Brookdale Senior Living Inc (BKDT) 2015 Q4 法說會逐字稿

Good morning, my name is Ginger, and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living fourth-quarter and full-year 2015 earnings conference call. (Operator Instructions)

Mr. Ross Roadman, you may begin your conference.

Thank you, Ginger, and good morning, everyone. I'd like to welcome you to the fourth-quarter 2015 earnings call for Brookdale Senior Living. Joining us today are Andy Smith, our Chief Executive Officer; Cindy Baier, our Chief Financial Officer; and Mark Ohlendorf, our President.

I'd 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 other 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 Andy. Andy?

Good morning. And thanks for joining us. We always appreciate your interest in Brookdale's progress, and we have a lot to talk about this morning.

Today is a special day -- it's your first opportunity to hear from our new CFO. As you know, Cindy Baier joined Brookdale at the beginning of December and so I want to welcome her to the call today.

Thanks, Andy.

Cindy will review our fourth-quarter performance and talk about our 2016 outlook in detail. So I will focus my comments on the progress we made in 2015 and talk about the key drivers of our business as we look at 2016.

There are three things I would like you to think about. First, 2015 was an extraordinary year despite the challenges we had to overcome. And yet we are now well positioned to capitalize on our platform and strong industry dynamics. As planned we spent 2015 bringing together two really big enterprises to create America's largest senior living provider. Our goal, however, was always to make Brookdale not only the largest, but the best senior living provider. And we are well on our way to do so.

Putting all of our communities onto one set of systems and processes was an enormous task. Through all of this there were disruptions with occupancy decreasing and not meeting our own expectations. We began turning the corner on performance midyear. And the fact remains that Brookdale is well-positioned to capitalize on our market-leading position.

Here is why: the industry has strong macro tailwinds. The senior population is growing at a rate greater than any other population group. We know 70% of seniors will need an average of three years of some form of senior care. And at the same time, the number of those who traditionally have taken on the role of family caregiver is declining. And general awareness of what the industry does to improve people's lives is growing. There are so many more positive associations as more people have great experiences with our products and our services.

We are well-positioned because Brookdale brings a number of competitive advantages into this growing marketplace. I will remind you that seniors are attracted to the broad set of products and services we offer, so that as their needs change and increase, Brookdale is still the right partner for them. Also, we have a large footprint, with a presence in nearly all of the top markets, with large number of seniors and their adult children living quite close to a Brookdale community. So geography -- it's in our favor.

We have been investing heavily in the quality of our properties to drive occupancy and improve rate. Our size and scale provides us with the resources to continually improve how we attract residents, manage operations, and ensure the best possible care.

And finally, we have plans in place to address new supply. This includes the investments in our communities that I just mentioned. And in general, we continue to see new construction in our sub-markets at about half the rate of the overall market. Also, we believe that we will see positive absorption in most of our sub-markets over the next year as the number of potential residents who can afford our services grows faster than the new supply. And we also believe that penetration will potentially increase.

The second thing I want to share with you this morning is that, as I look forward to 2016, I am excited about our execution plan. We have our teams in place and we are focused on execution. In addition to Cindy becoming CFO in December, you will recall that Labeed Diab joined as Chief Operating Officer in early November. And I have to tell you he hasn't stopped moving yet. We are already seeing the positive effect of blending new ideas with the incredible depth of experience and knowledge within Brookdale -- that combination of fresh eyes and historical experience we cultivated by hiring Labeed and simultaneously promoting Mary Sue Patchett to report to him as she leads community operations.

So, in 2016 we are focused on execution, with three components to that. We plan to grow occupancy; we plan to grow revenue; and we plan to simplify and improve our day-to-day execution.

Here is our plan to rebuild occupancy in 2016: we are continuing our integrated multi-channel marketing campaign, blending national, regional, and local marketing activities. This campaign worked to improve occupancy in the second half of 2015, and we expect that will continue. This marketing blend increases the number of leads with a higher proportion of those leads being generated internally. Internal leads are better than those we buy, as they have a higher conversion rate than outside leads. So we have an execution plan for rebuilding occupancy.

We also expect to increase our revenue per unit growth by increasing monthly service fees and reducing concessions. Of course we are always careful about any price increases and we will remain sensitive to our customers' willingness and ability to pay. With the full adoption of our personal services plan system on January 1 in the former Emeritus communities, we can now better begin to capture additional revenue associated with the care that we provide in those communities. That will be a solid step forward regarding revenue.

Additionally, we expect to reduce long-term concessions made to encourage move-ins. Over the last quarter or so, we have had success with increasing short-term time-bound incentives while decreasing longer-term permanent discounts. This is a positive, because short-term concessions have a smaller impact on our long-term revenue growth while still stimulating demand for our units. The net result will be a powerful driver of revenue growth in 2016 and beyond.

The third piece to our execution plan, in addition to building occupancy and revenue, is to simplify our business. It's important to simplify and improve how we operate so that we can spend more time with those that we serve. Under Labeed and Mary Sue's leadership we are solidifying a number of operational effectiveness initiatives to simplify the workload of our community associates. And we're working to improve management of our sales processes to increase the sophistication of our unit pricing and to assure that our procurement processes capitalize on our increased scale. All of this will further increase our competitive position.

So we've talked first this morning about 2015 and the progress that was made in spite of our challenges. And we've also talked about our execution plan for 2016 -- growing occupancy, increasing revenue, and simplifying our business. The third thing I want to talk to you about this morning relates to our corporate strategy.

Now that the wholescale changes from the integration are largely behind us, we are in the process of refining our corporate strategy. Our primary objective is to maximize the strong foundation that we have today to create substantial value for our shareholders while reaffirming our commitments to our other stakeholders. Several months ago we engaged a top-tier strategy consulting firm to partner with us on this project, which takes a comprehensive look at how we reach full potential for Brookdale. This includes optimizing our portfolio to strengthen our position in priority markets, identifying opportunities to better leverage our scale and drive best practices through operational excellence, and driving new longer-term financial improvement by streamlining our G&A and our overall cost structure.

We are moving with haste, but this work will take a little time. We expect the initial phase of the project to continue into the second quarter of this year. And we look forward to sharing more with you as the project progresses.

Finally, I'd like to update you on the outcome of the work of our Board and Investment Committee over the last several months. As a reminder, we strengthened our Board last year by adding four new members with significant healthcare and real estate experience. Mark Parrell, Bill Petty, Lee Wielansky, and Dan Decker have been great additions to our Board.

The Board also reconstituted our Investment Committee and charged it with reviewing our capital allocation strategies and assessing potential options and alternatives available to us to create value for our shareholders. Management, the Investment Committee, and the Board, along with our financial and legal advisors, conducted extensive analysis and thoroughly evaluated a wide range of alternatives. And this included active engagements with a number of market participants. The Investment Committee and the Board have unanimously determined that, at this time, the best path for Brookdale to enhance shareholder value is to continue to focus on pursuing our long-term growth strategy and executing our existing business plan.

As I stated earlier, we believe that we are well-positioned to capitalize on our platform and our market-leading position, particularly with the integration of Emeritus largely behind us. By producing improved operating results and realizing upon the benefits of the merger, Brookdale will be well-positioned to create substantial shareholder value. With that said, the Investment Committee and the Board will be turning their attention in the near term to efforts to optimize our portfolio, leveraging the work underway with our strategic consultant.

We remain very disappointed in the performance of our stock over the last several months. And we continue to find that unacceptable, given our belief in the underlying value of our business and our growth prospects. The Investment Committee and the Board are also in the process of reviewing whether to authorize a share repurchase program as an additional means of enhancing shareholder value. There are obviously numerous considerations that must be taken into account in connection with such a decision. We will update you regarding these matters in the normal course of shareholder communications.

Now I will turn the call over to Cindy for the business performance review.

Thank you, Andy. It's a great pleasure to be here today. I am so excited to be part of the Brookdale management team.

I believe there is a tremendous opportunity to drive shareholder value, and at the same time we're providing critically needed services to seniors. You know, as I thought about joining the team here I realized that Brookdale is a company that really matters. We are the leader in a unique industry. Senior living is one of the very few industries with the potential to impact every single person in America, either right now or down the line. So it is very rewarding to know what a great and positive impact we can have on pretty much every American. So again, very glad to be here.

This morning I will take a few minutes to comment on our overall Company results for the fourth quarter of 2015 and then review our 2016 outlook. Let me start with our fourth-quarter results. We accomplished a lot during the quarter. And I'm pleased with our adjusted CFFO results. Importantly, we met our expectations.

Adjusted CFFO for the fourth quarter was $106.6 million or $0.58 a share. That is a 9.5% year-over-year increase. Our full-year 2015 adjusted CFFO per share was $2.40. As we described in our press release, we exclude integration, transaction, transaction-related, and electronic medical rollout costs from adjusted CFFO. The full details of these exclusions are in our press release and supplements.

Our fourth-quarter 2015 adjusted EBITDA, excluding integration, transaction, transaction-related, and EMR rollout costs increased 4.4% year-over-year to $197.5 million. Revenue for the quarter was $1.2 billion, nearly level with the fourth quarter of 2014. Our quarterly consolidated senior housing revenue per unit increased 1.9% year over year.

We had strong performance in our retirement centers, where our quarterly senior living revenue per unit increased 3.8% on a year-over-year basis. Our CCRC quarterly senior housing revenue per unit performance was soft because of a decrease in skilled nursing revenue. A moderate flu season decreased demand for nursing services. Our skilled nursing business was higher revenue per unit and the lowest margin compared to the rest of our portfolio. So the softness in skilled nursing has a larger impact on revenue than it does on operating income.

We were pleased with consolidated senior housing rates for the quarter. As we expected it was generally consistent with the third quarter.

Now that most of the integration is behind us, our main focus is on execution. And we're making progress on occupancy. Our fourth-quarter average occupancy for the consolidated senior housing portfolio increased to 86.8%. That is an improvement of 10 basis points from the third quarter.

We made significant improvements in our retirement centers, where fourth-quarter occupancy increased 40 basis points from the previous quarter. Consolidated skilled nursing performance, which represents about 3.5% of our portfolio capacity, was soft. Counter to historical trends there was a 13 basis point sequential decline in our quarterly skilled occupancy rate. Again, the moderate flu season impacted these results.

We continue to see progress in our sales and marketing initiatives. Our integrated, multi-channel marketing campaign produced more internally generated leads during the quarter than in the third quarter. Given that our internally generated leads have historically had the longest sales cycle, we believe that the benefit of the occupancy is mostly yet to come.

Looking at our senior housing portfolio on a same-community basis, we're pleased that our fourth-quarter 2015 operating income grew 4.1% on a year-over-year basis. We've made sequential progress on total quarterly revenue and our year-over-year revenue was slightly lower than the prior year.

Our ancillary services provided $17.3 million of operating income during the fourth quarter. That is consistent with the third quarter of 2015. I will note that this piece of the business isn't operating at the profitability that we think is possible, so we've invested in building the network and now we're working hard to build a caseload.

Also, we are continuing to roll out our programs into the former Emeritus buildings. So while our profitability wasn't where we wanted it to be during the fourth quarter, we have reason to be optimistic that the caseloads will improve as we become better-integrated into these communities as a provider of choice and we will be better able to leverage our fixed costs. Unfortunately we're still working on the regulatory permit issue in California. Movement there would be a significant progress.

General and administrative expense was $92 million for the fourth quarter of 2015. G&A cost included non-cash stock-based compensation expense of $5.8 million. It also included integration, transaction, transaction-related costs, and electronic medical record rollout costs of $23.6 million. General and administrative expense, excluding these items, was $62.6 million. This is a $7.4 million increase from the fourth quarter of 2014 and was driven primarily by increased advertising costs, a change in where rebates are reported for G&A into the communities to more accurately portray where all the operating cost-savings are occurring, and staff returning from integration work, back to their regular job.

Let me point out a few additional items on the income statement. You'll see several large non-cash charges this quarter. The first is an asset impairment charge. By way of background, every year we perform a review of our assets to measure carrying value against estimated fair value, given projected cash flows. This quarter, based on that review and the decline in occupancy over the year, we are writing off $57.9 million of carrying value.

And second, we recorded $105.3 million tax valuation allowance on the income statement, following GAAP accounting guidelines as we review our deferred taxes. This is a GAAP matter, not a tax matter. We still expect to eventually use all of our net operating losses for tax purposes, as we now project that we will become a federal taxpayer in 2020.

Turning to the balance sheet, nearly all of our $3.6 billion of debt is secured mortgages, along with a $310 million outstanding on our secured line of credit at the end of the year. We will have a relatively small amount of maturities this year and are already working to refinance some of our post-2016 maturities. Remember, this is high-grade debt sourced in the mortgage-backed securities market where we haven't seen any reduction in credit availability. At the end of the quarter we had a $106.6 million available under our line of credit and $88 million of cash for a total liquidity of $194.6 million.

At the end of the year we sold the first group of assets that we had previously discussed as slated for disposition. The rest of the transactions are scheduled to close over the next few months. We have isolated these assets held for sale on the balance sheet and their results will be included in our results until they are sold.

To summarize, we accomplished a lot during Q4. Now let's talk about our outlook for 2016.

We're targeting resident fee revenue, which includes senior housing and ancillary services revenue, to be in a range of $4.2 billion to $4.3 billion. The midpoint of our guidance represents a growth of approximately 2%. Remember that the 2015 base has the communities that have been disposed of or will be disposed off. Removing these communities from the base would add approximately 2 points to revenue growth, resulting in a growth rate of over 4%. More specifically, on Brookdale ancillary services, we expect ancillary services revenue to be in the range of $470 million to $490 million as we continue to roll out into the former Emeritus communities and expand outside our walls.

Our outlook for adjusted EBITDA is $935 million to $955 million, excluding certain items I will mention in a moment. The midpoint of our guidance represents growth of approximately 4%. We're targeting CFFO to be to $2.45 to $2.55 per share, excluding these same items. The midpoint of our guidance represents growth of approximately 4%.

Our adjusted EBITDA and CFFO guidance excludes these items: transactions and transaction-related costs; costs associated with our final integration efforts, including some upfront costs to recruit our new leadership team; strategic project costs, such as scaling and enhancing systems like CRM to meet the needs of our larger Company; refining our strategy; capturing procurement savings and cost efficiencies; rolling out EMR to our assisted living and memory care communities. We expect that the 2016 amount of our adjustments to CFFO and adjusted EBITDA in the aggregate could be less than half of the 2015 total of $123.7 million, excluding any expenses associated with unplanned transaction activity.

2016 is our building year during which we expect to deliver a meaningful improvement in the senior housing business. We stabilized our occupancy levels and are positioned for continuing growth during 2016 and beyond that. We expect to see the normal seasonal pattern for occupancy growth with the second half of the year producing more growth than the first half.

As you think about our guidance for 2016, remember that we lost occupancy during the first half of 2015 and stabilized occupancy in the last part of 2015. So our year-over-year comparisons in the first half of the year will be challenging as we rebuild occupancy. The first quarters are a particularly tough comp. Note again that we are expecting to make progress in improving our occupancy over the course of the full year and subject to normal seasonal patterns.

Pricing will be one of the primary drivers of revenue growth. As Andy mentioned, we expect to make significant progress on growing revenue per unit, particularly in the former Emeritus communities.

We expect our portfolio will be slightly smaller in 2016 than it was in 2015. We sold 16 communities at the end of 2015 and we're in the process of selling 18 additional communities in 2016. These communities represent 2,933 units and approximately $90 million of revenue in 2015. The communities produced little operating income and the disposition will result in a slightly lower interest cost. So the disposition isn't expected to have any meaningful impact on adjusted EBITDA or CFFO.

We will be focused on solid community operating expense control in three areas: first, we expect to partially offset potential wage pressure with expanded use of our labor-management system. Second, we are consolidating facilities management to a single nationwide vendor. And third, we have initiatives designed to consolidate and optimize our food and beverage spend. These last two areas, consolidation of facilities management, and consolidating and optimizing our food and beverage spend, are examples of how we can leverage Brookdale's size as a competitive advantage.

Our business isn't yet running as efficiently as we believe it can over time, and so we're focused on capitalizing our industry-leading position. We've got the largest platform in the industry and we are managing over $6 billion of revenues when you consider the revenues of our managed communities. So we believe that there are many opportunities to capitalize on this scale.

During 2016, we expect our G&A expenses to grow faster than revenue for three reasons: our associates who are focused on integration have returned to their day jobs; our bonus compensation will return to a more normal level; and we will continue to build the technology platform to support our long-term growth potential. For example, we are enhancing the capabilities of our corporate sales and marketing functions to create more sophisticated approaches to procuring and managing leads.

With all that said, we expect G&A to be in a range of $255 million to $265 million, excluding the noted items above. Our G&A percentage as a percentage of revenue is higher than we would like it to be in 2016, and we're launching initiatives to improve our future G&A ratios, including working with our strategy consultant to assist with our cost realignments.

While we have completed the vast majority of Emeritus integration, we believe there is opportunity in the G&A area to improve our efficiency through automation and process redesign. We will be starting a comprehensive review of G&A costs to identify areas with the potential for additional savings. We will give you additional information on that as the project progresses.

During 2016, we're targeting very significant improvements in our operating cash flow. Improving the profitability of the business should drive 3% to 7% improvement in CFFO. The largest driver is increasing our revenue faster than our expenses. We believe strongly that in 2016 we will appropriately capture our rate increases and continue to see positive mark-to-market in our rates. Also, we expect to regain market share as we improve our occupancy during the year.

For all of the reasons that Andy highlighted a few minutes ago, we believe that we can achieve significant improvement in 2016.

Over the last several years, we have chosen to reinvest much of our operating cash flow back into the portfolio. You may recall that legacy Brookdale launched a multi-year program in 2010 to refresh its portfolio. This had a primary focus on acquired communities with significant deferred-capital needs. This program has been active for five years and has made significant physical improvements to the portfolio. Additionally, as part of the merger, we underwrote a three-year process for renovations and deferred infrastructure projects specifically for the legacy Emeritus communities.

So as we look at 2016, we expect our recurring CapEx, which is included in CFFO, to be $65 million to $70 million net of reimbursements. We expect our total CapEx, net of reimbursements and excluding the recurring CapEx, to be approximately $255 million to $265 million, including EBITDA-enhancing major projects, corporate, and Program Max, our development program. Once the accelerated renovation CapEx is completed during 2017, we will focus on getting back to a more normal run rate for community CapEx. This will keep us in the forefront as an industry leader.

So that's the summary for the fourth quarter and our 2016 outlook. We accomplished a great deal last year and we have solid plans in place for 2016 to be a year of rebuilding.

As I turn the call back to Andy, I'd like to say once again how excited I am to be part of the Brookdale Management Team. I see great opportunity ahead of us to strengthen the business and to enrich so many more lives. I believe that 2016 is an important year as we leverage our size and scale as the largest senior living provider in the country. Thank you.

Andy?

Thanks, Cindy.

As we get ready to take your questions now, let me summarize by saying I'm encouraged by the progress we are making. With the systems integration activities largely behind us, we have our teams up and running.

We have a solid execution plan to grow revenue and to simplify our business. And we are making important refinements to our corporate strategy to maximize the strengths of the entire enterprise. We're happy to turn the call over to questions now.

(Operator Instructions) Your first question comes from Ryan Halsted from Wells Fargo.

Thanks, good morning.

Hey, Ryan.

I was hoping you could maybe provide a little more color on the revenue growth guidance. It sounds like you are looking for some occupancy gains. Would you be -- could you sort of outline what kind of occupancy increases you are looking for? And then obviously pricing is a big driver; any more color on where you are seeing the pricing outlook?

Well, as Cindy said in her prepared remarks, you heard the revenue expectations we have, we expect occupancy to behave similar to or in accordance with seasonal patterns. So a little bit softer in the first part of the year and then we expect occupancy to grow in the latter half of the year. To the -- breaking down revenue, we would expect to see more revenue growth from the rate-side of the equation than the occupancy-side of the equation.

Okay. And then on that rate growth outlook, any sense of the range of rate growth that you are looking at? I mean in the markets where you think you have significant pricing power, I mean how aggressive do you really think you could be relative to the overall industry?

And then in those markets where maybe it's a bit more competitive, is the outlook for pricing to be above wage or cost inflation by a certain basis points about 50 BPS to 100 BPS? Is that how you're thinking about the dispersion of your rate growth?

Well, we are expecting and intending to capture pretty strong rate growth generally speaking in 2016. Now, obviously, we adjust our rate expectations by what's going on in the local markets so if there is new capacity that's coming on board we have to adjust our rate expectations to account for that.

But as, again, across-the-board generally speaking we are expecting to be on the stronger side in terms of our rate increases, both with respect to in-place residents and with respect to residents that we move in as we mark-to-market. And we do expect our rate increases to reflect the fact that we are expecting a little bit of labor pressure, certainly in pockets of the country, on the coast, a little bit in the Midwest, so we expect our rate to increases -- our rate increases to be in excess of what we expect our labor increases to be.

Okay. And so on that last point, you are guiding to 4% revenue growth. What kind of additional headwinds are you expecting that is not contributing to more operating leverage where you might see 4% top line growth translate to 5%, 6% EBITDA and CFFO growth like it has in the past or historically?

So, Ryan, this is Cindy. Thanks for the question. One of the things that's different for us this year is that we are ending 2015 with a lower occupancy than we started 2016 (sic - see press release, "2015"), so we have to grow occupancy during the year to achieve our 4% revenue growth adjusting for those 90 dispositions.

We feel pretty good about the rate increases that we have had, particularly given that our January rate increases have gone very smoothly for us.

Okay. I will get back in the queue. Thank you.

Thanks, Ryan.

Thanks, Ryan.

You next question is from Joshua Raskin from Barclays.

Hi, thanks, good morning. So you know, in light of the comments, Andy, that you made around the Board of Directors finalizing their process and looking at external opportunities and everything and just deciding that the long-term growth strategy is the best for shareholders, can you help us understand maybe, what does that really mean?

I mean, I don't think the Street's particularly excited about the growth rate in earnings for 2016. So, what is normal? What does long-term top line growth mean and then what does that translate into, you know, long-term EBITDA or CFFO growth?

Well I would say, Josh, that, again as Cindy said in her prepared remarks, we view 2016 as a year of rebuilding. Again we believe we have stabilized the platform coming through the integration and so we think we're using 2016 as a starting off point to build long-term value.

We would expect over time that our growth rates would be in excess of what we have in place for 2016. But again, as we come into 2016 we face a reality that our occupancy rate, when compared to January of 2015 to January of 2016, is lower. And we expect to make meaningful improvement on that and meaningful progress on that, on the occupancy front as we go through 2016 but it is a reality that what we're starting off with.

So I don't think the growth rates necessarily -- at all reflect what our longer-term expectations would be into 2017 and beyond that. Again, going back to the merger, we were always clear that we thought we would get the -- realize the full benefits of the merger in the third year, 2017.

We continue to believe that will be true. And you know we are excited about our long-term prospects but we are where we are starting off 2016.

That's fair. I guess, Andy, more from a bottoms-up, as you think about Brookdale business model, your opportunity long-term, favorable demographics, ability to sell ancillary services. What is long-term, not 2016 or 2017, for the next five years what does revenue growth look like on an annual basis and what should that mean for a bottom line growth?

Well, I'm not in a place to give you, again we are working, we are excited about the work that we are doing with our strategy consultant. We would expect, as we go through 2016, to lay out for you all or for everybody who's interested in Brookdale, our longer-term growth prospects. But I'm not in a position right now, Josh, to give you guidance on five years.

That is part of the work that we are doing with our strategic consultant. Again, I would reiterate though, we think our growth prospects in the outer years are certainly more robust than what we are guiding you to in 2016.

Okay. And then just maybe one follow-up on a more -- smaller detail level. You talked about the in-house versus external lead generation and the focus on in-house. Can you give us a little more color on statistics around that?

What do conversion rate looks like? Do you do a little bit better on rate? Are concessions lower? All that sort of stuff.

The conversion rate for internal leads as compared to external leads, those that we buy, is about 4 times greater. There is not a meaningful difference between the concession rate or the discounting that we might do because our sales folks are going to be using their toolkits and their discounting programs or their stimulative programs consistently irrespective of who the lead might be. But the conversion rates are what is most important, which is about 4 times higher. And therefore a much more productive lead source for us.

I can also add that when leads come in from our internal sources they tend to have a healthier population and they tend to stay with us longer. So once the move-ins occur, they tend to be residents with Brookdale for a longer period of time.

Okay. That's helpful. Thanks, Cindy.

Thanks Josh.

Yes, that's it. Thanks.

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

Hi. Thanks so much for taking the question here. So I guess a couple of questions here. You mentioned the marketing campaign and you're seeing some benefits there, so can you talk about costs there? What costs has been incurred in 2015 and what do you expect in 2016?

And the other question I have on the Emeritus deal is specifically you mentioned about the synergy, so similar question. How much was realized in 2015 and what's included in 2016?

Okay, I will take the marketing costs. Our marketing costs were a little inflated in the fourth quarter, which Cindy mentioned. The marketing costs that we have in our plan for 2016 of course are included within the guidance that we gave you. I would say marketing is a little bit elevated as compared to 2015. But we don't expect to have a huge additional marketing budget as compared to what we showed for 2015. Synergies?

Joanna, your second question was overall synergies from the Emeritus transaction?

Yes. Correct. Or however you want to break it out, if that's possible as well, would be helpful.

Okay. The G&A number that Cindy guided to for 2016 is a post synergy G&A number. So by the time we reached the end of 2015, the infrastructure is substantially combined from the standpoint of cost. The ancillary service synergy, we continue to see those numbers achieving our targets in 2017.

We have had some delay again related to both the development of the caseload and getting the permits in California. So if we looked at 2016 separately it would be a bit behind the initial forecast that we had done, but 2017 we believe continues to be intact.

The community-level cost savings, we are running well ahead of the non-labor forecast that we had done. We achieved procurement level savings, so this is buying food and supplies and so forth, of a little over $30 million in 2015.

We expect that synergy number procurement-wise to grow to a cumulative roughly $70 million in 2016. And beyond that we are also achieving some significant savings in the insurance programs. So running well ahead of our initial targets in terms of community-level cost savings.

So that's, I'm sorry so you said $70 million cumulative by the end of 2016? Pretty much, $30 million or $40 million incremental in 2016, that's really what's driving the EBITDA year-over-year growth at the midpoint of 4%? Is that the way to think about it?

To some extent. Now again, recall as Cindy said, the occupancy is starting the year at a lower level than we started 2015 so that is the other item that you will have to consider in your calculus.

Right. And are you willing also to talk about the breakdowns in terms of the pricing versus occupancy. Are you -- I guess you did kind of suggest that you still expect occupancy to grow in 2016 versus 2015.

Is that the right way to think about it? But that's going to be minimal if you are talking about the midpoint of your guidance, I guess implying revenue growth of 2%, so that is pretty much all pricing. Is that the way to think about that?

Joanna, this is Cindy. We do have to improve our occupancy during the year because, 2015, we lost occupancy during the year. So we're expecting to build occupancy during the year but we're not expecting a significant average occupancy increase year-over-year. Does that make sense?

Right; you have a starting point, clearly it's lower. And then last question --

Joanna, just to be clear, the starting point is lower; that is a reality unfortunately. We also expect a portfolio to behave in accordance with seasonal patterns which we've discussed many times before. So we do have -- we do expect to, over the course of the year, subject to those normal seasonal patterns, we expect to begin to get back the market share that we lost.

Great. And then, last question. A quick one on, I guess, on leases. I appreciate all the details in terms of the guidance for the year, the different elements. So can you just remind me, 2016, right, is the year when you will get some benefits from the HCP transaction and then what was the amount of the savings on leases?

There's $6.5 million of interest savings from the HCP transaction built into the 2016 guidance.

It occurs largely towards the end of the year.

Great. Thank you. That is all for me.

Thanks Joanna.

Thank you.

Your next question is from Brian Tanquilut from Jefferies.

Good morning, guys. I guess, Andy or if Dan is in the room, the question that I have, just on the decision of the Board, on the strategic review, and given where the stock is and how it's traded over the last year or even the last three months. How do you -- how do we think about the options in front of the Company and the Board today to generate shareholder value, considering that you guys have obviously done an evaluation of the strategies and the options there?

Yes, well we have and, as I said in my prepared remarks, we, after having done an exhaustive evaluation, the Investment Committee and the Board has determined that in terms of getting the -- capturing the real shareholder value that we think is inherent in our assets and our platform, we think the best thing to do is to keep the Company organized the way it is right now and execute upon our plan. Now obviously that decision is made in light of current market conditions, in light of where our share price is trading, in light of what we think the value -- what we are confident that the overarching value of the Company is.

We have to take all of those things into account, our Board does, in considering whether there are additional transactional methods of capturing that value. And at the moment, the Board has decided that after all of this work that the appropriate thing for us to do, in order to create value for our shareholders, is to keep the Company organized the way it is right now, to execute upon our plan, to refine our strategy through the work with our strategic consultant along with all of the management team, and to build the longer-term value that we think is inherent in our business.

Andy, we've seen you guys sell some real estate here and there in the past and I think we're all in agreement that the stock is trading below real estate value, so is that an option at this point? Given tax liabilities and operational considerations.

You can be assured that, I think you heard when I, in my prepared remarks I talked about optimizing the portfolio. One of the components of that is at least potentially thinking about a disposition program for additional set of assets as we prioritize the markets we wish to be and we try to maximize what the portfolio is and looks like and enhance our future growth prospects.

So, sure, it could include that in a variety of different forms and fashions and so we're working on that. That is a tool in the toolbox.

Okay. And then just from a confidence on the guidance perspective, obviously 2015 was tough, so how do we gain confidence in your visibility into rate growth which you talked about rate growth being the stronger driver of revenue growth this year? What is your visibility into that and how do you have confidence in your ability to hold or grow occupancy at this point?

Well, Brian, you are right that 2015 was a tough year for us and we certainly are glad that these wholescale integration activities are largely in the rear view mirror. So we think we've got a base to build upon and a platform and a team here that is newly augmented to really reinforce all of the good stuff that we had going on in Brookdale in the first place.

In terms of rate, our confidence around -- remember we raise rates two different ways. One is with respect to our in-place residents and in the assisted living portion of our businesses -- assisted and memory care portion of our business, which of course is the majority of the units that we have, we raised those rates in the first part of the year. January, for the most part, to a more limited extent in February.

As Cindy indicated in her prepared remarks, that process has gone smoothly this year. And so we have growing visibility or visibility into the rate increases that happened in January. That gives us confidence.

We also believe that, based upon the investments that we've made in our communities, especially the Emeritus communities, and our consolidated portfolio, those investments were completed towards the latter part of the year. That gives us confidence that those buildings as they've been refreshed, that we can grow rate in those communities. We think we're making -- we have made a number of improvements with respect to our marketing and sales processes that we likewise believe will give us increased opportunity to capture rate.

I mentioned in my prepared remarks that we now have complete visibility in the differential between what the care piece of the charge was in the legacy Emeritus communities as compared to legacy Brookdale communities. We know that there is a large differential. We can't capture that differential immediately but we can begin to capture it going into 2016 and that is a big opportunity for us to grow rate and revenue in those communities.

So that is a number of the factors that give us confidence that we can increase rate the way we have discussed and what's included in our guidance.

And I really want to add that integration of any large company or any large merger is very disruptive. What Brookdale saw, to a certain degree, is to be expected. And I'm happy that the integration is largely behind us so that we can get back to the business of operational execution and focusing on delivering our guidance.

All right got it. Thanks, guys.

Thanks, Brian.

Thanks, Brian.

Your next question is from Frank Morgan from RBC Capital Markets.

Good morning. A couple housekeeping here. Just to go back to the ancillary part of the story for just a second. The guidance for 2016, that does not assume any approval in California is that correct? Or true or false?

It is not specifically dependent on any approval in California although we do hope that our licenses will come through.

Okay, so if they were to come through, that would be an upside in ancillary?

That's correct.

Okay. And then in terms of going back to this portfolio optimization, could you give us any kind of general framework about how potentially big that could be in terms of number of facilities that you would evaluate looking at for disposition?

Frank, it would be again, the 34 communities that we have announced, 16 of which we have disposed of, the balance of which we're in the process of disposing of over the next several months, those did not fit into any strategy that Brookdale had for going forward.

We are not in a place right now to articulate any plans for additional disposition activity either in terms of the size or the scale of it. I will say to you that, that is simply a project that we are working on both as a management team and along with our consultant, we are working on that.

Got you and maybe one for Cindy or actually for all of you. As you look at your balance sheet, obviously you did talk about maturities and refinancings, it seems like that is going well. But longer-term how do you feel about leverage and comfort with levels of debt, particularly with the commentary about considering looking at share repurchase?

I'm pretty comfortable with our balance sheet. The 2016 debt, we don't have very many maturities. Our, the majority of our 2017 debt is either in the process of being extended or it is secured by assets that are either under sale or under contract. There is a large amount of leverageable equity included in our 2018 maturities.

Now most of our 2018 debt is fixed, so refinancing too far out triggers some significant prepayment penalties. I think we've got enough levers that we can look at that we should be fine.

Clearly, we want to focus on improving liquidity, any CFO in any company would say the same. But I feel very comfortable with where we are.

And do you have a longer-term target for leverage levels, like debt-to-EBITDA or adjusted debt-to-EBITDAR

I'm comfortable with where we are and also comfortable if we took it down a turn or so.

Okay and I guess one final CFO kind of question, now that you got your annual guidance out, you made commentary about seasonality, but in terms of just the cadence over the quarters of the year do you want to offer us any last minute guidance on how you see those directionally over the four quarters of 2016? Thank you and I'll hop off.

I think seasonality is the big driver. And I think the second driver is comparing against the comps of 2015. Clearly we are starting the year at a lower point from occupancy that we would like, and so we have got to rebuild that during the year. Those are the primary cadence points I would point to.

Okay, thanks.

Thank you very much for the question, Frank.

Your next question comes from Chad Vanacore from Stifel.

Good morning.

Hey, Chad.

So one of the things that's pretty clear is that there is a divergence in performance on the legacy Brookdale portfolio and on the Emeritus portfolios, so what are some of the differences in those portfolios that are driving that performance?

Well, you are right there is a differential, at least if you look at the same store numbers. As you know and we've discussed many times, the rate performance in the Emeritus portfolio has for quite a long time been relatively low, pretty anemic. That is one of the drivers.

We've also had to, again in accordance with our plan, we've added labor to some extent to the Emeritus portfolio as we've gone through 2015. That is likewise part of the driver.

But I would say the big differential is occupancy in both portfolios suffered in 2015 and is not yet recovered. Rate performance in the legacy Brookdale portfolio was much stronger than in the legacy Emeritus portfolio. And again the Emeritus portfolio has had a little bit of, well we've added labor to it through the course of 2015.

The only other thing that I would add is we're getting some synergies in the Emeritus expenses, particularly improvement in our insurance performance as a result of better claim.

All right then. Also, it looks like you've got that JV with HCP and that seemed to actually perform better. What are you doing there that's driving performance?

Well, you are talking, not about the entrance fee JV, but the core, the traditional seniors housing JVs? Is that what your question is directed at?

You could unpack both of those for us.

Okay, I can answer both. With respect to the entrance fee portfolio, we had a very good quarter in that joint venture with respect to entrance fee sales. We just sold a lot of contracts in the fourth quarter and therefore the net entrance fee receipts were quite strong.

With respect to the other joint ventures we have with HCP that are -- embrace the core seniors housing products, independent assisted and memory care, i.e. not the entrance fee platform, I think it is fair to say that those joint ventures, especially the one that includes 49 assets that came from Emeritus, HCP, which we own 10% of that joint venture, HCP invested very heavily and very rapidly in terms of the CapEx that they drove into, or that we collectively, drove into that platform. And I think a big driver of the growth and a big part of the performance of that platform has been those investments that we made along with getting those assets onto Brookdale's systems.

All right and then how should we think, you had mentioned of the wage pressures in 2016,how should we think about that and how does it balance against the synergies and cost controls that you expect?

So we are expecting our wage rate increase of about 3.5% and that includes 2.5% normal inflation and then we've got some add-on pressures for minimum wage as well as wage pressure in certain parts of the country, predominantly on the West Coast and specifically in California.

All right. That's it for me. Thanks.

Thanks.

Thank you.

Your next question is from Dana Hambly from Stephens.

Thanks, good morning. With the stock now off another 15% this morning, Andy, you mentioned a share buyback. Would this kind of movement influence a decision sooner rather than later on that?

Well, I think our Board will act with urgency with respect to the repurchase issue. Again, we have to balance a number of different factors there. I haven't been even looking at what is going on in the market today because we are on this call.

But you can presume that the Board -- as I said, we are extremely frustrated as a Board and as a management team. We are extremely frustrated with our where our share price is. We don't think it's -- we're trading on the fundamentals. We don't think it reflects in any way the intrinsic value of our assets or our business.

So we have to balance, as a Board, the obviously attractive investment opportunity that buying our shares back represents. But we got to make sure that we are careful in that or at least balanced in that: the source of funding for such a program, our need to continue to invest in the quality of our assets and the current economic environment that's out there which includes the fact that leverage is out of favor. And so while, as Cindy said, we are comfortable with our current leverage levels for sure and we've got plans in place to refinance our 2017 and 2018 maturities, we've just got to be mindful of the situation and where we are leverage-wise.

But we are going to be working on it very hard. We are very frustrated with where our share price is which we know is true of our shareholders and it certainly is true of management and our Board. We're looking at that with urgency, I will say that.

Okay. That's fair. And, Cindy, what is the -- what is your access to capital right now --

Yes, we have access --

-- if a buyback happens?

We do have access to capital through our line of credit as well as some under-levered assets in our portfolio.

Okay. And the engagement with this consultant, is that an open-ended engagement or is there some finality to that?

Well, it's not open-ended. I mean we have a clear set of work streams that we've been working on with this consultant for the past several years to improve the business, to hone our strategy and to make sure we are getting the full advantage of the Brookdale platform. But no, it is not an open-ended thing, Dana.

All right. That's helpful. Then just on the -- I know you are not giving quarterly guidance and I'll have to go back and check the transcript, but it sounded like the first quarter was not going well and I hope that is not the case.

And so obviously it is a difficult year-over-year comp but maybe, how can we think about the first quarter sequentially? Did occupancy deteriorate towards the end of the fourth quarter? I would think with being kind of a light flu season that would set up pretty well for the first half of the year.

And any color you could add there would be helpful.

Well, we're certainly not sending a signal that it was negative with respect to the first quarter of 2016. I think the only thing that we were trying to do was to reflect the fact that, again there is a reality here that our starting point compared to the first quarter of 2015, in terms of absolute occupancy is lower.

But our -- we do expect normal seasonal occupancy patterns to occur in the first quarter of this year but I will say that the January performance of the platform was completely consistent with our plan.

Okay. Thanks very much.

Yes.

Thanks, Dana.

That is all the time we have for questions today. I will now turn it back over to Mr. Andy Smith for any closing remarks.

Okay. Thank you, all, for joining us this morning. We are pleased to report to you about our plans to grow occupancy, to increase revenue and to simplify our business.

And we are excited about the refinements to our corporate strategy and the works to maximize the strengths of the entire organization. We look forward to talking with you in a few months at the end of our first quarter of 2016. Thanks again.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time you may now disconnect.