Sonida Senior Living Inc (SNDA) 2013 Q2 法說會逐字稿

Please stand by. We are about to begin.

Good day and welcome to the Capital Senior Living's second-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 in our reports filed by 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 2013 earnings release conference call. I am very pleased to report continued positive results for the second quarter as we've recovered from the effects of the flu season in the first quarter.

Second-quarter sales community occupancies increased 50 basis points. Revenue increased over 13%, and CFFO grew 15% from the second quarter of the prior year.

I am also pleased to report that we are further enhancing our private pay revenues through a repositioning of our two continuing care retirement communities. After considering a number of alternatives, including a sale of these owned communities, we decided that a reconfiguration of the services we offer will enhance CFFO, improve operating metrics and enable meaningful gains in shareholder value.

Complementing our organic growth is a robust pipeline that 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 in improving economy and housing market.

In the second quarter, we completed the acquisition of two senior living community in Missouri and Indiana for combined purchase price of approximately $25.4 million. These transactions are expected to add CFFO of $0.03 per share, increased earnings by $0.02 share and increased revenue by $5 million.

These communities were financed with an aggregate of approximately $19.1 million of nonrecourse mortgage debt consisting of $14.5 million on 12-year debt with an interest rate of 5.3% and bridge financing of approximately $4.6 million with a variable interest rate of approximately 4%. The bridge loan is for a community that we are converting from independent living to assisted living and once licensure is complete will be refinanced with permanent financing.

We have scheduled closing dates on approximately $65 million of additional transactions consisting of high-quality senior-living communities in regions with extensive existing operations. Subject to completion of due diligence and customary closing conditions, these transactions are expected to close in the third and fourth quarters.

During the first six months of the year, we have completed or agreed to acquire approximately $100 million of high quality, senior-living communities with an expected effective cash-on-cash return on equity of more than 17%. 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 fourth quarter of this year.

Now, I'd like to review our operating activities. 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. 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 platforms. 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 the 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.

We are enhancing our private pay revenues through the repositioning of our two continuing care retirement communities with space being converted to other private pay use. We expect a reconfiguration to enhance CFFO by approximately $0.02 to $0.03 per share. While these two communities are being repositioned, same community results for these two communities will be excluded. As communities under management, excluding these two communities, same community revenue in the second quarter of 2013 increased 3.2% versus the second quarter of 2012. Same community expenses increased 2%, and net operating income increased 4.7%. Our same community occupancies increased 50 basis points from the comparable quarter of the prior year.

Second-quarter occupancies were covered from the effects of the flu season in the first quarter. I am pleased to report that assisted living occupancies grew 70 basis points from the end of March to the end of June, while independent living occupancies decreased 20 basis points from the beginning to the end of the second quarter. Overall, independent and assisted living occupancies increased 30 basis points during the quarter. Slightly lower independent occupancy during the second quarter reflects the remnants of the first-quarter flu season as communities were recovering from the effective quarantines and other flu-related activity that stopped prospects from touring and delayed leasing.

We anticipate solid occupancy growth in the third and fourth quarters, which are typically our strongest quarters.

Deposit taking is robust, and we have a very strong move-in schedule for August. I am extremely encouraged for the occupancy growth in the second half of this year as we currently have more than 150 net deposits that we expect will move into our communities during the third quarter.

Second-quarter 2013 same community average monthly rents were 2.5% higher than the second quarter of 2012. Sequentially, second-quarter same community average monthly rents increased 90 basis points. Our 50 basis points growth in occupancy and average monthly rent growth of 2.5% compared favorably to NIC MAP data, which reported second-quarter occupancy growth of 20 basis points and rate growth of 1.8% in the top 100 metro areas.

Industry fundamentals continue to be strong with demand continuing to outpace supply. NIC MAP reported favorable supply demand trends for independent and assisted living communities with lower trailing 12-month construction starts as a percent of supply for the second quarter of 2013.

As we discussed on our first-quarter earnings call, we were able to review with the NIC MAP staff construction starts in Dallas and Houston and compare them to our existing communities.

I am pleased to report again 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 $3043 acts as an economic barrier to entry for new developments with replacement costs 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 new construction in most of our markets.

With strong industry fundamentals, an 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 88 in the second quarter 2012 to 101 in the second quarter of 2013. Excluding the two CCRCs being repositioned, financial occupancy of the consolidated portfolio averaged 86.7% in the second quarter of 2013, 40 basis points higher than the second quarter of 2012. Average monthly rents in the second quarter of 2013 increased 3.4% over the second quarter of 2012.

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 teams supported by strong regional and corporate resources.

We are fortunate to continue to recruit and retain many of the best operations for sales and marketing professionals in the senior living industry.

I'd now like to discuss our growth initiatives. We are excited at 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 demographics and supply/demand trends should allow for continued occupancy and rate growth.

During the second quarter, we increased our operational focus with the reorganization of our operations department. In June, we promoted five executive directors to district operational managers and promoted two regional managers to regional operating center officers. This reorganization provides us with more effective regional oversight of our existing portfolio and can accommodate an additional 35 to 40 communities as we continue our growth.

In addition, we have launched a new branding strategy for Capital Senior Living during the second quarter that involves an integrated marketing program, including a refreshed corporate logo, enhanced marketing content, a new responsive website and a new color palette and image scheme. Our new responsive website was designed to make searching for senior living communities easier than ever. The complete makeover of our branding strategy and website unites the Company's 104 communities under one corporate identity and facilitates the assimilation of newly acquired communities in a consistent manner.

I am pleased to report that our web-based lead generation has already increased 36% and is expected to increase further as our online reputation and search engine optimization take hold.

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 $10.4 million of incremental revenue. Every 1% improvement in occupancy is expected to generate $3.5 million of revenue, $2.5 million of EBITDAR and $0.06 per share of CFFO. We've 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. We are in the process of converting 210 units of independent living to assisted living. When stabilized, these new conversions are expected to add approximately $3.4 million of incremental revenue and $2 million of EBITDAR.

We are also reviewing conversion opportunities at another 10 communities, which is feasible would increase levels of care at approximately 300 units beginning later this year with the potential to further increase revenue by nearly $4 million.

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. We have completed $213 million of acquisitions since the first quarter of 2012, which are expected to generate in the first year of operations CFFO of $0.38 per share and more than a 17% initial cash on cash return on invested equity.

Our discipline in making acquisitions is evident by the fact that since August 2011, we acquired approximately $300 million of properties after evaluating in excess of $2 billion of acquisition opportunities.

Our primarily off-market acquisition focus continues to yield a robust pipeline. We have scheduled closing dates for approximately $65 million of acquisition transactions involving high quality, senior living communities near regions with extensive existing operations. We have completed due diligence on a number of transactions which would have closed in the second quarter but for seller requirements such as their ability to pay off existing loans that have placed the closings into the third quarter.

When completed, these acquisitions are expected to be accretive to CFFO and earnings and lead to further improvements in EBITDAR margin and operating metrics. 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 a completion of due diligence and customary closing conditions, we expect to acquire additional communities in the fourth quarter of this year.

During the first half of 2013, we submitted more offers and signed more agreements in both number of transactions and dollar volume than during the first half of 2012. This activity in the first half of the year puts us ahead of schedule in executing our disciplined accretive acquisition plan to acquire approximately $150 million of acquisitions in 2013, which we believe we can fund with our cash balances and cash flow generated by our operations.

This is in addition to the $38 million of acquisitions we completed in December of 2012, which would have been 2013 transactions but for the requirements of sellers to close in 2012 to take advantage of lower capital gain rates.

Our EBITDAR margin reflects the benefit we have derived 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, proprietary proactive expense management systems, 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 well-positioned to add to our success, and I am optimistic about our future 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 play strategy in an industry that is benefiting from need-driven demand, limited new supply and 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 second 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 second quarter and first six months of 2013. A copy of the press release is available on our corporate website at www.capitalsenior.com, and if you would like to receive future press releases by email, there is a place on our website where you can provide your email address.

For the second quarter of 2013, the Company reported revenue of $87.2 million compared to revenue of $77 million for the second quarter of 2012, an increase of $10.2 million or 13.2%. Resident and healthcare revenue increased from the second quarter of the prior year by $9.7 million or 12.9%. We consolidated 101 communities on our income statement this quarter versus 88 in the second quarter of the prior year.

Financial occupancy of the consolidated portfolio averaged 85.9% in the second quarter of 2013 compared to 85.8% in the second quarter of 2012, an improvement of 10 basis points. Excluding the two continuing care retirement communities that are being repositioned, financial occupancy of 86.7% increased 40 basis points compared to the second quarter of the prior year.

Average monthly rent was $3043 per occupied unit in the second quarter of 2013, an increase of $75 per occupied unit, 2.5% higher than the second quarter of 2012.

On a same community basis, excluding the two CCRCs being repositioned, occupancies were 50 basis points higher than the second quarter of 2012, and same community average rents were 2.5% higher.

On a same community basis, revenues increased 3.2% versus the second quarter of 2012, expenses increased 2% and net income grew 4.7%. As a percentage of resident and healthcare revenues, operating expenses were 59.9% in the second quarter of 2013 compared to 59.4% in the second quarter of 2012.

General and administrative expenses as a percentage of revenues under management were 5.2% in the second quarter of 2013, excluding transaction costs of approximately $0.4 million in the quarter.

Expenses this quarter were once again 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. Without a doubt, the self-insurance program significantly reduces the Company's health insurance costs. Occasionally, expenses are higher than average in a particular quarter as a few claims approached stop-loss insurance thresholds.

Healthcare costs in the second quarter of 2013 exceeded the second quarter of 2012 by approximately $0.5 million. We are encouraged by the fact that the months of June and July have been more in line with historical averages.

Adjusted EBITDAR for the second quarter of 2013 was approximately $30.1 million, and adjusted EBITDAR margin was 34.5% for the period. Excluding the two CCRCs being repositioned, EBITDAR margin for the second quarter of 2013 was 36.4%.

Since the first quarter of 2010, over a three-year period, revenues have increased 82%, EBITDAR has increased 122%, and EBITDAR margin has grown by 650 basis points. Adjusted net income for the second quarter of 2013 was $1.1 million or $0.04 per share, excluding the nonrecurring and noneconomic items reconciled in the press release. Adjusted CFFO was $9.5 million or $0.34 per share in the second quarter of 2013 compared to $8.2 million or $0.30 per share in the second quarter of 2012, an increase of approximately 15%.

The cost segregation study completed earlier this year is expected to offset all federal income taxes in 2013, and approximately $0.18 per share of CFFO will be realized as the Company generates taxable income in future periods.

Moving to the first-half results, the Company reported revenue of $173.4 million, an increase of 16.2% from the first half of 2012. Adjusted EBITDAR was $60.5 million for the first six months of 2013, an increase of $7.1 million or 13.3%.

Excluding the two communities being repositioned, EBITDAR increased $8 million from the first half of the prior year, and EBITDAR margin was 36.7%. Adjusted net income was $2.9 million or $0.10 per share in the first half of 2013, and CFFO was $19.2 million or $0.69 per share, an increase to $4.3 million or $0.14 per share in the first six months of 2012. CFFO increased 28.4% versus the first half of the prior year.

The Company ended the second quarter of 2013 with $30.5 million of cash and cash equivalents, including restricted cash. As of June 30, 2013, the Company financed 51 communities with mortgages totaling $381.3 million and interest rates averaging 5.23%. All of the Company's debt is at fixed interest rates, except one $4.6 million bridge loan at a variable rate. This bridge loan is for our recently acquired community that is undergoing a conversion and will be refinanced with permanent debt once licensure is complete. The Company has no mortgage maturities for the third quarter of 2015.

Capital expenditures for the quarter were approximately $3 million, representing $2 million of investment spending and $1 million of recurring CapEx. If annualized, the Company spent possibly $400 per unit on recurring CapEx in the quarter.

We would now like to open the call to questions.

(Operator Instructions). Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. Two areas of questions, first as it relates to occupancy trend and then secondly on the CCRC repositioning.

So on volumes or occupancy, you know, I guess I heard your commentary pretty clearly, you had financial recovery in assisted living, and that certainly makes sense given the impact from the flu. I guess just around independent living, can you just expand a little bit more on maybe some of the softness that you think you might be seeing there, and as it relates to the move-ins and deposits that you have for Q3 how that is progressing in IL, specifically?

Good morning, Darren. It's Larry. First of all, let me address the IL situation. As we talked last quarter, we had obviously very high attrition in the first quarter caused by the flu epidemic. Luckily in the second quarter, we saw attrition drop from 44.4% in the first quarter to 48% overall to 40% overall.

The biggest drop was in our IL communities, which dropped from 43% in the first quarter to 34.9% in the second quarter. On the other hand, we saw a 39% attrition rate in independent living in the second quarter compared to 37.5% year ago.

So, we did see additional attrition in the quarter that caused the reduction in occupancy. I would say that I'm extremely encouraged by what we're seeing in deposit taking at both independent living and assisted living. I do think that the softness in independent living was caused by attrition and still I think relates to the flu from the first quarter. So we are very confident that we'll see a nice recovery in both independent living and assisted living, and you know, the deposit taking across the board is pretty even as far as the gains in both levels of care.

So we think that the second half of the year -- you know it's interesting, I went back to look at the Company's history in the last three years on same-store, and since 2010 we've had a robust recovery of occupancy in Q3, Q4, which we expect to incur this year as well. We always have the fourth quarter is our highest occupancy level. Obviously there is seasonality in this business that was heightened because of the flu in the first quarter, but you know if you go back the last three years, we saw gains of occupancy on a same-store basis in Q3 of 120 basis points in 2010. We saw a gain of 110 basis points in 2011. We saw gains in Q3 of 90 basis points -- I'm sorry, it was 60 basis points last year, and then we saw even better gains in the fourth quarter.

So, you know, we're looking at a strong second half of the year, which is very typical. This year we experienced 115 more moveouts in the first quarter same-store than we had -- actually 100 more moveouts in the first quarter this year than we had last year. And that was because of the flu. And obviously it is the remnants of that phenomenon that has kind of delayed the leasing, but we feel we are back in stride for the second half of the year.

That's helpful. And then just in terms of the attrition. You're not seeing any increase at all as it relates to moveouts from hardship or assets being down for financial reasons?

No, we've really seen an improvement in the financial wherewithal of our residents over the last couple of years. Unfortunately, the moveouts are typically caused by death or higher levels of care to a very, very large percentage. So it's very much health related.

Got it. And then if I could, I just wanted to make sure I'm understanding the repositioning of the CCRC. So Ralph, did I hear you right that there was about a 2 point margin impact from that? Is that what this ended up being in the quarter? And then I guess as we think about this and the progression of the work that you have ahead of you, how long do you think it will take, what kind of impact on consolidated occupancy and rate growth do you think it might have as we think about the next two, three, four quarters?

Darren, you did understand correctly, if we had removed these two CCRCs from our results, for the second quarter, the EBITDAR margin would have been almost 2 percentage points higher. So clearly, they've been a drag on our operating performance, and this repositioning is expected to improve that. It's going to take a couple of quarters before those results are fully realized. We are going to make investments in these communities to improve those operations, along with the repositioning, and we expect that by the time we get through with that, these operating metrics will be much more similar to the rest of the portfolio.

But I would say that during the next few quarters, while we are not going to classify these as discontinued operations, we are going to continue to report the results in our consolidated financial results, and we will exclude them from our same-store trends so that all of our occupancy rates and margin trends will exclude them during the repositioning phase.

And, Darren, I think the timeline right now we are seeking approvals is working with families on the repositioning of these communities. We are hopeful that for 2014 it will probably result in an increase in cash flow of $0.02 to $0.03. So we do think that we will start to see a benefit beginning probably the first quarter or second quarter of 2014.

Got it. And then just so I am clear, we didn't see any of this impact in Q1. Is it correct that all the activity, the repositioning began, you know, in Q2, and can you maybe just describe the timeline of when that started?

Yes, we went through a process early this year to look to sell these two properties. We received about five or six offers. We selected one potential buyer. We were disappointed with their due diligence and the price at which they came back after their due diligence on the property.

Before we start the process, we actually had a Plan B, which was the repositioning of the property by enhancing the private pay revenue. And we decided that we can probably double the value of the property from what the offer was by executing this plan.

So while we were hopeful that we would have the proceeds to be reinvested in other transactions, we think that the more prudent measure would be to reposition and reconfigure the use the buildings. We think by doing that it will enhance our cash flow, and what's interesting we believe that the strategy could actually double or triple the value of this property from the offer that we ended up receiving through the process.

That's great. All right. Thanks for the color.

Daniel Bernstein, Stifel Nicolaus.

I just wanted to understand, did you actually close any units in those CCRCs this quarter, or did you actually start the repositioning (multiple speakers)?

We started the repositioning. We've been working on approvals. We actually did not close them, but there was actually disruption in services through the process we went through. So, hence, we've decided to remove them because we did begin the process. There was disruption, but nothing has been closed. That will -- most likely, those changes will take place the second half of the year.

So there was a little bit of an impact on margins in the business in the second quarter.

Yes.

A guess my next question was going to be, if you pulled out the healthcare, the high healthcare claim costs, your margins were still about 40.5%, somewhere in there. And what else was in the margins? Was that all the CCRC? Was there any --

It was. It's also revenue. If you go back to your numbers and assume that all revenues were your revenues with our actual operating expenses, our margin would be below your projection. So it's not just the expenses. It's also the fact that the revenue was lower for the quarter.

Right, okay. Okay. So the expenses were held. You didn't fire anybody. You kept your employees.

No, obviously, that's part of this process. We have plans in place for retaining employees during this process. So, you know, there will be expenses that will continue second half of the year as we transitioned the buildings.

Okay. Did sequestration -- you know, obviously those significant units and the CCRCs are not a large part of your portfolio, but did that 2% sequestration on April 1 impact you at all during the quarter?

Not much. All revenue from those two properties for Medicare is probably about, I guess, in total about -- it's about, I guess, $3 million a year. So it's insignificant and total base.

What's happening, quite frankly, which is probably a bigger kind of fundamental issue of what's happening in the skilled nursing and the CCR world is the hospitals are no longer discharging their patients to our communities or keeping them or directing them to their own facilities. That's really when we saw the change. It wasn't sequestration. We've just seen a marked change in the discharge patterns of the local hospitals to these two CCRCs.

Okay. The repositioning makes a lot of sense. Thank you.

The other question on the IL properties, IL seems to be acting a little bit more like AL in terms of the impact from the flu. Are you saying -- as far as it sounds like it's going back many years, but are you seeing that that creep-up in acuity in IL is kind of filtering in through to the occupancy when you have a harsh flu season? I am just trying to understand is IL acting like AL light and people are just a little bit more frail and being affected by the flu a little bit more?

Definitely. We have for many years now the renting space in our communities to home healthcare companies, therapy, rehab. We have visiting physicians. We have a very active program that is run by third parties in our communities to serve our residents.

What we saw kind of during the financial downturn is the price point making it very compelling for independent living. People were coming in a little later, a little frailer.

We saw -- it's interesting if you go back on our properties over the last three years, we had sequential increases, significant increases in IL occupancies really starting in the second quarter of 2011 that ran all the way through the end of last year. And the first time we saw it drop was in the first quarter, which was very much flu related, and then we saw the residents carry over into the second quarter.

But, you know, the good news is we are seeing the pickup come back. The other interesting corollary is our rate growth has actually been on a percentage basis higher over the last two years in independent living than assisted living. So, you know, we see independent living as being a very viable alternative for residents. Obviously there's about a $1200 differential in our portfolio between independent living and assisted living rents.

But as you point out about the frailty level, you'll note that we have also taken advantage of this attrition to now go back and implement conversion plans that were delayed as these properties were full. So we are actually taking advantage of the flu season and the attrition that's happened this year to now review another 10 properties that were kind of -- we had plans delayed because of properties that were 90%, 95% occupied where we are now going back and looking at licensing part or all those buildings later this year.

Okay. And I guess that means maybe for IL we should expect a little bit more of a when the occupancies, from thinking about [4] like in 2014 and beyond that the first half of the year is going to end up being maybe a little weaker in occupancy relative to the history in the second half is maybe going to be a little bit stronger. You are going to see a little bit (multiple speakers)

The second half has always been stronger, but I'll tell you this flu was the anomaly. If you go back last three years, we had some very nice -- I mean sequential gains in IL occupancy on a same-store basis is running 70 basis points, 100 basis points, 80 basis points, 20, 70, 130, but the highest was Q4. But this drop-off that we saw this year was unusual. We obviously had a very active and prolonged flu season, but you're right. If you go back and look at our same-store results -- and I think that's true for the industry, this industry does perform better in the second half of the year.

Okay. And some of the healthcare REITs have been talking about the rise in interest rate bringing out some sellers. I'm not sure that applies to you because you're going after some of the smaller one-off market transactions. Are you seeing any change in seller -- in your seller's motivations as a result of rising interest rates, or is it business as usual?

Well, business has picked up. It's interesting. I kind of commented earlier. In the first six months of this year, we actually submitted offers twice the level of offers that we submitted in the first half of 2012. And we had more offers accepted, and we had more transactions both in dollar volume, as well as number of transactions.

And the pipeline is very continuous, but the motivations we are seeing for these one-off pay deals doesn't seem to be really interest rate driven. It's much more family situations, local family businesses selling, but we had definitely seen a marked increase in deals this year, some of which might relate to interest rates, but most of the sellers we are dealing with and many of them are -- what's interesting the transaction that we are converting now from IL to AL was a gentleman that we bought a property from 18 months ago, he came to us early in this year because he needed cash for another investment that precipitated that transaction.

2/3 of the transactions that we are completing are off market, and a number of them are actually sales with sellers that we've dealt with previously.

I'll hop off. Thank you for the comments.

Thanks, Dan.

John Ransom, Raymond James.

You know with my sharp, sharp reading skills, I see that T-bills are up 100 basis points or so, up bottom, and then your financing costs are real cheap, but they are not as low as they were. How has that factored in if at all to your price talk in the market and your expected return? Thanks.

Expected returns are going to continue as current interest rates remain above 17%. So we're very, very pleased with that.

You know, John, it's interesting. We developed a strategy to acquire properties at the end of 2010 when Fannie/Freddie financing was averaging 6.5%. We ended up buying properties at 100 to 200 basis points higher than we expected and borrowed money at 200 basis points plus lower than we expected.

What's very interesting is expectations from sellers really hasn't changed as interest rates have risen. They are still -- and if I look at the metrics of the transactions we're scheduled to close currently, the quality assets are better, they are higher margins, higher average rent, very stable occupancies, but the cap rate and kind of returns are almost identical to what we've been buying over the last two years.

Now we are disciplined. We could have acquired $500 million of properties in the first six months of this year if we just wanted to grow for the sake of growth. And that's just in the regions in which we operate. So there is quite a bit out there. But we are really maintaining a discipline to self-fund these transactions with our internally generated cash flow and cash balances, making sure that -- I mean we've terminated the number of transactions that were under contract in the first half of the year in due diligence.

So the interest rate environment may have caused more activity vis-a-vis just deal flow, but sellers' expectations really haven't changed much. And, quite frankly, just observing other transactions in the market that we are seeing on the small-scale doesn't really change buyers' expectations either.

I think the interest rate environment today is still historically low. I think cap rates in this industry still are higher than other asset classes, and the other phenomenon I like to talk about, which no one really addresses, is, if interest rates continue to grow, cash flows in this business will grow exponentially. Because we serve as senior on fixed income that for years now has received no return. Darren asked the question about financial moveouts, which we saw quite a bit in 2010/2011. We are no longer seeing that, and we still are able to maintain with residents getting no return on their investment 2.5%, 3% rent growth.

Historically, this industry would get 4% to 5% rent growth. And if you compound that out over time, the cash flows on properties at a higher rate of growth in average monthly rate will more than compensate for any change in interest rate. So we think that this is an asset class that performs extremely well because there's need driven demand, limited supply and really it is almost insensitive to modest changes in interest rates.

Secondly, and this is for Ralph, I think. As you think about the next two quarters, how should we think about the CFFO growth from the second quarter when you factor in occupancy improvements and layering in acquisitions and CCRC repositioning and anything else you want to call out?

In terms of the growth rate, you know, CFFO growth this quarter was 15% over the second quarter of 2012. I would expect that rate to be stronger than that in the third and fourth quarters with some occupancy growth, some rate improvement. So I think that looking back, we'll see the second quarter of 2013 is possibly the lowest rate of CFFO growth in 2013.

The other thing is that these transactions have been closing -- have been pushed back because of seller needs. So, as we close transactions in the next 30 or 60 days, we will start to see the benefit in the third quarter and then really manifest in the fourth quarter. So that will supplement the organic growth.

So, you know, unfortunately we can't time the closing of the acquisitions as perfectly as the models would like, but you know, we feel that we are very much on target, in fact, ahead of schedule to hit our goal for the year, and we will start to see more contribution. You know, the $25 million that we completed in the second quarter were again in the second half of the quarter. So you don't really have that impact in the second quarter. So that, too, will build upon what we are seeing from deposit taking and moving schedules of improved occupancies for the second half of the year.

Was a reasonable number to think about for 3Q closings in terms of revenue acquired?

I'm sorry, John. Say it again.

For your third-quarter upcoming, just trying to get the fourth-quarter models --

Yes, I mean, we had $65 million of transactions scheduled to close. I'd say that probably all above one transaction will either close in the third quarter or early October. This one transaction that will close end of October because of the seller requirement. So I think that if you think about the pipeline and the closing schedules, we're looking at most of the transactions being complete by the end of September or early October.

So think about a 4 to 1 ratio of price to revenue, something like that?

I think, John, if we look at our models right now, that $65 million of acquisitions would generate about $17 million of annual revenue.

Okay.

And the kind of returns on that would be very consistent with what we've seen before as far as CFFO.

And, again, I think really it's probably around, if you do the math, it's probably 85% were closed in the third quarter, and 15% will be in the fourth-quarter closing.

And then just if we pulled the CCRC out, say, for the first half of last year, first half of this year, if we pulled those two assets out, do you have an idea of kind of CFFO growth or just color, which, you know, you didn't put it in discontinued operations. It's little hard to get the pro formas exactly, but again, we were a little surprised with the magnitude of the falloff in 1Q to 2Q, and we were just wondering -- kind of adjusted for that with the CCRC effect?

Well, the CCRC, if we had completed this repositioning a year ago, would have generated -- is it half year?

No, that's annualized.

We would've had $800,000 of incremental cash flow.

For the half year?

For full year.

For full year. That's actually the $0.03 we are talking about.

So the $800,000 is a pretax number. So if you tax back that, it's between $0.02 and $0.03 per share just by not having them.

And then could you also just occupancy exiting the quarter versus entering the quarter?

Yes, as I mentioned, we saw the end of the quarter occupancy 30 basis points higher than the beginning of the quarter, of which 70 basis point gain was in assisted living, and we lost about 20 basis points in independent living.

Okay. Thanks. Thank you.

(Operator Instructions). Dana Hambly, Stephens.

Just to clarify, the CCRCs they were a negative contribution to EBITDAR for the quarter?

The higher level of care that we're talking about is what we are focusing on.

Okay. And do you know what the occupancy in the first quarter was ex those two CCRCs?

I think occupancies in the first quarter ex those two properties was -- I believe it was around 85.5% (multiple speakers).

So it was 85.9%.

85% on a same-store.

85% -- well, consolidated was 85.9%; was that right?

Consolidated was 85.9%, yes.

So yes, I'm saying in the second quarter, it was 85.9%, and if you had stripped out those two properties, it was 86.7%, right, in the second quarter of this year?

That's correct, yes.

I'm just trying --- what is the comparable number to that 86.7% in the first quarter of this year, if you have it? If not, I can follow up later.

It was probably around 80 basis points higher than that, Dana.

Overall it was [87.1%]. Consolidated was 87.4%.

Okay. All right. On the -- so, Larry, you think you can fund all your remaining acquisitions, assuming you get to the $150 million target on balance sheet that that didn't require that you might -- you were counting on selling those two properties to fund any of that?

We were not.

We've enough cash on the balance sheet and cash equivalent generated over the second half of the year that should give us sufficient funds to complete these acquisitions.

Okay. All right. And just lastly for me, I know healthcare costs continue to be challenging, and that's really beyond your control. Could you talk about some of your other big costs, just compensation, food, utilities, etc.?

You know, food has been really very, very well controlled. We're running right now year over year on food less than 1% growth. You know, we have a very effective proof purchasing program that we've instituted years ago, and it has got another, I think, three or four years to run on the existing contract. So that's been very, very well maintained. There's been no pressure on wages.

Obviously, it's interesting in Texas it is going to be 106 degrees today, if anybody likes to join us. So utility bills will start to pick up, but July was a little cooler than usual. So we might benefit a little bit on utilities. We always have a little bit higher utilities in the third quarter, but the heat really didn't pick up until this past week. So we did get some benefit there.

But that being said, we have fixed contracts on electricity at $0.05 a kilowatt hour in Texas and other particular states. So we don't really see much pressure on expenses. Again, same-store expense growth year over year was 2%, which is a nice number. It was lower in the first quarter because of lower attrition. So I think we will continue to maintain the discipline we have on expense management to control expenses that we had previously, and the other only number that I can think of for this quarter that might have some jump as typically happens in the third quarter, utility costs because of the heat, particularly in the central Southwest.

And it appears there are no further questions in the queue. At this time, I would like to turn the conference over to our presenters for any final and closing remarks.

We thank you again for participating in today's call, and welcome you to give Ralph and myself a call if you have any further questions. We wish you a good day and look forward to speaking again on the third-quarter conference call. Thank you all.

And that does conclude today's conference. We do thank you for your participation.