Brookdale Senior Living Inc. (NYSE:BKD) Wells Fargo Securities Healthcare Conference September 8, 2015 11:50 AM ET
Andy Smith - President and CEO
Cindy Baier - CFO
Q - Unidentified Analyst
[Abrupt Start] and I am happy to be joining by Brookdale Senior Living and with the company is Andy Smith, President and CEO and Cindy Baier, CFO. It’s going Q&A format, so please feel free to ask a question.
So I will start things off. So to start with your occupancy trends, you noted during the quarter – or second quarter you had very high move-ins in May and June, which were up over a 11%. How have the movements trended so far for some of these peak movement moments?
Yes. Thanks, Ryan. And thanks for having us here. We're pleased to be with you and really appreciate you inviting us. When we think about occupancy, so we haven't talked that occupancy beyond our second quarter call, but what we saw through the second quarter was elevated move-in rates, compared to what we've seen for the past several years.
And so we're encouraged by that, and this is - our business is seasonal, as most of you who follow the company know, what we generally speak and see through a typical seasonal pattern would see occupancy fall from December through January, February, March, April and then sort of stabilize in May and then build through the middle and latter part of the second quarter through the third quarter and then kind of plateau with the end of the year.
Lot of that's driven by typical issues with respect to aging and mortality rates and so forth which is earlier in the year, you see more deaths and sort of thing. We've seen that this year. We are pleased with our move-in volume and activity and the growth that we saw in the middle of the second quarter. And again, we expect the portfolio to behave from an occupancy perspective consistent with seasonal patterns for the balance of the year.
Okay. A couple on the rate side of the equation, you talked a little bit about using some incentives and promotions last quarter, maybe just to put that into perspective, I mean, is there typically a seasonal peak time for incentives?
When we talk about incentives and simulative programs, promotional activity, first off, it's important to say we are doing that and the industry is doing that all the time. It's completely typical for us to see that happen more in the richer months for move-ins, lead volume is up, we're trying to stimulate activity and so forth.
And there is an element of consumers right now expecting some sort of movement and incentive and this could be as simple as we'll pay their moving costs or flat screen TV to promote, the final decision to move-in.
But it's completely typical. It is again also consistent with seasonal patterns to see it around the time that we saw it this year. And you know, again it just happens based upon on what's going on in the markets and so forth.
I will say one thing, last year our promotional activity took place for the most part during the same period of time, but it was of longer duration and maybe a little bit more robust, this time our promotional activity because the integration of the Emeritus platform is largely in the rearview mirror, has been more targeted and more short-term oriented. But again, is completely typical.
And then longer term, your RevPAR guidance, you're targeting annual growth rate of 3%, I mean, is the right way to think about that is that’s essentially your average monthly rate growth or at least how the industry has been growing this year and sort of more over the past few years. Help us think about how – how you're sort of framing that RevPAR growth goal?
Yes, let me take that one Ryan. So the way that we think about our forecast for revenue growth it is pretty conservative forecast. We look at the industry and we see our target consumer is growing at about 45% over the next five years, so roughly 7% or 8% a year, a very good growth.
So I think there is room to sort of attract more residence into Brookdale's community. At the same time, we think that we have the ability to grow both occupancy and rate in our portfolio.
If we think about full occupancy of a community, we definitely think it’s over 90% and our communities are at 86 percentage range today, corresponding a space in our communities for residence and we think we can grow both revenue and rate, occupancy and rate for each of the next three years.
And so the way that we think about it is the 3% forecast that we've given is a very conservative look at that and what excites us about the 3% revenue growth in really, that we can get 3% revenue growth of the CAGR between now and 2018, we can get 10 percentage of the EBITDA growth. And then because we're making we're making so much percentage on our CapEx, we should be able to get 99% improvement on our CFFO [indiscernible] with CapEx.
So Brookdale is really a very, very exciting cash flow story as we look at the next two years.
Obviously much focus is been paid to new construction and the metric most investors look at is new construction as a percentage of inventory, which according to Nick data is currently at about 5.6% just to put that into perspective, pre-recession levels, new construction average around 4% to 5% and I guess during the peak construction period in the late 90s it was as high as 7% to 8%.
So what do you think is a level of construction as a percentage of inventory that the industry can comfortably operate around and digest without many major disruptions?
Well, I'd love to say zero, or I wish it was zero. But actually to be serious about that, the first thing you have to when you think about new construction at least in my opinion, is you have to think about what the demand characteristics of the marketplace look like and to be - to below that down a little bit, if you look at the growth of seniors over the age of 75 who have more than $50,000 of income, which is a good proxy for our customers, generally speaking our customers are over the age of 80, but the only data we can get from the Census Bureau is 75 plus, with $50,000 in income.
That segment of the demographic cohort of seniors grows fairly rapidly over the next four year or so, about 8% a year between now and 2020. That’s pretty good growth, so that's one thing is to look at when you think about new construction.
And so what that means is a lot of this new construction is in fact needed to absorb the demand that’s being created at the same time.
The second thing I'd say, contextually around new construction is you can't look at it in broad on market, you have to look at it with respect to local market characteristics. So you can't just look at Houston as a marketplace, Houston's 12,000 square miles large as a market as Nick reports it.
So you got to telescope down to the local sub markets what's happening in the catchment areas where we we're really drawing residents to our communities on that basis and then you have to look at it further and say is the product that’s being built in fact truly competitive with what we have in place in the market, is it directed at the same price point that our communities are trying to capture.
And so those – you just got to be careful or take with a little bit of grain of salt these big broad statistics which is what the industry has in terms of data. And then finally a third piece of the puzzle is most of that new construction which is currently under construction or at least reported to be only about half of that gets delivered each year.
So those were some character - some broad generalizations I give. Now when we think about new construct, which means in many cases people - smart developers are building where there really is unmet demand that is not currently being served and I point out in that, Nick has produced a couple of white papers over the past six months or so which actually has gone back and done some time studies and shown the penetration rates have actually risen in commensurate with the new construction, which again proves the fact that some of this demand is in fact unmet and new stock of seniors housing communities are in fact necessary.
That doesn't mean that there aren’t places, there are some markets where there is a bit of overbuilding and that's something that we and the balance of the industry have to deal with as a challenge until that local markets stabilize, usually it takes 18 months to 24 months if there truly is new competitive pressures that we have to deal with before that market stabilizes and we get back to the ordinary course.
It's – so I don't mean to over or understate the new construction as an issue, I just think it has to be looked at on a balanced way by our local market.
Okay. Maybe just to kin of focus on one of the points you just made, so half of the new construction actually gets delivered, is that just a function of the timing of how those projects generally - they are completed or is there any reason to believe some of the new project might be on hold or?
I think if a building has started, if dirt has started to be moved, then that building is going to get completed, I mean, there may be some delay in the construction or some sort of impediment of planning problem or zoning problem or something like that that may cause a delay, but if the building started in almost every circumstances its going get completed.
There are some buildings that are announced and that for whatever reason financing falls apart they don't actually get started and so that can have a consequence. But most of it is going to be – it doesn’t take – it’s going to be that the new construction bleeds over until the next 12 month period of time.
Maybe to switch gears to your operations, ED retention is certainly a big focus of, how do you've been able to stabilize your ED retention and what are some of things that are been working and is there more of work you think that’s left to do before you feel really comfortable…
Right. To put that in the context, for those of you who follow the company, we merged with our largest competitor a couple of years ago and 2015 was a year of integration and we suffered some challenges from that.
One of the most glaring of which was we saw increased turnover for the three key leadership positions of our communities, that's the executive director the head clinician, which we call health and wellness director and in the sales manager. So we saw elevated turnover in those positions, largely as a result of the integration challenges that we were going through during 2015.
Good news is we have return to pre-merger levels in terms of our retention of those three critical positions. Now that doesn't mean that we don't have further work to do there and further opportunity to reduce those turnover statistics even further, both as a company and as an industry and seniors housing turnover is challenged with those three critical positions. And so we have lots of work to do to improve on that front.
What got us to where we are right now is one integration being behind us, two, we think as people are now on a common system, which is what we have, a common set of procedures, protocols, programming systems and tools these three critical positions can focus on what attracted them to seniors housing in the first place, which is to take care of seniors and their families. That's what they are passionate about, and if they're learning something new that is an administrative burden that is on top of their day-to-day work that becomes frustrating and challenging.
So simply by having that in the rearview mirror where they are not learning, making whole scale changes to how they do their work, but rather now at this point in time improving the efficiency and effectiveness of their use of those tools, that's a big deal.
Its very interesting by the way, during 2015, the latter part of 2015 we actually saw 61 executive directors who left Brookdale to go to one of our competitors who actually came back to Brookdale, recognizing that the grass isn't always greener on the other side, and most importantly coming back and saying, we get what you guys are trying to accomplish and how you're trying to make our lives better, so that we can spend more time on what's most important which is taking care of the seniors that were privileged to serve.
That’s a big drawback as – and we're really proud of that and I expect more of that to continue.
Some other things they we're doing just to - just to give you a taste would be, we really are spending a lot of time trying to find ways to simplify the administrative burden that is imposed upon on these key critical leaders in our communities. And we are trying to make sure that were recruiting the best talent, that were on boarding the best way, they were giving up the best training in the industry and in the best tool set so that they can do their jobs.
One of the things that Brookdale brings to bear is by far being the largest operator of seniors housing in the country, we have the opportunity to invest in systems and tools in ways that other operators can't justify, They can't spread those costs, as well as we can.
And so we think those are big opportunities for us to improve both how we do business, but equally importantly how we retain and make and empower these three critical leaders in our communities. And we're really excited about our progress there.
So there's work to be done, we have work and opportunities to improve, but where we're sitting we think we made a lot of progress over the past 12 months.
That’s great. You've been spending a fair amount capital over past two years into your communities, maybe you could just give an update on if that’s progressing, certainly as we head into 2017 and you know, an update on sort of – what sort of the capital levels you think are needed in 2017.
And then you know, 2018 is certainly where you have indicated you might see a nice step down, just any update on kind of the timing of how that’s right now?
Sure. Let me start by saying probably for the last six years Brookdale is on a pretty heavy capital plan. Starting in 2010 Brookdale basically started investing in the legacy Brookdale community to really making sure, they were refreshed, taken care of all the deferred CapEx that have built up over the years.
Then when we bought Emeritus, two years ago we committed to a three year $100 million per year, sort of planned to sort bring the Emeritus communities up to the same levels that we would like the Brookdale communities or Brookdale communities are. So we've been working very hard at getting our communities in good form.
Now with the announcement of the communities that we're selling, we probably won’t complete that $100 million investment next year, it will be a little bit less than that. We haven’t given guidance on exactly what our 2017 will be. But there will be a small step down in that as a result of the communities that we're disposing off.
But most importantly by the time we get to 2018 we're expecting the CapEx that we need to spend in our communities to drop to $1600 to $1800 per unit and that’s really because we're able to take advantage of the size and scale of Brookdale, we're able to buy things in the optimal way and been efficient about it. We'll be completely through for the first capital program for both the Brookdale and the Legacy Emeritus communities, so everything else is trash.
And then lot of our corporate capital that we've been spending over the last several years to do things like electronic health records, CRM, doing some of the energy efficiency projects will all be behind us.
So from a CapEx perspective, we are looking at taking our CapEx on the $150 million by 2018 and we'll do some small reduction or some reduction in 2017. We'll you give you more guidance on that when we give our 2017 guidance.
That’s great. You mentioned the asset dispositions, the portfolio rationalization, maybe you can just give an update on the timing of when you expect to close on the 60 that have – you've announced publicly?
So our hope is that we'll close some vas majority by the end of the year. The only reason we would think that we might not close, its licensing delay and as you know with government who can always guarantee when the licensing is going to come. So we would expect the vast majority of the sales to occur by the end of the year.
Okay. And have you closed on some portion of that already?
Okay. So when you include the 60 communities that you set to close or to dispose off, I mean, I think that’s about on a unit basis about 75,000 units that you will own and operate, how should I think about or should we think about an optimal size of Brookdale where you're still maximizing your operating leverage and scale, but certainly as you are contemplating you know a more streamlined number can you give?
Yes. The - right now our strategy for the next several years is to focus on operational excellence, below the amount, quality and the durability of our cash flow, we do that by growing occupancy, growing rate, making sure that we're being efficient and effective with our operating expenses and then we publicly announced that we feel like we'll get $25 million out of G&A through 2017.
Now when you think of the size of the portfolio, what we are doing at the moment is simply in order to focus on operational excellence and the - in our core business, we are simply - simplifying and streamlining the portfolio.
We had the opportunity as we came into the beginning of this year to for a variety of reasons to actually address some communities that simply don't fit with our longer-term game plan.
So what we did when we came with these disposition candidates, now these are assets that we own, outright, we looked at them and said, look or what we think about the markets that these assets are in, what we think about their physical plant, do they have capital expenditure requirements that we may not wish to invest, given the markets that they're in, are they geographically dispersed from other assets, if we have an asset's its 10 miles away – sorry, 10 hours away from anything else that we have, it may make sense for another operator to operate that in terms of getting their efficiency, what's the basic performance for these communities, most of them are underperformers.
And so when we put all of that together it makes sense for us to dispose of these nine years old communities that we've got. As we think about 2017 I think we have always as a company had modest passive rationalization or disposition programs and I think that will always continue and certainly maybe at a little bit more of an elevated pace, as compared to usual years in 2017.
In spite of those dispositions, we are still by far the largest operator of seniors housing. This is a matter of us owning and narrowing down the platform to markets and assets we wish to focus on, simply because they give us - that's where we want to invest our time and our energy and is where we think the most growth is, so simple as that.
But we don't think we lose by virtue of doing this, any of the advantages of the size and scale and the breadth and depth of services that we've got and what makes us unique. So we don't think that’s any stretch of the imagination an issue.
Okay. The lease, 25 leases that you have with HCP as we kind of talked about, you know, looking at where are you with those and could you give us a sense of how much revenue and CFFO are associated with those?
I'll take the first part of that and then Cindy can answer the second quarter part. HCP announced a while ago they were in negotiations with us to excuse me, to terminate their leasehold on 25 or to work with us to terminate our leases on 25 communities. We echoed their public statement to that effect and we are working with them collaboratively to make that happen.
That's an opportunity for us, these are assets which again are underperforming on an EBITDA basis, either because of their pure performance or because of the amount of rent that is been allocated to those assets.
And so we think it's in an opportunity for us to exit those assets. It's an opportunity for HCP for their own reason they would like to do it. I think we are confident that we will we will finalize those agreements relatively soon and at the determination phase of those leases we'll then kick into gear.
Now the timing of actually having the lease is terminated is going to dependent upon whether HCP wants to find a substitute operator and how fast they can do that, or if they decide to sell the assets, how quickly the disposition - the sale process can take place.
But I think over from the time that we enter in to those agreements over a period of 6 to 12 month we will exit those assets. And again, I think that will be an advantage to us certainly in the – the primary focus of what we're trying to do which is to simplify and streamline the portfolio. You can talk to demand.
So looking at the mat and knowing that I like to look at the math is not just to see what assets we are looking at disposing, but really the communities that we're looking at disposing. And so we're looking at about a $135 million of revenue and we're looking about $4 million of CFFO.
Now on the - after we get through rightsizing G&A and after we get through CapEx, we think it will be a positive for us on to the free cash flow basis, but there is certainly more revenue that we lose on the dispositions in the aggregate and that top facilities.
And just to echo on that point, it’s probably slightly dilutive for a quarter or two as we normalize G&A to the assets that are disposed in an overarching sense. So just to make sure people have - overall we would expect it be positive from a cash flow perspective, it just may take quarter or two to invest the proceeds in the right size of the G&A to those dispositions.
Understood. Your ancillary services business is been growing nicely, you are seeing the most sense growth, double digits in your home health and hospice. How should I think about – I think I calculated you have about 25% of your units being served as having a home, health and hospice senses, where do you think you can get better?
I make sure I understand, I think we serve more units than of our…
I mean the senses as a percentage of units served is about 25%, is that the right way to think about it or how should I think about what the real opportunity for growing your ancillary services?
Okay, I got it. I understand your question. Let me say couple things generally, then I'll speak to that in particular. Right now as we think about our ancillary services platform which is comprised of three primary service lines, home health, which is the primary service line, outpatient therapy, reimbursement or RB [ph] and then hospice.
The outpatient part B business is, we are intentionally narrowing that business line to focus more on home health, that's because of some technical things and then some reimbursement pressure on that business line and so forth. So I think you'll see overtime the outpatient business will narrow, shrink, the home health business will rise.
If you think - and in the hospice business take that, that is a new business line for Brookdale, its one of we began to take advantage of roughly a couple of years ago to start is an experiment and is beginning to give momentum and the reason that we did that is there are thousands of people in our communities today that require and benefit from hospice services, and if we can provide those services effectively and with the quality that we think is demanded, why wouldn’t we do that, we already have a relationship with that resident and their families, and so let's take advantage of that opportunity.
The hospice business is just beginning to grow and to get pace inside of our communities and I would expect that to continue. The home health business, if you were to look at it against the assisted-living and memory care product lines, generally speaking you will see max at max 25% to 30% of our senses in our assisted-living or memory care communities would be appropriate for home healthcare, whether they get it from us or they get it from somebody else.
Now all of it depends on medical necessity and those type of things that you have to be careful about, but that would be sort of the maximum level if you were to generalize. Now remember that in many cases our ancillary programs which we have rolled out to the Emeritus platform, we had to had the permits and then we had to get the agencies opened or started if we didn't have one in place, and then it takes a while for that census in case low to deal and we're just in the process of doing that.
Okay. That’s very helpful. And then just one last quick one, what's the target operating margin for the ancillary services?
So we're happy when its 15% or above and so we have that in the second quarter and that’s something that we continuously at more than 15%.
Okay. Well, I think that's going to do it overtime. So thank you again for joining us and thanks everyone.
Great. Thanks, Ryan. I appreciate it.
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