Brookdale Senior Living Inc (BKD) 2016 Q4 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 fourth quarter and full year 2016 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session.

(Operator Instructions)

Thank you. I would like to turn the conference over to Mr. Ross Roadman.

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

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 and performance may differ materially from the estimates or expectations expressed in those statements. Future events could render the forward looking statements untrue and we expressly disclaim any obligation to update earlier statements. Certain other factors that could cause actual results to differ materially from our expectations are detailed in the earnings release we issued yesterday as well as in the reports we filed with the SEC from time to time including our annual report on Form 10-K and quarterly reports on Form 10-Q.

When considering forward looking statements you should keep in mind those factors and the other risk factors and cautionary statements in the SEC filings. I direct to see the Brookdale Senior Living earnings release for the full Safe Harbor Statement. Also please note during this call we will present both GAAP and non-GAAP financial measures.

I directed to our earnings release and our supplemental information 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.

Good morning, thanks for joining us. As always we appreciate your interest in Brookdale. I'd like to make a few comments about the fourth quarter and then spend most of my time discussing our outlook for 2017.

But before it do that I'd like to ask Dan to make a few comments at this point. Dan?

Thank you, Andy and good morning to everyone. My remarks will be brief this morning. I have spent significant amount of time over the last few months talking with many of our shareholders to hear their perspectives on our Company.

On behalf of the Board and Management I want you to know we truly value your feedback and advice. Let me assure you that our Board of Directors and our management team are very focused on the creation and maximization of shareholder value.

Brookdale's Board and Management team regularly engage in a wide range of strategic opportunities to enhance shareholder value. I can report our Board and Management team working together with our legal and financial advisors are in the process of exploring options and alternatives to create and enhance shareholder value.

Obviously there can be no assurance this review will result in any specific action or transaction and I want to reiterate that no decision has been made to enter any transaction at this time. Brookdale will only enter into a transaction or transactions if they can do so under terms that our Board concludes are in the best interest of the company and its shareholders. While our review process is active and ongoing there is no set timetable for it to conclude.

I'm sure you understand we are not in a position to answer any questions or make any additional comments about this subject at this time. Andy, I'll turn it back to you.

Thank you, Dan. While the process review that Dan mentioned is ongoing, I want to assure you that we remain fully committed to our residents and our associates and to the continued execution of our business strategy. Simply stated we will continue to remain focused on achieving consistent operational excellence.

Now, I would like to cover four topics in the balance of my prepared remarks, an update on our portfolio optimization initiatives, our assessment of the competitive environment, a few comments about our fourth-quarter performance and finally our 2017 outlook. Let me start first with an update on our portfolio optimization activities. This is an important initiative for us to position the portfolio for success as well as provide improvements to the Company's cash flow and balance sheet.

And we were successful at affecting of a number of impactful transactions last year. During the fourth quarter we sold 12 of the 28 communities we had included in assets held for sale at the beginning of the quarter. In addition we terminated leases on seven communities during the quarter, four of which went into an existing RIDEA relationship with HCP.

These communities were part of the previously announced transactions with HCP. Including those transactions that I just mentioned, we sold 51 communities in 2016 generating $305 million gross proceeds and we terminated leases on seven communities. We still have 16 communities held for sale as of December 31, and we will continue to work to complete those sales in 2017.

We believe that we are on track to close our joint venture for the 64 communities with Blackstone by the end of the first quarter. We also expect to terminate the leases on 26 other communities leased from HCP throughout the year. We intend to continue to actively pursue additional opportunities to optimize our portfolio as we move through 2017.

We have several smaller one-off transactions in process and we continue to have discussions with our lessors about additional lease restructurings. Let me now turn to the competitive environment focusing on new supply and the labor market generally. As we expected and noted on our third-quarter call, we experienced another record number of new openings within 20 minutes of our communities during the fourth quarter.

We saw new deliveries in 34 markets with a total of 54 same product competitors opening during the quarter. In total, new openings were up 15% over the fourth quarter of 2015. Looking ahead, we expect new openings to track at this elevated level through most of this year and then based on lower new construction starts we anticipate new supply will begin to decline.

While supply is definitely a pressure in the short-term we think that the headwind softens as we move into 2018. One final note on supply for 2017, NICs projection for 2017 is that increased demand by seniors that need services will absorb new supply in the aggregate and that overall occupancy rates are projected to be flat for 2017. Another macroeconomic condition that is causing some pressure on our business is the labor market.

Unemployment is coming down and the labor market and a number of locales is very tight resulting in a degree of wage pressure. In addition, we continue to see states adjust their minimum-wage standards. As we entered into 2017, 17 states had increased their minimum-wage requirements.

And we have seen some salary cost pressure as we work to protect our top community managers from competition. In our planning process for 2017, we have assessed each market and reflected in our business plans our expectations for the competitive environment and for the wage pressures I just referenced.

Now let's turn to a discussion of our operations including our business initiatives and operating results. We continue to make strides in improving our operations and our ability to compete against new competition. While we can't control new competition we are focused on responding to it effectively.

For example, we have been particularly successful in competing against new competition in our memory care product. In fact the Q4 NIC report which provided a new break out of memory care occupancy showed that Brookdale's total and stabilized memory care occupancy exceeded national averages.

Just to contextualize for a moment, there is no single simple story, for Q4 we had just shy of 500 communities or almost 50% of our total portfolio with a weighted average unit occupancy and 90% or better. Many of these communities are in very competitive markets. Where we have the right people, sales and marketing execution and reputation, we are doing well no matter what the supply environment.

Our division presidents have performed an in-depth analysis of all of their communities and we have taken action to bolster those communities that are subject to new competition. First, we are focused on our programs to reduce turnover and to retain key community management. We continue to work to simplify and support these roles.

We have assessed the compensation of those leaders and continue to make appropriate adjustments as I described previously and we are adding committee level support staff to lighten the burden of the job responsibilities. We made progress in lowering turnover but we certainly have room to continue to improve. Second, we have naturally focused our corporate marketing budget on the communities the supply pressure.

We've identified 49 markets where we will deploy those marketing resources in various ways throughout 2017 including direct mail, increased digital exposure and print ads to improve our lead flow. This will augment the local community level budgets and should produce lead building activity.

Third, we have reviewed our community pricing to ensure that we have appropriate competitive pricing for our services. Our objective is not to engage in heavy discounting battles but rather to tactically use smaller valued incentives to encourage a quick move-in.

Four, as we have discussed previously, we are proceeding with our segmentation initiative in which we have performed extensive work to position our communities within the markets appropriately. Recognizing that all sub markets nor all of our communities are the same we have created operating models and matching price points to address different consumers in each market.

And to ensure the proper matching of needs to services within those local markets, we are deploying a network selling concept within the regional markets. We will implement the segmentation and network selling initiatives throughout the portfolio in 2017. The upshot of these activities is that we are taking a proactive approach to the competitive environment that we face.

Turning now to our performance for the fourth quarter. Our results were consistent with our revised expectations. Our occupancy change remained within a normal seasonal range with a 20 basis point sequential decline and we grew RevPOR by 3.3% from the fourth quarter of 2015.

We also made really good progress in downsizing our corporate overhead structure. In addition we made progress in the recovery of our ancillary services business and as planned we significantly reduced our outpatient business to focus more on the growth of our home health and hospice products. Our fourth-quarter adjusted EBITDA grew by 3.5% versus the fourth quarter of 2015.

Our adjusted free cash flow grew from a negative $33 million in the fourth quarter of 2015 to a positive $33 million in this quarter. A $66 million improvement. For the full year we came in at the high end of the revised guidance for our various metrics.

I'll close by saying that our guidance that Cindy will discuss in detail shows we expect to continue to produce significant cash flow in 2017 in spite of a very difficult operating environment. We feel good about the actions we are taking to defend their position in markets that will be pressured by competition and to take advantage of markets where there is less new supply.

We will also continue to be active with our portfolio optimization activity to simplify the business and to improve the cash flow of the Company. Now I'll turn it over to Cindy for more details on the quarter.

Thank you Andy and thanks everyone for taking the time to join us today. My comments will be organized into four sections. Revise Investor Relations material, full year 2016 results and highlights, Q4 2016 results and our 2017 Outlook.

Before I go into my comments about 2016, I'd like to make a few comments about our new Investor Relations material and the metrics we are focused on. First, I hope everyone has had a chance to look at our new supplement and investor deck which reflected feedback we received from our ongoing shareholder discussion. Our goal is to be as transparent as possible to make our disclosures as easy-to-use as possible.

Our Company is complicated and our capital structure is certainly complex. Our new supplement provides increased disclosures as well as more user-friendly format. There are a couple of metrics within the supplement I'd like to comment on.

First, as we instructed on our investor day we will be focus on adjusted EBITDA as one of our primary metrics going forward. If our adjusted EBITDA includes large amounts of integration, transaction, transaction-related and strategic project costs which I will call [add-back] we will also discuss adjusted EBITDA excluding add-back.

Second, we want to focus on the cash flow metric that takes into consideration the capital expenditures that we need operator business. In our investor day we introduced a metric which we called CFFO, non-development CapEx.

To simplify our communication we're refining our cash flow metrics and we will call it adjusted free cash flow. Adjusted free cash flow begins with net cash provided by operating activities and deducts community level capital expenditures and our corporate CapEx. It includes the net cash flow associated with entry fees and our free consolidated entry fee community.

It does not include development [CapEx]. We also excluded changes in working capital because in the course of a normal year it's normally neutral. We subtract all these financing debt amortization so all of our cash lease payments are reflected in our adjusted free cash flow.

We add insurance recoveries for property losses. We exclude distributions from our unconsolidated joint ventures but our proportionate share of adjusted free cash flow of such ventures will be recorded separately. We are also deemphasizing CFFO and adjusted CFFO though we will continue to recorded in our reconciliation.

These metrics are unchanged from the prior year -- the prior quarter. We hope you find our new Investor Relations material helpful. Of course, we are always open to feedback.

Let's quickly review our 2016 performance. Let me start by saying we performed well relative to our updated guidance. Our full-year 2016 adjusted EBITDA increased 5.8% on a year-over-year basis to $770.8 million.

Full year 2016 adjusted EBITDA was $825 million excluding add-backs. Our performance was in the top half of our guidance range. Full-year 2016 adjusted CFFO was $374.7 million which was also at the top of our guidance range.

We are making solid progress against the priorities we outlined during our investor day. First, we said we would grow our cash flow. For those of you who rely on GAAP metrics our full-year 2016 net cash provided by operating activity increased 25.1% on a year-over-year basis to $365.7 million.

Moving to our non-GAAP metrics we were able to improve our full year 2016 adjusted free cash flow by $162.5 million compared to the prior year. We produced $153.8 million of adjusted free cash flow in 2016 compared to having an outflow of $8.7 million in 2015. Our proportionate share of adjusted free cash flow in our unconsolidated ventures was $32.6 million for the full year 2016 compared to $22.5 million for the full year 2015.

These cash flows are not reflected in the $153.8 million of adjusted free cash flow I just highlighted. Second, we targeted reducing our add-backs by approximately 50%. During 2016 we lowered our add-backs by $123.7 million in 2015 to $62.1 million in 2016, a reduction of 50%.

Third, we said that we would strengthen our balance sheet through the exposing of non-core and under performing assets, reducing our CapEx and lowering our leverage. We are pleased with the progress that we've made.

We reduce our leverage and increased our liquidity particularly through our portfolio optimization transaction. The Company's total liquidity improved during 2016 to $584 million by December 31, 2016 compared to $194.6 million in the prior year which provides the liquidity for the investments we will be making in the Blackstone joint venture.

We targeted a leverage reduction of half a turn during 2016. The total of our mortgage debt and the balance outstanding on our secured credit facility decreased by $383.2 million. We successfully reduced our leverage during 2016.

Our leverage ratio of net debt to adjusted EBITDA after cash capital and financing lease payments for the trailing 12 months ended December 31, 2016 was 5.7 times down from 6.4 times for the prior-year period. Our leverage ratio of adjusted net debt to adjusted EBITDAR which includes these leases as debt was 6.9 times for the trailing 12 months ending December 31, 2016 compared to 7.2 times for the prior-year period. Both of these leverage ratios exclude add-backs from the calculation of adjusted EBITDAR and adjusted EBITDA.

During 2016 with targeted the significant reduction in CapEx. Our total CapEx for 2016 was $244.7 million, a reduction of 32.4% versus the prior year. This reduction resulted for fewer renovations in the legacy Brookdale portfolio as planned, lowered development spending, lower corporate spending and having fewer communities lead our portfolio optimization activities.

We accomplished an important goal. Let me turn to the third part of my comments, our fourth-quarter results. As we mentioned in our last earnings call we are facing the headwinds of heightened competition with more new competitive openings than we have experienced within the last several years.

At the same time, we are facing a competitive labor requirement. Clearly we are operating in a challenging environment. Even so, we generally performed well relative to our revised guidance.

We improved our fourth quarter 2016 adjusted EBITDA by 3.5% or $6.2 million on a year-over-year basis. We strengthened our CFFO.

On a year-over-year basis our fourth-quarter CFFO of $3.5 million or 5.6%. We produced positive adjusted free cash flow.

Fourth quarter 2016 adjusted free cash flow was a positive $33.2 million versus the negative $32.7 million in the fourth quarter of 2015. A $65.9 million improvement. This marks the fourth consecutive quarter of improvement on a year-over-year basis.

Additionally, our proportionate share of adjusted free cash flow from unconsolidated ventures was $6.8 million in the fourth quarter of 2016 compared to $6.2 million in the fourth quarter of 2015. The primary drivers for our adjusted free cash flow improvement were a $25.3 million reduction G&A including a $15.6 million reduction in add-backs and a $59.5 million reduction in non-development CapEx. Our lower CapEx spending was a result of our portfolio optimization transactions and decisions that we made to slow down our CapEx spending.

As we analyzed the performance of core senior housing operations it's important to isolate the impact of our portfolio optimization initiatives. So, I'll begin my review by looking at our senior housing same community results for the fourth quarter. Our same community revenue grew 100 basis points on a year-over-year basis.

We grew a same community RevPAR to $3,814 an increase of 110 basis points from the prior-year quarter. Our fourth quarter 2016 weighted average occupancy for the same community senior housing portfolio declined 120 basis points on a year-over-year basis to 86.3%. We experienced a 30 basis point sequential decline in our same community occupancy during the quarter.

Our fourth quarter 2016 same community RevPOR increased 250 basis points on a year-over-year basis. Our year-over-year rate growth reflects the increased use of incentives and discounts. Our same community fourth quarter 2016 senior housing expenses increased 350 basis points year-over-year largely as a result of labor increases.

Our fourth quarter 2016 same community labor expense increased 4.2% on a year-over-year basis. Our labor cost increased as a result of annual merit increases, labor cost pressure, primarily on the East and West Coast particularly in larger cities and wage adjustments or retentions. Our labor costs reflects a tighter more competitive labor markets that Andy outlined.

While we saw strong year-over-year performance in several cost areas such as food through our [per terment] savings we experienced normal inflation in many expense categories. The net results with the decline in same community operating income of 330 basis points. Looking at our consolidated senior housing results for the quarter, we generally met our revised expectations for the fundamental drivers of our senior housing business.

We grew RevPAR to $3,823 a year-over-year increase of 2.5% from the fourth quarter of 2015. Our year-over-year average occupancy for the consolidated senior housing portfolio reflected the impact of competition with year-over-year decline of 80 basis points to 86%. Our sequential quarterly decline of 20 basis points was within our normal seasonal pattern and was consistent with the industry as reported by NIC.

Our fourth quarter 2016 RevPOR increased 3.3% on a year-over-year basis. Looking at our ancillary services segment we earned $16.3 million of segment operating income during the fourth quarter of 2016, a $1 million decline from the prior-year period. As we described last quarter we downsized our outpatient therapy business by closing clinics in 510 out of 685 communities by December 31, 2016 lowering both revenue and expense.

Our home health business grew volumes in the third quarter in spite of the ongoing consequences of the corporate raid in Florida that we discussed last quarter and the hurricane activity in the fourth quarter which did disrupt service for short time. Moving on to fourth quarter 2016 general and administrative expense it was $66.7 million a 28% year-over-year reduction. There are two elements to our favorable G&A performance.

First, during the quarter we took actions to streamline our over a structure and reduce headcount. These actions will result in a $25 million in savings before cost inflation and normalized bonuses that we targeted for 2017. We also decreased our add-backs $15.6 million.

Second we benefited from a favorable settlement of and Medicaid dispute dating back to the [Emeritus]. Fourth quarter 2016 G&A net of add-backs and non cash compensation was [$63.6 million versus $62.6 million] in the fourth quarter of 2015. We also continued to strengthen our balance sheet during the fourth quarter and we reduced our mortgage debt by $80 million and paid off $100 million term loan portion of our line of credit.

At December 31, 2016 we had availability on our line of $[368] million. During the fourth quarter our unconsolidated entry fees QCRP venture contributed non-record financing of communities and we received distributions of $221.6 million of net proceeds. After using a portion of the proceeds to repay selected debt our cash balance stood at over $260 million at year-end.

During the fourth quarter we sold 12 of the 28 communities that we had included in assets held for sale at the beginning of the quarter. We received $80.7 million of net proceeds for these communities which were used to repay $50 million of mortgage debt and to pay down the balance of the secured credit facility.

We terminated leases on seven communities during the quarter. These communities were part of the previously announced transactions to HCP.

As of December 31, 2016, we had the 16 committees in our assets held for sale with a carrying value of $97.8 million with $60.5 million of related debt. Our current expectation is we will complete the sale of these 16 communities 2017. Let's move to our 2017 guidance.

I do want to note that our latest investor presentation, which can be found on our website, contains a pro forma of our results for 2016 after adjusting for the impact of disposition, lease termination and restructuring completed during 2016. The impact of the expected completion of the sale of the 16 communities held for sale at year-end as well as the pending transactions of HCP and Blackstone which were announced during the fourth quarter of 2016. This presentation also has other information which will help you understand our guidance.

For 2017, including the expected impact of the pending or planned dispositions of communities and the pending transactions of HCP and Blackstone which were previously announced we expect adjusted EBITDA excluding add-backs to be $670 million to $710 million and adjusted free cash flow for the year to be $140 million to $170 million. In addition we project our proportionate share of the adjusted free cash flow of our unconsolidated joint venture to be $25 million to $35 million. Let me talk about the assumptions underlying that guidance.

Beginning with 2017 revenues were targeting residency revenue of $3.7 billion to $3.85 billion which includes senior housing revenue and ancillary services revenue after reductions from the pending disposition and lease termination. You will find our expectation for our quarterly unit capacity in our investor presentation. These estimates are based on our assumptions of when the transactions are likely to occur it should help you build out the revenue pattern over the year.

Our guidance does not reflect any transactions that have not previously been announced. As Andy said, we expect new competitive openings to be disrupted in some of our markets. Nevertheless, we expect our senior housing RevPAR to increase the minimum a 1% at the bottom of our revenue range mostly from [rate pro] and the impact of disposing units lower RevPAR.

Ancillary services revenue is expected to grow to $460 million to $480 million as volume increases and offset home health reimbursement rates decreases in the streamlining of our outpatient therapy. During 2016 we produced approximately $28 million of ancillary revenue in those outpatient clinics that were closed. There are two factors beyond the transactions that are impacting senior housing on the expense side.

The first is pressure on labor cost in our senior housing business. While minimum wage is expected to have a small impact on us 2017, approximately $2.5 million we are experiencing higher wage costs in both hiring and for retention. In addition, we are investing in additional community level support associates as part of our initiative to retain key community leadership.

Overall, we expect compensation, adjusted for the impact of disposition, to increase by 5.5% to 6% driven by increased salary and wages, normalized bonus and increased help benefit costs. The second impact is a large number of favorable reserve adjustments during 2016. Notably for 2016 we reduced our Emeritus purchase accounting reserves four GL/PL and Worker's Compensation by $41.6 million.

In addition there were a number of other smaller adjustments. We do not expect these adjustments will occur at the same level and therefore make a year-over-year comparability difficult.

We expect our G&A expenses excluding add-backs and non-cash stock based compensation for the full year to be in the range of $235 million to $245 million. We successfully made the $25 million of reductions we committed in 2016 in order to get to an expected $240 million run rate at the midpoint of our 2017 range.

We will continue to look for opportunities to streamline the organization as we continue with our portfolio optimization activity. Our current outlook for add-backs is approximately $20 million mostly related to transaction costs for transactions that are already announced and cost associated with refinancing our 2018 debt maturity. As we look at our 2017 capital expenditures we expect our non-development CapEx which excludes development CapEx to be in the $190 million to $200 million range.

This is made up of community CapEx which is expected to be $150 million to $155 million net of reimbursement and our corporate CapEx which is expected to be $40 million to $45 million. We are expecting to spend $40 million to $50 million on development CapEx.

To summarize, during 2016 while we didn't make as much progress as we expected we made solid progress on several important milestones of our strategy. We enter 2017 with a stronger balance sheet with transactions in progress to improve our ability to operate and are financial results and operating plan which is focused on cash flow and is specifically designed to compete effectively in a highly competitive market. Our guidance reflects the competitive market and we will look forward to updating you as we go throughout the year.

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

Thank you Cindy, let me close by saying this remains an exciting business with huge potential. Although the near-term competitive landscape we discussed will be a factor in 2017.

The demand tailwinds for business only get more robust as time goes on. Our Management team is focused in acting with urgency to improve our operating performance and we are happy to answer any of your questions now.

Thank you.

(Operator Instructions)

Our first question comes from Chad Vanacore with Stifel.

I guess I'm up first.

I have the honors of asking first, if you are exploring options would you think about the sale of the whole Company? Or just maybe some parts of the portfolio?

Chad, what we said in our prepared remarks were that we were exploring all options that are on the table to increase shareholder value, and I think we have to leave it at that.

Okay, I respect that; thanks, Andy.

Just thinking about rate growth the next year, the comments were you thought that rates would be the primary driver, and you are expecting that in line with senior housing to be offset by some higher wage inflation. Can you put a little more color on what levels of rate increases you pushed through in January? And what level of wage inflation you are seeing?

Hi, Chad, this is Cindy.

In January we realized rate increases that range from over 3.5% to 5% on our in-place resident population depending on the type of community. We feel pretty good about those rate increases. As you know, by this time of the year, we have gone through the discussions with our residents and we have a pretty good sense of what rate increases will hold. While our revenue range is pretty broad, given the competitive environment, we are off to a good start with regard to inflated rate increases.

That's good; what about on the expense side?

On the expense side we have got to factors that are the most significant factors for us. First is labor pressure and we outlined that in the call. The second is the purchase accounting reserve adjustments in our senior housing business we made last year. We had $41.6 million of favorable purchase accounting reserve adjustments for GL/PL and Worker's Compensation, and those will be a headwind for us in the current year as a result of not expecting a similar level of adjustments.

All right, but what would you say your base wage pressure would be ex that?

Our compensation is expected to go up 5.5% to 6%.

Okay. One more question, on just the occupancy side: what should we expect in 2017 with your properties? You're running around mid-80% occupancy. There's probably some room to grow when supply pressures ease a bit. So what should we think about for 2017?

The first point, as we have normal seasonality during 2017, certainly in the first part of the year, you tend to see your occupancy decline. We are expecting supply pressure for most of 2017, so we do not expect growth in occupancy.

Thanks, Cindy.

Your next question comes from Frank Morgan with RBC Capital Markets.

Good morning.

On the question of occupancy, in light of the NIC map data and their projections over a flat occupancy environment for the year, you contrast that with your view. Is there any more color you can provide us there? Is there something unique in the growth in your markets? Or do you view yourself as being more conservative than you have in the past?

I think as you know, our market basket of communities is slightly different than NIC. Certainly we are seeing more occupancy pressure in assisted living than we are in the rest of our communities. We've always said a community is impacted for about a year after the time new competition enters the market. We've given a relatively wide range of revenue reflecting the fact that competition could hit us for most of the year. We've got upside at the top end of our range if we are able to perform better or if the competition is more muted than we expect.

You referenced the slowdown in new construction starts; have you been able to verify that yourself? Obviously, that is what NIC map data says, but in all of your specific markets do you have any current intelligence on the trend specifically in the Brookdale market?

Sure we do, Frank.

You are right, the NIC data shows a slowdown in new construction. That's confirmed by what we know from our local operator and sales folks. They keep a database of what's going on in their marketplace. We also independently checked through various services what construction permits have been pulled, et cetera, through third-party resources and markets the NIC doesn't cover. What our operators tell us, we have some independent confirmation. Finally, in addition to all of that, we have anecdotal information we get from financing sources, construction lenders, and the like that we think they are getting more circumscribed in their willingness to finance new construction. Of course construction costs have been rising through this period of time.

So we think all of those things conspire together to cause us to feel like these new deliveries will begin to abate and the environment will get a little less hostile as we move into 2018.

Got you. Final question, just on the subject of this process that you're going through. Obviously this has happened in the past, and we've seen this movie before. Did you have any plans about how you will communicate in the future with regards to where we are, either something happening or not? Do we have a timeline over which you would say, we've reviewed the process and we are either going or not going? Have you thought about a timeline on that? Thanks.

As Dan said in our prepared remarks, this process is active, it's ongoing. We're focused upon it, but there is no set time frame. If there is something appropriate to announce to the marketplace at the appropriate time, Frank, we will of course do that. But there is no set timeline for this type of thing.

Okay, but just to be clear, if whatever is going on comes to a completion, you would notify us of that?

At the appropriate time we will notify you, yes, of the outcome of the process.

Okay, thank you.

Thanks, Frank.

Your next question is from Joanna Gajuk with Bank of America Merrill Lynch.

Good morning; thank you so much for taking the question.

In terms of how you talk about adjusted EBITDA guidance for 2017, when we look in your slide on page 18 you have this performance 2016 adjusted EBITDA excluding the impact of the divestitures and other transactions. So that implies looking then on the next page, on the outlook for 2017, it suggests EBITDA down 5%. Obviously, there is impact from the divestitures from adjusting it or using the pro forma adjusted EBITDA of 2016 which provided there. But then there was some favorable reserve adjustment in 2016, so we adjust for that and maybe we should think about adjusted EBITDA down 3.5% versus 5% or so just on the face of it. So is that the right way to think about it? I know you did not go into talking about your same-store NOI outlook for 2017 so that's what I'm trying to assess, in terms of the range of potential outcomes.

Sure; Joanna, as you correctly point out, on page 18 of our investor deck, we have given you a pro forma adjusted EBITDA excluding for the impact of a transaction that was either completed in 2016 or will be completed in 2017. And that gets to an adjusted EBITDA on a pro forma basis of $675.5 million. If you adjust for the $41.6 million of pre-Emeritus purchase accounting reserve adjustments, that will get you down to $630 million. I think what you will see is that the midpoint of our guidance would reflect improvement on a year-over-year basis. We can overcome the transaction impact, which is designed to have a positive cash flow, that's including the impact of CapEx but a negative adjusted EBITDA impact as well as a headwind of purchase accounting reserve favorability.

That's helpful, because on the call you said it was close to $42 million, these adjustments. I was using a lower number, so that's helpful. On that front, you said there was a favorable resolution in Q4 of this year of 2016 from these items related to legacy Emeritus; did you quantify it or did I miss it?

In Q4 it was $6 million or so in the fourth quarter in our senior housing business; much smaller in the fourth quarter as we had expected.

Okay, great.

This number of the $6 million, that will be included in the same-store NOI you talk about being down 3%?

Yes, on a Q4 to Q4 basis, it is included in the same-store year over year.

That's helpful.

And the last very quick question: I know you give the non-development contracts outlook for 2017. How much is private spend on the item that is not in debt, or the prevalent mark?

$45 million to $50 million, Joanna, on Program Maps.

Great, that's all for me. Thank you so much.

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

Good morning, guys.

Andy, as we think about 2017, it seems like it is sort of a reset year or rebasing year of sorts. How are you thinking about 2018? I know you talked about occupancy or new construction slowing down towards the end of this year, but how should we think about the pricing power? Your outlook for your ability to bring occupancy up if new construction really tapers off? And on the cost side, you talked about raising wages for some of your managers, but is that the new normal we should be thinking about? Or is that something you think can taper off as competition dies down or flattens out? I wanted to see more of your long-term view on the business beyond 2017.

Right, I'll start by saying, Brian, I think the value proposition that we as a Company and we as an industry provide to the seniors that we serve and their families is only going to grow and only going to become more apparent as the country ages and as the number of folks available to take care of that aging population goes down. We are very bullish about the long-term prospects for the Company, including a more favorable environment as we go into 2018. I think that will produce a rising occupancy market for Brookdale as we get out of this peak of this competitive storm. I definitely think you could expect occupancy growth in a more accelerated way beginning in 2018.

Also, going back to that value proposition I referred to earlier, I think that will allow us to continue to get good rate performance throughout 2018 and beyond. Again, I think the value proposition of what it is that we provide, which can't be replicated except at enormous cost in a single-family residence or apartment, I think the value proposition gets even clearer; and I think that will give us pricing power as we move forward.

My own perspective on the labor markets, and this is just one man's view, is that I think we're kind of at the apex in 2017 for our industry and our business; we are kind of at the apex of the increase. That's partly because, again as we indicated in our prepared remarks, we are adding some labor to our communities to assist us in reducing the turnover and increasing the retention in some of these key positions. We have done a pilot program with respect to our health and wellness directors for the past six months, which has been very successful; and that adds a little bit of short-term wage costs that, over the longer term, we think is the right thing to do and actually will help our overall economic performance.

That's a long way around of saying I think 2017, again, I'm not an economist, but I think the labor as we moved into 2018 and beyond, I don't think you'll see as much labor bump as we are seeing in 2017.

Got it.

Andy, [tend] to follow-up on the point of the value proposition. You alluded to your home health business as one area you were trying to grow. So, given multiples were seeing the market for home health assets and the growth rate that, that business is generating, as well as the valuation investors are giving you right now, which is primarily [pay for] real estate, what is the strategic value of keeping home health at this point, as you guys look at it from that perspective.

We think the home health business is, a, a growth business. We think the hospice business has very attractive growth opportunities. We think the ability to provide those services in a seamlessly coordinated way within our communities and where we have geographic concentration, out into the general communities at large, we think that's a big competitive differentiator for our business. We think it's actually going to become a growing differentiator as the industry better interfaces with the balance of the post-acute system as well as the health system generally.

We think it's a differentiator into our customers; but we also think it will be a differentiator to those other participants in the health care system who are all going to be looking for ways to get better quality outcomes for seniors as they age, at a lower cost. We think the senior living, coupled with home health and hospice program, that, that is a big differentiator for us that, frankly, we don't think other people can emulate, at least at scale.

Last question for me: we're hearing that the flu season is really acute right now and we are almost back to epidemic levels. We know that has an impact on your business. A few questions: number one, what are you seeing there on that front? And second, what is embedded in your guidance in terms of flu season impact? And how we should think about Q1 as it relates to that specific factor?

We, like the country itself, has experienced the flu jumping up and spiking beginning in December and this continued into January. Actually, last week continued that trend, so we have seen a rise in deaths in terms of turnover of our attrition. With respect to our residents, we've seen an elevated level of death at the end of last year and that has continued into January of this year. Our expectations for the flu were built into how we thought about occupancy that Cindy just described as we built our 2017 plans.

Thanks, Andy.

The next question comes from Ryan Halsted from Wells Fargo.

Good morning.

I just wanted to go back to the strategic review. Obviously, this was an avenue that the Board looked into in the past, so I would be curious to hear, what is different now that you are seeing in the marketplace? Or what is different now internally as far as how the Board is evaluating alternatives today?

Ryan, as Dan said, and I can reiterate on behalf of the Board and the Management team, we are all about assessing ways to increase and enhance shareholder value. There are lots of things that are different in the environment, the competition, et cetera, we just talked about, but what is driving us is what we think is important, which is, it is incumbent upon this Board and this Management team to constantly assess whether there is an attractive transaction or set of transactions we ought to execute on behalf of our shareholders. And that's what were doing. We are in the process of reviewing that. As we said, we are actively engaged in that process; there is no set time frame. We can't make any assurance that anything is going to come from it, but as we go through that process, if and when it's appropriate to update our shareholders, we will do so.

Okay, that's helpful.

You mentioned discussions with your lessors about potentially revisiting your lease agreements. Any color you can provide on that? Should we be thinking of a similar situation as 2016, and the transactions that took place in this year? In 2016, sorry.

Thanks for the question Ryan.

First, let me say, we have a good relationship with all of our lessors, all of our major lessors, and all of the big healthcare REITs. We and they are constantly assessing ways to modify our portfolio, our contractual arrangements with one another, for the good of both parties. It has to obviously work for Brookdale and it has to obviously work for each of those REITs, each one of whom have to assess the opportunities before them in light of their own individual circumstances. So we engage with them quite consistently to see if there are things we can do to improve our leverage levels and our cash flow. We have to do that in a way that works for them, so both sides of the equation we search for opportunities that create mutual benefit. And we're going to continue to do that with all of them.

I can't give you a foreshadowing for what that might portend, Ryan, because it depends on each particular negotiation. All I can say is there is receptivity on behalf of all of our landlords to work on things that work for them and work for us as well.

That's helpful.

Maybe on the CapEx outlook, I just wanted to get a sense of how you feel about the long-term step-down goals you guys of outlined in the past? How do you feel about that 1,600 to 1,800 per unit goal I think you've laid out last year?

We are still comfortable at the 1,800 level for 2018.

Okay; and just last one on the call: Cindy, any sort of aspirational goals with additional corporate overhead savings for 2017?

None that I'm going to commit to publicly.

Thanks for taking my questions.

We have no other questions in queue at this time. I would like to turn the call back over to Andy.

Thank you all for joining us this morning. We appreciate your time and we are available to follow up. We know we've given you a lot of new information; we hope it's helpful and we look forward to your feedback, and we thank you again for participating.

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