Brookdale Senior Living Inc. (BKD) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] I now would like to turn the call over to your host, Mr. Ross Roadman, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Brent, and good morning, everyone. I'd like to welcome you all to the fourth quarter and full year 2013 earnings call for Brookdale Senior Living. Joining us today are Andy Smith, our Chief Executive Officer; and Mark Ohlendorf, our President and Chief Financial Officer. I would like to point out that all statements today which are not historical facts, may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain other factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement. With that, I'd like to turn the call over to Andy. Andy?

Good morning. I want to add my welcome to all of our shareholders and other participants for our fourth quarter and full year earnings call. We had a great fourth quarter, and we capped off a great 2013. We moved the organization forward in multiple areas, all with the goal of enhancing our platform to improve our ability to serve our residents and their families, and to improve our financial performance and position the company for future growth. During the year, we successfully implemented a flatter and more responsive field operations organization. We also made progress on new initiatives like our branding activation and cost management programs. We launched additional initiatives targeted at simplifying how we do business, particularly reducing the administrative burden on our community leadership teams so that they can spend more time on what they want to do, that is, to spend more time with their residents and their families. We made progress on our health care IT systems. We fully implemented electronic medical record systems in our Home Health and Therapy business lines, and we have selected our electronic vendor for -- and begun designing work for our skilled nursing communities. We also advanced our pilot programs for electronic medication administration in our Assisted Living communities. Finally, we continued to expand our set of service solutions. Two examples of this are that we are now -- we now have hospice programs up and running in 11 markets, with 3 more markets awaiting survey to begin building. We also opened 14 pilot programs providing services outside of our walls in the broader general community. Of course, much of the organization has been focused on pursuing the tremendous opportunity for organic growth from our current portfolio. We've talked before about our activities to improve how we interfaced with the changing marketplace. We have continued with our national brand campaign, supplemented by internal and external call centers, an improved website and a higher level of social media engagement. Our latest marketing innovation has been the launch of a Live Chat function on our website. It's amazing to me that since August, we have had live chats with over 10,000 people who are looking for solutions for seniors. We also launched our first webinar for professionals conducted by our associates, with over 100 participants. And we started a webinar series for the public on aging. For the fourth quarter, we saw an 8% increase in inquiries versus the fourth quarter of 2012. But more impressively for the year, we saw that 2.3 unique visitors -- visits were made to the Brookdale website, an 18% increase which led to a 42% increase in move-ins sourced from the website. And we received 463,000 inbound calls into our external call center, which didn't even exist in 2012. The impact of everyone's hard work produced very strong fourth quarter financial results. We produced 4.3% top line growth for our senior housing operations versus the fourth quarter of 2012, occupancy was up 30 basis points, and rate grew 2.5%. And we had continued positive contributions from 22 Program Max projects we completed since the beginning of 2012. At the same time, we actually decreased our senior housing cost by 60 basis points quarter-over-quarter. Our service alignment labor management programs, where we match labor with service requirements, continued to favorably impact cost in the fourth quarter. Service alignment is our program to ensure that we deliver the right service at the right time with the right associate. Our rollout of service alignment is now largely complete, and our fourth quarter numbers reflect what we believe is an appropriate run rate for our labor costs. We also had positive experience in our benefits and insurance programs, and as a result of our revenue growth and our expense decrease, we produced growth and operating income for the senior housing portfolio of 14.4%, and a margin improvement of 310 basis points. Within our same community senior housing portfolio, we produced 12.5% operating income growth, quarter-over-quarter, on 2.9% revenue growth and a 1.5% expense decrease. In addition, we had a very good entry fee quarter. For the full year, we had net entry fee sales cash flow of $57 million, slightly above our original guidance and about $2 million above last year. For the fourth quarter, we had nearly -- I'm sorry, we had net entry fee sales of $21.7 million versus $15.1 million for the fourth quarter of 2012. We remain very bullish regarding entry fee sales as we continue to work down our open inventory. Our unsold inventory currently stands at just under 600 units. We believe that this market will continue to firm up and we also believe that we can further refine our branding and marketing activities to continue to improve performance for this asset class. Our entry fee sales and operations managements teams did an excellent job this year, and I want to personally thank them for their hard work. Beyond organic growth, we are focused on deploying our free cash flow into those areas that produce the most attractive returns for our business. We are seeing the impact on our results of increased occupancy, better pricing and new capacity or repositioned units from our Program Max initiative, which we will continue this year, as Mark will discuss. We remain active in seeking acquisitions in a fragmented industry that has considerable potential for consolidation opportunities. In conclusion, 2013 was a very successful year for Brookdale. From a purely financial perspective, we produced full year -- a full year increase of 17.6% in CFFO and 10.2% in adjusted EBITDA. We successfully launched a national brand and enhanced our leading industry -- our industry-leading platform. Most importantly, we continue to provide quality care for tens of thousands of our residents and peace of mind for their families. With an extremely talented and experienced team of associates, we are excited about the prospects for 2014 and beyond as we continue to strengthen our position as the leading national solutions provider for seniors. Now here's Mark to review our financial results in more detail.

Thanks, Andy. After the market closed yesterday, we issued our press release summarizing our financial results for the fourth quarter of 2013. We've also posted on our website, brookdale.com, our quarterly supplemental data package. Let me walk you through the key elements of our performance for the quarter and we'll then discuss our guidance for 2014. Looking at our key non-GAAP financial metrics, we saw that excluding certain items from both periods, our cash from facility operations, or CFFO, for the fourth quarter totaled $88.5 million, a 29% increase over the fourth quarter of 2012 and full year CFFO was $308.5 million, a 17.6% increase over 2012. Adjusted EBITDA was $129.1 million, an 18.1% increase over the fourth quarter of 2012. And full year adjusted EBITDA was $477.7 million, a 10.2% increase over 2012, again, excluding certain items from both periods. Our same community results for senior housing for the fourth quarter of 2013, compared to the fourth quarter of 2012, reflect the contributions related to the initiatives Andy already discussed. We produced a 2.9% increase in same community revenue due to solid growth in revenue per unit and a 40 basis point improvement in occupancy. Our initiatives to manage costs carried into the fourth quarter and resulted in a same community cost decrease of 1.5%. Behind that is a net 1.3% increase in labor costs, along with savings in our benefit plans and positive experience in our insurance programs. Senior housing same community operating income grew 12.5% versus the fourth quarter of 2012, and 7.9% for the full year 2013 versus the full year 2012. On a consolidated basis, we drove senior housing revenue growth of 4.3% for the fourth quarter of 2013 over the fourth quarter of 2012. Total average occupancy grew by 30 basis points year-over-year, while rates grew 2.5%. Sequentially, occupancy for the quarter grew about 15 basis points, excluding the skilled nursing occupancy. As you all know, hospital volumes were soft in Q4, which was reflected in our skilled nursing occupancy. As a result, our overall occupancy was flat sequentially. As I'm also sure you're aware, weather conditions across the country this winter have been relatively severe. This also had an impact on our sales efforts in occupancy in the fourth quarter, although the impact is difficult to quantify. We made meaningful progress in building occupancy during the second half of 2013, as we had positive net move-ins for Independent Living, Assisted Living and Dementia Care every month since May, except for the month of November. As we will describe later in our guidance, we expect occupancy growth to continue into 2014. We did produce very solid rate growth for the quarter, and slightly exceeded our expectations for the year, producing rate growth in excess of 3% when skilled nursing is excluded. Revenue is, after all, an artful balance of rate and occupancy, with rate being the more powerful economic driver. A highlight of the quarter was that we produced 4.5% rate growth for our Independent Living units as we judiciously raised street rents and reduced discounts. For the full year, we drove rate growth of 2.6%, up from 1.9% in 2012. I do want to bring to your attention that our Outpatient Therapy volume actually increased, as shown in our supplemental material, versus what was written in our press release. We continue to see positive contributions from our reinvestment in the portfolio. We spent $50 million in the fourth quarter and $127 million for the full year renovating our portfolio to improve the competitive position of our communities and to drive higher occupancy and rate growth. We spent almost $50 million on Program Max projects during 2013, completing 15 projects, with 20 projects under construction and 12 more in active development. Our capital structure continues to be sound. Our ratio of debt to adjusted EBITDA is 5.6x, slightly below our target and is trending down. We had negligible debt maturities through the end of 2014, and we have almost $280 million in availability, on a liquidity basis, from cash on hand and capacity under our line of credit. Turning now to our outlook for 2014, we've based our guidance on a continued gradual improvement in the economy through 2014. For the year, we expect consolidated senior housing revenue to grow by 5% to 5.5%. We expect to see growth in our occupancy due to the improved environment, our reinvestment in our portfolio over the last few years, our brand and marketing initiatives and good, solid sales execution. We expect the center point of our guidance range to reflect an increase on a full year average occupancy for our consolidated portfolio in the range of 80 to 100 basis points for 2014 over -- for 2014 over 2013. Our average resident capacity will go up year-over-year by 600 to 700 units due to the Chartwell acquisition and the expansions from Program Max. We expect rate growth to improve slightly to be in the 3% plus or minus range. For the senior housing business, we expect costs to increase in the 4.5% to 5% range, including same-store expense growth of 3% to 3.5%, driven by health care plan cost increases, full year branding activation costs and challenging comps due to the 2013 expense management success. Also included in this expense growth guidance are incremental costs for the capacity additions. The net of the revenue growth and cost growth is expected to produce operating income growth in the senior housing business in the 7% to 8% range. In addition, we expect net entry fee cash flow in 2014 to be in the $50 million to $55 million range, a similar level to 2013. For the ancillary services segment, we expect to see better performance because for the first time in several years, we aren't faced with material rate decreases or procedural changes. We expect to produce a 10% to 15% increase in operating income over 2013 because of increased volume in Home Health and Hospice services. Additionally, we expect for 2014 that: management fee revenue will be in the range of $30 million to $32 million; cash G&A expense, excluding noncash comp and integration, transaction-related and EMR rollout cost, will total approximately $145 million to $150 million; and lease expense will grow by approximately 3%. With those drivers, we expect that adjusted EBITDA growth will be in the 9% to 10% range. We intend to increase the portion of our mortgage debt that carries a fixed rate so we expect interest expense to increase by approximately 5%. Due to our continuing cash flow growth, we also expect that our quarterly state cash taxes will increase by several million dollars over the 2013 run rate. In summary, we expect that CFFO per share for 2014 will be in the $2.68 to $2.75 range, excluding any integration, transaction and EMR costs and the potential impact of any acquisition or disposition activity. On the capital deployment side, we expect that we will incur $15 million to $25 million for integration, transaction-related and EMR rollout costs in 2014. For capital expenditures, we forecast that routine maintenance CapEx, which impacts CFFO, will total approximately $40 million to $45 million. EBITDA enhancing in major projects CapEx, including corporate initiatives, will total $125 million to $135 million. And we plan to invest $55 million to $65 million of net cash in Program Max projects. We do not provide quarterly guidance but want to remind you that historically, we have seen a seasonal pattern where CFFO in the first quarter decreases from the fourth quarter because of the seasonal softness in both occupancy and entry fee sales in Q1. Typically, CFFO builds from there, with operating expenses peaking seasonally in the third and fourth quarters. This guidance does not include the impact of future acquisitions we may make nor the expenses from transactions, integration and EMR rollout costs. We'll now turn the call back to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Your first question comes from the line of Ryan Daniels with William Blair. Ryan Daniels - William Blair & Company L.L.C., Research Division: Let me start with a big picture one on the marketing and branding initiatives. And great data to start the call there on the returns you've been generating from that. I'm curious if, based on what you've seen thus far, it's changing your impression on how much to spend on your marketing or if you're allocating resources differently, now that you know kind of what is the best customer acquisition vehicle to drive entries?

That's a good question, Ryan. This is Andy. We've -- as we've gone through our branding and our reworking of our marketing programs, it's fair to say that we have changed how we allocate resources there. We have more centralized the marketing function where we think we can so that we can leverage our expertise here in the corporate headquarters. And that's allowed us to develop a multilevel marketing program that starts at a national level, and then cascades down to a regional marketing approach, and then the more traditional marketing approach at the communities themselves, which is again, in the process of evolving as we move forward through 2014. But we have changed how we market the business, yes. Ryan Daniels - William Blair & Company L.L.C., Research Division: And have you noticed it impacting any property type more than another or is it kind of manifesting across the board with greater interest?

I wouldn't -- I guess, I would say this for that. What we have seen is it has generated more interest in Brookdale and more leads to the business as an entirety. As I mentioned in my prepared remarks, we think we can do more around the entrance fee product line. We think we can particularize our marketing message better there in 2014. So that's an upside opportunity. Otherwise, I would not -- I wouldn't say that the effects of the marketing program are isolated on any particular business line. Ryan Daniels - William Blair & Company L.L.C., Research Division: Okay, perfect. And then another different question. You talked about the selection of an EHR vendor. Can we get an update on where the other EHR rollouts stand? I guess, not just where they are but how you're leveraging that either to drive operational improvements or maybe more data for all partners that could help with the different business lines?

Sure, well, in terms of where we are on the rollout activities, we've completed the rollout of EMR our Outpatient Therapy business and our Home Health business. We're in advanced pilots right now in skilled nursing. And the first phase of EMR for Assisted Living is likely to be automated medication administration. This dovetails with our proprietary assessment systems that we use in Assisted Living. So by the end of 2014, we should be pretty far along installing across the various product lines. It's an interesting world right now with EMR because as you know, the stimulus bill -- many years ago funded a lot in the acute world and in the physician practice world. So there is a very significant desire on the part of acute systems, in particular, to get good outcomes data and quality metrics from all their post-acute providers. That, of course, is the market we compete in and a lot of our markets. It's made a bit more complicated though because the hospitals have received so much funding and the providers of the software products, therefore, have developed so much more on the acute side than they have on our side. So we're left to particularize and customize a fair amount, market-to-market, in terms of how we relate to folks. I think we've been relatively successful with that, but it's a bit of a challenge because it's on our nickel as opposed to on the government's payment. Ryan Daniels - William Blair & Company L.L.C., Research Division: Okay. Now that makes a lot of sense. And then, last question and I'll hop off, just in regards to the Assisted Living unit, it looks like pricing was down maybe 1%, sequentially, despite the occupancy staying above 90%. Is that just some of the new units coming in the pool or is that just noise in the quarter? Just any thoughts you have there.

Yes, it's nothing particularly significant. We raised rents on the Assisted Living part of the business, principally, on January 1. So what you're really seeing, as you go through the year, are changes in market rents and mix. Remember that segment includes both traditional Assisted Living and freestanding Memory Care, where the rates are a little bit higher. So if you get a change in mix, as we go through the year, that can change the rate without the underlying economics really changing very much. So I think that's more of what you saw in the quarter than any fundamental change in the rates.

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

Here with Jack, as well. Just wanted to follow-up on the entrance fee sales in the quarter. I'm curious if there was any overlap with the branding campaign. Was there more impact on some of the CCRCs? And I wonder if there's a way to sort of parse out the geographic improvement, I guess, in some of the entrance fees relative to where the branding spend was, and if you guys have looked at that.

The -- first off, I would not say that the marketing campaign -- again, we think there's more upside in the marketing campaign being more particularized and more specialized and refined toward the entrance fee business line, which we think we will be doing in 2014. So I wouldn't say that the entrance fee sales in the fourth quarter were driven by the branding campaign any more than the balance of the business was being driven by that. Again, we think there's more upside opportunity in '14 by refining the marketing approach to that particular subsegment of buyer. So we would expect to drive results even better in 2014 because of that. On a geography basis, the branding campaign generally is having -- it's not limited or particularized to a particular geographical area. And this is a national, a regional and a local branding activation, so we are not seeing any particular effects that are geography-based.

It's Jack. In the CCRCs, was the SNF pressure concentrated in Medicare payers with the 2-midnight rule or did you see lighter occupancy from private pay as well? And then is it possible to parse out the portion of your CCRC beds that have the skilled nursing component?

We do have, in our investor materials that are on the website, the mix of our consolidated and unconsolidated portfolios. I don't have that data right in front of me here, but that data exists out there on our website. We have roughly 3,000 skilled beds in the consolidated portfolio. In terms of the 2-midnight rule impact and the interplay with the hospitals on our occupancy, I think the bigger impact you see is when hospital admissions are down, therefore, hospital discharges are down, our skilled nursing census suffers. Roughly half of our skilled nursing census is short-stay census, so it's very sensitive to volumes that are coming out of the hospitals in those markets. And I think that's the part of our business that saw the impact in the fourth quarter.

The private pay business was generally stagnant.

Got you, that makes sense. And then, last question, Mark, you talked a little bit about the weather in the fourth quarter. And as I look out the window, 2014 started off rocky as well. Are you embedding and guiding to similar headwinds for the first quarter?

Well, when we seasonalize our guidance, we take a look at the last couple of years and try to project what, then, that means for what we should reasonably expect for the first quarter. And then, inevitably, we're wrong because you have to try to predict the flu and season or weather, and those kinds of things. I think what we have baked into our guidance for the year and what we've seen so far is, okay, there's no significant outlier one way or the other. But it is a bit of a challenge to get that exact wave pattern in terms of how the occupancy cycles through the first part of the year. I think we're okay, though, based on what we've done with our guidance.

Your next question comes from the line of Kevin Fischbeck with Bank of America.

A lot of focus the last several quarters around your new construction in the industry. Just wanted to get your latest thoughts on kind of what you're seeing out there in your markets.

We don't have much to say that's in addition to what we said last quarter. We're mindful of this new construction and this talk of new construction. But we, generally speak and feel like that it is at a manageable level and that absorption is in fact exceeding new supply. And so we keep a watch on it, but we're not overly concerned right now. Where we do have actual new competition in our local submarkets, and that's where you have to think about it, it's a local submarket type of thing. We feel like we have new competition-readiness plans that we've put into action to make sure that we retain our associates in our existing communities, make sure that our communities are in a place to deal with that new competition. And again, as we said on our last call last quarter, there's a silver lining that in most cases, when that the new competition is actually competing with you, as things stabilize, there's actually a great opportunity as that new competition is absorbed. So we're mindful of it, but not overly concerned right now.

Okay, that's great. And then just on the cost side, just -- can you just give a little more color? It sounds like you're saying that there was a comp benefit, or an easy comp benefit year-over-year on the health insurance cost. But just wanted to understand kind of what was going on here in Q4.

Yes, really, 2 things I think I would point out. One, again, our labor cost Q4 to Q4 was up 1.3%, even though our occupancy was up 30 basis points quarter-over-quarter. Rate growth today is probably somewhere between 2% and 3%, let's say 2.5% just for discussion purposes. So that suggests we did gain some efficiencies on the labor structure this year compared to last year. Labor and benefits were 60% of our cost structure, so that is a meaningful recurring savings that's in the number. We also did see good experience on our health plan in our insurance programs in Q4 compared to the fourth quarter of last year, where as you probably recall, we had some pretty tough experience in our health program. So those 2 things, I think, are the most meaningful color on the cost growth.

Okay. And then you mentioned in your guidance that you assume a bit more having to be paid out as far as the state taxes. Any updated thoughts on the NOL and when you're going to run out of that?

We continue to forecast that we begin to become a cash tax payer, again, all else equal, in 2016.

2016. Okay, great. And then with the free cash flow coming in well, your leverage down below what your targets are, just wanted to hear what your thoughts were about the opportunity to make more acquisitions like the Chartwell deal or others.

Our pipeline, Kevin, is pretty full in terms of what we're looking at. There's a lot of activity out there. We think there's going to be opportunities for us to deploy our capital into acquisitions as the industry -- and we also believe the industry is going to continue to consolidate over the next several years. So we expect to be acquisitive.

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

A couple here. I was hoping you could go back to that service alignment program. You talked about making sure you had the right staffing level. Can you just give us some real-life examples of what you're actually doing there and how that works?

Sure. It actually applies somewhat differently in different product types. For example, in Assisted Living, a lot of our associates are devoted towards taking care of our residents on the floor. So in that case, the refinement work you tend to see in service alignment are around things like scheduling the actual interchange with the residents for showers and grooming, and those kinds of things, dealing effectively with the notion that, for example, we generally have to have at least 2 associates in the community overnight for safety reasons. They're able to do things at that time, other than direct resident care because obviously, most of the residents are asleep at that point. So you're trying to find useful things that the associates can do overnight in addition to ensuring that the residents are safe and cared for. In the larger communities, the more amenity-driven CCRCs and Retirement Centers, a better example would be around the dining programs, which are very significant. So obviously, there are a wide range of dining programs, depending on how the community is positioned in the market, upmarket, midmarket, more of an economy product; urban- versus rural-type settings. But the tools there revolve around identifying benchmarks for what's the labor requirement in the kitchen to prepare food, to plate food, what's the appropriate labor requirement in the dining room to set things up and clean and provide good service. Again, the changes in labor costs that we're seeing here are pretty modest. So mostly, what's happening is some fairly narrow refinements. The reality is, though, if we're are able to save 1%, it's a pretty big number. And we've been rolling these programs out now for the last 5 quarters or so. So the balance -- the lion's share of the portfolio is now installed with these kind of tools. So the key thing is, what we're doing is we're adjusting service demand, whether it's acuity on the Assisted Living side or the type of product that's being delivered in the dining room in an Independent Living building or correlating the labor demand with how we're staffing.

I want to underscore, though, Frank that the main purpose of service alignment is to make sure that we have the staff there to provide the quality of services that we want to. It's a secondary goal to make sure that we don't overstaff or that we are precise in terms of correlating the labor needed to provide that quality. But it's first and foremost a quality tool.

Okay. And then one more, and I'll hop. Just what do you attribute, other than the obvious, but -- the pricing strength you commented that you're seeing on the IL side of the business?

We think the Independent Living side of the business suffered the most through the Great Recession, I think it's fair to say. We're trying very hard to modulate or to reduce the number of discounts that we've granted and to try to get that pricing power. The -- those communities are almost right at 90% occupancy, and so we think there's just a better opportunity to drive rate, and we've been careful to try to do that. That part of the market is kind of the first to suffer in an economic downturn and it -- generalized or generally speaking. And is the last to recover, but we think as the economy is recovering, we think that the Independent Living sector is likewise showing strength and, again, we're trying to drive our rate their pretty carefully and constantly.

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

I wanted to just start out with a question about your CapEx outlook. I think it does seem like it's moderating somewhat for 2014 and really just curious to get a little bit of a longer-term view on your CapEx outlook as we think into some of the outyears, do you think it continues to moderate? And when you think about the free cash flow profile of the company, when do you think it becomes a bit more normalized around your CapEx spending?

Sure, yes. We obviously update or look at the CapEx plan every year as we do our business plan. We're working through a bubble of CapEx right now, quite frankly. We started to ramp things up in 2011, continued in 2012, 2013. That moderates a little in 2014. Probably moderates a little more in 2015 and 2016. Most of that spending is driven around common area refurbishments of our communities. So the direct answer to your question is it probably ticks down a little bit again after 2014 into 2015 and 2016. We then should hit a period of time where it runs in a relatively consistent pattern for a number of years. But we are working through -- just last year, we refurbished almost 20% of our locations. That's a pretty high level of activity.

Great. Okay, that's helpful. And then, I guess, just back to the entry fee commentary, one of the things that jumped out as we looked at your supplementals is just the higher resale value of your entry fee closing. So I guess, I'm just wondering if you can comment a little bit more about the inventory that you have and how maybe that looks different based on this resale value, and whether or not the absolute number of closings might actually be lower but the actual value could be higher. Your outlook on entry fee cash flow seems a lot higher than what we would have thought, so maybe there's some interplay there with just the inventory that's left.

Yes. The average sale number in the quarter, I think, was a little bit over 170,000 units. That is more of a product of the specific units that were sold. Particular locations are just more costly and particular units within locations, for example, 2-bedrooms compared to 1-bedrooms are more costly. In this quarter, we sold more units in the more expensive locations, and within locations, more expensive units. We did not have any purposeful change in pricing in particular in the fourth quarter. It is somewhat encouraging, to be honest with you, that we are beginning to sell some of those more expensive units, though. Because we went through a period of time where people were gravitating towards the smaller, less expensive units. We seem to be seeing a little bit of a turn from that.

And then just in terms of what's implied in your outlook, is it that the closings pipeline that you foresee will have a bit more of this higher resale flavor to it? Or is there anything more to say about that?

No, I -- we're assuming pretty similar average sale numbers to what we saw last year and this year -- 2012 and 2013.

Okay, that's helpful. And then Mark, you mentioned that your interest expense expectations are up about 5%. I'm sorry if I missed exactly what you said but is there something different about the debt stack of -- can you just repeat what's driving that?

Our intention is to fix a bit more of the debt. And when we fix a bit more of the debt, the spreads are a little higher. So we're estimating that our interest expense dollars will increase by roughly 5% year-over-year.

Got it, okay. And last one and I'll jump, but Andy, I wanted to ask you just a little bit about regulation. And we certainly have seen a lot of news in California just about proposed legislation at the state level on -- would love to just get your commentary and any kind of general message you might have for us just around how you think you're positioned should some more regulation come down the line and maybe your thoughts, generally, about this.

Well, first, given how we operate our communities, given the staffing levels we have at our communities, we are not terribly worried about regulatory changes at the various state levels because we already have quality programs and staffing policies that are in excess of what we think any likely regulatory change would produce. I do think it's fair to say that there is some areas of, I'll call them, regulatory hotbeds, California is one of them. We're trying to -- we're monitoring the situation and trying to, both as a company and through our various associations, trying to influence that regulatory discussion so that we can make sure that any changes, in fact, are good for our residents and appropriate for the industry. I think the regulatory environment is going to continue to evolve as the industry evolves, and we'll just have to manage through that. We're not overly concerned with it. I don't really personally believe that there is a likelihood of federal regulation of assisted living. But I think there are also lots of things that we, as an industry, can do to better influence the regulatory environment. And I think that's something that the industry has got to do as it matures.

The next question comes from the line of Daniel Bernstein with Stifel. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: I just want to follow-up on the last caller's question in terms of the entrance fee, higher-price entrance fee units that you're reselling. Are you also seeing residents moving into your rental side of the business, whether it's CCC IL or AL seeking larger units. Instead of studios, they're now looking at 1-bedroom, 2-bedroom and is that influencing your guidance as well for 2014?

I don't think so. It would not be -- it is certainly possible that some of the 4.5% of average rent growth we saw in IL in the quarter was also some of that impact. But again, the more notable impact in the entry fee community is where the sales occur, because some of the entry fee communities are in much higher-cost markets than others.

Yes. I'd say, Dan, for a portfolio of this size, it's pretty subtle on the point that you're asking. I mean, I do think it's a fact that if you went back 2, 3, 4 years ago, when people were more pessimistic about the economic outlook, folks were looking for smaller units, you see a slight shift where people are now feeling a little bit better about their personal situation when they move in, and they're looking for larger or more luxurious units. But that's very subtle for a portfolio the size of Brookdale's. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay, okay. I also noticed, in the quarter, you did some dispositions. Are you more actively -- given the size of the company, more managing -- more actively managing or weighing dispositions for weaker assets or assets where if you think you put the CapEx in, you won't get the return? How are you thinking about your -- the asset management side of the portfolio?

Yes, that's a good question. Our disposition program is -- we haven't made any changes there. We are constantly evaluating and there's always -- there are always a handful of assets that we feel like somebody else could operate better than we can or we don't see the upside opportunity, et cetera. And so each year, this has been true over the past 2 or 3 years. We sell a handful of communities because somebody else can -- could turn the portfolio and to get them into the hands of someone else. I think the only thing that probably happened a little bit differently and maybe why you're remarking upon it, we did a -- for us, we did a relatively large transaction in the fourth quarter. And that was all about balancing the need to invest, in our opinion, quite a few capital dollars into this asset. And we decided, on balance, it would be better to dispose of it than to do that because of the risk-reward features of that particular asset. It just happened to be larger, which is I think why it's probably jumping out at you. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Yes, it did a little bit. And then, I assume that what you're disposing just tends to be a little bit older assets as well.

Yes, I think that's fair to say. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, we were also looking at some of the flu data this season showing that the predominant flu strain is H1N1 out there which if you remember back in '08, '09. There's always going to be seasonality in the seniors housing business, right? But this particular strain doesn't affect the 65-plus population as much as 18 to 64. Are you seeing any evidence at this point that you may have -- or if you can categorize the seasonality as maybe less than normal or more than normal? I'm just trying to understand if you're seeing a little bit -- any evidence of fewer move-outs at this point in the first quarter than you would typically.

Yes, I'd say that I'm not going to characterize the flu season as being mild, but it's certainly not extreme. And you're right. I do think that the vaccine this year, from a lay person's perspective, has been pretty effective for seniors of the folks -- of the age that we serve. And so we have not seen, to date, knock on wood. Our January has been reasonably good in terms of move-outs from the flu. And we believe the information that we look at, we would think that the flu has plateaued at this point in time. So we're optimistic about January, in the first quarter. Now that can always change. I mean, February can be rough but January really wasn't. And again, to the extent that there is any incidence of flu, it really helps our skilled business. And have seen that in the month of January. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, a possible offset, are you seeing any increase -- can we expect or should we expect higher-than-normal weather-related expenses: snow removal, heating? So you have a positive maybe -- maybe a positive from the flu but maybe a negative from -- on the expense side versus the normal? Would that be a correct assumption also?

Dan, we're only 1 month into the year. Snow removal costs in January was certainly higher than normal. It snowed a lot, and it was cold. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then one last question, if I could. There's -- you've seen the data and you've commented that there's really not an oversupply at this point, if that can be positive for IL, absorption versus supply. But there is a lot of demand and interest out there. Are you getting more opportunities to potentially manage assets for third parties? Is there -- you talk a lot about growing the business elsewhere, but not a lot of talk about growing the management side of the business. Are there opportunities on the management side for you?

Yes, a couple of answers to that question, or a couple of facets to that question. First, yes, we do get lots and lots of inquiries from folks who wish -- from developers and financial sources who would like for us to manage their business or their new construction or even their existing communities. As a general rule, the way that I think about the management fee business, I think, well, the way that we as a team think about it is we would like to enter into a management arrangement where we have an ultimate pathway to ownership of the real estate, either in whole or in part. And so managing for 5% of revenues on a standard term 3-year management contract, we don't believe that adequately compensates us for the programs, the platform, the systems, the name of Brookdale that we bring to those communities. So that -- and not to say that we won't do that, and we certainly have relationships with our institutional owners that we cherish and value for whom we currently manage. But as a general perspective, we feel like we are entitled and should be compensated more than just a simple straight up-and-down fee against gross revenue. So we will do it, it's a tool in our toolbox, but we will do it sparingly, absent some sort of belief that we can capture more value -- more of the value that, frankly, we think we are producing and creating.

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

Andy, I appreciate the comments on your outlook for acquisitions. Maybe just a little more detail on it. If you're looking at more one-off facilities or larger portfolios and if the latter, how do you feel about your ability to compete for some of those larger portfolios right now?

The -- we're looking at acquisitions. Our pipeline, Dana, includes small tactical acquisitions. We've also got some large portfolios that we're exploring right now. I'd say, from my perspective, the cap rate environments hadn't changed too terribly much. So some of the larger acquisitions, we probably would pursue them in partnership with others, although, that doesn't mean there's some plenty of large acquisitions that we were thinking about doing on our own. And it's just the facts and circumstances for each particular opportunity are just different. I will underscore that I think there are opportunities out there for us to take advantage of, but we're going to be judicious and opportunistic and swing at the fat pitches where we can identify them and we're confident we'll be able to.

Okay, that's helpful. And just, Mark, you had mentioned you're below your target leverage. Just remind us where is the target and how comfortable would you feel going -- or how far above that would you go?

Sure, back in 2009, I think we set a target at 6x net debt to adjusted EBITDA. We're roughly 5.5x at the end of the fourth quarter, and then our guidance would imply that we get down in the low 5s next year. I think we're still comfortable with 6x as a number, and it's simply another way that we can finance some of the acquisition opportunities that we're exploring.

Okay. And just the last one for me, Mark, I think you said on the ancillary side that we should look for operating income up 10% to 15%, is that right?

That's correct.

Okay. Is that something you'd expect to start right away or would you be looking more for the second half of the year to get to those levels?

I think it'll be relatively consistent through the year. The seasonal -- there's a little bit of a seasonality built into that business now because of the way the Outpatient Therapy with new cap works. That business actually does a little better early in the year. At the same time, part of the growth there is coming out of our Hospice operations maturing, and that should advance during the year. So I don't have the math right here in front of me, but I would think it would be pretty consistent growth on a net basis as you go through 2014.

And sir, we have no further questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.

Thank you, Brent. With that, we'd like to thank you, all, for your participation. Management will be around today for follow-up questions, either email me or give us a call, and we'll get back to you as soon as we can. With that, thank you very much.

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