Brookdale Senior Living Inc. (BKD) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Ginger 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 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise [Operator Instructions] Mr. Ross Roadman, you may begin your conference.

Thank you Ginger, and good morning, everyone. I would like to welcome you all to the fourth quarter 2015 earnings call for Brookdale Senior Living. Joining us today are Andy Smith, our Chief Executive Officer; and Cindy Baier, our Chief Financial Officer; and Mark Ohlendorf, our President. 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 joining us. We always appreciate your interest in Brookdale's progress and we have a lot to talk about this morning. Today is a special day, it's you first opportunity to hear from our new CFO. As you know Cindy Baier joined Brookdale at the beginning of December and so I want to welcome here to the call today.

Thanks Andy.

Cindy will review our fourth quarter performance and talk about our 2016 outlook in detail. So I will focus my comments on the progress we made in 2015 and talk about the key drivers of our business as we look at 2016. There are three things I would like you to think about. First, 2015 was an extraordinary year despite the challenges we had to overcome and yet we are now well positioned to capitalize on our platform and strong industry dynamics. As planned, we spent 2015 bringing together two really big enterprises to create America's largest senior living provider. Our goal however was always to make Brookdale not only the largest, but the best senior living provider and we are well on our way to do so. Putting all of our communities under one set of systems and processes was an enormous task. Through all of this, there were disruptions with occupancy decreasing and not meeting our own expectations. We've again turning the corner on performance mid-year and the fact remains that Brookdale is well positioned to capitalize on our market leading position here as well. The industry has strong macro tailwinds. The senior population is growing at a rate greater than any other population group. We know 70% of seniors will need an average of three years of some form of senior care and at the same time, the number of those who traditionally have taken on the role of family caregiver is declined and general awareness of what the industry does to improve people's lives is growing. There are so many more positive associations as more people have great experiences with our products and our services. We are well positioned because Brookdale brings a number of competitive advantages into this growing marketplace. I will remind you that seniors are attracted to the broad set of products and services we offer so that as their needs change and increased Brookdale is still the right partner for them. Also, we have a large footprint with a presence in nearly all of the top markets with large number of seniors and their adult children living quite close to a Brookdale community. So geography it's in our favor. We've been investing heavily in the quality of our properties to drive occupancy and improve rate. Our size and scale provides us with the resources to continually improve how we attract residents manage operations and assure the best possible care. And finally, we have plans in place to address new supply, this includes the investments in our communities that I just mentioned. And in general we continue to see new construction in our sub-markets at about half the rate of the overall market. Also, we believe that we will see positive absorption in most of our sub-markets over the next year as the number of potential residents who can afford our services grows faster than the new supplier. And we also believe that penetration will potential increase. The second thing I want to share with you this morning is that as I look forward to 2016 I’m excited about our execution plan. We have our teams in place and we are focused on execution. In addition to Cindy becoming CFO in December, you will recall that the Labeed Diab joined as Chief Operating Officer in early November. And I have to tell that he hasn’t stopped moving yet. We are already seeing the positive effect of lending new ideas with the incredible depth of experience and knowledge within Brookdale. That combination of franchise and historical experience we cultivated by hiring Labeed and simultaneously promoting Mary Sue Patchett to reporting to him as she leads community operations. So in 2016, we are focused on execution with three components to that. We plan to grow occupancy, we plan to grow revenue and we plan to simplify and improve our day-to-day execution. Here is our plan to rebuild of occupancy in 2016, we are continuing our integrated multi-channel marketing campaign, lending national, regional and local marketing activities. This campaign work to improve occupancy in the second half of 2015 and we expect that will continue. This marketing blend increases the number of leads with a higher proportion of those leads being generated internally. Internal leads are better than those we buy, as they have a higher conversion rate than outside leads. So we an execution plans for rebuilding occupancy. We also expect to increase our revenue per unit growth, by increasing monthly service fees and reducing concessions. Of course, we are always careful about any price increases and we will remain sensitive to our customer's willingness and ability to pay, with a full adoption of our personal services plan system on January 1, in the formal and Emeritus communities. We can now better begin to capture additional revenue associated with the care that we provide in those communities. That will be a solid step forward regarding revenue. Additionally, we expect to reduce long-term concessions made to encourage move-ins. Over the last quarter or so, we have success with increase in short-term time bound incentives while decreasing longer term permanent discounts. This is a positive, because short-term concessions have a smaller impact on our long-term revenue growth while still stimulating demand for our units. The net result will be a powerful driver of revenue growth in 2016 and beyond. The third piece to our execution plan in addition to building occupancy in revenue is to simplify our business. It's important to simplify and improve how we operate, so that we can spend more time with those that we serve. Under Labeed and Mary Sue's leadership we are solidifying a number of operational effectiveness initiatives to simplify the workload of our community associates. And we are working to improve management of our sales processes to increase the sophistication of our unit pricing and to assure that our procumbent process is capitalized on our increased scale. All of these will further increase our competitive positions. So we have talked first this morning about 2015 and the progress that was made in spite of our challenges. And we have also talked about our execution plans for 2016, growing occupancy, increasing revenue and simplifying our business. The third thing I want to talk to you about this morning relates to our corporate strategy. Now that the whole scale changes from the integration are largely behind this, we are in a processes of refining our corporate strategy. Our primary objective is to maximize the strong foundation that we have today to create substantial value for our shareholders, while reaffirming our commitments to our other stack holders. Several months ago, we engaged a top-tier strategy consulting firm to partner with us on this project, which takes a comprehensive look and how we reached four potential for Brookdale. This includes optimizing our portfolio to strengthen our position in priority markets, identifying opportunities to better leverage our scale and drive best practices through operational excellence and driving new longer term financial improvement by stream lining our G&A and our overall cost structure. We are moving with haste, but this work will take a little time. We expect the initial phase of the project to continue into the second quarter of this year. And we look forward to sharing more with you as the project progresses. Finally, I would like to update you on the outcome of the work of our Board and investment committee over the last several months. As a remainder, we strengthen our Board last year by adding four new members with significant healthcare and real estate experience. Mark Parrell, Bill Petty, Lee Wielansky and Dan Decker have been great additions to our board. The Board also reconstituted our Investment Committee and charged it with revealing our capital allocations strategies and assessing potential options and alternatives available to us to create value for our shareholders. Management the investment committee in the board along with our financial and legal advisors conducted extensive analysis and thoroughly evaluated a wide range of alternatives and this included active engagements with a number of market participants. The Investment Committee and the Board have unanimously determined that at this time the best path for Brookdale to enhance shareholder value is to continue to focus on pursuing our long-term growth strategy and executing our existing business plan. As I stated earlier, we believe that we are well positioned to capitalize on our platform and our market leading position. Particularly, with the integration of Emeritus largely behind us. By producing improved operating results and realizing upon the benefits of the merger, Brookdale will be well positioned to create substantial shareholder value. With that said, the Investment Committee and the Board will be turning their attention in near-term to efforts to optimize our portfolio, leveraging the work underway with our strategic consultant. We remain very disappointed in the performance of our stock over the last several months and we continue to find that unacceptable given our belief and their underlying value of our business and our growth prospects. The Investment Committee and the Board are also in the process of reviewing whether to authorize a share repurchase program as an additional means of enhancing shareholder value. There are obviously numerous considerations that must be taken into account in connection with such decision. We will update you regarding these matters in the normal course of shareholder communications. Now I'll turn the call over to Cindy for the business performance review.

Thank you, Andy. It's a great pleasure to be here today. I'm so excited to be part of the Brookdale management team. I believe there is a tremendous opportunity to drive shareholder value and at the same time while providing critically needed services to senior. As I talked about joining the team here, I realized that Brookdale is a company that really matters. We are the leader and a unique industry. Senior living is one of the very few industries with the potential to impact every single person in America either right now or down the line. So, it's very rewarding to know what a great and positive impact we can have on pretty much American. So again, it's very glad to be here. This morning, I'll take a few minutes to come in our overall company results for the fourth quarter of 2015 and then review our 2016 outlook. Let me start with our fourth quarter results. We accomplished a lot during the quarter and I'm pleased with our adjusted CFFO results. Importantly, we met our expectations. Adjusted CFFO for the fourth quarter was $106.6 million or $0.58 per share that's a 9.5% year-over-year increase. Our full-year 2015 adjusted CFFO per share was $2.40. As we discussed in our press release, we exclude integration, transaction, transaction related and electronic medical rollout costs from adjusted CFFO. The full details of these exclusions are in our press release and supplements. Our fourth quarter 2015 adjusted EBITDA excluding integration, transaction, transaction related and EMR rollout costs increased 4.4% year-over-year to $197.5 million. Revenue for the quarter was $1.2 billion, nearly level with the fourth quarter of 2014. Our quarterly consolidated senior housing revenue per unit increased 1.9% year-over-year. We had strong performance in our retirement centers while our quarterly senior living revenue per unit increased 3.8% on a year-over-year basis. Our CCRC quarterly senior housing revenue per unit performance was soft, because of the decrease in skilled nursing revenue, a modern flu season increased demand for nursing services. Our skilled nursing business with higher revenue per unit and a lowest margin compared to the rest of our portfolio. So the softness in skilled nursing has a larger impact on revenue than it does on operating income. We were pleased with the consolidated senior housing rates for the quarter, as we expected was generally compared with the third quarter. Now that most of the integration is behind us, our main focus is on execution and we are making progress on occupancy. Our fourth quarter average occupancy for the consolidated senior housing portfolio increased to 86.8% that's an improvement at a 10 basis point from the third quarter. We made significant improvement in our retirement centers where our fourth quarter occupancy increased 40 basis points from the previous quarter. Consolidated skilled nursing performance, which represents about 3.5% of our portfolio capacity was soft, countered as historical trend there was a 13 basis point sequential decline in our quarterly skilled occupancy rate. Again, the moderate flu season impacted these results. We continue to see progress in our build and marketing initiatives, our integrated multichannel marketing campaign produced more internally generated leads during the quarter than in the third quarter. Given that our internally generated leads have historically has a longest sales cycle, we believe is the benefit of the occupancy is hopefully yet to come. Looking at our senior housing portfolio on a same community basis, we experienced that our fourth quarter 2015 ongoing income grew 4.1% on a year-over-year basis. We've made sequential progress on total quarterly revenue and our year-over-year revenue was slightly lower than the prior year. Our ancillary services provided $17.3 million of operating income during the fourth quarter that's consistent with the third quarter of 2015. I'll note that this piece of the business isn’t operating at the profitability that we think is possible, so we've invested in building the network and now we're working hard to build the case load. Also, we're continuing to rollout our programs into the former Emeritus building, so our profitability wasn't very wired it to be during the fourth quarter. We have reason to be optimistic that the case loads will improve as we become better integrated into these communities as the provider of choice and we will be better able to leverage our fixed cost. Unfortunately, we're still working on the regulatory permit issue in California. Movements there would be a significant progress. General and administrative expense was $92 million for the fourth quarter of 2015. G&A cost included non-cash stock based compensation expense of $5.8 million, it also included integration, transaction, transaction related cost and electronic medical record rollout cost of $23.6 million. General and administrative expense excluding these items was $62.6 million. This is a $7.4 million increase from the fourth quarter of 2014 and which [Technical Difficulty] early by increased advertising cost. A change in where we have been rewarded for G&A into the community to our accurately portrait where all the operating cost savings are occurring. And staff retaining from integration work back to their regular job. Let me point out a few additional items on the income statement, you'll see several larger non-cash charges this quarter, the first is an asset impairment charge. By way of background, every year we perform a review of our assets to measure caring value against estimated fair value given projected cash flow. This quarter based on that review and the decline in occupancy over the year, we are writing off $57.9 million of caring value. And second, we recorded a $105.3 million tax valuation allowance on the income statement following GAAP accounting guidelines as we review our deferred taxes. This is GAAP matter not a tax matter. We still expect to eventually use all of our net operating losses for tax purposes as we now project that we will become federal tax payer in 2020. Turning to balance sheet, nearly all of our $3.6 billion of debt is secured mortgages, along with the $310 million outstanding on our secured line of credit at the end of the year. We will have a relatively small amount of maturity this year and are already working to refinance some of our post 2016 maturities. Remember, this is high-grade debt sourced in the mortgage backed securities market where we haven't seen any reduction in credit availability. At the end of the quarter, we had a $106.6 million available under our line of credit and $88 million of cash for a total liquidity of $194.6 million. At the end of the year, we sold the first group of assets that we had previously discussed escalated for disposition. The rest of the transactions are scheduled to close over the next few months. We've isolated these assets held for sale in the balance sheet and their results will be included in our results until they are sold. So to summarize, we accomplished a lot during Q4. Now let's talk about our outlook for 2016, we are targeting resident fee revenue which includes senior housing and ancillary services revenue to be in the range of $4.2 billion to $4.3 billion. The midpoint of our guidance represents a growth of approximately 2%. Remember that the 2015 base has the community that has been disposed off or will be disposed off. Removing these communities from the base would add approximately two points to revenue growth resulting in a growth rate of over 4%. More specifically on Brookdale ancillary services we expect ancillary services revenue to be in the range of $470 million to $490 million as we continue to rollout into the former Emeritus community and expand outside our wall. Our outlook for adjusted EBITDA is $935 million to $955 million excluding certain items, I will mention in a moment. The midpoint of our guidance represents growth at approximately 4%. We're targeting CFFO to be 245 to 255 per share excluding these same items. The midpoint of our guidance represents growth of approximately 4%. Our adjusted EBITDA and CFFO guidance excludes these items, transaction and transaction related costs, costs associated with our final integration effort including some upfront costs to recruit our new leadership team. Strategic project cost such as scaling and enhancing systems like CRM to meet the needs of our larger company, refining our strategy, capturing procurement savings and cost efficiencies, rolling out EMR to assisted living and memory care communities. We expect that the 2016 amount of our adjustments to CFFO and adjusted EBITDA in the aggregate to be less than half of the 2015 total of a $123.7 million, excluding any expenses associated with unplanned transaction activity. 2016 is a rebuilding year, during which we expect to deliver a meaningful improvement in the senior housing business. We stabilized our occupancy levels and our positioned to the continuing growth during 2016 and beyond that. We expect to see the normal seasonal pattern through occupancy growth with the second half of the year producing more growth than the first half. As you think about our guidance for 2016, remember that we lost occupancy during the first half of 2015 and stabilized occupancy in the last part 2015. So our year-over-year comparison in the first half of the year will be challenging as we rebuild occupancy. The first quarter is a particularly tough comp. Note, again that we are expecting to make progress and improving our occupancy over the course of the full-year and subject to normal seasonal patterns. Pricing will be one of the primary drivers of revenue growth. As Andy mentioned, we expect to make significant progress on growing revenue per unit particularly in the former Emeritus communities. We expect that our portfolio will be slightly smaller in 2016 than it was in 2015. With sold 16 communities of the end of 2015 and we are in the process of selling 18 additional communities in 2016. These communities represent 2933 units an approximately $90 million of revenue in 2015. The communities produce little operating income and the disposition will result in slightly lower interest cost. So the disposition isn’t expected to have any meaningful impact on adjusted EBITDA or CFFO. We will be focused on solid community operating expense control in three areas. First, we expect to partially offset potential wage pressure with expanded use of our labor management system. Second, we are consolidating facility management to a single nationwide vendor. And third, we have initiative design to consolidate and optimize our food and beverage spends. These last two areas consolidation of facilities management and consolidating and optimizing our food beverage spends are examples of how we can leverage Brookdale’s size as a competitive advantage. Our business isn’t yet running as efficiently as we believe it can overtime, and so we are focused on capitalizing our industry leading position. We've got the largest platform in the industry and we are managing over $6 billion of revenue when you consider the revenue of our managed communities. So we believe that there are many opportunities to capitalize on this scale. During 2016, we expect our G&A expenses to grow faster than revenue for three reasons. By focus through a focus on integration have return to their data, our bonus compensation will return to more normal level and we will continue to build the technology platform to support our long-term growth potential. For example, we are enhancing the capabilities of our corporate sales and marketing functions to create more sophisticated approaches to procuring and managing leads. With all that said, we expect G&A to be in the range of $255 million to $265 million excluding the noted items above. Our G&A percentage as a percentage of revenue is higher than likely to be in 2016 and we are launching initiatives to improve our future G&A ratio including working with our strategy consultants to assess with our cost realignment. While we've completed the vast majority of Emeritus integration, we believe there is opportunity in the G&A area to improve our efficiency through automation and process redesign. So that we are starting a comprehensive review of G&A cost to identify areas with the potential for additional savings. We will give you additional information on that as the project progresses. During 2016, we are targeting various significant improvements in our operating cash flow. Improving the profitability of the business should drive 3% to 7% improvement in CFFO. The largest driver is increasing our revenue faster than our expenses. We believe strongly that in 2016 we will appropriately capture our rate increases and continue to see positive mark-to-market in our rates. Also, we expect to retain market share as we improve our occupancy during the year. For the all reasons that Andy highlighted a few minutes ago, we believe that we can achieve significant improvement in 2016. Over the last several years, we have chosen to reinvest much of our operating cash flow back into the portfolio. You may recall that legacy Brookdale launched a multi-year program in 2010 to refresh its portfolio. We've had a primary focus on acquired communities with significant deferred capital needs. This program has been active for five-years and has made significant fiscal improvement to the portfolio. Additionally, as part of the merger, we underwrote a three year process for renovation and deferred infrastructure project specifically for the legacy Emeritus communities. So as we look at 2016 we expect our recurring CapEx which is included in CFFO to be $65 million to $70 million net of reimbursements. We expect our total CapEx net reimbursement and excluding the recurring CapEx to be approximately $255 million to $265 million, including EBITDA enhancing major projects, corporate and Program Max, our development program. Once the accelerated renovation CapEx is completed during 2017, we'll focus on getting back to a more nominal run rate for community CapEx, this will keep us in the forefront as an industry leader. So that's the summary for the fourth quarter and our 2015 outlook. We accomplished a great deal last year and we have solid plans in place for 2016 to be a year of rebuilding. Before I turn the call back to Andy, I would like to say once again, how excited I am to be a part of the Brookdale management team. I see great opportunity ahead of us to strengthen the business and to enrich so many more lives. I believe that 2016 is an important year as we leverage our size and scale as the largest senior living provider in the country. Thank you. Andy.

Thanks, Cindy. As we get ready to take your questions now, let me summarize by saying I'm encouraged by the progress we're making. With the systems integration activity is largely behind us, we have our teams up in running. We have a solid execution plan to grow revenues and to simplify our business and we are making important refinements to our corporate strategy to maximize the strengths of the entire enterprise. We are happy to turn the call over to questions now.

[Operator Instructions] Your first question is comes from Ryan Halsted with Wells Fargo.

Thanks, good morning. I was hoping you could maybe provide a little more color on the revenue growth guidance, it sounds like you are looking for some occupancy gains, could you sort of outline what kind of occupancy increases you are looking for and then obviously pricing is a big driver, any more color on where you are seeing the pricing outlook?

Well, as Cindy said in our prepared remarks, if you heard the revenue expectations we have, we expect occupancy to behave similar to or in accordance with seasonal patterns. So a little bit softer in the first part of the year and then we expect occupancy to grow in the latter half of the year. Breaking down revenue, we would expect to see more revenue growth from the rate side of the equation and the occupancy side of the equation.

Okay and then on that rate growth outlook, any sense of the range of rate growth that you are looking at? I mean in the markets where you think you have significant pricing power, I mean how aggressive do you really thinking it could be relative to the overall industry? And then in those markets where maybe it’s a bit more competitive, is the outlook for pricing to be above wage or cost inflation by a certain basis points about 50 bps to 100 bps is that kind of how you are thinking about the dispersion of your rate growth?

We are expecting and intending to capture pretty strong rate growth generally speaking in 2016. Now obviously we adjust our rate expectations by what is going on in the local market, so if there is new capacity that's coming on board we have to adjust our rate expectations to account for that. But as again across the board generally speaking we are expecting to be on the stronger side in terms of our rate increases both with respect to in place residence and with respect to residence that we move in as we mark-to-market. And we do expect our rate increases to reflect the fact that we're expecting a little bit of labor pressure certainly and pockets of the country on the coast, a little bit in the Midwest, so we expect our rate increases to be in excess of where we expect our labor increase is to be.

Okay and so on that last point, you are guiding to 4% revenue growth, what kind of additional headwinds are you expecting that sort of is not contributing to more operating leverage where you might see 4% top-line growth translate to 5%, 6% EBITDA and CFFO growth like it has in the past or historically?

Ryan this is Cindy, thanks for the question. One of the things that’s different for us this year is that we are ending 2015 with a lower occupancy than we started 2016. So we have to grow occupancy during the year to achieve our 4% revenue growth adjusting for those 90 disposition. We feel pretty good about the rate increases that we had, particularly given that our January rate increase have gone very smooth for us.

Okay. I'll get back in the queue. Thank you.

Thanks Ryan.

Thanks Ryan.

Your next question is from Josh Raskin with Barclays.

Hi, thanks, good morning. So one of the comments Andy that you made around the Board of Directors sort of finalizing their process and looking at external opportunities and everything and just deciding that the long-term growth strategy is the best for shareholders. Can you help us to understand maybe what does that really mean, I mean I don' think the street is particularly excited about the growth rate in earnings for 2016. So what is normal, what does long-term top-line growth mean and then what does that translate into long-term EBITDA or CFFO growth?

Well I would say Josh again as Cindy said in here prepared remarks, we view 2016 as a year of rebuilding. Again we believe we've stabilized the platform coming through the integration and so we think we're using 2016 as a starting off point, to build long-term value we would expect overtime that our growth rates would be in excess of what we have in place for 2016. But again as we come into 2016, we faced a reality that our occupancy rate when compared to January 2015 to January 2016 is lower. And we expect to make meaningful improvement on that and meaningful progress on the occupancy front as we go through 2016, but it’s a reality that where we are starting off with. So I don't think that these growth rates at all reflect what our longer term expectations would be into 2017 and beyond that. Again, going back to the merger, we were always clear that we thought we would get the - realized full benefits of the merger in the third year, 2017. We continue to believe that will be true and we are excited about our long-term prospects. But we are where we are starting off 2016.

Now that's fair, I guess Andy more from a bottoms up as you think about the Brookdale business model, your opportunity long-term, favorable demographics, ability to sell ancillary services, what is long-term not 2016 or 2017 for the next five-years what does revenue growth look like on an annual basis and what should that mean for a bottom line growth?

Well, I'm not in a place to give you - again, we're working, we're excited about the work that we're doing with our strategy consultant. We would expect as we go through 2016 to layout for you all or for everybody who is interested in Brookdale, our longer term growth prospects. But I'm not in a position right now Josh to give you guidance on five-years. That’s part of the work that we're doing with our strategic consultant. Again, I would reiterate that we think our growth prospects in the average years are certainly more robust than what we are guiding you to in 2016.

Okay and then just maybe one follow-up just on more smaller detailed level, you talked about the in-house versus external lead generation, the focus on in-house, can you just give us a little more color on statistics around that. What conversion rates look like, do you do a little bit better on rate, is our concessions lower all that sort of stuff?

The conversion rates for internal lead has compared to external lead those that we buy is about four times greater. There is not a meaningful difference between the concession rate or the discounting that we might do, because our sales folks are going to be using their toolkits and they are discounting programs or their simulative programs consistently irrespective of who the lead might be. But the conversion rates are what is most important which is about four times higher and therefore a much more productive lead source for us.

I can also add when leads come in from our internal sources, they tend to have a healthier population and they end to stay with us longer. So once the move-in occur, they tend to be residents with Brookdale for a longer period of time.

Okay that’s helpful. Thanks Cindy.

Thanks Josh.

Yes that’s okay.

Your next question is from Joanna Gajuk from Bank of America Merrill Lynch.

Hi thank you so much for taking the question here. So just a couple of questions here. You mentioned that the marketing campaign and you have seen some benefits there, so can you talk about costs there, what cost has been incurred in 2016 and where do you expect to be in 2016? And the other question I had on Emeritus you know specifically you mentioned - so a similar question, how much was realized in 2015 and what's included in 2016?

Okay I'll take the marketing cost. Our marketing costs were a little inflated in the fourth quarter which Cindy mentioned. The marketing costs that we have in our plan for 2016 of course are included within the guidance that we gave you. I would say marketing is a little bit elevated as compared to 2015. But we don't expect to have a huge additional marketing budget as compared to what we showed for 2015. Synergies?

Joanna, your second was overall synergies from the Emeritus transaction?

Yes. However you want to break that if that’s possible that will be helpful.

Okay, the G&A number that Cindy guided to for 2016 is a post-synergy G&A number. So by the time we reached the end of 2015, the infrastructure is substantially combined from the standpoint of cost. The ancillary service synergy we continue to see those numbers achieving our targets in 2017, we have had some delay again related to both the development of the case load and getting the permits in California. So if we look at 2016 separately it would be a bit behind the initial forecast that we have done for 2017 we believe continues to be intact. The community level cost savings, we are running well ahead of the non-labor forecast that we have done, we achieved procurement level savings. so this is buying food and supplies and so forth of a little over $30 million in 2015, we expect that synergy number procurement wise to grow to accumulative roughly $70 million in 2016 and beyond that we are also receiving some significant savings in the insurance programs. So running well ahead of our initial targets in terms of community level cost savings.

so you said $70 million accumulative by the end of 2016 is pretty much to $30 million or $40 million incremental in 2016 that’s pretty much driving the EBITDA year-over-year growth at the midpoint of 4% is that how you think about it?

To some extent, now again recall, as Cindy said the occupancy is starting the year at a lower level than we started 2015, so that’s the other item that you will have to consider in your calculus.

Right, and are you willing also to talk about the breakdowns in terms of the pricing versus occupancy, I guess you did kind of subjected that you still expect occupancy to grow in 2016 versus 2015. Is that the right way to think about it, but that’s very minimal if you are talking about the midpoint of your guidance I guess in growing revenue over 2%. So that’s pretty much all pricing, is that the right way to think about that?

So Joanna this Cindy. We do have to improve our occupancy during the year, because 2015 we lost occupancy during the year, so we are expecting to build occupancy during the year, but we are not expecting a significant average occupancy increase year-over-year. Does that make sense?

Right you had a starting point is lower. And then the last question…

Joanna just to be clear, the starting point is lower that’s a reality unfortunately. We also expect the portfolio to behave in accordance with seasonal patterns which we have discussed many times before. So we do have growth - we do expect to over the course of the year subject to those normal seasonal patterns we expect to begin to get back the market share that we lost.

Right and the last question a quick one on I guess leases, I appreciate all the details in terms of the guidance for the year with some elements, so can you just remind me 2016 [Technical Difficulty] saving on leases.

So it's $6.5 million of interest savings from the HCP transaction built into the 2016 guidance.

And it's occurs largely towards the end of the year.

Good. Thank you, that’s all from me.

Thanks Joanna.

Thank you.

Your next question is from Brian Tanquilut with Jefferies.

Hey good morning guys. I guess Andy or Dan is in the room, the question that I have just on the decision of the Board on the strategic review. I mean given where the stock is and how its traded over the last year or even the last three months. How do we think about the options in front of the company and the Board today to generate shareholder value? Considering that you guys have obviously done an evaluation of the strategies of the options there.

Yes, well we have and as I said in my prepared remarks, we after having done in the exhaustive evaluation, the Investment Committee and the Board has determined that in terms of capturing the real shareholder value that we think is inherent in our assets and our platform. We think the best thing to do is keep the company organized the way it is right now and execute upon our plan. Now obviously that decision is made in light of current market conditions in light of where our share price is trading, in light of what we think. At that level we are confident that the overarching value of the company is, we have take all of those things into account our Board does in considering whether there are additional transaction methods of capturing that value. And at the moment, the Board has decided that after all of this work that the appropriate thing for us to do in order to create value for our shareholders is to keep the company organized the way it is right now, to execute upon our plan, to refine our strategy through the work with our strategic consultant, along with all of the management team. And to build a longer term value that we think it is inherent in our business.

And Andy we've seen you guys sell some real estate here and there in the past and I think we are all in agreement that the stock is trading below real estate value. So is that an option at this point given tax liabilities and just operational considerations?

Yes, you can be assured that - I think you heard in my prepared remark, I talked about optimizing the portfolio. One of the components of that is at lease potentially thinking about a disposition program for additional set of assets as we prioritize the markets we wish to be in and we try to maximize what the portfolio is and looks like and enhance our future growth prospects. So sure it could include that in a variety of different forms and fashions. And so we are working on that that is a tool in the tool box.

Okay and then just from a confidence on the guidance perspective, obviously 2015 was soft. So how do we gain confidence in your visibility into rate growth which you talked about rate growth being the stronger driver of revenue growth this year. What is your visibility into that and how do you have confidence in your ability to hold or grow occupancy at this point?

Well Brian, you are right 2015 was a tough year for us and we certainly are glad that these whole scale integration activities are largely in the rearview mirror. So we think we've got a base to build upon and the platform and a team here that is newly augmented to really reinforce all of the good stuff that we had going on at Brookdale on first place. In terms of rates, remember that we raise rates two different ways, one is with respect to our in-place residence and in assisted and memory care portion of our business which of course is the majority of the units that we have. We raised those rates in the first quarter of the year, January for the most part to a more limited extend in February. As Cindy indicated, in her prepared remarks that process has gone smoothly this year and so we have growing visibility or visibility into the rate increases that happened in January that gives us confidence. We also believe the investments that we've made in our communities, especially the Emeritus communities and our consolidated portfolio, those investments were completed towards the latter part of the year. That gives us confidence that those building has been refreshed that we can grow with rate in those communities. We think we're making, we have made number of improvements with respect to our marketing and sales processes that we like less believe will give us increased opportunity to capture rate. I mentioned in my prepared remarks that we now have complete visibility and the differential between what the care piece of the charge was in the legacy Emeritus communities as compared to legacy Brookdale communities. We know that there is a large differential, we can't capture that differential immediately, but we can begin to capture going in to 2016 and that's a big opportunity for us to grow rate and revenue in those communities. So that's a number of the factors that gives us confidence that we can increase rate the way we've discussed and what is included in our guidance.

And I really want to add that integration of any large company or any large merger is very disruptive, what Brookdale saw to a certain degree is to be expected and I'm happy that the integration is largely behind us, so we can get back to the business of operational execution and focusing on delivering our guidance.

All right, got it. Thanks guys.

Thanks Brian.

Thanks Brian.

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

Good morning, a couple of housekeeping here. Just to go back to the ancillary part of the story for just a second. The guidance for 2016 that does not assume any approval in California, is that correct - true or false?

It is not specifically dependent on any approval in California, although we do hope that our licenses will come through.

Okay, so if they were to come through that would be an upside in ancillary?

That's correct.

Okay and then in terms of just going back to this portfolio optimization, could you give us any kind of general framework about like how potentially big that could be in terms of number of facilities that you would evaluate or looking at for disposition?

Frank, it would be again the 34 communities that we have announced for 16 of which we disposed of, the balance of which we are in the process of disposing of over next several months. Those did not fit into any strategy that Brookdale had for going forward. We are not in the place right now to articulate any plans for additional disposition activity either in terms of the size of the scale of it. I will say to you that that is simply a project that we are working on both as a management team and along with our consultant, we are working on that.

Got you and maybe one for Cindy in or actually for all of you but as you look at your balance sheet obviously you did talk about maturities and refinancing things like that's going well. But longer term, how do you feel about leverage and look comfort with the levels of debt particularly with the commentary about considering looking at share repurchases?

I'm pretty comfortable with our balance sheet, the 2016 debt we don't have very many maturities or the majority of our 2017 debt is either in the process of being extended or its secured by assets that are either under scale or under contract. There is a large amount of leverageable equity, included in our 2018 maturities. Now, most of our 2018 debt is fixed, so refinancing too far out triggers some significant prepayment penalties. I think we've got enough levers that we can look at that we should be fine. Clearly, we want to focus on improving liquidity, any CFO in any company would say the same, but I feel very comfortable with where we are.

And you gave a long-term target for a leverage levels like debt to EBITDA or adjusted debt to EBITDA?

I’m comfortable with where we are and also comfortable if we took a down turn or so.

Okay and I guess just one final CFO kind of question. Now that you have got your annual guidance out and you made some commentary about seasonality, but in terms of just the cadence over the quarters of the year do you want to offer us any kind of last minute guidance on how you see those directionally over the four quarters of 2016? Thank you and I'll hop off.

I think seasonality is a big driver and I think the second driver is comparing against the comps of 2015. Clearly, we are starting the year at lower point from occupancy that we would like and so we got to rebuild during the year. Those are the primary cadence points I would point to.

Okay. Thanks.

Thanks Frank.

Thank you very much for the questions Frank.

Your next question comes from Chad Vanacore from Stifel.

Hey good morning.

Hey Chad.

Hey so one of the things that’s pretty clear is that there is a divergence and performance on the legacy Brookdale portfolios on Emeritus portfolios. So what are some of the differences in those portfolios that are driving that performance?

Well, you are right there is a differential at least if you look at the same-store numbers. As you know and we've discussed many times the rate performance in the Emeritus portfolio has for quite a long time been relatively low, pretty anemic. That's one of the drivers. We've also had to again in accordance with our plan we've added labor to some extent of Emeritus portfolio as we've gone through 2015 that's like last part of the driver. But I would say the big differential is occupancy in both portfolios suffered in 2015 and is not yet recovered. Right performance in the legacy Brookdale portfolios was much stronger than in the legacy Emeritus portfolio. And again, the Emeritus portfolios has had a little bit of where we've added labor to through the course of 2015.

And the only other thing that I would add is, we're getting some synergies as a new Emeritus expense particularly improvement in our insurance performance as a result of better claim.

All right then also it looks like you get that JV with HCP and that seemed to actually perform better, what are you doing there that's driving performance?

Well, you are talking not about the entrance fee JV but the traditional senior housings JVs is that what your question is directed at?

You could add both of those for us?

Okay, with respect to the entrance fee portfolio, we had a very good quarter in that joint venture with respect to entrance fee sales. We sold a lot of contract in the fourth quarter and therefore the net entrance fee receipts were strong. With respect to the other joint ventures we have with HCP that are embraced the core seniors housing products and independent assisted and memory care i.e., not the entrance fee platform. I think it is fair to say that those joint ventures especially the one that includes 49 assets that came from Emeritus, HCP which we owned 10% of the joint venture, HCP invested very heavily and very rapidly in terms of the CapEx that they drove into or that we collectively drove into that platform. And I think a big driver of the growth and a big part of the performance of that platform has been those investments that we made along with getting those assets onto Brookdale's systems.

All right then how should we think you had mentioned about some wage pressures in 2016, how should we think about that and how does it balance against the synergies cost control that you expect?

So we're expecting a waited increase of about 3.5% that includes 2.5% normal inflation and then we've got some add on pressures for minimum wage as well as wage pressure in certain parts of the country predominately on the west coast and specifically in California.

All right that’s it from me. Thanks.

Thanks Chad.

Thank you.

Your next question is from Dana Hambly from Stephens.

Thanks good morning. The stock now of another 15% this morning, and you mentioned a share buyback and with this kind of movement influence the decision soon rather than later on that?

Well I think our Board will act on it with urgency with respect to the repurchase issue. Again, we have to balance a number of different factors there. I haven't even been looking at what is going on in the market today, because we're on this call, but you can presume that as I said, we're extremely frustrated as a Board and as a management team, we are extremely frustrated with where our share price is. We don't think it's trading on the fundamental, we don’t think it reflects in anyway the intrinsic value of our assets or our business. And so we have do balance as a Board. The obviously attractive investment opportunity to buying our shares back represents, but we got to make sure that we are careful in that or at least balanced in that the source of funding for such a program, our need to continue to invest in the quality of our assets, any other current economic environment that’s out there which includes the fact that leverage is out of favor. And so, while as Cindy said we are comfortable with our current leverage levels for sure and we've got plans in place to refinance our 2017 and 2018 maturities. We just got to be mindful of the situation and where we at leverage wise. But we are going to be working on it very hard, we are very frustrated with where our share price is, which we know is true of our shareholders and you know and its certainly true of management in our Board. So we are looking at that with urgency I’ll say that.

Okay that’s fair. And Cindy what is your access to capital right now, if the buyback happens?

We do have access to capital through our line of credit as well as some under levered assets in our portfolio.

Okay. And the engagement with this consultant, is that an open ended engagement or are there some finality to that?

Well it's not open ended, I mean we have clear set of work streams that we have been working on with this consultant for the past several years to improve the business to hone our strategy and to make sure we are getting the full advantage of the Brookdale platform. But no it's not an open ended thing Dana I mean.

All right that’s helpful. And then just on the - I know you are not giving quarterly guidance and I'll have to go back and check the transcript, but it sounded like the first quarter was going well. I hope that’s not the case and so obviously it's a difficult year-over-year comp, but maybe how can we think about the first quarter sequentially did occupancy kind of deteriorate towards the end of the fourth quarter. I think with being kind of light flu season that would set up pretty well for the first half of the year. Any color you could add there would be helpful.

Well, we are certainly sending a signal that it was negative with respect to the first quarter of 2016. I think the only thing that we were trying to do was to reflect to back that again there is reality here that our starting point compared to the first quarter of 2015, in terms of absolute occupancy is lower. But we do expect normal seasonal occupancy patterns to occur in the first quarter of this year, but I will say that the January performance of the platform was completely consistent with our plan.

Okay. thanks very much.

Yes.

Thanks Dana.

That is all the time we had for questions today. I will now turn it back over to Mr. Andy Smith for any closing remarks.

Okay thank you all for joining us this morning. We are pleased to report you about our plans to grow occupancy to increase revenue and to simplify our business. And we are excited about the refinements to our corporate strategy in the works to maximize the strength of the entire organization. We look forward to talking with you in a few months at the end of our first quarter of 2016. Thanks again.

Ladies and gentlemen this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.