Brookdale Senior Living Inc (BKD) 2015 Q2 法說會逐字稿

Good morning. My name is Tonya, and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living second-quarter 2015 earnings conference call.

(Operator Instructions)

I will now turn the call over to Mr. Ross Roadman, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Tonya, and good morning, everyone. Thank you for joining us for the second-quarter 2015 earnings call for Brookdale Senior Living. With us today are Andy Smith, our Chief Executive Officer, and Mark Ohlendorf, our President and Chief Financial Officer.

I would like to point out that all statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements.

Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.

With that I would like to turn the call over to Andy. Andy?

Good morning. And thank you for being with us. Our experience continues to underscore our belief in the long-term growth potential of our Company. However, our near-term operating performance was below our expectations.

I am disappointed that, as a result, we need to revise our guidance for the balance of 2015. We wanted to tell you the reasons for this revision on this call, together with the ways we are addressing our integration challenges.

Before doing so, I want to reiterate that we are confident that this is a near-term situation and that, ultimately, we will achieve our expectations with respect to the Emeritus merger. Our original conviction of long-term potential of the Emeritus transaction remains as strong as ever.

We have made, and we continue to make, substantial progress in integrating Emeritus into our operations. This has allowed us to identify meaningful property level operating and expense savings. And we expect to significantly exceed our aggregate third-year cost savings synergy target.

However, the integration process has also been disruptive. And it is the driver of our two primary challenges during the second quarter. First, our occupancy loss; and second, to a lesser degree, our ancillary services rollout.

We experienced a 90-basis-point sequential decline in occupancy during the second quarter. This partly reflected the Q2 softness for the industry in general as evidenced by industry data. The industry showed a sequential decline of 30 basis points compared to our 90-basis-points decline. Consistent with the balance of the industry, we experienced a continued elevated level of flu-related move-outs during the first part of the quarter. However, while we did see our typical seasonal pattern, with net move-ins turning positive in June, our overall result was later and was more muted than normal.

This stemmed from the ongoing integration of Emeritus. While there are a number of factors at play, I will point out the most important. First, people. Throughout the integration process we have been pleased and we continue to be pleased with the retention level of management associates above the community level.

However, as we moved from the third into the fourth wave of our integration process, we experienced increased turnover of key management personnel in the communities themselves. This includes executive directors and sales managers. And this was most pronounced in the Emeritus communities. This integration has been difficult on these folks. It has required a fast pace, a lot of additional work, a high commitment, and a more sophisticated skill set.

Obviously, vacancies in these key positions created some operational difficulties and hampered our ability to maintain and grow occupancy during the quarter. A significant amount of our occupancy miss was concentrated in communities that experienced key management turnover.

Second, we also had several integration challenges to work through in our marketing and sales programs. We completed the re-flagging of our communities to the Brookdale name, creating 1,100 billboards across the country to publicizes our brand. That effort, however, created some short-term confusion with our referral sources and in the marketplace generally, which we believe affected our lead flow, particularly in our smaller communities.

Additionally, as we combined marketing activities into one united effort, we focused on driving prospects to our call centers. With the benefit of hindsight, we moved too far too fast, with the result that our call centers did not adequately keep up with the increased volumes.

In addition to our occupancy challenges, our second-quarter rollout of our ancillary services platform into the former Emeritus portfolio did not meet our expectations. Due to delays in obtaining regulatory approvals to expand our current services in a number of California locations, we are behind with our rollout plan in this major market.

Now we are entitled to these approvals, but the state has been frustratingly slow to process them. Outside of California, we are on plan as to the number of communities being served. But we have not built our caseload to projected levels in approximately 30% of these locations. This is due to integration-related people issues. These two factors put us behind where we had projected to be for this business.

We have made good progress in addressing these challenges. Most importantly, we have filled many of the vacant positions. And we are seeing a return to more normal levels of associate attrition at the community level through improved training, onboarding, increased support, and as we near the end of this intense integration process. I am personally grateful to those associates who have worked so diligently during this time period.

On the marketing front, we've adjusted the lead flow to our call centers and have greatly improved the effectiveness of the call centers themselves. We are focused on providing the local markets with the support needed for outreach and for market awareness to improve lead flow generally and to deal with the local name changes.

We believe that our marketing and sales adjustments are already making a difference. In our consolidated portfolio, we moved in over 8,300 independent and assisted-living residents during the second quarter. And we have seen building momentum with positive net move-ins in both June and in July.

For the ancillary services business, we expect to continue to rollout to the Emeritus communities, to build our caseload, and to obtain the necessary licensure approvals over time. In fact, approximately 70% of our locations are meeting or exceeding their plan. As a result, we continue to expect to reach our year-three CFFO revenue synergy goal of $0.14 per share in 2017 for our ancillary services programs.

We have just reached the one-year anniversary of the merger, and we have made significant strides toward becoming a fully-integrated Company. Our systems rollout and the more technological integration activities are beginning to wind down. It was important to get all communities using the same systems, policies, and procedures, particularly given how underinvested Emeritus was in this area.

Importantly, with the systems integration winding down, we can now begin to assess more rigorous pricing rationalization through our markets, as well as to apply our service alignment and labor management tools to the Emeritus communities. As you've seen with Legacy Brookdale, we expect these tools to contribute to stronger revenue growth and better cost control over time.

While we are running behind on our revenue underwriting assumptions at this point in time, we are projecting significantly more cost synergy savings at the community level than originally underwritten. Throughout the integration, our procurement team has been working with a nationally-recognized consulting firm to analyze our cost structure and our expense savings opportunities.

As a result of these efforts, we now expect that our year three property-level cost savings will be significantly more than the original guidance of $0.12 per share. We continue our work on the physical plant improvements in the former Emeritus portfolio. And we are on track to achieve our goal of renovating 150 Emeritus communities this year.

We recently announced some top-level management changes. As I worked with our board to assess our management team, it became clear that we needed to make changes as we take Brookdale to the next level. I appreciate Mark stepping up to provide added focus to our operational execution until we put in place a new chief operating officer. We are proceeding through the recruitment process with our executive search firm, and we're excited about the prospects we're seeing for both the CFO and the COO positions. We will move as expeditiously as possible with the goal of completing our recruiting efforts by year-end.

On the transactional front, we are in the process of disposing of a select number of communities that do not fit our long-term plans. In addition, our newly-constituted investment committee continues its work to analyze and evaluate our real estate alternatives. This work will, of course, take into account our current operating performance, our projections for the future, and market conditions overall.

Let me close by saying that the strategic thesis for the merger with Emeritus is still very much intact. It is true that the integration has been more disruptive than we thought, and it has hampered our short-term performance. But the opportunities from the merger are, in fact, intact.

Our vacant units, they are an asset and an opportunity. They will be filled as they have in the past. Our opportunity to gain pricing power by rationalizing local markets, it's still there. And we know that our cost synergies will significantly exceed what we originally underwrote.

The strategic intent of the merger was to build the first national senior living solutions company, to be the recognized leader with the largest market share, to be in the position to take advantage of changes in the healthcare landscape, to be the Company other businesses come to, to take advantage of an aging population. All of this is happening.

We are in ongoing discussions with parties inside and outside the healthcare field to explore new business opportunities. We have a number of exciting pilot programs underway. We have a tremendous opportunity to expand the services we provide to our residents and, importantly, to take those services outside of the confines of our real estate to seniors in the marketplace generally.

We remain confident and excited about the many opportunities we have to transform our Company as we move forward.

Now here is Mark to review our results in more detail.

Thanks, Andy. Beginning with the results for the second quarter, we produced $0.60 of CFFO per share, excluding certain integration and other costs below our internal expectations. While occupancy declined, rate held strong and costs decreased as result of cost management and the emergence of synergy savings.

During the second quarter we saw continued pricing strength. Looking at senior living same-community rate growth, the combined portfolio produced the 2.8% year-over-year increase in average monthly rates.

The Brookdale same-community portfolio produced a 3.8% year-over-year increase in senior living revenue per unit. While the Emeritus same-community portfolio experienced a 1.6% year-over-year increase in that metric.

We are using, in certain markets, incentives and discounts to rebuild occupancy, which are more than offset by positive mark-to-market and in-place rate increases. Our combined average occupancy for the second quarter declined sequentially by 90 basis points from the first quarter of 2015. We did see the typical seasonal rebound start during the quarter.

April experienced a decline as we to continued to experience a higher flu-related mortality rate than average. May showed nearly flat net move-ins, as we began to turn the corner. And June was net positive with move-ins exceeding move-outs for that month. As a result, average monthly occupancy declined through May and was roughly flat in June. Average occupancy in July is up approximately 20 basis points from June. And July, like June, showed positive net move-ins.

Same community expenses evidenced both our focus on managing cost as well as achieving cost synergy savings. Salaries and wages grew 2.3%, primarily due to wage increases and an increase in FTEs largely in the Emeritus communities. We saw decreases in food, insurance, and supplies as procurement savings were realized.

We did experience an increase in bad-debt expense as a result of integration-process disruptions related to our efforts to centralize third-party governmental billing activities. We expect the bad-debt expense to persist for the next several quarters and then to normalize to customary levels.

Continuing on with our pro forma same-community data for senior housing for the second quarter of 2015 compared to the second quarter of 2014, our consolidated pro forma senior-housing same communities produced a 30-basis-points increase in revenue, due to a 2.8% increase in revenue per unit, offset by a 220-basis-point decline in occupancy. At the same time, expenses decreased 30 basis points, with the operating margin increasing to 35.5% from 35.2%.

Our ancillary services business produced $116.2 million of revenue, a 77.3% increase from the second quarter of 2014, largely stemming from the closing of the Emeritus merger a year ago. The main driver was the inclusion of Nurse On Call and an increase in home health census due to the rollout to the Emeritus communities.

As Andy described, we have had regulatory delays in California with the rollout into the Emeritus communities, and the caseload has not built as quickly as we anticipated in certain markets. NOI declined from the first quarter because of start-up costs and increased bad debt related to process disruptions, related to our conversion of third-party billing activities, as we saw in the senior-housing business.

Finally, turning to guidance, we're disappointed that our occupancy performance requires that we reset our base from which to project forward growth. We revised our CFFO guidance range by approximately $0.25 to $0.30 per share. First, the primary change relates to occupancy. We ended the second quarter with an average occupancy for June of 86.3%. We project occupancy will climb through the remainder of the year by 60 to 70 basis points from that June starting point and will have a resulting average occupancy for the year in the range of 87%, plus or minus.

We expect to offset some of the lost revenue through reduced expenses and synergy savings, [plus] a $55 million to $65 million senior-housing occupancy-related shortfall. Second, the pace of growth for the ancillary services rollout is now extended slightly from the original plan as we work through all of the expansion and licensure requirements, reducing 2015 guidance by an additional $10 million to $15 million.

Two other updates to our 2015 guidance relate to cash G&A costs and interest expense. We are managing costs at all levels and cash G&A expense, excluding non-cash comp and integration, transaction, and EMR rollout costs, is now projected to run in the range of $225 million to $230 million, a reduction of approximately $10 million from our initial guidance. The final adjustment to our guidance is that we now expect cash interest expense to be $360 million to $365 million, given interest rates and refinancings we have completed, or expect to complete shortly, another $10 million-or-so improvement from our prior guidance.

In summary, there are four primary components to our guidance revision. First, the lower occupancy starting point net of expense reductions causing a shortfall of $55 million to $65 million. Second, ancillary services operating income will be lower by $10 million to $15 million. Third, G&A will be better by approximately $10 million. And fourth, interest cost will be lower by approximately another $10 million.

These four items total a reduction of $45 million to $55 million of CFFO. As a result, we are lowering our full-year CFFO guidance to $2.35 to $2.45 per share. While not providing quarterly guidance, I want to point out that expenses are historically the highest in Q3, given the numbers of days in that quarter and other seasonal costs, such as utilities. Also, the ancillary services operating income will build over the last two quarters. This full-year CFFO guidance does not include any integration, transaction-related, and EMR costs in any un-planned acquisition or disposition activity.

We'll now turn the call back to the operator to begin the question-and-answer session. Operator?

(Operator Instructions)

Your first question comes from Stephan Stewart with Goldman Sachs.

Good morning, guys, and thanks for the question. Just wanted to touch base on Emeritus. It seems like the integration has gone, I would say, much worse than expected at this point. As we look into the 3Q, which is typically strong, do you feel like you are getting over the hump with respect to everything you mentioned? Vacancies filled to the point where you're ready to actually go out and actually increase move-ins in 3Q?

Yes, Stephan, thank you. This is Andy. Thanks for your question. Obviously, as I said in my prepared remarks, the Emeritus merger has been more challenging than we originally anticipated, and certainly at this point in time. But we do see progress. We feel like we are turning the ship around. As Mark and I both mentioned, we saw positive net move-ins in June. We have an increase in July occupancy of about 20 basis points, and we saw positive net move-ins roughly commensurate with June in July. And so we think we are making steady progress, and we think we are at point -- an inflection point, that we will turn positive on an occupancy basis through the balance of the year.

Got it. And you guys mentioned 60 basis points to 70 basis points through the balance of the year. But you are about 300 basis points below the industry average. Is there a possibility or and ability to catch up to the industry average over time? If so, what will it take to get there, and how long do think it could take to close that gap?

Yes, certainly we expect to close the absolute performance metrics with the industry over time. There are a lot of activities underway right now across the Company and particularly in the Emeritus portfolio. For example, we're refurbishing 150 of those locations this year. We will continue at a relatively high CapEx rate for an extended period of time there. We are rolling out the ancillary services platform across the Emeritus portfolio, which gives us another differentiating factor. So overtime, we'd certainly expect to close those gaps.

The guidance that -- the 60 basis points or 70 basis points -- just be sure we're clear on that -- that is our expectation for the month of December average occupancy above the average occupancy for the month of June. So it's our expected occupancy growth trajectory for the second half of the year.

Got it. Thanks for the questions.

Thank you.

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

Hey, good morning, guys. Mark, just reading the press release, there's a comment here that you guys made about realizing higher-than-anticipated cost synergies from Emeritus. So if you don't mind just giving us concrete examples of that and how we should think about your views on how much you can squeeze out of the Emeritus transaction over the next -- on the cost side at least -- over the next two to three years?

Sure, so putting aside G&A cost for a second here and just focusing on a discussion around community level costs. The community-level cost structure is roughly two thirds labor and benefits, one third other cost items, utilities, food, other forms of supply costs and the like. We've been able to focus a lot of activity over the last 12 or 18 months, particularly in that non-labor cost area, identifying new opportunities to save costs. Again, utilities is a big area there. And we can save on utility costs, both in terms of how the utilities are priced, particularly in non-regulated markets, but also around energy-saving opportunities. For example, the kind of light bulbs we use in the communities can result in a fair amount of savings over time. Obviously, food and other supplies are also a big cost area there. There are hundreds of categories of procurement there. And our team has worked on rationalizing what we buy and how we buy it in that area. And quite honestly, the savings we see in the non-labor part of the cost structure are -- as Andy said, I think -- substantially higher than we initially underwrote now that we've had an opportunity to get into a lot of detail in looking at those costs.

On the labor and benefits side of cost structure, we are in the process of completing the fourth wave of the integration, which involves assessing all of the residents in the Emeritus portfolio, as we do in the Brookdale portfolio, which gives us the baseline to quantify labor demand and a better sense of how we would staff those communities over time based on different acuity profiles and different occupancy levels. That process is ongoing on the labor side to quantify where we believe that ends up. Now, I think you'll recall when we provided our initial guidance on the merger, we did assume that we'd be providing some additional staffing in those Emeritus communities over a two- or three-year time period and that we would also achieve some higher revenue realization out of those communities as we quantify this demand in that portfolio. So that part of things has not yet quantified, on the labor and benefits side. But we know enough at this point based on the programs we put in place on the non-labor side, that the savings there will be substantially higher again than what we had originally forecast.

Okay. And then, Mark, just on the guidance. Thank you for the detail giving us what you guys think will happen on the cost side and netting everything out. But how do you think or how do you feel in terms of visibility into these numbers at this point? I mean how confident are you in your ability to get to these target occupancy rates on the cost-structure side?

Well, again, the primary driver here is building the occupancy in the senior-housing portfolio. Again, we are forecasting occupancy growth of 60 basis points to 70 basis points measured on a monthly average between June and December. Our average occupancy in July was up roughly 20 basis points. Based on the admission performance we had in July, we should expect similar average occupancy growth in August. So we've already picked up somewhere between 30 basis points and 40 basis points of occupancy growth in July and August. Now, historically, if the seasonal patterns hold, we'll continue to build occupancy through September and October. And then, things will flatten in November and December. But we are well along the way on the occupancy growth numbers to getting where we need to be.

Okay. And then, one question that has come up a lot for us is, why is it that the Legacy Brookdale assets, that group of assets, why is the occupancy worse in that set of assets versus the Emeritus portfolio?

Again, there's a number of factors here around different markets, different product mix, and so forth. For example, there is a higher percentage of skilled nursing in the Brookdale portfolio. We had very strong skilled nursing occupancy in Q1. It's kind of the built-in hedge we have in a severe flu season, and that occupancy was relatively soft in the second quarter. Adjusting for that, I don't think you would see a significant difference in occupancy in the two Legacy portfolios.

Okay, and then, last question for me. Andy, any change or updates on what the Board is doing as it relates to the strategic review?

Well Brian, as I said in my prepared remarks, our newly constituted investment committee is hard at work doing that work, doing that analysis and that evaluation. They are earnestly engaged. We are committed to that process, but I don't have anything more definitive than that to say.

Got it. All right, thank you, guys.

Thanks, Brian.

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

Good morning. You made reference to softer industry backdrop in the second quarter. As you look at where you are today and you try to evaluate and assess your business, how much waiting would you attribute to Company-specific issues versus, say, industry issues?

While I would say, Frank, we have underperformed the industry in the second quarter. And while I think that industry trends generally are a factor, the majority of our [missed to our] expectations in the second quarter are related to Brookdale. And they are directly correlated to all of this integration activity that we've had and the disruptions that it has caused. So there has been general softness in the industry. But again, the industry was down 30 basis points and we were down 90 basis points. Now as I said, Frank, we are confident that these vacant units that we have here are both an asset and an opportunity for us. We know we're going to fill them up. It's simply a matter of time and how quickly we can do it. We are confident that we are on the right path and that we've reached an inflection point and are turning it around.

Got you. And I think Mark made reference to already seeing about a 20 basis points improvement in occupancies from the June levels. As I think about the continual ramp up, as I'm sitting here on the outside, if I'm looking for benchmarks of how you ultimately get up to that extra 60 bps to 70 bps of occupancy by the end of the year, what are the milestones we should be looking at? Is it this now that you've got, or now that you're filling still these vacancies with executive directors at the field level? Is it something going on the marketing staff? Is it the adjustment of your referral sources to this national branding? Like, what would be the sequence of events that need to get better? And what are the ones that are most likely to get better first so that you get to this 60 bps to 70 bps higher occupancy and then go higher from there?

Well, there are a number of factors at play, obviously. Again as I mentioned, we did suffer some elevated turnover at the community level key management positions. But we think we are filling those -- well, we know we are filling those vacancies, and we think we are doing that with an enhanced set of team members and our attrition levels are returning to normal. We think have made appropriate adjustments in the sales and marketing area. But the primary thing I think you have to look at is all those factors have to fit together. And I think you have to look for steady progress on the absolute move-ins exceeding move-outs. In other words, that we continue to grow by 20 basis points, 30 basis points a month. And again, we expect to do that, as Mark said, throughout the balance of the summer, and then flattening out in November and December as is typically the case for both Brookdale and for the industry.

Got you. Yes, and I guess I was trying to just -- some specific milestones. Absolutely understand that the occupancy needs to be -- we are definitely watching the occupancy. In terms of the improvement you've seen so far, I know -- I think either you or Mark mentioned some limited discounting you are using out there in the marketplace. Could you comment on what effect that has had in more detail?

Yes, we have always used discounts where we felt like we needed to in order to stimulate occupancy. We haven't lost that discipline, and we are using discounts, in some cases pretty significant discounts, for communities where we feel like pricing is the issue to increase the occupancy rate.

And is this more on the -- I'm assuming this is on the Emeritus side, predominantly?

I'd say it's probably more predominant on the Emeritus side of things. But it's -- where there are a select number of Legacy Brookdale communities where we feel like we need stimulative pricing programs in order to [pace some] move-in activity. So it's across the portfolio.

Okay. One follow one, and I'll hop and let somebody else ask. In terms of the slow build that you referenced on the Emeritus side with the ancillaries, is there any precedent there as you were building ancillaries over on the Brookdale portfolio over the years? Did you ever see periods where you ran into these sort of walls of where rollout and implementation was slower? And how long did that take to recover from? Thanks. I'll hop.

Well, thank you, Frank for your questions. Yes, of course, historically, we've seen hiccups in our plans with respect to the rollout of our ancillary programs. This delay with the state of California in terms of getting licenses -- which, again, we believe we are entitled to as a matter of right. Not only our management team, but also our attorneys. That's been frustratingly slow and has been a little bit more lengthy than we would've anticipated, obviously. So sure, we've seen ups and downs in how rapidly these programs rollout. And again --

This is a somewhat different situation though in that there are a large number of Emeritus communities in a single state where we're running into some delays. I think many of the other rollouts we have done historically, Frank, were a little more diversified in terms of geography. So if we ran into a snag in one area, it didn't have quite as much of an impact on the overall activity.

That's fair.

Thank you.

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

Hey, good morning.

Morning, Dan.

Good morning. I wanted to go back a little bit more on the discounting. In terms of, are you going to change, or how do you think about the rate growth going forward, particularly, in, say, the Legacy Brookdale assets where you've had rate growth of about -- rate, which I think was 3.8% year over year. Do you think overall rate growth now is going to slow down until you can build occupancy back to something closer to the industry average?

Well again, we can have some dynamics in the rates, particularly on the Brookdale side depending on what happens with CNS and the skilled-nursing rates. So putting that aside for just a second, I don't think our ambitions in terms of rate growth in the Brookdale portfolio are really all that changed. I mean from a macro standpoint, I think what we would expect to see is sort of a gradual improvement in the rate growth in the Emeritus legacy portfolio as we complete the physical planned improvements, as the impact of brand takes hold, as the Brookdale programming is implemented in those communities. Now, it's certainly the case that our same-store regrowth can bump up and down 20 basis points, 30 basis points, 40 basis points quarter to quarter.

It just -- depending on what's happening in the business from the standpoint of seasonal patterns. A big bunch of our in-place rent growth occurs on January 1 when we raise a lot of our assisted living rents for example. So it's certainly not going to be an exact straight line as we go quarter to quarter over time, but I don't think our general ambitions are really all that changed.

And Dan, I would add to that, if implicit in your question is are we sacrificing occupancy to grow rate? We do not believe that we are doing that. We think we are pricing at the levels that we can in order to grow occupancy, and we don't think that, by virtue of our rate performance, that we are, again, as I say, sacrificing occupancy for rate. We don't believe that to be the case.

Okay. Just so I understand, of the occupancy loss year over year in the Legacy Brookdale assets, how much of that is attributable to changes in skilled nursing occupancy? And how much of it is attributable [private pacing Johnson] side?

I don't have those numbers right in front of me here. There is an impact in both cases. The skilled nursing portfolio is about 6% of our capacity, I believe.

It's about 2,000 units on a consolidated -- consolidated out of 83,000 right now.

Right, so it's across the portfolio product types, Dan.

Okay. And then on the re-hiring of management -- I guess the Executive Director sales level at the property. You say that's mainly done. Is there a training that needs to be done? Is there still going to be delay on your efficiency relative to the second quarter? Just trying to get a better grasp of are there still negative impacts occurring in the portfolio today from not having proper management at the Executive Director sales level at the property?

Well, we are gradually coming out of this integration tunnel that we are in. And so as the process winds down, we think all of this is getting better. We are very proud of a whole host of new training tools and onboarding programs that we have. And we feel like we are really improving our ability to onboard -- first, to hire the right people and to onboard them correctly to get them up to speed as rapidly as possible and to continue to cause them to develop in their careers. Now, there is still, however, a lot of new faces inside of Brookdale. And there will be some time -- and by the way, that is a constant in this business where there is turnover at the community level. We just happened to have seen an elevated level of it over the past four or five months that we've had to deal with. But again, we feel like we have got our arms around it. We feel like we've got the right team on board. We feel like we've onboarded them correctly, and we've given them the appropriate training tools. Does it take them a little bit of time to get up to speed? Of course it does. And that's taken into account with regard to the guidance that we've given you all for the balance of this year.

Okay. I will hop off for now.

Thank you, Dan.

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

Good morning. Thanks so much for taking the question. Just a comment around the guidance cut, and, I guess, the fact that you expect the occupancy to improve December versus June. And then, here you talked about the cost seasonably high in Q3. Because it just feels like the guidance assumes that the cost will [pre-pop] in Q3 and Q4? Is at the right (inaudible) and then the reasons for it? And on that front, any color around wage pressure that we are seeing in some other markets?

Okay. I think Q3 is, clearly, a higher-cost quarter. It's a 92-day quarter. It's at the end of the summer, so utility costs are at their peak. So I think that's really all we were trying to say around quarterly sequencing as we go through the year.

On the wage question, there are some concentrated parts of the labor market. Therapists, for example. Nurses in certain markets, where there really has always been a little more wage pressure, and we continue to see that today. We have not seen, across the portfolio, significant changes in terms of wage growth. Clearly, we are adjusting wages for inflation a bit more today than we would have in 2008 or 2009 when the labor market was extremely soft, but that's a relatively small increase. Maybe a 0.25 point or a 0.50 point more today than would have then. Now, as we look farther forward, as we have more states look at minimum wage implementation, as we have more large national employers look at adjusting their wage scales, in some of our markets that can certainly cause some issues. And that's something that we pay very close attention to.

And then on the cost front, did you quantify any synergies you achieved this quarter? Or would you assume the synergy number will be this year?

We did not quantify that. I suspect, once we get to year end, we will be able to look back and do a little bit of a retrospective on the cost synergies. But we did not talk about those specifically for the quarter.

So then when you mentioned that you expect the G&A cost to be lower than the original guidance by $10 million this year, so is it because of the synergies or some other things?

Joanna, to be honest with you, as time goes on, particularly in the overhead structure and the management organization, it becomes difficult to identify exactly what the change relates to. We are seeking to be as efficient as we can, yet manage the business as best as we can. So I could probably give you a pretty good argument either way on the G&A side.

All right, and just lastly, quickly for the turnover that you experienced in Q2. It sounded like this was a new issue that you did not see, or at least did not call out in Q1. So can just tell us why it happened now versus right after the deal closed? Thanks.

Yes, on the turnover issue, we began to see that in the mid first-quarter-ish timeframe -- and that is when people, of course, they are paid their bonuses and so forth. But the root cause of it is, I would say, twofold. First, it's integration-related. This effort is very difficult on people. They have to do their day jobs, and they have a whole lot of additional work on top of them. We're asking them to learn new systems and new programs. Some of them are unwilling to do so, resulting in involuntary terminations, but others get burnt out or decide it's not for them or are simply tired and move on.

And then, there's been a lot of noise in the industry around new construction, which is a marginal factor for all of us in the industry to have to participate in. But the critical part of that is not so much with respect to the effect on occupancy or rate on communities that are facing new construction. It's true that is a disruption and a dislocation that you have to handle in the local marketplace. But it can have a consequence on people trying to -- or other competitors trying to poach our people. And that's probably a lesser contributing factor to that enhanced turnover. Again, the good news is, is we feel like we are back to normal levels of attrition and that we've got -- we've filled many of these vacant positions. But it was a problem for us coming out the first quarter and going through the second quarter.

Great. Thanks.

Thank you.

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

Thanks, good morning. So you brought up the new supply, concerns around new supply dragging down occupancy. I was hoping you could comment specifically. What gives you the confidence that new supply is having less of an impact on the occupancy declines that you've experienced so far? And specifically, I'm trying to reconcile the comments you made about using incentives to try to stimulate occupancy. So I'm just wondering, why do you feel the need to do that if it's more integration-related issues you've seen and not so much softness in occupancy industry-wide?

Well, the use of incentives or discounting programs are not directly related to the integration effort. Those are based on local market conditions, which could be new competition. It could be the fact that the building needs to be refurbished and refreshed, but we have not yet done so. And therefore, we need to price the products and services at a lower level until we can do so. There are a whole host of factors that go into our pricing decisions. And those are not driven by integration concerns, at least as a general rule. Now, with respect to new competition, I'm not saying that is a non-problem. We just do not believe it is the major cause, being frank, with our occupancy softness in the second quarter. Again, we attribute the vast majority of that to integration dislocations and the disruption in changed management. That having been said, where there is truly competitive new construction or new openings, that can cause local market dislocations, we always put into place, very carefully, plans to deal with that. And that starts with trying to protect our people as best as we can, to preclude them from being poached away. Sometimes it causes us to adjust our capital expenditure programs to invest money more quickly in a particular community that's going to face new competition in order to be successful in the marketplace.

And then, when you look across our portfolio, you can see some cities where there has been a host of new competition, where our occupancy may have dropped. But then, you can see other communities where we've been very successful. For example, Houston, which people always talk about as being heavy new construction. And our occupancy has actually gone up 120 basis points in that market in the face of that new competition. So it's very difficult to precisely correlate new competition to our performance. Again, we would love to have no new competition anywhere. And that would be a fantastic thing because it is a negative factor. But we do not believe that is the driving factor to our performance.

Okay. That is helpful. So are you seeing new competition continuing to grow? Are you seeing more ground being broken in your market? Or was it just a temporary blip and it's being absorbed? Or is it continuing to accelerate?

Ryan, as we look at our footprint and identify communities that have opened in our footprint over the last couple of years that are in some way directly competitive with our portfolio, the number of those new communities has been pretty consistent. Somewhere between 20 and 25 directly competitive communities a quarter for the last two years or so. Now, obviously, openings change a little bit depending on the weather and those kinds of things. But the number of new communities opening in our markets has been pretty stable. So when you see the NIC data change from new construction at 3% of existing capacity and go to 4.5%, we don't really see that in our portfolio and in our competitive set as much of a change, to be honest with you.

And our projection, Ryan, is for construction to continue -- or new openings to continue -- at roughly that level for the next year or so.

Okay. That's helpful. And then the last one for me, on your occupancy guidance. So it sounds like you mentioned a flattening by 4Q, with maybe half of the 60 basis points to 70 basis points you're already experiencing. I'm just curious, do you feel pretty comfortable with that fourth-quarter outlook? Looking back last year, you did call out a decent amount of occupancy challenge related to the integration, maybe 40 basis points that I would think you would benefit from as an easier comp. So I'm just curious if fourth-quarter are you giving yourselves the benefit of that easier comp and less occupancy build from 3Q into 4Q? Or is there a potential for even more?

Well, the way we're calculating our guidance is we are projecting our performance for the balance of the year. So we are projecting occupancy off of where we started in June. So it is true that on the same-store comps for the fourth quarter some of that impact you are describing may come into play. But we are simply trying to explain how much occupancy growth, from here to there, we have assumed in our guidance.

Okay. All right, thank you.

Thanks, Ryan.

There are no further questions at this times. Do have any closing remarks?

I just wanted to thank everyone for joining us. And management will be around today for follow-up questions. So with that, thank you for your participation.

This concludes today's conference call. You may now disconnect.