Brookdale Senior Living Inc. (BKD) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Third Quarter 2015 Earnings Call. [Operator Instructions] I will now turn the call over to Mr. Ross Roadman, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Angela, and good morning, everyone. I would like to welcome you all to the third quarter 2015 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 of the 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 would like to turn the call over to Andy. Andy?

Good morning and thank you for being with us. I have progress on several fronts to report to you this morning. We’ve reported in line results for the third quarter with $0.59 per share of adjusted CFFO. And earlier this week, we announced some very exciting organizational developments and additions to our management team. Finally, I’ll provide an update regarding the continuing work of our Board’s Investment Committee. First, our third quarter results were essentially in line with our expectations and our guidance. We achieved an occupancy increase of 50 basis points when measured from the month of June to the month of September. The 50 basis point increase is roughly consistent with our expectation of a 60 basis point to 70 basis point increase from June’s average through December. Our sequential quarter average occupancy grew by 20 basis points as we expected. We were somewhat promotional during the quarter as reflected by our same-store average revenue per occupied unit growth of 1.7%. We also showed good expense control during the quarter and continued to progress on delivering operating cost synergies. I’m encouraged by the progress we’re making on the basic blocking and tackling of our business, aided by having the bulk of the systems integration activities behind us. This is not to say that we are finished with the integration, we have work to do to optimize the use of the systems and processes that are now in place throughout the organization. Beyond that, we are making improvements in how we execute. Let me give you just a few examples. Last quarter, we talked about a challenge with community level leadership turnover. We adopted a number of different initiatives that we believe are making a difference and we’ve seen our turnover in the top three community positions return to historical norms. But that isn’t our goal, our goal is to reduce turnover to a minimum. On the marketing front, we are beginning to better achieve the value of our national footprint and brand. For the fourth quarter, we implemented a multichannel marketing campaign that includes television, print, direct mail, digital, public relations and social media at the national, market and community level. The combination of these initiatives will drive approximately 0.5 billion impressions in the fourth quarter. Our early results are positive. In the first three weeks of the campaign, total enquiries have increased by 15%. We are also seeing positive gains across the sales funnel with improvements in scheduled and completed visits from our contact centers and brookdale.com, up 25% and more than 10%, respectively. I’m excited also that we have hired two accomplished talented executives with decades of large company experience to join us at Brookdale as Chief Operating Officer and Chief Financial Officer. We are pleased to have Labeed Diab join the company as Chief Operating Officer. He has broad executive experience, tremendous energy and a proven track record of success at large, complex multisite businesses. He brings significant retail and health and wellness operational experience, having most recently served as the President of the Health and Wellness of division of Walmart, a $30 billion business with 85,000 employees. In that capacity, he led the growth and success of Walmart’s transformation into a provider of full service health and wellness services, implementing these services across 5,000 locations including pharmacies, vision centers and retail primary-care clinics. He also served Walmart in a variety of field management roles with direct bottom-line responsibility for a large number of geographically dispersed operating locations. Prior to Walmart, he was a regional executive in Aramark’s Health Care Division focused on providing food and technology services to over 200 hospital systems across North America. As Chief Operating Officer, Labeed will report to me and will have responsibility for all aspects of operations, including community and field operations, our ancillary platform, marketing and sales. As a complement to Labeed, we have promoted Mary Sue Patchett to be our Executive Vice President of community and field operations. Mary Sue has been our division president for the Southeast division. She has 30 years of experience in the senior housing field, including having served as Chief Operating Officer of Horizon Bay, one of the largest operators of senior housing in the country before its acquisition by Brookdale. We are also excited to have Cindy Baier join us as Chief Financial Officer. Cindy brings almost 30 years of executive leadership experience in accounting, taxation, finance and treasury functions. She is currently the Executive Vice President and Chief Financial Officer of Navigant Consulting, a leading professional services firm traded on the New York Stock Exchange and she is actively involved in their health care practice. Cindy has also held leadership positions in a number of organizations that have complex multisite businesses. Cindy will be responsible for the traditional CFO functions and will also report directly to me. Mark Ohlendorf will assist Cindy in transitioning into the CFO role as rapidly as possible. Mark will also be shifting his focus to, among other things, our revenue growth opportunities, including enhancing our pricing power in local markets and new innovative service solutions. Both Labeed and Cindy will be relocating to Nashville and we look forward to having them join our leadership team as we work to complete the Emeritus integration and leverage our opportunities as the leading senior living solutions company in this country. Finally, I’d like to provide an update on the work of our Investment Committee. Earlier this year, we reconstituted our Investment Committee and charged it with reassessing options available to Brookdale to create value for our shareholders. While this is an exercise that the Board regularly conducts, we thought it’s appropriate in light of the various market conditions to formalize that assessment in the Investment Committee. The Investment Committee has worked diligently over the past several months. We have discussed repeatedly and at great length along with our financial and legal advisors the various options available to Brookdale in market conditions that impact both the type of options and the likely valuations associated with each. We remain confident that Brookdale is a uniquely valuable asset. Management, the Investment Committee and our Board remain completely committed to the creation and maximization of shareholder value. In that regard, we are acutely aware of how our stock has performed over the recent months and we find that unacceptable given the long-term strength of our company and the value associated with our underlying assets. The Investment Committee and the Board along with our advisors will continue to advance their work regarding the potential options and alternatives available to us, including our capital allocation strategies, all in light of current conditions. I want to reiterate that at this point the Investment Committee and the Board have not eliminated nor have they prioritized any value enhancing alternative, transaction or strategies. I assure you that we remain committed to transparency and as such we will continue to provide regular updates on our plans and progress in the normal course of shareholder communication. Separately, our management team is focused on completing the integration of Emeritus which must be completed irrespective of whether we pursue any other value enhancing alternative or strategy. The Emeritus transaction was and is about strategically positioning our company in the best possible way to benefit from the changing demographics and health care landscape in this country. We remain highly confident in the benefits that this combination will ultimately deliver to our shareholders. With that, I’d like to turn it over to Mark for his comments.

As Andy said, we produced third quarter results in line with our expectations, highlighted by increased occupancy and strong expense control. CFFO was $108.7 million, a 9% increase from the prior year, and adjusted EBITDA was $227.2 million, a 16% increase from the third quarter of 2014, in each case excluding integration, transaction, transaction related and EMR rollout costs. These headline numbers are obviously impacted by the fact that the third quarter of 2014 included only two months results following the closing of the Emeritus merger. A big driver to our guidance that we gave last quarter was that we projected occupancy decline through the remainder of the year by 60 basis points to 70 basis points from the month of June starting point to the projected average for the month of December. Our average occupancy grew through the quarter from the month of June’s 86.3% to the month of September’s 86.8% resulting in a 20 basis point sequential improvement for the full quarter from the second quarter’s 86.5%. The legacy Brookdale portfolio produced a 60 basis point improvement from the months of June to September and the legacy Emeritus portfolio produced a 50 basis point growth between those months. For our consolidated skilled nursing portfolio, it’s typical and expected for the third quarter occupancy to be seasonally weak and we saw 190 basis points sequential decline from the second quarter. We’d expect a rebound in the skilled occupancy in the fourth quarter, consistent with typical seasonal patterns. Our independent living, assisted living and memory care occupancy, in other words our occupancy without skilled nursing, increased 60 basis points from the months of June to September. We produced this occupancy growth through a number of initiatives. We utilized the balanced marketing approach combining national lead generation programs with local marketing activity; we continued to improve our sales process by analyzing and focusing on the most likely to convert leads and by improving our lead squaring methods; it is also typical during this period of higher lead generation to use discounts and incentives to close more sales. We were aggressive this year, particularly in the legacy Emeritus portfolio, we thought we needed to create occupancy momentum and consciously decided to trade some rate for occupancy. Many of these incentives used burn off over time leaving us with an occupied unit at an attractive rate as we progress through 2016. We also focused on reducing move outs through initiatives involving operations, sales and our clinical teams with good success. Continuing on with our pro forma same community data for senior housing for the third quarter of 2015 compared to the third quarter of 2014, our occupancy softness which began last November and continued through the first part of this year continues to impact the same community numbers. While the current quarter same community occupancy improved sequentially by 20 basis points versus the second quarter, occupancy remains significantly below last year. Expense growth showed strong controls in growing cost synergies. While the Brookdale portfolio showed positive same community NOI growth in spite of the year-over-year occupancy shortfall, operating income for the Emeritus portfolio with rate growth impacted by the third quarter’s promotional activity showed a modest decline from the third quarter of 2014. Our ancillary services business was below our expectations for the quarter, producing $17.4 million of operating income, flat with the second quarter of 2015. Our ancillary services rollout to the Emeritus communities continues to lag our expectations. While we’ve rolled out our home health services into 17,000 more units since the merger, building productive case load in those units is taking longer than planned. We also continue to be hampered by delays in obtaining regulatory permits, particularly in California. General and administrative expense was $99.5 million for the third quarter of 2015. Included in G&A cost was non-cash stock based compensation expense of $10.1 million and integration and transaction related and EMR rollout cost of $35.8 million, which included a significant amount related to the completion of the implementation of EMR in all of our skilled nursing locations. General and administrative expense excluding these items was $53.6 million. I want to close by providing some comments on our view regarding supply and demand in our markets. With our market reach, it is a fact that we have seen and will continue to see competitive new supply in our markets. New supply is not an issue in all of our markets, but as in any industry with growing demographic demand dynamics, there is some new supply. The impact of new construction generally occurs in a geographically localized way. In our own case, new construction is reported to be approximately 5.5% of inventory in our top 91 markets. But within 5 miles of own communities, it is approximately 2.9%. We also continue to see that it’s generally the case that new buildings are not opening right down the street from over own buildings. Many of the current construction projects are being built in submarkets where existing senior housing penetration rates are lower, meaning the number of units per qualified senior, those aged 75 with $50,000 of annual income is below the overall market’s average. Also, well over 60% of the new unit construction is being built in highly affluent submarkets. In contrast, our portfolio is more evenly balanced through the economic spectrum. As we’ve stated before, we’ve seen a relatively steady stream of total openings in our major markets over the last few years and the data shows that it will remain at nearly the same 20 opening per quarter level that we’ve seen. But supply is only one side of the question. One also has to look at the growing demand side to get a complete picture of the supply/demand dynamics. As we’ve said before, we looked at the demographic growth of those aged 75 plus with annual incomes over $50,000 as our target prospects. That group is projected to grow at roughly 8% per year for the next five years or an additional 300,000 age and income qualified seniors per year. Based on this fact alone, it is clear that the market needs more units. At the same time, both we and the balance of the industry have seen that penetration will increase as new supply comes on stream. Two studies were presented at the recent NIC Conference that showed in both Boston and Houston that new communities increased penetration in demand without diminishing the occupancy in the surrounding competition to any meaningful extent. We’ve experienced that to be the case in more of our markets, including Houston, Denver and Riverside, California. We just came through a period of time where the recession depressed demand and therefore heightened competition. We learned some things from that. We saw five years ago that we needed to invest in our portfolio to remain competitive and that is why we commenced a five-year accelerated CapEx renovation program in the legacy Brookdale portfolio. It’s why it’s important to invest in the legacy Emeritus assets as well. It’s why we upgrade our services and amenities and do the extra things like put Wi-Fi in all of our buildings. It’s why it’s important to focus on high quality care and it’s why it’s so important to build a brand and to use our scale to develop differentiated product offerings. While we feel supply is growing because it is needed, we take competition seriously and it’s why we remain excited about the prospects of what the largest market leading platform can do to attract more than our share of customers. We will now turn the call back to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Your first question is from the line of Brian Tanquilut with Jefferies.

Mark, thank you for all that comments on the supply/demand equation. So I guess to summarize that, how does supply impact you guys? I mean, because I know that there are a lot of fears both for investors and even some players in the industry, the resounding on higher supply, so how should we think about the trickle-down effect, if any, to Brookdale?

Obviously, any new competition in the market has some impact us at the margin. Each market situation is quite different. I think probably the most important fact that I went through there in my comments is the fact that if you look at the aggregate supply growth in our top markets, the inventories growing at roughly 5.5% across those broad markets, but the actual directly competitive new supply is less than half that number in our case. And again, we’re in a situation where those over age 75 with more than $50,000 a year of income, that demographic is growing by 8% a year. So the demand side of things is growing very rapidly as well.

And then just a question on your integration of Emeritus, Andy, the comments you made, it sounds like the integration is mostly done. So as you progress through that, what is your view today on synergies, both on the revenue side and the cost side?

You’re right, the systems and the infrastructure cut-overs of the integration are in fact nearing completion. Again, as I said in my prepared remarks, that doesn’t mean we’re done with the integration. It will take some training and some time to develop and hone the use of those systems and tools, but the great bulk of the work, it’s so distracting out there in the field, is getting behind us. Our view in terms of the revenue synergies we expect to get from the Emeritus transaction as well as the operating expense synergies is consistent with what we’ve said before. We think we’re going to get the revenue synergies, measured in the third year, so call that 2017, we feel good about that. We’ve also pointed out to folks previously that now that we have an ability to assess all of the Emeritus residents using our tool sets, we can quantify the differential between what legacy Brookdale charges for care as compared to what Emeritus charges for care. And that’s a big number. That’s a real opportunity for us over time to incrementally capture that additional revenue. On the operating expense side of things, as we said in our last quarter call and have said many times, we’re excited about the prospects that our consultants and our procurement teams have developed and we feel like the operating expense synergies, actually we know that the operating expense synergies that we’re going to generate from the transaction are quite a bit larger than we originally underwrote.

Andy, just on the rate commentary, so you had a little more discounting this quarter. How should we think about your strategy going forward in rates and how should we think about that relative to what – because you’ve always comped yourself against the industry, so how does that look today versus industry rate growth?

If you break it into pieces, if you look at the legacy Brookdale portfolio, you will see that we continued to outperform the market in terms of our rate growth in the third quarter. As we’ve said consistently, the Emeritus portfolio has had muted rate growth for several years coming into the merger and the year following the merger since we consummated it. Also recollect and remember that we adjusted our operating procedures with respect to the Emeritus portfolio such that we moved the rate increase process for the in place residents in the Emeritus communities to January and February of this year. So our opportunity to raise rates throughout the year on in-place residents, we don’t have that opportunity and won’t have it again until the first quarter of 2016. We’re going to get rate growth ultimately in the Emeritus portfolios by running the play that we’ve run many times in the past, that’s to get those communities on to our systems and our programs, to get them on to our pricing procedures et cetera and to invest in those communities to get them to a place that they are – that platform is available to as such that we can build rate. We have to make those investments so that we’re in a place to sell value as compared to what’s been happening historically.

Last question from me, Mark, as we think about same store margins, Brookdale was up sequentially, but Emeritus was down, so if you mind is giving us some color in that and how we should expect that, given Andy’s last comments on rate, the rate differential between Emeritus and legacy Brookdale?

The next moment that we would naturally see meaningful change in our rate performance would be the first of the year, that’s where we raise in place rents for the lion’s share of the assisted living portfolio. So you’re unlikely to see significant changes in the rate performance until you get to the early part of next year.

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

Actually want to ask on three items. But first on the marketing side, the success you’ve had so far in your new national marketing initiative, I think you’ve done something like this maybe in the past, I’m just curious if you could remind us how that works, the success of that work, what was the timing of it, and how is this one different from that one? And is this a time of the year you want to go into a national marketing campaign to get to the heavier moving activity that comes in late spring?

You are right, Frank. Several years ago in the legacy Brookdale platform we ran a similar campaign and operated to good effect. We expect the same thing here, again we’re three weeks into it, we are very encouraged about the early results. We expect that to build based upon the multichannel marketing campaign that we’re running and absolutely we think this is the right time to do it. Although again, we expect to run this program for the next 12 months, but we would expect growing momentum from all of this coordinated and multichannel marketing work as we move through the next 12 months.

Second one on – I think you mentioned that your turnover level at your field level positions EDs were starting to turn back to pre-merger levels. Is that just basically you’ve got all the change-outs that you need to have and you got the right people in the seat right now? Are there any other structural changes coming from that? And then is there any, as it relates to labor in general, can you talk about any wage inflation that you’ve seen out in the field?

Sure, of course. On the turnover question or the retention question, we adopted a number of different initiatives, but I have to say that the primary driver of returning to normalcy there would be, one, the fact that the integration distraction is dissipating. I think that would be the principal point. And the second is we’ve now had a year of operating the Emeritus platform under our belt and people – we’ve gotten people more with the program and people are more committed. Those who weren’t committed to going forward have left the company. By the way, I’m really excited to say that we’re seeing in just this past month, we saw actually for executive directors who left us a couple of months ago who have actually returned to the Brookdale family. So again, I think we feel like we are seeing a return to normalcy there on that front. With respect to the labor markets generally, I don’t have much to add, Frank, from what we’ve said previously. There are pockets of the country where we are seeing a little bit of tightness in the labor market. That would be California, we are seeing a little bit of tightness there, a little bit in Wisconsin and Minnesota as it happens, but I’d say that’s isolated to a minority of our different markets. With respect to labor cost increases, the same thing is true. We are seeing a little bit of labor price pressure, that’s mostly on the coasts, primarily for us in the case of California where we are seeing minimum wage laws change, things like that that are creating some marginal labor pressures for us. But really we don’t have much to add from what we’ve said previously on the labor front.

And then finally ancillary is obviously more – continued delays in California, any alternative vehicles to accelerate that process and then why do you see there seems to be a slower uptake in parts of the country where you have implemented it?

With respect to California, we remain frustrated that we’ve been unable to get the permits that we believe we are entitled to. But you are correct, Frank, that we are dropping back to a plan B to develop alternative arrangements to get those permits which would probably require us to go back to what we’ve done many times before which is to acquire those permits in the market through an acquisition or two. Those California markets are important for us with respect to home health. There are 30 to 35 buildings that we feel like are just sitting there for us to roll out our ancillary services platform to them and that’s an important part of the growth with their health services as we move forward. So we do have to drop back to at least plan for an alternative to if we can’t get the State of California and CMS to move more rapidly than they have up to now. The rollout, there is some softness in the home health census compared to our growth expectations in a couple of isolated markets with respect to the balance of the Emeritus platform where we’ve rolled the programs out to. Those have to do frankly with just fundamentally executing a little bit better in a couple of isolated markets and of course we’re working on that and expect to improve the growth of that census as we move forward.

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

I want to stick on the discounts and incentives that you mentioned, and Mark it sounded like you’re more aggressive on the Emeritus side, could you just maybe walk us through what exactly you’re doing in terms of discounting and any statistics in terms of percentage of residents that are on some sort of discount versus not and any data just to figure out how that differs versus what you’ve done in the past?

When we report rate performance in the same store numbers, that is all net of the impact of whatever promotions and incentives and discounts that we have in place. So it’s essentially reflected in the growth rate numbers that you see there. I don’t think it’s possible to give you a generic answer to that question. The pricing strategies and therefore the promotional incentive packages are stratified and targeted based on different markets with different dynamics. Particularly around occupancy, both in our own communities and in the broader market, not surprisingly we are typically prepared to more heavily discount a unit that you would consider to be an unattractive unit because of its amenities, let’s say, doesn’t have a great view, a long ways away from the dining room, you would be more likely to discount that room in a lower occupied building in a lower occupied market. So we’re we are constantly managing both the incentive packages and also the asking prices, particularly in higher occupancy buildings throughout the portfolio.

Maybe just pragmatically, how long do these discounts persist? I mean, you gave someone – I guess, if we’re changing the rate, obviously that can last for a year, these discounts just for a couple of months, and I know you mentioned we’ll see the in-resident rates come up in January, but I guess we’re just trying to figure out how long does this persist?

Josh, again, it’s difficult to generalize, but as a general rule what we would try to do is to provide a simulative incentive to get somebody to move in that would be of short duration, so that it would burn off, the notion being that you promote – provide a promotional discount to allow somebody to move in and then over time that incentive burns off such that their rate jumps back to a more attractive rate for us.

Next question, do you have an update in occupancy for October?

Our October occupancy, I would say two things about that. We held on to our games in September and we are up a little bit. In October, we also began to see that turnaround that Mark referenced in his prepared remarks with respect to the skilled occupancy, it began to build and that’s continuing to at least through the first couple of days of November.

And you’re still on pace you think to get the 20 to 30 more basis points in 4Q, or I guess September to December?

Yes.

And then just last question, you talked about staff retention tools, is it just simply we’ve gotten rid of those that weren’t committed or are you doing something in terms of incentives and bonuses and things like that for your EDs?

We are not doing anything special in terms of incentives or bonuses. You are correct that some folks who didn’t want to be part of the continuing program et cetera either voluntarily or involuntarily left the company. But I would also say there are a host of things that we’ve done internally, we think, that are directed towards improving retention of these positions. Couple of things I’d mention will be we’ve got ED mentor programs where we’ve married up new executive directors or new either because they just joined the company or they’ve comes from the Emeritus platform with legacy Brookdale, or more senior executive directors to provide a partnership arrangement. We believe we’ve improved dramatically our training techniques through technology and simply better programming that is making a big difference in terms of folks’ job satisfaction. We’ve developed a proprietary system which we call BEST, which we are very proud of that we think is an attractive tool and feature for executive directors, clinicians and sales folks. We’ve sent our sales folks through a number of different training programs that we believe is illustrating to them that we’re making investments in them so that they become more connected and show a longer durability in terms of their staying with Brookdale. So we’ve done a host of things, but in returning to normalcy, I would say a lot of it frankly is simply getting the pain in the neck part of the integration largely behind us.

And your next question is from the line of Stephan Stewart with Goldman Sachs.

Just to touch on the real estate here, I think you guys previously mentioned plans to dispose a select number of communities that maybe don’t fit the long term plan and I know that REITs have been talking about high asset prices of late. Any update there and can you talk about maybe the environment, interest from potential buyers, types of valuations you’re seeing?

What we are doing, Stephan, just to make sure we are talking about the same thing, we have a modest disposition program for roughly 30 assets or so that really aren’t part of our longer term strategy as we move forward. We are in the process of disposing of those assets, I think that we would expect to do so beginning at the – maybe have a closing right here at the end of this year and then maybe at the end of January, principally. Those transactions are proceeding in accordance with our expectations as we initiated that process both in terms of valuation and timing. I’d say with respect to the market generally, on an asset by asset level basis, you’re still seeing pretty good pricing power and a pretty low cap rate environment with respect to where we’re seeing assets trade.

And just a follow-up on the Emeritus synergies, I know you guys have said couple of times that the facility level synergies are significantly greater than you thought. Any way you can size the order of magnitude there, just to give some ballpark for how we should be thinking about it? And then on the G&A side, I guess where are we there and how should we think about the run rates going forward?

On the G&A side, we are obviously not yet in a position to provide our guidance around 2016 yet, but when we do so, I’d expect that over 2016 G&A number will be the post-synergy G&A number for the combined enterprise. By the time we get through the fourth quarter of this year, the vast majority of the infrastructure staffing changes will be in place. So the run rate that we get to in 2016 should fully reflect the synergies that we are expecting. Your first question around the community level synergies, remember, when we articulated the synergies at the local community level, we talked about a net synergy number of roughly $20 million and that reflected savings in the non-labor area of roughly $80 million and then reinvesting in the staffing in the portfolio to the extent of roughly $60 million. What we know at this point is that the savings in the non-labor area will be substantially higher than the $80 million. We’ve just completed the implementation of the fourth wave of the system and process integration that puts in place the tools we use to assess resident needs and identify appropriate staffing in the Emeritus locations. That process is ongoing. Until we complete that work, we’re reluctant to share half of the information, if you will. The other thing that is a reality that may impact our thinking a bit on this as we provide guidance for 2016 is there are some proposals out there that impact wages more broadly, some localized changes in minimum wage for example, also some changes around who qualifies to be exempt or salaried employee. We want to be sure that our thinking reflects the best information we have available on that as well.

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

So two questions here. Coming back to the discussion around pricing [indiscernible] legacy Emeritus portfolio, is that the reason why the delta in the margin performance between the two portfolios, was there anything else there, maybe the comparison year-over-year, but what I’m getting at is the same store NOI declined 11% for Emeritus, but it was actually up 2.7% for legacy Brookdale. So I’m just trying at what’s going on with legacy Emeritus and what’s driving that significant decline year-over-year?

It will be largely the difference in the rate performance year-over-year. We also had softer occupancy performance in the Emeritus portfolio than in the legacy Brookdale portfolio.

And then on CapEx, so the recurring CapEx this quarter was a little lower than what we thought, so is that the reflection of the fact that you just slowed down some spending because you’re trying to focus on other areas or the question I guess where I’m getting at is do you still expect about $70 million range for the full year in recurring CapEx?

We would not change our annual guidance range for CapEx.

And then lastly in terms of the performance in occupancy, sequential performance in occupancy by the different types of products, so independent living part of the portfolio did better than assisted living, so that also maybe a reflection of that there are more units being added, assisted living units being added out there in the market or is there anything else to think about there in terms of the difference in the performance?

I would say, Joanna, a couple of things about that. Across the entire industry, certainly inclusive of our portfolio, independent living has performed better over the past several quarters. That was the sector that was hurt the most in the great recession and began to recover the slowest as it’s less demand oriented than assisted living or memory care. So I think that’s part of it. I think you’re seeing strength across the industry and certainly in our portfolio on the independent side of things. It is absolutely true to the extent that there is new construction out there, it is primarily in the assisted and memory care space. So that would probably be part of it. At least on the margins as we’ve said, if there is new construction in one of our markets, we have to deal with that and again that’s been more in the AL and memory care space. So that’s probably part of it.

Your next question is from the line of Ryan Halsted with Wells Fargo.

Just wanted to start with the Investment Committee update you gave. I was curious if there is a particular timeframe you’re thinking for that formalized assessment process?

We are not in a position to announce a particular timeframe for a variety of reasons; it is a complex process. As I said, the Committee is actively at work trying to move forward with its work, but we are not in a position to just present you with a concrete timeframe. It’s complicated process.

How about any initial thoughts on your capital allocation priorities, how you see maybe capital priorities for community reinvestment versus returning capital to shareholders and versus delevering the balance sheet?

As I said, we are acutely aware of market conditions inclusive of where our stock price is currently trading. I don’t want to get in front of the Committee, we haven’t prioritized as I said in my prepared remarks any particular tactic strategy or alternative, but that has to include looking at our capital allocation strategies as you alluded to it and the Committee is doing that.

And then on the new executive leadership announcements, I’d be curious what changes or enhancements that you feel these new hires can bring to the much larger Brookdale enterprise are you most excited about?

I’m most excited about having folks with an experience set that’s from outside of our industry, managing large complex businesses with distributed services in a distributed services field. I’m most excited about bringing their talent and their experience and their energy to blend it with all of the senior living know-how and experience that we’ve got inside of Brookdale. So the idea behind this is to blend their experience base with our existing experience base and make one plus one not equal two, but equal five.

In the past you’ve talked about a big opportunity of expanding the cross-selling opportunity, it sounds like Labeed certainly has a lot of experience with health and wellness services. Do you think that’s something you can potentially execute on sooner or start to realize in the near term?

I certainly believe that Labeed Diab and Cindy both bring experiences that we expect to take advantage of. And you’re exactly right; Labeed is a pharmacist by background. He has been involved with Walmart health and wellness business, which includes pharmacy, and that’s a big opportunity for us. So you would expect his experience base to help us try to figure out how to exploit that opportunity and other similar opportunities. In addition to that, Mark is going to be freed up to spend more of his time directly on trying to exploit those opportunities as well. So we’re working hard as we told you before to prioritize those different opportunities that we’ve got to cross-sell and to build new service solution opportunities for our residents and our families. And we would expect to be laying that out for you all, taking it from the abstract to better identify the actual priorities that we will be working on going through 2016. So we’re hoping to do that relatively quickly.

Maybe one last follow-up question, what’s the status of the Emeritus communities where you’re investing capital? What percentage of those communities do you anticipate being online by the end of the year?

We have roughly 150 refurbishment projects planned in the Emeritus portfolio this year. We have an expectation that we will get the vast majority of those started and many of them completed by the end of the year. As the cycle worked out, we ended up spending a fair amount of time in the CapEx programs related to the new JV portfolios earlier in the year this year and then the consolidated legacy Emeritus assets probably more bunched up around the third and fourth quarter. But we expect to make significant progress getting through those 150 projects in 2015.

Your next question is from the line of Daniel Bernstein with Stifel.

Andy, the language you used for the strategic reviews at least I thought was much stronger than you’ve used in the past. Is it correct to now call it a formal strategic review and have you hired any additional consultants to help with this review since you last talked about it on the last earnings call? Just seems like it’s much more formal than it was before.

Let me answer your technical question first. We got plenty of advisors and we are well advised and so no, we haven’t added anybody, but we are well advised. As you know, we have three different investment banks and [indiscernible] helping us on the legal front. Aside from that, I don’t have anything to add to what I said in my formal remarks.

The debt term outs, we noted that – I think that’s a very good strategy. If you can talk a little bit more about the opportunity to further term out some of that 2017 and 2018 debt, are there any restrictions to you terming out or extending those debt maturities, just once you would turn the plate going forward there?

There are a number of different pools of financing once you get out into 2017, so it’s hard to provide you with a general answer to that. Not surprisingly, to the extent those are fixed rate financings, the closer we get to the maturity date, the more financially feasible it is to prepay the debt or otherwise extend the maturities. So at this point, we are, as we have since the company has been public, trying to strike that balance between managing the term and duration of the debt, first is the cost to affect extensions of the debt and in general just keeping an eye on the interest rate environment and how we feel about that.

And just so, is that 2017 debt mainly coming due late in 2017 and same thing with 2018, is that late 2018 or is it spread out through the year? I’m just trying to get a sense of the timing of it.

It’s spread out, it’s scattered through both of those years.

On the asset sales, are you able to provide any generalization of what the proceeds might be? I know you may not report real specifics on each tranche or cap rates, but just trying to think about what the total proceeds might be and I assume that’s simply just going to be an offset to your CapEx needs and other capital requirements.

We will obviously report that information as those transactions close. We will largely use the proceeds from the sales to pay down our line. We are drawn on the line at this point and have been as we’ve prepaid some debt and done some asset acquisitions and so forth, so we have some opportunity when we generate cash proceeds to generate a yield that is better than just cash, if you will.

And then in terms of the rate growth, I don’t know if we could parse out a little bit of what was the impact on rate growth from a decrease in skilled nursing occupancy versus the discounting, I’m just trying to understand the impact of each on rate?

We have in our consolidated portfolio somewhere just over 2,000 skilled nursing beds, so that is roughly the mix and the occupancy in those skilled nursing beds was down about 1.9% in Q3 compared to Q2. So that is the math.

But it’s not easy to quantify that rate was impacted 20 bps by the decrease in skilled nursing, it’s not that easy to parse out like that?

It is certainly possible to do that, I don’t have an information on that front.

And then also I had a question on – just want to go back to the recurring CapEx, was there any reduction in that recurring CapEx as a result of the development projects that you started? In other words, did you close any units that [indiscernible] units that were closed as part of refurbishment that had impacted your recurring CapEx number for this quarter?

I honestly doubt it, there are literally thousands of and thousands of projects in those numbers. So it would be difficult to influence it in that way.

So it’s just a shift of CapEx into 4Q then?

I think that is generally the case, yes.

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

When we look at the legacy Emeritus portfolio, the facility operating income was $128 million this past quarter. That was down about $10 million sequentially from the second quarter. How should we think about the progression there? Do you feel like maybe this is the bottom or do we have a couple more quarters where maybe that bleeds out?

Again, when we let look at these year-over-year numbers, in either of the portfolios, but particularly the Emeritus portfolio, we saw starting roughly a year ago very soft occupancy performance, which has only started to turn in the last three or four months. So a big driver of NOI growth obviously in our business and particularly in that portfolio, given what’s happened with occupancy, will be healthy occupancy moves as we go forward.

Just thinking about it sequentially from here, you’d think we do start to see improvement just on the margin and the actual dollar that’s coming out of the legacy Emeritus?

Again, this is a little bit tricky, because we don’t provide quarterly guidance and we only have one quarter left this year. But the next moment that we will cause a meaningful change in the rate structure in the business, will be at the beginning of the year when we change in place rates. That is the next point you will see an opportunity for a meaningful change in the rate structure.

You’re not providing quarterly guidance, but it’s pretty easy to back in to what the guidance is for the fourth quarter, it’s a pretty wide variation, $0.10, is there anything we should be thinking about on the cost or revenue side that you guys don’t really have full control over right now?

I don’t think we’d add a lot to the comments we’ve already made on the call.

Just last one from me, Mark, you called out the EMR cost, I think you said $45 million, I’m sorry, $35 million. I think the supplemental had $42 million. So what’s the $7 million delta there?

There is an item, if you look at the income statement, there is a $6.7 million item that is essentially fees and costs associated with the debt refinancings we did in the quarter. There is a subtle difference in accounting between an outright refinancing and a renegotiation of debt and these two extensions we’ve done are being accounted for as essentially renegotiations. So that $6.7 million item causes a bit of a difference if you look at those numbers in the way you are. It just comes through the cash flow statement in a different place, but that’s the difference between those two.

That’s rather too much for me to handle. But the $53 million in cash G&A, that’s a pretty good number going forward?

That was the number for Q3. I’d expect that number will move up a bit as we get into 2016.

I would like to turn the call back to Mr. Roadman for closing remarks.

Thank you, Angela. With that, we’ve hit the top of the hour. We greatly appreciate your participation on the call. If you would like follow-up discussions, either email or call me and we will follow up. With that, thank you very much.

Thank you.

This does conclude today’s conference. You may now disconnect.