Sonida Senior Living Inc (SNDA) 2012 Q2 法說會逐字稿

Good day and welcome to the Capital Senior Living second-quarter 2012 earnings release conference call. Today's conference is being recorded.

The forward-looking statements in this release are subject to certain risk and uncertainties that could cause results to differ materially including but not without limitation to the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risk of downturns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure of the ability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations among others and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time I would like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you and good morning. Welcome to Capital Senior Living's second-quarter 2012 earnings release conference call. I am very pleased to report continued occupancy growth and strong operating and financial results for the second quarter. Successful execution of our strategic plan is significantly enhancing shareholder value through a focus on operations, marketing, and accretive growth.

Our same community occupancy increased 160 basis points from the comparable quarter of the prior year and 20 basis points sequentially even though our margin increased by 90 basis points from the second quarter 2011 and 40 basis points from the previous quarter. We continue to enhance our geographic concentration by acquiring high-quality senior living communities that generate meaningful increases in CFFO, earnings, and net asset value.

So far this year, we have acquired seven communities for a combined purchase price of $75.6 million and we are conducting due diligence on communities that should enable us to meet or exceed this level of transactions in the second half of 2012.

As the value leader in providing quality seniors housing and care at reasonable prices, we are well positioned to make further gains as a substantially all private pay business in an industry that benefits from need-driven demand and limited new supply.

On April 30, we completed the acquisition of a senior living community in Texas for a purchase price of $19.2 million, enhancing the Company's geographic concentration in Texas to a resident capacity of 3627. This transaction is expected to add CFFO of $0.03 per share, increase earnings by $0.01 per share, and increase annual revenue by more than $4 million.

Occupancy at this community averages 89% with average monthly rent of $2845. The community was financed with approximately $11.8 million of 10-year fixed-rate nonrecourse debt with an interest rate of 4.48%. In our first 90 days of ownership and operation, we had realized about $200,000 of annual expense savings and occupancies have increased by 300 basis points.

Because of the seller's lower occupancy, we put on less leverage on this property than we typically do with when we close an acquisition. Even with the lower leverage, our expense savings and improved occupancy should combine for cash returns in the mid teens, consistent with our other acquisitions.

In the first quarter, we closed the acquisition of four senior living communities in Texas that are part of a five-property transaction with the fifth property also located in Texas. We have completed due diligence on this additional community and subject to customary closing conditions including the assumption of existing mortgage, we expect to complete this transaction this quarter.

We are conducting due diligence on a number of additional transactions consisting of high-quality senior living communities in regions where we have extensive operations. Subject to completion of due diligence and customary closing conditions, we expect to acquire these communities in the third quarter as well.

Now I would like to review our operating results. I am pleased to report that in addition to the success we are experiencing with our acquisition program, we are also achieving strong operating results with gains in occupancy and net operating income. Our results differentiate Capital Senior Living as the value leader in providing quality seniors housing, care, and services that are personalized and tailored to meet the needs of our individual residents at reasonable prices.

We are also benefiting from our geographically focused operating platform with the bulk of our regions enjoying better economies and lower levels of unemployment than national averages. We believe we are different from other companies in our peer group with our sole focus on substantially all private pay senior living capitalizing on our competitive strengths and operating communities in geographically concentrated regions with larger company economies of scale and proprietary systems in a fragmented industry that are yielding solid operating results.

At communities under management, same-community revenue in the second quarter of 2012 increased 3.9% versus the second quarter 2011, excluding one community that had a recent conversion. Same-community expenses increased 3.4% and net income increased 4.6% from the second quarter of the prior year. Same-community occupancies were 160 basis points higher than the second quarter of 2011 and 20 basis points higher than first quarter 2012.

Same-community occupancy in the second quarter reflected occupancy gains in independent living exceeding those in higher levels of care, resulting in average monthly rents 1.6% higher than the second quarter of 2011 and 70 basis points higher than the first quarter of 2012.

Our second-quarter operating results compare favorably to NIC MAP top 100 MSA data which reports for the industry same-community second-quarter 2012 occupancy growth of [54] basis points year-over-year and 15 basis points from the first quarter of 2012 with average daily rate increases of 2.2%. NIC MAP reported inventory growth of only 1.2% and trailing 12 month construction starts were limited to 1.6% of existing inventory. These statistics compare favorably to NIC MAP annual absorption rates of 1.9% with absorption exceeding inventory growth for the past nine consecutive quarters.

NIC MAP's second-quarter 2002 data reported that seniors housing industry occupancy is now 160 basis points higher than a cyclical low in the first quarter of 2010. I am pleased to report that over that same timeframe since the first quarter of 2010, Capital Senior Living's same-community occupancies have increased 370 basis points and our average monthly rates have increased nearly 8%.

The number of our consolidated communities increased from 74 in the second quarter 2011 to 88 in the second quarter 2012. Financial occupancy of the consolidated portfolio averaged 85.8% in the second quarter of 2012, 190 basis points higher than second quarter 2011 and 10 basis points higher than first quarter of 2012. Average monthly rent in the second quarter 2012 increased 2.6% over the second quarter 2011 to $2968 per occupied unit.

Occupancies and rates continue to trend positively and I am optimistic that fundamentals will continue to improve this summer, which is typically our best season. In fact, we have a strong start to the third quarter with occupancy gains reported in July for all levels of care totaling an increase of more than 50 occupied units for the month.

Our positive results demonstrate that our team, with its disciplined focus and attention to detail, is successfully executing our operating strategy and confirms that Capital Senior Living is different than other senior living providers.

Successful senior living operations require well-located communities with the right on-site team supported by strong regional and corporate resources. We are fortunate to continue to recruit and retain many of the best operations and sales and marketing professionals in the industry.

Once again I thank our dedicated on-site staff, our regional and corporate team, as well as the members of our Board of Directors for their commitment, their passion, their focus, and the accomplishments in serving our residents so well and contributing to our positive operating and financial results.

Now I would like to discuss our growth initiatives. I am excited about our growth as seniors housing is a need-driven product with very limited new supply. Demographic demand growth is driven by an aging population. These favorable demographic and supply-demand trends should allow for continued occupancy and rate growth. We have improved our operations by implementing software programs for care plans and level of care charges and we are enhancing our Internet marketing and social media initiatives.

We are also benefiting from our investment and cash flow-enhancing renovations, refurbishments, and conversions of units to higher levels of care. These initiatives combined with the operating leverage in our prudently financed business are expected to increase our revenues, our margins, and our cash flow. Each 3% increase in average monthly rent generates more than $8.5 million of incremental revenue. Each 1% improvement in occupancy is expected to generate $3 million of revenue, $2 million of EBITDAR and $0.05 per share of CFFO.

We have completed conversions of 165 consolidated units to higher levels of care through 2011 and we are now converting an additional 73 units from independent living to assisted living. When stabilized, these conversions are expected to add more than $6 million of incremental revenue and approximately $3.6 million of EBITDAR. Additional conversion opportunities are currently under review.

As we execute our strategic business plan, we are enhancing our geographic concentration with expanded [cancer] residents, maximizing our competitive strengths and lowering our cost of capital. Our strategy is focused on generating attractive returns, enhancing free cash flow, and maximizing shareholder value. This is evident in our acquisition program.

The $75.6 million of acquisitions completed since the beginning of 2012 are expected to generate more than an 18% initial return on invested capital. This return is calculated before we factor in the operating improvements already realized in our recent Texas acquisition that I discussed earlier or from our proprietary expense management systems, group purchasing, risk management, and insurance programs and other synergies.

As you can see, our ability to complete off-market acquisitions of strategically located high quality communities in the current favorable interest-rate environment is outstanding -- is yielding outstanding returns.

Our acquisition pipeline remains robust and we are conducting due diligence on communities that should enable us to meet or exceed this level of transactions in the second half of 2012. When completed, these acquisitions are expected to be accretive to CFFO as well as earnings and lead to further improvement in our EBITDA margin and operating metrics.

The 90 basis point improvement in second-quarter 2012 EBITDAR margin compared to second quarter 2011 and 40 basis point increase from the previous quarter reflect the benefit we derived from executing on a strategy of acquiring communities in geographically concentrated regions. We are able to leverage our nimble operating platform and benefit from economies of scale, our existing infrastructure, our group purchasing program, our proprietary proactive expense management, and other systems as well as our focused marketing programs to integrate acquisitions in a highly accretive manner.

Our success in acquiring high-quality senior living communities on attractive terms validates Capital Senior Living's competitive advantage as an owner-operator with a geographic focus able to successfully assimilate acquisitions with minimal incremental costs. And our liquidity and balance sheet are solid, allowing us to have the capacity to comfortably fund our working capital, maintain our communities, retain prudent reserves, and have the equity to fund more than $75 million of additional acquisitions in the second half of 2012.

We also believe that our cash balances, free cash flow, and opportunities for additional supplemental financings on our existing portfolio will allow us to acquire another $150 million of communities in 2013.

I am optimistic about our future and I am confident in our team's ability to continue our successful execution of a well conceived strategic plan. We expect continued significant growth in CFFO, earnings, and net asset value that will lead to a meaningful increase in shareholder value. Our fundamentals are strong and I am excited about the Company's prospects as we benefit from need-driven demand growth with limited new supply.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the second quarter of 2012.

Thanks, Larry, and good morning. I hope everyone has had a chance to see the press release which was distributed last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the second quarter and first six months of 2012. A copy of the press release is available on our corporate website, www.capitalSenior.com, and if you would like to receive future press releases by e-mail, there is a place on our website for you to provide your e-mail address.

For the second quarter of 2012, the Company reported revenue of $77 million compared to revenue of $64.3 million in the second quarter of 2011, an increase of $12.7 million or 19.7%. Resident and healthcare revenue increased from the second quarter of the prior year by $12.6 million or 20.1%. We consolidated 88 communities on our income statement this quarter versus 74 in the second quarter of the prior year.

Financial occupancy of the consolidated portfolio averaged 85.8% in the second quarter of 2012 compared to 85.7% in the first quarter of 2012, a sequential improvement of 10 basis points. Financial occupancy increased 190 basis points compared to the second quarter of the prior year.

Average monthly rent was $2968 per occupied unit in the second quarter of 2012, an increase of $75 per occupied unit, 2.6% higher than the second quarter of 2011. On a same-community basis, occupancies were 160 basis points higher than the second quarter of 2011 and increased 20 basis points sequentially. Same-community average rents were 1.6% higher than the second quarter of 2011.

On a same community basis, revenues increased 3.9% versus the second quarter of 2011. Expenses increased 3.4% and net income grew 4.6%.

As a percentage of residents and healthcare revenue, operating expenses were 59.4% in the second quarter of 2012 compared to 59.9% in the second quarter of 2011, an improvement of 50 basis points. Excluding transaction costs associated with the acquisition process, general and administrative expenses as a percentage of revenues under management were 4.3% in the second quarter of 2012. Transaction costs were approximately $500,000 in the quarter.

Adjusted EBITDA for a second quarter of 2012 was approximately $27.7 million and adjusted EBITDAR margin was 36% for the period. EBITDAR increased $5.1 million and margin improved 90 basis points from the second quarter of 2011 and 40 basis points sequentially.

Since the first quarter of 2010, revenues have increased 61%, EBITDAR has increased 94% and EBITDAR margin has grown by 610 basis points. Adjusted net income for the second quarter of 2012 was $2.1 million or $0.08 per share excluding the nonrecurring and noneconomic items reconciled in the press release. This is an increase of $0.6 million or $0.02 per share from the second quarter of 2011.

Adjusted CFFO was $8.1 million or $0.29 per share in the second quarter of 2012 compared to $5.2 million or $0.19 per share in the second quarter of 2011, an increase of nearly 55%.

Moving to the first-half results, the Company reported revenue of $149.2 million, an increase of 20.2% from the first half of 2011. Adjusted EBITDAR was $53.4 million through the first six months of 2012, an increase of $10.3 million or 24%. Adjusted net income was $4 million or $0.15 per share in the first half of 2012 versus $3.2 million or $0.12 per share in the first half of 2011. CFFO was $14.6 million or $0.53 per share in the first half of 2012, an increase of $3.6 million or $0.12 per share from the first six months of 2011.

The Company ended the quarter with $46 million of cash and cash equivalents including restricted cash. As of June 30, 2012, the Company financed its 38 owned communities with mortgages totaling $289 million as fixed interest rates averaging 5.5%. None of the Company's mortgages mature before July of 2015.

This mortgage debt includes supplemental financing that closed in the second quarter on existing communities with proceeds of $20.2 million at a fixed interest rate of 4.39%.

Since the original mortgages were placed with Fannie Mae and Freddie Mac, we own communities that have increased in value and a portion of the principle has been amortized. We can then go back and take out additional proceeds one time for each mortgage. The supplemental debt is co-terminus with the original loan and is priced off the treasury rate for the remaining term.

The Company has additional owned communities that have appreciated in value since the original mortgages were placed and we could pursue additional supplemental financing in the future. Even with these additional proceeds, our EBITDA to interest coverage was 3.5 times in the second quarter.

Cash on hand, cash flow from operations, and proceeds from these supplemental financings are expected to be sufficient for working capital, prudent reserves, and equity to fund the Company's 2012 acquisition program.

Capital expenditures for the quarter were approximately $3.4 million, representing $2.2 million of investment spending and $1.2 million of recurring CapEx. If annualized, the Company spent approximately $500 per unit on recurring CapEx in the quarter.

The Company also completed a lease modification and extension in the second quarter. In anticipation of a potential lease covenant violation related to a property in its portfolio of 10 properties with a certain landlord, the Company negotiated a lease modification that became effective at the end of the second quarter.

The Company exchanged two independent living communities with capacity for 338 residents for a continuing care retirement community or CCRC with capacity for 358 residents. The landlord assumed $18.3 million of debt on the two communities added to the lease and the rent increased by an amount approximately equal to the interest on the debt assumed. The Company now owns the CCRC free and clear.

As part of the lease modification, the Company negotiated an extension of the lease term from September 2015 to September 2020. The landlord's right to reset the underlying values of the leased assets was thus deferred for five years. In addition, the lease modification eliminates property level covenants and results in the return of all shortfall deposits.

Benefits of the lease modification include improved lease coverage on the portfolio and the elimination of all property level covenants; the return of approximately $3.4 million in shortfall deposits; improved cash flow with a new rent approximately equal to the old rent and interest payments, eliminating any amortization of principle; an extension of the lease term for five years eliminating a potentially large increase in rent payments beginning in 2015.

We would now like to open the call to questions.

(Operator Instructions). Daniel Bernstein, Stifel Nicolaus.

Good morning. I thought maybe you could walk through the quarter in terms of the trend in occupancy from, say, the beginning of the quarter to the end of the quarter. Did you see any differences between how your occupancy trended during that period and maybe distinguish between maybe IL and AL and even maybe geographies if that's appropriate?

I would be happy to, Dan. If you look at the weekly results for the quarter, we had a good April, a very good May. We actually had a first few weeks of June that kind of saw some slow down but a very strong recovery in the third and fourth week of June and an excellent July.

The feedback I'm getting from the field is outstanding. I mentioned that we had increases in July in all levels of care. It is rare that we see that -- that across the board including CCRC, IL, AL, and memory care.

In the second -- it's interesting, in the second quarter as I noted in the comments and the press release, we had more growth of independent living occupancy than assisted living and that has been fairly true for not only capital but the industry going back now kind of middle of 2011.

That being said, we had an incredible amount of growth in assisted living in July and a very stable second quarter. So our assisted living occupancies have remained extremely stable and are now growing again. IL growth continues.

We benefit from Texas. You probably saw a couple weeks ago on CNBC they rated Texas as the number one state to do business in the country. It represents 29% of our operations and Texas continues to be extremely solid.

We saw excellent gains in Ohio in the quarter, very strong performance in Indiana, kind of the whole Midwest has performed well -- Minneapolis, Nebraska -- and as I said, we get these weekly reports and monthly reports and I am very optimistic for the third quarter, which historically is our best quarter, and what's really interesting is how many buildings we operate that are just on the cusp, properties that were kind of low 80s. We have so many properties we have right now about 10 buildings that are 88% or 89% occupied. They're just at the cusp of getting into 90%.

We have a number of buildings that were down in the low 70s or high 60s. They are at 78 and 79. So the trends seem to be very positive. We have our weekly calls where we discuss occupancy trends. We go through what we call our rent [down] calls. Properties below 85% and the commentary, the tones have been very positive and we are seeing the results.

So all levels of care are doing well right now. Obviously we think that we benefit from a strategy of operating in some of the better economies. I track some of the -- Case-Shiller data, you look at unemployment data, I ask people to go through the states, Nebraska 3.2 percent unemployment; Texas, Indiana, Ohio, North Carolina, some of the best unemployment rates in the country -- that's where we operate.

So not only benefiting from our strategy to grow within these areas and having less competition, we are also getting the advantage of just better economies, which I think are giving us a consistent performance of organic growth that we have not seen really since the beginning of 2010.

Are you accelerating rate growth at all, given that some of the overall portfolio is starting to approach 90%? And just trying to understand if I had to look out forward a couple more quarters, should I start to expect occupancy growth maybe to start to slow a little bit and your rate growth start to accelerate? Maybe similar to what we are starting to see in NIC MAP or do you still see a lot more occupancy growth over the next 12 months?

We expect much more occupancy growth over the next 12 months. The way we set our rates, we have budgets are prepared at the end of a year for the following year and they set the rate growth projections for that year. As you can see, we budgeted 3%. If you look sequentially, we are up 70 basis points. We are very much on track for that type of 3% rent growth. Some buildings may be a little more, some less.

As we get into September-October, we start to really look at our rates very closely and we will forecast rate growth for next year. Again that rate growth will also be determined as what we expect for expense growth. Obviously we are benefiting from very slow growth economy and low inflation and food costs have been very, very -- really haven't moved at all, quite frankly.

Utilities have been very, very controlled. We've been benefiting from all the electricity contracts we negotiated in nonregulated states. So we do anticipate having greater rent growth next year. That's not yet implemented in our budgetary plans but in our strategic plans we had considered some better growth next year. Clearly with improving occupancies that will give us some more confidence to accomplish that.

But I do think we are on a trajectory for good, great growth, good operating growth, and very stable and good organic growth that should result in a nice kind of attractive growth rate on our same-store NOI growth.

Turning the tables to the acquisition pipeline, we have heard from a number of healthcare REITs that their acquisition pipelines seem to be building for the second half. You've talked about meeting or exceeding your first-half acquisitions.

Is your pipeline growing? Are you seeing more sellers in the market? Maybe what's driving the selling at this point from small operators? Is it the capital gains tax maybe increasing in 2013 potentially? Or is there something else that is motivating people to sell the assets?

There are two factors I believe that are motivating sellers in the transactions that we are conducting. One is the tax rates and we have one transaction where the seller clearly -- we expect to close the transaction in September. The seller was only concerned that we closed it before the end of the year because he was concerned about change [over] rates.

But the other advantage we are seeing with our strategy of conducting these off-market transactions is developing relationships where we have repeat transactions with sellers that have been so pleased with the feedback they received from their residents and their staff of being part of Capital Senior Living's family after we complete the acquisition that they have come back to do more business with us.

So this is a very emotional transaction. We've discussed this in the past with a lot of the smaller operators that this is their baby and they continue their relationships and communications with their staff. Fortunately the success we are having and the easy transition that we are able to accomplish on these transactions have generated more sales and more opportunities.

So we are focusing on the growth, the pipeline as you say is very robust. We are very -- and the quality is very good. But fortunately we are not competing against the REITs for the larger transactions. We're still focused on transactions typically in two to six property type portfolios in Ohio, in Indiana, in the Carolinas, in Texas and the financial and the economic metrics of the transactions have been so consistent over the strategy that we have implemented beginning the middle of last year but we are getting the benefit obviously of the lower interest rates as the tenure has come down so much.

Okay, I'll jump off now. I appreciate you having me on the call.

Drew Jones, Stephens, Inc. Investment Bank.

Good morning, guys. Congrats on a good quarter. Staying on the topic of acquisitions I guess just thinking about the buyside of that transaction, could you give us a quick update on the financing environment and whether or not there's any new competition for deals or anything unforeseen that might elongate that process?

You know, Drew, I will start with the financing environment and it just continues to be extremely favorable. Obviously all of our debt is at 10-year fixed rates nonrecourse to the Company through the government agencies and it's all priced off the 10-year Treasury. So with the 10-year staying in the 1.5 range, we would expect future deals to be very comparable or perhaps even better than the loans we've closed in the low to mid 4% range. So the financing environment is still extremely attractive and we plan to take full advantage of it.

Competition hasn't changed, Drew. I'd just look at a statistic -- if you look at the transactions we've completed this year and those which are under due diligence and under contract that we expect to close in the third quarter, 91% of transactions, all but actually one are off-market transactions. These are transactions where the sellers came directly to us. We are very well-known in the industry for being acquirers in the regions in which we operate and I think that as we are seeing just by the fact that we have so many transactions coming to us before they go to market or just coming to us exclusively, I think it allows us to continue in this kind of sweet spot where we can continue to have highly accretive acquisition growth in a very favorable environment without having much competition from other buyers.

Great. Just transitioning over to rate, if we look back at 2Q 2011 and some of the occupancy trends there, is it right to think that maybe there weren't quite as many resident anniversaries in this last quarter and that maybe 3Q there should be, we should be lapping more of those anniversaries so maybe a little more pricing power?

I think the difference in the pricing really comes through, as I commented in the release, is just a fact that we have more independent living rents coming up -- there's more growth in the occupancy and independent living than assisted living, so on a weighted average of course the IL rents are lower. You get on that basis you get a lower trendline so that will change.

One thing we are seeing as I said is that our AL comparisons quarter-over-quarter were very steady. We had about 50 basis points growth in occupancy and IL in the second quarter from the first quarter. In July, it was interesting about 60% of our growth in July came from AL with steady growth in the IL, memory care, and even our CCRCs.

So as we have more growth in the higher levels of care as well as the software programs that we have implemented and start to benefit for some of the charge level of care charges, we should start to see a little more growth on the revenue side as well.

All right. Thanks, guys.

Joe Munda, Sidoti.

Good afternoon, guys. I'm sorry, good morning. One of the questions were answered already, but I was wondering if you could walk us through the criteria for rent increases for a particular property geographically? Obviously it's going to be different by state, but you touched on it a little bit. Can you walk us through and give us a little bit more clarity there?

Sure, we have a very involved process every year that starts at the community level and works its way up through our operating management team, which is looking at each line item, a zero-based budget and they go through each expense item and decide what a reasonable increase is anticipated for the following year. From that, we always want to have a spread where we have more rent growth than expense growth, so we kind of look at that.

We look at trends in the economy. One of the advantages we have if you look at our performance over the last couple of years compared to our peer group in NIC MAP, is that our average rents are lower than many other operators based on the geographies, so the rent growth is a little more accepting to some of the residents when you're increasing a $2000 a month rent at 3% versus a $6,000 a month rent at 3%.

But it really ties into a process. We then will fine-tune that during the course of the year. We pay particular attention to the properties that operate below an 85% level and then we actually look weekly at rents and units in those buildings to see how we can manage the process.

Our focus is always not looking at rent growth, occupancy growth. Our focus is NOI growth, so our systems are generating information and our managers are looking at results that are focused on driving bottom-line growth. So we are happy to -- where we can -- push rates and maybe sacrifice some occupancy to generate cash flow growth, but it's really a system that has been utilized for many years and continues to work pretty well.

But a lot of it is -- it's more than geographic. It's really more a function of making sure that we have rent growth that is exceeding our expense growth expectations.

Have you lowered any of your rents at any of your facilities?

We occasionally in competitive markets may give some specials on a limited number of units. We don't discount. We like to maintain the integrity but we are seeing much less of that and less need to do that, which is very positive. So that's a positive aspect but we typically don't discount. We typically raise the rents both in-house rents and street rents. One of the advantages we are seeing over the last year or so is during the downturn, it was a little harder to raise the rents on anniversaries to residents to keep the level of street rents. Now we are really looking at rent growth pretty consistently both to the renewals as well as to new residents coming into the properties.

And do you guys have a referral network in place?

We do. Our best referral source are our residents and family members. We also work with companies like A Place For Mom and other vendors that refer to us. And then our sales and marketing directors, they're focused always on outreach looking at geriatric physicians, discharge planners from hospitals, social workers, a tremendous amount of activities both inside the community and within the community at large trying to expand our leads and now we are very focused on upgrading our Internet and Web emarketing realizing that's another opportunity for us to increase our leads and expand our penetration rates.

Okay, all right. I will hop back in the queue. Thanks.

Daniel Bernstein, Stifel Nicolaus.

Thanks, just one extra question. There have been a pretty big heat wave across the US. Are you expecting any bump up in utility costs in the third quarter?

We haven't seen it yet. I'll tell you, Dan, it's a great question. When we look at the numbers, we haven't seen it. We will wait until we get July and August numbers but June was hot. We didn't see any utility growth. In fact, I think we were down in June.

So one benefit we do have as I mentioned, with such a big platform in Texas as well as in some other states like Ohio, we have negotiated long-term contracts on kilowatt rates for electricity. Three or four years ago we were paying $0.07, $0.08. It went down to $0.06. We are now at $0.05 a kilowatt hour in Texas, in Ohio, a few other states, which is the bulk of our portfolio. So fortunately now usage may increase because of the heat but again, we are benefiting from very low rates.

And if you look at variance reports as recent as June, the actual year-over-year variance in utilities was actually down, so that's not to say something may pop up this month or next. It has been warm. Ralph and I and Gloria Holland were at a Texas Ranger game the other night. It was 104 degrees, not a pleasant temperature to be watching a baseball game. I don't how the ballplayers play in this heat.

You go with the 100 days of 100 degree in Texas last year?

That was last summer, exactly, but so far we haven't seen it, Dan.

Okay, then one other quick question I have here on conversions. Are you looking at doing any conversions or expansions for the acquisitions that you have done or looking at in terms of due diligence? I don't know if other -- the smaller operators had capital to make those changes. Do you see possibilities to improve the assets that you are acquiring?

Definitely. In fact it was interesting. We just brought some deals to the Board two days ago and as part of that portfolio, there was actually approval for expansion and we've seen this in other transactions where the sellers didn't have access to capital to finance that growth.

But what we are going to do on these transactions is first get into the operations, make sure we really understand the markets, make sure there is a demand in that market for that growth on the expansions, and then we will look at that as a growth opportunity. But we are buying properties and many of them have either land for expansion and some actually have plans for expansion that just couldn't be paid for by the existing owner.

Okay, that's it for me. Thank you.

Todd Cohen, MTC Advisors.

Ralph, could you just please walk me through again the lease transaction that you referred to?

I would be happy to, Todd. What we did was to avoid a potential lease covenant violation, we did a complete modification and extension of one of our major leases and what we did was we took two independent living communities that had mortgage debt on them and we exchanged those two independent living communities and the debt for one CCRC that was unencumbered.

So the landlord accepted the two independent living communities, independent living communities and assumed $18.3 million of debt. We got back a CCRC that we now own free and clear which gives us flexibility going forward in terms of how we operate that community.

What happened on the cash flow statement if I might just expand on that is that the Internal Revenue Service considered the $18.3 million of debt assumption as a taxable gain to the Company even though the values exchanged were roughly comparable. So for book purposes, the values were comparable and there was no gain booked on Capital Senior Living's books but for tax purposes, we owe the IRS because $18.3 million of debt was assumed by someone else.

For that reason, we had to book nearly $7 million of an increase in our deferred tax asset in our taxes payable and for that reason we added that back on our cash flow statement because it was not from operations. So that's the big number on the CFFO and how that appeared. It's the difference between book accounting and tax accounting.

Now look, Todd --

Are you saying you won't have to actually pay that cash tax?

No, we will have to pay the cash tax so that the taxes that we pay sometime probably later this year, partially offsetting that was we got back about $3.4 million in shortfall deposits. So there was a small difference in the amount of taxes we will pay. We are also doing some cost segregation studies on all of these acquisitions and we think the result of those cost segregation studies if you know how they work is basically to rather than just to depreciate a building over 30 years, we separate it into various asset classes that have shorter depreciable lives and reduce taxes accordingly.

So we're working with third parties to help us do a cost segregation study which we think will make up the difference in the taxes between the cash we received, the taxes we owe, and we don't expect to be out of pocket significantly.

Then next -- how many properties are in this pool now?

The pool now has 11 properties. It had 10, so we contributed two properties and got one back.

Okay, then you said the lease terms were extended out five years?

One of the major benefits, Todd, is that this lease we could've extended it in 2015 for another five years. We now have two five-year options beyond 2020 but as typical of these leases, the landlord has the right to reset the underlying lease values on the date of the extension and we have now deferred that for five years so that we are assured that our leases are not going to have a step up in 2015 which could have been very significant.

Right, good. Okay, then, Larry, I know you have said that you've got additional acquisition candidates kind of coming up in the quarter here. How far along were the ones that you think you are going to close on get you to your balance for the 150 for the year?

We are very comfortable with our numbers and believe that if we complete our due diligence successfully and close this quarter, we will be very close to our target for the year. So we are very well ahead of our goal of achieving transactions totaling $150 million this year.

Great, thanks.

There are no further questions at this time. I would like to turn the conference back over to Mr. Cohen for any additional or closing remarks.

Well, again, we thank you all for your support and participation on the call. As always if there are any further questions, please feel free to contact either Ralph or myself and we look forward to talking to you soon. Thank you very much. Have a good day.

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