Brookdale Senior Living Inc (BKD) 2011 Q1 法說會逐字稿

Good morning my name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference 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. I will now like to turn today's conference over to Ross Roadman. Sir, you may begin your conference.

Thank you, Ashley. Good morning, everyone. I would like to welcome all of you to the first quarter 2011 earnings call for Brookdale Senior Living. Joining us today are Bill Sheriff, our Chief Executive Officer, and Mark Ohlendorf, our co-President and Chief Financial Officer. Also present is Andy Smith, our Executive Vice President and General Counsel. As Ashley mentioned, this call is being recorded. A replay will be available through March 17, and the details on how to access that replay are in the earnings release. This call will be available via webcast on our website www.brookdaleliving.com for 3 months following the call.

I'd also like to point out that all statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain other factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement. Now I'd like to turn the call over to Bill Sheriff. Bill?

Good morning, and welcome to our first quarter earnings call. Our first quarter results were solid particularly with all that was going on in the quarter. Beyond the historic seasonally weaker quarter for occupancy, major weather disturbances, a consumer faced with escalating commodity pricing, unrest in the Middle East, a catastrophe in Japan, and a deceleration of domestic economic growth, the Company continued improvement in the fundamentals of the business.

The Company produced a 13.5% increase in cash from facility operations and a 7% increase in adjusted EBITDA compared to the first quarter of 2010. Our $0.51 CFFO number was consistent with our internal expectation in relationship to our 2011 business plan. Our occupancy was up 60 basis points over the first quarter of 2010. From a sequential perspective, occupancy did decrease by 30 basis points from the fourth quarter, historically consistent with prior years. The primary driver of the sequential decrease was an increase in the move-outs over the fourth quarter. Much of that was driven by increased thefts and moves to be near family. Attrition can be a sine wave that over time is fairly predictable, but it will have some variation for a single period of time.

Sales inquiries continued to grow with much of the new traffic coming through our website and links with the referral sources as prospective customers increasingly employ technology to do prospecting. We issued a release a week ago about our latest upgrade in our website which we are excited about. Our webmaster continues to improve the content, ease of use, and how it is linked to the outside world.

Importantly, we also saw the continued improvement in revenue per unit growth in the first quarter. Our same store average monthly revenue per unit growth in the senior housing business, which excludes ancillary services, was 3.5% over Q1 2010. Continuing the upward trend of 0.8 % in Q2, 1.5% in Q3, and 2.6% in Q4 of 2010. We did increase resident rates in our freestanding assisted living communities on January 1 a little over 3%.

Our ancillary services business continues to perform well. For the quarter, our outpatient therapy and home health revenues grew by 16% over the same quarter last year as volume increases more than offset the reimbursement rate decreases that started January first. We continue to look for attractive opportunities to increase the footprint, particularly for home health. During the quarter, we acquired two agencies covering a potential of nearly 600 additional units.

The one area that has -- it was a little bit of a disappointment was our entry fee sales although the first quarter is historically the lowest sales quarter coming out of the holidays. On our call last quarter, we said we expected $35 million of entry fee sales for the year, and we still feel comfortable with that projection. We did reach the 70% mark for closed units at Freedom Pointe during the quarter, and we were able to secure the state of Florida's approval to break escrow and pay down the debt on the community by $38 million. Before giving our outlook for the rest of 2011, I will now turn the call over to Mark to provide more details on the quarter.

Thanks, Bill. The underlying fundamentals for the quarter were good and largely in line with our external expectations. Rate showed continued improvement. Occupancy was down slightly due to seasonality. Expenses, with a few exceptions as planned, and entry fees came in slightly lower than our plan. In summary, our $0.51 CFFO per share number was close to our internal expectations. We know it was below some analysts' estimates, and we clearly didn't convey enough about the expected pattern of the quarters in 2011. We feel the first quarter puts us on track to meet our annual guidance.

Let me start by looking at the details of our operating performance for the quarter. 534 of our 539 consolidated communities are now in our same community results. Compared to Q1 2010, same community revenue increased 4.5% with average revenue per unit up by 4.5% and occupancy up 10 basis points. Expenses increased 5% resulting in facility operating income growth of 3.7%. Breaking the same community data down further, our senior housing revenue grew by 3.6% with revenue per unit increasing by 3.5% and occupancy up 10 basis points.

Senior housing expenses grew by 3.9%. Unlike last quarter, there were a few notable item that did affect our expenses for the quarter. We had storms that caused damage to a number of our communities causing us to incur approximately $1 million more in uninsured property repair cost than last year. Higher than expected state unemployment rates impacted payroll taxes by about $500,000. That should be a first quarter phenomenon as people hit their caps. In addition, the federal work credit ended at the end of last year.

On a normalized basis, our cost growth ran in the 3% to 3.5% range that we had projected. The key element of that was a 3.3% increase in labor-related expenses, though our average wage rate growth was less than 1.5%. You've seen that we've made progress moving the business forward in the last year, and we've been adding resources in support of that progress. While there are multiple moving parts, an example of that added support has been a planned increase in the number of salespeople and health and wellness nurses in our communities. Along with executive directors, these two positions are critical to increasing occupancy and improving an individual community's performance. In the last year, we've added 47 sales positions and over 100 health and wellness and nursing FTEs in our same community portfolio. We've already seen results from this investment as we produced 200 more move-ins than last year. This increase in key resources is consistent with our 2011 business plan and is included in our guidance.

Excluding the ancillary services business, same community senior housing facility operating income, or FOI, grew 3.1% in the first quarter. Ancillary services, primarily outpatient therapy and home health, added a little less than 1% to our revenue per unit growth. Volume growth overcame the rate reductions in home health and outpatient therapy that were effective January first. The growth was primarily in home health where we now serve 27,000 of our units along with 38,000 units served by outpatient therapy. We continue to be active in acquisitions of small home health agencies and acquired two in the first quarter with the potential of serving almost 600 units.

We've begun limited start-ups of hospice services in two markets as a prelude to getting licensure with 2 more markets targeted. Our hospice start-ups will incur modest start-up losses this year. Excluding the impact of therapy in our skilled nursing units, average monthly ancillary services FOI per occupied unit was $156 in the first quarter compared to $154 per unit in the first quarter of 2010. General and administrative expenses, excluding non-cash stock comp expenses, was approximately $29 million which was 4.8% as a percentage of total revenue under management.

Turning to the balance sheet, we continue to strengthen our financial position and improve our flexibility. During the quarter, we continued to use the positive cash flow of the business to delever the balance sheet while at the same time maintaining access to liquidity. In the first quarter as Bill mentioned, the Company received approval from the state of Florida to release the escrow of entrance fees received related to our Freedom Pointe at the Villages community and subsequently reduced the outstanding balance on the associated mortgage debt by $37.9 million which has a 2013 maturity. Additionally during the quarter, we've repaid $48.7 million of outstanding mortgage debt, and the related assets were moved into the line of credit borrowing base. Our plans to refinance the mortgage debt with 2012 maturities continues to progress.

The debt markets are very active right now, and we expect to take advantage of opportunities in the market to minimize the rate reset we have discussed before. We expect to announce our plans for the 2012 maturities in the near future. We ended the quarter with $37 million of unrestricted cash and no borrowings on the line. At the end of the quarter, we had cash and available borrowings under our line of almost $267 million. After considering normal working capital needs and current underwriting standards, we have several hundred million dollars of purchasing power which doesn't include cash yet to be generated during the remainder of 2011.

Looking at the CapEx which we include in our CFFO calculation, our spending in Q1 for maintenance CapEx was $7.9 million. For the full year, we still expect to spend $35 million to $40 million on maintenance CapEx for our communities. Looking at the other areas of CapEx, we spent a total of $20.7 million for the quarter broken down as first, major project and EBITDA-enhancing CapEx -- primarily community renovations, apartment upgrades, and other major building infrastructure projects, was $14.3 million for the quarter. Second, corporate CapEx, which includes home health acquisitions, ancillary services spending, and systems investment, totaled $4.8 million in the quarter of which about $1 million related to home health acquisitions. And finally for program [max] and development CapEx, we spent $1.6 million during the quarter. We now have 12 active projects with several more recently approved by our Board.

Finally, just a few comments on CMS' 2012 skilled nursing proposal. Our Medicare Part A skilled nursing revenues are about 7% of total revenues, or approximately $150 million per year. It's still too early to know what the ultimate result will be given the unprecedented timing of the proposal which was based on limited data that was taken out of a new system. We do believe there will be a rate reduction -- timing and extent to be determined -- and did include in our guidance a contingency in the fourth quarter for some rate reduction though not as Draconian as the proposal cut rates by an average of 11.3%. We do not believe that ultimately the rate reduction will be material to our 2011 guidance. I'll turn it back over to Bill.

Thanks, Mark. As we've said, the quarter was consistent with our expectation relative to our business plan. In fact, it was within $0.01. We feel good about the annual guidance we've given. What remains to be seen how consumers navigate their way through such things as rising energy and food costs. The recently released [NIC] data should be encouraging in that there does appear to be a semblance of stabilizing going on in all segments of senior housing though not yet any real tail wind.

For 2011, we continue to expect that with a slow, steady, improving economy, we will see an increase in occupancy during the year similar to 2010, a more favorable environment for rate growth, ancillary contribution continuing to show good growth, revenue growth of 5% to 5.5% from occupancy growth, and revenue per unit growth in the range of 4% to 5%, expense growth in the range of 4% to 4.5% with senior housing cost growing at 3% to 3.5%, routine maintenance CapEx of $35 million to $40 million, and approximately $35 million in net entry fee cash-flow. We expect that this will drive a 12% to 13% adjusted EBITDA growth, and CFFO will be in the range of $2.30 to $2.40 for the year.

While not giving quarterly guidance, we do want to remind people that we do have a seasonal pattern where occupancy and entry fee sales are weakest in Q1 and stronger toward the last half of the year. Our operating expenses also peak seasonally in Q3. Therefore, we expect CFFO to be higher in the second quarter than Q1, Q3 to be slightly lower than Q2, and then the highest quarter being Q4. This guidance does not include the impact of future acquisitions we may make. The pipeline is active, and we expect that with our advantaged cost structure and add-on revenue opportunities that we will take advantage of accretive acquisitions. We will be incredibly well positioned -- we are incredibly well positioned to capitalize on significant opportunities to maximize shareholder value. We will now turn the call back to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) Our first question comes from the line of Ryan Daniels with William Blair.

A couple quick ones. First, I know you recently introduced a new inventory management system, and I'm curious if there's any way to parse out what benefit that had in the period? More specific, are we seeing that yet in the pricing? Or is that more to come as we go through the year, and the pricing we're seeing now just from the Jan. 1 rate increases?

Yes. Ryan, it's Mark. I think that's probably right. The inventory management system came into play toward the end of last year. Clearly, it's putting us in a better position to get our hands around particular unit pricing as units turn. But I don't think we've seen a big impact from that yet.

Okay. And then if we think about cost inflation, it sounds like you've accounted for a lot of this in your budget. But two questions. Number one, are you seeing any more pressure on commodity prices? I think you hedge your utilities but also on the food side, we've seen some increases. So one, your view on that. Number two, you mentioned the increase in some of your key personnel on the sales and wellness front, and I'm curious how staffed up that is? Meaning, have you ramped up to good levels based on your occupancy goals for this year? Or will that continue to ramp up through the year?

I think we have reached a good place with the staffing. I think we're probably in one of our better positions we've been at in that regard.

Okay. What about on the -- ?

With regard to commodity prices, we're definitely seeing some of that. Our folks are doing an incredible job, though, with what they've done both in terms of our contracts and our hedging activity. But more specifically in our ability such as in the food service area to quickly adapt and shift off of higher cost items. Our food cost in the first quarter was only 2.4% which is less -- a fair amount less than what if you just took the average cost of items if you didn't have a system that helps you adjust quickly to adapt and change the feature of your menus. On the utility side, are all the things, investments we made last year also came in very well. So we feel good about what we've been doing to try to manage what is going on in terms of some of the cost pressures.

Okay. Makes sense. Last question, and I'll hop off. Just if we think of the uncertainty around the skilled nursing rates out of Medicare, how does that fit within your development pipeline? Does that make you a little bit more hesitant to look toward SNF beds in the future until you get more clarity there? Do you still have projects underway that you'll push forward?

We would feel still very good about where we are on that in that regard. Margins that we've [pegged], again, in our type of setting -- or advantaged versus the typical freestanding [health center]. Nobody wants to give it up -- the increase. But we did anticipate that there would be a little bit of a claw-back. We don't think that the 11% is going to be the reality of where that comes in though.

Okay. Fair enough. Thanks a lot.

Our next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Good morning. A couple things. I haven't seen the Q yet. Do you have ending share count?

Yes, give me just a second, and we'll get that for you.

Okay. And then maybe I'll shift to Bill while you're looking, Mark. Just expansion plans, development -- it looked like development CapEx is picking up a little bit. Can you jus talk a little bit more about what's going on? Maybe timing, amount that kind of thing?

Well, again, we are ramping up. We are getting projects underway. We do have a good pipeline that's in the pre-approval as well as the approval process as well as that which is starting to get under construction. Our goal again is to produce by 2012 about 1,000 units per year -- new units. As you'll see in the data, the historical returns and yields -- unleveraged yields on those type of projects continue to be very impressive.

Bill, just in terms of coming on line, you don't expect anything yet to really [bruise] much benefit in 2011 at all? It will all be 2012?

You're getting some 2011 benefit from those that were completed previously. But yes, of the new wave, you won't have any impacts in 2011.

And if I was trying to think about them in 2012, front-end loaded ratably across the year, what's the best way to think about it?

I'd say it's going to be loaded a little toward the middle and latter part of the year, Jerry.

Okay. Okay.

The share number at the end of the quarter is 120.8 million.

Okay. Thanks. And then I just wanted to come back to the reimbursement stuff. I heard you said about the SNF reimbursement. How much on other Medicare in terms of hospice and home health? And is the home health cuts which are clearly coming as well. Is that something we should be thinking about at all for really next year, I guess?

Well, you saw in our numbers in the first quarter that the continued growth in that part of our business offset the rate reduction we had on the home care side. And the rates on the outpatient therapy side have not been particularly strong either. So that business continues to grow on a unit basis. It will continue to do so here for another couple years.

Basically, any -- volume growth you think continues to be sufficient, say through 2012 to offset any rate growth you see -- or rate cut you see?

That would be our view based on what we've seen for the last 12 months from a reimbursement stand point.

I was wondering if I could just get a little color on both the rental side occupancy on things like move-ins and inquiries and that sort of stuff. And then on the entrance fees, a little bit more just about what the dynamic you're seeing -- really, almost real time -- now that we've gotten into spring.

Inquiries are up. We are seeing in the second quarter a little improvement in terms of the transfer of the inquiries to actual [visits rented] -- meaningful interchange, exchange or interaction, rather, excuse me. And the move-ins, trending is still up. And on the entry fee side, also we see increased inquiry and pipeline movement as well.

Bill, last thing for me, and then I'll jump off. Markets, in terms of maybe some of the places where it's been more challenging -- I don't know if that's Phoenix for you and Florida. But are you seeing improvements across the board? Are we seeing some places that are still really lagging and others much stronger? Just again, any more regional color you could give me?

It is definitely regional, and Florida would still be a little bit soft. Actually seeing some improvements in some of the other markets that have been traditionally a little tough. I don't know that there's any other new pattern to any of that.

Great. That's all for me, thanks.

Next question comes from the line of Brian Sekino with Barclays Capital.

Good morning. Quick question. Follow-up on the last one on the entry fee. As you talk about maintaining the $35 million for the year, are you seeing some of the folks that may be delayed during the March month come back to you? And it's really a timing thing? And just want to get some detail on maintaining the guidance there.

Again -- once again, the world events and the outlook and all the issues that bothered the consumer, we did see a bit of a reflection in that in March. We did have a bit more of ones that carried over to the first quarter, and we did have closings in the first month -- the second quarter that was our highest first month closings that we've had in I don't know how long. Some of that was that delay factor. But it's -- we still have a fragile consumer confidence related to a fragile economy.

Shifting to the occupancy. I know you maintained the 100 bps for all of 2011, year-over-year increase. I guess you're expecting a ramp-up [of bps] in the back 9 months of the year. Is there a specific type maybe? Like the independent living? I know you called that out last quarter as being a reason for the increase year-over-year. Is there still expectation for that segment to do better this year?

Yes. With the very slow improving economy, we do expect to see improvement in each of the segments. We don't need a big tail wind. We just need a little bit of a steady breeze, and we expect that what we're seeing in the economy is that there's more evidence that there is some improvement.

Okay, just one more for me. On the acquisition front, I know you've have talked about the pipeline being full. Is there -- do you have any updated commentary? If it's some of the smaller, one-off facilities, are you seeing larger portfolios? Or maybe opportunities for joint ventures?

We will -- it's going to be an active year, and I think it will span that whole spectrum.

Okay. Thank you.

Our next question comes from the line of Rob Mains with Morgan Keegan.

Thanks, good morning. Actually follow up to that last question. One of your peers has said that acquisition pricing may have moved up a little bit. Some of the activities of the REITs, et cetera, may have some people with unrealistic expectations. Are you seeing anything pricing-wise that you think is a notable trend?

We have to wait until we see what the final terms are on the deals that may come to market here.

Okay. A question about the flip side of that, you had a divestiture during the quarter that you took an impairment charge on. Mark, any details about that transaction?

Primarily what those are are either executed or planned dispositions of communities that just don't fit into our market footprint quite right. As you know back in '06 and '07, we did several portfolio-type transactions. It's really just rationalizing the portfolio more than anything.

We've had a lot to go through to get some assets freed up from pools, and we've made good progress in that regard. So we're beginning to prune some of those off that some people may have wondered why didn't we prune those earlier. But it's been a matter of a process to work through the negotiations [all] to free some of these up from the pools.

Okay, that makes sense. All right. That's all I have, thank you.

Our next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

Hello, good morning. This is actually Josh [Marins] in for Kevin. I just wanted to come back to the SNF cuts -- the proposed cuts -- and what you're including in guidance. Can you just quantify the level you're including? I know you said it wasn't quite that 11% proposed cut. Could you just quantify it?

I'm not sure I can because I don't have that information in front of me here. I think in our business plan, we reflected a modest reduction in rates in the fourth quarter -- a few percent, I don't recall exactly what it was.

Yes, a few percent.

Okay. And how should we think about that just generally? Are there ways that you can offset some of the revenue through expense management? Or is there additional action you can take other than what you're doing on the expense side if we were to see a higher cut [comforter].

I think it's too early to tell, to be honest with you. It's a preliminary proposed rule at this point. I think it's too early to tell.

Connected to that, there's some changes to -- proposed changes, too, on the group therapy side of the business? Would there be any impact to you on that side?

I think in the final end, there's a little bit of a double dip issue within that where there is some clarification on the therapy fees. I think in the final end those two will be --of the different options -- will be, end up rationalized. So I would -- at least, we would tend to think that they're still within that Draconian 11%. And something more in the middle being more what's the likely outcome.

In terms of the therapists and how they practice, do you have any numbers around how prevalent group therapy is within your communities?

We really made the adjustments in the operation of the therapy business really in the fourth quarter of last year. So there is not any meaningful effect related to that, that you haven't already seen in our numbers for a couple of quarters.

Coming back to occupancy. Could you speak specifically to what your expectation was in the quarter? It sounded like you had some bullish commentary on the fourth quarter earnings call on the occupancy side. Am I reading it correctly that that bullishness maybe is toned down a little bit now for the first quarter? Or do you really see the outlook the same as you saw it on the fourth quarter earnings call?

I don't think we're seeing any -- I don't think we're articulating any meaningful difference in the way we view occupancy for the year. We did have a little sequential decline in occupancy in the first quarter. That is typical and probably happens four out of five years. Then we start to see things rebuild beyond the first quarter.

If any area -- if any segment was slightly below our expectation, that was the assisted living, and that was strictly driven by the unusual level of deaths we had within that segment. Which that segment, you would expect to be able to regain those elements as the sine wave effect levels within the attrition factors. So it doesn't really change our outlook for the year.

Okay. Thank you.

Our next question comes from the line of Rob Mains with Morgan Keegan.

Yes, just one follow-up and promise this really isn't a nursing home reimbursement question. Just want to make sure I got the numbers right, Mark. You said 7% of revenues from nursing homes. Doing the math, then that would imply that's a low 20% of CCRC revenues or SNF revenues?

I'd have to do the math quickly, but that's probably about right.

There's no SNF revenues embedded in the other two categories the way that you're defining them?

Correct. The $150 million is the Medicare revenue in the SNFs. Right? So there's obviously a fair amount of private pay revenue in the SNFs as well.

Right. Okay. All right. That's all I had, thanks.

And there are no further questions. I will now turn the call over to Mr. Roadman for any closing remarks.

Thank you. We want to thank all of you for participation. Management will be around today if you have any follow-up questions. We look forward to talking to you. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.