Brookdale Senior Living Inc. (BKD) Q2 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Brookdale Senior Living Second Quarter 2026 Earnings Call. Operator instructions were provided. I will now hand the conference over to Mike Grant, Brookdale's Vice President of Investor Relations. Mike, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Brookdale Senior Living's Second Quarter 2026 Earnings Call. Participating on today's call are Nick 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 second 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. 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 after market 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-GAAP financial measures. For reconciliations of each non-GAAP measure to the most comparable GAAP 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 8-K yesterday. With that, it is my pleasure to turn the call over to our CEO, Nick Stengle.

Thank you, Mike, and good morning, everyone. Thank you for joining us on this morning's call and for your interest in Brookdale Senior Living. The actions we have taken so far through the first half of 2026 and our second quarter results are aligned with our multi-year projection of, first, achieving annual mid-teen adjusted EBITDA growth over the next several years; and second, deleveraging our balance sheet to a less than 6x leverage ratio by the end of 2028. We also remain on-track to deliver on our 2026 annual guidance of 8% to 9% RevPAR growth and adjusted EBITDA in the range of $502 million to $516 million. Our results and recent actions also directly reflect and support the 5-point strategy we have discussed in previous earnings calls, and the Investor Day we hosted in late January 2026. As a reminder, this 5-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. I would like to take a moment and describe our recent progress on the first 3 points. On point number one, improved operating performance. Our consolidated RevPAR for the second quarter increased 8.2% over the prior year, which is in line with the anticipated quarterly pacing we discussed last quarter. This meets our 8% to 9% full year 2026 RevPAR growth guidance, and we continue to expect an accelerated rate of growth for the second half of this year. Breaking apart the components of RevPAR, our second quarter RevPOR, revenue per occupied room or pricing remains strong. Our second quarter consolidated RevPOR increased 5.2% over last year. As a reminder, we took high single-digit pricing at the start of this year, and we are now beginning to lap the price concessions taken last year. On the occupancy side of the equation, second quarter consolidated occupancy landed at 82.4%, up 230 basis points year-over-year and a 30 basis point sequential improvement from the first quarter of 2026. Candidly, our occupancy growth thus far in 2026 has not inflected as quickly as anticipated. But with our new operating structure and team in place, as well as the actions we have taken, we see underlying improvement that is beginning to bear fruit, as shown through our July occupancy results, which I will cover in a minute. Additionally, given where occupancy stands through mid-year, we have taken steps to ensure that our cost base is scaling in line with our occupancy levels. During the second quarter, we continue to realize improvement within our occupancy bands. We saw a strong expansion in the number of our communities in our top occupancy band, those with greater than 95% occupancy, which now number 99, an increase of 16 communities since the prior quarter. We experienced some improvement in our lower occupied bands, but we recognize the pace of that improvement is not sufficient. Total communities under 80% occupied improved to 211 in the second quarter from 219 in the first quarter. Year-over-year, we had stronger improvement as 281 communities were below 80% in the second quarter of last year. We are taking targeted actions to drive accelerated improvement in those levels through the second half of the year. We are now entering the heart of the summer selling season, and our initiatives are taking hold. As referenced earlier, July occupancy marked a strong acceleration, up 30 basis points sequentially on a same community basis and up 20 basis points sequentially on a consolidated basis. Our month-end occupancy results were also strong, up 30 basis points sequentially for same community and up 40 basis points sequentially for consolidated. This improvement represents our 57th consecutive month of year-over-year occupancy growth. While we are encouraged by the pace of our move-ins and overall occupancy over the last 2 months, we recognize that we can do much more and as a result, are taking further actions to drive improvement. To that end, a key action in the past quarter was the hiring of Margaret Cabell as our new Chief Sales Officer, filling the vacancy we have had in this role since the first quarter of this year. I'm really excited about adding Margaret to our executive leadership team. She brings over 25 years of senior housing experience. While most of this experience has been in sales leadership, she also has meaningful operational and P&L ownership experience, which bolsters our new organizational structure that fully aligns operations with sales. Most recently, she served as Chief Community Relations Officer and Head of Sales for A Place for Mom, which, as many of you know, is the leading senior care referral service in the United States. In the short period Margaret has been with us, we are already seeing measurable changes in key sales leading indicators to include conversion ratios, sales yields, and improvements across our referral channels. These improvements can be directly attributed to changes in our sales strategy, specific actions we are taking within each community and an overall reaffirmation of expectations across our entire organization. Expense management is the other broad component of our operations optimization strategy. As most in the audience know, labor is our single largest expense. On a same community basis, our labor expense declined to 45.2% of revenue from 46.1% in the second quarter of last year. This improvement was a direct result of heightened vigilance and operational focus at all levels of the organization. In fact, we now see additional opportunities to improve labor productivity in the second half of this year. So we would anticipate increased operational leverage over this significant expense driver looking forward. I would also like to take a moment and discuss strategic objectives #2 and #3, which are our portfolio optimization and capital deployment strategy. As we discussed at our Investor Day, Brookdale is now positioned to take a more offensive posture as it relates to deployment of capital given the positive industry environment and Brookdale's significantly improved financial health. Looking at uses of capital, our North Star is to make acquisitions and to invest in projects that bring our shareholders high returns and that correspond to our portfolio strategy, which is to stay within our existing product types and our geographic market footprint. I'll provide more color on both our community reinvestment as well as recent acquisition activity. During 2026, we are increasing reinvestment in our existing communities through a program we call First Impressions. First Impressions projects are significant targeted CapEx investments with a focus on upgrades to community common spaces, including improved flooring, updated lighting, new furniture, and repositioning various areas to be more active and engaging to residents. These upgrades improve visitors' first impressions, hence the name of our First Impressions projects, and help drive occupancy through higher tour to move-in conversion ratios. These investments also support higher in-place rate increases and decrease future repairs and maintenance expenses. Overall, we see high ROI paybacks on such projects, and we have described 3 recent representative community reinvestment examples in our investor deck on Slide 19. We expect our First Impressions reinvestment to become even more prominent starting in the third quarter of this year and investment in the second half of 2026 will be roughly double our first half pace. Overall, for 2026, we anticipate completing around 30 First Impressions projects with budgets of greater than $250,000. The average spend on our significant First Impressions projects is roughly $500,000 to $600,000. Aligned with our capital deployment and portfolio strategy, we're excited to have recently announced 2 separate acquisitions. The first is the acquisition of the Brookdale Galleria community in Houston for $23.4 million, which closed at the end of June. We're thrilled about this opportunity. We previously managed the Galleria community under a long-term management contract, so we know the property and its occupancy dynamics exceptionally well. The community is in the affluent Galleria submarket of Houston, adjacent to high-end shopping, so it is well located in a market where Brookdale has meaningful density. At 244 units, it's a large community, and we were able to purchase it substantially below replacement cost. From an operational improvement perspective, the Galleria opportunity is compelling to us. The current occupancy at the Galleria community is lower than our Brookdale average. We will be investing additional capital in addition to significant renovations that have recently occurred to reposition the community. Most importantly, we have already closed the skilled nursing operations at the community and expect to replace those units with additional community amenities and other configuration improvements designed to take advantage of market demand, and drive improved economic performance. Now as the owner rather than the manager, operating income expansion will accrue to the benefit of Brookdale and our shareholders. The second is the planned acquisition of 17 communities that we currently lease in a triple net arrangement. These 17 communities are in markets where we have meaningful operating density, and we know these markets and buildings well. The purchase price of approximately $157 million for 735 units represents a per unit acquisition cost of $214,000, which is well below replacement cost. The transaction is expected to close in the fourth quarter of this year. And once it closes, it will further increase our mix of owned versus leased communities, reduce our lease payments and bring us down to 4 remaining lease portfolios, which in their own right, are producing positive cash flow. Importantly, this transaction is expected to increase our 2027 adjusted EBITDA and cash flow. We plan to fund the acquisition with a mix of non-recourse mortgage financing and cash on hand. Both of these acquisitions further bolster the fact that we are the third largest owner of senior living real estate after only Welltower and Ventas. As I shared during our Investor Day, we are an operating company, but we are a company that is built upon a foundation of highly specialized real estate, and this real estate is becoming increasingly scarce with each passing quarter. Pulling all these points together and following our in-line second quarter, we reaffirm our 2026 annual guidance of 8% to 9% RevPAR growth and adjusted EBITDA range of $502 million to $516 million. We also reaffirm our multi-year growth outlook of annual adjusted EBITDA growth in the mid-teens and achieving a leverage ratio of less than 6x by the end of 2028. In summary, the significant changes we've made to our team and structure over the past several quarters are taking hold. I see it in our communities, I hear it from our associates, and it's beginning to show in our results. While we still have work to do, I'm confident that we're building a stronger Brookdale, and that we will accelerate our performance in the second half of the year and create long-term value for our residents, our associates, and our shareholders. I am genuinely excited about our direction and our bright future at Brookdale. We remain firmly on-track to unlock the intrinsic value of Brookdale's specialized services and real estate assets. I will now turn the call over to Brookdale's CFO, Dawn Kussow, for more details on our financial performance and outlook. Dawn?

Thanks, Nick. This morning, I'll review 4 key areas: Brookdale's second quarter financial performance, recent improvements to our balance sheet, progress we're making on our ongoing portfolio transition, and our outlook for the remainder of 2026. Starting with our financial performance. Our second quarter results were consistent with the progression we outlined last quarter. Let me highlight a few key points. Second quarter adjusted EBITDA was $122.1 million, up 4.3% year-over-year and in line with our suggested pacing of a low- to mid-single-digit increase and slightly ahead of consensus. RevPAR for the quarter increased 8.2% over the prior year, also in line with the pacing we outlined. Although it is not a component of our guidance, I'll also highlight that our adjusted free cash flow was $38.2 million for the quarter, and we are now meaningfully positive for the year. That said, occupancy came in slightly below our expectations during the second quarter. On a consolidated basis, occupancy increased 230 basis points year-over-year to 82.4%. On a same community basis, occupancy grew 110 basis points over last year to 82.9%. We now expect full year consolidated occupancy to come in at roughly 83%, and we continue to expect to deliver on our 8% to 9% RevPAR growth guidance. Our operations team has identified additional efficiencies through our realignment and our continued focus on maintaining an appropriate expense structure to align with our business while continuing to provide high-quality care and service to our residents. We expect those savings, which will begin to be realized in the third quarter, to fully offset the impact of that slightly lower occupancy on our adjusted EBITDA target. As a result, we remain on-track to deliver our 2026 adjusted EBITDA guidance of $502 million to $516 million. For the second quarter, Brookdale resident fees were $708 million, a decline of 8.7% from the second quarter of last year. The primary drivers of the year-over-year revenue decline were a 15.7% reduction in consolidated average units driven by portfolio optimization activities, partially offset by an 8.2% RevPAR increase. On a same community basis, RevPAR increased 5.5%. Revenue per occupied unit, or RevPOR, remained strong and continued to support revenue growth during the quarter. During the second quarter, RevPOR improved 5.2% versus last year on a consolidated basis and 4.1% on a same community basis. While RevPOR typically moderates over the course of the year, we expect year-over-year RevPOR performance to become increasingly favorable over the back half of the year as we annualize the concessions embedded in last year's results. Overall, we expect year-over-year RevPAR growth to accelerate during the second half of the year, driven by improving occupancy, healthy RevPOR and the favorable mix impact of the dispositions. As a reminder, we guided to 8% to 9% consolidated RevPAR growth for 2026. Through the first half of the year, we've performed within that range, and we continue to expect to deliver on this component of our guidance. Now let's turn to expenses. On a consolidated basis, second quarter expense per occupied unit, or ExPOR, increased 3% over the second quarter of 2025, resulting in a positive RevPOR over ExPOR spread of 220 basis points. On a same community basis, ExPOR increased 4%, generating a 10 basis point positive RevPOR over ExPOR spread. On a same community basis, our operating margin was flat versus last year at 29.5%. On a same community basis, community labor expense performed favorably as our labor as a percentage of revenue improved 90 basis points year-over-year. While this is a strong improvement, we continue to see meaningful opportunity on the expense side. We continue to evaluate and make sure our expenses are appropriately aligned with our occupancy levels, and we are already expecting a positive impact from the efficiency actions I mentioned earlier. For the third and fourth quarters of the year, we expect labor as a percentage of senior housing revenue to slightly improve sequentially despite those quarters containing an additional day and holiday. Our same community other facility operating expenses were elevated during the second quarter. There is always a level of variability in our other expenses, and we expect other facility operating expenses to follow normal seasonal trends. General and administrative expense, excluding non-cash stock-based compensation expense and transaction, legal, and organizational restructuring costs declined 6% year-over-year to $38.9 million for the second quarter. The second quarter results reflect that we scaled our G&A cost base to reflect both disposition activity and the reduction of our managed community portfolio. We continue to expect approximately $157 million for the full year G&A costs. Cash facility operating lease payments during the second quarter of 2026 were $44.8 million, down $12.7 million year-over-year, primarily due to the Ventas lease dispositions, which occurred in the second half of the year, coupled with the contractual step-up on lease payments on the retained Ventas leases. Turning to our balance sheet. Our balance sheet strengthened during the quarter. Our annualized leverage improved to 8.4x from 8.8x at the end of the prior quarter. Total liquidity increased to $566 million as of June 30, 2026, up from $369 million at the end of last quarter, reflecting both the expansion of our revolving credit facility, and higher cash balances resulting from positive operating cash flow and disposition proceeds. During June, we completed 2 financing transactions, which addressed a portion of our 2027 debt maturities while also expanding and extending our revolving credit facility. As a result of these transactions, we repaid $200 million of outstanding mortgage debt with $188 million in new non-recourse first lien mortgages. These new loans are interest-only for 5 years and mature in 2036. Additionally, we expanded our revolving credit agreement to $200 million, an increase of up to $100 million from our prior line. The facility now extends through April 2029 and includes 2 1-year extension options. More recently, in August, we announced the refinancing of all of our remaining 2027 mortgage maturities. Specifically, we obtained $249 million of fixed rate financing and used the proceeds to repay $244 million of mortgage debt scheduled to mature in 2027. These transactions demonstrate our continued proactive approach to managing the balance sheet well ahead of upcoming maturities. We appreciate our key lending partners for their support and their confidence in Brookdale's business outlook. We now have no remaining debt maturities until 2028. Adjusted free cash flow for the second quarter was a positive $38 million, reflecting the growth in adjusted EBITDA, lower use of cash for working capital and a timing-related reduction in non-development capital expenditures. Now turning to the progress we're making on our ongoing portfolio optimization. We continue to execute on our capital recycling strategy, which includes the disposition of non-strategic or underperforming owned and leased communities. Earlier this year, we said that we expect to sell 29 communities, comprising 2,364 units during 2026. Through June 30, we sold 13 owned communities, comprising 1,108 units for proceeds of $147 million, net of transaction costs. And we also exited 2 lease communities with 152 units. We've continued to close transactions since the end of the quarter. And as of August 10, we have closed the sale of an additional 3 communities with 228 units for net proceeds of $2.5 million. Today, 13 of the planned 29 communities identified for disposition remain. We expect most of those to close before the next earnings call. In total, we now expect proceeds for 2026 community dispositions, including completed transactions to generate net proceeds of approximately $190 million. As Nick mentioned, we also completed 1 acquisition at the end of the second quarter and announced a second acquisition expected to close in the fourth quarter. At the end of June, we acquired the 244-unit Brookdale Galleria in Houston, a community we previously managed for approximately $23 million. We closed the Galleria transaction using our line of credit and cash on hand. Last week, we announced the acquisition of a 17-community portfolio, which we currently lease, comprising 735 units, for a purchase price of approximately $157 million. We expect to close the second acquisition using a mix of non-recourse mortgage financing and cash on hand. We're excited about both of these acquisitions of high-quality communities. Both were purchased below replacement costs and are expected to improve our intermediate and long-term financial results. Now let's turn to our outlook for the remainder of 2026. We remain on-track to deliver our 2026 guidance of 8% to 9% RevPAR growth and $502 million to $516 million of 2026 adjusted EBITDA. Here is the path to delivering our guidance for the remainder of 2026. And note that the highlights of this are also included on Slide 12 of our second quarter investor presentation, which we posted to our IR website yesterday. Average units, which were 42,820 in the second quarter, are expected to decline to approximately 42,200 in the third quarter and 41,500 in the fourth quarter. The decline reflects the tail end of our previously described capital recycling program and the impact of our Galleria acquisition. Remember, the acquisition of the leased assets will not change the expected unit average as those units were already included in the expected average unit count. Consolidated occupancy should be approximately 83% for the full year. We expect stronger growth in the third quarter, including the 30 basis points of sequential same community occupancy improvement achieved in July, followed by continued expansion in the fourth quarter. Both quarters should show stronger sequential expansion than what we reported earlier in the year. RevPOR, or rate, is expected to show greater year-over-year growth in the third and fourth quarters than in the first half of the year. RevPOR is expected to show greater year-over-year growth in the third and fourth quarters than in the first half of the year as a result of dispositions as well as the comparison against discounting in the prior year. As a result of improved occupancy and rate, the sequential RevPAR growth for the second half of the year is expected to mark an accelerating trend from the first half of the year. Labor costs, as I mentioned earlier in my remarks, should slightly decline as a percentage of revenue in the third quarter and further again in the fourth quarter. We project $157 million in annual G&A expense. We now expect cash lease expense of slightly under $180 million for the year as we realize the initial benefit of the 17 community portfolio acquisition we announced earlier this month. Summing it up, we expect adjusted EBITDA growth to accelerate into the third and fourth quarters of this year. Specifically, we expect third quarter year-over-year adjusted EBITDA growth to be in the low double-digit range. For fourth quarter, we anticipate adjusted EBITDA growth to come in above our mid-teens target growth range. In closing, while we delivered on our overall expectations for the second quarter, occupancy growth hasn't moved as quickly as we initially expected. We've taken decisive action to further drive growth in the back half of the year and to identify additional cost efficiencies. We continue to expect to deliver on our 2026 guidance. We're confident in our strategy, and our team's ability to execute and in our ability to continue creating long-term shareholder value. Operator, we will now open the call for questions.

Operator instructions were provided. Your first question comes from Ben Hendrix with RBC Capital Markets.

I was wondering if we could talk a little bit more about the guidance for the second half. The RevPAR guidance, it seems like you were expecting about 100 basis points better in 3Q and 4Q. Now we're kind of pushing that inflection a little bit more into 4Q. Maybe you can kind of talk about some of the dynamics there. It seems like you put through some really good RevPOR growth, but maybe the move-ins were a little bit still kind of down 5%. Maybe you can talk about kind of receptivity to those rate updates and how that's impacting your RevPOR outlook.

Thanks, Ben. This is Dawn. I appreciate the question. Yes, our RevPAR growth for the third quarter we tempered a little; we expect it to be similar to the growth we reported in Q2, and that's driven by the slower occupancy that Nick and I discussed in our prepared remarks and by the timing of dispositions. We experienced some delays in the dispositions where we would have expected to get that accretion, and we now expect to get that accretion in the fourth quarter. But stepping back, our year-over-year RevPAR growth of 8.2% is something we're proud of. This is the highest RevPAR in the last two years. Looking at the fourth quarter, RevPAR growth will benefit from full occupancy from our summer selling season and from the disposition timing, so we expect to see acceleration in the growth.

And what I'll also add, Ben, part of the focus as a team has been truly on RevPAR and tackling both sides of that equation, both the occupancy and the rate side of it. So this year, we're taking a far more disciplined, far more deliberate approach to our in-place rate increases for sure, but even our market rate increases as new move-ins come in and replace move-outs, we're really driving to that RevPAR number. So as you look at occupancy, as you look at rate, the overall push on RevPAR, I think the points that Dawn made on the acceleration for Q3 and Q4, part of it is also coming from rate in addition to the occupancy growth.

So we should expect RevPOR to continue to tick up as we get through the back half of the year then?

That's right, Ben. If you remember what we talked about at the beginning of the year on our RevPOR is you see the benefit of the rate increase in the first quarter. Typically, we see that RevPOR stepping down every sequential quarter from acuity and discounting. What we said at the beginning of the year and remains the same is that RevPOR we expect our RevPOR to remain firm in the back half of the year. So we'll expect that little bit of a step-up in the third quarter, and then it will remain firm. When I say remain firm sequentially, we don't expect that step down.

Which is atypical for our company and the industry really. So it's a little bit of a change this year based on the dispositions and based on this pricing strategy that we've implemented.

Your next question comes from Rob Simone with Compass Point.

Kind of a high-level or big picture question for you. So I mean, obviously, the company has changed pretty dramatically over the last several years. And I wouldn't use the word tumultuous, but like there's obviously been lots of changes at the higher level management ranks over the past year or so. I was just wondering if you can maybe elaborate on what changes you guys made at kind of like the local and regional operational level? Like what has been done behind the scenes to kind of get you guys where you need to be and give you the confidence that the next like year or so, you'll gradually add on to occupancy.

Yes, Rob, I love the question and really appreciate it because it is sort of defined who we are and who we will be for the next year. The first point I'll make is the changes that we have made, all very appropriate and a bit disruptive. The cool thing is the table is now set. The pace of change is more or less behind us and now we're looking forward to the new team, the new structure, the new organizational effectiveness that we have going forward. As far as the specifics of the changes that have happened, it really starts with our communities. At the core of it, we have what we call our Key Three, which are our operations leader or executive director, our sales leader, and our clinical leader. We have truly bolstered what that looks like within communities—the reporting relationships, the authority they have, the empowerment they have and the accountability that they have. To that point, our Key Three turnover is the lowest it has been since COVID. The number of communities that we have executive director openings is the lowest it has been since COVID. So some real performance improvement around the engagement of our leaders across our 500-plus communities. That's a big part of what I brought to the table as a new CEO, and what the management team has really leaned into is the leadership within the community. Now stepping up one level to what we call the district, we have replicated the same organizational model at the district level. We changed that in the middle of Q1. Our sales, operations, and clinical leaders all report up through the District Director of Operations. That creates clear accountability, clear empowerment, clear authority through the district into the community. So instead of having 2, 3, 4 leaders district leaders reaching into a community and providing guidance and authority, there's now a single line of accountability, which goes right to the regional level, where we did the exact same thing all the way to the COO. Practically, what I'm describing is a single line from me as the CEO down through our executive ranks, the regional ranks, the district ranks into the community. With that single line, you have a single line of empowerment, enablement, accountability, and reporting that reaches into each of our communities. Another big part of the change—we now are structured into 6 regions of about 90 to 100 communities each, where we're in effect operating like a regional company of 6, but with the capabilities and the funding that a company of our size has. If you look across every layer, from community to district to region to corporate, we've simplified reporting and clarified accountability, and the result is better execution and the ability to drive operations more effectively.

It's good color for folks. Maybe just one unrelated question, and it's kind of been hit on, but to the extent you can, what gives you the confidence or what points give you the confidence that besides the price that you've already taken and your view into occupancy thus far into August, that you're actually going to be able to accelerate RevPAR and maintain or hit your guidance as the year goes on? Just any anecdotal data points or qualitative things that could kind of give people more comfort might be helpful.

Rob, this is Dawn. I'll start. When we think about the sequencing of our quarterly adjusted EBITDA, the July occupancy coming into our summer selling season gives us confidence. The move-ins we saw coming out of the second quarter, that July occupancy growth gives us confidence coming into August and September. Now as you know, our third quarter has an additional day and an additional holiday. We expect that occupancy growth to offset that natural step-up in our expense base. But what we said in our prepared remarks was the labor efficiencies that we saw with the structuring that Nick was just talking about, those labor efficiencies and the expense savings with that lower-than-expected occupancy in the second quarter, we expect our labor and have specific actions around making sure that that labor savings is happening in our expense base. In my prepared remarks, I mentioned that we expect our labor as a percentage of our revenue to slightly improve in the third and the fourth quarter. That's atypical for our seasonality because of the additional day and holiday in the third and the fourth quarter. So those expense savings, we would expect to see coming through both in the third and the fourth quarter. And so that gives us the confidence with the step-up in the adjusted EBITDA that we're talking about.

Your next question comes from Brian Tanquilut with Jefferies.

This is Meghan Holtz on for Brian Tanquilut. I appreciate the color you guys gave on the 2 acquisitions, but I was hoping you can elaborate a little bit more on maybe the strategic rationale of these communities that you're now going to own in any financial or operational metrics.

I appreciate the question, Meghan. I'll step in first, and Chad will provide a few more details. The overall strategy we've articulated is that we are, for the first time in many years, more in an offensive posture. We have the capital, we have the free cash flow, we have leases that are generating cash flow. We're in a position to make targeted deliberate acquisitions. We're not looking for broad portfolios or to expand into new states or new markets where we don't already have a presence. Our growth strategy around acquisitions is to acquire in markets where we already have meaningful presence and where we can create more density and leverage the strength of a company of our scale. That's exactly what these 2 acquisitions do. The Galleria in Houston is in an affluent area and we know the building well. As the owner rather than the manager, we now have flexibility to capture operating upside. The leased portfolio acquisition increases our owned mix in markets where we already operate and reduces our lease exposure, improving cash flow.

I'll start with Galleria. We were very excited to be able to execute that acquisition at an attractive per-unit purchase price substantially below replacement value. It's in an affluent area next to the Galleria Mall in Houston. From an underwriting standpoint, we know the asset and its potential, and we had a unique vantage point as the existing manager of the property. We view this as a very low-risk and very high-reward transaction. We purchased the community for a purchase price of just over $23 million, which was less than $100,000 per unit. Importantly, Brookdale Galleria had already benefited from tens of millions of dollars of capital expenditures over the last several years that had been funded by the prior owner. Much of that was related to updating major systems and refreshing the aesthetics of the community. The community looks great, and we have plans to further improve it with relatively limited additional capital investment. As the owner, we now have much more flexibility to implement changes we believe will help drive value creation for our shareholders. For example, we've already shut down the underperforming and negative NOI skilled nursing operations at the community, and we have plans to reposition the community as a high-end hospitality-focused, multi-product-line senior living community. Through modest development capital expenditure investments, we plan to add additional amenities and other changes designed to take advantage of demand dynamics in the Houston market. The changes we have implemented since we closed the transaction just over a month ago have already resulted in improved NOI, and we see much more potential in the months and years ahead. We're confident that the acquisition will provide intermediate-term adjusted EBITDA and cash flow accretion that will drive value creation for our shareholders. On the leased acquisition, we reached a win-win transaction with our landlord to accelerate our exercise of a purchase option on the portfolio at an attractive price. Again, with minimal risk and upside given we are already the operator of the communities. As Nick mentioned, we know these buildings and markets and are confident we can continue to drive occupancy and NOI growth. Similar to other lease acquisition transactions we've completed, this allows our shareholders to capture full owner economics and reduce rent exposure. Dawn mentioned earlier this transaction improves our 2027 adjusted EBITDA by about $11 million and will meaningfully improve our annual cash flow by replacing high-cost lease financing with lower-cost mortgage debt.

Okay. And then just touching base on the new Chief Sales Officer hire, what are some of the actions you're putting in place to drive occupancy?

So very excited to have Margaret join the team. If you look at our July occupancy and compare month-end versus the weighted average for the month, those numbers are indicative of what the following months will look like. Margaret joined us about 1.5 months ago in June. We launched a very specific campaign and initiatives in July that are more activity-based than outcome-based. The prior approach focused more on outcomes. Now we're asking our 500-plus community sales professionals to do specific actions with specific accountability. Margaret brought that approach immediately. In July, our numbers reflect that. She has brought new energy and a new focus on the sales process, and importantly, she has aligned sales, operations, and clinical to work together at every layer. It's a meaningful change that is showing up as an early indicator in our July numbers, and we're excited about what August, September, and October will bring as we continue selling in the summer season.

Your next question comes from Raj Kumar with Stephens.

Maybe just one on kind of thinking about the operating leverage of the business, specifically on the labor component. One, would love to get any updated thoughts on kind of hiring trends that you saw in the second quarter? And then secondly, as we kind of think about the opportunity ahead across the different portfolio bands, it would be kind of helpful to illustrate kind of the operating leverage magnitude, especially kind of just, for example, kind of considering maybe a 90% occupancy is well equipped to service a 95%-plus occupancy. So kind of that type of leverage dynamic, just would be kind of curious on any color commentary there.

From an overall hiring perspective, it feels like an employer market. We have more applicants per open requisition than we've had since COVID. Underpinning that is the lowest turnover even since before COVID. Our Key Three turnover is the lowest since COVID, and overall company turnover is better than before COVID. So this year, we feel like an employer of choice. We're able to hire the right people with passion for senior living and service and retain them at a much better pace. That gives us the ability to manage labor more effectively. On occupancy bands, in our investor deck Slide 18, we show that as occupancy goes up, EBITDA per available unit increases meaningfully. For example, in the under 70% occupancy band, on average we generate about $3,800 of EBITDA per available unit annually. Jumping to the next band more than doubles that, and at over 80% occupancy you're around $21,000. That fixed-cost operating leverage is real. At the end of Q2, we reported 85 total communities that are below 70% occupancy, down from 129 a year ago. Within that 85, 9 are on the disposition list. A meaningful part of those 85 are recent erosion; almost all of them need between 1 and 3 units to sell to move above 70%. We've relaunched the SWAT team under our SVP of Strategic Operations, Clark Jones, to tackle the more consistently underperforming communities.

And then maybe just a follow-up, as you kind of think about the free cash flow trajectory for the second half, I know you called out some incremental investments or accelerated investments related to facility uplifts and whatnot. So I guess maybe any framing on the back half free cash flow would be helpful.

If you look at our second quarter, we were $38 million of adjusted free cash flow. We said that we expect to be meaningfully adjusted free cash flow positive for the year. Last year, we had $23 million of adjusted free cash flow, and our expectation is that we would be much higher than that in 2026. As we think about the second half of the year, we wouldn't give specific quarter-by-quarter guidance due to working capital variability. We expect to spend about $175 million to $195 million of CapEx for the year, and on top of that, still be significantly adjusted free cash flow positive.

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

So maybe coming back to the discussion about the guidance, and I appreciate the comments around the occupancy a little bit less and some of the cost efficiencies. But also the other dynamic you mentioned is the delay or I guess, delay of these dispositions, right? So you're holding these underperforming assets a little bit longer on your books. So can you help us understand this dynamic? How big of a drag is the fact that these asset sales are delayed? And also, is this being offset by, call it, $3 million or so from the benefit in Q4 from the purchase of the 17 leased assets?

Joanna, that's a very good question. The benefit from the leased assets converting to owned will start to show up in our cash lease payments, which is why we adjusted our language around the full year guide on those cash lease payments. We're thinking about the drag on the dispositions as being offset by that lease benefit. So the lease buyout and the reduction in cash lease payments should offset the disposition timing drag.

If I may, last one on the move-in slide that shows the move-ins declining year-over-year for some time now. So can you walk us through why that is happening?

Move-in pace and pricing go hand in hand. Last year, we made some deliberate discounting to get things moving in the June-July period. This year, we're taking a different approach, with more meaningful in-place rate increases and a more deliberate, disciplined move-in pricing approach. We're focused on RevPAR. In our 90%-plus occupied communities, we can drive rate more meaningfully. In lower-occupied communities we will do targeted discounting. We're balancing those components to drive overall RevPAR. The move-in pace decline you see on Slide 9 includes pricing components in the math.

I'd also point to recent monthly results. Some of the changes we made, like bringing in a new Chief Sales Officer and other structural changes, are starting to take hold, and you can see that with the July results. A lot of the work this year has set the stage for a successful summer selling season as we move forward.

And if I may, last one on the summer season comment. I appreciate you gave us the July data point because the sequential growth in July versus June last year was much stronger. So where do you stand right now in terms of your selling season and any incremental color you might have already on early activity in August?

Take a look at the month-end compared to the weighted average for the month. If you compare that gap this year to previous years, you can see the indicator is fairly healthy, and that's a good indicator of what the following month looks like. The number is not accidental; it's underpinned by the changes we've made in our sales organization, structure, and leadership. It's also underpinned by favorable industry dynamics, and we're taking advantage of that. We feel really good about what August and September will look like based on the indicators we have and the July number.

Your next question comes from Andrew Mok with Barclays.

It's still not clear to me exactly what's driving the occupancy shortfall in the quarter, and you noted some of the issues with the year-over-year comparisons shown on Slide 9. So I guess, very simply, was the shortfall against expectations more of a move-in issue or a move-out issue? And would love to just hear more color on the drivers of the variance.

Great question. Occupancy is driven by both move-ins and move-outs. Move-outs include controlled and uncontrolled reasons, the latter being things we don't control, such as residents moving to a higher level of care. We've been happy with our move-in pace; in many cases, our move-in activity has been strong. Move-outs vacillated and were a bit of the story this quarter. There is cyclicality in move-outs across the industry. You can have several months of good move-outs followed by a month or two of weaker move-outs. Much of the move-out variability is uncontrolled, such as changes in resident health. In short, move-in pace has been strong in some areas, but move-outs were more of the headwind this quarter. We expect those dynamics to stabilize.

Andrew, I'll add that not having a sales leader in place since the middle of the first quarter contributed to some of the month-to-month volatility in occupancy. Bringing Margaret on board has provided different energy, is very actionable, and is interactive and strategic on driving sales at the community level. You can feel that in the company, and that has made a difference.

Maybe just a follow-up on the expense side. Same community other facility operating expenses were up high single digits in the quarter. Can you provide more color on what drove that pressure specifically and elaborate on the initiatives you're pursuing on labor productivity to help offset the occupancy pressure?

It's a great question. For non-labor expense, we saw headwinds around repairs and maintenance, some insurance expense, and some incremental bad debt expense. We expect non-labor expense to follow normal seasonality. On the labor side, we expect labor as a percentage of revenue to slightly improve in the third and fourth quarters despite the additional day and holiday in the third quarter. Under the new operating structure we've looked at labor productivity at the community level and taken specific actions to align the variable labor with occupancy levels. We expect those expense savings to come through, which is why we guided to a slight improvement in labor as a percentage of revenue in the back half of the year.

There are no further questions at this time. I will now turn the call back to CEO, Nick Stengle, for closing remarks.

Excellent. Thank you, Rebecca. I'll just close it out the same way I started it first by thanking our associates every day; they care for our residents, they care for each other. At the end of the day, that's fundamentally what we provide against the backdrop of the real estate that we own that we've talked about so much. I'd like to thank our family members and our residents who put their trust in us for their care and for the service that we provide. I'd like to thank our shareholders for their continued trust in this management team and for continued interest in Brookdale. With that, I recommend we shut down the call. Thanks, Rebecca.

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