Sonida Senior Living Inc (SNDA) 2013 Q1 法說會逐字稿

Good day and welcome to the Capital Senior Living First Quarter 2013 earnings release conference call. Today's conference is being recorded. The forward-looking statements in this release are subject to certain risks 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, risks of downturns and economic conditions generally, satisfaction of closing conditions, such as those pertaining to licensure, availability 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'd like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you, and good morning and welcome to Capital Senior Living's first quarter 2013 earnings release conference call. I am very pleased to report continued strong results for the first quarter, which is typically a challenging period. Excellent expense management has yielded significant growth in net operating income, despite the effects of normal seasonality and active and prolonged flu season. First quarter same-community occupancies increased 70 basis points from the comparable quarter of the prior year and CFFO grew by approximately 45%.

Recent trends indicate solid growth in occupancy in the second quarter. Our most robust pipeline allows us to continue our disciplined and strategic acquisition program that increases our ownership of high quality senior living communities in geographically concentrated regions and generates meaningful increases in CFFO, earnings and real estate value. We differentiate Capital Senior Living as the value leader in providing quality seniors housing and care at reasonable prices. We are well positioned to make meaningful gains in shareholder value as a substantially private pay business in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market.

In the first quarter, we completed the acquisition of a senior living community in Nebraska for a purchase price of approximately $6.7 million. This transaction is expected to add CFFO and earnings of $0.01 per share and increase revenue by $2.6 million. This community was financed with another community we acquired in October 2012 to repay its bridge loan with a combined loan proceeds of $16.4 million of 10-year fixed rate non-recourse debt with an interest rate of 4.66%. The effective cash-on-cash return on equity on the Nebraska acquisition is greater than 18%. We are conducting due diligence on additional transactions, consisting of high quality senior living communities in regions where we have extensive existing operations. Subject to completion of due diligence and customary closing conditions, we expect to acquire these additional communities in the second and third quarters of this year.

I would now like to review our operating activities. I'm pleased to report that in addition to the success that we are experiencing with our acquisition program, we are also achieving strong operating results with gains in occupancy and net operating income. We benefit from our proprietary expense management systems, our community-based empowerment philosophy, our operating strategy to provide value to our senior living residents and our geographically concentrated operating platform with most of our regions enjoying better economies than national averages.

We believe we are different from other companies in our peer group with our sole focus on the substantially all private-pay senior living business, capitalizing on our competitive strengths in operating communities in geographically concentrated regions and profiting from our competitive advantages as a larger company with economies of scale and proprietary systems, operating in a highly fragmented industry that continues to generate excellent results.

At communities under management, excluding one community that had a recent conversion, same-community revenue in the first quarter of 2013 increased 3.1% versus the first quarter 2012. Same-community expenses increased 0.9% and net operating income increased 6.4%, with margins improving by 100 basis points from the first quarter of the prior year. Our same-community occupancies increased 70 basis points from the comparable quarter of the prior year and were down 80 basis points sequentially. Lower sequential occupancies resulted from the effects of normal seasonality and an active and prolonged flu season.

We quarantined dozens of communities during the flu season, which limited prospects from touring our communities in January and February. This protocol delayed first quarter move-ins to the latter part of the quarter. In addition, we had more move-outs than anticipated in the first quarter, primarily due to death in higher levels of care. Fortunately, first quarter 2013 same-store deposits were 3% higher than in the comparable period in 2012. I'm pleased to report that occupancy growth has been positive since the middle of March with net gains in occupancy resulting from more move-ins and fewer move-outs for March and April, and the outlook for May is very strong.

We anticipate solid growth in occupancy in the second quarter, which is typically a strong period. For example, last year in 2012, we gained 117 units of occupancy in the second quarter for a 1.1 percentage point gain in occupancy during the quarter. Same-community occupancy of the past year reflected occupancy gains in independent living, exceeding those in higher levels of care, resulting in average monthly rents 2.1% higher than the first quarter of 2012. Sequentially, same community average monthly rents were 60 basis points higher.

Industry fundamentals continue to be strong with demand continuing to outpace supply. NIC MAP reported for first quarter 2013 that trailing 12 month construction starts as a percent of supply decreased to 1.2% and unit absorption to supply increased to 2.1%. Recently, we were able to review with the NIC MAP staff, construction starts in Dallas and Houston and compare them to our existing communities in Texas. I am pleased to report that none of the construction currently underway in these two cities is competitive with any of our Texas communities. This confirms that our value strategy with average monthly rents of $3,022 acts as an economic barrier to entry for new development, where replacement costs are averaging in excess of $175,000 per unit. Rents would have to be about 50% higher than current levels to generate a reasonable return on the cost of development, indicating the opportunity to realize significant rent growth before we expect to see any new construction in most of our markets. With strong industry fundamentals and improving economy and housing market and virtually no new supply in our markets, we believe that our occupancies can continue to grow to an optimal level of 92% to 93%, leaving tremendous opportunity for additionally organically driven CFFO growth and increases in our real estate values.

The number of our consolidated communities increased from 87 in the first quarter of 2012 to 99 in the first quarter of 2013. Financial occupancy of the consolidated portfolio averaged 86.7% in the first quarter of 2013, 100 basis points higher than the first quarter of 2012. Average monthly rents in the first quarter of 2013 increased 2.7% over the first quarter of 2012, to $3,022 per occupied unit. I am optimistic the industry fundamentals will continue to improve throughout 2013. We were benefiting from a recovery in existing home sales, increasing home prices and very limited new supply. I am encouraged by the high levels of tourists, deposits and move-ins we are experiencing with the passage of winter.

The first quarter is typically a challenging period for the industry and with a prolonged flu season, occupancy didn't recover until late in the quarter. I want to recognize and thank our on-site, regional and corporate teams for their discipline and effective use of our proprietary expense management systems that resulted in our strong first quarter same-store net operating income gains of 6.4%. Our positive results demonstrate that our team with its disciplined focus and attention to detail is successfully executing our operating strategy. Successful senior living operations require well located communities with the right on-site team, supported by strong regional and corporate resources. We're fortunate to continue to recruit and retain many of the best operations and sales and marketing professionals in the senior living industry.

I'd now like to discuss our growth initiatives. We are excited that our growth as seniors housing is the need-driven product with very limited new supply. Demographic demand growth is driven by an aging population. These favorable demand and supply/demand trends should allow for continued occupancy and rent growth. We have improved our operations by implementing software programs for care plans and level of care charges. In addition, I am very pleased to announce that later this month we will be introducing a new branding for Capital Senior Living that will serve as the cornerstone for all marketing and sales initiatives. Some of the things you will see on our website will include new corporate and property site design, tailored with the new Capital Senior Living branding, expanded SCO development, increased search functionality for community locations, expanded content, new resource sections, as well as an adaptive, mobile-friendly version of the site.

We are also benefiting from our investment in 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, margins and cash flow. Each 3% increase in average monthly rent generates approximately $10 million of incremental revenue. Every 1% improvement in occupancy is expected to generate approximately $3.3 million of revenue, $2.3 million of EBITDAR and $0.05 per share of CFFO. We have had much success in converting units to higher levels of care to meet the needs of our residents and allow them to age in place, as well as generate excellent financial returns to our Company and shareholders.

We are in the process of converting an additional 158 units to assisted living. When stabilized, these new conversions are expected to add approximately $2.9 million of incremental revenue and $1.7 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 care to 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.

We have completed $188 million of acquisitions since the first quarter of 2012, which are expected to generate in their first year of operations, CFFO of $0.35 per share and an 18% initial cash-on-cash return on invested equity. I am pleased to report that our 2013 budgeted occupancies, average monthly rents, revenues, operating expenses and EBITDAR are all better than our 2013 projections at the time of their acquisition. Our discipline in making acquisitions is evident by the fact, since August 2011, we have acquired over $270 million of properties after evaluating in excess of $1.3 billion of acquisition opportunities, by primarily off-market acquisition focus to continue to yield a robust pipeline, which currently consists of dozens of high quality senior living communities.

We are currently conducting due diligence on numerous transactions, consisting of high quality senior living communities in regions with extensive operations. Subject to completion of due diligence and other customary closing conditions, we expect to acquire these additional communities in the second and third quarters of the year. When completed, these acquisitions are expected to be accretive to CFFO and earnings and lead to further improvement in our EBITDAR margin and operating metrics.

We expect our disciplined and accretive acquisition strategy to result in approximately $150 million of acquisitions in 2013, which we believe we can fund with our cash balances, the cash flow generated by our operations and the proceeds of possible sales of certain non-core properties. Our EBITDAR margin reflects the benefit we derive from executing on our acquisition strategy.

We are able to leverage our geographically concentrated operating platform and benefit from economies of scale, our group purchasing program, our proprietary proactive expense management systems, our risk management and insurance programs, as well as our focused marketing plans 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 future acquisitions. We are very well positioned to add to our success and I am optimistic that our future will be -- as 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 owned real estate 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 our substantially all private pay strategy in an industry that is benefiting from need-driven demand, limited new supply and in an improving economy and housing market.

I would now like to introduce Ralph Beattie, our Chief Financial Officer to review the Company's financial results for the first quarter of 2013. Ralph?

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 first quarter of 2013. A copy of our press release is available on our corporate website at www.capitalsenior.com. If you'd like to receive future press releases by email, there is a place on our website for you to provide your email address.

For the first quarter of 2013, the Company reported revenue of $86.2 million compared to revenue of $72.2 million for the first quarter of 2012, an increase of $14 million or 19.4%. We consolidated 99 communities on our income statement this quarter versus 87 in the first quarter of the prior year, reflecting the results of our disciplined and strategic acquisition program over the last 12 months. Financial occupancy of the consolidated portfolio averaged 86.7% in the first quarter of 2013, compared to 85.7% in the first quarter of 2012. The financial occupancy increased 100 basis points from the comparable quarter of the prior year. On a same community basis, occupancies were 70 basis points higher than the first quarter of 2012.

At communities under management, same community revenue in the first quarter of 2013 increased 3.1% versus the first quarter of 2012. Same community expenses increased only 0.9% and net operating income increased 6.4% from the first quarter of the prior year, demonstrating the effectiveness of our proprietary expense management system.

As a percentage of resident and healthcare revenue, operating expenses were 59.1% in the first quarter of 2013, compared to 59.8% in the first quarter of 2012, an improvement of 70 basis points in operating margin. General and administrative expenses as a percentage of revenues under management were 5.1% for the quarter, excluding transaction cost of approximately $0.4 million. Expenses this quarter were impacted by an abnormally high level of medical claims. The Company is self-insured for the costs of employee and dependent medical benefits and purchases stop-loss protection on an individual and aggregate basis. Without a doubt, this self insurance program significantly reduces the Company's self-insurance cost. Occasionally, expenses are higher than average in a particular quarter, as a few claims approach stop-loss insurance thresholds.

Healthcare costs in the first quarter of 2013 exceeded the first quarter of 2012 by approximately $0.5 million. Adjusted EBITDAR for the first quarter of 2013 was approximately $30.5 million, an increase of $4.8 million or 18.5% from the first quarter of 2012. Adjusted EBITDAR margin was 35.3% for the period. Adjusted net income for the first quarter of 2013 was $1.8 million or $0.07 per share, excluding non-recurring or non-economic items reconciled on the final page of the press release. This equals adjusted net income of $0.07 per share in the first quarter of 2012. Adjusted CFFO was $9.7 million or $0.35 per share in the first quarter of 2013. Adjusted CFFO exceeded the first quarter of 2012 by $3 million or $0.10 per share, an increase of approximately 45%.

In the fourth quarter of 2012, the Company initiated a tax consulting engagement to assist in reviewing the classification of costs incurred for the purchase of fixed assets and capital improvements to its leased portfolio. The purpose of this study was to determine which cost may qualify for shorter depreciable lives for federal and state income tax purposes. The preliminary findings of this cost segregation study indicated that the Company could increase its depreciation expense for tax purposes by approximately $6.1 million in the fourth quarter of 2012, saving approximately $2.4 million of taxes and increasing CFFO by approximately $0.09 per share. The Company will realize additional tax benefits from its cost aggregation study of approximately $0.20 per share, as the next $15 million of taxable income is offset by this additional depreciation. Approximately $0.02 per share of CFFO was realized in the first quarter of 2013, with $0.18 per share of benefit remaining. While CFFO in the first quarter of 2013 was significantly higher than the first quarter of 2012, CFFO declined approximately $0.07 per share from the fourth quarter of 2012, excluding tax benefits in both quarters. We estimate that the CFFO difference was partially due to lower sequential occupancy, partially due to higher G&A expenses, primarily health insurance claims, and the majority was due to timing differences in the receipt of residents' payments.

We received a large number of January rent checks prior to January 1, 2012, resulting in a large increase in deferred income and cash flow. With a few days prior to April 1, 2013, a weekend, the number of rent checks received early and the consequent deferred income dropped and reduced CFFO. This appears to be a timing difference that is likely to reverse itself in the fourth quarter of this year. It is interesting to note that only about 18% of the 2012 CFFO was generated in the first quarter of last year.

Capital expenditures for the quarter were approximately $2.1 million, representing $1.1 million of investment spending and $1 million of recurring CapEx. If annualized, the Company spent approximately $400 per unit on recurring CapEx in the first quarter of 2013. The Company ended the quarter with $27.9 million of cash and cash equivalents, including restricted cash. As of March 31, 2013, the Company financed its 49 owned communities with mortgages totaling $364 million at fixed interest rates averaging 5.2%. None of the Company's mortgages mature before July of 2015.

We'd now like to open the call to questions.

(Operator Instructions) Darren Lehrich, Deutsche Bank.

Hi, good morning. This is [Dana Nandan] in for Darren. Just wondering if you could talk about how the portfolio is sort of breaking down in terms of occupancy, looking at percentage above 90% and then below 80%?

Sure. Good morning, Dana. How are you? Right now, as far as, if you use 90% threshold, I'd say right now, about 50% of our properties are above 90%, another 30% are actually at 87%. We reclassify our properties in three colors, designations, green, yellow and red. Green are 90% and above, the average right now at 96%, that's about 50% of our portfolio. Another 30% are our yellow zone properties, which as of last Friday averaged 87%. And the balance are our red zone, which are below 85%. What's very encouraging, as of last Friday is the red zone, which is our most challenged properties. Well, in April and May, have 80 basis points of gains in occupancy.

So the reason that we are very pleased with what we're hearing for the second quarter is evident in the success we're recognizing in those red zone properties, and clearly they're filtering through as we go operate into our yellow and green zones as well.

Okay, great. And then just on the conversion that you spoke to, can you talk about the timing of the conversion (multiple speakers)?

Yes. We actually are in the process of looking at conversions at five of our communities. Most of these actually, almost all of these are second and third generation conversions that we've already successfully completed. We have one property, where we are converting eight units from IL to AL. That's underway right now, should be done quickly. We are actually changing the designation of licensure in one of our buildings, adding 65 units of assisted living, that's just a licensure process, there is no CapEx or cost involved with that. We are increasing our [float] units in one of our properties by 25. Again, that's merely licensure to allow for more assisted living residents. We've successfully done this in many of our buildings and it has obviously allowed us to both transfer residents within and attract residents from outside the community into the assisted living at higher rents and higher margins. We are now seeking approval for a second conversion of a building that we converted last -- actually converted it two years ago. We converted 45 units in all independent living property in Florida. That conversion was very successful, leasing to 90% in its first year. We're now looking at doing a Phase II of taking another 45 units from independent to assisted living. And then we have a last property where we're looking at converting 15 units in the existing property that has IL and AL. Again, this is a designations.

So the good news about these conversions, they're highly profitable and the cost to complete these are very, very minimal. The only property that will incur significant cost for the conversion will be the one in Florida that we received the approvals. That's a property we leased. the landlord or REIT will actually pay for the cost and then we'll just increase our rents to pay for that conversion as additional rents in future years on that property.

Okay, great. Thank you.

Thank you, Dana.

Daniel Bernstein, Stifel.

Hey, good morning.

Good morning, Dan.

Hi. I'm just trying to understand how the occupancy trend for calendar first quarter, maybe if you have an occupancy at the beginning of the quarter and ending occupancy and maybe what months the full impact it was?

I can actually give that information, I have it by month. For the quarter, Dan, we lost 59 units, which is interesting is, if you do the math, the financial occupancy was down 80 basis points, but the real loss was much less. What's interesting is when we report occupancies, these are financial occupancies. These are number of days rent is collected in a quarter. What is typical in our industry is that most of the move-ins occur at the last week of the month. And most of the move-outs seem to move out the first week of the month.

So if you look at what actually occurred in our portfolio, in January we lost 49 units, in February we lost 45 units. Again, what's interesting is year-over-year that move-ins were pretty comparable. It was really the attrition levels were higher for getting the higher levels of care. We gained 33 units in March and in April we have exceeded that number. So we've grown -- right now we don't have financial, but physical occupancy appears to have grown by about 40 units in April and the reports for May are even stronger.

So what's interesting, last year, if you look at the second quarter, we had our best month was May of last year and it looks like we may accomplish that as well. But, hopefully, that gives you some color as far as the effect of the quarantining of our buildings. We had about -- almost three dozen buildings during those two months that had flu and our protocol was to limit the spread by (inaudible) to apartments for residents and then also stopping tourists into the building while there was flu in the building. And, obviously, we saw the impact. The good news is, we saw a nice gain in March, a better gain in April and could expect that to continue, especially as we get into the much better season during the summertime.

Was it broad based or was it more local geographies, say, like Houston or Dallas. Do you have a little bit (multiple speakers) more geographic concentration?

As I said, there were dozens of buildings. It definitely affected some properties in (inaudible) were impacted with very bad snow in Kansas and some in the Midwest that also happened during the quarter. But there was nothing that really stuck out as far as geographically concentrated flu, if you will. The epidemic is around and they kind of spread through a variety of buildings. Again, almost 30% of our portfolio had some flu. And then, fortunately, with the passage of winter and better weather and better health, the move-outs are down considerably and move-ins are better. So we're seeing very positive trends now.

Okay. And in terms of your expense controls, it seems like it was very good in the quarters. Was there something in the fourth quarter that affected your fourth quarter expenses that would have kind of rolled into the first quarter -- that you corrected in the first quarter that kind of helped out expenses, or maybe you can give an example of your cost controls and how that's worked in the first quarter, because there was much better operating margins than we had expected?

Dan, it's an question. It's something that Ralph and I talk about frequently when we meet with investors. During the recession, you may remember, you actually called me, Dan, asking to stress test the industry on the effect of loss of occupancy. And our experience has been that we have systems in place that, for example, on December 25, every executive director in every regional knows their billings for January. They then will go through their budgets for January and make sure that they can find expense management to control expenses, to compensate for loss of revenue when there's a downtick. The easiest, the most effective will be on food purchasing, so we only purchase enough food for the actual meals per serving, based upon the occupancy. Secondly is staffing, particularly hourly staff as it relates to wage staff and housekeepers. And then by department, we look at areas where we can either reduce the cost or perhaps delay a cost. But it's really mostly through food and labor.

The Company, in my experience, and again, I give all the credit to our operating team that does a fabulous job, and the systems that we have in place that shows the resiliency of this business model that even with loss of occupancy, we can expand cash flow and margin by very disciplined and effective systems and people using those systems to manage expenses in those areas.

I'm sorry, Dan, I might just add to that. If you look at the first quarter of 2013, again, a quarter where sequential occupancy declined, our revenues were up 3.1% on a same-store basis, expenses increased 0.9%, net operating income grew 6.4%. If you compare that to the fourth quarter of 2012, a quarter where occupancies were growing, revenues increased 4.2% over the comparable quarter of the prior year, expenses up 2.8% and NOI up 6.2%. So we actually had a larger NOI increase in an environment where occupancies were declining that we did in a very strong fourth quarter of 2012. It really demonstrates how effective these expense management controls are.

And I invite everybody, we filed an 8-K this morning with the press release and an updated corporate presentation. On slide 16, because we do talk about this frequently with investors, we actually now have a same-store comparable quarter slide, showing for the last five quarters, revenue growth, expense growth and NOI growth. And again, consistent with the Company's practices, they continued to demonstrate a very nice spread between rate growth and expense growth that provides that leverage for a very strong NOI growth on a same-store basis.

And you're not seeing any expense pressures at this point from labor or food, utilities?

Not at all. In fact, our food costs are running less than 1% growth a year. Again, we have fixed contracts on our food through our group purchasing program that has continued to save costs. In 2012, we actually invited about 10 chefs from our communities into Dallas. We spent three days with US Foods looking at the procurement, to make sure that we will also be able to take advantage of rebates by having the same limited number of staples that are used at our communities to benefit from that. Again, our systems, our group purchasing programs have worked well. We have fixed electricity contracts in deregulated states in Texas. We now have, I think, about $0.05 a kilowatt hour for electricity. We've been expanding that to other states as well and that will last for next three to five years. So there's been no wage pressure at all. So, the good news is, and obviously, you look at just what's happening in the general economy on CPI and other kind of pressures, there really aren't many cost pressures out there and we're able to efficiently operate our businesses with very disciplined focus on expenses.

The reason that Capital Senior Living succeeds as a value provider and is so successful with high margins, with average rents of $3,000 a month is expense. And the most important metric that this team, operating team that we have focuses on every year is expense management and expense controls. It's really the expense growth that will then decide the rate growth. For example, in 2013, we are achieving about 3% rate growth in our communities and that's about 100 basis points higher than the kind of normalized 2% rent growth. The reason that was so low in the first quarter was really the fact that as occupancies [drop], we're able to proactively anticipate that drop and manage the expenses to the occupancies.

The other area, I will tell you, since I'm here in Dallas today, it's very cool. I mean, utilities have been down. And unfortunately the first quarter, it did have some of the extremes with the exception in the Midwest that we had in the prior year, so that was a benefit. And I'm optimistic that the second quarter we'll have lower utilities, because temperatures in Texas are lower than they were last spring.

That's good information. I think I'll hop off and then see if there's any other questions and I'll come back on.

Thanks, Dan.

All right, thanks.

(Operator Instructions) Dana Hambly, Stephens.

Good morning. On the acquisitions, Larry, it sounds like -- I know it was light in the first quarter, but I guess that was within expectations. And so, the target is still $150 million and you said second and third quarters, so are you expecting all of that to close in the second and third quarter?

Let me, first of all, comment that if you recall last year, our target was $150 million. We acquired $181 million. We had over $30 million of transactions that closed in December of 2012. That was really the desire of sellers to sell transactions, quick sales before year-end to take advantage of lower capital gains rate. So in a normal period, those $30 million of acquisitions would have given us about $40 million in the first quarter, kind of accelerated into December. We did have a $6.7 million transaction.

It's interesting, we have more transactions under contract, in due diligence, than we've ever had as a Company at the current time. These transactions are under due diligence. We have closings scheduled, subject to completion of diligence for later this month, June, and then through September. So we are looking at completing those acquisitions of properties that are currently under contract in the second and third quarter.

Then we have in our pipeline, additional transactions where we're submitting notice of intent and negotiating terms for transactions that will be closed later this year. So, in total, we think that we will still hit our target of $150 million. They will, again, start hopefully end of this month and then proceed through the balance of the year.

Okay. And I assume the cap rates that you're seeing are pretty consistent with what you've seen in the past and just comment on the financing as well, is that similar to what we've been seeing?

Sure, I'd be happy to. Cap rates have been very consistent, the terms are very consistent, the quality has been outstanding. I feel it's really encouraging. We all receive fabulous reports from our regionals that conduct their due diligence. And the properties that we're buying are just terrific. They are well maintained, they're pristine, they have great staff, they're well occupied, good performance. Obviously, we have found a big benefit, we take them over, we incorporate our expense management programs, our group purchasing, our risk management insurance programs, we've seen a nice uptick.

On cap rates, they've been very, very constant and I think they'll continue that way. Again, we're very disciplined. There are some sellers that have expectations for lower cap rates, but they're not selling. In fact, two or three of the properties we're buying this year are properties that we saw over a year ago where the seller wasn't ready to sell, and now they are. And, again, we're seeing virtually no competition. I'm amazed at the ability to maintain the discipline on pricing and quality in geography, and be able to continue to succeed in buying properties that we make offers on with virtually no competition.

Financing, obviously, the tenure has come down some from the first quarter. I think last I saw it was about 175-ish. Ralph can talk about that and the spread, but we expect interest rates to be -- continue to be low, and Fannie and Freddie continue to be very active in the sector.

Dana, we will continue to use both Fannie Mae and Freddie Mac to finance our acquisitions. It's all 10-year fixed rate non-recourse debt. It is priced off a 10-year treasury, plus the spread. So we're still anticipating financing available to us at about 80% LTV and probably all-in interest rate fixed in the mid-fours. So financing is still readily available and aside from an occasional bridge loan, which we may do, all of our financing is going to be 10-year fixed rate non-recourse debt.

Actually, there's a new program out now by Fannie Mae that we're looking at. That might actually offer us 12-year lows. The loan to value on 10-year financing is about 70%. If we undertake a 12-year loan, then the proceeds would increase to about 80%, so we're looking at that. We think with these rates, we can continue to borrow in the 4.25% to 4.5% range on -- it's the same pricing, 12 years and 10 years purchased with the same pricing and have fixed rate non-recourse long-term debt, we think that's very attractive, it's also assumable, so it'll be a very attractive -- particularly a great to do increase over time, becomes an enhancement of value to a potential buyer of properties. So we would look to utilize this new program that's being initiated by Fannie Mae for 12-year terms that actually would slightly increase proceeds, have very strong coverages, but more importantly, would give us a 12-year term of very attractive, low fixed rate financing on a non-recourse basis.

Okay. Yes. And just on that point, when you talk about being able to finance the full $150 million with existing cash, cash flow and perhaps a sale. Are you assuming a 70% or an 80% LTV?

We're assuming 70%.

Yeah, okay.

Yes, I mean, if you look at it, we believe that we will have cash flow each quarter somewhere in the $9 million to $10 million range. The tax segregation cost study that Ralph spoke about earlier is expected to save about $50 million in taxes, so that's cash that won't be spent. And then the sales, if they are effected, could also generate tens of millions of dollars of cash.

So, we feel very comfortable that we'll have cash that would allow us to complete $150 million of acquisitions and still have cash left over for additional acquisitions that either -- whether they accelerate into the fourth quarter or carry over into next year. So we feel very comfortable that we can continue to finance our growth prudently on our balance sheet and still maintain reserves, maintain our buildings with CapEx. Something else that we'll talk about next quarter, we have gone through our properties and we continue to update and renovate. The pictures I've been getting back on some of the renovations that have been done are fabulous on our portfolio, so we're very excited about that as well, and that will continue throughout the year. So we are very pleased with the position that our properties have in their markets and we feel they can compete extremely well with very, very attractive and well maintained buildings.

Okay, yeah, that's great. And just last one from me. Ralph, in your prepared comments, you mentioned something that was interesting. You said CFFO for the first quarter last year was 18% of CFFO for the year. I don't know if you can elaborate on that. I know you guys don't give guidance, but I mean are we sensing maybe a similar pattern this year?

Well, I don't want to make that statement if it's going to be a similar pattern, but I do want to point out that the $0.35, if that were to be somewhere in the 18% to 20% range, would still indicate that we'll be in line with most of the analysts' consensus estimates.

Great, thank you.

Peter Sicher, Sidoti & Company.

Good morning.

Good morning, Peter.

Could you guys comment -- I don't think I caught this, on the cadence of the remaining tax benefit, how you expect that to play out over the rest of the year?

I'd be happy to, Peter. You know, when we did the cost aggregation study, we had a pool of accelerated depreciation to apply to our taxable income. About $0.09 of that benefit was realized in the fourth quarter of 2012. And then the remainder will be realized to offset future taxable income. There's about $0.20 per share of benefit remaining and the timing is simply going to be based upon when we realize taxable income. I know not many analysts actually project taxable income, they're more focused on GAAP. But we don't expect to be a taxpayer in 2013. We'll expect to offset all of our taxable income for federal income tax purposes. And depending on how the rest of the year plays out, what kind of gains we might have on the sales of non-core assets, we could realize that $0.18 per share of CFFO benefit over the remainder of 2013.

Okay, good. And then my second question is, based on the comment you guys made with the NIC study findings, does that change your view in any way on the achievable rate growth for you guys going forward?

Well, I think, Peter, it's consistent with what we believed. We track from our communities whether there is constructions beginning. We don't see that in our markets. What's interesting though is the construction is not all that bad. To the extent that typically the rents of the newer products are higher than ours, actually typically improves our occupancy and does provide some rent growth. This year, we are expecting, as I said, we're achieving that 3% rent growth. And some markets will do a little better than that. Obviously, as occupancy starts to trend upward and stabilize, will give us more conviction for future growth. We are forecasting better rent growth next year at this time. Again, what's really important is we are very confident that we can maintain a 5% to 7% same-store net operating growth quarter-to-quarter, as we have been doing by having our expense management programs in place and have the ability to raise rents at a level higher than the expense growth.

Okay, great. Thank you.

Thank you, Peter.

Donald Marchiony, WestPark Capital.

Hi guys, thanks for taking my question. Can you talk about the implementation of the Vigilant Software across your asset base, just kind of within the context of opportunities to capture additional revenue and how many locations are using the software currently and kind of what are the initial results of the rollout compared to maybe what you're expecting? Thanks.

Good morning, Donald. Right now, it's interesting, 71 of our communities have assisted living in them and all of those properties, I believe, including the last acquisition, I think at this point, has Vigilant implemented in those properties. So we are now able to have a technology for the care plans and the buildings and we are monitoring that, we're studying that. As we get some kind of data over some period of time, we'll give some better guidance on that. Today, it's still new. Most of the cost that we have been -- being able to document in Vigilant for the level of care charges to the residents will not immediately pass through to the residents, because they would be a little higher than they had anticipated. With new residents coming in, expecting to be billed for this, and with attrition we are gradually implementing that and we are now budgeting for that in 2013. And we plan to give further guidance during the year once we have a history that we feel is reliable enough to give guidance, but we are seeing some benefits. Ralph, do you want to add anything to that?

No, I think that's probably as much as we can say right now. We're actually measuring the effect of the care plan technology and trying to determine exactly how much benefit we're going to receive over the course of 2013 and beyond. And when we have some better data, we'll share that, but right now the program it's new, it's in a transition phase and there's probably not a lot more we can say until we have some better data to (inaudible).

Okay, well thanks, guys. Appreciate it.

Thank you.

(Operator Instructions) Daniel Bernstein, Stifel.

Hi. Just a quick follow-up question on the portfolio pipeline. Are you still looking mainly at assisted living or do you find anything attractive in independent living?

Hey, Dan. We are seeing some in independent living. It's more -- it's just living in independent, you know, what's happened is, if you look at the construction cycles, even NIC MAP this quarter, there's been very little independent living built really since the late 1990s. Most of the buildings we're looking at are newer than that. So most of what we're buying or seeing are either freestanding assisted living, assisted with memory care or independent with assisted. There are some buildings that are independent living. Interestingly, what we're looking at in some of these acquisitions is actually the ability to license some of the buildings from independent living to assisted living, so we can buy an independent living building and obviously with the conversions that we've been able to affect, really enhance some of the growth on that. But I'd say, today looking at the portfolio, we're probably looking at about 75% to 80% assisted living and 20% to 25% would be independent living. So when I say assisted living that would also incorporate some memory care units.

Looking at any freestanding memory care, net debt seems to be the one place -- where in certain geographies there seems to be some overbuild of demand as well. So is that product attractive or you really want to be in combination building (inaudible).

We will only look at combination buildings. We do not like the freestanding memory product. We have learned over the years that memory care is very needed, but it's expensive. And there is a limit to what people are either able or willing to afford to buy and favor memory care. I believe that part of the reason, I think NIC MAP shows one-third of the AL development today is memory care, freestanding memory care. And the reason for that is consistent with my comments earlier about cost of construction. And if you do the math, at $3,000 average monthly rate that we generate in our communities, if you take that out at 90% occupancy, at a 35% margin, you're probably going to generate about 6%, 6.5% return to $175,000 development cost per unit. If you are able to build freestanding memory care and generate $4,500 to $6,000 a month of rent, your pro forma looks very nice and you'll possibly get financing. The challenge is filling it. What we have found is it's much easier for a family to move a family member into assisted living, they can still get some of the care levels they need if they have some memory issues. As their needs increase, as their billings increase, they can transition to memory care and it's a much easier transition. We find that it's much more of a sticker shock phenomenon, moving right from the home to memory care.

So we have looked at memory care for years, we love it as a small adjunct to our communities. We also feel that size is important. I track weekly the occupancies of our properties by level of care. Consistently, our memory care properties are way over 90%. Those properties that have 14 units stay full, 14 to kind of 20, 21 stay very -- high 90% do well. But once we have properties that exceeds 30 units, it's hard to exceed 85%. It's a numbers game. So we prefer -- we're pretty risk-averse, we're pretty conservative, we pretty much rather buy what we feel comfortable buying, which are properties that have a small component of memory care as an adjunct to either assisted living or have the continuum with independent living, assisted living and memory care.

So if you have 30 units in memory care in a property, you're basically -- you need to draw from the community to fill, whereas if you're 10 units in memory care you're drawing more from the facility and not really competing with freestanding, is that the way to think about it?

That's exactly right. That's exactly right. Yes, it's interesting, I'm looking at the numbers for April and it's so consistent on memory care. I mean, it's interesting, our memory care properties are 90% and it really is a function of size. I mean, I can go down this list and you can see how those smaller buildings, [9,300, 9,300, 100, 9,400 100, 100] and then once you get -- here's 41 units, 78%. So 37 units, 80 -- actually that's 92%, that's pretty good. But it's definitely -- it's a numbers game as we look at this and we feel more comfortable of having that 14 to 21 unit size that can easily draw from within and be less dependent upon the market. And also, that will be less susceptible to competition if there is free-standing memory care going in. I will say that even in the NIC data that we looked at, there is very, very little memory care going into a market that we're seeing. So we don't expect to see much impact by that. But, again, we just do not subscribe to the freestanding model.

Okay. That's good. Thank you very much.

Thank you.

Wilson Jaeggli, Southwell.

Thank you. Just a question, a follow-up here on Donald's question about the implementation of your software for revenue capture. You said 71 communities so far out of 102 it's been implemented, but I believe you said it's only been implemented for new occupants. So, consequently, in each of those 71 units, it would be what, maybe only 20% of the residents are under this new recapture program. Is that a fair number?

Yes, Wilson, hi. No, all of the residents in these properties are under the Vigilant program. We use it for staffing, we use it for managing the care plan that's being delivered. We have -- just we have tablets, we have iPads, minis that are being used by our staff when they serve the resident. What we said is that we have been slow to implement the revenue capture, because we recognized that when if we're doing it by hand, we weren't capturing all of the potential revenue. So we want to ease that in with our existing residents. It's easier to implement immediately to new residents who is coming in, they understand that. So it's going to be some of a catch-up for the existing residents, but through attrition and through utilization, we will start to see -- we believe we'll start to see further increases in the revenue generation through the Vigilant program.

All right. And so, what you're saying for the effective implementation on current residents in the 71 communities, it's a small percentage, is that right?

Well, yes, it is being used from staffing, it's being used to monitor the actual numbers. It may be 50%. I wouldn't say it's small. It probably is at least 50%. If you look at the attrition in assisted living, it typically averages about 45% to 50% a year and we did implement this program over the last couple of years. So we're probably seeing about 50% of the residents, they are starting to see the plans being implemented. And even those residents that aren't being billed, they do see the levels of care charges, they see it in their billings monthly. So they understand what's being provided. It's also helpful for the family to see what care their family members are receiving, but the financial implication has not yet been fully implemented, although it is -- for the first time occupancy has actually budgeted the Vigilant revenue in 2013.

Okay, thank you for the clarification.

Thank you.

And it appears we have no further questions at this time.

Well, we want to thank everybody for participating on today's call. Feel free if you have any follow-up questions to give Ralph or myself a call. We'll be seeing many of you at conferences over the next few weeks with the various conferences around the country and we hope to see you there. And if not, we look forward to talking in August when we report the second quarter earnings. Thank you and have a good day.

That does conclude today's conference. We appreciate your participation. You may now disconnect.