Brookdale Senior Living Inc (BKDT) 2012 Q4 法說會逐字稿

Good morning, my name is Marly and I'll be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living fourth quarter earnings conference 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)

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

Thank you, Marly, and good morning, everyone. I also would also like to welcome you to the fourth quarter of full year 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. As Marly mentioned this call is being recorded. A replay will be available through February 26, and the details on how to access that replay are in the earnings release. This call will also be 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 filed 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?

Thanks, Ross, good morning and welcome to our call. We have a lot of exciting things to talk about today. As you saw in the announcement we made last night, the Board has appointed Andy Smith to become Chief Executive Officer of Brookdale. Before we get to the fourth quarter and 2013 outlook, I'd like introduce Andy to you. Some of you have had the chance to meet Andy and get to know him but not all of you. Andy has been with Brookdale for six years now, but his involvement with the senior housing business goes back 25 years. And as an attorney at Bass, Berry & Sims, he was heavily involved in working with me in the formation and growth of American Retirement Corporation, one of the legacy companies of Brookdale. Through his law practice, he was very active in other aspects of healthcare with both public and private healthcare companies and has built a network of friends and associates spread throughout the industry. When American Retirement was acquired by Brookdale, I felt extremely fortunate to be able to persuade Andy to join Brookdale in building what we knew could be an industry leading enterprise.

While his title has been Executive Vice President, General Counsel, he's been involved in a broad set of activities that have helped build Brookdale into what it is today. Andy has a wealth of transactional experience, both within the industry and in other fields of healthcare real estate. Since arriving, Andy has functioned as our chief investment officer having shepherded us through all major transactions from acquisitions such as Horizon Bay to restructuring of leases. He has also led our corporate finance function, managing our capital structure in all of our financings and risk management. All of our key capital structure participants know Andy. He has the key relationships with our read partners, lenders, and insurers. Andy also has had the responsibility of the Company's strategic planning process and has led us through a process of defining who we are and where we want to go. What is equally important is that Andy has worked hard to prepare himself for this role through active participation in operations, sales, and marketing.

Preparation for this transition has also long been part of the Board's formal succession planning process. The transition will go smoothly because of that process by virtue of the fact that Andy has been an integral part of the Company's senior management team since 2006. He will also be supported by a very skilled and competent executive group with deep and varied experience. Andy is prepared. He has an intimate knowledge of Brookdale, its culture, and its strengths and its weaknesses. I am confident he will take Brookdale to the next level. On a personal note, I would like to take this opportunity to express what a great honor and privilege it has been to serve with so many great associates and people who make up Brookdale and to witness all the wonderful things that they do in making it a real difference in the lives of our residents every day. With that, let me now turn it over to Andy to make a few comments before proceeding into the earnings call.

Thanks, Bill, and good morning. Let me begin by saying that I'm very gratified by the Board's decision, and I welcome this opportunity to take on the role of Chief Executive Officer as Brookdale embarks on the next chapter of its history. As the leading provider in the senior living industry, we have some great opportunities before us which I will touch on in just a second. But first, I want to thank Bill for his leadership and his commitment to the Company's success. Bill's passion for serving others and his dedication to creating a culture that sets the right priorities has made the difference in shaping Brookdale into the industry leader that it is today. The comprehensive platform that Brookdale has created under Bill's leadership, and by platform I mean, our capital assets, our technology infrastructure, our systems, our procedures, and our operating philosophy, and our people and our culture. This platform not only differentiates Brookdale in the market today, but it also positions Brookdale, unlike any other company, to pursue ongoing opportunities for expansion in the senior living industry.

So I'm glad that Bill will continue to be an asset and a resource for me and for Brookdale as we move forward. And speaking for all of my fellow associates at Brookdale, we again want to thank Bill for all that he has done and wish him the best in the future. So let's discuss briefly where we go from today. We start from a position of leadership and strength as the largest provider of senior living services in the country. We also have the broadest and most diverse set of product offerings in the industry, and we are the best positioned provider to take advantage of favorable demographic trends and to address the needs of an aging population. The strength of this position is based on our platform through which we currently touch more than 67,000 residents, millions of their family members, and hundreds of thousands of prospects who come through our door looking for solutions every year. Because of our direct daily engagement with these people, we believe we are uniquely positioned to understand the demands and challenges of the aging population and to provide an ever expanding set of solutions to meet the wants and needs of seniors and their families.

With this strong industry position we see near term opportunity in today's environment in which little new construction has provided limited new supply, and improving economic conditions have set the stage for Brookdale to continue to produce improving results. To leverage these favorable industry dynamics, we will be laser focused on organic growth by continually improving our operational sales and marketing execution. As a result, we expect to take advantage of the operating leverage inherent in our business model to increase margins through higher occupancy, rate improvement, and tight expense control. One example of this focus is that we have recently made changes to flatten our field operations and to decrease community level span of control. This will result in better operational effectiveness, tighter cost control, and greater responsiveness at the community level. We have also recently taken steps to centralize and enhance our marketing function and our marketing programs, including our use of social media. This effort will better leverage our national scale and industry leading service offerings. As a result, we expect to engage more prospects and to do so more effectively and more efficiently.

This will produce more leads, better conversion rates, and more move-ins. A component of this effort is an exciting new branding initiative that you will learn more about in the coming months. In an industry as fragmented as ours, we believe that we have a huge opportunity to differentiate Brookdale and our communities in a marketplace that does not have a strong national brand. As a result, we will create greater awareness of the benefits of our platform and greater opportunities for engagement with seniors and their families with the final result of more people experiencing the benefits of what we do. The development of a strong brand will broaden our market and increase our market share. In addition, we will continue to invest in our communities through our ongoing capital expenditure strategy and through our Program Max development program. Program Max allows us to reposition our communities to best compete in the evolving marketplace. Our completed Program Max projects are producing mid-teens returns on the capital invested, and we expect that level of returns on future projects. We will also continue to expand our ancillary service offerings to provide more solutions for our residents.

For example, we continue to see exciting new opportunities for hospice services and private-pay home care, both in our communities and outside of our walls. We know that in our communities alone, there are thousands of residents receiving these services from third-party providers today that we can replace. We also believe that we can grow through strategic and tactical acquisitions in a fragmented industry that is experiencing increasing consolidation pressures. We have a demonstrated ability to acquire and integrate assets and operations accretively and we will continue to evaluate these opportunities. Finally, as we have previously discussed, we are in a dynamic capital environment, and we are always evaluating all of our capital structural alternatives to optimize our ability to achieve long-term growth and to increase shareholder value. This has been a big part of my job, and it will continue to be a big part of what I do as CEO.

I'm sure that you will understand that we are not in a position to comment further on these evaluations today. In closing, let me add that consistent with our history, we will continue to place a high premium on innovation as we consider how we design or redesign our communities, the programs that we deliver, the services we offer, where we offer those services, and even the customers we serve. With our innovation, execution, and sort service oriented culture, I'm confident that we will continue to deliver market leading solutions to expand our footprint so that we can meet the need for demand for our services and to become the preferred senior living solutions partner for the country's growing aging population. By achieving these goals, we expect to produce great results for our associates, and great results for our shareholders. So thank you for your time. I look forward to getting to know each of you better in the days to come. Now let me turn it back to Bill to discuss our results in more detail.

Well, Mark is going to take us through the results for the quarter and the year but first I want to comment on our strong finish to the year. Some elements of the economy that drive demand for our products and services continue to gradually improve. And we saw it in a broader set of geographic markets. Through 2012 and into 2013, we have been evolving our field sales and operations organization to meet the opportunities of improving market and the challenges effectively operating a large portfolio that uniquely offers a continuous services in a rapidly evolving environment. Taking a moment to reflect back on the full year, our organization has performed well. We successfully hit our budget number of $2.15 for CFFO. All elements came in as expected with unforeseen events like Medicare coverage policy changes and higher costs in our group medical plan but in other areas, performance exceeded expectations. For example, the organization capitalized on the improving housing market to rebuild its effort with MPP CCRC sales and produced a record 468 entry-fee sales for annual gross entry-fee sales of $82.7 million or $55.3 million after refunds.

During 2012, we created a third-party management business. We successfully completed the integration of Horizon Bay to our community operating structure. We also created a function to effectively interface with the third-party owners of the managed community who have a variety of needs depending on their structure and objectives. We invested almost $150 million of capital this year back into our portfolio, touching 126 communities to update, improve, and enhance our service offerings for current and prospective residents. We invested almost $45 million in Program Max, completing ten projects with very good results. We have 22 additional Program Max projects underway and a robust pipeline of future opportunities is building. We spent the year continuing to strengthen our platform, bringing innovation into business with initiatives like electronic medical record system and patient care transition for which we were awarded a CMS innovation grant and we completed the year in an excellent position for 2013. Let me now turn it over to Mark to discuss the fourth quarter and our 2013 outlook.

Thanks, Bill. Last night we announced our operating results for the fourth quarter. Excluding certain items, our cash from facility operations, or CFFO, for the quarter totaled $0.56 per share. We drove top line revenue growth for the fourth quarter of 4.1% by ending the year with a very strong performance, particularly with occupancy. In fact, occupancy grew by 70 basis points sequentially over the third quarter and was up 100 basis points over the first half of 2012. Our strength in occupancy was across the portfolio. From the third quarter of 2012, average occupancy in each senior housing segment grew by at least 60 basis points. Looking across tier levels, both independent living and assisted living were up 60 basis points. Skilled nursing was up 130 basis points. Clearly good to see some strengthening there. And dementia care was up 30 basis points with our dementia units already having the highest overall care level occupancy in the Company.

Looking year-over-year for the fourth quarter of 2012, occupancy was up 90 basis points. That year-over-year increase was across most of our major markets, with 16 our top 20 markets showing increases with those increases anywhere from 0.10% to over 10%. In spite of uncertainties related to the federal budget, the improving domestic economic trends continue to provide positive support for basic market demand for our senior housing business. In addition, we've also added sales in marketing resources, for example, local community sales staff and increased spending on advertising in those markets where we expect demand to improve. As we previously discussed, in our business increasing occupancy drives higher rate growth over time. The number of our 550 consolidated communities that we're at 95% or greater occupancy improved gradually throughout 2012, from 186 in June to 208 in September, to 222 in December. Our Q4 same store senior housing rate increased 2.8%, which after eliminating the impact of Medicare skilled nursing rate changes over the last two years, is at the upper end of the range that we've seen for some time.

Another highlight for the quarter was the continuing improvement in our independent living entry-fee sales. Our $15.1 million of net entry-fee cash flow was $5.7 million higher than the fourth quarter of 2011. Sales activity remains strong with improving numbers of existing home sales and strengthening home resale prices giving prospects greater confidence to make the decision to move in. This level of entry-fee sales produced more move-ins and move-outs with the occupancy in the IL component of the entry fee CCRCs up 70 basis points over the third quarter of this year. The result is not only the contribution of the entry-fee sales to cash flow, but a longer term structural improvement in the ongoing operating cash flow of the entry-fee CCRCs as well. Our ancillary services business produced $11 million of operating income for the fourth quarter, down from $13.5 million the year before. Revenue grew by 4.2% as growth in the home health census more than offset a decrease in outpatient therapy utilization, as beneficiaries effectively scaled back use of therapy for fear of tripping the new approval cap.

In addition, with the 2012 rate reductions, the margin on the increased volume is lower. We continue to work on cost mitigation strategies to strengthen the margins. We still believe that ancillary services remain both a critical set of services for our residents, and therefore a key Brookdale differentiator, as well as the solid incremental financial opportunity. Looking at our same community data for senior housing for the fourth quarter of 2012 compared to the fourth quarter of 2011, our senior housing same communities produced a 3.9% increase in revenue, due to a 2.8% increase in revenue per unit and a 100 basis improvement in occupancy. This revenue growth rate was one of the strongest we've had in several years.

Senior housing same community expenses grew by 5.4%, and NOI grew by almost 1% between the fourth quarters. The 5.4% increase in same community expenses amounts to $18.7 million. Included in these expenses were some items we would like to point out. First, we had $1.8 million of group medical insurance program cost increases over the fourth quarter of 2011, again related to an unusual number of large claims this year. Second, our bonus program costs for our community teams increased by nearly $3.5 million, due in large part to stronger performance this year. Third, public relations and advertising costs increased by roughly $1 million as we focused on regeneration in the recovering market. And fourth, we also incurred incremental costs in the quarter related to Hurricane Sandy, which are somewhat difficult to quantify. General and administrative expense was $44.6 million for the fourth quarter of 2012. Included in G&A cost was non-cash stock based compensation expense of $6.3 million, an integration transaction related and EMR roll-out cost of $7.2 million, of which $4 million relates to EMR roll-out activities.

General and administrative expense, excluding those two items for the quarter, totaled approximately $31 million, which was 4% as a percentage of total revenue under management, compared to $28 million for the fourth quarter of 2011, which was 3.9% as a percentage of total revenue under management. Our Q4 spending on routine CapEx, which we reflect in our CFFO calculation, was $10.2 million. For all of 2012, we spent $38.3 million on maintenance CapEx for our consolidated communities, in the range of our guidance for the year. Finally in December, we completed the purchase of the 11 formerly leased communities which we discussed last quarter plus one additional formerly leased community for a total of 12 lease re-purchases. That increased the number of owned communities to 221 or approximately 23,000 units. Subsequently, we completed a refinancing that included some of these communities and several others. The impact of these transactions is reflected in our 2013 guidance.

Turning now to a discussion of our outlook for 2013, we've based our guidance on a continued gradual improvement in the economy throughout 2013. We expect to see growth in our occupancy due to the improved environment, our reinvestment in our portfolio over the last few years, our innovative initiatives, and good solid sales execution. Pricing should improve slightly during the year as occupancy builds in more markets. We will be focusing on improving margins and expect costs to rise with inflation and at a rate less than revenue growth. We will continue to prioritize capital deployment to those areas with the highest returns, with expansions, redevelopment and repositionings at the top of the list. We expect that CFFO per share for 2013 will be in the range of $2.30 to $2.40 per share, excluding any integration, transaction, and EMR costs, and any potential acquisition or disposition activity.

Looking at some of the key drivers for 2013, let's begin with the consolidated senior housing portfolio. In 2013, we expect consolidated senior housing revenue to grow by 4% to 4.5%. This is driven by two factors. We expect the continuation of our momentum with occupancy and therefore the center point of our guidance range reflects an increase in full-year average occupancy in our consolidated portfolio of 120 basis points for 2013 over 2012. We expect to see the occupancy improvement across all segments. While occupancy continues to improve, we don't expect to see the pricing power really manifest itself until the end of the year. Therefore we expect rate growth to continue at recent levels in the 2% to 2.5% range. Our guidance assumes that a 2% reduction in Medicare rates occurs March 1 as a result of sequestration, which as you know, effects both skilled nursing rates and the senior housing portfolio and home health and outpatient therapy rates in the ancillary services segment.

On the expense side, we expect cost growth to be lower than we've seen in 2012 as we benefit from some positives. One less pay in 2012, lower expected cost growth in our employee group medical plan, and some modest improved staffing efficiency in our communities. For the senior housing business, we expect costs to increase in the 2% to 3% range. For the ISC segment, we expect to see flat growth in operating income. Revenues expected to increase slightly as an increase in volume is offset by lower reimbursement rates in outpatient therapy due to the change in MPPR and sequestration. We're taking actions to adjust ISC's operating costs where we see opportunities to do so.

We do see producing operating income roughly at 2012 levels, but somewhat lower margins. We believe that we could see a seasonal pattern emerge in ISC's results, with a declining margin dollar amount quarter-to-quarter due to outpatient therapy beneficiaries stemming utilization as they near the calendar year approval cap. Of course, there's meaningful uncertainty around the ISC's segments forecasted performance in the near term due to the unknowns of the political process as policy makers endeavor to work on overall budget issues. Finally, we expect management fee revenue in 2013 will be in the range of $30 million to $35 million. Running through a few other detailed assumptions related to our guidance, we expect our cash G&A expense excluding non-cash comp and integration transaction related and EMR roll-out accounts, to total approximately $140 million to $150 million. This increase in G&A results largely from modest wage and compensation program growth, increased software licensure and maintenance costs for recently installed systems and technology, and additional field operations and sales resources that we have put into place. This represents G&A costs at approximately 4.7% of all revenues under management.

We expect that we will see $15 million to $25 million for integration transaction related and EMR roll-out costs. For our 2013 cash lease expense, the fourth quarter 2012 run rate will be a good indicator of the 2013 run rate, with future rent escalators being offset by a reduction in rent expense related to the community re-purchases that we completed in December. Interest expense will come in higher than 2012 due to the debt added at the end of 2012 related to community re-purchases, as well as refinancing the 2013 maturities, some at higher spreads. While this all is somewhat dependent on the ultimate interest rate of the refinancing, we would expect that it could be up to a $5 million increase in interest expense for the full year.

Our capital lease amortization should remain close to an annual $12 million level over the course of 2013. We expect that our quarterly state cash taxes will be roughly offset by CFFO from our unconsolidated joint ventures. Turning to entry-fee cash flow in 2013, again taking into account the gradually improving environment, we're forecasting $50 million to $55 million of net entry-fee cash flow. We forecast our routine maintenance CapEx, which again impacts CFFO, to be approximately $40 million to $45 million for 2013. We also expect to spend an additional $110 million to $120 million on other major projects including corporate initiatives. In addition, during 2013, we plan to accelerate our Program Max projects to expand, redevelop, reposition our communities and expect to invest $75 million to $85 million of net cash in these activities.

In summary, we expect that adjusted EBITDA will grow in the range of 9% to 10%, and CFFO per share will be in the range of $2.30 to $2.40 for the full year. We do not provide quarterly guidance, but want to remind you that historically we've seen a seasonal pattern where CFFO in the first quarter decreases from the fourth quarter because of the seasonal softness of both occupancy and entry-fee sales in the first quarter. Typically CFFO builds from there, with operating expenses peaking seasonally in the third and fourth quarters. This guidance does not include the impact of future acquisitions we may make nor the expenses from transactions, integration, and EMR roll-out costs. We'll now turn the call back to the operator to begin the question-and-answer session. Operator?

(Operator Instructions)

Ryan Daniels, William Blair.

Good morning. It is Kristina Blaschek for Ryan today. I guess to start, you mentioned you saw occupancy increases in 16 of your top 20 markets during the quarter. Can you give us a little more color on perhaps foot traffic trends throughout the quarter and also any color you can share with us on foot traffic or entrance fee deposits so far in the first quarter would be helpful?

Sure. We actually saw a typical continuing behavior on the sales pipeline side. We continue to see increased inquiry activity particularly across the internet. I think our inquiries in the fourth quarter over the prior year were up about 17%, tours were up about 7%, so we continue to see the pipeline build. Good conversion rates, so the occupancy was strong. Since the end of the year, we've seen what we typically do see, or often see seasonally. It has been a somewhat severe flu season, so our attrition rates in the assisted living and independent living side of the business pick up a little bit, but at the same time our occupancy in the skilled nursing part of the portfolio have actually increased by an equal amount, and I think our sense is both of those are probably driven by the severity of the flu season.

Okay. That's really helpful color. I guess similarly along the same lines, did you happen to use any type of incentives during the quarter for any specific segments? Anything you can share with us on that or anything that you've started to use for the first quarter?

You know the incentive programs have been largely unchanged since the middle of 2011. We're obviously re-packaging market to market depending on how the markets are behaving, but really no significant change there.

Okay. And then one final one if I may. Mark, you had mentioned in your prepared remarks that you expect to spend about $110 million to $120 million on other major projects this upcoming year. Can you share with us a little bit more color on what type of projects those are?

They are -- they're largely the same kinds of projects that we've done over the last couple of years. Major physical refurbishments. Some large projects on locations so similar to what we've done in the past.

Okay. Great. Thanks for all the color.

Kevin Fischbeck, Bank of America, Merrill Lynch.

Okay. Thank you. I appreciate the color there but I guess a question, you know, since the new CEO is change is kind of a captured people's attention as well as the transaction, or potential for real estate transaction. I appreciate your inability to comment specifically, but maybe you can kind of go back and talk about the, you know, your role in kind of, in that decision process historically? You know what you've been involved in around those discussions and, and, you know, anything you can give color there about how you started the process?

Sure. I'm happy to do that Kevin. The two things that I've done of particular note as I've worked here at Brookdale, in addition to being the General Counsel, I've been responsible for all of our corporate development activities and how we finance the business and so that goes to, among other things, how we think about our capital structure and how we see evolving and the opportunities we have in that regard, so that's really frankly where I've spent the majority of my time over the past five or six years. In addition to that, I've been responsible for the development of our strategy in coalescing the team about the vision for where the Company needs to go. So I've spend a lot of time in that, on that topic as well. You're right, though, we can't, aside from that, and aside from saying that I've spent a lot of time thinking about and working on our capital structure, we simply can't say anything more today on that topic.

Yes. I appreciate that. I guess, I guess moving over to the guidance, a lot of color there which is very helpful. I think you still have, though, another, you know, nine or so facilities with purchase options? Do your guidance assume anything around those?

Yes. The lease terms are relatively long, and I actually don't think any of those options are even active in the coming year.

Okay. So there's no transactions around that. Okay. And then, you know, I guess, can you talk a little bit about, you know, I think that the occupancy numbers were fantastic and the rate numbers were good too, but you know the cost numbers were a little bit higher and it sounds like you got some initiatives you know I think in the prepared remarks or some comments about, kind of flattening the cost structure. Can you talk a little bit about what exactly you're doing there at the community level to get control of those costs and how much success, you know, do you need to have there to really move the needle back down. I guess you talked about the cost growth kind of moderating from 2012 into 2013. How much of that is a function just kind of some of these one time items going away? How much of it is what you're doing at the facility level, if you want to go into that a little more?

Sure. Well let's go back again and repeat the numbers on the fourth quarter a little bit. The dollar increase in our same store operating cost is $18.7 million, if we compare it to fourth. Included in that $18.7 million are the three items I called out. $1.8 million related to the group medical plan, $1 million related to increased advertising activity, and $3.5 million related to our incentive comp programs where that was good news because our incentive comp cost went up because our performance was so strong. Those three items total a little over $6 million. Excluding those three items then, the same store operating cost was up about 3.5% year-over-year. As we go into next year, we do not expect to see the same kind of cost behavior out of the group medical plan, and in fact, we think we're going to get -- we're going to have -- our expectation with plan design is that we're going to have a good year with group medical plan -- group medical plan in 2013. So a lot of it's just normalizing the performance from year to year to be completely honest with you.

Okay. But I guess you know, it sounds like the marketing expense, you know, you spent a little more on Q4 in marketing expense you also had a good occupancy quarter, I mean, how much of the occupancy expense or occupancy improvement that you're looking to drive next year is going to be predicated on marketing? You talked a little bit about, you know, the marketing initiatives. Centralizing marketing, I guess, but also spending more in certain markets. You talked a little bit about, you know, is that really kind of one time or do you expect that to kind of ramp up in 2013 as well?

Well, I'll turn it over to Andy to add some thoughts here in a second. The branding initiative that we have underway is very, very powerful, and a part of that is a more centralized spend management of our advertising and event activities, so we have seen a little bit of slide as we've gone through the year with some of our advertising costs but there's a lot of activity underway to manage that cost next year.

Right. And I guess I would add to that by saying, first, on the branding side of things, we do not expect to be spending more dollars. We expect to be spending our dollars more efficiently, effectively, and to produce greater results. We've been studying this issue very hard for the past couple of years and we, as Mark said, we think we have a fantastic opportunity to differentiate Brookdale on a national platform against the, frankly the sea of saneness that's out there in our industry. So we're very excited about this program, and we expect it to, that you all will be too when you see it set forth over the next couple of months.

Okay. Then last question. Just looking at the rates. The entry-fee CCRC rate was down sequentially for the year. We didn't see that in the CCRC rental side of it. Can you talk a little bit about what was going on there?

Again, that one is good news as well. In the end the CCRCs, particularly the entry-fee communities, the rate is an average of the independent living units, the monthly service fee, the assisted living unit monthly serving fee, the skilled nursing monthly service fee. So as our occupancy on the independent living side comes up, it simply impacts the average in that kind of way. If you look at the separate components of the rates on the entry-fee side, the independent living monthly rental rates actually performed very well over the last few years, but what you're seeing is a change in mix as the occupancy rebuilds there.

Okay. That makes sense. Thank you.

Jack Mann, Barclays.

Hi, thanks and good morning. I appreciate the color on the number of properties above 95% occupancy, 222 within the year. Can you just talk about the elasticity of raising rents from there, and what is the seasonal benefit from that?

Well, you know, senior housing does not take care of 100% of the seniors. Our market penetration is, depending on how you measure it, somewhere between 15% and 20%, so clearly as we see markets move up from an occupancy standpoint, rate performance will improve. But it's not limitless. There is some logical correlation between how much rates can change and what overall inflation is in the economy. So if you look at the range of performance in terms of rates, clearly we show higher rate growth and high occupancy markets, high demand markets. But the delta between the high occupancy markets and the low occupancy markets is not a gigantic number.

Okay. Got you. And then just the second question. On the EMR investment, obviously that ramped throughout the year. Have you seen any actual benefit in terms of improvement in operating expense in addition to that?

Yes. For sure. I mean, in the home health world and the outpatient therapy world, that is a very fluid, very rapidly evolving regulatory environment right now, and we're clearly much better equipped to manage those businesses than we would have been without those tools.

Okay. And is there any way to actually size that benefit? Or is it more modest?

You know, there are so many moving pieces in that business right now, I think it would be, it would be very difficult to try to isolate the impact of one single thing.

Okay. Then just lastly on the real estate. I appreciate you can't give a lot of detail around that. I just wanted to make sure that I heard you correctly, is there a time line that you had in mind to make a decision? Does that impact some of the other strategy that you're going about for the Company?

Jack, this is Andy. We, we have no set time line, and again, that's this whole topic is just something we frankly cannot comment further on than what we said in the past.

Okay. Yes, I appreciate all the help. Thanks, guys.

Darren Lehrich, Deutsche Bank.

Thanks, good morning, everybody. Bill, I just want to congratulate you on a fantastic tenure. Look forward to working with you, Andy. I had a couple questions here. You know, I guess just first on the entry-fee numbers. Can you just comment a little bit more on the unsold inventory, sort of where we are with that, and then, you know, and just looking at the numbers, it looks like my choice is getting a little more traction. Is there anything more to read into that and you can you know, I guess just how does the guidance here you're giving $50 million to $55 million of entry-fee cash flow square with, you know, with what we saw in 2012?

Well, let me try to do the numbers here. The unsold inventory at the end of the quarter we're valuing at about $88.6 million. That data is in the -- that data's in the supplement. I'm sorry. Could you repeat the other part of the question?

Yes. I guess so you gave me the unsold inventory. Just what does that translate into units? Or we just calculate that based on the average I guess?

Well, we valued that at $155,000 a unit, so --

Yes.

You can get to roughly what the number of aging units looks like.

Okay. And then MyChoice was the other part of the question.

Okay. I'm sorry. The distinction. We separately identify MyChoice from normal typical in quotes entry-fee sales as if they are completely separate from each other. That's not necessarily the case. A not insignificant amount of the MyChoice activity occurs at the initial sale. To some extent, it's a way for a perspective customer or an existing customer to change what their monthly service fee is. So in an environment like today where interest rates are relatively low, it can be attractive for people, so you know, there's a number of factors that are occurring there. We clearly don't project a lot of that but to some extent it's assumed in or out of whatever you're using as your average sale in any case.

Okay. And then, you know, I guess just the question around the $50 million to $55 million in '13 versus what we saw in 2012, I'm just trying to, you know, square that up a little bit more. Is there anything more you can say.

And that is a similar level of sales activity. You know we're selling units in different communities at different points in time, and that impacts the sales volume to some extent, but it's, I would say net-net, relatively consistent with what we have this year.

Got it. Okay. And then I guess just switching gears a little bit to the guidance as it relates to Medicare and some of the impact from MPPI and sequestration. You know, you made a number of comments throughout the prepared remarks about mitigation and things that you're working on. Can you just help us think about, you know, what the headwind is, what kind of mitigation you'll be looking to achieve and maybe just put some numbers around that?

Okay. So we have roughly $360 million worth of Medicare revenue in the Company all told. That includes the skilled nursing benefit, outpatient therapy, and home health. So the impact of sequestration is roughly $7 million a year there. Now, the sequestration as you know, has been delayed until March 1, so the actual effect there is something under $6 million for the March to December time period. The impact of MPPR on our rates for the balance of this year is roughly $6.5 million. I think our initial objectives around cost mitigation here is to cover half or more of the MPPR rate impact. Skilled nursing side, obviously we're looking for opportunities there as well. That's our general sense.

Okay. That's, that's very helpful, and then last thing here, was just CapEx. I thought I heard you correctly, you said there were three, you know, different components I think that you've been guiding to, but so we've got Program Max at $75 million to $85 million, maintenance at $40 million to $45 million, and then another $110 million to $120 million of other major capital projects. Just, you know, maybe could you confirm that, and then, you know, as we think longer term maybe a comment from you Andy, just, you know, how should we be thinking about CapEx in the business and the opportunities you're seeing?

Okay. I think those numbers are right.

Yes. Those numbers are correct.

Yes. The -- I think one of the most important things we can do going forward is to invest in our capital assets. The returns that we're getting off of those investments, again, are mid teens or higher. That's both from Program Max and for the repositioning investments that we've made. We expect to, over the next couple of years, to have an elevated level of CapEx investment into our community, because frankly we deferred some of those investments back when the great recession started, simply as an effort to make sure that we remain financially viable. So I think you will see over the next couple of years investments in the capital asset base of the business about like what we're doing right now, and then I think you could expect over the longer term that we will throttle that back down as we kind of take care of the -- some of the deferred projects that we didn't take care of a couple years ago.

Okay.

Bill, you want to add anything to that?

No.

Thank you.

Frank Morgan, RBC Capital Markets.

Good morning. And I also wanted to offer a congratulations to Bill as well as Andy on the future. Couple of questions. You talked about what the rate growth is implied in your guidance for 2013 but I'm just curious, could you talk a little bit more about where you're seeing street rates today right here, right now, across the country, the kind of growth that you're seeing as, in the marketplace right now?

Well, I think the only reliable information we've got there, Frank, has been NIC data that's reported each quarter and that's for the top hundred MSAs. I think the Q4 street rate growth was there was 2%, 2.2%.

Something like that.

Okay.

And I certainly would have no reason to dispute that that's accurate.

Okay. And then secondly, on the topic of the CapEx, I guess two questions. One, it sounds like 20 --, based on what you were just saying, that 2014 in terms of CapEx could be a lower year than '13? Is that fair to say?

I don't think so. I think Andy said that we would expect it to decline over time.

Right. I will say, Frank, over the next couple of years, we will continue to invest in the assets and expect the commensurate returns that we're currently seeing, but we would expect those investments to continue for the next couple of years about the level that Mark just laid out. Over time, we expect to, say that in 2015 and beyond, we would expect to see that throttle back some.

Okay. And then when you think about deploying capital for growth this year, not your Program Max or the maintenance but kind of the growth CapEx, is there any way you can kind of help us allocate between what we might expect to see on the ancillary side versus the facility base side?

Only if you could tell us what the opportunity sets going to look like? It's obviously very opportunistic in those areas, Frank. So we don't reflect those kind of deals in our guidance numbers. It's very difficult to anticipate what the precise opportunities are going to be.

Okay. Thank you.

Nick Yulico, Macquarie.

Thanks. I wanted to see on the same store guidance for this year, you know you gave revenue expenses. Can you just tell us what that blends to for NOI growth?

We don't, we don't do separate guidance for the same store portfolio. All of those numbers I gave you are for the full Company.

Sorry, but I thought the numbers that you gave were for senior housing? I was just trying to get same store senior housing NOI growth. And --

I don't have that right here. It's 6%, 7% I believe.

Okay.

8% --

8 -- 8.

Obviously 1% growth in occupancy, that's right, pretty good NOI growth.

So sorry you said 6% to 7% or possibly 8%?

Go ahead with your next question and let me get you the --.

Sure. Sure. Sure. Can we get the total dollar amounts for the EMR costs? Only the EMR costs for 2012 and then what is forecast for 2013?

We could. I don't have those numbers here, but we can get you those numbers.

Okay. And then lastly, I'm wondering if, you know, if you've hired outside tax council or any other outside advisors regarding the strategic alternatives at this point?

Yes. Nick, this is Andy. Again, we can't say anything more than we've said in the past about our evaluation of our capital alternatives.

Okay. I guess, just I'm wondering, I mean, I mean, you know, have you actually spent any money, you know, on this process to date, you know, how much has it been? What line item is it? You know is there anything included in guidance for this year?

What we've said in the past is that we are spending, time, energy and money exploring this process, and we can't say anything further than that.

Okay. I guess just lastly, I mean, when you guys have your add back of transactional costs for your CFFO calculation, does that line item include any of these costs for strategic alternatives?

That line item includes transactions costs of one sort or another, yes.

Okay. Thanks.

The answer to your NOI growth rate question, it's going to be a little over 7%. Between 7% and 7.5%, overall NOI growth just on senior housing.

Okay. Thanks.

Daniel Bernstein, Stifel Nicolaus.

Hi, good morning. I just wanted to offer my congratulations as well to Andy, and again, I really enjoyed speaking with you over the years, Bill, so look forward to talking to you further. I'm sure I'll see you at the conferences. I know you don't want to talk too much about that real estate question, but just from your last comments, is it safe to say there's the review of the real estate is a formal review or is it more casual, just normal course of business that, you know, you would do as management? Did I characterize it as a formal review?

Daniel, I guess I'm saying, I don't think we do anything casually. We certainly --

Okay.

But, again, we really can't say anything more than we've said in the past.

Okay. Okay. And then the -- one of the other questions I had is looking at your owned assets performed really well in the quarter, you know, sort of justifying certainly the money you're putting in the Program Max, and do you expect your owned assets to perform as well as some of your leased assets? I think your leased assets have a little bit higher occupancy. You know, mix aside, do you expect the owned asset performance to eventually catch up to the leased assets in terms of occupancy and margin?

You know, quite honestly, I don't think I evan looked at the numbers that way. It is the case, just to put it in some perspective, it's been -- we can be somewhat more facile in terms of what we do with the real estate and the owned portfolio because we own it. All right? The process of affecting different kinds of things with the asset proper is it's somewhat simpler for us to do, therefore we can do it quicker, therefore as we restored our CapEx to more normal levels in 2009 and 2010, probably relatively speaking a few more projects on the -- on the owned side than what we've been able to get started on the leased side where we are focused on doing the same thing but because we have somebody else very involved there, typically our REIT partner, it takes a little while to spend those -- a little bit longer to spend those projects up.

Okay.

Beyond that I'm who not sure I would draw any general conclusions around owned versus leased. We operate all of our assets in the same way.

Okay. And I assume there's differences in mix between the owned and leased that factor into the operating occupancies as well. Would that be a correct statement?

I'm sure it's true.

Okay.

Although to be honest with you, I've never even looked at it.

Okay. Okay. And then going back to the initiatives you have on the marketing side, is it -- I guess you eluded to the actual expense is not going to go up, so I assume there's some additional CapEx that's already embedded in your guidance. I guess what I'm trying to understand here, are the initiatives aimed to say take away some of the cost of outside referrals that you pay, you know, what portion, perhaps of your G&A or your costs there go to outside referral sources and are you trying to bring that, effectively bring that in house? Is that part of the initiative?

Well, we do, we do consider those costs as part of our overall sales and marketing costs. They're not in our G&A.

Okay.

Obviously we're doing what we can do manage all of our costs over time, but it is the case that the role of internet and the role of that sales and marketing channel is growing over time. And there's some intersection there between some of those other organizations you're talking about and the role of the internet.

Okay.

Would you like to add anything.

Well, I'm not sure I'm answering your question, but I would want to say that our new marketing initiatives, including our branding program, a large part of it, certainly not the only part but a large part of it is to better deal with the internet and social media in a way that people are accessing senior living services, which is largely nowadays not the resident themselves for most product types, but really their family members, and so we're evolving in order to take advantage of those new opportunities, again, around the internet, social media, and those sort of channels.

I guess the only thing else, my point was that there is some significant out -- I think those costs were fairly significant, and if you could bring them in house, it increases your operating margin. Is that the correct way to think about it, you know, like you said, the internet has become a more important source, so you want to bring it in-house rather than pay somebody else for those sources.

If you heard that, it would be true. But I'm not sure it's reasonable to assume that you could.

Okay.

We have in our Company on the order of 0.25 million inquiries a year.

Okay.

I'm not sure how we would shut off that channel.

Okay.

Or that we would want to, quite honestly.

Okay. And then the last question real quick is on the acquisitions front, you specifically talked about consolidation opportunities. Do you have a formal, not to bring the formal word back up again, but do you have a, I guess a formal strategy or dedicated person to go ahead and seek out acquisitions or will you look at having a dedicated person to seek out acquisitions as part of the consolidation opportunities or is it somewhat more you know as the opportunities just simply come to you? I'm just trying to understand because one of your peers, you know, has a person who looks for acquisitions. Do you see yourself actually looking for acquisitions in a more formal way?

Sure.

In a more meaningful way?

Sure. We have a team of folks, and have had a team of folks who are dedicated to sourcing and reviewing acquisition opportunities and we have an active pipeline of those sort of opportunities that we're evaluating right now.

Okay. All right. And what do you think is going to drive the consolidation? Is it something in the Affordable Care Act or healthcare reform or something else that you think consolidation will occur?

This is Andy talking. I think it's a host of different factors that are going to drive -- drive consolidation. We've seen activity everyone knows about on the REIT side of things. We also think it's going to become more and more obvious that the size, breadth, and scale of platforms which we have are going to be advantageous when you think about like the marketing program we just talked about, and innovate strategies in order to deal with the evolving marketplace. We just think it's going to become evident that size, scale, and breadth are important. And so we think that will -- is among many factors one of the things that will drive consolidation.

Okay. Okay. Again, appreciate the time, and look forward to working with you in the future.

Tom Truxillo, Bank of America.

Hey, guys. Thanks for taking the question. I appreciate the limitations you face on talking about a real estate deal that may or may not ever take place, but from someone that hasn't really watched your story as closely in the past as others on this call, can you kind of lay out how you think about real estate, the advantages and disadvantages of owning versus leasing and then, you know if the proclivity of RIDEA deals that are being done with REITs right now which would enable you to continue to participate in the upside of kind of managing the portfolio, if that changes the way you kind of look at whether or not you would pursue a real estate transaction?

I don't want to frustrate you. All those same factors are about how we think about things but we really are just not in a place to say anything further.

Okay. Great. Thank you.

Dana Hambly, Stephens.

Good morning. Thank you, and congratulations to Bill and Andy. I think I'll stay away from the real estate questions. Just on the cash -- (laughter) The cash G&A mark, it was about $130 million this year and I think you said you're looking more like $140 million, $150 million for 2013.

Correct.

What were the two items there? I think you called out?

Well, there will be some, that is predominantly compensation oriented in the overhead or a meaningful part is, but there's some natural inflationary growth.

Yes.

And that [rhymes] with that, one. Two, as Andy mentioned, we have worked on reducing spend and control in our field organization.

Yes.

So that as, if you look at those numbers year to year, resulted in a modest increase in cost. And then the third thing is, as we have very aggressively deployed new systems over the last couple of years, and watched those new technology like using hand held devices for EMR, deploying wireless in all of our locations, that has increased our software and hardware maintenance costs, much of which is reflected in our overhead.

Okay. But so presumably, though software maintenance costs stay at elevated levels going forward then right?

Yes, I think this is a new run rate that you would work off, quite logically.

Okay.

Obviously, we're also seeing again, expecting to continue to see real economic benefits of those investments.

That's right. Okay. And just lastly for me, I haven't heard an update in a while. Can you tell me where you are with the care transitions and the CMS pilot program and if you're seeing any, I know it's, it's small, small right now, just a handful of facilities, but any kind of occupancy increases being seen there or traction in getting referrals from the hospitals? Thanks.

That's still in its very early stages and all the protocols -- all of the number of different parties that have become involved in that, and all the base-lining and setting up to measure all those results. I don't think it's going to be the practice of the Company to report any, any interim kind of outcomes from that. I think that's part of the ground rules with the grant, so but it is -- it is proceeding.

Thank you.

We did have a couple of emails that folks sent asking us to clarify the NOI growth rates from 2012 to 2013 that are implicit in our guidance. Again, these are overall company senior housing growth rates, so not same store. Overall company, full portfolio, senior housing NOI growth rates are 7%, 7.5%. Okay?

Dana, are you done? Okay. With that, we'll close the call, and we appreciate everyone participating. Management will be around today to answer follow-up questions. Email me or give me a call. With that, we appreciate your attendance. Thank you very much.

Thank you for your participation, everyone. That does conclude today's conference call.