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Brookdale Senior Living (NYSE:BKD)

Q4 2012 Earnings Conference Call

February 12, 2013, 9:00 am ET

Executives

Ross Roadman – SVP, IR

Bill Sherriff – CEO

Mark Ohlendorf – CFO

Andy Smith – EVP, General Counsel

Analysts

Kristina Blaschek – William Blair

Kevin Fischbeck – Bank of America Merrill Lynch

Jack Meehan – Barclays

Darren Lehrich – Deutsche Bank

Frank Morgan – RBC Capital Markets

(Mick Ilico) – Macquarie

Daniel Bernstein – Stifel

Tom Truxillo – Bank of America

(Dana Handley – Stephens)

Operator

Good morning. My name is (Marlee) and I will 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.

Ross Roadman

Thank you, (Marlee), and good morning, everyone. I also would like to welcome you to the fourth quarter and full-year 2012 earnings call for Brookdale Senior Living.

Joining us today are Bill Sherriff, our Chief Executive Officer; Mark Ohlendorf, our Co-President and Chief Financial Officer; and Andy Smith, our Executive Vice President and General Counsel.

As (Marlee) mentioned, this call is being recorded. A replay will be available through February 26th 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 Sherriff. Bill?

Bill Sherriff

Thanks, Ross, and 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 to introduce Andy to you. Some of you have had the chance to meet Andy and get to know him, 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 is 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.

American Retirement was a partner by Brookdale, I’ve felt extremely fortunate to be able to persuade Andy to join Brookdale to building what we knew could be an industry-leading enterprise.

While his title has been Executive Vice President, General Counsel, he has 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 and 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 and all of our financings and risk management. All of our key capital structure participants know Andy. He has the key to relationships with our REIT partners, lenders and insurers.

Andy also has had the responsibility of the company’s strategic planning process and has led us through the 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 the 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 our various field 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 want 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 (me) this business all the wonderful things that they do to making a (inaudible) 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.

Andy Smith

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, 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, out 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 providers 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 that 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 opportunities 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 margins through higher occupancy, rate improvement and tight expense control.

One example of this focus is that we have recently made change 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 medial. 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 engagements with seniors and their families with the final result of more people experiencing the benefits of what we do.

The development of 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 (NYSE:X) development program.

Program (X) allows us to reposition our communities to best compete in the evolving marketplace. Our completed Program (X) projects are producing mid teens returns on the capital invested. 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 structure 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 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 needs 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.

Bill Sherriff

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 continued to gradually improve and we saw 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 an improving market and the challenges effectively operating a large portfolio that uniquely offers the 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 per 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 redouble its effort with (inaudible) 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 into our community operating structure. We also created a function to effectively interface with the third-party owners of the managed communities who have a variety of needs and depending upon 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 (X) completing 10 projects with very good results. We have 22 additional Program (X) projects underway and a robust pipeline of future opportunities is building.

We have spent the year continuing to strengthen our platform, bringing innovation into business with initiatives like the electronic medical records 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.

Mark Ohlendorf

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 30 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 of our top 20 markets showing increases with those increases anywhere from a tenth of a percent 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 and marketing resources, for example, local community sales staff and increase 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 were at 95% or greater occupancy improved gradually throughout 2012 from 186 in June to 208 in September to 222 in December.

Our Tier 4 same-store senior housing rate increases 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 we’ve seen for some time.

Another highlight for the quarter was our 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 than move outs with the occupancy and the IL component of the entry fee CTRCs 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 the longer term structural improvement in the ongoing operating cash flow of the entry fee CTCs 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 a 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 point 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’d 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 cost 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 focus on regeneration in the recovery 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 costs was non-cash stock based compensation expense of $6.3 million and integration transaction related and EMR roll out costs of $7.2 million, of which roughly $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 (inaudible) 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 formally leased communities which we discussed last quarter plus one additional formally leased community for a total of 12 lease repurchases. 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 base our guidance on a continued gradual improvement in the economy throughout 2013. We’d expect to see growth in our occupancy due to the improved environment, a 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 highest returns with expansions, redevelopment and repositionings at the top of the list.

We’d 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’d 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, affects both skilled nursing rates in 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 days that 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’d expect to see flat growth in operating income. Revenue’s 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 with 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 spending utilization as they near the calendar year approval cap.

Of course, there is meaningful uncertainty around the ISC segment’s forecasted performance in near term due to the unknowns in 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’d expect our cash G&A expense, excluding non-cash comp and integration transaction related and EMR roll outs, 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 repurchases 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 repurchases as well as refinancing the 2012 maturities, some at higher spreads.

While this all is somewhat dependent on the ultimate interest rate of the refinancing, we would expect there 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 routing 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 (X) projects to expand, redevelop and reposition our communities and expect to invest $75 million to $85 million of net cash on 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?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ryan Daniels – William Blair.

Kristina Blaschek – William Blair

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?

Mark Ohlendorf

We actually saw a typical continuing behavior on the sales pipeline side. We continue to see increase 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 ticked up a little bit but at the same time our occupancy in the skilled nursing part of the portfolio 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.

Kristina Blaschek – William Blair

And then 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?

Mark Ohlendorf

The incentive programs have been largely unchanged since the middle of 2011. We’re obviously repackaging market to market depending on how the markets are behaving but really no significant change there.

Kristina Blaschek – William Blair

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?

Mark Ohlendorf

They are 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.

Operator

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

Kevin Fischbeck – Bank of America Merrill Lynch

I guess a question since the new CEO change has gotten a few people’s attention as well as the potential for a real estate transaction. I appreciation your inability to comment specifically but maybe you can go back and talk about your roll in that decision process historically, what you’ve been involved in around those discussions and anything you can give color there about how you start the process.

Andy Smith

Kevin,, two things on a particular note because 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 it evolving and the opportunities that we have in that regard. And so that’s really, frankly, where I 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 and coalescing the team about the vision of where the company needs to go. So I’ve spent a lot of time on that topic as well.

You’re right, though. We can’t – aside from that and aside from saying that I spent a lot of time thinking about and working on our capital structure, we simply can’t say anything more today on that topic.

Kevin Fischbeck – Bank of America Merrill Lynch

I guess moving to the guidance, a lot of color there, which was very helpful, I think you still have, though, another nine or so facilities with purchase options. Does your guidance assume anything around those?

Andy Smith

These lease terms are relatively long and I actually don’t think any of those options are even active in the coming year.

Kevin Fischbeck – Bank of America Merrill Lynch

And then I guess can you talk a little bit about – I think that the occupancy numbers were fantastic and the rate numbers were good too. But the cost numbers were a little bit higher and it sounds like you got some initiatives.

I think in the prepared remarks there’s some comments about 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 do you need to have there to really move the needle back down?

I guess you talked about the cost growth moderating from 2012 into 2013. How much of that is a function of just some of these one-time items going away? How much of it is what you’re doing at the facility level, if you would go into that a little bit more?

Bill Sherriff

Let’s go back and again repeat the numbers on the fourth quarter a little bit. The dollar increase in our same-store operating costs is $18.7 million if we compare fourth. Included in that $18.7 million are the three items I called out: $1.8 million related to 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 costs went up because our performance was so strong.

So 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 – our expectation with plan design is that we are going to have a good year with group medical plan in 2013.

So a lot of it is just normalizing the performance from year to year, to be completely honest with you.

Kevin Fischbeck – Bank of America Merrill Lynch

I guess it sounds like the marketing expense, you spent a little more in Q4 marketing expense (inaudible) occupancy quarter. How much of the occupancy expense or how could the improvement that you’re looking to drive next year is going to be predicated on the market?

You talked a little bit about the marketing initiatives, centralizing marketing, I guess, but also spending more in certain markets. Can you talk a little bit about is that really one time or do you expect that to ramp up in 2013 as well?

Mark Ohlendorf

The branding initiative that we have underway is very, very powerful and a part of that is a more centralized stand to management of our advertising and event activities. So we have seen a little bit of spike as we’ve gone through the year with some of our advertising costs. But there is a lot of activity underway to manage that cost next year.

Andy Smith

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, as Mark said, we think we have a fantastic opportunity to differentiate Brookdale on a national platform against the, frankly, the sea of (inaudible) that’s out there in our industry.

And so we’re very excited about this program and we expect that you all will be to when you see it set forth over the next couple of months.

Kevin Fischbeck – Bank of America Merrill Lynch

Then last question, just looking at the rates, the interest CCRC rate was down sequentially and 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?

Mark Ohlendorf

Again, that was good news as well. At the end, the CCRC, particularly the entre fee communities, that rate is an average of the independent living units monthly service fee, the assisted living unit monthly service 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 have actually performed very well over the last few years. But what you’re seeing is a change in mix as the occupancy rebuilds there.

Operator

Your next question comes from the line of Jack Meehan – Barclays.

Jack Meehan – Barclays

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?

Mark Ohlendorf

Well, senior housing does not take care of 100% of the seniors. Our market penetration is, depending on how you measure it is 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 numbers.

Jack Meehan - Barclays

And then just a 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?

Mark Ohlendorf

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.

Jack Meehan - Barclays

And is there any way to actually size that benefit or is it more (modest)?

Mark Ohlendorf

There are so many moving pieces in that business right now. I think it would be around – it would be very difficult to try and isolate the impact of one single thing.

Jack Meehan - Barclays

And then I guess just lastly on the real estate, I appreciate that you can’t give a lot of detail around that. Just wanted to make sure I heard you correctly. Is there a timeline that you had in mind to make a decision? Does that impact some of the other strategy that you’re doing about for the company?

Andy Smith

We have no set timeline and, again, this whole topic is just something that we, frankly, cannot comment further on than what we said in the past.

Operator

Your next question comes from the line of Darren Lehrich – Deutsche Bank.

Darren Lehrich – Deutsche Bank

I had a couple questions here. I guess just first on the entry fee numbers, can you just comment a little bit more on the unsold inventory, where we are with that? And then just looking at the numbers, it looks like my choice is getting a little more traction. Is there anything more to read into that?

I guess just how does the guidance – you’re giving $50 million to $55 million of entry fee cash flow square with what we saw in 2012?

Mark Ohlendorf

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 supplements. Could you repeat the other part of the question?

Darren Lehrich – Deutsche Bank

Yes, I guess you gave me the unsold inventory. Just would it have translated into units or we just calculate that based on the average?

Mark Ohlendorf

Well, we value that at $155,000 a unit, so you can get to roughly what the number of vacant units looks like.

Darren Lehrich – Deutsche Bank

And then my choice was the other part of the question.

Mark Ohlendorf

The distinction – we separately identify my choice from normal, typical “entry fee sales” as they are completely separate from each other. That’s not necessarily the case.

A not insignificant amount of the my choice activity occurs at the initial sale. To some extent it’s a way for a prospective 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 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.

Darren Lehrich – Deutsche Bank

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

Mark Ohlendorf

That is a similar level of sales activity. 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’d say net-net relatively consistent with what we had this year.

Darren Lehrich – Deutsche Bank

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

Mark Ohlendorf

So we have roughly $360 million worth of Medicare revenue in the company also. So that includes the skilled nursing benefit, outpatient therapy and home health. So the impact of sequestration is roughly $7 million a year fair.

Now, the sequestration, as you know, has been delayed until March 1st, so the actual affect 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.

Darren Lehrich – Deutsche Bank

And then last thing here was just CapEx, I though I heard you correctly. You said there were three different components I think that you’ve been guiding to. 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 maybe could you confirm that and then as we think longer term maybe a comment from you, Andy, just how should we be thinking about CapEx in the business and the opportunities you’re seeing?

Andy Smith

I think those numbers are right.

Mark Ohlendorf

Yes, those numbers are correct, yes.

Andy Smith

We 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 in our mid teens or higher as both for Program (X) 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 we 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 we can expect over the longer term that we will throttle that back down as we take care of the – some of the deferred projects that we didn’t take care of a couple years ago.

Bill, do you want to add anything to that?

Bill Sherriff

No.

Operator

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

Frank Morgan – RBC Capital Markets

A couple questions, you talked about what the rate growth is implying you guys 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 is in the marketplace right now?

Mark Ohlendorf

Well, I think the only reliable information we’ve got there, Frank, is the mixed data that’s reported each quarter. And that’s for the top 100 MSAs. I think the Q4 street rate growth there was 2%, 2.2%, something like that. And I certainly would have not reason to dispute that that’s accurate.

Frank Morgan – RBC Capital Markets

Secondly, on the topic of the CapEx, I guess two questions. One, it sounds like, 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?

Mark Ohlendorf

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

Andy Smith

I would 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.

Frank Morgan – RBC Capital Markets

And then when you think about deploying capital for growth this year, not your Program (X) or the million (that’s) – but kind of the growth CapEx, is there any way you could help us allocate between what we might expect to see on the ancillary side versus the facility-base side?

Mark Ohlendorf

Only if you could tell us what the opportunity set is going to look like. It’s obviously very opportunistic in those areas, Frank, so we don’t reflect those kinds of deals in our guidance numbers. It’s very difficult to anticipate what the precise opportunities are going to be.

Operator

Your next question comes from the line of (Mick Ilico) – Macquarie.

(Mick Ilico) – Macquarie

Wanted to see on the same-store guidance for this year – you gave revenue, expenses – could you just tell us what that blends to for NOI growth?

Mark Ohlendorf

We don’t do separate guidance for the same-store portfolio. All of those numbers I gave you were for the full company.

(Mick Ilico) - Macquarie

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 in the guidance.

Mark Ohlendorf

I don’t have that right here. It’s 6%, 7% I believe – 7%, 8%. Obviously, a 1% growth in occupancy does drive pretty good NOI growth.

(Mick Ilico) - Macquarie

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

Mark Ohlendorf

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

(Mick Ilico) - Macquarie

Could we get the total dollar amounts for the EMR costs, only the EMR costs for 2012 and then what is forecast for 2013?

Mark Ohlendorf

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

(Mick Ilico) - Macquarie

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

Andy Smith

Again, we can’t say anything more than we’ve said in the past about our evaluation of our capital alternatives.

(Mick Ilico) - Macquarie

I guess I’m wondering have you actually spent any money on this process to date? How much has it been? What line item is it? Is there anything included in guidance for this year?

Andy Smith

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.

(Mick Ilico) - Macquarie

I guess just lastly, when you guys have your add back of transaction related costs through CFFO calculation, does that line item include any of these costs for strategic alternatives?

Andy Smith

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

Mark Ohlendorf

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.

Operator

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

Daniel Bernstein – Stifel

I just thought – 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 is – the review of the real estate is a formal review or is it more casual, just normal course of business you would do as management? Can I characterize it as a formal review?

Andy Smith

Daniel, I guess I would say I don’t think we do anything casually. But again, we really can’t say anything more than what we’ve said in the past.

Daniel Bernstein – Stifel

So then the – one of the other questions I had – I was looking at your owned assets, performed really well in the quarter sort of justifying certainly the money you’re putting into Program (X). Do you expect your own assets to perform as well as some of your leased assets? I think your leased assets have a little bit higher occupancy.

Mix aside, do you expect the owned asset performance to eventually catch up to the leased assets in terms of occupancy and margin?

Mark Ohlendorf

Quite honestly, I don’t think I’ve ever even looked at the numbers that way. It is the case, just to put it in some perspective, we can be somewhat more fantasile in terms of what we do with the real estate in the owned portfolio because we own it, so the process of effecting different kinds of things with the asset proper is somewhat simpler for us to do, therefore, we can do it quicker, therefore, as we restore our CapEx to more normal levels in 2009 and 2010, probably relatively speaking, a few more projects on the owned side than what we’ve been able to get started on the lease 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 spin those – a little bit longer to spin those projects up. Beyond that, I’m not sure I would draw any general conclusions around owned versus leased. We operate all of our assets the same way.

Daniel Bernstein – Stifel

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

Mark Ohlendorf

I’m sure it’s true. To be honest with you, I’ve never even looked at it.

Daniel Bernstein – Stifel

And then going back to the initiatives you have on the marketing side, is it – I guess you alluded 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 is are the initiatives aimed to say take away the cost of outside referrals that you pay? What portion, perhaps, of your G&A or your costs go to outside referral sources and are you trying to bring that, effectively bring that in house? Is that part of the initiative?

Mark Ohlendorf

Well, we do consider those costs as part of our overall sales and marketing costs. They’re not in our G&A. Obviously we’re doing what we can to manage all of our costs over time. But it is the case that the role of the internet and the role of that sales and marketing channel is growing over time.

And there is some intersection there between some of those other organizations you’re talking about and the role of the internet. Would you like to add anything?

Andy Smith

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 and the 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.

Daniel Bernstein – Stifel

I guess the only thing – my point was that those are some significant – I think those costs are fairly significant and if you can bring them in house it increases your operating margin. Is that the correct way to think about it? 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.

Andy Smith

If you (heard) that would be true but I’m not sure it’s reasonable to assume that you could. We have in our company on the order of a quarter of a million inquiries a year. I’m not sure how we would shut off that channel or that we would want to, quite honestly.

Daniel Bernstein – Stifel

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 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 as the opportunities just simply come to you?

I’m just trying to – as one of your peers has a person who looks for acquisitions, do you see yourself actually looking for acquisitions in a more formal way?

Andy Smith

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

Daniel Bernstein – Stifel

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?

Andy Smith

I think it’s a host of different factors that are going to 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, as is among many factors, one of the things that will drive consolidation.

Operator

Your next question comes from the line of Tom Truxillo – Bank of America.

Tom Truxillo – Bank of America

I appreciate the limitations you face on talking about real estate deal that may or may not ever take place. But from someone that hasn’t really watched the story as closely in the past as others on this call, can you lay out how you think about real estate, the advantages and disadvantages of owning versus leasing?

And then if the proclivity of (inaudible) deals that are being done with REITs right now which would enable you to continue to participate in the upside of managing the portfolio, that changes the way you look at whether or not you would pursue a real estate transaction?

Andy Smith

I don’t want to frustrate you. All these things are factors about how we think about things but we really are just not at a place to say anything further.

Operator

Your next question comes from the line of (Dana Handley – Stephens).

(Dana Handley – Stephens)

Just on 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.

Mark Ohlendorf

Correct.

(Dana Handley – Stephens)

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

Mark Ohlendorf

There will be some advantage for not only compensation oriented in the overhead or a meaningful part of it, so there’s some natural inflationary growth in (the inventory) for that, one. Two, as Andy mentioned, we have worked on reducing (statement) control in our field organization 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 years and lots of new technology like using handheld 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.

(Dana Handley – Stephens)

And but so presumably the software maintenance costs stay at elevated levels going forward, right?

Mark Ohlendorf

I think this is a new run rate that you would work off of quite logically. Obviously we’re also seeing and expecting to continue to see real economic benefits of those investments.

(Dana Handley – Stephens)

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 small right now, just a handful of facilities but any kind of occupancy increases you’d be seeing there or traction in getting referrals from the hospitals?

Bill Sherriff

That is still in its very early stages and all the protocols, all the number of different parties that are becoming 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 the interim kinds of outcomes from that. I think that’s part of the ground rules (inaudible). So but it is proceeding.

Mark Ohlendorf

We did have a couple of emails that folks sent asking us to clarify the NOI growth rates from 2012 to 2013 that are – been posted in our guidance. And these are overall company senior housing growth rates, so not same-store, overall company, portfolios senior housing NOI growth rates are 7%, 7.5%.

Ross Roadman

With that, we will 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.

Operator

Thank you for your participation, everyone. That does conclude today’s conference call. You may now disconnect.

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