Brookdale Senior Living Inc (BKD) 2014 Q4 法說會逐字稿

Good morning. My name is Toni, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Fourth-Quarter and Full-Year 2014 Earnings call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Ross Roadman.

Sir, you may begin.

Thank you, Toni.

Good morning, everyone. I'd like to add my welcome to all of you to Brookdale's Fourth-Quarter and Full-Year 2014 Earnings call. Joining us today are Andy Smith, our Chief Executive Officer, and Mark Ohlendorf, our President and Chief Financial Officer.

First, I would like to point out that all statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the Federal Securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of those factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.

With that, I'd like to turn the call over to Andy.

Good morning and thank you for being with us.

We've talked to many shareholders and analysts since our pre-announcement last week. And I want to begin by reiterating the key messages that we have conveyed. Most importantly, we remain fully confident in the long-term economic thesis behind our merger with Emeritus. In particular, we are confident that we will achieve our three-year accretion expectations for the combined companies.

Going into the transaction, we knew that there would be turnaround aspects to the Emeritus integration, including significant underinvestment in buildings, technology and systems. We also knew that bringing capital and more sophisticated systems and processes to the Emeritus portfolio would be an important part of realizing the benefits of the merger. So we made a conscious decision to move through the integration as rapidly as possible.

Our fourth quarter CFFO was $0.53 per share, which was below our internal expectations. This includes a $0.06 per share of larger-than-usual insurance reserve adjustments. And we also experienced certain seasonal impacts during the fourth quarter, like the flu, which resulted in approximately 60 communities being closed to admissions for some period of time during December.

However, we attribute virtually all of our miss to lower admissions in occupancy during the latter part of the fourth quarter, primarily in the former Emeritus communities. This occupancy softness in the fourth quarter, coupled with our expectations for a normal seasonal progression during 2015, dictated the need for the revisions to our guidance. The good news is that we believe that we understand the root causes, which relate to changed management stemming from our integration activities.

For example, as we combined the organizations, we created a number of new reporting relationships for our sales and our operational teams. Then on October 1, we also cut over to the Brookdale CRM or sales management system. This obviously created a learning curve for the former Emeritus sales teams as they learned how to use the new system to manage their sales pipeline. Speed to lead is an important factor in our business because the first to contact a new lead has a higher probability of converting that prospect to a move-in. That response time was affected by the transition to the new CRM system.

In addition, our lead generation was temporarily reduced as we worked through relationships with referral sources and as we combined the two companies' websites and lead banks. The combination of these factors adversely impacted our incremental move-ins. Our move-out activity was within the normal seasonal pattern.

Now, throughout all of this, our sales force, of course, they didn't forget how to sell. In fact, we moved in more than 8,000 people during the fourth quarter, excluding our skilled nursing census. And since move-outs weren't at unusual levels, a few more percentage points of incremental move-ins would have painted a different picture.

I want also to add that occupancy at the legacy Brookdale portfolio was not unaffected by the integration, though it was impacted to a lesser and to a more anticipated extent. All in all, our sales metrics began to stabilize in December. And although we are not where we need to be, we are making process (sic) towards normalization.

In spite of our last quarter's rough patch, the integration is progressing well from a timing perspective. We completed the third of our four waves of cutovers at the beginning of the first quarter, mainly HR-related systems; and we had no glitches. And we are now moving towards the fourth and final wave of the systems and process integration. We expect the fourth wave of systems cutovers to be completed through the late summer, though the overall integration effort will, of course, continue throughout the year.

Once wave four is complete, we will have a common infrastructure and technology platform. And we can manage the business more uniformly across the entire system. Although this integration is complex and involves a lot of work, as we talk to our associates in the field, they are excited about our progress. These are dedicated people who want to help seniors. And we are bringing them resources and more sophisticated systems and processes to make their jobs more effective and fulfilling. We get the feedback from the field that we are on the right path and I want to thank all of our 80,000 associates for their hard work and effort.

I'd like to close by making a few comments about 2015. Mark is going to take you through the detailed guidance discussion, but I'd like to comment about how we look at the year. Our guidance is based upon having created business plans and CapEx plans for each one of our 1,150 communities. Although we have a lower-than-expected starting point for occupancy going into 2015, we are confident that we will see the benefit from the systems and processes that we are putting into place; the capital investments that we're making; and the fact that people are acclimating to our new environment.

We expect a normal seasonal occupancy pattern for the business as we move through 2015, with seasonal softness in the first half of the year and occupancy building in the second half. We do know that we have traded some short-term volatility for a quicker path to the endgame. But we remain intently focused on achieving the value creation opportunities of the Emeritus merger as quickly as possible, and we're confident in our ability to do so.

Now I'll turn it over to Mark.

Thanks, Andy.

First, I'd like to make a few comments about the fourth quarter and then move on to some more details on our 2015 guidance. In the fourth quarter, Brookdale produced $0.53 per share of CFFO. That excludes integration, transaction related and EMR expenses of $46 million.

The fourth quarter includes approximately $11 million, or $0.06 per share, of insurance adjustments primarily related to some large settlements of prior-period cases and a few large individual medical claims. The fourth-quarter results were heavily influenced by the occupancy of the portfolio. Rather than look at the reported consolidated occupancy numbers, let me give you the occupancy data in a more meaningful and comparable manner; that is, as if the third-quarter transactions had happened on July 1.

On that basis, our consolidated average occupancy decreased sequentially by 40 basis points from the third quarter of 2014 to 88.3%, ending with average monthly occupancy in December of 88.1%. For the legacy Brookdale portfolio, the sequential quarterly change was a 10-basis-point decrease. However, the average occupancy in December was up 10 basis points from the average occupancy in September. For the legacy Emeritus portfolio, the sequential quarterly change was an 80-basis-point occupancy decline. However, the average occupancy for December declined 120 basis points from the average occupancy in September, reflecting the impact of the ongoing integration.

Senior housing rates, as reflected in the reported same-community data for senior housing for the fourth quarter of 2014, showed a continuing trend of strong rate growth in the legacy Brookdale portfolio with a 3.9% increase in the fourth quarter versus the fourth quarter of 2013. For the legacy Emeritus portfolio, the year-over-year same-community rate growth was an increase of 90 basis points, similar to the last several quarters.

Looking at the consolidated portfolio detail on the same store expenses, the increase was 5.9% quarter over quarter and without the insurance adjustments was 3.9%. Legacy Brookdale same-store expenses were up 9.3%. Three reasons for this unusually large increase include, one, we had the insurance reserve adjustments; two, our same-store expenses in the fourth quarter of 2013 actually declined by 1.5%, thus we faced a difficult comparison; and, three, there were some consequential impacts from the integration activities evidenced by items such as increased overtime. We also believe we were not as crisp in our cost management of labor expenses. Steps have already been initiated to address that issue.

On the legacy Emeritus same-store side, expenses were up 1.8%. Finally, we issued equity in September and used $276 million of the proceeds to pay down debt and $51 million to purchase eight formerly leased communities during the fourth quarter.

Turning now to our outlook for 2015. Before going into the detailed numbers, I'd like to discuss a bridge between our prior guidance and our current guidance. We changed our CFFO guidance, all told, by $0.35 per share or approximately $65 million. The largest change relates to occupancy. With the lower starting point, projected occupancy for our current guidance range is 1.25% to 1.50% lower than we had previously forecast.

Also, the senior housing margin is lower by 100 basis points or so, such that the incremental margin on the occupancy shortfall was over 80%. That's $45 million to $50 million of the $65 million CFFO shortfall. Our overall senior housing rate is also projected to be slightly lower than previously forecasting, impacting the CFFO guidance by $5 million to $10 million.

Finally, the timing of ancillary services rollout is now pushed back slightly from the original plan as we work through all of the various licensure requirements. This impacts the guidance by another $5 million to $10 million, though the fourth quarter 2015 run rate is projected to be roughly equal to the original plan.

Some additional details. Due to the Emeritus merger that closed in July and the HCP transactions that closed in August, the comparability between years for virtually all metrics is less meaningful. As a result, we'll also give the change between the fourth quarter of 2014, which is the first quarter with a reflective run rate, and the fourth quarter of 2015.

Looking at topline growth, the full-year impact of the Emeritus merger will have a significant impact on reported results, such that we expect consolidated senior housing revenue to grow by roughly 30%. Because the run rates for average occupancy and revenue per unit for the two legacy portfolios differed materially, the year-over-year consolidated as-reported metrics look static. However, the fourth-quarter-to-fourth-quarter growth rates reflect comparable metric performance for the portfolio.

We expect the center point of our guidance range reflects an increase in average occupancy in our consolidated portfolio in the range of 140 to160 basis points for Q4 2015 over Q4 2014. While this may seem aggressive, we're starting from a low point. We expect to regain market share and will benefit from the planned capital investments in the portfolio.

We expect the center point of our guidance range reflects rate growth in the 3.5 % plus or minus range for Q4 2015 over Q4 2014. This increase is for the entire portfolio and reflects the fact that we raised most of our assisted living in-place resident rates on January 1. Our average resident unit capacity is projected to remain static as expansions from Program Max are expected to offset one-off dispositions of assets.

For the senior housing business, we expect fourth-quarter costs to increase in the 2% to 2.5% range as labor cost increases of 2.5% to 3%, driven by wage inflation and healthcare plan cost increases, are offset by synergies in the accounting conformity impacts in the former Emeritus portfolio. The net impact of the revenue growth and cost growth is expected to produce fourth-quarter operating income growth for the senior housing business in the 7% to 8% range. For the ancillary service segment, we expect to see a 50% or so increase in the full-year 2015 revenues, due to the full-year inclusion of Nurse on Call and the rollout of the ancillary services into the former Emeritus locations.

We expect to produce a similar increase in operating income over 2014 as margins remain level. We expect margins for senior housing and ancillary services combined to be 34% to 34.5% for 2015. I would note that in the press release, the pre-announcement we issued last week, we erroneously referred to that margin as the senior living margin.

Additionally, we expect the full-year 2015 to include management fee revenue in the range of $55 million to $60 million; cash G&A expenses, excluding non-cash comp and integration transaction and EMR rollout costs, will total approximately $235 million to $245 million; integration and transaction-related and EMR costs are estimated to be $35 million to $40 million in 2015.

Cash lease expense is expected to be $375 million to $380 million. And in addition, we expect consolidated net entry fee cash flow in 2015 to be in the $5 million to $6 million range. With those drivers, we expect that adjusted EBITDA, which is cash-based, therefore excludes non-cash charges and also integration transaction and EMR costs, will grow to the range of $930 million to $960 million for full year 2015.

Continuing on for full year 2015, we expect cash interest expense to be $375 million to $380 million; capital lease amortization is forecast to be approximately $50 million; state cash taxes are forecast to total $5 million to $6 million; and CFFO contribution from our unconsolidated ventures is projected to be in the range of $50 million to $55 million. As an aside, we intend to change our definition of adjusted EBITDA beginning in 2015 to include the CFFO contribution of our unconsolidated joint ventures, though this guidance does not reflect that change.

We've also updated our projections on future federal cash taxes and now do not expect to become a federal cash taxpayer until at least 2017, given the lower expected operating results, planned purchases of leased communities, and other factors. We expect that CFFO per share for 2015 will be in the $2.60 to $2.75 per-share range, excluding any integration transaction and EMR costs and any unplanned acquisition or disposition activity.

For capital expenditures, we forecast that routine maintenance CapEx, which impacts CFFO, will total approximately $65 million to $75 million for 2015. Our investment in EBITDA-enhancing and major project CapEx will total $170 million to $175 million, plus an additional $40 million to $45 million of renovations will be reimbursed by third parties. Corporate CapEx is projected to be $60 million to $65 million, primarily for technology and the rollout of ancillary services.

We plan to undertake $150 million to $175 million of Program Max projects, including $60 million to $65 million funded by Brookdale and the balance funded by landlords or lenders. Finally, there will be $40 million to $45 million for acquisition integration CapEx.

We do not provide quarterly guidance, but I'd like to remind you that historically we've seen a pattern where CFFO in the first quarter is somewhat soft because of seasonal occupancy declines. Typically CFFO builds from there with operating expenses peaking seasonally in the third and fourth quarters.

We will now turn the call back to the operator to begin the question and answer session.

(Operator Instructions)

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

Good morning. Certainly a lot of talk at [OSHA] last week about the age of the physical plant out there in the industry and the need to reinvest. And certainly sounds like that's what you're doing with Emeritus. I was hoping you could give us a little more detail on the relative investments that you are making in that portfolio. And then maybe some color around how long you actually think it takes to see the impact of that investment in terms of the occupancy.

Yes, good morning Frank. You are right. As you know from following the Company, we've been talking about this particular topic for several years. And as you also know, we've, beginning about four years ago, began a pretty heavy investment or reinvestment program into the Brookdale communities which we believe has been quite effective for us and has shown good effect. We are running that same play with respect to the Emeritus communities. And I think you saw in our press release that we issued last week where we're expecting to refresh approximately 150 of their communities this year. So what is that? That's a little more than a third, right at a third of their portfolio.

The good news is that on these refreshing-type of capital expenditures, we see and expect to see results, in many cases, beginning immediately. The fact that we tell our resident base and tell new prospects that we're investing this capital into the communities and refreshing them to current standards, it's obviously helpful to the current sales process and we expect that to help us both in terms of occupancy as well as in terms of the rates that we can expect. Did I answer your question? Frank?

Yes. My next question was really I think you refer to the fourth wave of the cutover coming and being completed by midyear. I'm just curious, is there any reason why that particular wave of this cutover could affect your sales activity, the coordination of that, or if there are any other structural issues that might impair your ability to experience that normal third-quarter pickup that you see on move-in activity?

Well, obviously we are taking steps to make sure, to the extent that we can, that our sales force and our marketing activities are isolated from the fourth wave of the rollout, so that they can focus on their day jobs which is to produce leads and then to move folks into our communities. So we're going to do what we can to make sure that those folks are able to be isolated and to focus on that level of activity.

That having been said, this is an important systems and process cutover that we're going to undertake that will allow us to get the entirety of the platform onto Brookdale systems. But we believe that we've got a process in place that will allow us to achieve the guidance that we've articulated here for you, which includes what we would expect to see in terms of seasonal growth in occupancy in the third and fourth quarter.

Okay. One more and I'll hop. It's accounting stuff. I wrote down accounting conformity impact. Could you maybe flesh that out just a little bit and explain what that was? And then finally, I think you said your guidance did not include the impact of unconsolidated JVs. And I'm just curious, what would that be? Is it just basically cash distributions off your interest in the joint venture coming back to the Company? But if you could elaborate there and I'll hop. Thank you.

Your second question first. What we indicated is that our EBITDA guidance, our adjusted EBITDA guidance for the year, which we preannounced last week and repeated today, of $930 million to $960 million does not include the CFFO that comes out of our unconsolidated ventures. That's $50 million to $55 million.

We are going to change our definition of adjusted EBITDA to include the JV distributions on a go-forward basis. Historically, the distributions for the JVs have been a fairly de minimis number, but now with the scale of the HCP joint venture, it's much more meaningful. That is EBITDA-type earnings, so we're going to simply conform our definition of adjusted EBITDA to pick that up.

The first question around accounting conformity, we are obviously putting the Emeritus business on the Brookdale accounting platform and using the Brookdale accounting methods and principles. Not a lot of big differences, but there are a few subtle differences. For example, Emeritus expensed the cost of unit turns. At Brookdale we treat that as CapEx. So from a CFFO standpoint, there's no net impact but there is some modest definitional impact of that. There are two or three other items like that.

And again, as we get through the year this year, the effect of that will be largely zero in the second half of the year, because we will have had pretty much a full year on the Brookdale accounting methods.

Okay. Thanks.

Thanks, Frank.

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everybody. Few things. I guess I wanted to start with the Emeritus occupancy. And you gave us the helpful metric just around the 120 basis point decline as of December versus September. I guess just given how you are characterizing the integration and where you've progressed, I guess would be helpful just to get a sense for whether December was the bottom and how that might compare to January for the legacy Emeritus to help us to think through where you are in some of the disruptions you're describing.

Yes. I think I said in my prepared remarks that we began to see some normalization in December. And now against the backdrop that this industry and certainly these two companies, we usually experience a seasonal softness in the first quarter. That stems from higher mortality rates, the death rate goes up, there are greater degrees of move-outs, that type of thing, what we normally see. But against that backdrop, we saw December beginning to normalize. And I hesitate to draw any conclusions around one month. But if you look at January's occupancy across the Company and compare it to the prior two years, we will have done better than both 2014 and 2013.

We also have begun to see a normalization of our lead banks, actually our lead bank is slightly up, when you take into account the duplication of the leads that both companies would've gotten previously. So again I hesitate to -- I would just caution you to remember that we're expecting the usual seasonal softness for Q1, but the performance in January was better than the prior two years in terms of move-ins.

Got it. So just so I'm understanding what you are saying. The rate of change sequentially from the end of December to the end of the month of January, just the occupancy rate, the rate of change was a little better, even though it was down, as we'd expect, but a little bit less so than the last two years? Is that what you're saying?

What I'm trying to say is if you compare January of 2013 or January of 2014 to January of 2015 -- again, hesitating to just draw any market conclusions around one month, but January of 2015 in terms of net move-ins, it was better than the prior two years.

Okay. And move-outs, would they be --

Net move-ins. So the net was better. Move-ins versus move-outs was better.

Got it. So that's the net number. Thank you.

My other question was related to the EMR implementation. I know you're giving us, Mark, the $35 million to $40 million of integration and EMR costs. I just wanted to separate out the EMR implementation for a second here. And can you maybe update us on what the total project cost of that is and how much more is left to spend? And then just confirm that that's mostly geared to the SNFs. And I don't know if you've expanded the scope of it, but just wanted to get a quick update there.

Okay. I admit to you I don't have in front of me the historical project costs for the whole thing. We would have to loop back with you on that. But from a rollout standpoint, we have completed the EMR rollout in the ancillary service business, outpatient therapy, home care, and there is some interplay there into the SNFs, particularly on the therapy side of things.

We will be focused this year on rolling EMR into Nurse on Call. So the Brookdale home health business has been automated. We are now going to roll Nurse on Call onto the same platform including EMR. And Emeritus had actually gotten fairly far down the road on EMR in their SNFs. We are going to use a platform similar to that and roll that into the Brookdale SNFs. So most of the activity this year will relate to EMR in the Brookdale skilled nursing portfolio and Nurse on Call. There will probably be some initial work done around preparatory planning work on EMR and the assisted-living portfolio, but we don't have significant dollars contemplated for that this year.

Okay. And the breakdown of the $35 million to $40 million, how much of it would split out between integration costs related to the transaction and then on the EMR itself?

Again, I don't have that in front of me. We will have to get back to you. And, quite frankly, it's a little bit difficult to separate out the two. For example, in Nurse on Call, the platform is being integrated into the Brookdale ancillary service platform. EMR is a piece of that. But EMR then intersects with the way the back office works, the revenue cycle management and so forth. So I'll see if I can track those numbers down for you, but they'll be a little bit of a distinction without a difference.

Okay, great. Thanks a lot.

Thanks, Darren.

You next question comes from the line of Brian Zimmerman with Goldman Sachs.

Hi. Thanks, guys, and good morning. Just as a follow-up to Darren's question, I'm just curious. Are you making any pricing concessions at the Emeritus portfolio that would help bolster occupancy? It seems like that pricing is a bit lower and just trying to understand the relationship a bit more.

Well, good morning, Brian. The pricing on the Emeritus portfolio has been significantly below the pricing on the Brookdale portfolio for the past several years. So there is no real change in that running through in the fourth quarter.

Now as we try to rationalize our pricing by local markets and we try to gain pricing leverage, you know we're beginning to make changes around the pricing paradigms in the Emeritus portfolio. Over time, expecting the rate growth in that portfolio to begin to get closer to the rate growth that we've seen historically in the Brookdale portfolio. Right now we're always running pricing programs and discounting programs based upon local market activities and what we're seeing in the market. But there is nothing that I would remark upon that happened in the fourth quarter that would be something to remark upon at this point.

Right. I guess you could just make the argument that as you make those investments in Emeritus and they are running below the Company average, that at some point those pricing increase could even be above the Brookdale portfolio, given that they're playing a bit of catch-up. So just trying to understand all the numbers you got here. My second question is on --

Let me follow up on that and to be sure that we underscore the fact that as we invest this capital into their communities, just like we experienced with respect to the Brookdale portfolio, we would expect to see pricing improvement in the Emeritus portfolio. We underwrite those investments to a yield and we have expectations of ourselves and of our field folks to make sure that we see pricing improvement as a result of those investments.

All right. That's helpful. My second question is on -- I'd just like to get your updated thoughts on the potential for restructuring your real estate portfolio and whether you see this as a potential avenue to unlock value.

Well, as we've said many times, the real estate that we have on our balance sheet and that we own is a valuable component of our capital base. And we believe that our job is obviously to create value for our shareholders. So part of that is to constantly and continually assess our capital structure and how our Company is organized. And that's a complex analysis, as you know from following the Company. And as you also know, we've put a lot of work and a lot of effort into this over the past several years. We expect to continue to do so.

All right. Thanks a lot, guys.

Sure.

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

Thank you. Question here on the guidance. How much of synergies from the deal are you including in your guidance?

Not very significant numbers, Joanna. I mean, we are beginning to see some synergy impacts out of particularly the corporate side of programs, things like the insurance programs, for example. We're beginning to see some of the overhead synergies as we migrate onto a common system and process platform. But I would not say net-net there are very dramatic numbers coming through 2015.

And also, I'm not sure if I missed it, but on the benefits you expect to see in this year from the investments you are making in [letters] in Emeritus assets how quickly you expect these benefits to occur? Are you already starting those renovations as we speak now? By now you have couple of buildings already sort of done or any color you can give us on the timing of things here.

Sure. We are aggressively attacking the CapEx in that portfolio. I think if you look at our rate guidance for next year, we're talking about rate growth across the entire Company of roughly 3.5%. In the last quarter, those same-store numbers were 3.9% in the Brookdale portfolio and 90 basis points in the Emeritus portfolio. So to get to that overall 3.5% number in 2015, we have to be seeing some rate acceleration on the Emeritus side.

I honestly don't have those numbers in front of me split between the two. But clearly, partly because of the CapEx, partly because of the integrating the brand and the sales systems, and a number of other factors, we are expecting to see better rate performance in the legacy Emeritus properties in 2015.

And lastly, did I hear right? Did you give the occupancy shortfall versus your prior expectation? Was it 125 to 150 basis points?

Yes.

This was for the consolidated portfolio or Emeritus?

It is for the consolidated Company. There would be a disproportionate impact in the Emeritus portfolio.

All right. Thank you very much.

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

Hi. First question, just on the strategy and timing of the integration. And it sounds like, based on the press release last week and this week, you've sort of accelerated some of the integration efforts. And it certainly seems like that's creating some short-term pain, I guess. Were there any thoughts on slowing down the integration? Do you guys think, in hindsight, you might have moved a little too quickly?

Good morning Josh. Obviously there were some unexpected negative effects around the change management that we've described here in the fourth quarter. That having been said, our goal for the Emeritus merger has always been directed at realizing the benefits that we see there and the $0.50 of accretion, when coupled with the HCP transaction, for the third year.

So we adopted a philosophy of engaging in the integration as rapidly as we prudently could do so, as opposed to metering the integration out over a longer period of time. Because we believe the more quickly that we get through this, the better positioned we're going to be to achieve those longer-term benefits that we've described and that are included in our accretion estimates. So I don't think that we second-guess. Well, I know we don't second-guess the speed with which we went through the integration to this point. And we feel good about the rollout of the fourth wave.

And, again, going back to a prior question, we believe that we will have our sales folks and our marketing teams positioned to avoid that level of change management, to have them isolated so they can focus on their main jobs. So we don't question the integration plan. And, again, we feel good about getting through it.

Okay. That's helpful.

The second thing, I was just a little confused on the occupancy. It sounded like from September to December you saw some improvement in occupancy at the Brookdale facilities but some deterioration at Emeritus legacy facilities. I was curious what created that dynamic? What were the improvements seen at Brookdale that weren't seen at Emeritus?

I will let Mark speak to the numbers on that, but let me just describe the dynamics to you as what we saw going through the quarter. Again we rolled out the CRM system on the 1st of October, which is a large change to the folks out there in the field in terms of how they access leads. It's not rocket science, but it does create some change management and causes people to learn how to access the pending lead file as rapidly as they can, how to triage between what's an A lead, a B lead and a C lead. Those type of things.

So we rolled that out in the 1st of October. And our occupancy in October in both portfolios was, I would say, adversely affected by the change management and different than what it would've been if both companies had remained separate. But, nevertheless, was, generally speaking, within expectations.

And as you know there's a tendency in this business across the industry for folks to move in -- most of the time you see move-outs at the beginning of the month and move-outs at the end of the month -- I'm sorry, move-ins at the end of the month. So as we went into November, which is, generally speaking, a soft month and almost always is a difficult month when Thanksgiving is at the end of that month, we saw a dramatic drop-off in move-ins. We did not move in nearly the number of folks that we expected in the latter part of November.

Once you've done that, you pretty well printed your results for December because of that dynamic of moving folks in at the end of the month. So while we began to see normalization in the move-in activity in December and we began to see normalization of our lead bank in December and we began to get back to what we consider more normal and more expected behavior, the result, when you had that level of a drop-off in November, is pretty much setting you -- that is your December results. Again, because of the dynamic of moving folks in. And that negative variance in November was primarily isolated in the Emeritus portfolio which, again, we attribute to all of the change management that's going on in that portfolio.

Okay. That makes a ton of sense. Thank you, Andy.

I guess last question just following up on the real estate opportunity and the value there. Maybe I will ask it a different way. I think a lot of people see the opportunity to create shareholder value through some sort of spinoff because cap rates have come down and you guys have, obviously, more valuable assets, great operator, all private pay. And then the fact of carrot, you've got the stick of cash taxes coming in a couple of years. You've always talked about this as a complex formula, I guess, in terms of how you think about the value. What are some of the countervailing forces? What sort of has held you back, I guess, at this point, because I know it sounds like you guys have done a ton of work on this in the past?

Well, Josh, as you know and as we've talked about many times and disclosed in the S-4 that we filed with respect to the Emeritus transaction, we went through a very rigorous process of thinking this through and we ended up deciding, at least at that point in time, that the right thing for us to do was to acquire Emeritus.

It doesn't mean that the analysis ends. It doesn't mean that it's over. It simply means that at that point in time we thought the best thing to do to build value for our shareholders was to merge with Emeritus and generate the synergies and the additional value that we think we can do by integrating that platform.

That does not mean that the analysis around the real estate has stopped. What it does mean is that we've got to be truly creating enduring value for the benefit of our shareholders. So the real estate has a valuation -- has a value. And then the operating side of the business has a value. You've got to make sure that if you were to do something structural, you have to make sure that you think A plus B is worth more than the C you would get by keeping everything together.

That is a complex analysis. How would the operations be valued, et cetera? And then there are a whole set of complexities, which we've talked with many of you about, of what is the relationship between the operational side of the equation and the real estate side of the equation? That's an additional level of complexity that affects what you think you can do.

So I don't mean to be elusive on this. There are just a whole host of variables that have to be thought through and taken into account, all directed at making sure if you were to do something, that you truly are increasing value for our shareholders. And, again, I want to reiterate that we, the Management team of this Company and our Board, absolutely believes that it's our duty to make sure that we are analyzing that in a way that is consistent with creating the most value that we can for our shareholders.

Perfectly fair. Thank you, Andy.

Thanks Josh.

Your next question comes from the line up Brian Tanquilut with Jefferies.

Hey, guys. Andy, just a quick question for you. Most of my questions have been answered already. As we think about the pricing versus occupancy dynamic, how do you strategically balance making a decision -- because clearly your pricing has been strong. How do you balance going after rate at the expense of occupancy? And I know this is a market-by-market decision, but from the head-office perspective, what's your view on that?

Well, Brian, that's a good question. The way that we think about it is what we're really trying to do is to hit that efficient frontier of maximizing revenue, to state the obvious, right? And that obviously has two primary drivers to it, which is occupancy and rate and how do they relate to one another? We have consciously, in the Brookdale portfolio over the last several years, we have been really trying to capture rate, which in many ways is the more powerful driver, at least over time, to capitalize on the investments that we've made in the Brookdale portfolio. We expect to do the same thing in the Emeritus portfolio.

Obviously you've got to balance the -- there is an obvious direct correlation, in many cases, between rate and occupancy. And we are always conscious of that because, again, we are trying to get to that efficient frontier in terms of maximizing revenue. But we really do believe over the longer run, getting rate is really going to be an important driver for this business as we move forward. Now right now, in all frankness, in the many markets where Emeritus and Brookdale directly competed for the past many years, we are trying to get much more sophisticated and much more -- well, just much more sophisticated on our pricing methodology and our pricing tools with respect to those markets.

And I'd remind you that the way the laws work in this country, the folks who do this work, both in the field and here at our corporate office, they couldn't even access the detailed sales data or marketing data for the Emeritus communities or vice versa, until after we closed because of the way the Antitrust Rules were. So we've just begun this effort to really get to a place where we feel like we can really maximize pricing while at the same time maximizing occupancy in these shared markets. Again, that's an unquantified but, in our view, huge upside to this merger which we expect to realize over time.

Got it. And then just a follow-up on that Andy, or maybe for Mark. As we think about the balance between occupancy and rate, which one in your view has a bigger impact on the margin at the facility level?

Well, obviously rate. Now again that's answering that question from the standpoint of a portfolio that's 88% or 89% occupied, right? Structurally long-term, we could have a fascinating debate about when are you full. I mean, is the portfolio full at 91% or 92%? But whatever it is, it's only another 2% or 3% of revenue growth -- or occupancy growth from where we are today. The cumulative effect of growing rates at 3.5% rather than 1% over a number of years is very significant.

Got it. Thank you, guys.

Thanks, Brian.

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

Hi, good morning.

Good morning, Dan.

I actually just wanted to go back over the rate question a little bit. When you look at the legacy Emeritus portfolio, do you think that portfolio was capturing all the services they could have provided to those residents? Obviously when you get into the assisted-living and memory care, a big component of that rate is the services you provide. Is there upside to the rate by better capturing those services needs of the residents at those facilities?

Well, again, Dan, as we've said, we believe there's an opportunity to improve the rate environment and the rate structure in the Emeritus communities. That's partly by pulling that part of the platform onto our systems and our infrastructure, including the service levels that we provide, including the clinical protocols that we have at Brookdale. So that's part of the opportunity. Especially when it's coupled with the investments that we are making in those communities, both in terms of the physical plant and the technologies and tool sets that we're bringing to that part of the portfolio. So it's all part and parcel.

Okay. One part of many, right? And then when I look at the integration costs, the EMR costs, look at the ancillary services margin a little bit lower than we expected, and a pretty high G&A allocation in [supplement]. Can you break down the integration EMR costs between seniors' housing and the ancillary services business a little bit so I can better understand what a normal margin would be for both businesses?

You're looking at the fourth quarter numbers?

Yes.

Okay. I will admit to you that things like the G&A allocation in the supplement, those numbers are continuing to be refined as we've now got both Companies combined in one reporting structure here. So I would look at those as directional as opposed to extremely specific [fixed] numbers.

It's also the case that we are in the process of combining the structure in the ancillary service business, just as we have done probably four to six months ahead from a timing standpoint in the senior housing business. So that ancillary service business is not completely, but to a significant extent in the fourth quarter, two separate ancillary service businesses where we are reporting them together. So I think you'll see those numbers change as we go through 2015 and certainly into 2016.

In the fourth quarter, there was not a lot of EMR work ongoing. There was some preparatory work related to the skilled nursing that will roll out into the Brookdale platform as we get into 2015. So, again, I don't have the numbers right before me here, but the lion's share of that P&L costs would have been integration related.

Okay. It's safe to say that the operating margin I'm looking at in the ancillary business in 4Q was impacted by some type of integration costs that you are normalizing out for the entire CFFO? I'm just trying to --

To some extent. And also by the fact you do have two freestanding organizations operating on a freestanding basis so far.

Right. So the synergies have not been taken out?

Right.

I may have asked this before, but the operating margin on the owned assets are very different than the operating margin on the leased assets. Over the next three years, as you achieve that $0.50 of synergies, how should I think about the operating margins of the owned assets versus the leased assets? Should they be moving up at the same amount, same type of degree, 100 bps a year, whatever it would be? Or should I see that owned operating margin start to pull in or equalize versus the leased operating margins in the seniors housing?

Personally I would not -- obviously there are differences in our margins on a segment basis. The highest margins are in the retirement centers. Independent-living margins are higher than assisted living, which is higher than memory care, which is higher than skilled nursing. The portfolios are not perfectly ratably owned or leased. But there are functions of other things going on there.

So, for example, I suspect we own relatively more CCRCs than some of the other product legs. So the fact that there is skilled nursing -- and we can do some more work on this to answer your question more directly. We will follow up on it. But I suspect there are differences in the mix of product type here that would account for more of the margin difference than anything else.

Okay. What I'm thinking about going forward, it's not like the owned assets are suddenly going to get much, much better than the leased assets. As you integrate, they are both going to improve about the same level.

I would say that's a fair thing to say, Dan, and I would want to just follow up to what Mark said on that. Our operators and we as a Company, we operate our leased and our owned communities in precisely the same way. We don't distinguish between, and our operators in most cases don't even really reflect upon or even know that their assets may be leased.

Now there is one slight exception to that, which is if we want to invest large capital into a leased community, then obviously we have to have a conversation and reach an agreement with the relevant lessor in order to make those investments. But generally speaking, we are very intentional about making sure that we operate those assets on exactly the same basis as we operate our owned assets.

Okay. And then one last quick question. Just wondering, have you seen any unusual turnover in personnel post-integration? Did that impact at all in the fourth quarter?

No, Dan, we've actually been pleased and have done better to date. We have done better than our underwriting and our expectations were in terms of retention. So we're actually pretty pleased with that, at least at this point.

Okay. Thanks for answering the questions. Have a good day.

Thanks, Dan.

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

Thanks, good morning. Going back to the accelerated CapEx, I guess first can you clarify which bucket of CapEx sort of reflects that accelerated spending?

It's going to be the major project in EBITDA-enhancing CapEx bucket that we talked about.

Okay. My question would be how should we think about the accelerated nature that you are categorizing at? Is this capital that you had earmarked for spending in the future that you're just bringing forward? And I guess more specifically does it in any way take away from spending that you maybe had planned for Program Max?

Program Max is pretty independent of this thought process. And, quite frankly, the returns on Program Max tend to be sufficiently high that financing is never a barrier. Again, we don't own all of our assets. We lease a fair number of our assets. And if we have a project that is particularly attractive with high returns, our landlord wants us to do the project too.

The first question around the timing of the CapEx, I would think of this as bringing forward CapEx. On the Brookdale portfolio, we've been aggressively investing for really the last four years. And we're starting to see -- though we're still spending in a pretty aggressive way, starting to see that we have tipped over the peak CapEx levels. On the Emeritus side, we will invest on an accelerated level for a three- or four-year period. Again, as Andy said, we've seen the benefits of that on the Brookdale side and we plan to run the same play in the Emeritus portfolio.

Okay, great. And on the occupancy ramp over the year. Obviously fourth quarter, you have some good targets. Just curious how we should think about third quarter? If we look at the prior-year third quarter 2014 on an adjusted basis as if the transaction were closed July 1, should we consider occupancy and rate growth similar in that occupancy build cycle?

Well, we would expect Q3 and Q4 of 2015 to not suffer from some of the impacts that we saw in 2014. So we would be projecting a more normal seasonal growth pattern in 2015.

Okay. One last one. On the cash G&A, is there an expectation that you will be increasing, that you will be spending more G&A in 2015? I'm just looking at the fourth quarter of $55 million and just curious if that's sort of the run rate or are you assuming an increase in 2015?

The G&A numbers are coming in pretty much right on top of our underwriting. So no real change from expectation there.

All right, great. Thank you.

Your final question comes from the line of Dana Hambly of Stephens.

Sorry. I actually tried to get out of the queue. I'm all set. So appreciate it and we will end it there. Thanks.

Well, we will say good morning to you anyhow, Dana.

I would now like to turn the call back over to Mr. Roadman.

Thank you, Toni. Just wanted to close by thanking everybody; letting everybody know we are going to be at the RBC Conference in New York at the end of February; the Citi Global Property Conference in Florida the first week in March; and then mid-March at the Barclays Healthcare Conference in Miami, and look forward to seeing everyone there.

With that, thank you. Management will be around today if you have any follow-up questions. Thanks very much.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.