Brookdale Senior Living Inc (BKD) 2017 Q2 法說會逐字稿

Good morning. My name is Jennifer, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Second Quarter 2017 Earnings Conference Call. (Operator Instructions)

And I would like to turn the conference over to Mr. Ross Roadman. Sir, you may begin.

Thank you, Jennifer, and good morning, everyone. I'd like to welcome all of you to the Second Quarter 2017 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 of the Board.

I'd 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 security 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 of the 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 file with the SEC from time to time, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. When considering forward-looking statements, you should keep in mind those factors and the other risks factors and cautionary statements in such SEC filings. I direct you to the Brookdale Senior Living earnings release for the full safe harbor statement.

Also, please note that during this call, we will present both GAAP and non-GAAP financial measures. I direct you to our earnings release and our supplemental information, which may be found on the Investor Relations page at 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'd like to turn the call over to Andy. Andy?

Thanks, Ross. Good morning, and thank you for joining us. As always, we appreciate your interest in Brookdale.

I will make a few comments about the second quarter and discuss our outlook for the remainder of the year. But before I do that, I'd like to ask Dan to make a few comments. Dan?

Thank you, Andy, and good morning to everyone.

The second quarter reflected the challenges the industry is currently facing as the construction pipeline continues to bring new competition to the market. We are focused on defending our market share, while at the same time, working hard on initiatives that will best position the company for the future. I'd like to take this opportunity to welcome Marc Bromley to our board. I'm pleased that we were able to bring on a new highly qualified Independent Director to replace Mark

Parrell.

I'd now like to comment on our ongoing process to explore options and alternatives available to us to create and enhance shareholder value. We understand that there have been a number of rumors regarding Brookdale in the market and that there has also been a fair amount of speculation in the press regarding our review process, including as recently as yesterday. We hope you understand that we simply are not able to comment on market rumors and speculations. That being said, let me assure you that the review process continues to be active and ongoing. Our board, in conjunction with management and our financial and legal advisors, remains hard at work on the ongoing review. As previously indicated, there can be no assurance that this review will result in any specific action or transaction. I wanted to reiterate that no decision is made to enter into any transaction at this time and want to confirm that Brookdale will only enter into a transaction or transactions if it can do so under terms that our board concludes are in the best interest of the company and its shareholders. While we are not in a position to answer any questions or say any more than we've already said about this subject at this time, rest assured that we remain committed to transparency and will provide update if we're able to do so.

Andy, I'll turn it back to you

Thank you, Dan.

Let me turn to my comments about our second quarter performance. As we expected, industry headwinds, particularly from new competition, were challenging in the second quarter. Our operating performance was therefore mixed. Our rate growth and core expense growth were generally consistent with our expectations. But occupancy was softer due to both new competition and elevated move-outs during the first 2 months of the quarter. Our GAAP rate was up approximately 100 basis points over the second quarter of 2016. Year-to-date, death rates are up 9% over last year, reflecting the effect of this year's flu season. This difference represents approximately 60 basis points of occupancy. As the quarter progressed, we did show the typical seasonal improvement in move-ins. This year, while we saw move-in improvement in May and June, we saw occupancy start to build in July.

We continue to make progress on our portfolio optimization initiatives. During the quarter, we sold 2 owned communities and terminated the leases on 7 communities. We have 14 communities classified as assets held for sale and have agreements to terminate leases on 26 additional communities by the end of this year.

Finally, as Cindy will discuss in detail, we are advancing our plan to refinance the majority of our 2018 debt maturities by the end of this year. We have closed several of these refinancings and are actively engaged on the balance of these refinancing transactions. As a result, we are building liquidity in the form of cash and short-term securities, a portion of which will be used to repay the convertible debt in 2018 in cash.

Looking at the balance of 2017 and into the first part of 2018, we continue to expect that the competitive landscape for the industry will be difficult. The recent second quarter NIC data evidenced this with a large number of new openings and a corresponding negative impact on industry occupancy. Nevertheless, there were some positive signs in the NIC data as well. Absorption continues to trend up, reaching almost 3% of inventory, evidencing increased demand due to demographics, increased awareness and increased penetration rates. New construction starts remain elevated but continued to ebb down as financing sources pull back, construction costs increase and markets become saturated. Increasing demand and the reduction in new construction point to a more normalized operating environment in the back half of 2018 and beyond.

We saw similar trends in our markets. We had a large number of new competitors open with 68 new same product competitors opening within a 20-minute drive of a Brookdale community. The better news is that we saw only 41 new projects get started this quarter that will open sometime in the future. That means that we have currently 285 competitive communities opening in the future, and that's down 27 from the first quarter. This means, we will have 364 of our communities facing future new same product competition within 20 minutes. This number has fallen from 464 in the third quarter of 2016.

Nevertheless, new openings will remain elevated as new communities exit the development pipeline. We are working diligently to be the most effectively as can be in the face of these near-term competitive pressures.

As I have described before, we are enhancing our revenue management processes and focusing on operating as efficiently as possible. And we are working to put the company in the best financial position with reduced leverage and increased liquidity. But we are also focused on the bigger picture, the longer term. Using our strengths such as our size, scale and operating systems, we are positioning Brookdale to be the leading provider for seniors to have the choice that best fits their needs. This means building out an array of lifestyle choices the customer see as attractive value propositions as we offer the most choices for high-quality care and quality of life. No one else offers the array of senior living services that we offer. And we have surrounded senior's housing with our Ancillary Services platform offering home health, outpatient therapy and hospice services.

I have talked before about our work on segmentation for our senior housing portfolio. That segmentation creates more differentiated choices to meet the differing needs and desires of our customers based on factors such as location, price, services, amenities and program. Our operating teams have assessed the entire portfolio and determined the proper market position for each of our communities. As part of the process, we have developed piloted, and on April 1, implemented network selling across many markets. Network selling leverages our SaaS by offering customers multiple choices that only Brookdale can offer.

In addition, we are working to improve how we market our portfolio based upon our research into how customers and their families make the decision for seniors housing. More customers turn to the Internet for information to assist in their decision-making process. In fact, 61% of prospects start their search online. And at the same time, a vast majority of them do not have a very good understanding of the costs and the benefits of what they are shopping for. We have bolstered how we use digital media in our marketing to attract prospects, to educate the consumer and to encourage interaction with our senior living advisors and care teams. Importantly, our search engine optimization in terms of ranking and effectiveness for our industry is optimized to the highest level of performance.

To support our competitive position, we are continuing to make progress in how we price our services. We have now rolled out our data-driven pricing system to 174 independent living communities. These systems use multiple data points to predict and update the rate that will maximize revenue for each partner. Over time, we believe this process change will produce meaningful revenue improvement. And we are the only provider in the senior living industry with an integrated robust Ancillary Services platform.

While other companies have third-party providers coming into their communities, those providers don't have the opportunity to build out the interaction with their customers as a single provider. This allows us to focus on expanding services that enrich the lives of our customers and positions Brookdale like no other operator. As the health care landscape continues to evolve, we see having a robust Ancillary Services platform as important in building relationships within the health care community.

Finally, I would be remiss if I didn't mention the focus we have on the people side of our business. We continue to increase the sophistication with which we approach recruitment, compensation, development, roles and responsibilities as well as training. We have a strong team of passionate associates serving our customers, and we are focused on enhancing their experience. We are pleased that our second quarter 2017 key community leadership turnover improved by 15% when compared with the second quarter of 2016.

I'll close by saying that our expectations for 2017 are unchanged. We are focused on improving our adjusted EBITDA and adjusted free cash flow. We have made good progress on strengthening the financial position of the company. And while we continue to expect that 2017 will be a difficult operating environment, we remain confident in our plans.

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

Thank you, Andy, and thanks, everyone, for joining us today.

I will discuss 3 topics: our second quarter 2017 results, our refinancing plans for our near-term maturities and our 2017 outlook. Before we get into the details of the quarter, let me set the stage. In addition to our business performance, there are 2 large items that impacted our financial results: our portfolio optimization initiative and a large favorable reserve adjustments that we booked last year. And putting our results into context is important for you to understand these items. First, our portfolio optimization initiative included the disposition of leased and owned communities that we chose to dispose of for strategic or economic reasons. As we expected, our portfolio optimization initiative, where we have disposed of 130 communities since the beginning of the second quarter of 2016, dramatically impacted our year-over-year results as we sacrificed resident fee revenue and adjusted EBITDA to improve our cash flow.

On a year-over-year basis, our portfolio optimization initiative accounted for the entire decline in our Q2 '17 resident fee revenue. We generated $109.9 million less in resident fee revenue as a result of the disposition of the 130 communities since the beginning of the second quarter of 2016. Otherwise, higher rates fully offset lower occupancy. The portfolio optimization initiative also significantly reduced adjusted EBITDA. We generated $17.4 million less adjusted EBITDA as a result of the disposition of the 130 communities since the beginning of the second quarter of 2016. The portfolio optimization impact is inclusive of $3.1 million of increased management fees. Taking into account phased or reduced costs, including capital expenditures and interest expense, adjusted free cash flow of the company was positively impacted by this disposition activity in the second quarter. We generated $4.9 million more in adjusted free cash flow, including management fees as a result of the disposition of 130 communities since the beginning of the second quarter 2016.

The second large item that impacted our results on a year-over-year basis was the large, favorable general and professional liability insurance reserve adjustments that we booked last year. The year-over-year decrease in favorable insurance reserve adjustments of $9 million also contributed to the adjusted EBITDA decline. As a reminder, the second quarter of 2016 included a benefit from the reversal of reserves established with the Emeritus merger based on the expected cost of historical claims.

Let's turn now to our second quarter business performance. For our senior housing communities, the best way to think about our business is using our same-store results. Our same-store community senior housing revenue was consistent with the second quarter of 2016, as the decline in occupancy was offset by RevPOR growth. We're always trying to strike the right balance between occupancy and rate to react to the competitive dynamics in our local market.

Our second quarter 2017 same community senior housing operating expenses increased 5.7% and our same community operating income decreased by 9.2% compared to the prior year. Like last quarter, we continue to see labor wage increases, which are partially offsetting our improved productivity. For example, while our Q2 2017 average wage increased 4.2% on a year-over-year basis, we experienced a 3.5% year-over-year increase in salaries and wages. Including benefits like our medical plan expenses and workers' compensation, we experienced a 4.6% growth in total compensation. This was modestly better than our planned increase of 5.5% to 6%. Again, as we mentioned when we provided our guidance for the year, we benefited from favorable GL/PL reserve adjustments last year, and we did not expect these to recur at this year. Our same community portfolio insurance expense increased by $8.5 million on a year-over-year basis, primarily due to the fact that we did not have the benefit of the favorable reserve adjustments that were made in the prior year period.

There are 2 other smaller factors that affected our same community operating income decline. A $2 million termination payment to a vendor and higher workers' compensation cost of $2.8 million. If you exclude the impact of portfolio insurance expense increase primarily related to the GL/PL reserve adjustments, the workers' compensation increases and the vendor termination payments, our same community operating income declined 4.5% on a year-over-year basis. Our prior period purchase accounting insurance reserve adjustments will also create tough comparisons in the third and fourth quarters. Needless to say, our results reflect that competition is intense and has been for the last year. We are seeing a lot of competitive openings in our markets and it's having an impact. We have also seen increased flu-related death rates, which has been noted by our competitors across the industry these factors of pressured occupancy, though our performance is generally in line with the industry.

Our expense performance is a bit worse, given the large favorable reserve adjustments last year, as well as having pushed hard on compensation for a few years. The labor market is tight, and we are sometimes challenged by recruiting and retaining the necessary talent while our total compensation costs are increasing.

Moving to our Ancillary Services segment. We earned $13.1 million of segment operating income during the second quarter of 2017, a $5.9 million decline from the prior year period. The decrease in operating income was the result of a decrease in home health service volume and lower Medicare reimbursement rates that started on January 1. We are excited to see our continued growth in hospice, which outperformed last year. And we had good cost control, though not enough to offset the home health rate and volume decrease.

Our general and administrative expense performance is good with a 26% year-over-year reduction. G&A expense of $67.1 million during the quarter included $600,000 of transaction-related and strategic project costs and $7.2 million of noncash stock compensation expense. We generated adjusted EBITDA, excluding transaction and strategic project costs of $164.2 million and generated adjusted free cash flow of $40 million during the second quarter of 2017. Our proportionate share of adjusted free cash flow of unconsolidated ventures was $7.9 million, a $1.9 million year-over-year decline. Increased interest expense was partially offset by cash flow from the Blackstone joint venture, which we entered into late in the first quarter of this year.

During the second quarter, our joint ventures, as a whole, has strong rate growth, occupancy declines in line with the industry, expenses in line with budget and operating income a little below the prior year. We continued our portfolio optimization activity during the second quarter. We began the second quarter of 2017 with 16 communities or 1,508 units classified as assets held for sale. During the second quarter of 2017, we completed the disposition of 2 of these communities or 236 units. As of June 30, 2017, we had 14 communities or 1,272 units that were classified as assets held for sale. They had a carrying value of $91 million and $60.5 million of associated mortgage debt. This is classified as current on our balance sheet.

Additionally, we terminate the leases on 7 communities or 710 units during the quarter. We continue to make good progress on our goal of strengthening our balance sheet and our liquidity. First, we are progressing our plan to refinance our 2018 debt maturities. Remember, the goals of our refinancing plans are to increase liquidity and begin addressing our 2018 maturities, including our convertible bonds, while balancing prepayment penalties and potential increased interest costs with lower risks. This includes refinancing mortgage debt on under levered assets to extend maturities and to build liquidity in the form of cash and short-term securities, a portion of which will be used to repay the converts in 2018 in cash.

During the quarter, we obtained a $54.7 million supplemental loan secured by first mortgages on 7 communities. The proceeds from this loan were utilized to fund our liquidity needs. Subsequent to the end of the quarter, we completed the refinancing of 2 existing loan portfolios secured by first mortgages on 22 communities. The $221.3 million of proceeds from the refinancing were utilized to pay off $188.1 million of mortgage debt, which was scheduled to mature in April 2018 and $13.6 million of mortgage debt that was due in January of 2021. Other refinancing transactions are in process, and we'll announce them as they are completed. Our total liquidity continues to increase. It was $546 million on June 30, 2017 compared to $306.3 million on June 30, 2016. Compared to the prior quarter, our liquidity increased by $119.3 million. The primary driver for this include $54.7 million of cash proceeds from a supplemental loan obtained during the period and $40 million of adjusted free cash flow in the second quarter of 2017.

Let's move to our 2017 guidance. For full year 2017, we reaffirm our guidance ranges. Based on results year-to-date, we are reiterating our full year 2017 guidance for adjusted EBITDA, excluding transaction and strategic private costs to be in the range of $670 million to $710 million.

Turning to adjusted free cash flow. Our previously issued guidance for full year 2017 adjusted free cash flow of $140 million to $170 million excluded any impacts of subsequent refinancing and debt modification costs associated with our refinancing plan as well as excluding costs associated with our ongoing evaluation of options and alternatives to create and enhance shareholder value. And that range remains appropriate guidance. Based on such costs incurred today and projected for the remainder of 2017, the company expects those costs to be approximately $30 million. We believe the benefit of accelerating our refinancing plan to lower risk by increasing liquidity and beginning to address our 2018 maturities balance outweighs the debt modification costs and increased interest costs. Accelerating our refinancing plan creates increased interest costs because we build liquidity before we can retire the converts of cash. Accordingly, we expect adjusted free cash flow for 2017 will be in the range of $110 million to $140 million, including such costs. The actual amount of such costs associated with our ongoing evaluation of options and alternatives to create and enhance shareholder value, and our refinancing costs are subject to a number of assumptions and may differ significantly from our current projections. We also reiterate our full year 2017 guidance for the company's proportionate share of adjusted free cash flow of unconsolidated ventures in the range of $25 million to $35 million. The forward-showing guidance excludes any potential impact of future acquisitions, dispositions and portfolio optimization activities, other than the pending portfolio optimization transactions described earlier.

So to summarize, with our first half performance and our expectations for the remainder of the year, we are still comfortable with our full year guidance ranges. We expect that 2017 would be a difficult competitive environment, especially for our top line. Importantly, we are focused on defending our position in 2017 and putting the company in a better position for 2018. We continue to be focused on the fundamental, which will improve our operational results and strengthen our financial position. Thank you for your attention on this.

I'd like to now turn the call back to Andy. Andy?

Thanks, Cindy.

Our management team is focused to improve our operating performance. We are focused on overcoming the challenges of increased supply and wage pressures in 2017 and believe that we will be well positioned to return to growth in 2018 and beyond.

We're happy to take your questions now.

(Operator Instructions) Our first question comes from the line of Frank Morgan with RBC Capital Markets.

Cindy, if you could touch on that, you mentioned the confidence in the guidance for the rest of the year. I'm just curious, could you give us a little bit more color? I think you mentioned that occupancies were actually up in the month of July. But maybe, tell us kind of where -- #1, where that number is? And kind of where you see it having to play out to get the confidence on the top line for the balance of the year? And then a secondary question would just be for everyone is on the -- you mentioned that the number of facilities coming online and new openings out there in the marketplace. What are you specifically doing in those markets? I know you just mentioned defending your position, but if you could give us a little bit more color on specifically what you're doing, and maybe, does this new pricing model thing that you've rolled out, does that somehow play into that process? I will stop there.

Frank, thank you so much for your question. It's really a good question. If you think about our results for the year, normally, we have our seasonal occupancy start to build in May or June. It was a bit later for us this year and started to build in July. Now we don't give monthly occupancy. But what I can tell you is that our forecast is based on a normal seasonal pattern for the remainder of the year. So what we would expect to see is occupancy build in the third quarter. And then normally, for us, there is not as much occupancy build in the fourth quarter. It's generally in the neighborhood of flat. So that's what we think about occupancy just generally from a normal seasonal pattern. We'll focused very hard on expense controls. I will highlight that our CapEx will have a pretty significant impact on the pacing of our cash flows as we progress throughout the year. In the first half of the year, you'll note that we spent less than half of our annual CapEx guidance. So we're not changing our nondevelopment CapEx guidance, but what that will mean is that we'll need to accelerate our CapEx spend in Q3 and Q4. While that won't change adjusted EBITDA, it will have an impact on our adjusted free cash flow. And then as I mentioned, we've got the costs associated with our debt refinancing. Those will impact our adjusted free cash flow in Q3 and Q4. So that's the big picture. I'll turn it back to Andy now so he could talk about the competitive response.

Yes. Frank, thanks for the question. When we face new competition in markets, there are number of different techniques that we use to combat that new competition. I'll mention just a few. First and most importantly, we try to protect our people. The folks that are in our communities, that are doing the work on the ground. We try to make sure that we retain those folks. And that means, we look at the compensation, we look at a lot of different factors to make sure that we protect our people. In the face of new competition, where we very often adjust our capital expenditure programs to focus more CapEx on those buildings that need to be refreshed as the new competitor's opening in the marketplace. We will also adjust the flow of our marketing dollars as appropriate to put more marketing dollars to work, where there is heightened new competition. And so far as our new pricing algorithm program works. That's with respect to our independent living communities right now. We will be rolling that program out or at least piloting in assisted living, in memory care in 2018. But it's helpful because it -- and in a data driven way, adjust to what's going on in the marketplace so that we can deal with new competition more quickly and more appropriately. With respect to pricing generally, now aside from the data-driven algorithmic tool, we also adjust our market rates in the assisted living and memory care side of the platform based upon whatever is going on in these local markets that have new competitors opening.

Got you. One final one, then I'll hop. I think you'd mentioned a number of divestitures you got teed up here. Any thought looking beyond this group, any incremental opportunities that you think you'll see there, and maybe any -- a kind of sense of how many we'll be talking about?

Yes. Frank, we're not in a position to talk about how many or to get into that level of detail. But it's fair to say that we have ongoing dialogue with all of our REIT partners, our landlords about ways to search for things that are good for them and good for us. Those can include disposition activity or lease terminations. And so we have an active and ongoing dialogue around that type of activity. And then, of course, with respect to our owned assets, we are constantly looking at what's the right way to maximize the platform. But I would say that the primary additional disposition activity we're at or asset optimization activity that we're doing is around leased assets, as we speak.

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

So Cindy, on the $30 million that you highlighted as impact to adjusted free cash flow. Can you just break it in terms of those 2 target markets that you outlined around debt modification and increased costs versus the other costs?

Sure, Joanna. Thank you so much for your question. So the $30 million that we incorporated into our guidance is really roughly $20 million or so debt modification cost that includes the increased interest costs from the fact that we have to borrow money to increase our liquidity before we're able to retire our converts. And the remaining $10 million is our strategic review cost as well as any additional portfolio optimization cost that we see for the rest of the year.

So that's really pretty much saying that there's going to be, I guess, increased interest expense because you will carry that to 2, I guess, pieces. But then come June 2018 that's when you will buyback your convertible notes, right? So we should expect then the interest expense to come down somewhat for that.

That's correct. Our converts expire and -- or they mature in June of 2018. Just a reminder, they have an interest rate, a coupon rate of 2.75%. But the interest rate that goes through our financial statement is a little higher than that because of the impact of...

Would you be able to quantify that? What's the interest expense impact effective on the P&L from the...

It's in the neighborhood of 7%, Joanna.

7%, right. That what's I remember that it's much higher than the coupon. And then if I can just squeeze one more on the CapEx. I will appreciate a commentary that the nondevelopment CapEx guidance is unchanged. Any comment between the different pieces in there in terms of how you're tracking on the corporate CapEx versus recurring? And also, outside of this nondevelopment CapEx, I guess the other piece is probably at Max, where it's only been trading up like $1 million per quarter. So any view around how much you're going to spend this year, and maybe going forward on that piece, outside of the nondevelopment CapEx?

Joanna, another good question. So our development CapEx, which is traditionally what we refer to as Program Max. We brought our guidance down on that by $10 million sort of in this quarter. And that's largely because we've been a little bit slower getting out of the gate with some of our REIT partners in terms of the getting their agreement to proceed with some of the projects that we think -- we still are firm believers in Program Max. We normally get double-digit returns on those projects. And so we're very anxious to do those because they help us respond to competition and position our markets very effectively in the community. As we think about the components of our CapEx, we're basically -- we'd underspent both our corporate CapEx as well as our community CapEx on a year-to-date basis. But we are still expecting to be within our original guidance ranges on the nondevelopment CapEx.

Great. But then in terms of this Program Max, so you're saying that there are some slowdown this year, but then next year, I guess that's when you might expect this $10 million to show up? Is that what you're trying to say?

So we would hope that we would increase our development CapEx next year. Again, we see it as a very good use of our proceeds. And so while we're saying $30 million to $40 million in 2017, I think in 2018, we would hope that number would be higher.

Your next question comes from the line of Chad Vanacore with Stifel.

So how labor costs trended so far. I think you had originally expected to see 5.5% to 6% growth in FWB, but I think you've been below that so far. So are you doing a better job of management? Or should we expect some modeling increases in second half?

It's Cindy again. Good question. So our labor cost as you stated, we did expect 5.5% to 6% for the year. Now what we saw in the second quarter was a 4.6% increase in total compensation cost for the quarter on a same-store basis. Now it's up from Q1 because we saw our normal merit increases that take place in sort of Q2. We haven't changed our guidance for the remainder of the year. And what I'll say is we are continuing to see pressure on our community leader position, particularly in competitive markets, when we are making market adjustments to make sure that we protect our existing people and recruiting when there is turnover. In addition, we're continuing to see wage pressures on the Coast and in the Midwest. But I will say is that we've been pleased with the productivity that we've had on our wages during 2017. While we've seen market wage increases, we've been more productive within our communities that's offset part of that increase, but still at 5.5% to 6% for the full year.

Okay. And just thinking about your home health business. The margins were depressed in Q2. Should we expect some recovery in the second half? Or this the run rate for the balance of the year?

We would expect some recovery in the second half of the year. There are a couple of things going on in that business. The Medicare rate reduction will affect us on a full year basis. But one of the things that did impact us is the competitive intrusion that we're overlapping. So if we are able to sort of build volume, we'll get better leverage on the business and see improving margin.

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

It's Jason Plagman on for Brian. Following up on Frank's earlier question, on -- specifically on the 2018 lease maturities. I believe majority of those have purchase options that are available to you. So just wondering how you're evaluating that optionality as you get closer to those renewals.

Yes. When -- as we -- generally speaking, as we approach the maturity of the lease, we're going to think about whether we want to remain with the asset or not. And that will be dependent, of course, upon the performance of the asset and our outlook for whatever markets those assets are in. Now where we have options to purchase, and again, we have 2 flavors, we have options to purchase the assets at fair market value or we have -- in some cases, we have the options to purchase at a bargain purchase price. Well, obviously, if we have a bargain purchase price, we would be inclined, again as a general rule, to exercise that option and own the asset and control both sides of the equation. Where we have a fair market value purchase option, there, of course, we would be acquiring the option at its then fair market value. We would, generally speaking, also be inclined to exercise those fair market value purchase options because given today's rate environment and the availability of financing, there's generally speaking a financial arbitrage between what the lease rate is and what we could finance the ownership of the asset at. Those are general guidelines, Jason.

Okay. And any -- as far as the 42 I think that are purchase options that are coming up next year. How many are -- have bargain purchase options?

We have articulated that in our -- or we've given you the detail in our supplement -- or I'm sorry, in the investor deck on that.

But we don't break out between fair market value and bargain purchase options. My recollection is more of them are fair market value in 2017, 2018 than bargain purchase.

Okay. That's helpful. And then I appreciate the stats around the key employee turnovers on the year-over-year basis. Any color you can provide on a shorter-term basis? Trends you're seeing from Q1 to Q2 or on a shorter-term basis on competition for those key employees?

Well, I'd say the competition for many of our key employees is intense. People like to hire from Brookdale. That having been said, again as I mentioned, our quarter-over-quarter turnover improved about 15%. And it was roughly the same in the first quarter. So again, we've had pretty good experience for the first half of 2017.

We also have a follow-up question from Joanna Gajuk with Bank of America.

So yes, I was just thinking about the ancillary businesses. I guess there's been this pressure on the home health side. And there has been this proposal for home health group, model proposed for 2019. Obviously, the industries are arguing there's is going to a lot of changes between now and when that eventually get implemented. But nevertheless, does this proposal change in any way your view around home health business keeping it and running it, and just given that you've had -- you're now already having a pressure there both on volumes and rates?

Yes, I'd know -- like the balance of the home health industry, we expect there to be significant dialogue with CMS before that rule is finalized. It also seems to me, at least, to be countered to where public policy is heading, and seems to be -- meaning that public policy is generally searching for higher-quality outcomes, but at lower costs settings, which I think home health fits into that. So I expect that the final rule will be different than what has been proposed. And I think we're in accord with the balance of the industry in saying that. And our long-term view of the Ancillary Services platform is unchanged by virtue of the proposal that CMS has just issued.

There is one thing that I'd like to add to that, Joanna. If you look at the agencies, the guidance provided flat rates for urban providers with the cut for our overall providers, all of our agencies with the exception of one, are urban providers. And so that's an important consideration.

Right. And then but on the front, I would expect that I guess you don't have what they will call the admission from institutional setting, but instead all your admissions are from the community, because I guess it's viewed as the -- their resident has been at home already, unless I guess, a senior resident is coming. But then on the other side, if you can provide some color in terms of your mix between therapy and nursing visits?

Okay. I hope I understood your question correctly. If you were asking what is the mix? The average mix between therapy and nursing for an average whole day home health episode?

Exactly.

Okay. We're going to have a pretty half proportion of therapy under our current case mix, given the nature of our customers in our home health patients, we're going to have a higher percentage of therapy than just skilled nursing.

Would you be willing to share what the average like your, I guess, how's that in particular data is it close to say, 55% of their episodes have therapy component? I guess the more helpful way to say it from point of our -- in terms of the percentage of visits. So I don't know if there is anything you can provide there.

Joanna, we can follow up on that. We have not normally broken that out. And it's going to be different between our residents that are inside of our walls who were getting home health services as compared to those that are out in the general community. But if you'd like to follow up, we can certainly do that.

We have no further questions in queue at this time. And I would like to turn the call back over to our presenters.

Thank you all for joining us this morning. We'll be around today if you have follow-up questions. And we appreciate again your interest in Brookdale. Thank you.

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