ever been. And that's the real litmus test on whether someone values your product. Are you priced correctly?

52:40 And do they like the product? That's how you measure whether you're successful with that decision or not. And we're at the highest conversion rate in effect we've ever had, at least in recent history, as far as back as we're monitoring numbers. So if anything, I feel even more strongly about our sales engine and being able to drive what we need. The big question mark and where we're leaning into is how do we continue filling in The shortage of externally generated leads because I'm not so sure that will ever recover back to historic norms. It should stabilize. So now we just need to fill in again. I'll keep alluding to the fact that we have always been a bit overweight than our peers. Even though the majority do come from internal. So as I think of kind of the trajectory of occupancy growth, I feel very good about it. It should be stronger than this year.

53:36 Again, we had one of our better years in 2025. So somewhere in between those two marks, again, just trying to be way over generalized here.

53:44 No, I appreciate it. Thank you so much. Your final question from the line of Ben Hendricks with RBC Capital Markets. Ben, your line is open. Please go ahead.

53:57 Great. Thank you very much. And I'll start by echoing the condolences for the Mississippi community. Then I just wanted to ask about the record lead conversion, encouraging commentary there to follow up on the end of the last question there. Can you kind of parse out how that conversion rate was Is that even across the internally and the externally generated leads? And I'm wondering if, I ask because if we're carrying forward this softer occupancy into fourth quarter, would that imply that any execution on this increased marketing spend and external lead generation might largely be upside to your current outlook for 26th?

54:45 Thanks.

54:47 Yeah, great question, Ben. I appreciate the kind words. So when we talk conversion yields, really we're looking at two specific benchmarks. One is overall lead to move in. and then we're also looking very focused at visit to move in because the visit to move in, as I mentioned earlier, really ties to the overall pricing, how well the sales execution, the product we have. In other words, someone has walked into your community and they make the choice or not to move in. There's a lot that you control within the four walls of the community. As far as the actual conversion rates, we very closely monitor, as you can probably well imagine, what those conversion rates look like depending on the source and it should be no surprise internally generated leads convert more highly.

55:32 They convert more highly to a visit, more highly from visit to move in. You just have a higher quality lead when you generate that lead yourself as compared to externally generated where they come to you, much lower conversion rate. So again, part of that mixed shift is to get more internal that convert more highly. Marketing is part of that. and the marketing spend we've been alluding to, but it's also just a lot more activity. So to pre-say that we're gonna have an upside, I think our guide is very appropriate based on the shift that we've seen. The upside is how can we continue changing that behavior, continue changing that mix of our internal, more internal, less external over the next several quarters as we close out this year and enter 2027.

56:21 Yeah, I appreciate that. And just on that last point, you noted a lot of effort to accelerate your community outreach with various community referral sources. Any milestones there, any big hires you need to do to kind of get that infrastructure in place? We can think about those in that internal lead generation infrastructure ramping over the next couple of quarters in terms of a timeline. Thanks.

56:47 Yeah, so no new hires. I mean, we have a sales force of 500-plus individuals that reside within the communities. We have a very nice oversight leadership structure of sales professionals. So if anything, it's more about, again, Ben, it's kind of a cultural shift. It's a paradigm shift where we had grown as a company, and again, as an industry, I'd argue, maybe a bit too accustomed to allowing third-party referrals to help feed our lead pipeline. And again, I've said that they've been a little upended and unfortunately over indexed in this. So if anything, again, it's just a behavior change. It's a lot of training. It's a lot of engagement. It's a lot of visits with leaders alongside these salespeople.

57:34 But as far as investment, it's more about the people and the time. and changing expectation that it is any silver bullet. We're hiring someone that can change all this. It's really focused on what happens in this hyper-local environment that is senior living.

57:51 Thank you very much.

57:53 Thanks, Ben. There are no further questions at this time. I will now turn the call back to CEO Nik Stengle for closing remarks.

58:04 Thanks, Kendra. As I typically do on calls like this, and I've done over the last few quarters, I do want to thank all of our associates and all of our partners for bringing our mission, the Brookdale mission, to life every single day as we enrich the lives of those we serve. I will tell you, this sentiment is especially meaningful to me and to our company today. I'm grateful for the entire Clinton, Mississippi community. And by community, more than just the Brookdale community, truly the town, the city of Clinton, Mississippi. the first responders, the Good Samaritans who chose to be more than just bystanders, the local churches and the countless other organizations and truly our own associates. I'm thankful for that immediate response. And just importantly, I'm thankful for the continued support for Brookdale and all our residents.

58:51 And I want to thank you. With that, Kendra, we can close the call. This concludes today's call. Thank you for attending. You may now disconnect.