Brookdale Senior Living Inc. (NYSE:BKD) Q2 2016 Earnings Conference Call August 9, 2016 10:00 AM ET
Ross Roadman - IR
Andy Smith - President and CEO
Cindy Baier - CFO
Frank Morgan - RBC Capital Markets
Joanna Gajuk - Bank of America
Chad Vanacore - Stifel
Brian Tranquilut - Jefferies
Ryan Halsted - Wells Fargo
Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Second Quarter Earnings Call. [Operator Instructions]
Thank you. And Mr. Roadman, you may begin your conference.
Thank you, Jennifer. Good morning, everyone. I would like to welcome you all to the Second Quarter 2016 Earnings Call for Brookdale Senior Living. Joining us today are Andy Smith, our President and Chief Executive Officer and Cindy Baier, our Chief Financial Officer.
I would like to point out that all statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.
With that, I'd like to turn the call over to Andy. Andy?
Thanks, Ross. Good morning and thanks for joining us. We appreciate your interest in Brookdale and I'm looking forward to our discussion this morning. It was a little over 10 weeks ago that we articulated our plan at our Investor Day. We were very pleased that the vast majority of our shareholders were able to participate in our Investor Day to hear about our plan in detail and to meet many members of our senior management team. We hope you walked away with clarity around our plan and confidence in our ability to execute on that plan.
We have been very focused on execution and I'm pleased to share our progress over the quarter. Our plan is based on leveraging both the enormous market opportunity that exists for Brookdale and our unmatched platform for making the most of that opportunity. We know that the key to our success is simply how we leverage our platform and our scale. No one else has the size, the scale and depth of product offerings that we have, no one else has an organization with as much senior housing experience as we have and no one else has the resources to invest in creating best-in-class systems and customer facing programs as we have.
Our primary focus is on operational excellence. Further developing our competitive advantages to improve performance in the fundamental drivers of our business. Operationally, we're focused on three key elements. First, consistently delivering a great resident and family experience. We have recently enhanced our resident experience programming, which we call the Brookdale Experience. This program includes operational and customer service standards, technology, training, programming and Net Promoter Score measurement. The goal of this program is to provide our associates with the tools for delivering a great resident and family experience, along with a method for measurement and feedback to ensure that we're delivering on that promise.
Our second area of operational focus is attracting and retaining the best talent. The quality and longevity of community level leadership drives each community’s success. And so we are very excited about work that is underway to formalize a proprietary, customized leadership model and leadership development program throughout the company. The program is the result of extensive in-depth investigation and analysis related to Brookdale's culture and thought leadership and its design will connect leaders at all levels with the company's strategy and is still a common focus.
In the last quarter, we formalized the process to nurture our internal leaders. We are identifying our half potential performers and surrounding them with mentors, coaches and development plans to help them succeed, not only today, but also at higher levels in the organization. This will help ensure that we are developing our leaders in creating better engagement with those associates, which as I'm sure you know leads to better job satisfaction and better retention.
And the third element of our operations focus is to sell the value that we offer. So we're focused on sales. In April, we enhanced our Brookdale School of Sales and over 150 sales associates have already participated in it. This new training focuses on the customer of course, and on the customer's journey. People do not make snap judgments when it comes to senior living. In this training program, our sales associates are challenged to identify where the customers are in the journey and then to work with them to build a tangible and practical plan that meets their needs. We know that moving into seniors housing is a difficult decision for seniors and their families. Helping to clarify the solution and working as a partner increases comfort levels for all involved.
Another key part of our strategy that we've laid out is that organizationally, we will simplify and streamline to improve our fundamental execution. Initiatives are underway to simplify and reduce the administrative burden on our three key local community leaders, Executive Directors, Health and Wellness Directors and Sales Directors. For example, we're exploring how the organization can better support local hiring, on boarding, training and retention of associates. We are committed to simplifying, improving systems and tools and streamlining reporting. Simplifying also means that we have to focus on our most important assets and markets.
We are continuing our market-by-market work on how to best position the assets we have in particular markets to offer customers multiple options at different price points. In this way, we can best meet their needs both for service level and price. It takes a multi-disciplined approach to make sure marketing activities are directed appropriately, that each community is well-positioned and importantly, that our sales associates coordinate across the market to provide the correct solution for each individual customer as new leads come to us. It's early yet in this process, but we did see positive results of refocusing on our Memory Care positioning in key markets in the second quarter.
As outlined in our Investor Day event in May, simplifying and streamlining also means that we will divest assets that are underperforming and/or that do not fit within our longer-term market plans. We have made good progress on this front. Currently, we have entered into agreements to sell 60 communities with approximately 4,000 units. We own these 60 assets outright. As such, we now have classified 60 communities in assets held-for-sale. The largest transaction is the agreement we announced recently to sell 44 communities to a third-party. We previously had agreements in place to sell 10 additional communities. And during the quarter, we also executed agreements for two smaller transactions covering six additional communities.
We expect to close most of these dispositions before the end of the year, subject to the usual caveats on licensing approvals, et cetera. Cindy will provide the highlights of the economics of these divestiture transactions in her remarks. In addition to the 60 assets held-for-sale, we continue to work with our REIT partners to find opportunities to rationalize our portfolio while benefiting them as well. For example, as we discussed on our first quarter call, we are working with HCP to terminate our leasehold interest in 25 communities currently leased from HCP. We're making good progress on this front.
Finally, our plan focuses on growing the amount, the quality and the durability of our cash flow and strengthening our balance sheet. Our plan delivers tremendous organic growth in cash flow to increase top line growth and improved efficiency in our cost structure.
Now looking at the results for the second quarter, we're continuing to see the impact of improved execution in our financial results. During the quarter, we saw very good momentum with occupancy, strong cost controls and our Ancillary Services business made good strides. We used a strategy to maximize the top line revenue growth, and to that purpose, we traded off a bit of rate through a short-term incentive program designed to build occupancy. We saw very strong move in activity during the course of the quarter. Q2 move-ins were 11.1% higher than last year's second quarter. May 2016 and June 2016 were the two highest months for move-ins in at least 4 years.
In May, we had more than 3,200 consolidated move-ins. In June, we marked the fifth consecutive month in which move-ins were higher year-over-year. The result was that our average June consolidated occupancy was almost exactly the same as June of 2015, and nearly climbed back to January 2016's level. We also continued to show an ability to control cost growth through cost discipline and cost savings.
Now, I'll turn the call over to Cindy for more details on the quarter and how we progressed on our financial plan.
Thank you, Andy. I also want to thank everyone who has taken the time to listen to our earnings call today. As Andy described, at our Investor Day, we laid out our goal of growing the amount, quality and durability of our cash flow, improving adjusted EBITDA and strengthening our balance sheet. 2016 is an important rebuilding year for Brookdale where we expect to significantly improve the cash flow of our business and we are pleased to discuss our results with you.
This morning, I'll take a few minutes to comment on our overall company results for second quarter 2016 and review our liquidity and balance sheet. I will also describe some adjustments that we have made in our reporting with respect to non-GAAP measures, taking into account some very recent guidance from the SEC on non-GAAP reporting. I want to be clear this is in no way a departure from our outlook or our original guidance for adjusted EBITDA or adjusted CFFO. We will also update our revenue guidance to address the expected impact on our senior housing and Ancillary Services revenue guidance, a planned closing of several disposition transaction. This reduction in revenue guidance does not have any impact on our adjusted EBITDA or adjusted CFFO guidance. I will close with comments about our guidance.
First, we accomplished a lot during the quarter. Total second quarter 2016 revenue was $1.3 billion, a 1.7% year-over-year increase. This included a year-over-year resident fee revenue increase of 1%. Our second quarter 2016 average occupancy for the consolidated senior housing portfolio was 85.8% versus 86.1% in first quarter 2016, a 30 basis point sequential decrease. Normal seasonality in our business usually results in a second quarter average occupancy decline, but we were pleased that our average occupancy rose throughout the quarter and we exited June with an occupancy that nearly matched January's level.
Move-ins continued to be strong with each of the last five months surpassing last year, and in some cases, reaching all-time highs for the given month. May and June of 2016 were the two highest months for move-ins for those months in at least four years. We gained nearly 70 basis points of average occupancy in the last two months of the quarter.
As Andy described, we intentionally made some targeted short-term rate concessions to improve our occupancy and we were glad that these actions drove improved occupancy. As expected, our short-term promotional incentive modestly impacted our rate. We saw a small sequential decline in our rate growth between first quarter and second quarter of 2016. Even so, we are continuing to see strong year-over-year rate growth. Our second quarter 2016 revenue per occupied unit increased 3.3% on a year-over-year basis.
As you know, we have pledged to rationalize our portfolio in order to enhance profitability and strengthen the balance sheet. As a result, we do forgo the revenue generated by our disposed of assets. In the last 15 months, we have disposed of 24 communities including seven communities in the first quarter 2016. In addition, we terminated six leases. These dispositions and lease terminations reduced year-over-year quarterly senior housing revenue by $13.7 million in the second quarter.
Second quarter 2016 same community consolidated senior housing revenues increased 1.6% year-over-year. Overall, our consolidated same community senior housing portfolio generated a 3% year-over-year increase in revenue per occupied unit, again, reflecting the short term incentive. This was led by our Assisted Living segment where the increase was 3.4%.
As a reminder, our revenue per occupied unit is shown net of discounts. For comparison, NIC recorded an asking rate increase of approximately 3%. Average occupancy for second quarter 2016 was 120 basis points lower than second quarter of 2015. We remain optimistic that our initiative to build occupancy through the rest of the year.
For the second quarter, we continue to manage senior housing operating expenses well. We experienced a 10 basis point year-over-year same community expense growth in second quarter 2016. Our expenses benefited from an approximately $10.8 million decline in insurance expense. The decline reflected the reversal of reserve established with the Emeritus merger based on our expected claims going forward. Our actual experience since the merger has been much better than we anticipated, and I want to congratulate our legal and our risk management teams for managing the results claims so effectively. We had 3% same community labor expense growth.
Our Ancillary Services segment produced $19 million of operating income during second quarter 2016, a 7.4% increase year-over-year. We are pleased with the progress that we have made in growing this business and focus on labor productivity and restoring our label management discipline. We continue to produce revenue growth in both hospice and home health episodes with second quarter 2016 revenue increasing by 6.2% year-over-year.
Operating margin for second quarter was 15.4%, on par with second quarter of 2015 and a nice improvement over last quarter's 11.9%. We have now obtained a good number of the required regulatory permits for California and will work to expand that business. We project the expansion into our communities with these new licenses represents approximately $5 million of potential annual revenue over the next 12 months or so.
Second quarter 2016 general and administrative expense was $90.7 million. G&A cost included non-cash stock-based compensation expense of $9 million. It also included integration, transaction, transaction-related and strategic project costs of $16.7 million, a decrease of $11.9 million or 41.6% from the second quarter of 2015. General and administrative expense, excluding these items and non-cash stock-based compensation expense was $65 million.
I'm pleased with our CFFO and our adjusted CFFO results. Second quarter 2016 CFFO was $106.1 million versus $80.9 million in the prior year period. Adjusted CFFO excludes the $16.7 million of cost I just described plus an additional $600,000 of debt modification and other transaction costs for a total of $17.3 million. Excluding these items for both periods, adjusted CFFO was $123.4 million in second quarter 2016 versus $109.9 million in second quarter 2015. As I said, during the second quarter, costs that are excluded from adjusted CFFO were more than 40% lower than the same quarter a year ago.
We were also pleased with the progress we made in the second quarter to positively impact our leverage and our liquidity through a number of portfolio rationalization transactions. We now have 60 communities in assets held-for-sale as a result of ongoing transactions. 10 of these communities were included in assets held-for-sale during the first quarter. When these 10 assets are sold, we expect to receive $67.3 million of gross proceeds and plan to use the proceeds to retire $60.6 million of debt.
In the second quarter, six more communities were added to the assets held-for-sale as a result of two new transactions. We signed an agreement to sell five communities with 615 units to a single purchaser. We expect approximately $41 million of gross sales proceeds and expect to repay $28.8 million of debt. A transaction for a single community added a sixth community to the assets held-for-sale, which we expect to sell for $1.4 million. That asset is unencumbered.
Additionally, we just recently announced that we entered into an agreement to sell 44 communities with 2,453 units in a single transaction for an aggregate sales price of $252.5 million. The total expected gross proceeds of all of these transactions is approximately $362 million before transaction costs, debt repayment and prepayment penalties. When the transaction closes, we expect most of the net proceeds to repay debt, which will lower our leverage. We expect that most of these transactions will be completed by the end of the year, the license transfers may stretch out the process longer for some assets.
In total, for the 12 months ended June 30, 2016, the 60 communities being sold that I just described had revenue of approximately $138 million and CFFO of approximately $4 million. These transactions are examples of our progress in simplifying our business and improving our balance sheet and liquidity and we continue to look for future opportunities.
Let me now address the changes in our presentation of non-GAAP measures. The SEC has been clear that they are increasingly focused on non-GAAP financial measures particularly where the non-GAAP measures differ significantly from the GAAP measures. In addition, in May of this year, the SEC issued revised guidance regarding the use of non-GAAP measures. We have carefully reviewed our non-GAAP financial metrics and we are making some changes to our reporting in response to the new guidance and SEC rules regarding the presentation of non-GAAP financial measures.
First, we will be reporting CFFO as a measure of liquidity. As such, we will no longer report CFFO per share in our quarterly financial reporting. We will continue to report CFFO in the aggregate and will continue to report weighted average shares outstanding for our historical practice.
Second, we are changing our definition of adjusted EBITDA. As a performance measure, the new definition of adjusted EBITDA now includes GAAP amortization of entry fees and no longer includes the cash amount of the net interest fee received or the CFFO from our unconsolidated ventures. To make it easier for you to understand what has changed, our supplement includes a reconciliation of our results using the new definition of adjusted EBITDA to the amount of adjusted EBITDA previously reported using the old definition.
The change in definition of adjusted EBITDA results in a lower amount than what would have been reported under our previous definition. This is because the new definition excludes our share of cash flow from the operations of our non-consolidated ventures from adjusted EBITDA. As a result, our net debt-to-adjusted EBITDA is now reported at 6.4 times. While changing the definition doesn't reflect in an underlying change in our capital structure or financial results, it does highlight why we are focused on reducing leverage.
Finally, I want to close by talking about our guidance. As we reported in our earnings release last night, we have updated our guidance for 2016. Fundamentally, our outlook hasn't changed. However, as a result of the disposition activity referenced earlier and the changes to our non-GAAP metrics, we did need to make two adjustments.
First, with the exception of the original 17 assets that were held-for-sale on December 31, 2015, we did not include the sale or disposition of any communities in our original revenue or adjusted EBITDA or adjusted CFFO guidance. Given our assumptions as to the timing of closing of the transactions I described earlier, we are incorporating their expected impact into our revenue guidance to reflect the planned reduction in units. Compared to our previous guidance, we expect that the fourth quarter revenue will be reduced by $25 million to $30 million as a result of these transactions. Thus, we are removing this revenue from our guidance.
And second, we are recapping our previous adjusted EBITDA guidance to reflect the new definition we have adopted. Our original guidance excluding integration, transaction, transaction-related and strategic project costs of approximately $60 million was $935 million to $955 million. As a result of the new definition of adjusted EBITDA, that range becomes $870 million to $890 million. That still excludes $60 million of integration, transaction, transaction-related and strategic project costs. Therefore, adjusted EBITDA as we reported without deducting those costs would be in a range of $810 million to $830 million. We have traditionally included our entry fee revenues on a cash basis in our adjusted EBITDA and we have reflective the CFFO of our joint ventures in this metric. Going forward, we will be excluding any economics of our joint ventures in our calculation of adjusted EBITDA and will be reflecting consolidated entry fee revenues on a GAAP basis.
The company's full-year projected capital expenditures guidance for non-development CapEx remains at $230 million to $245 million with developed CapEx or Program Max at approximately $45 million. Our full-year guidance for G&A remains at $255 million to $265 million exclusive of integration, transaction, transaction-related and strategic project costs and non-cash stock compensation. We previously expressed our adjusted CFFO guidance on a per share basis. Stated on an aggregate basis, our guidance for 2016 full-year adjusted CFFO remains in the range of $455 million to $475 million. While we have adjusted revenue for the dispositions, we are still comfortable with our original full-year ranges for adjusted EBITDA as presented under the new definition and adjusted CFFO. If closed as expected, the disposition transactions will be slightly dilutive in the fourth quarter as we adjust overhead and CapEx and fully deploy proceeds over time.
But given our year-to-date performance and our forecasts, we still expect to be within those adjusted EBITDA feasible ranges. With the plan that expects significant revenue growth in the second half of the year, it's too early to make significant adjustments to our full-year guidance. The bottom line is that we feel good about our ability to manage the various drivers of our business, revenue and expense, to achieve our guidance ranges. So to summarize, we made progress in the second quarter on executing our plan. We continue to meet expectations for adjusted CFFO for the year. We feel very good about the opportunities to grow revenue in the second half of the year and control expenses, to significantly reducing the amount of costs that are excluded from adjusted CFFO and to improve the liquidity of our business. This current focus on the right thing to bring about these results.
I'd like to now turn the call back to Andy. Thank you. Andy?
Great. Thanks, Cindy. As we get ready to take your questions now, let me summarize by saying we're encouraged by the progress we’re making. We have a solid execution plan to grow revenue and to build durable cash flow and we're continuing to execute on a rationalization initiative to simplify the business and strengthen our balance sheet. We're happy to answer your questions now.
[Operator Instructions] And our first question comes from the line of Frank Morgan with RBC Capital Markets.
It was interesting your commentary about those May and June occupancy numbers. I'm curious if you could comment maybe a little bit on what you're seeing so far in the current quarter, and it sounds like there's a good chance that you might actually show year-over-year occupancy growth in third quarter of '16 versus '15, just curious of your comments there first.
Yes, thanks, and good morning, Frank. Thanks for your question. I'll take that and then Cindy can add to it. So it's early in the quarter, obviously. Our July occupancy is right at actually just a little bit below what our June average occupancy was, which again is not unusual. We expect to build occupancy through the quarter and to keep the momentum up to that we talked about and began to see beginning in May.
And your next question comes from Joanna Gajuk with Bank of America.
So I just want to come back to the $10.8 million decrease in insurance expense that you mentioned, Cindy. And then, should we kind of look into this number as sort of the savings going forward? Or was there something unusual in the year-ago period that's why you are kind of stacking it out as being a decrease?
Joanna, thanks for your question. We're really happy with the performance of our legal and risk management teams in generating the $10.8 million reduction in insurance expense. From our perspective, adjustments to reserve for claims are a normal part of our business. We make those adjustments regularly. What was unusual about this adjustment, it was a larger adjustment than we normally see. So the way that I think about it is it's lumpy, it's bigger in the second quarter than we usually see but absolutely a part of our ongoing business.
And then on another - I guess, immediate cost item around labor costs. I appreciate the commentary that was up 3% - labor expense was up 2% on same-store basis. So can you give us sort of respective over the last 12 months and then where you see going forward? And then specifically, any color or any commentary about the potential impact of the overtime that will start to take effect later this year?
So Joanna, let me take that question. So let me start by saying that we've clearly seen wage pressure in our skilled wages as we've made a change of - our coverage to 24 hours and we've made market adjustments for our skilled clinical. We've also seen some increases in our wages for Executive Directors as we've experienced turnover in that business. We do expect to continue to see wage rate pressure in 2016 related both to the minimum wage requirements that you talked about as well as the competitive labor markets in some region. As a reminder, we always thought that our 2016 wage rate increase would be higher than 2015. We saw overall wages increase 2.5% last year. Our plan includes a 3.5% overall wage inflation for the year at the associate level, plus some add-on for changes to minimum wage rate increases in selected region market pressure. So the impact of the minimum wage increases is about $500,000 for 2017. Now with regards to the new overtime regulation, as a reminder, it is for about $47,000 and under associate. We have roughly 1,500 associates who are under the threshold and most of those people are in the field. We expect to have the final decisions on impacted jobs by mid-August in time for our 2017 budget. So we'll likely talk about that more with you in our third quarter call.
If I can squeeze just one last, I guess, quick question on the recurring CapEx. I appreciate the comment you made on the CapEx versus recurring guidance that's unchanged. But is there anything that's changing in terms of your outlook in the number you included in the CFO calculation because I guess the first half of the year so far was $27 million. So I'm trying to see whether this is a good run rate because I guess previously you talked about $65 million to $70 million range for the recurring CapEx.
Joanna, we have not made any changes whatsoever from the first quarter with regards to our CapEx guidance. The only thing that we did in our information is to combine sort of the three categories that will ultimately be called non-development CapEx. So you could see what that total is. Now the recurring CapEx that's in there is already adjusted from CFFO. The other two buckets aren't. So when we move to our new reporting next year, we'll show CFFO less non-development CapEx was a full amount deducted.
Are you saying that the recurring CapEx bucket did not change; there was not movement between the three buckets or anything like that?
Your next question comes from Chad Vanacore with Stifel.
So I just want to make sure I heard this part right on the move-ins. So it looks like May and June had trended up and were strong. Maybe you gave back some of that in July and August. Did I get that right?
Well, we don't know August, obviously. July was just a little - on an average basis, July's average occupancy was slightly below June's.
Okay. But I mean, overall, Andy, where the comments that maybe you get back to 3Q '15 levels by the end the quarter?
Well, look, what we're trying to do is to grow RevPAR. And therefore revenue. And again, I would underscore that we have maintained our revenue guidance for the full year. So I think, Chad, and as you know, and we said in the first quarter, our occupancy as an absolute, just looking at that measure, was slightly coming into the year, was slightly below our internal plan. It remained slightly below our internal plan. But what we're really focused on doing is not talking about occupancy in isolation but rather focusing on revenue, and that's what we're trying to do as a management team.
And then, one thing I noticed, ancillary bounced back pretty strongly from weak 1Q. Is there anything that you're doing to drive that? And are the bumps behind us and should we expect these margin levels that are good going forward as run rate?
So let me start by answering that. The first thing I'm really happy with is we did add great job sort of controlling labor and that was really the issue that we saw in the fourth quarter. [Indiscernible] and his team have done a great job of really controlling labor. As you know, we've been exiting certain markets in the Outpatient Therapy and we're actually trying to grow about our home health and hospice business. And so as you move forward with the changes that we're making in the underlying business and with the receipt of the licenses in the California, we do expect this business to continue to grow nicely with good margins.
And Cindy, as California institution, those have been a bit of a drag for a while, you’re trying to roll out and get license. Is that now all pretty much settled?
We have the vast majority of the licenses in California and as I mentioned in my prepared comments over the next 12 months, we expect that, that could create $5 million of revenue. Now it takes time as you would expect to build the caseload but we’ve cleared the first hurdle of getting the licenses so that we can start.
Our next question comes from Brian Tranquilut with Jefferies.
Andy, just a follow-up to your answer to Chad's question on RevPAR and growing revenue. How should we be thinking about the discounting environment right now? And how do you do that balancing act between driving occupancy and driving rate growth? I mean, what's your outlook there?
Yes. Well, obviously, the selling price and the marketing, the incentives, et cetera all of that is based on what’s going on in each community. And so it's a very particularized program that we try to implement based on what's happening on local, with respect to local markets and local market conditions. I think going through the year, we would expect to, again, we're focusing on the RevPAR, focusing on revenue. I would expect to see reasonably strong rate performance. And I would expect to build occupancy through the third quarter and into the fourth quarter in accordance with seasonal patterns. But again, to me, it's kind of a little bit of a mistake to focus on just one metric as opposed or one building block, one driver to what RevPAR really is. And so we're focusing on the topline and trying to drive through a blend of, selling better, as I said, in our prepared remarks using appropriate incentive and discounting programs where the local markets necessitated and also growing occupancy at the same time. To summarize, I’d say, we would expect to see occupancy grow through the back part of the year and we would expect to see our rate continue to remain pretty strong.
Got it. Then, as I think about the divestitures and your ongoing process in evaluating in future moves, so how should we think about the criteria that you run these assets through to make that decision? And then, also the consent requirement, I mean, are there any consents required for some of these divestitures and then, I guess last part to that, how should default through the metrics say in 12 months look whether its occupancy rate growth, CapEx or cash flows or CFFO?
Okay. I'll take a crack at that. There were a bunch of questions in there. So make sure - that's okay, I just want to make sure we remember to cover all of them. As we've said before, our criteria in terms of looking at dispositions would start with one of the performance of the assets when we think about the markets that they're in, that we want to be in those markets long-term. What are the capital expenditure requirements for those particular assets? Do we want to invest in them if a large CapEx, infusions are necessary? Or would we prefer not to? So it's a host - it's a multivaried factors that we look at to make a determination whether something is suitable for us to divest on it or not. And those are for assets that we own. There are no consent requirements for the assets that we own outright other than most of them have mortgage debt on them so we have to pay debt mortgage that often. As opposed to this and other factors too. If there are outsize prepayment premiums associated with fixed rate paper or fixed-rate mortgages on those assets, we will at least take that into account with respect to our viewpoint on what the underlying economics of the transaction would be. Separately, and I would call this a disposition activity, we are - as we've said, we have negotiations ongoing with HCP to terminate some of their leases for our benefit and for their benefit too. It's really is hoped to that we will get to a win-win situation. Transactions of that type, obviously, we need a mutual agreement with our landlord. So if you want to call that a consent, you could call it that.
And then let me take to flow-through on the metric. I’m going to adjust my comment only to the 60 assets that we had held for sale as we're still working to the disposition with HCT. On trailing 12 months basis, they have revenue of $138 million. They had CFFO of approximately $4 million. As you would expect their lower occupancy than the remainder of our portfolio. And we would expect to redeploy the proceeds in debt repayments and it will take some time to actually redeploy all the proceeds because we have to balance interest costs and prepayment penalties. But once we deploy the proceeds, we're probably somewhere between 4.34 - 4.75% and close to 5% on the return that we would have in terms of low interest expense from deploying of proceeds. Did I answer your question, Brian?
Yes, you did, yes, last question for me. One question that we've been getting this morning, given the $10.8 million kind of savings on the insurance side, how should we think about your view on guidance? Because obviously, that was probably bigger than expected and you're maintaining EBITDA guidance for the year. And the recurring nature of that savings that you're going to see from the insurance accrual.
What I would say is we're very comfortable with our guidance for the year. We hoped that we would have significant insurance savings during the year although you can never count on it. I think what surprised us is that Q2 but that doesn't mean that we would have hoped for at least that amount for the year.
Your next question comes from Ryan Halsted with Wells Fargo.
Just a couple of follow-ups. You've mentioned that the lease renegotiations. I was wondering if you can just give us an update on I guess the potential timing of that given that there's some change in management at your REIT partners.
Well, I can speak from our side of the equation. And I can tell you that we're working very cooperatively the negotiations with HCP are going well, and nothing is done until it's done. But our anticipation is that we would have that pen to paper in those agreements executed relatively quickly.
And then, you mentioned with the dispositions. CapEx requirements is one of the criteria you look at. So is it fair to assume that the communities you're disposing may have had higher than usual CapEx requirements that we could potentially look at sort of going forward when they are disposed of?
Ryan, that's a great question. I should have mentioned that. I'm sorry. You can think of that is having higher-than-average CapEx requirements on a historical basis and on an average historical basis, you can think about them using more CapEx that the CFFO they generated.
Last one, just going back to the question on guidance. So clearly, you have a good amount of confidence in the RevPAR growth, is that sort of the biggest swing factor? Or what gives you the biggest confidence of achieving your guidance over the course the year? Or are there other factors that you think are going to be important to hitting your numbers for the full year?
I'd say, basically, that we expect to continue to make progress on all the key drivers of our business. That includes making progress on RevPAR. But we also expect to tightly control our expenses. We expect synergies to continue to build, our cost synergies to continue to build through the balance the year. So I'd say it's a combination of all the key drivers of the business, Ryan, that we expect to continue to make progress on.
And I think timing of dispositions is another thing that's key, right? We've got 60 assets that we are looking to sell. We think we'll get it done by the end the year. But timing is one of the things that is never certain when you're dealing with licensure requirements.
And we have no other questions in queue at this time. I'd like to turn the call back over to Andy.
Okay. Thank you all very much for joining us this morning. We're very pleased to report to you about the progress we've made regarding our plan, and we look forward to periodically the point back to you as we continue to execute and continue to build shareholder value. Thanks for joining us this morning.
Thank you for your participation. This does conclude today's conference call, and you may now disconnect.
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