Brookdale Senior Living Inc (BKD) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

Thank you. I would like to turn the call over to Ross Roadman. Sir, you may being.

Thank you, Jennifer, and good morning, everyone. I also would like to welcome you all to the third-quarter 2016 earnings call for Brookdale Senior Living. Joining us are Andy Smith, our President and Chief Executive Officer; Cindy Baier, our Chief Financial Officer; and Dan Decker, our Executive Chairman.

I would like to point out that all statements today which are not historical facts, including all statements regarding our earnings guidance, may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date and are subject to various risks and uncertainties.

Forward-looking statements are not guarantees of future performance. Actual results of performance may differ materially from the estimates or expectations expressed in those statements. Future events could render the forward-looking statements untrue, and we expressly disclaim any obligation to update earlier statements.

Certain other factors that could cause actual results to differ materially from our expectations are detailed in the earnings release we issued this morning, as well as in the reports we file with the SEC from time to time, and including our annual report on form 10-K and quarterly reports on form 10-Q. When considering forward-looking statements, you should keep in mind those factors and the other risk factors and cautionary statements in such SEC filings. I direct to you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.

Please also note that during this call we will present both GAAP and non-GAAP financial measures. I direct you to our earnings release, which may be found on the investor relations page of brookdale.com for important information regarding the Company's use of non-GAAP measures, including the definitions of each of these non-GAAP measures and a reconciliation of each such measure from the most comparable GAAP measure.

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

Good morning and thank you for joining us. As always, we appreciate your interest in Brookdale. We are disappointed with our results for the quarter, and with the fact that we have revised our guidance for the year. While we made progress from occupancy, rate, cash generation and on a number of fronts, we misjudged the effect of new competition in certain of our markets and our results were lower than we expected.

Our management team and our Board are laser-focused on and acting with urgency to improve our operating results and to optimize our portfolio. Before I discuss our results, let me update you on some really important business, relating to our portfolio optimization efforts.

With all of the transactions we announced this morning, we have completed or entered into agreements to sell, terminate the leases, or change the underlying structure of just shy of 200 communities, representing over 15% of our post-merger portfolio. You can think of this in three broad buckets.

First, asset dispositions. Prior to the quarter, we had already sold or terminated leases on a total of 30 communities. During the quarter, we completed the sale of 32 of the 60 assets we had held for sale at the end of last quarter. We expect to complete the sale of the remaining 28 assets over the next few quarters for an ultimate total of 90 communities.

The second bucket involves 64 communities that we currently lease from HCP. HCP has been clear in their public remarks that they wish to reduce their Brookdale concentration following their spinoff. HCP's decision to sell these 64 properties has provided an attractive investment opportunity for us.

By terminating the leases for these assets and participating in the Blackstone joint venture purchasing the assets, we expect to improve our return on invested capital, improve our cash flows, and reduce our leverage. To confirm the transaction steps, HCP selected the 64 underperforming assets from all of the assets that we lease from them, and then decided to split them out of their existing lease pools. They then agreed to sell them to Blackstone.

Given the way the leases were structured, the rent for these assets significantly exceeds the net cash flow generated by the communities, with a current coverage of 0.8 before CapEx, and less than 0.7 after CapEx. At the closing of this transaction, we will invest approximately $170 million of cash to acquire a 15% equity interest in the Blackstone joint venture to terminate the underwater leases, and to fund our share of closing costs and working capital.

For us, the above market leases represent a significant long-term burden with a remaining average lease maturity of 12 years. We are happy that this transaction eliminates that burden, along with its high leverage, while retaining the management of the communities in an equity state in a portfolio we believe has upside. We expect this transaction to be accretive to cash flow immediately upon closing, adding in excess of $33 million in year one to consolidated CFFO less nondevelopment CapEx.

For our capital outlay, we are projecting a year one yield in excess of 20% as a result of the management fees, our equity interests and the elimination of the negative cash flow from the leases. We expect this transaction to close in the first quarter of 2017.

In summary, this transaction reduces leverage by terminating tremendously underwater leases while simultaneously providing a very attractive return with an immediate and significant increase in cash flow upon closing. Following closing we estimate that the lease coverage ratio of our remaining leases with HCP will exceed 1.2 times.

Finally, the third transactional bucket includes an additional entirely separate agreement with HCP, which we discussed on our last earnings call. This has three components.

First, we will transition four communities from a triple net lease structure into a RIDEA joint venture. Second, we will terminate a total of 29 community leases. And, thirdly, we have agreed to add nonrecourse mortgage debt on our nonconsolidated CCRC joint venture with HCP.

We anticipate these financings will provide us with in excess of $200 million of proceeds at an attractive rate. The 29 communities do not fit our long-term strategy. And the leases will be terminated in stages, beginning in the fourth quarter of this year and continuing through the fourth quarter of 2017 as HCP sells the assets or finds replacement operators.

The pro forma economic impact of terminating these 29 leases is expected to be approximately $7 million accretive to CFFO, less nondevelopment CapEx, after we right size the G&A associated with these communities. Our lease leverage will also be reduced by this transaction.

Taking all of these three transaction buckets together, these transactions represent an important milestone for us as we streamline our portfolio and improve our capital structure to improve the amount and quality of our cash flows. On a pro forma basis, assuming all of the transactions associated with HCP's assets close, we expect our CFFO less nondevelopment CapEx to benefit by an annualized $40 million. As we move forward into 2017, we intend to aggressively pursue additional opportunities to optimize our portfolio, including selling additional owned assets and restructuring underperforming leases.

With the liquidity provided by our portfolio optimization, and having already materially reduced our leverage, we believe that we have an opportunity to return capital to shareholders through an initiation of a share repurchase program. To that end, as we announced this morning, our Board of Directors has authorized a $100 million share repurchase program. We are strong believers in the value creation potential of Brookdale. And, like the transactions I just described, we also see the opportunity to create high returns from a share repurchase program.

We also announced this morning that Dan Decker has agreed to step into the Executive Chairman role. Dan will become a member of our executive team with a special focus on capital cation, portfolio optimization, strategic growth and shareholder engagement.

For those of you who don't know Dan, he has been involved with the senior living industry for almost 25 years as an investor and as an owner. Having daily access to Dan's insight and experience will benefit our management team as we move forward.

I would like to ask Dan to make a few comments at this point.

Thank you, Andy, and good morning, everyone. I welcome the opportunity to increase my involvement with Brookdale, a company that I have been keenly interested in since I first began investing in the senior housing industry almost 25 years ago. I continue to be optimistic about Brookdale and our opportunity to drive meaningful value creation for the benefit of our shareholders and other stakeholders.

We have made solid progress in a number of areas, and I am especially positive about the additions that we have made to the senior leadership of the Company with the addition of Labeed, Cindy and Cedric. While it certainly takes time for a new team to positively impact the business, I and the rest of the Board share the disappointment expressed by Andy with our results. I look forward to working with Andy and the management team with a keen sense of urgency to improve in every key area of our business, and especially with respect to improving our senior housing and ancillary service operations, optimizing our portfolio through asset dispositions and through lease restructurings, improve the amount and quality of our cash flow, and capital allocation, effectively utilizing our financial resources to drive substantial value creation through initiatives like the $100 million stock buy back program that we announced today.

Lastly, I would not have agreed to this role without my belief that we will make meaningful progress in creating value for shareholders. And I'm confident that I can work collaboratively and synergistically with the management team.

Andy, thanks, I turn it back to you.

Thanks, Dan. Now turning to our operating results, we always knew that executing our strategy would take time and that 2016 is an important rebuilding year. Our plan was based on growing faster than our historical norms by recapturing the occupancy and associated revenue losses that occurred last year during the integration.

Although there is significant evidence of improved execution and progress, our results are lower than we expected them to be. Our occupancy increased 40 basis points sequentially and our same community revenue per occupied unit increased by 3.2%.

Importantly, for the third quarter in a row, we produced positive cash flow as we look at CFFO less nondevelopment CapEx. In the third quarter of 2016 alone, on a year-over-year basis this measure improved by almost $60 million. We improved from a negative $14 million in the third quarter of last year, to producing $46 million this quarter.

While we have achieved a number of milestones in our turnaround strategy, it is taking longer than we expected to generate our planned level of improvement. As the second half of the year has unfolded, it has become increasingly clear that there have been several unfavorable developments in the competitive environment that have slowed our progress.

During the third quarter we experienced the highest amount of new competitors opening within 20 minutes of our communities than we have seen in many years. The number of openings in the quarter, since timing can be difficult to predict, exceeded our projections.

Importantly, the market mix of new openings also changed. New openings in our larger metropolitan markets were consistent with recent averages, but new openings in our mid-sized markets were at the highest level in over a decade. For example, in the third quarter, using the markets defined by NIC as secondary or additional markets, new competitor openings within 20 minutes of a Brookdale community were more than double the level we saw last year. At the same time, the number of our communities that faced multiple competitor openings in these mid-sized markets impacted us more than we anticipated.

Our occupancy in markets like the NIC secondary and additional markets, which represent more than 30% of our total units, only increased a little north of 10 basis points sequentially, which is well below our seasonal norms. We also did not get as much rate growth in the quarter as we anticipated.

In the markets with new competition we were compelled to use more discounts and incentives to maintain occupancy. Although our same-community revenue per unit increased 3.2%, it nevertheless fell short of our expectations, due to this increased use of incentives.

Based on our history, we fully expect that these mid-sized markets will regain strength. New competition is generally in the intermediate term headwind, and we are normally able to recover within 12 months or so. Even so, as reflected in our full-year outlook, we expect this elevated level of competition to continue for the next several quarters.

As we look to our near-term outlook, we are disappointed that our progress, while still positive, is slower than we anticipated. However, we are confident that the initiatives that we have in place are taking us down the right path. The long-term opportunity is obvious. The need for seniors to use services like ours will only grow.

We believe in our plan because, first, it delivers a great customer experience. We are continuing and expanding our market segmentation effort to create the right product for different customer needs. We are continuing to differentiate the programming in our communities to better meet the marketplace.

Second, we are simplifying and streamlining the business. As I just discussed, we are making good progress on our asset disposition program and in our efforts to exit or restructure leases. Again, we intend to aggressively pursue these opportunities as we move forward. We are also beginning to make headway on reducing our overhead, as we previously committed.

And, third, our plan is to attract and retain the best talent. We are excited with the hiring of Cedric Coco as our new Chief People Officer. He comes with a background in large, diverse organizations. And he will enhance our capabilities to attract, retain and develop our organization's human resources.

We are showing progress with the initiative to reduce associate turnover. For example, health and wellness director turnover declined from the second quarter to the third quarter, based on some adjustments we have made around that position. But we recognize the need to improve our performance even further and we remain confident that we will do so.

Before turning the call over to Cindy to take you through the quarter and our outlook for the rest of the year, I would like to take a moment to express my sincere gratitude to all of the Brookdale associates who serve our residents and their families. In particular, I want to say a special thank you to the many Brookdale associates who put our residents first as Hurricane Matthew disrupted all of their lives. We are fortunate from a business perspective that there was only a small amount of interruption to our business. But it was due to the extraordinary efforts of our associates that kept our residents safe and their experience positive.

Now I'll turn the call over to Cindy for more details on the quarter.

Thank you, Andy, also Dan. And thanks, everyone, for being on the call with us today. I want to start by building on what we've already shared with you about the exciting transactions that we announced this morning. These transactions have important long-term benefits for the business.

Andy has already stepped you through all the different buckets of our current portfolio optimization transaction. We are very excited about the transactions involving communities that we currently lease from HCP, as well as our entry fee CCRC joint venture with them. There is additional detail in both the release we issued this morning and a presentation we have placed out on our website regarding these transactions.

These transactions represent a significant milestone in our portfolio optimization effort. When completed they will have several important benefits.

Most importantly, these transactions will improve our consolidated CFFO, less nondevelopment CapEx, by approximately $40 million, based on the trailing 12 months ended September 30, 2016, through eliminating the above-market triple-net lease cash payment and most of the CapEx obligations, and gaining the management fee on the 68 communities. We also expect that the transactions, including our entry fee financing, will reduce our consolidated total adjusted net debt to adjusted EBITDAR leverage by 0.3 turns.

Additionally we expect that the transactions will provide an extremely attractive return on investment. When all these transactions are completed approximately 20% of our currently leased units will have had their leases terminated or have been transitioned into a joint venture with an ownership position. Finally, our lease coverage on the remaining triple-net lease portfolio with HCP derived over 1.2 times.

As a reminder, we have already made significant progress related to our portfolio optimization through our asset dispositions. During the third quarter we built 32 communities, receiving $177.5 million of gross proceeds, retiring $51.9 million of mortgage debt, and repaying $86.5 million of our line of credit. On a year-over-year basis all of our portfolio optimization efforts have reduced our capacity by 3,832 units, or about 5%.

Now let's discuss our overall performance. On results for the quarter weren't what we expected them to be. Our plan was built on growing faster than we had historically grown because of the investments that we have made in the business, and because we believed that we could recapture our market share losses associated with the integration.

We showed some progress with our financial performance during the third quarter, but it is taking longer than we expected. As Andy described, it became increasingly clear during the quarter that there have been some unfavorable developments in the competitive environment that has slowed our progress.

We expected third-quarter 2016 to be an important turning point. Because of the normal seasonality our business, our plan assumed that we would lose occupancy in the first two quarters of 2016 and would build occupancy during the third quarter. As we have previously discussed, our occupancy during the first two quarters was within our historical season norm but below our plan.

This pattern continued into our third quarter and the gap between our plan and our performance increased. Even so, we are pleased we achieved several important milestones during the third quarter, which I'll cover in a minute.

As I get into the details of our financial performance for the third quarter, let me take a moment to tell you about some of the additional guidance we received from the SEC very recently that led to some additional adjustments in our non-GAAP reporting. I'm telling you about this now because it affects the numbers we are about to share, as well as the guidance that we'll get into in a few minutes.

We are removing our proportionate share of CFFO of unconsolidated ventures from our CFFO calculations. We will provide a separate calculation of our proportionate share of CFFO of unconsolidated ventures.

With regard to our updated reporting, please note that, despite the fact that we are entitled to and will receive a proportionate share of our distributions of cash from each of our unconsolidated joint ventures from time to time, those distributions will never be included in our Company CFFO under this new reporting format. To provide you with visibility to these cash flows we will report them separately.

Though we are now required to report these cash flows separately, they are important to Brookdale's valuation. As we continue to optimize our portfolio, unconsolidated joint ventures, like the new one with Blackstone, are becoming much more important.

Now let's move on to the major accomplishment of the third quarter. We improved our third-quarter 2016 adjusted EBITDA by 17% to $28.8 million on a year-over-year basis. We strengthened our CFFO. On a year-over-year basis our third-quarter CFFO grew by $34.4 million or 68%.

We produced positive CFFO, less nondevelopment CapEx, which in the third quarter was a positive $46.5 million, versus a negative $16.5 million in the third quarter of 2015. That is a $60 million improvement.

By the way, this marks the third consecutive quarter that this metric has been positive. We did this by reducing our nondevelopment CapEx by $23.2 million, or 29%. And lowering our integration, transaction, transaction-related and strategic project costs we have $33.7 million or 79% from the third quarter of 2015. On a year-to-date basis 2016 CFFO left nondevelopment CapEx was $118.6 million compared to $25.7 million in the prior-year period.

Finally, we strengthened our balance sheet. At September 30, 2016, we had increased our total liquidity by 88% year over year to a total liquidity of $383.8 million. We reduced our mortgage debt and the balance outstanding on our line of credit by over $150 million since last quarter. This improved our net debt to adjusted EBITDA after capital and financing lease payments leverage ratio by 0.3 turns.

Finally, we improved our third-quarter 2016 revenue per occupied unit on a year-over 8year basis by 3.8%. This was driven primarily by in-place rent increases, slightly positive mark to market move-ins, and increased care fees.

Let's take a deeper look into our third-quarter financial performance. I'll begin with the highlights of our senior housing business.

Our third-quarter 2016 residency revenue increased 30 basis points on a year-over-year basis. As you analyze the results for the quarter, it's important to keep in mind the changes to the portfolio from our portfolio optimization initiatives.

The revenue and expenses of properties that we have disposed included in our results from last year, are not included in our results after disposition. In fact, the 57 communities we sold or terminated leases on in the 15 months ended September 30, 2016, produced $15.1 million of revenue, and $1.3 million of adjusted EBITDA in the third quarter of 2016. This compares to $31.5 million of revenue and $3.2 million of adjusted EBITDA in the third quarter of 2015.

So, while our third-quarter year-over-year senior housing revenue growth was 30 basis points, which was again heavily impacted by our disposition, our same-store revenue growth rate was 200 basis points.

Our third-quarter 2016 average occupancy for the consolidated senior housing portfolio was 86.2% versus 85.8% in second quarter 2016, a 40 basis point sequential increase. Our revenue growth continues to be impacted by lower year-over-year occupancy. Our weighted average occupancy for third quarter 2016 was 50 basis points lower than third quarter 2015. At the same time, the year-over-year same-store occupancy decline narrowed to 100 basis points in third quarter, compared to 120 basis points in the second quarter.

As we've said before, we expected to make more progress in occupancy but the impact of new supply in our mid-sized market was greater than we expected it to be. We are continuing achieve solid year-over-year rate growth. Our third-quarter 2016 same-community revenue per occupied unit increased 3.2% on a year-over-year basis.

We continue to see a decent pricing environment in the aggregate, with the ability to pass on costs effectively, and a system in place that routinely updates resident care fees charges as acuity rises. However, given the competitive environment, we increased the use of our discounts and incentives in certain markets, which negatively impacted our rate growth, resulting in being below our expectations for revenue rate growth.

As you would expect, the lower than expected occupancy and rates resulted in lower revenue growth than we anticipated. For the third quarter, our consolidated senior housing operating expenses benefited from our portfolio optimization efforts and increased only 40 basis points on a year-over-year basis as the reduction from dispositions offset other expense increases.

On a same-community basis, our third-quarter 2016 senior housing operating expenses increased 210 basis points year over year. Our third-quarter 2016 same-community labor expense increased 3.4% year over year. In addition to the increases from our annual merit increases, we are continuing to see labor pressure on the east and west coasts, particularly in larger cities. We are seeing a 10% increase in benefit costs, primarily due to higher health insurance costs, and a 4% increase in real estate taxes, offset by reductions in food and utilities, largely due to initiatives our procurement team is leading.

In many of our other cost categories, we experienced normal inflation, offset by an approximate decline in insurance expense of $13.8 million. The insurance decline reflected a reversal of reserves established within the Emeritus merger based on expected claims going forward. Similar to last quarter, we continue to see improving claims experience.

Looking at our ancillary services segment now, it produced $14.6 million of operating income during third quarter 2016, a 16.1% year-over-year decrease. There are several reasons for this.

First, as the supplement shows, the number of outpatient therapy codes continues to decline as we downsize the outpatient therapy business. Next, in response to the declining economics of reimbursement for that business, we can still serve qualifying residents through our home health business and quality service. We are moving towards operating outpatient therapy only in markets in which we don't have home health or where there is a large population of independent living residents. As we transition from using outpatient therapy to home health, there is usually a period of time required to capture the business into our home health services.

Another reason for the decline in our ancillary services business is that earlier this year our Florida community-based home health business, former Nurse on Call, suffered what we considered to be an aggressive and egregious corporate raid in southern Florida. Over 20 associates left Nurse On Call to join a new company which competes directly with Nurse On Call.

We believe several ever these former associates, on behalf of their new employer, are or have been directly soliciting our patients, referral sources, and associates in violation of non-solicitation agreements, and are engaging in other behaviors that violate Florida state law, to our financial detriment. We have filed legal action against several former associates and their new employer.

While we do not generally comment on ongoing litigation, we can state that we have already succeeded in securing a temporary Injunction against one of the former associates. We are aggressively pursuing all available legal remedies in connection with this situation, while we replace staff and recover our lost business.

This revenue decline has affected our operating margin. It was 12.5% for the third quarter of 2016 compared to 15.4% in the second quarter of 2016, as expenses don't (inaudible) as rapidly.

Another part of our ancillary services, our hospice business, is doing very well. On a year-over-year basis our average census increased 67%. Going forward, we are focused on improving our overall ancillary services business by rationalizing our outpatient therapy business, improving our preferred provider relationship with our community, recovering the lost Florida business and growing the hospice business.

Moving on to third-quarter 2016 general and administrative expense, it was $63.4 million, a 36% year-over-year reduction. The most significant item driving the G&A reduction is a 79% year-over-year decrease in the integration, transaction, transaction-related and strategic project costs of $33.7 million.

Third-quarter 2016 G&A, excluding integration, transaction, transaction-related and strategic project costs and noncash compensation, was $48.6 million, versus $53.6 million in the third quarter of 2015. While we have been steadily working on our initiative to reduce G&A this year, our third-quarter G&A was $18.3 million, favorable to our plan. About 75% of this benefit comes from the $9.4 million reversal of the year-to-date portion of the bonus tied to CFFO and from $4.5 million of reserve adjustments.

We tightly controlled costs in the third quarter, reduced headcount slightly, left budgeted positions unfilled, and controlled costs, such as travel. It's worth noting that our current G&A run rate is below our guidance as we started to make adjustments to our corporate cost structure.

Turning to leverage and liquidity, we are pleased with the progress that we have made. We have positively impacted our leverage and improved our liquidity, particularly through our portfolio optimization transaction. The Company's total liquidity improved 88% to $383.8 million at September 30, 2016, versus $203.8 million at September 30, 2015.

Our net debt to adjusted EBITDA for the trailing 12 months was 6.1 times and, including leases, was 7.1 times. That's down 6.4 times and 7.2 times for the trailing 12 months of second quarter of 2016.

We still have, as of September 30, 2016, 28 communities in assets held for sale. These are recorded on the balance sheet for $173.5 million with $106.9 million of related debt. Our current expectation is that we will complete the sale of these 28 communities over the next few quarters.

I want to close by talking about our guidance. As we reported in our earnings release this morning, we have updated our 2016 full-year guidance for two primary reasons.

First, we were counting heavily on our ability to drive occupancy and rates during the third quarter. Given that we didn't make as much improvement in these two metrics as we expected, and given what we now know about competition, and given normal seasonality, we needed to rethink our expectations for the year. Therefore, we are lowering our revenue, adjusted EBITDA and adjusted CFFO guidance to reflect our expectations in year-to-date performance and changes in the competitive environment.

Second, we are recasting our adjusted CFFO guidance to reflect that we are no longer including the Company's proportionate share of CFFO of unconsolidated ventures in adjusted CFFO. This change comes as a result of additional guidance from the SEC.

Let me start by talking about guidance for revenue for 2016. We are targeting resident fee revenue of $4.15 billion to $4.2 billion, which includes senior housing revenue and ancillary services revenue. Our guidance reflects the fact that we are and expect to be behind our plan for occupancy for the year and that we have used discounts and incentives to respond to a heightened competitive environment.

As we have described, we experienced a shift in new supply into our mid-sized market. We expect that we will continue to see more competitive pressure on occupancy and rate, as we saw during the third quarter. While we were able to build occupancy during the third quarter of last year, we reflected a more normal seasonality dip in our forecast for the fourth quarter, along with rate growth with of 10% with our current trend.

As we look into the next several quarters, the data suggests that we will continue to see increased supply in the mid-sized market. While we believe that we will improve occupancy over the next year, we are not as optimistic about the magnitude as we were earlier this year.

We expect our ancillary services revenue for 2016 to be in the range of $470 million to $480 million as we shrink the unprofitable outpatient therapy business and work to recover our Florida business. Our guidance does reflect tightening of our ancillary services revenue range as a result of a new competitor in the Florida market.

As a reminder, for senior housing guidance reflects the fact that we have disposed of communities during the third quarter, which will not generate revenue during the fourth quarter, And that we will have additional dispositions during the fourth quarter, reducing the fourth quarter's average capacity by approximately 2,000 units in the third quarter. And we have lowered our G&A guidance, excluding integration, transaction, transaction-related and strategic project cost and noncash comp, for the full year to a range of $235 million to $240 million.

With the lowering of our expectations for the year's financial performance we have reduced our accrual for bonus payments. We have also started to streamline the organization as we look to optimize our overhead by simplifying the business while improving processes and systems.

Our outlook for adjusted EBITDA, excluding integration, transaction, transaction-related and strategic project costs, is $818 million to $828 million. As a reminder, adjusted EBITDA excludes any economic of our unconsolidated joint ventures. The largest reason that we are reducing our adjusted EBITDA guidance is that we have lowered our revenue guidance.

At the same time you are seeing pressure on our labor per resident day in our senior housing business. We are expecting to see a sequential increase in this metric. Together with combined rate pressure and normal labor cost for the holidays, we expect wages to be higher in the fourth quarter.

We do expect ancillary services to have a bit better quarter as we expand hospice and home health but will continue to have pressure in Florida. Our improved G&A outlook partially offsets the competitive pressure that we are seeing. While we are expecting our G&A to be below our plan, it will increase sequentially, given the one-time items like the bonus trueup that was booked in the third quarter.

Our outlook for adjusted CFFO for the year is $365 million to $375 million. As a reminder, our prior guidance was based on the total of our adjusted CFFO and our proportionate share of CFFO for unconsolidated ventures. Exclusive of this change in reporting, we are reducing our adjusted CFFO guidance by $35 million to $40 million. This reflects the realities of the current competitive environment, particularly from the revenue guidance decline.

In addition to the changes in adjusted EBITDA discussed above, and our results for the first nine months of the year, we would expect to see continued improvement in interest expense. Our outlook for our proportionate share of CFFO from unconsolidated joint ventures remains at $55 million to $60 million. Our current outlook for integration, transaction, transaction-related and strategic project costs continues to be $60 million.

While we expect there to be some movement within the categories of nondevelopment CapEx that we've previously talked about, our nondevelopment CapEx guidance in the aggregate remains unchanged. We have reduced our guidance for development CapEx by $15 million and we are expecting to spend $30 million on development CapEx during 2016.

So, to summarize, we are pleased that we have achieved several important milestones of our strategy. At the same time, it is taking longer than we expected to generate the planned level of improvement, particularly as a result of changes in competitive environment. We have updated our outlook to reflect our expectations based on year-to-date performance and changes in the competitive environment, and with respect to adjusted CFFO to address additional guidance from the SEC.

We are aggressively responding to the changes that we are seeing in the marketplace. While we remain very focused on growing the top line, we are working aggressively to control costs and to simplify our organization.

Thank you for your attention on this. And I'd now like to turn the call back over to Andy. Andy?

Thanks Cindy. Let me close by saying that due to the competitive landscape we've described, our progress, while still positive, is simply slower than we expected. We believe that this is cyclical and will normalize over the immediate term. Our management team, along with our Board, is focused, and we are acting with urgency to improve our operating performance.

We are pleased that we have increased our liquidity, and that we have made very significant improvements in the cash flow that we generate. We also believe that our portfolio optimization efforts will have a significantly positive impact on the economics of the Company as we move forward.

We are happy now to take your questions.

Frank Morgan with RBC Capital Markets.

Good morning. Certainly a lot to absorb here today. But I was hoping maybe both Andy and Dan could step back and give us some high-level perspective here. I've always thought of this story more as one of a company-specific turnaround related to the Emeritus acquisition. It looks like it is shifting more to an industry macro issue story today.

So, I was just curious if you could step back and maybe prioritize by the magnitude some of these issues that you are talking about today, be it competition, increased costs that you haven't seen in the past. And then any thoughts about visibility on timing of improvement of any of these issues. I'll start there and then I have a follow-up. Thanks.

Good morning, Frank. Thanks for your question. I'll take a crack at that. What we are seeing in the marketplace, first, let me be clear and underscore, what we are seeing is we are seeing positive improvement in our business. We just expected the back half of the year to improve more than we were able to generate or to predict that we will improve in the fourth quarter.

What happened is we misjudged our ability to improve even more rapidly in the face of the new competition that we saw, mostly in these middle markets, during the third quarter. My perspective on the industry is we do, as an industry, have a heightened competitive environment, which I think is going to persist for the next two or three quarters. And then, based on our analysis and our perspective on the industry, we believe those competitive openings will begin to abate and dissipate.

I also think the industry, and certainly with respect to Brookdale, we have shown good stickiness with our ability to raise rates in spite of that environment. So, I would just simply underscore that I look at this, we are in the teeth of this competitive challenge, as we speak, and it is simply holding us back from growing even more rapidly than we were able to do so in the third quarter, which, as you know and we just said, we had a 40 basis points sequential increase in occupancy. That would be my perspective.

Any thoughts from Dan?

Just the same, Frank. Clearly, as I said in my remarks, the most important thing we can do is improve our operating results, obviously, in the senior housing businesses as well as in the home health business and other ancillary services we have. We've got to be keenly focused on that, which we have been, but we need to be better and I believe we will. As part of that, especially, we need to be better with respect to our sales and marketing function.

Okay. On the increasing competitive markets, I'm curious, now that you have seen those in those mid-sized markets, I'm sure it has probably sparked you to look around further in other pockets of your portfolio. Do you see anything out there on the horizon that you would say might replicate what you saw in this quarter where you had this influx of openings in the current quarter?

What I've said in my prepared remarks is we expect this heightened level of competition in these more middle-sized markets to continue for another couple to three quarters, and then we expect that to abate as we get to the latter half of 2017.

Okay. And then if you bifurcate out the markets, the ones you have highlighted here, how are the markets that didn't experience this competitive influx of capacity, how did those markets perform?

If you were to think about the primary markets, as NIC defines it, just as an example, as I said in my prepared remarks, in these pressured markets with the spike in new competition, we grew just north of 10 basis points. And that is way below our seasonal norm in those markets.

As a company, we grew about 40 basis points. So, obviously the balance of the markets in which we participated were well north of 40 basis points. So, we saw good -- again, as I would say, 40 basis points is better than the industry did, at least as reported by NIC, but it was not what we expected. We expected to do better than that.

Frank, this is Cindy. I would like to add just a little bit of color on the cost part of your question. As we have been talking about, we've seen wage pressure in our skilled clinical area, and that continues. We've also seen wage pressure in some of our executive directors as we have hired replacements. And then we do see wage rate pressure related to minimum wage requirements as well as competitive labor in some regions.

As I mentioned in my comments, it's somewhat geographic, particularly on the coasts. And then, of course December 1, I think everyone knows we have the hourly wage increase to $47,500, which we have reflected in our guidance.

Just an update, we think that will affect about 1,800 associates, primarily in our field. About two-thirds of these people will move from salaried to exempt, which will cause a wage rate increase. And the increase in salary cost is about $1.5 million for that.

Then we've got a sensitivity that we can share with you on overtime for the remainder that on an annual basis would add $4.8 million if the people who stay below that have two hours of overtime a week.

Cindy, let me ask you one, and then I promise I'll hop off here. Could you give us any kind of guidance on what the pro forma annualized run rate of CFFO would be for the unconsolidated joint ventures? And I'll hop off. Thank you.

We are looking at $55 million to $60 million CFFO for the unconsolidated joint ventures. If you look at the supplement, on the first page you can see the pacing of that throughout the year. We haven't changed that guidance at all. The big difference is that that was always included in our consolidated CFFO calculation. Now, as you'll see on the supplement, we just have to show it separately, one on top of the other. So, you'll need your calculations to get back to our historical method.

Joanna Gajuk with Bank of America.

Good morning. Thanks for taking the question here. Just stepping back to maybe a very detailed question about the divestitutes that have been happening third quarter and prior to that. Can you talk about the impact of those -- maybe I missed that -- in terms of how we should be thinking in terms of the impact to EBITDA for the fourth quarter or however you can frame it in terms of the divestitures that have happened already.

The divestitures that have happened already, Joanna, in the quarter ended September 30, 2016, that included $15.1 million of revenue and $1.3 million of adjusted EBITDA. So, those are communities that we have already disposed of. So, that revenue and adjusted EBITDA goes away in the fourth quarter. Then, as I mentioned in my remarks, we are expecting about 2,000 fewer units in the fourth quarter sequentially.

Okay. So, these would be the additional divestitures that are still pending, that you expect to complete during the fourth quarter, correct?

The aggregate of the two. So, if you think about the first metric I gave you, what is the revenue and adjusted EBITDA for the communities that have already been disposed of. And the second metric I gave you is if you just look at average capacity between Q3 and Q4, the average capacity will be down 2,000 units. And that, of course, includes the 57 communities.

Great. And then coming back to the topic around new competition, and the commentary that now you are seeing increased activity in those secondary markets, can you talk about the experience so far in terms of the primary market? I know you say that things were trending in line with history. But is there any incremental change there? Or it's just pretty much you are saying tat now with the new construction, activity has shifted towards the more secondary market and that is what came as a surprise to you to some degree in third quarter?

The new competition in the primary markets was basically what we've seen in the past and what we would have predicted. It's been level. And our performance in those primary markets has been pretty positive. Off the top of my head I think roughly 60 basis points we grew in those markets, is my recollection.

So, the big, primary markets -- where? I would say new construction started in those more affluent and those type of markets earlier in this process. But I would say our performance in the primarily markets and our view of new competition has been pretty consistent.

Where we saw the shift was to some of these more middle-sized markets where, again, it is a little difficult to predict exactly when new competition is going to open. What happened there is, while we grew, we just didn't grow as -- we thought we would do a better job. And we misjudged our ability, at least during the short term, to deal with those competitive pressures.

Again, as I say, we are confident that those markets will regain their strength as we get through what we believe is a cyclical and intermediate-term period for the next couple of quarters.

Thanks. So, you were saying that you saw those assets being planned to be built but then you misjudged your ability to stand in that market. So, is there any color there you can talk about in terms of how aggressive you were with incentives and discounts and things, and such in those markets, and how quickly you responded to the new situation in terms of the new assets being open? Because you would think that there is some lead time between the plans being approved and assets actually being opened. So, you would think that there is some time for the assets to prepare for the new competition company.

Right, I get the question. Our local operators, our sales managers, our marketing folks, they respond to that new competition as it opens or immediately before it opens, usually four or five months beforehand. And we responded aggressively to that in terms of adjusting our prices, using incentives, et cetera. We were just not quite as successful. Again, I want to underscore, we had positive growth in the market. We were just not quite as successful as we would have anticipated using the tools in our toolbox as we responded aggressively to that new competition.

Okay, thank you. I'll go back to the line.

Ryan Halsted with Wells Fargo.

Thanks, good morning. Just maybe to stick with that last point, since you broke out the occupancy, can you break out the average monthly rent growth in the mid-sized markets versus the other markets?

Ryan, we don't give out that kind of detail.

Okay. The reason I'm asking the question is you talked about having an ability to price consistently despite the new pressures from the occupancy or from the new supply. So, what I'm trying to get at is how come you had to be so aggressive when you've generally tried to remain pretty disciplined on the rent growth?

I would say, again, we did show 3.2% same-store rate growth across the Company on a same-store basis. As we've discussed before, we are constantly assessing on a day-to-day basis, week to week, based on what's going on in local markets, we constantly assess our pricing and what incentive tool boxes that our sales folks need in order to move folks in. And we will continue to do that.

And, of course, adjustments are made if the competitive pressures in a particular market are such that we need to even more aggressively respond to that competitive pressure, we're going to continue to do that. I think, as Cindy said, we expect to continue to get the -- our rate growth, however, was not as high as we would have anticipated when we built our business plan. It's still 3.2% same store, 3.8% on a revPAR basis as we went through the quarter. We are expecting to do okay in terms of holding price as we go into the fourth quarter.

Okay, that's helpful. With these latest transactions, what percent of the communities are in these mid-sized markets? Or is there any read through to make on where you are looking to reduce your lease exposure as it pertains to the market dynamics that you've outlined with the new supply?

I would say our disposition activity to this point has been around, as we've discussed previously, disposing of communities that are either underperforming or have outsized capital expenditure requirements, or are in markets where we do not wish to concentrate our efforts. Again, with respect to some of these middle markets, we expect those markets, in many cases, to be good markets over time. There is just a cyclical bit of pressure that's on them right now. And we are confident that, based on our experience from years and years of doing this, that they'll recover.

We have to battle through that cyclical storm, which we will do, and we are confident that these markets will recover and we have well-positioned assets in those markets.

And, Ryan, this is Cindy. This isn't exactly on point with regard to your secondary markets, but if you think about the 64 communities that are going into the joint venture with Blackstone, they had an 0.8 coverage ratio pre CapEx and 0.65 after CapEx. So, clearly a lot of the transactions are the portfolio that is not performing well. So, just getting those out of our portfolio will allow us to improve.

Okay. Then maybe just looking out longer term, your revised guidance implies fourth-quarter revenue down 5% to 10%, even backing out the impact from the dispositions that you have announced or that have been closed already. How should we think about your long-term expectations for 3% revenue growth, certainly over the next 12 months?

I think as we look into next year, we certainly are expecting to see heightened competition in the secondary market for at least the next two or three quarters. As you look at our same-store portfolio, we would expect to see revenue growth but at a growth rate that is more muted than we previously thought. We'll continue to see labor pressure in 2017.

And I do want to highlight that we did get the benefit of some larger-than-normal reversals this year which will create a bit of a headwind for us in terms of growing next year. When you put all that together, our consolidated revenue and expense growth rate will be lower than our same-store growth rate because of the disposition. And then we are expecting that our CFFO from our recently announced transactions will have about a $27 million positive impact on CFFO and a $40 million positive impact on CFFO less nondevelopment CapEx. And then, of course, our G&A initiative is ongoing which should improve our G&A performance next year.

All right. Thanks for taking my questions.

Brian Tanquilut with Jefferies.

First question for Dan. Looking at where the stock price is right now, where you sit and coming in as Executive Chairman, how are you thinking about value creation in terms of prioritizing the moves that you guys need to make as a Company? And also where the near-term opportunities are to create value and support the shareholder base at this point?

Yes, sure, Brian. I mentioned a couple of times I think our top priority has to obviously be improved operations. When you look at the senior housing business, as you probably know, a 1% increase in occupancy, I think, drives about $27 million of additional cash flow for us. So, when you look at where we are, it's hard to understand why we are 350 basis points shy of the NIC average occupancy. I think that we've got work ahead of us, but I think there is clearly opportunity there to create meaningful value in our portfolio through improved operations. So I think that's priority one for us, for sure.

I would say the second and third thing are closely tied to each other. One is obviously the disposition of assets that we can sell smartly for reasons that people have outlined that I think some of that, I would expect, would be done in conjunction with a very important opportunity for us, which is to try to make sense out of some of these leases in the way we did with the Blackstone situation. As I'm sure you know, we have some other troubling leases. And I think there's opportunities for us to figure out ways to create win/wins with our landlords in those situations.

We are already working hard and carry a real sense of urgency to work on that where, hopefully, we have an opportunity to not only result in improvements in our cash flow as a result of these restructures, but additionally obviously we hope to reduce our leverage. So, I think those are the areas of concentration for us, Brian.

I appreciate that, Dan. To follow-up on that, Cindy, you laid out all the headwinds on the P&L. Is there a way for us to discuss some of the action plans in terms of especially the things that you have already discussed in the past, such as synergy realization, G&A cuts, all these things we have talked about in the past? Where do these stand in terms of updating those expectations? And are there other things that management is laying out in terms of initiatives that we should be looking for to drive both top line and rationalize the expense line to match the headwinds on the macro side or the occupancy side related to competition?

Sure, absolutely. As you think about initiatives, as you would expect, we've got a pretty detailed action plan. The first and most important thing is to make sure that we have the right leadership in our communities. So, we have been talking about retention of our executive director, our health and wellness director, and our sales director positions in our communities. There is nothing that we can do that is more important to that.

And we are pleased that we made progress on reducing our health and wellness director turnover during the third quarter. Clearly, our people are very valuable and they are targeted by competition. That is it is most important thing. We are continuing to work on our service alignment labor model, which helps us make sure that we've got the right labor in the communities to match to the acuity of the residents' needs, and that helps us offset some of the labor pressure to make sure you are matching labor appropriately to needs.

Our procurement initiatives are growing and doing really well. We are very happy with the savings we have seen in food costs and supply. You'll continue to see that as you look forward into our P&L.

Our best tool is allowing us to make sure that our communities are operating effectively. And we know that the communities that have high best scores have higher profitability. So we'll continue to roll that out and that will be important.

On our G&A, we have reduced a number of positions throughout the year, and eliminated additional positions recently. So, we'll continue that effort as we streamline and simplify the G&A. And then our ancillary services business, we are right-sizing our portfolio in the outpatient therapy business, which should improve the profitability of that business going forward. Probably won't have a big impact on Q4 but it will help us as we go into 2017. I hope that answers your question, Brian.

Yes. And then just a follow-up on that for Andy. We have talked about the marketing strategy before. As we think about increased competition, where do we stand on reevaluating the marketing strategy or ramping that up? And then how do you think about pricing at this point, to follow-up to Ryan's question. Do you think that you have ability to give some basis points on rate to chase occupancy, or vice versa, to give up some occupancy in exchange for higher rate growth? Because this is a discussion we have had in the past on pricing and occupancy strategy.

Yes. So I'll take both parts of those questions. On the marketing front, we are currently focusing virtually all of our efforts around marketing on both a local basis and then by market basis. So, we are directing our efforts at the tried and true strategies of developing professional referral relationships and those sort of traditional methods. That is currently where we are focusing our efforts.

With respect to pricing, Brian, again it is a very localized strategy. Our local sales and operating teams adjust their prices, and they have incentive tool boxes that allow them to respond to the market to move folks in. What we are trying to do is to maximize revenue. We are not trying to maximize rate at the expense of occupancy.

Again, we had good success with that in the second quarter and we had success with it in the third quarter, just not quite as much as we anticipated as we went into the quarter. So, we are constantly adjusting our pricing strategies by virtue of what's happening in the local marketplace and we'll continue to do that, all, again, so we can maximize revenue.

All right, got it. Thanks, guys.

Dana Hambly with Stephens.

Thank you. Andy, as you look out over the next two to three quarters, you are going to be pressured by the unprecedented level of new openings. What line of sight do you have beyond the next two to three quarters of new supply coming online?

I think we have reasonably good both objective analysis that we do, we have industry data that we can look at, and then we have anecdotal information. So, I would say that we feel reasonably confident that after the, say, middle of 2017, you will begin to see new competition abate and get back to what I would say are more normalized levels as opposed to the spike that we are seeing, that we are right in the teeth of, as we speak.

Okay. The unprecedented level, was it a surprise that it came online or was it just you were surprised by your inability to perform a little bit better than your expectations?

Obviously we are looking at new competition all of the time, so I wouldn't say that it was a surprise. We knew that these buildings were being built. Again, it's a little bit difficult to predict exactly when in totality that you are going to see all of these new openings happen.

Obviously, our local teams are mindful of what's happening in their marketplace. And our analytical teams in the corporate office are mindful of what the new competitive environment looks like. So, what we misjudged as we came into the year and as we have gone through the year, is that we thought -- again, I would say, we made progress, we still grew rate, we still grew occupancy, we just didn't make quite as much progress as we had anticipated in the face of these new openings.

Okay. Cindy, could you help us out on a pro forma rent expense, a quarterly or annualized, once all of these transactions are completed?

If you look at the investor deck that we put up on the website, we tried to give you the update for that. We are looking at a reduction in cash rent expense that is pretty significant. It is $71.7 million for the nine months ended September 30 and it's about $85 million for a full-year basis.

Okay, that's helpful. Is the SEC done with you guys for now?

I hope so. But I will say that we are not alone. It's hard to be here and have two consecutive quarterly changes in non-GAAP metrics. That's certainly not what we expected or wanted to have happen.

At the same time, it appears that there is a very strong focus across all industries and the guidance is evolving. And discussions with the SEC and discussions with our outside advisors, we know that we are not alone. That doesn't make it a fun place to be.

Okay. Last one for me, and I apologize, I just had it scribbled down here. I'm sure you've detailed it. $200 million to $225 million in proceeds in the fourth quarter. Can you tell me where that's coming from?

I think what you are referring to is we are in the process, along with HCP, to get non-recourse mortgage financing on our non-consolidated entrance fee, CCRC joint venture. And we expect those financings to produce to Brookdale between $200 million and $220 million worth of proceeds at an attractive rate.

Okay. Thanks very much.

Our final question comes from the line of Chad Vanacore with Stifel.

Thanks for fitting me in. There's a lot going on here today. I'm just thinking about, you've made significant progress in the restructuring. So, where would you say we are now in terms of portfolio restructuring, what inning are we in? And what do you think still has to be done, and what's a priority?

I don't know that I want to characterize it, Chad -- and thanks for fitting us in and joining us this morning -- I don't know that I want to characterize where we are in terms of innings or that sort of thing. What I want to underscore is that we intend to, as we move forward and into 2017, we intend to aggressively think through additional asset dispositions for assets that we own in order to optimize the portfolio.

We are also aggressively going to pursue additional lease restructurings with our landlords. That's a big effort for us as we move into 2017. I don't know that it's appropriate for us to give you any precise calibration of that or calculation of that, because it's all dependent upon what transactions we can get accomplished and whether they make sense for us under the circumstances we're in.

But we are very happy that we've addressed 20% of our leased portfolio through the transactions that we announced this morning.

Okay. And then just thinking about the wage inflation piece of the puzzle, you said you are seeing 10% wage inflation. I think last quarter or somewhere earlier in the year you had thought maybe 3.5% wage inflation was right. Can you talk about the differences in expectations?

If I said 10% wage inflation I misspoke. It is 10% benefits inflation. Our wage inflation is still within our budget but higher than we've historically seen.

Okay. And then just thinking about the ancillaries, we saw them bounce back in Q2 from a weak 1Q, and then decline pretty significantly in 3Q. I think last quarter you said you could create another $5 million in revenue and you were controlling labor. So, what's changed there?

Basically the competitive intrusion that we talked about. We've taken action but we had the loss of 20 associates from the former Nurse On Call. And we believe that certain of these associates are, on behalf of their new employer, soliciting our patients, referral sources and associates, in violation of non-solicitation agreements. We have taken legal action and we have gotten an injunction against at least one of these former associates.

Okay. And then just one last question, just thinking about where the stock's trading today, does it make sense to open up a strategic review on the owned real estate, where we stand today?

We are taking the actions, Chad, that we outlined, the Board. We're not going to get into that type of discussion again right now.

All right. Thanks for taking my questions.

Okay. Thanks, Chad.

Thank you for joining us this morning. We appreciate your time. Thank you.

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