Brookdale Senior Living Inc. (BKD) Q1 2016 Earnings Report, Transcript and Summary

Good day. My name is Victoria and I will be the conference operator. At this time, I would like to welcome everyone to the Brookdale Senior Living First Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Ross Roadman. Sir, you may begin.

Thank you, Victoria. Good morning, everyone. I'd like to add my welcome to all of you to the first quarter 2016 earnings call for Brookdale Senior Living. Joining us today are Andy Smith, our President and Chief Executive Officer, and Cindy Baier, our Chief Financial Officer. I'd 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. Last night, we issued a release reminding people that we are presenting tomorrow at the Bank of America 2016 Healthcare Conference. We are presenting at 7:20 Eastern Time, 4:20 Pacific Time. I know that's kind of late. There will be a transcript out later. So we welcome everybody to listen to that. It's a fireside chat with Joanna Gajuk. So with that, I'd like to turn the call over to Andy.

Good morning and thanks for joining us. We appreciate your interest in Brookdale and I'm looking forward to our discussion this morning. We are pleased to have started the year with first quarter adjusted CFFO of $0.58 per share, which is a bit ahead of our plan. More on results in a few minutes, and Cindy will have the detailed financial review. I plan to cover three things in this call. What we see in the general market, what we are focused on in 2016, and then finally a few comments about our capital allocation plans. First, the industry backdrop for the quarter was stable. NIC reported its first quarter statistics a couple of weeks ago, which showed healthy industry metrics. Rate continues to trend upwards, and occupancy declined seasonally, but within normal historical boundaries. The NIC data also evidenced that new construction appears to be leveling out. In fact, NIC's most recent projection, which matched demographic trends, economic conditions, and penetration against new construction, projected that in general, absorption will match new supply for the rest of this year. Our own internal analysis shows that the level of new supply coming online to be consistent with what we have seen over the last several quarters. In our local submarkets, we still see right at about 3% new construction as a percentage of inventory versus 5.6% in the surrounding larger markets. This reflects the fact that one has to look at local markets to understand the potential impact of new supply impact of new supply. That said, new supply does present a headwind in selected markets. However, as some recent NIC studies show, new supply over time increases penetration rates, which blunts the impact of that new supply. In fact, a recent study showed that after 24 to 36 months, two thirds of all newly constructed assisted living and independent living properties were more than 90% occupied, while only 10% had not yet stabilized. That said, we understand where new supply in a local market will be challenging, and we fashion strategies to address that new supply. Now let's turn more specifically to Brookdale and what we are focused on this year. We made significant organizational changes during the fourth quarter. These included bringing on Labeed Diab as our Chief Operating Officer, and Cindy as our CFO. They have assessed the business, noted areas for improvement, and they are making significant progress. We have also added Anthony Mollica as the new President of Brookdale Health Services. Anthony brings a wealth of healthcare leadership experience to drive our ancillary platform forward and improve performance. While we have a lot of work to do, and it will take a little time, I'm confident that we have the operational and financial leadership teams in place to show significant results. To reiterate, our strategy for 2016 is to focus on improving revenue, improving occupancy, and simplifying and streamlining our business. That focus is starting to bear fruit. We are right on the plan that we guided to for revenue. Diving a little deeper, while both rate and occupancy are important, we believe that it's important to maximize revenue earned on the portfolio. That is revenue per available unit rather than maximizing either rate or occupancy in the isolation. Frankly, we feel very good about growing rate in 2016. We were successful at implementing rate increases in January for the majority of our assisted living and memory care units. As a result, our rate grew by more than 4% in the first quarter. We have now installed our personal services system in all of our communities. This system matches our care charges to each resident's acuity level. It will take some time to get the full benefits of that system, but over time, this will be a big step forward for us. We have dedicated resources to improving how we drive pricing, and we believe that over time we will be able to further optimize revenue per unit. To rebuild occupancy, we are continuing to refine and enhance our sales and marketing activities. We have created simple executable plans at the local level that focus on both move-ins and move-outs. We have initiatives in place to help us attract, retain, and train the best sales force. Our integrated multichannel marketing campaign, which blends national, regional, and local marketing activities, is focused on producing higher-quality leads with better conversion ratios. We are also enhancing the systems that support our sales force to better utilize the sales data our systems collect to ensure that our sales force is focused on the highest value opportunities. Our third area of focus is simplifying what we do. We are simplifying our operational processes to allow our community-level personnel to spend more time with our current and prospective residents. We are reducing the administrative burden on our three key local community leaders: the executive director, the sales director, and the health and wellness director. And we are providing them with more support in areas such as recruiting and staffing. The goal is to reduce turnover for these three key positions below historical norms because these folks are so critical to success at the local level. We have a proprietary system in place that simplifies the work of our community leaders and at the same time helps to ensure compliance with our operating standards at our communities. We call it the Brookdale Excellence Standards Tool, or BEST. The system has follow-up and feedback mechanisms for our community leaders to measure their own progress in meeting these standards. And we are beginning to work on the complexities in our overhead structure that have come from being an industry consolidator over time. So we feel good about our operational execution plan: to improve revenue, improve occupancy, and to simplify our business. I'm pleased to let you know that as I look back on the first quarter, there are some very positive signs of progress. First, we slightly exceeded our plan for adjusted CFFO as we maximized rate growth during a seasonally weak occupancy quarter. We effectively managed our senior housing operating cost through the entire portfolio. And we continued to expand the benefits of the Company's scale as we realized growing cost synergies. Let me close by talking a little bit about our capital allocation plan. 2016 is an important year for us to grow free cash flow from improved operations and through reduced capital expenditures, and for us to show increased -- to increase the quality and durability of that cash flow. To that end, we are actively exploring further rationalization of our portfolio. Our criteria for dispositions include current performance of the assets, local market dynamics for the assets, including new competition, and the CapEx needs of those assets. We also look at dispositions as a method of reducing the leverage, including lease leverage. We anticipate selling at least another 35 noncore communities in 2016. This is in addition to the assets that we have previously classified as assets held for sale. We are also exploring the divestiture of leased assets with our REIT partners, including advanced discussions with HCP regarding the disposition of up to 25 noncore communities that we lease from them. Besides generating cash, disposing of noncore committees will allow us to simplify and streamline our business. This gives us the opportunity to spend more time and effort on core assets in key markets. We will of course provide additional information on these activities as these processes progress. Our primary use of cash that we generate in 2016 either through operations or through asset sales will be to deleverage the business although our access to the credit markets remain strong, we fully understand the balance between risks inherent in leverage versus the rewards of using financial leverage to enhance organic growth. Our focus right now is on deleveraging, though we continually assess the best use of our capital as conditions change. Finally, I know that many of you are wondering about the progress that we are making on our strategic planning process. I'm pleased to say that we will be discussing our strategy in depth at our investor day on May 26 in New York City. I look forward to seeing many of you there. Now, I'll turn the call over to Cindy for the business performance review.

Thank you, Andy. I also want to thank everyone who took the time to listen to our earnings call today. 2016 is an important year for Brookdale and we're pleased to discuss our progress with you. This morning, I'll take a few minutes to comment on our overall Company results for first quarter 2016, review our liquidity and balance sheet, and reaffirm our Company guidance, first, our first quarter results. We accomplished a lot during the quarter and I'm pleased with our adjusted CFFO results, our adjusted EBITDA results, and the fact that we reduced the costs that are excluded from adjusted CFFO. Importantly, we modestly exceeded our internal expectations for adjusted CFFO, and adjusted EBITDA was exactly on our internal plan. First quarter 2016 adjusted CFFO was 107.1 million or $0.58 per share. When evaluating the progress that we're making in the business, I look at adjusted EBITDA, excluding integration, transaction, transaction related, and strategic prospect costs. Excluding these items, adjusted EBITDA was 219.6 million in first quarter 2016 versus 230.7 million in first quarter 2015. The decrease was primarily caused by the year-over-year decrease in occupancy of 130 basis points. We have reduced the costs that are excluded from adjusted CFFO by more than 23% on a year-over-year basis. Total revenue for first quarter 2016 was 1.3 billion, a 1% year-over-year increase. This included a year-over-year residency revenue increase of 1%. As we think about the results for first quarter, I want to highlight that we expected 2016 residency revenue growth to come primarily from rate growth. I also want to note that revenue from our disposed-of communities is reflected in our financial statements until the sale of the community. Since the beginning of 2015, we have disposed of 24 committees, including seven communities in the first quarter 2016, and we've terminated six leases. These dispositions and lease terminations of these communities resulted in a $13 million year-over-year quarterly revenue decline. This reduced our residency revenue growth rate by approximately 1 percentage point. First quarter 2016 same community consolidated senior housing revenues increased 1.5% year-over-year. As expected, our consolidated senior housing rate per occupied unit was generally a strong driver of our revenue for the quarter. Overall, our consolidated senior housing portfolio generated a 4.2% year-over-year increase in revenue per occupied unit, led by our retirement center segment, where the increase was 5.2%, and our assisted living segment, where the increase was 4.9%. These increases were largely driven by successfully implementing annual in-place resident rate increases and managing opportunities to obtain higher selling rates. Our first quarter 2016 average occupancy for consolidated senior housing portfolio was 86.1% versus 86.8% in fourth quarter 2015, a 70 basis point sequential decrease. Despite a mild flu season, our occupancy rate was a bit softer than we expected. We expected a decline in first quarter 2016 as a result of normal seasonality and our mix of units that are heavily weighted towards assisted-living and memory care, where there's higher attrition. Our results were within our historical experience, but behind our plan. We believe that our experience is consistent with the industry reports, which have been publicly reported in this earnings season. We feel optimistic about our initiatives to build occupancy. For the first quarter, we continued to manage senior housing operating expense as well. Given the dispositions of non-core assets, I focus on same community numbers. We experienced a 2.7% year-over-year same-community expense growth in first quarter 2016. First quarter 2016 expense growth was inflated by approximately $4 million by an extra day for leap year. We had 2.5% same community labor expense growth. This was a little below our annual assumption of 3.5%. We continue to hit our operating costs synergy targets, having achieved our Q1 cost savings. We are on track for the $70 million savings in our budget. Our ancillary services segment produced 14.5 million of operating income during first quarter 2016. This piece of our business still isn't operating at the profitability that we have historically demonstrated or that we think is possible. As planned, we have been expanding our programs into the legacy Emeritus communities and our caseload is building. For example, in the first quarter 2016, our home health census grew by 19.8% from the first quarter of 2015. We've made some progress with the regulatory permit issues and we've been able to expand services in one California community. Unfortunately, we are still working on the vast majority of the regulatory permitting issues in California. We haven't optimized labor costs, as we have expanded that platform quickly. This represents an opportunity for future improvement. I'm pleased to say that we've added Anthony Mollica as the President of Brookdale Health Services. Anthony and his management team are working hard to bring our costs back in line as well as to continue to build the caseload. We are optimistic that our ancillary service revenue will -- that our ancillary service results will improve as we proceed throughout the year. Our first quarter 2016 general and administrative expense was 92.6 million. G&A costs excluded the non-cash stock based compensation expense of 9.8 million. It also included integration, transaction, transaction related, and strategic project costs of 20 million. General and administrative expense, excluding these items and non-cash stock based compensation expense, was $52.8 million, slightly better than our plan. Looking at capital expenditures, total CapEx during first quarter 2016 was 61.2 million, which is net of third party lessor reimbursement. This included $13.3 million of routine maintenance CapEx that reduced CFFO and $47.9 million of other CapEx. During the quarter, we sold seven noncore communities that were recorded as assets held for sale at yearend, raising net proceeds of $45.6 million. There are 10 more communities currently included in assets held for sale. When these assets are sold, we expect to receive $65.9 million of proceeds and plan to use the proceeds to retire $60.8 million of debt. An additional community is expected to sell soon also, but with minimal net proceeds. Turning to the balance sheet, we increased our liquidity to 302 million at the end of first quarter 2016. We used proceeds from asset sales, refinancing, and operating cash flow to reduce the outstanding balance on our line of credit to 210 million. This leaves us a capacity to borrow of $231 million under the line. We also had $71 million of cash at the end of the quarter. As our supplement shows, our leverage remained nearly level with last quarter, with net debt to adjusted EBITDA of 5.8 times. Based on our results year-to-date, the company reaffirms its guidance for full year 2016. With our first quarter results and initiatives underway to improve revenue, we are maintaining our resident fee revenue guidance of 4.2 billion to 4.3 billion, with 2% growth at the midpoint of the guidance range. Our guidance includes ancillary service revenue in the range of 470 million to 490 million. We generally feel pretty good about our rate performance and have confidence in what that means for the rest of the year. While our occupancy for the first quarter was below our expectation, we did see an improving trend with move ins during the quarter. Move ins started to pick up in February and March turned out to be the second best move in month in 21 months. We are reiterating our G&A guidance of 255 million to 265 million, exclusive of integration, transaction, transaction related, and strategic project costs. We are making good progress on our operational review and still expect to be able to reduce our G&A costs by 25 million in 2017, excluding normal cost inflation. We are not reflecting any savings from this initiative in our 2016 guidance at this point. Our outlook for adjusted EBITDA is 935 million to 955 million, excluding our integration, transaction, transaction related, and strategic project costs. The company continues to expect 2016 full year adjusted CFFO per share in a range of $2.45 to $2.55. Adjusted CFFO excludes integration, transaction, transaction related, and strategic project costs. During the first quarter of 2016, the company reduced its full year projected capital expenditures guidance, excluding recurring capital expenditures of 65 million to 70 million included in CFFO to 210 million to 220 million. This is net of third party lessor reimbursements. The CapEx is broken down into the following buckets: EBITDA enhancing and major projects in the $115 million to $120 million range; corporate CapEx in the 50 million to 55 million range; and Program Max at approximately 45 million. I want to acknowledge that we received some feedback about the complexity of our capital expenditure guidance. We are reviewing our capital expenditure presentation with the objective of simplifying our analysis of the business. The guidance excludes the potential impact of any future acquisition or disposition activity other than the planned dispositions of 11 communities expected to sell in the near-term. So to summarize, we are off to a good start for the year. We modestly exceeded our internal plan for adjusted CFFO and met our internal plan for adjusted EBITDA. We feel very good about growing same community revenue while controlling expenses, significantly reducing the amount of costs that are excluded from adjusted CFFO, and improving the liquidity of our business. We still have much work to do and we are fully focused on areas of opportunity, including growing occupancy and improving the performance of our ancillary services business. With our improved liquidity position, we look to deploy available cash into deleveraging the business. I'd like to now turn the call back over to Andy. Thank you.

Okay. Thanks, Cindy. As we get ready to take your questions, let me summarize again by saying that I'm encouraged by the progress we're making. We have a solid execution plan to grow occupancy and revenue and to simplify our business. And we're making important refinements to our corporate strategy to maximize the strengths of our enterprise. We are happy to turn it back to the operator now so that we can answer your questions.

[Operator Instructions] Your first question comes from the line of Chad Vanacore with Stifel.

Andy, just in the commentary that Cindy made, she mentioned that move ins trended better in March. Can you give us some early indications of lead generation in move ins in April and May?

Yes, the trend in April kind of continued March. In fact, the April net move in move out that we had has been the best that we've had in the past three years. But I'd have to say to remind you, Chad, the way that our business works in terms of seasonality is occupancy drifts down and bottoms usually in the middle part either May or June of the second quarter. And then you build occupancy going forward. So as Cindy said we had a really good move in month in March. It was the best in roughly the past two years. April activity was good on a net basis. And again, as I say, it was the best we've had in the past three years. But we've got to get to that bottoming point so that we can build our occupancy as we go forward. It's too early to tell about May; we're just off to -- it's just too early to tell at this point.

All right, thanks, just thinking about overall margin weakness. How should we expect margin progression through the year?

We would expect our margin to improve throughout the year. As we think about the year, sort of Q1 is normally seasonally down in terms of occupancy, flattens in Q2, and then increases in the back half of the year. As our occupancy bills, that will grow our revenue, which will help our margin. Thanks, Chad.

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

Thanks so much for taking the question. So in terms of the numbers, can you repeat the number of assets that you mentioned and in terms of plans of selling, did I hear 34?

What I mentioned in my remarks, Joanna, was in addition to the assets that we currently have classified as assets held for sale, our anticipation on top of that as we move forward in 2016 is to sell an additional at least 35 assets that we own that are noncore to our business. That's one. Number two, we are also in dialogue with many of our REIT partners, but in particular with HCP to dispose of 25 assets that we lease from them. And that's separate and apart from the 35 assets that I just mentioned.

Okay. I just want to clarify these numbers. Okay, that's helpful. Because then it sounds like you are not really considering buying those leases from HCP because it sounds like these are noncore assets. So you just I guess or HCP will dispose of these assets and have another operator for those, is that the right rate?

Yes, that's right. Assuming we can get the agreements finalized with HCP, which we are again, as they said on their call, we are in constructive and active dialogue with them and hopefully we can do so. Nothing is done until it's done. But that's right. These would be assets we probably would not be interested in acquiring at least these particular ones.

Okay, that's helpful. So in terms of your guidance, or rather the fact that the CFFO came in modestly above your plan, but I guess you still sort of kept the guidance unchanged. But I guess sounds like modestly. So the guidance is wide. So maybe that's enough, but any additional color you would want to provide here in terms of keeping [Indiscernible] while having maybe some positive traction on the pricing side of things?

This is Cindy. Thanks so much for your question. As we think about it, we are very pleased that we modestly exceeded our adjusted CFFO for the year. But it's early in the year. And so while we're making good progress on our initiatives, our plan does build throughout the year. And so we think that maintaining guidance is the right answer for us.

Great, thank you and if I can squeeze just one last thing. Because in the supplement, you no longer really disclose same-store performance for the legacy Emeritus versus legacy Brookdale, which I guess is fine but any commentary there in terms of the legacy Emeritus that you are willing to provide in terms of occupancy and pricing. Because it seems like the assisted living performance of the assisted living segment, there was occupancy that's worse than retirement center. So I think that maybe is an indication that there's still -- that Emeritus assets are doing worse than Brookdale assets. So any comment you can give. Thanks.

You are right, Joanna. We feel like it's appropriate to provide same-store sales numbers now for the entirety of Brookdale going forward. We are one Company and that's the way we want to think about it internally and externally. But I'm happy to give you a little bit of additional color there. We are quite pleased that for the first time in a very long time, at least the past four or five years, we showed pretty good rate performance on the Emeritus platform. You'll remember over the past three, four years, the Emeritus platform has grown at their rates are roughly 0% to 1% and we were well north of that this year. So we are pleased with that. It is correct that they are probably Emeritus's portfolio was predominantly assisted-living and memory care. 82% of that platform was AL and memory care. And that's a place where there is new competition. It's mostly in that sector, assisted-living and memory care. And it's probably fair to say it is fair to say that there was more occupancy pressure on that part of the platform than there was on the Brookdale legacy Brookdale platform.

Your next question comes from line of Brian Tanquilut with Jefferies.

Andy, do you mind just giving us a little more color on the differential in performance between assisted-living and independent living during the quarter because occupancy seemed worse on the AL side?

You can see in our supplement that our retirement centers did better than our assisted-living platform so there was a little bit more occupancy pressure on the assisted living part of the platform. Again, that's a place where you are going to see more attrition in the AL and memory care side of things because that's -- obviously the acuity levels are higher there. And by the way, we did see a spike in flu. We did see a spike in flu late in March that affected that component of the business a little bit more heavily than it would the independent living side of things. So again, we expected to see more attrition in that part of the portfolio simply because of normal seasonality factors. And again, that's kind of to be expected.

So nothing specific to the asset or maybe the marketing program driving more IL? Or basically just the way it is, it seems like.

I wouldn't say, Brian, that there's anything specific that we would remark upon.

And then Andy, you mentioned that your view is that it's all about managing overall revenue per unit. So as you look at your business, you did a pretty good job generating good CFFO this quarter and driven mostly by rate growth. As you balance rate growth, cost controls, occupancy -- you can't have everything all at once, right? How do you prioritize what you are really focused on right now in terms of what -- what's driving value for the Company and profitability and also for shareholders as you think about the strategy going forward?

Obviously, we are focusing on expense control because that's in our control. And we are pleased with respect to the synergies that we've been developing and expect to continue develop through the platform through the balance of 2016 and going into '17. So we are focused on that. With respect to the revenue side of things, it's a balance between rate growth and occupancy growth. And we are laser focused on trying to maximize that balance so that we can maximize the revenue that we can generate through the platform. We are not trying to over emphasize one component of revenue against the other. In other words, we are not trying to maximize rate growth as over against revenue growth. We are trying to balance between those two to maximize revenue generally. And that's, there's science to that, but there's also art to it. And our teams are working on that each and every day.

And then last question for Andy -- or for Cindy, maybe. Is there a leverage target as we go through this whole divestiture process? I mean, is there a -- is it a five times leverage that you are trying to work towards? And also, given the fact that most of your debt is mortgage and cap lease, at what point do you start thinking about other capital deployment strategies beyond you're staying down debt, whether it's returning value or dollars to shareholders. Or starting to make acquisitions on the ancillary side basis. It seems like that's such a key focus for you guys.

Brian, thank you so much for the question. This year, our plan basically takes leverage down by half a turn. Now, that does exclude sort of the dispositions that Andy mentioned of the additional 35 communities and what we might do with additional lease leverage. I think at this point in time, we are certainly very focused on executing the plan that we have. And at our investor day in New York in a couple of weeks, we'll take you through sort of our complete strategy, including more of our thoughts on the capital allocation strategy. But as Andy mentioned in his prepared comments, our focus for 2016 really is on reducing our leverage from the excess cash flow that we create.

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

Can you just remind us on CapEx, I guess on the overall spend. And you also see this in the routine more. It seems like there's some seasonality in that. So I guess I'm curious what drives the seasonality in CapEx. And then can you also help us with the reduction that you made during the quarter? What types of projects were -- and I don't know were these canceled or delayed? But what CapEx items were pushed back this year?

Josh, I don't know that there's a lot in terms of seasonality that I would talk about. It's not just general construction related. I mean, obviously, if you are doing stuff outside in the elements, it's harder to do it in the fourth quarter and the first quarter, where the elements are against you. But there's really -- there's not a seasonality -- at least to the way that we make the majority of our capital expenditure investments. In terms of the reduction of CapEx that we are -- we've guided to for 2016, a large chunk of that are energy efficiency projects that we don't have to do this year. I mean, we can defer those and we can do them when we think it's most appropriate. So that's one thing. That's an additional opportunity down the road. And there are some renovations that we have simply elongated the process around and have deferred some of those. Because we think we can, based on local market dynamics around those assets.

And at the same time, when we went back and looked at our CapEx, we found there were some places where we could sharpen the pencil and actually just spend less.

And then on the corporate CapEx side, is it fair to say all of that is what we would consider routine or recurring? Or are there project based corporate expense CapEx as well?

Oh, there's definitely project based corporate level CapEx, Josh. Our normal CapEx for corporate is somewhere in the neighborhood of 30 million to 40 million. So we got at least $20 million above that that project and other CapEx above what our normal run rate would be.

Okay. What you would call so recurring would be the 30 million to 40 million, and then 20 million is the extra. Okay. Then just on the rate progress that you guys are making, it didn't sound like you were seeing occupancy impact from rate. It sounds like those are kind of two distinct issues. So I'm curious on the rate side if there were any generalizations were there specific types of properties, were they older versus newer, or newer, I guess, versus older. Were there certain geographies? Any color on that?

Okay. Couple of questions in there, Josh, which I appreciate. One, I would say you are right. We raised rates relatively aggressively, but fairly, we believe, on our in place residents. And the good news about that was A, those rates held; and B, we didn't see any elevated move out activity as a result of that. And so that's good news. With respect to the rate performance generally, I'd say a couple of things. The retirement centers were very strong. There's nothing about geography that is to be remarked upon as a general matter. The retirement centers were particularly strong with respect to their rate performance. As I already indicated, the legacy Emeritus platform for the first time in a long time, we were successful in raising rate in that platform, which we think is eliminating the opportunity there to better maximize pricing. And then, again, as I said, there's nothing to remark upon with respect to geographies, except for those few markets where there are markets that there is in fact true top local directly competitive new entrants. That's a place where we would have adjusted our rates to take that into account.

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

One housekeeping question here. Just a confirmation, really. The 25 leased HCPs that you might look at doing something with, are those consolidated? Or are those some of the JV properties?

They are consolidated.

Okay. Because I guess HCP had mentioned yesterday that there were some other joint venture related financing that they might be looking at trying to do something with, but this is a separate group of assets.

Correct. That's right.

Okay. Also on hopping over to ancillaries, I know you called out having some nice census growth on the home healthcare side. But the segment ancillary segment EBITDA looked like it was down. Just any color or clarifications on what's causing that? And then do you still feel like for 2017 that in California, you still think that's likely to go live in 2017?

Andy can have the second question and I'll take the first. So in response to the quarter, look, we called out that our labor control in the first quarter was less than what it had historically been and less than what we think that it will be in the future. We would expect our margins to improve in the second half of the year, and I'm really pleased that Anthony has already started working on those labor control issues. Part of the issue was as we expanded our services, we had a little bit of growing pains where labor increased without having an appropriate balance with census. And part of it was just the operating discipline that we normally see in that business was a little weaker in Q1 than it has historically been and will be in the future.

Yes, with respect to I will say two things, Frank. First, we maintain our confidence that we will meet our 2017 objectives with respect to BHS, with the ancillary platform. We feel good about that and are confident about it. And as Cindy said, we were very excited about what Anthony is doing in his short time here to really move that part of the business forward. With respect to California, it's unimaginable to me that the thing won't be worked out by 2017. I think there is again, we believe that we are entitled to those permits as a matter of right. The issue is before CMS right now and the logjam could break relatively quickly or it could persist for awhile. But I would have to say it will be solved by 2017.

Okay. One more and I'll hop. I think you've said that the operating stats continue to show the results of those assets that are held for sale. So I'm assuming or how would you generally characterize that or those assets at lower occupancies than your average? And just any comment on that or maybe even also on the 25 leased HCPs, their operating stats relative to the overall averages. Thanks.

I think as I mentioned in my prepared remarks, Frank, one of the criteria that we use as we think about dispositions, whether they are owned assets or leased assets, would be current performance. That would be current performance with respect to rate, occupancy, etcetera. So I think as a general matter, you should assume that if we are disposing of an asset, it's going to be performing not as well as the balance of the portfolio. That would be a generalization, but I think that would be a reasonable assumption on your part.

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

I don't suppose you'd be willing to share what the dispositions of the owned or the leased would have on cash flow at this point, would you?

No, Dana, as we go forward and as we firm up the agreements around those particular processes, obviously we'll give you more information at that time.

No problem. Then Andy, on the occupancy and the rate, you said the rate increases didn't -- don't drive move-outs, but and I'm not sure it had any impact on occupancy in the quarter. Are you able to capture when you are raising rates aggressively, is it preventing move-ins? And you mentioned there is some science in the trade-off here. I was wondering if you could share any of that.

What I would reiterate is that we are trying to balance in terms of new move-ins, which we call mark to market. And you've heard us use that term before, Dana. We are trying to balance the asking rates for new move-ins against what the market will bear. That's a local street corner market-based decision that is applicable to every move-in. We are not intentionally intending to drive rate higher and at the same time as a consequence of that, sacrificing occupancy. That's not our objective. What we are trying to do is to grow revenue, which requires a balance of those two functions. And that's what we are focused on doing.

Okay. And then last one. Cindy, just on the integration costs, the 20 million this quarter, does that start to ramp down this year? And then what should we think about for that next year?

We are still expecting our integration costs to be less than half of the 123.5 million that we experienced last year for 2015. And then we would expect to see a very significant reduction in 2017 as well. We haven't given specific guidance, but you can think that it will be much, much less than it is in 2015.

Your last question comes from the line of Ryan Halsted with Wells Fargo.

Quick question on the portfolio rationalization, just wondering how would you categorize the state of the market? With the REITs largely on the sidelines, I was just curious if you are seeing any pressure on cap rates. And maybe additionally, as they are sort of reevaluating their portfolio, do you think that could change over the course of the year?

Let me take the first part first. I think the market for the type of assets that we intend to dispose of, either we or if it works out some of our REIT partners, I think that market remains strong and very active. I know it does. There's a lot of interest in these type of assets and I don't think anything has changed over the past couple of quarters with respect to the level of interest, the availability of capital to pursue those transactions, or pricing. So I feel like that's in a pretty good place to dispose of these assets. I think -- I'm not sure I understood your question with respect to the REITs. Can you make sure I'm addressing what your point is?

I guess maybe as they are spinning out some of their noncore some of the skilled nursing facilities, does that maybe create a pathway for them to sort of become more active in the senior housing space as they sort of cleanup their balance sheet?

Well again, I'm simply giving you my perspective on that part of the market. I think HCP, for example, has been very clear that if they accomplish the spin that they are talking about, they would expect to get more active in the seniors housing marketplace as a way to get back to growing their business. That's just basically what they said on their call yesterday. I think the way I look at it is I think all of the REITs are constantly assessing and looking at ways to optimize and rationalize their portfolio. And I think there are opportunities for Brookdale in there. At least I hope there are, and we're certainly in dialogue with all of the REITs searching for transactions that would be good for Brookdale. And likewise good for the particular REIT owner that we may be talking to.

That's helpful. And you mentioned in your comments that I think you referenced some of the industry data about new supply potentially slowing down. I was wondering if you could reference anything in particular within your markets? Are there any signs of, you know, new projects being held up? No new groundbreaking sort of being put on hold?

I think in our markets, Ryan, we have seen over the past several quarters it's been pretty consistent. And we expect it to remain at sort of this level for the next few quarters going forward. There is anecdotal evidence out there that you are seeing financing sources, lenders, etc., new construction financing being more difficult to obtain. And so we are hearing some anecdotal stories about that and some word of mouth type things. And again, our perspective is that new construction is sort of normalizing at the level that it is right now. We project across the country, as does NIC that demand will absorb the new construction that's coming online over the next couple of years. And that's not to say that there are some markets where it's a challenge and where there is truly an excess of new supply. And we just have to deal with those local submarkets where that's an issue.

Maybe as a follow-up, as the new supply that is coming online, are you seeing some really aggressive pricing to try to get some of the initial occupancy? And how sustainable do you think that is? I guess sort of thinking longer term, I mean does that create an opportunity where you think maybe if there is irrational pricing that that should sort of lend itself to you guys maybe being able to retake some occupancy?

Yes, I'll say a couple of things about that. You are right that there are certainly pockets of -- or certainly some developers who have opened up new product who have been very aggressive in their pricing strategies. Presumably to buy occupancy in a place where they can get to cash flow breakeven. The -- in fact, I was talking to one of our local operators in California last week who experienced exactly that. And we lost five residents to this new competitor. And I'm happy to say that after 90 days, all five of them came back and actually brought other folks with them. Because they weren't getting the services that they had been promised because of the price point that that developer had offered up. So I congratulate our local operators in that case. More generally, the way we think about it is the phenomenon of new competition actually buying occupancy is a real one and it's something that we have to combat. Over time, that really becomes an opportunity for us because in order to justify the returns against the cost of developing a particular asset, ultimately those prices are going to have to come to equilibrium. And generally speaking, that's an opportunity for us as the market stabilizes for us to actually raise our prices as we go forward. That has been our history and that would be our expectation as these particular markets stabilize.

And then if I could squeeze one last one. On the ancillary services, I could appreciate some decent growth in the home health census. But the broader industry is seeing -- has experienced some pretty remarkable growth there. And I was just curious if you could break out ex-California, what is the home health census build across the rest of your portfolio?

I think we've outlined that in your -- in the supplement for you, where you can see the census build. I will say except for California, we are basically on plan in terms of the number of home health units that we are serving. Now remember that a lot of our business is inside of our communities and it takes time for those networks to stabilize or actually to get to their most full economic activity. It takes awhile for that census to build and for those platforms to build within our communities. But we are now serving the number of units with the exception of California that we anticipated.

You have no further questions at this time. I'll now turn it back over to Andy for any closing remarks.

Okay, thank you all for joining us this morning. We are again pleased to report to you about our plans to grow our occupancy, to increase our revenue, and to simplify the business. And we are excited about the refinements to our corporate strategy that's in the works to maximize the strength of our entire enterprise. We look forward to talking with you at our investor conference on the 26th of May. And thank you again for joining us.

This does conclude today's conference call. You may now disconnect.