Brookdale Senior Living Inc (BKDT) 2012 Q1 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living first-quarter 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 now like to turn the conference over to Mr. Ross Roadman, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you Kimberly. Good morning everyone. I'd like to welcome you all to the first-quarter 2012 earnings call for Brookdale Senior Living. Joining us today are Bill Sheriff, our Chief Executive Officer, Mark Ohlendorf, our Co-president and Chief Financial Officer, and Andy Smith, our Executive Vice President and General Counsel.

This call is being recorded. A replay will be available through May 10 and the details on how to access that replay are in the earnings release. This call is also available via webcast on our website, www.brookdaleliving.com, for three months following the call.

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

With that, I'd like to turn the call over to Bill Sheriff. Bill?

Good morning and welcome to our first quarter earnings call. The Company performed well in the first quarter. While the macro environment for us was marked by mild weather and mild flu season, the economy remained pretty even and we did see the enactment of government reimbursement changes, though the financial impact was as we had anticipated.

First, looking at occupancy. We increased quarter average occupancy by 60 basis points for the consolidated portfolio over the prior year. Significantly, our sequential average occupancy was flat with last quarter's 87.8%. During the first quarter, our attrition rate did tick up as historically happens, but we produced higher move-insurance to offset the losses. While the number of leads actually held pretty steady with 2011, we were able to produce a better inquiry to move-in close ratio than we've seen in the past couple of year -- first quarters. This was fairly uniform across all of our segments with most holding steady from the prior quarter.

We continue to be focused on our sales execution. We talked previously about the impact of technology of the leads part of our business. In 2011, we saw a 72% in leads coming through the internet, either through our website or others that carry our information such that it became almost half of our inquiry base. The conventional wisdom for internet inquiries is that those who have speed and persistence win the race. We feel we continue to lead with our efforts with technology, whether it is website design, internet optimization, social media usage. We even have apps that can be downloaded on iPhones and Android platforms. We are working hard and continuing to innovate how we build our leads and execute closing them.

Looking at pricing, the pricing environment remained pretty consistent for the last several quarters. It is still competitive in a fair number of our markets and so increases in the prepaids remain muted, while we did raise [in placements] on all of our freestanding assisted living communities in the first quarter at a level that approximately our expense increases. The revenue per unit increases in the quarter were in line with our expectations.

The first quarter independent living entry fee sales were good given the quarter is typically the lowest of the year. We produced $15 million of gross entrance fee proceeds. Our refunds were again higher than normal, but we still produced almost $7 million of net entry fee cash flow. With the success we have had with Freedom Point at The Villages, the CCRC we opened in Q4 of 2009, we are now past the need to separately report the first generation sales and refunds. Freedom Point restabilization, total occupancy over 90% for the first quarter, up from 76% a year ago. We have had 240 sales in a community of 240 IL units, including a few second-generation sales.

Our Ancillary services remained a vital part of the incremental cash flow we produced from providing services to our residents, and more important, to our overall product strategies. We have successfully accelerated our plans to roll out ancillary services to the Horizon Bay Communities. We now have generated revenue at communities representing 5,000 formerly Horizon Bay Units for home health and over 4,000 units for outpatient therapy. This gets us to approximately 50% of our expected coverage of the Horizon Bay units with one of our services. Not only was this footprint expansion quite an accomplishment, but the total economic impact of all of these locations was close to break even. It will take several quarters for us to mature the results of these locations.

This quarter we acquired two more home health agencies in difficult to acquire CON states. In our hospice initiative, while never going to approach the size of our other ancillary services, did produce almost $1 million in revenue this quarter and was slightly above breakeven from an NOI perspective.

All in all, we produced approximately $101 million of EBITDA and approximately $59 million of CFFO in the quarter, excluding the integration and transaction related costs largely related to Horizon Bay.

I'll now turn the call over to Mark to provide more details on the quarter.

Thanks Bill. Our reported CFFO in the first quarter was $0.45 per share. Excluding $3.9 million of integration and transaction related costs, our CFFO was $58.5 million or $0.48 a share. The impact of the Medicare changes on the first quarter results were a reduction in revenue of $7.2 million in skilled nursing and home health and a $1.6 million increase in skilled nursing therapy cost. In total, the $8.8 million impact was equal to approximately $0.07 per share of CFFO.

First quarter resident revenue increased 5.1% versus last year driven by a 60 basis point increase in occupancy, a 1.6% increase in revenue per unit, and a 2.7% increase in operated units. The revenue per unit increases in the quarter were in line with our own expectations. Our full year expectations for revenue per unit growth remain that revenue per unit in senior housing, in other words excluding ancillary services, will increase by 1% to 1.5%, consisting of a 2% to 2.5% average increase less an approximately 1% impact of the RUGS for reimbursement change.

For same-store communities, we produced a 1.1% increase in revenue per unit excluding the ancillary services. When we exclude the RUGS for reimbursement change, the revenue per unit growth was approximately 2%. Ancillary services added another 40 basis points to revenue per unit growth to make our total same-store revenue per unit growth 1.5%. This was a good achievement given the headwinds of reimbursement reduction in home health and should increase over the year as we roll out ancillary services to more of the Horizon Bay communities.

Comparing same community results for the quarter, including ancillary services, same total community revenue increased 2.1% with average revenue per unit up 1.5% and occupancy up 50 basis points. Expenses increased 4.4%. NOI decreased by 2.4% though adjusting for the Medicare skilled nursing and home health reimbursement changes, it would have been an increase in NOI of 1.8%.

Breaking the same community data down further and now excluding ancillary services, our senior housing revenue grew by 1.7% with revenue per unit increasing by 1.1%. Excluding ancillary services, senior housing expenses grew by 2.9%. This is largely in line with our expectations and includes the impact of the extra leap year day as well as the added therapy expense in skilled nursing from the elimination of group therapy, somewhat offset by modestly lower utility costs.

Same community senior housing Facility Operating Income, or FOI, decreased by 50 basis points in the quarter. Of course, the reduction in Medicare skilled nursing reimbursement rates impacted the first quarter for revenue in FOI growth. Adjusting the Medicare rate reduction impact out of the calculations, senior housing revenue grew by 2.5%, average rate grew by 1.9%, and FOI would have increased by 2.7%.

General and administrative expense, excluding non-cash stock-based comp and integration and transaction related costs, was approximately $34.6 million, which was 4.6% as a percentage of total revenue under management, compared to $29 million for the first quarter of 2011. Much of the increase in absolute dollars is of course related to the addition of the Horizon Bay communities.

Turning to the balance sheet, we continue to be in a strong position. We do not have any debt maturities until 2013 except for normal scheduled principal amortization. Our 2013 maturities without extension rights total around $300 million, or roughly an amount that we will refinance annually if we achieve eight-year level laddering of our roughly $2.5 billion of total debt.

During the quarter, we refinanced a $64 million mortgage loan that was due in 2013. We ended the quarter with $42 million of unrestricted cash. At quarter end, we had $85 million of outstanding borrowings on our line of credit. As a result, at the end of the quarter we had cash and available borrowings under our line of over $150 million.

Looking at CapEx, our spending in Q1 for maintenance CapEx, which we include in our CFFO calculation, was $8.1 million. Our corporate CapEx totaled $6.7 million in the first quarter. $3.7 million of this related to home health acquisitions. The majority of the balance was spent on systems development. Particularly, we continue to progress well on our electronic medical records initiative. Given the breadth of our services, we've gone with a best of breed approach in our EMR system selections. Our timetable is to be fully deployed with EMR in home health by August with outpatient therapy, skilled nursing, and assisted living achieving initial functionality by the end of 2013.

We expect to increase productivity, improve clinical items, better document our regulatory compliance, reduce our accounts receivable, and enhance our risk management with this EMR implementation. We continue to prioritize capital deployment in those areas with the highest returns, with expansions, redevelopment, and repositionings at the top of the list.

We've completed eight Program Max projects during the last nine months, which encompassed almost 1,800 units and added 159 new units. We currently have 17 projects ongoing, which encompasses approximately 1,700 units and will add 400 new units over roughly the next year. Another 19 projects are in the process of being readied for approval, touching another 4,000 existing units and 800 additional units.

During the first quarter, we spent $13 million of cash equity and continue to expand to invest in the range of $60 million to $70 million this year on Program Max activities. We've also completed 25 EBITDA enhancing projects in the last 12 months, encompassing over 2,500 units. As a reminder, these are less expansive projects than Program Max, but enhance the communities such that we expect higher financial performance through better occupancy and rate growth.

During the quarter, we made no purchases under the share repurchase program and ended the quarter with $82 million of authorized capacity remaining.

I'll turn the call back to Bill for closing comments.

Thanks, Mark. While the first quarter is not the best quarter to look at as a benchmark, we do see reasons to be encouraged about the general environment. Maintaining occupancy, better entry fee sales, consistent pricing all hint that perhaps the first quarter results were a manifestation of more than better weather or a mild flu season. For 2012, we will continue to expect that with a slow, steady growing economy we will see an increase in occupancy, a steady environment for rate growth, ancillary contribution continuing to show good growth as we expand our footprint. Revenue growth of 5.5% to 6% from occupancy growth, same community per unit growth in the range of 1% to 1.5%, Horizon Bay and incremental economic from our reinvestment program, expense growth in the range of 5.5% to 6%, including the new Horizon Bay communities, and the impact of increased therapy costs in our skilled nursing. Routine maintenance CapEx of $40 million to $45 million and approximately $35 million of net entry fee cash flow.

We are focused on growing occupancy, partly from slight improvement in the environment, partly from market share, partly from reinvestment in our portfolio, and partly from our innovative work. We will be diligent about market rates but don't really expect to see much pricing acceleration this year. Of course, the Medicare rate reductions will be a drag on total revenue growth, although it does look like the skilled world will not see another Draconian decrease later this year.

We expect that the relationship between senior housing unit revenue growth and unit expense growth will remain similar to the last several years where they both were running at similar rates, resulting in relatively stable markets. For the longer term, it is still hard not to be bullish. Underlying the relatively solid performance of the industry over the last five years has been the reality of aging, that people are living longer and with that increased longevity comes an increase in all functional limitations where seniors need more assistance. Also, as recent studies have shown, seniors are showing not only an increased awareness of senior living, but more are expressing that they see it as a desirable option.

Increasing product familiarity and acceptance together with increasing acuity certainly bodes well that senior living should achieve a higher penetration, all at the same time of limited new supply. We are focused on creating the optimal aging experience for seniors and their families, and are committed to becoming the most widely recognized and trusted senior living brand.

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

(Operator Instructions) Your first question comes from the line of Brian Sekino of Barclays.

Good morning. Just a question on, in the past you said you had used some price incentives to maintain occupancy. Can you give us some color on your use of pricing to maintain the flat sequential occupancy in the quarter?

Brian, I'd say that the mix of incentives this quarter is very similar to what we've seen for the last couple of quarters.

Okay, and maybe if you can remind us when we'll kind of anniversary -- you implementing some of those incentives?

Well, as you may recall, we had gotten a bit more rigid with our pricing structure in the early part of last year, probably through April, perhaps into May. And then at that point we went back to what we had been using from a pricing standpoint through 2010, really. That was probably in about May of last year. So sometime in the second quarter would be the anniversary of our resumption of that pricing approach.

Okay, and then just one on the Program Max. I know you've mentioned in the past some of the constraints that could keep you from ramping up the expansion units. Can you give us an update on whether there's been any availability of financing to help you kind of go back to that 1,000 per year expansion goal?

A couple of points on that. One, we have made some good progress in the first quarter and through April on reaching some understandings with particularly the REITs to move things along on Program Max. The second thing I think I would note is as we look at the project opportunities, I think we're finding larger early opportunities related to repositioning the retirement centers. The economic returns will still be very solid for us, but we likely won't generate quite as many incremental new units in the process as it looks like right now. We certainly will over time, but I think the early projects are going to be more focused in the retirement centers.

Okay. Thanks, guys.

Your next question comes from the line of Ryan Daniels of William Blair.

Good morning, it's Kristina for Ryan today. On the expense front, anything of note for the quarter? For example, were utility expenses lower than usual given the mild winter season and record low natural gas prices?

Really two things on expenses in the quarter. One, the expenses were up roughly 1% if you look at the dollars year-to-year because this year is a leap year. Right, one more day this year than there was last year. Some of that was offset by the fact that utility costs and some removal costs were lower, but our NOI operating expenses are roughly $400 million. So the impact of that one day is in the neighborhood of $4 million.

Okay, great. That's good color. And then also quick question on your IT systems investments that you talked about. Who is providing that system right now?

Actually, as I said, we're using a best of breed approach. So we're actually making different system selections in three or four different areas.

Okay, and then one last question relating to Program Max as well. What are you seeing in the updated units relating to price and occupancy upticks, if there's anything you could share with us?

We're seeing some pretty strong performance. Generally, in the Program Max repositionings and even in the expansions, the product that is coming into the investment profile tends to be a higher acuity product. There's a fair concentration there of adding assisted living where we only have independent living, adding dementia care where we only have assisted living, adding skilled nursing in markets. So the rates are going to be higher in any case. But the returns, I think, are at or above what we had expected, low to mid-teens, are looking like good numbers.

And the retirement center is where we've taken and converted sections of community to independent -- I mean from independent living to assisted living and to [memory] care. We have seen as high as an almost 20% increase in the independent living rates once that project, of the non-converted basis, based on the strength of the repositioning, in addition to getting the higher revenue and gross margin dollars out of the assisted living and memory care. So we're seeing positive effects in that regard as well.

Thanks.

Your next question comes from the line of Kevin Fischbeck of Bank of America.

Okay, thank you. Just want to confirm something. The impact this quarter from the rate cuts I think you highlighted as $7.2 million, which I guess implies a higher annualized impact than the guidance before, which is 25 to 26. Is the delta just that the [sniff] cuts aren't in Q4 or is this coming in higher than you had thought?

When we made the original estimates that we talked about last summer on the impact of the home health rate change, I think we articulated that as $8 million to $9 million. That was based on the caseload that we had in home health probably in the second quarter of last year. That business has grown since then. So the actual impact in the first quarter was about $2.4 million from the home health rate change largely because we have a larger caseload now than we did last year. I think that's the primary change.

Okay, so it's higher but net it's a positive because you've got more home health revenue?

That's right.

Okay, and then I missed it. Did you say that your outlook includes revenue growth assumption of 5.5% to 6%?

You're talking about total?

Total.

That's right because that includes not only same store growth but a full year of operation of the Horizon Bay properties.

Okay, and expense growth equal to that. I guess -- maybe I don't have it right, but I thought last quarter the number was more like 6% to 6.5% for both revenue and expense growth. Is there something that changed in there?

There's no intention to change anything.

All right, maybe I have it wrong. And then can you just kind of walk me through what happened on the entrance fees this quarter? It was actually obviously a good number given the number of entrance fee resales, but the amount per resale was a bit lower. How do we think about that number going forward?

It is a matter to be across our -- the communities there. We have a fair spectrum from some very high end to some that are more middle market and we've got some particularly good positive and up to communities that are on the lower spectrums of the mix of sales in this particular quarter. We have a little stronger mix of sales than that. I think that you'll see that -- a little bit of that this year, but that was I think probably averaged the quarter down a little bit more than you'll normally see that.

Okay, because the last few quarters it's been in that [$150 million to $160 million] range. Something between what you did in Q1 in that range is the way to think about it?

Yes.

And then, the villages, I just want to make sure that I understand that that is now a stabilized business, right? So there's no longer -- any entrance fees you got from the villages would be in the consolidated, CFFO number, now is not backed out anymore. Is that correct?

That's right.

All right, that's all I have. Thanks.

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

Good morning. Obviously, a lot going on with these project expansions, but you didn't talk so much about acquisitions. Just curious, can you give us an update on what you see in the acquisition environment and really, what's your appetite for taking on a big acquisition and going through another integration in today's environment?

Well, we are certainly going to continue to be active in the market and certainly being opportunistic. We do think that over the year, it will end up being a year with a fair amount of transactions and we will still be looking at what really strategically makes a real difference in our company.

Any commentary around what you're seeing on the deal flow with regard to where valuations are just directionally? Are they about the same? Do you see any change at all and maybe what cap rates look like?

About the same. There certainly has been an increase that goes back into last year, people testing the market, not being quite fulfilled when they find a B product that doesn't get an A cap rate. But it's about the same.

And if you look, and maybe Mark can jump on this one as well, between all these options today, if you look between the project expansions, acquisitions, and even share repurchases, what's -- kind of right here, right now how do you prioritize those in terms of what are most attractive?

Well, obviously, you look at the financial returns and history would show our highest absolute financial returns are first in the ancillary business, second in repositioning and expanding our locations, and then acquisitions. But at the same time, acquisition opportunities are somewhat blocky. They don't come to the market in an even way and particularly larger portfolio acquisition opportunities are relatively rare because the industry is so fragmented. So because that's an opportunity to deploy a fair amount of capital and create fairly significant changes in our market concentrations, you certainly look at those.

So it's really kind of a classic balance between the financial returns and the business opportunity.

Where would you put share repurchases in that pecking order?

It certainly depends on the price of stock, where the stock is trading, how we view that in terms of the growth profile with the Company and so forth. So it certainly is one of the factors that we look at.

Okay, thank you.

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

I think I might have missed it. What is the G&A -- what are you calling for G&A for 2012 and G&A seemed a little bit higher or elevated in the first quarter. Was that related to the Horizon Bay ancillary rollout? Just want to go over that again if you again.

Sure. Well, the G&A as a percentage of revenue under management in the first quarter was 4.6% and was 4.8% I believe in the first quarter of 2011. So from the standpoint to kind of overhead efficiency, we're actually a little better this year. Obviously, the first quarter of this year includes the full effect of operating Horizon Bay. There is some modest uptick in that G&A related to the ancillary rollout, but it's honestly pretty modest. That's primarily driven around the senior housing business.

Our guidance for the year for G&A is about $130 million. So if it were absolutely level on a quarterly basis that would be about $32.5 million a quarter. So this year or this quarter was a couple of million dollars above that even run rate. The G&A costs are not necessarily completely linear in the way they lay out during the year. There are a number of factors that can cause them to be a little higher or lower in a particular quarter. We're still anticipating that annual number to be about $130 million. Is that responsive to your question?

Yes, yes. There wasn't anything unusual like worker's comp or (inaudible) or anything like that?

No, no.

And then I don't know if maybe you want to take it offline, but I just wanted to also find out where you're getting the information on consumer preferences that lead you to believe that penetration rates in the industry will increase? If somebody can go ahead and email me or call me about that information that would be great. And then just related to that, does the industry have to change the physical plan at all? What does the industry have to do to increase the penetration rates with the consumer? I mean penetrate rates have been really pretty flat over the last decade if you even out early decade increase and then recent decrease. What does the industry have to do and what do you have to do to increase penetration rates?

Again, we go back basically with what's happening, what are the realities of aging, and the fact that people are living longer but they are living longer with multiple chronic conditions and an increased element of physical limitations as well as an increasing incidence with that longer lifespan, increasing instance of dementia and Alzheimer's related disorders. So with people living extended years in present condition and basis, and the industry -- research surveys have shown, not to go back too many years when there was relatively two people in independent living dining rooms and stuff with walkers or wheelchairs. Today, 51% of people across the industry moving into independent living have either a walker or wheelchair.

So with that you're going to have an increasing element of need base across a larger -- oldest cohort of our society. And yes, we do have to modify our units. We do have to modify some of the common areas. Do have to also update to the preferences of what the next generation that's already coming into our market do have some different expectations. And so a lot of the assets that were developed and built in this industry were built some time ago and without the full visibility of what was going to happen in aging and all the realities of it.

So there is a real need. At the same time, the fantastic news is the fact of the incredible returns we get when we do that work.

And the other question I had just also, I guess related to the acquisition side. Would you then be more inclined to buy more higher acute type facilities if those came to market rather than more independent living and CCRCs? And then also another related question on the pipeline. Do you have any leases that are expiring that have purchase options that are exercisable so that we might see any additional property buyouts from the REITs this year or next year?

Second question first. We do have a couple of purchase options becoming exercisable over the next 12 months. We would intend to exercise them. They are not dramatic in their size, but we will very likely exercise those in due course. To your first question related to product preference in acquisitions, I think what we're saying more than anything is the service demand in senior housing now is more service intensive. So that relates somewhat to the type of property but it relates more so to a need to have a broader range of service available. So our ancillary service platform, for example, is critical in positioning yourself properly in the market today.

Today's independent living customer is dramatically different than it was ten years ago or 20 years ago. So certainly, there may be some differences in terms of the optimal physical plant, for example, for independent living residents. It doesn't necessarily make that product less attractive or more attractive.

In some cases it does make it more attractive in just the long illustration of one isolated case, in any way, but not totally atypical as where we took a retirement center, did conversions of assisted living and memory, it's frankly the IL product component. And in many acquisition opportunities out there, they're with assets that have kind of opportunity with them to make that whole product more attractive, make the independent living more attractive because it has the assisted living and memory care available to it. As a continuum for the residents to move in and then not have to move out as they go to the next level of care, as well as the higher gross margin dollar and return factors we get off of the assisted living memory care component of a campus setting.

So we like the perspective of looking at products all the way across the spectrum.

That's good for me. I appreciate you taking my questions. Thank you.

Our final question comes from the line of Peter Lux, Private Investor.

Hey, guys, Ross and Bill, how you doing? I've been following you guys forever and it seems to me we've been growing bigger, shuffling a lot of people, adjusting measurements, but ultimately we're not returning enough to the stockholder in the form of real nominal gains. What we had seen when you guys first started when you were on a track to return in the form of dividends, et cetera. Now, you're putting a lot of money into share buybacks. I think you'll get significant more bang for your buck in today's environment if some of that money was came back to the shareholders in the form of dividends, as the original game plan established when Brookdale went public.

Okay, well, we appreciate your counsel. Obviously, there's a number of things in terms of managing the capital structure that we're weighing, including the investment opportunities. But we appreciate the thoughts.

Thanks.

Ladies and gentlemen, this concludes today's Q&A portion. I would now like to turn the call back over to Ross Roadman for closing comments.

Thank you, Kimberly. With that, we'll close. Management will be around all day for follow-up questions if you have them. I just want to remind folks, we're going to be at the Deutsche Bank conference next week in Boston. We'll be May 16 at the BofA Healthcare Conference in Las Vegas and then June 4 at the Jefferies Conference in New York. With that, thank you very much for your participation.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.