Brookdale Senior Living Inc. (BKD) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I'd like to turn the conference over to Mr. Ross Roadman, Senior Vice President of Investor Relations. Sir, you may begin.

Thank you, Jennifer, and good morning, everyone. I would like to welcome all of you to the third quarter 2017 earnings call for Brookdale Senior Living. Joining us today are Andy Smith, our President and Chief Executive Officer; Cindy Baier, our Chief Financial Officer; and Dan Decker, our Executive Chairman of the Board. I'd like to point out that all statements today, which are not historical facts, including all statements regarding our earnings guidance, may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. These statements are made as of today's date and are subject to various risks and uncertainties. Forward-looking statements are not guarantees of future performance. Actual results and performance may differ materially from the estimates or expectations expressed in those statements. Future events could render the forward-looking statements untrue, and we expressly disclaim any obligation to update earlier statements. Certain of the factors that could cause actual results to differ materially from our expectations are detailed in the earnings release we issued yesterday, as well as in the reports we file with the SEC from time to time, including our annual report on Form 10-K and quarterly reports on Form 10-Q. When considering forward-looking statements, you should keep in mind those factors and the other risk factors and cautionary statements in such SEC filings. I direct you to Brookdale Senior Living earnings release for the full Safe Harbor statement. Also please note that during this call, we will present both GAAP and non-GAAP financial measures. I direct you to our earnings release and our supplemental information, which may be found on the Investor Relations page at brookdale.com for important information regarding the company's use of non-GAAP measures, and including the definitions of each of these non-GAAP measures and a reconciliation of each such measure from the most comparable GAAP measure. With that, I would like to turn the call over to Andy. Andy?

Thanks, Ross. Good morning to all of our shareholders, equity analysts and other participants and welcome to the Brookdale third quarter earnings call. I will make some brief comments about the third quarter, our outlook for new competition and then discuss the progress we're making with the underlying foundation of the business. Before I do that, I'd like to ask Dan to make a few comments. Dan?

Great, thank you, Andy, and good morning to everyone. I'm excited about the recent transaction with HCP. I want to thank both the HCP and the Brookdale teams for their hard work and creativity in bringing this agreement to the finish line. The underlying goal of our company is to increase the durability of our cash flow and increase its growth trajectory. With the [Blackstone] having stronger control of the ownership of our assets and reducing lease leverage over the long-term, the HCP transactions fit perfectly with that goal. Along with improving the underlying capital structure of the company, we're focused on improving our operating performance. As Andy will describe, we're seeing progress in some important operational metrics, key is operational excellence, providing high quality of care for our residents. Our operational initiatives are having a positive impact and we're seeing a significant improvement in our customer satisfaction, in key associate retention metrics. We don't accept the difficult competitive environment as an excuse for not improving, we're pushing hard to improve our results. I would like to now comment on our ongoing process to explore options and alternatives available to us to create and enhance shareholder value. We acknowledge that it has been a long process and that we have been limited in what we can publically say about the status. We know that many of our shareholders would like for us to provide more transparency regarding the process and we certainly appreciate that. However for a variety of reasons there are limits to what we can say, while the process is ongoing and it wouldn't be in our company's or shareholders' best interest to provide more detailed information at the present time. But know that we're working as expeditiously as possible to bring the review to a conclusion. As evidenced by the transaction we've announced with HCP last week, which in itself was a byproduct of the review process in our portfolio optimization initiative. We have been working to improve the change of controlled provisions in our lease agreements, and to provide the company with more transactional flexibility. Let me assure you that the review process continues to be active and a very high priority for the company. Our Board in conjunction with management and our financial and legal advisors remains hard at work on the ongoing review. As previously indicated there can be no assurance that this review will result in any specific action or transaction. I want to reiterate that no decision has been made to any transaction at this time other than the HCP transaction and I want to confirm that Brookdale will only enter into a transaction or transactions if it can do so under terms that our Board concludes are in the best interest of the company and its shareholders. Andy, I'll turn it back to you.

Thanks, Dan. Before returning to the quarter, I'd like to make a few comments about the transactions we just completed with HCP. I want to start by first thanking Tom Herzog, Kendall Young and their team at HCP for diligently working with us to create a set of transactions that met the goals of both organizations. We really believe this was a win-win deal. HCP has been very public about their goal of reducing their Brookdale concentration. We also have been public about our desire to reduce the burden of underwater leases, to continue to rationalize our portfolio, to simplify our business, and to improve the change of controlled provisions in our lease agreements. These transactions met the respective goals of both parties with a fair and balanced economic outcome for both. For us, we are reducing our lease leverage by terminating leases on 34 communities with coverage a bit below 1.0 without paying any termination fees. This also resulted in a much healthier lease coverage for our remaining leases with HCP. We also effectively swapped our minority position in the two joint ventures for 100% ownership in six communities, all at fair market value. The net effect on our cash flow is roughly neutral, when you balance all elements of the deal. Ultimately, the transactions will reduce our footprint by 69 communities, which allows us to continue to simplify our business. And we modified our agreement with HCP to allow Brookdale to engage in certain change of control and other transactions without HCP's consent. Turning now to the quarter; we saw Texas and Florida face devastation that two large hurricanes can bring. I'm so incredibly proud of the way that Brookdale responded to these challenges to keep our residents safe and to assist our associates who were also harmed by the storms. I can't even begin to describe the experiences that our teams went through in Texas and Florida. We had 143 communities that were affected by these storms. We evacuated 26 different communities. Making a decision to evacuate is not an easy task given the stress that an evacuation can cause for our residents. Our teams demonstrated how much they care for our residents and worked around the clock to focus on their care and their comfort. Our [hearts] are warmed by the many, many, many letters of gratitude that we received from our residents and their families. Natural disasters showcase the benefits of our size and scale. To prepare for the hurricanes and provide support post-storm, our functional support staffs aggressively aid and assist stricken communities by arranging things like generators, refueling, extra equipment, buses, and by setting up communications with the families of our residents. Communities outside of the disaster area provide relief for community staff. Repair and restoration teams were on the ground cleaning up the damage even before the storms ended. Together, we are proud that these disasters showcase the character of our associates and the advantages of our scale. Cindy will take you through the financial impact of the hurricanes, which we summarized in our press release several weeks ago. The only major revenue impact was to the Ancillary Services business in Florida, where either the patients or our service associates were not available. We did not see major impact to Seniors Housing revenue as many of the evacuated residents went to other Brookdale communities and returned home fairly quickly. We did incur significant operating expenses primarily for added labor expense, overtime, and equipment rental. And we did incur some physical damages to our communities, which we're in the process of [remediating]. All but one of these communities are back in operation although we do have damage in a handful of communities that are still undergoing repairs and are out of service. Aside from the impact of the hurricanes, our operating performance was mixed. We grew occupancy sequentially from the second quarter of 2017 by 20 basis points. In fact, we grew occupancy every month of the quarter and that trend continued in the month of October. As I mentioned earlier, the hurricanes did not materially impact occupancy and in fact we saw a bit of a pickup in our Texas new gain rates in September. We produced the best net move-in, move-out performance for a third quarter in the last several years. Along with our sale and marketing activities, this was aided by initiatives to focus on controllable move-outs and by the fact that move-outs due to death returned to normal seasonal levels. The market remains challenging for pricing in Seniors Housing as we continue to compete for market share. Our in-place rate increases continue to offset overall negative mark-to-market pressure. As a result our average revenue per occupied unit grew by 1.9% in the quarter versus the prior year quarter. We continue to see labor tightness and wage inflation of around 4%. As we look at the competitive landscape of the industry, whether through the NIC data or our own on the ground intelligence, we believe that elevated levels of new openings and associated lease-up pressure will continue through 2018. There were some positive signs in the industry, however. Absorption continues to trend up and new construction starts are down by almost 50% from where they where two years ago. Within our markets we saw similar trends with the pipeline of new construction narrowing. We saw 47 new projects gets started in the third quarter similar to last quarter. At this point we expect 273 competitive communities opening in the future and that's down from 285 that we saw in the second quarter of this year. Let me now turn to how we're driving performance. I told previously about a number of initiatives that we're working on to improve our financial performance and we're beginning to see success come through in our metrics. First, we've often highlighted the strong correlation between key community leadership retention and resident satisfaction in financial performance. We've been focused on the retention of our top community leaders through appropriate compensation adjustments and continuing to support their career progression through training programs and development programs. We've also made good progress on simplifying their roles and reducing administrative demand. We've continued to see a good improvement in our key leadership turnover. Voluntary turnover in our consolidated portfolio improved by 26% year-over-year and of the Executive Directors who have voluntarily left the company over the past few years, just shy of 20% of them have actually returned to the Brookdale family. Second, we are focused on customer satisfaction. We had talked previously that we introduced NPS, or Net Promoter Score as a measure of effectiveness down to the community level. NPS is a proxy for gauging our customer's overall satisfaction and loyalty. Our NPS scores improved dramatically in 2016 and again improved significantly this year, evidencing our team's focus on customer service. We have also been strengthening our sales and marketing activities. We have now combined sales and marketing under a single person, Ryan Wilson, who joined us early this year. We continue to focus on marketing, combining digital, social and local marketing activities with the activities of our 1,600 person sales force, who have been now undergoing more robust training. We believe that we are seeing the results of these efforts and again have five consecutive months of positive net move-ins starting in June. Third, in addition to the recent HCP transactions, we continue to work on our portfolio optimization efforts and to improve the positioning of our communities within their local markets. During the quarter, we entered into an agreement to sell one community, exiting the quarter with 15 communities classified as assets held for sale. During the quarter, we also terminated leases on nine communities. And in the fourth quarter of this year, we expect to terminate leases on 23 communities, completing the transaction with HCP that we announced in the fourth quarter of last year. To be clear, this is separate from the HCP transactions that we announced last week. Finally, I want to close, by again expressing my appreciation to our associates who have been through so much this year. Our associates have been outstanding as they could, the comfort and safety of those that they served before their own needs and in many cases before their needs of their own families. We did it again with our California communities in October, as they were impacted by wildfires. 20 communities were affected by these fires and we evacuated six communities. I'm pleased to say that all of our residents have moved back home and we didn't have any significant property damage. I will be forever grateful for the strength and courage of our community associates, our field leaders and our corporate personnel who literally have saved lives. I also want to express my gratitude to HCP, to [indiscernible], to many of our vendors and the many Brookdale Associates that contributed to our Associate Compassion Fund. The fund has assisted many associates who sustained significant losses from these natural disasters. Now I'll turn the call over to Cindy for more details on the quarter.

Thank you, Andy. And thanks, everyone, for joining us today. I will discuss three topics, our current capital structure, our third quarter 2017 results and our 2017 outlook. I'd like to start by highlighting the progress that we've made on our balance sheet and liquidity. During the quarter, we successfully refinanced four mortgage loan portfolios. The aggregate $1.2 billion of proceeds were used to repay $821 million of outstanding mortgage debt principal, including $578 million of 2018 maturities. We were very pleased with the resulting fixed variable mix of debt as well as the maturities schedule. Excluding the convert, we don't have a year with more than $500 million of mortgage maturities until after 2021. We've made really good progress on our near-term maturities. In addition to the $316 million of convertible note, we have $95 million of mortgage debt coming due in 2018. As we have previously stated, our intention is to repay our converts with cash. We've built a significant amount of liquidity. At the end of the third quarter of 2017, we'd $899 million of liquidity including $538 million of cash and marketable securities and $361 million of availability on our line of credit. Now before we get into the details of the quarter, let me cover four items that impacted our financial results and the comparability to prior period. Our portfolio optimization initiatives, some large favorable reserve adjustments that we book last year, the financial impact of Hurricanes Harvey and Irma and the goodwill asset impairments totaling $359 million. Understanding these items will [evaluate] our results in the context. As expected our portfolio optimization initiatives dramatically impacted our year-over-year result, particularly revenue and adjusted EBITDA. We have dispose of 136 communities since the beginning of third quarter 2016. As a result of these dispositions we generated a $111 million less in residency revenue and $84 million less in facility operating expenses, resulting in a negative adjusted EBITDA impact of $18 million. These dispositions positively impacted our adjusted free cash flow by almost $1 million during the third quarter of 2017, compared to prior year period. Second, we recorded a large favorable insurance reserve adjustment during the third quarter of 2016. These reserves had been established as part of the Emeritus merger based on the expected cost of the historical claim and $11 million year-over-year reduction in favorable insurance reserve adjustments in 2017 also contributed to our adjusted EBITDA declines. Let's turn now to hurricanes; before we get into the financial results of the hurricanes, I want to take a moment to say thank you to our dedicated associates, who put our residents, patients and their families first. I'm so very grateful for the way that our team came together to deliver great care for our residents and patients and to take care of each other. The hurricanes negatively impacted third quarter 2017 adjusted EBITDA by approximately $9 million. Let's talk about the revenue impact of the hurricanes for third quarter 2017. In our Senior Housing business we provided approximately $400,000 of rent credit to displaced residents. The impact on our Ancillary Services business was greater as we estimate that we lost more than $3 million of Home Health business in Florida due to patients plus service providers being unavailable. Our hurricane response also increased our third quarter 2017 operating costs by approximately $5 million. To protect our residents, we needed to provide additional staffing to prepare for, manage through and recover from the storms. We also needed to rent and fuel incremental generators, transportation equipment and purchase other supplies. The impact of the hurricanes will also impact our fourth quarter 2017 adjusted EBITDA. We expect a negative impact of approximately $3 million to $4 million due to lower Ancillary Services revenue, due to asset sales that couldn't be recertified and lower [growth] rates as a result of lower volumes. We will also have some incremental personnel costs associated with the hurricanes. Taking together our estimates with the Hurricanes Harvey and Irma will have a negative impact to full year 2017 adjusted EBITDA of approximately $12 million to $13 million. We also expect to incur at least $15 million to $17 million net of insurance reimbursements of hurricane related CapEx during the next year or so. First, we have to repair the damage that our communities sustained during the hurricanes. We expect that this will cost approximately $13 million to $14 million net of insurance reimbursement and we'll incur the cost over the next year. We believe that approximately $8 million of repair costs will be incurred in the fourth quarter before insurance reimbursement. Second, Florida issued an emergency order requiring skilled nursing homes and assisted living communities to obtain generators and fuel necessary to sustain operations and maintain comfortable temperatures in the event of a power outage. While the emergency order has been overturned, there are legislative and regulatory rule-making actions in process to address generator requirements. We expect that we incurred about $3 million of costs during the third quarter, as a result of the emergency order and we're closely monitoring developments to determine what additional costs may be incurred to meet any new generator requirement. The total fourth quarter costs of approximately $11 million of capital expenditures for the fourth quarter does not include possible insurance reimbursement of an estimated $2 million to $3 million. The remainder of the generator installations in CapEx will occur in 2018. Finally, turning to goodwill and asset impairment; we recorded approximately $369 million of non-cash impairment charges for the third quarter of 2017, which primarily related to our Assisted Living segment. We performed an interim impairment analysis as a result of the significant reduction in our stock price and market capitalization as well as decreases in the current and expected results of our Senior Housing and Florida Home Health business. When we completed the analysis, it revealed that the estimated fair market value was less than the carrying value. We recorded impairment charges to reduce the carrying value to the fair market value. The impairment charges consisted of $205 million of goodwill within the Assisted Living segment, a $150 million of property, plant and equipment and leasehold intangibles for certain communities primarily in the Assisted Living segment and $14 million of intangible assets for healthcare licenses. Let's turn now to our third quarter business performance. For our Senior Housing communities, the best way to think about our business is using our same community results. Our same community Senior Housing revenues declined from third quarter 2016 as a result of the decline in occupancy that was not completely offset by RevPOR growth. Our same community operating income excluding hurricane costs decreased by 9.1% compared to the prior year. Excluding the impact of a favorable reserve adjustment in 2016, which did not recur in 2017, our same community operating income declined 6.8%. Our third quarter 2017 same community Senior Housing facility operating expenses increased 4.6% excluding the related hurricane expenses and by 3.2% excluding both the hurricane expenses and the favorable reserve adjustments that were made in the prior year period. Reflecting wage pressure, our same-store salary and wage expense increased 4.4% on a year-over-year basis. Further including benefits by our medical plan expenses and workers' compensation, we experienced a 6.1% growth in total same-store compensation expense. Turning to same store operating income and excluding the hurricane costs and the impact of the insurance reserve adjustment, our same community operating income declined 6.8% on a year-over-year basis. As a reminder our prior period insurance reserve adjustments will also create a tough comparison in the fourth quarter as well. Needless to say, our results reflect that competition is intense and has been for the last year. We're continuing to see a lot of competitive opening in our market and as Andy discussed we did have some success with move-ins and occupancy during the third quarter. While a little later than our historical pattern we saw the positive turn in occupancy in July and produced sequential occupancy increases each month of third quarter 2017. The rate environment continues to be very competitive and our results were consistent with the industry. We recorded year-over-year growth rates in our Senior Housing Retirement Center segment of 2.9% and 2.7% in our Assisted Living segment. Our expense growth continues to be dominated by labor cost increases. With the tight labor market, it's challenging to recruit and retain the necessary talent. Of course, our year-over-year expense performance is negatively impacted by the large cyclical reserve adjustments last year which did not recur. Moving to our Ancillary Services segment; we earned $9.8 million of segment operating income during the third quarter of 2017. As I described, the decrease in operating income was heavily impacted by the lost revenue days from the hurricane. Since we elected to continue to pay our home health associates during the loss days, the impact of lost revenue fell to the bottom line. In addition the lost business and lost start of care will negatively be impacted and will affect our [indiscernible] in the fourth quarter. We're continuing to see growth in Hospices. We recently purchased a Hospice agency in Chicago and continue to extend our presence. Our general and administrative expense of approximately $64 million during the quarter included almost $1 million of strategic project costs and $8 million of non-cash stock compensation expense. Third quarter 2017 G&A excluding integration, transaction, transaction related and strategic project costs and non cash compensation was $55 million versus $49 million in the third quarter of 2016. In the third quarter of 2016 we had $5 million of favorable reserve adjustments. We generated adjusted EBITDA of $144.7 million excluding transaction and strategic project costs of $2.8 million which represents almost $1 million in G&A and $2 million of transaction costs. We also generated adjusted free cash flow of almost $6 million during third quarter of 2017, which included a deduction from $12 million of incremental refinancing costs including additional interest expense and debt modification and extinguishment costs and $3 million of transaction, transaction related and strategic project costs. Both metrics reflect the hurricane's impact on our revenue and facility operating expenses. Our proportion of share of adjusted free cash flow of unconsolidated ventures was almost $7 million or $1 million year-over-year decrease. We continued our portfolio optimization activity during the third quarter. The company began the third of 2017 with 14 communities or 1,272 units classified as assets held for sale. During the quarter, the company entered into an agreement to sell one additional community of 236 units. As of September 30, 2017 we had 15 communities represent 1,508 units that are classified as assets held for sale with a carrying value of $106 million and $50 million of associated mortgage debt, which is included in the current portion of long-term debt. Additionally, during the third quarter 2017, we terminated the leases for nine communities representing 546 units. Let's move now to our 2017 guidance. For full year 2017, we are lowering and narrowing our range for adjusted EBITDA and adjusted free cash flow. Based on results year-to-date and our outlook for the future, we are now expecting our full year 2017 guidance for adjusted EBITDA excluding transaction and strategic project costs to be in a range of $650 million to $670 million. In addition to the $12 million to $13 million negative hurricane impact, we continue to see rate and occupancy pressure that we expect to negatively impact our fourth quarter results. Our expectation is the impact of the California wildfires will be less than $1 million. We are now expecting our guidance range for adjusted free cash flow for 2017 to be in a range of $80 million to $100 million. This includes the impact of refinancing and debt modification costs and costs associated with our ongoing review of strategic alternatives. It also includes our expectation that the hurricanes will result in the negative impact to adjusted free cash flow of $20 million to $21 million for the year, and that rate and occupancy pressures will have a $10 million negative impact. We now expect that our non-development capital expenditures will be in a range of $180 million to $190 million. The HCP transactions announced last week will not have a material impact on our 2017 results. We are also narrowing our full year 2017 guidance for the company's proportionate share of adjusted free cash flow of unconsolidated ventures in a range of $28 million to $32 million. The foregoing guidance excludes the potential impacts of any future acquisitions, dispositions and portfolio optimization activities other than the completed and pending portfolio optimization transactions described earlier. To close, let me say as Andy described, we are seeing progress on our initiatives. Our capital structure has not been this strong in a long time. We are focused on building the operational foundation for our business through improved performance. And with the transactions that have been completed, like last week's HCP transactions, we are improving the quality of our portfolio, the capital structure underlying our communities and reducing the complexity of our business. Thank you for your attention on this. I'd like to now turn the call back to Andy. Andy?

Thanks, Cindy. Our management team is focused on improving our operating performance. We are making progress in key areas to overcome the near-term headwinds and we believe that we are laying the foundation for success in 2018 and beyond. We're happy to answer your questions now.

[Operator Instructions] And our first question comes from the line of Brian Tanquilut with Jefferies.

Good morning. This is Jason Plagman on for Brian. Just first off on the kind of the key performance indicators on the operations side, you talked about the increase in Net Promoter Scores and reduction in executive turnover. Have you done any analysis on how that drives performance over time in the business?

Yes, absolutely. Thanks for your question, Jason. Both of those factors, both of those metrics are directly correlated very tightly to success in our communities, success in terms of occupancy, success in terms of rate, and so they are very, very tightly correlated which is why we focus so intently on them.

And most importantly they improve profitability.

Great that's helpful. And HCP last week on their same store NOI recorded 5.3% and you guys managed most of that, any color on why that performance is so much different than the same store results that you reported for Q3?

Well, you're right that we do manage the vast majority of HCP's ready exposure. Its hard -- those [pull back] for a particular portfolio first, I believe it was affected by some accounting adjustments between the two years and how rebates were calculated and I believe that HCP was clear about that, so that's part of it. The other part of it is that -- again it's -- you have to look at performance by a portfolio and by markets and in the case of HCP's portfolio a lot of that's Independent Living, which has sort of better market characteristics at the moment, so that's part of it. But really it's just -- it boils down to the difference between what's going on in particular communities and particular markets.

Your question comes from the line of Chad Vanacore with Stifel.

Hey, guys, can you hear me?

We hear now, Chad.

So if occupancy trended up each month in the quarter and average occupancy was up 20 basis points, what was the monthly progression? I mean, where did occupancy end in the quarter?

So we don't break it out Chad, by -- with that level of precision. What I can tell you is that our net move-ins -- again later this year than we would normally see, but measured at in the end of the month net move-ins against net move-outs were positive beginning in the month of June that continued through each month in the quarter and it continued in the month of October. But we don't really quantify by month what those changes look like.

All right. But if net move-ins have improved and presumably you ended the quarter at a higher level than you began the quarter, what makes you think that the fourth quarter occupancy you expect it to be flat to down?

Well you're right on your assumptions, generally speaking and virtually every year November is a challenging month. There are very few actually selling days when you take into account the Thanksgiving holiday at the end of month. So it is generally speaking challenging and that affects occupancy in the month of December which is why as a rule, we see flat to slightly lower occupancy in the fourth quarter.

All right. And then just aside from the hurricane impact that you outlined that you expect to continue in the fourth quarter, so what are your assumptions for occupancy rate in fourth here that factor into your guidance?

So Chad this is Cindy, thanks for the question. We're expecting to see rate pressure continuing into Q4 and we're expecting normal seasonality. But the one thing that I do want to remind you as you think about our guidance for the full year, in both our first and second quarter calls we talked about the fact that debt was elevated. In Q3 we're happy that our debt returned to a more of a normal level but that doesn't affect our annual outlook for our guidance as we entered the third quarter with lower occupancy as a result of debt.

So when you think about pressures on rate, typically we would expect you to get 3% rate increases on in-place in the New Year. Should we not expect something like that going into 2018 given you have already experienced pressures?

I think we are expecting to see the normal increase in our in-place residents, where we are seeing the pressure on rate is really in the mark-to-market for our [new residents]. So we are seeing in areas of how competitive pressures discounting to get those people to move into our communities.

And what kind of discounts are you giving?

Mid-single-digits are the average across the portfolio, when you compare the discounts that we gave in Q3 compared to the in-place resident and for Q1. So that's really in-place resident to a new move-in. And it can be a combination of a lower market rate, an incentive or a discount, it's not necessarily discount per se, but if you look at sort of the difference between the rates that we receive, it's a mid-single-digit difference.

Okay. And then just thinking about your HCP transaction, are there any other potential transactions like that that you can execute with other landlords to rid yourself of underperforming leases?

Yes. As we've talked about before. First, one way to get out of underperforming leases or underwater leases is as you get to maturities, you can either renegotiate the terms of those instruments or you can walk away from those leased assets. And as you can see in our supplement, we have a number of near-term maturities that are forthcoming. I'd also say that we are in constant dialog with all of our REIT partners to try to search for transactions or restructurings or amendments to leaseholds that work for them and to work for us. And so again, we are constantly dialoging with those folks as part of our optimization and simplification efforts and as part of the strategic review process that we are undertaking.

Just one more for me. Cindy, you mentioned tough comps in the fourth quarter. Are there any one-time items that we should note there?

Good question. We do have about $7 million of favorable insurance reserve adjustments that we booked in the fourth quarter of 2016. So that will create a tough comp for us.

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

In terms of the labor costs, so Cindy, you talked about, I guess all-in compensation increases in the 6% range, right? So is that still sort of the same outlook for the year that you had before and also how do you think about next year in terms of your labor costs all-in and maybe also wage increase for next year?

Our labor and wage increase for the year is unchanged. We are still expecting a year-over-year increase of 5.5% to 6% for the full year of 2017. That's the combination of our average wage rate increase, the increase in our benefits and other costs associated with our employees and an increase in hours per resident day. As we look into 2018 we continue to see that there will be wage pressure particularly in areas that have low unemployment. We as -- as we looked at our portfolio this year, we see that we have higher wage increases while the employment is lower, we also see wage pressure in our Skilled Nursing. So those are the areas where we would expect to see pressure in 2018.

Great. And in terms of the Ancillary segment, you mentioned you added one agency, I think in Chicago, so to me it sounds like you're expanding that business but at the same time from the metrics it looks like maybe you are [stepping] down home health, is that correct?

With the agency that we have added in Chicago, the Hospice agency in Chicago and throughout our Hospice business we are growing very, very nicely. That business is just very needed by our residents and its growing nicely. Home health has been impacted by the hurricanes, we posted $3 million to $4 million of revenue in Q3 and there will be a tailing effect in Q4. We were also impacted by the competitive intrusions that we talked about in earlier call. So I think that business will be healthy for the long-term but it has had some headwinds in 2017.

So in terms of this competition you mentioned in the home health, so it's the continuation of the situation that we talked about before right and then with that is there any way to spend there and do you plan to continue with this business or you plan to exit that all?

It's the same issue that we have talked about before, it's not a new issue and it is getting better over time. I will let Andy address that.

As the -- it's pretty basic. When you lose a lot of sale -- when people competitively intrude and take sales folks and clinicians it simply takes a while to re-hire, train, get onboard new sales folks, new clinicians and allow them time to rebuild the census that you lost because again of this competitive intrusion. So this is no different than what we've talked about before. In terms of staying in the home health business, yes that's our current intention, from where we sit today.

And we have no other questions, thank you at this time. And I would like to turn the conference back over to Andy. End of Q&A:

Thank you all for joining us this morning. We'll be around today, if you have supplemental questions. Thank you.