Sonida Senior Living Inc (SNDA) 2014 Q1 法說會逐字稿

Good day, and welcome to the Capital Senior Living first quarter 2014 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, refinancing, community sales, 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 very much. Good afternoon, and welcome to Capital Senior Living's first quarter 2014 earnings release conference call. I am pleased to report positive results for the first quarter, as we continue to recover from high levels of attrition in 2013 with growth in revenue, EBITDA, and occupancy. These improvements were achieved despite harsh winter weather. However, winter-related expenses negatively impacted first quarter financial results.

In the first quarter, we completed the acquisition of a senior living community for approximately $14.6 million. This community enhances our geographic concentration around Ohio and was financed with approximately $11 million of non-recourse 12-year mortgage debt with a fixed interest rate of 5.43%. This acquisition is expected to add adjusted CFFO of $0.02 per share and increase annual revenue by $4.5 million.

We expect to acquire approximately $84 million of high-quality senior living communities in regions with extensive operations in the second quarter, subject to customary closing conditions. In addition, we are conducting due diligence on approximately $34 million of additional transactions of high-quality senior living communities in regions with extensive operations. Subject to completion of due diligence and customary closing conditions, these transactions are expected to close in the third quarter of 2014.

Our pipeline remains robust, and we are negotiating additional transactions consisting of high-quality senior living communities in regions where we have extensive operations.

In addition to our successful acquisition program, we are focused on generating superior organic growth through gains in occupancy, proactive expense management, community refurbishment projects, and unit conversions. 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. We are capitalizing on our competitive strengths in operating communities in geographically concentrated regions that allow us to profit from our competitive advantages as a larger company with economies of scale and proprietary systems in a highly fragmented industry.

We have implemented many initiatives that are yielding positive results. During the first quarter, we experienced a 30% increase in visits to our website and increases in our community leads from the launch of our integrated marketing program, a new responsive website, an e-marketing campaign, and expansion of our search engine optimization strategies. We are also benefiting from the utilization of software programs at our assisted living communities that optimize care plans and level of care charges, as well as enhanced training and adherence to quality assurance.

We are also encouraged by the positive results from our call centers that were initiated at many of our communities earlier this year. We have also enhanced our private pay revenues by closing the only skilled nursing beds we had operated in two continuing care retirement communities. I am excited about the very attractive design plans that had been developed to reposition these two communities, which will include the addition of 21 memory care units, the conversion of 40 independent living units to assisted living, and adding more interesting and appealing spaces, such as additional dining venues, Internet cafe, media room, theater, and conversation clusters at each of the communities.

While these communities are being repositioned, they will be excluded from same community results. At communities under management, same community revenue in the first quarter of 2014 0.8% versus the first quarter of 2013. As we experienced in December 2013, first quarter same community expenses were impacted by higher costs from the unusually harsh winter, including heating costs and snow removal, along with multiyear real estate tax adjustments from successful tax appeals and referral fees from higher movings.

Fifty-four of our 133 communities had winter-related, weather-related insurance claims during the quarter. Excluding these unusual items, same community expenses increased 1% and net operating income increased 0.7% from the first quarter of the prior year. First quarter 2014 same community average monthly rents were $3,115 per occupied unit, or 1.2% higher than the first quarter of 2013.

First quarter same community financial occupancy improved sequentially 20 basis points from the fourth quarter of 2013. We had 110 more same community net move-ins in the first quarter of 2014 compared to the first quarter of 2013, as this year's flu was mild for seniors. First quarter occupancy trends are typically the weakest of the year.

Our improvement in first quarter occupancy is encouraging, particularly in light of the harsh winter weather and increases in April traffic and deposits indicating promising improvements in second quarter occupancies. We are focused on reducing attrition and improving occupancy by converting approximately 360 vacant independent living units to assisted living and memory care at 15 communities. We expect to receive required licensure approvals for most of these conversions during the second and third quarter of this year.

Once these converted units are stabilized, we expect overall occupancy to increase by approximately 300 basis points to 90%. And when stabilized, these converted units are expected to add approximately $0.20 in annual CFFO and enhance the value of our owned real estate. We have a successful track record in converting vacant independent living units to assisted living and memory care. Conversions of larger residential independent living units with full kitchens, walk-in closets, and one- or two-bedroom apartments provide our communities with a competitive advantage over smaller, purpose-built assisted living units.

Prior conversions of independent living apartments to assisted living and memory care units have been very well-received, as demonstrated by our successful track records. Over the past two years, we completed assisted living and memory care conversions at 10 of our communities, resulting in occupancy gains of 10%.

Industry fundamentals continued to be solid, with demand outpacing supply. NIC MAP reported favorable supply-demand trends for independent and assisted living committees with a slowdown in construction starts during the first quarter of 2014, and unit absorption to supply remained positive in the first quarter 2014.

As we have discussed previously, new construction remains muted in most of our markets, confirming that our value strategy with average monthly rents of $3,145 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 would 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 additional organically driven CFFO growth and increases in our real estate values. Every 1% improvement in occupancy is expected to generate $3.8 million of revenue, $2.7 million of EBITDA, and $0.06 per share of CFFO.

We are also looking to improve the quality of our portfolio and increase our liquidity by selling certain non-core communities. We expect that selected asset sales in 2014 will improve our operating metrics and allow us to redeploy the proceeds to acquire better-performing communities in our geographically concentrated regions. Our operating strategy is to provide value to residents by providing quality senior living services at reasonable prices. We believe our competitive advantage that allows us to achieve solid operating results and disciplined growth is our people and our culture.

We continue to execute on the strategic plan that is focused on a very important objective of enhancing shareholder value through organic growth, proactive expense management, and utilization of technology, as well as allocating capital to accretive acquisitions of high-quality senior living communities in our geographically concentrated regions, unit conversions, and community refurbishment projects.

As we maximize our competitive strengths, we are lowering the cost of our capital. We continue to grow through a disciplined and strategic acquisition program that began in 2011 and which has been funded from internally generated cash flow. In the past three years, we have acquired 36 communities for a combined purchase price of approximately $430 million. These strategic acquisitions have generated greater than a 16% cash-on-cash return.

Our success in acquiring quality communities in off-market, non-broker transactions validates our competitive advantage as a highly respected and credible owner-operator with a financial ability to complete transactions. 90% of the communities we have acquired or expect to acquire this year are off-market transactions.

Many local and regional operators tell us that they prefer to transact with Capital Senior Living as opposed to REITs or private equity investors as they feel comfortable entrusting their residents and staff to the Capital Senior Living family. 50% of the communities that we purchased last year and many that we expect to acquire in 2014 are with sellers that we have completed previous transactions.

As our cash flow continues to grow and our liquidity improves from refinancings and planned asset sales, a robust pipeline provides us with ample quality acquisition opportunities in a favorable financing market. We are excited about continuing our successful acquisition programs this year and in future years.

We are well positioned to add to our accomplishments, and I am optimistic about our future, as I am confident in our team's ability to continue to successfully execute the well-conceived strategic plan. 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 an improving economy and housing market.

Last week, we announced that our CFO, Ralph Beattie, will be retiring from the company. Ralph will continue to serve as a consultant until next February. I want to thank Ralph for his friendship, his 15 years of service, and many contributions to the company, and wish him all the best on his retirement. We are excited to have a highly qualified successor in Carey Hendrickson join our company as senior vice president and chief financial officer. Carey has 22 years of public company finance and administration experience in a multi-site geographically concentrated media company and will be a valuable member of our management team as we focused on operations and growth in geographically concentrated regions.

I look forward to many of you meeting Carey over the next several months, as he will be joining me at our many upcoming investor conferences. I would now like to introduce Ralph on his 60th earnings conference call to review the company's financial results for the first quarter of 2014.

Thanks, Larry. Good afternoon.

I hope everyone has had a chance to see the press release, which was distributed earlier today. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the first quarter of 2014. A copy of our press release is available on our corporate website at capitalsenior.com. And if you would like to receive future press releases by e-mail, there's a place on our website for you to provide your e-mail address.

The company reported revenue of $91.9 million for the first quarter of 2014, compared to revenue of $86.2 million for the first quarter of 2013, an increase of $5.6 million, or 6.5%. We consolidated 110 communities on our income statement this quarter versus 99 in the first quarter of the prior year due to the acquisition of 11 wholly-owned communities.

Financial occupancy of the consolidated portfolio averaged 87.1% in the first quarter of 2014. Excluding the two CCRCs that are being repositioned, average monthly rent for the consolidated communities was $3,126 per occupied unit in the first quarter of 2014, an increase of $64 per occupied unit, 2.1% higher than the first quarter of 2013.

As a percentage of resident and health care revenue, operating expenses were 61.8% in the first quarter of 2014. Margins were negatively impacted by higher utility and snow removal costs from an unusually harsh winter, and real estate taxes were higher in the first quarter of 2014 because the first quarter of 2013 had multi-year favorable tax adjustments from successful property tax appeals.

Furthermore, higher move-ins during the quarter resulted in higher referral fees to third parties. The unusual weather-related costs, along with higher real estate taxes and higher referral fees, totaled approximately $1.6 million and increased operating expenses by 1.8% of revenue. Excluding transaction costs, general and administrative expenses as a percentage of revenues under management were 4.9% in the first quarter of 2014. Transaction costs were approximately $500,000 in the quarter.

Adjusted EBITDA for the first quarter of 2014 was approximately $31 million, an increase of $500,000, or 1.7% from the first quarter of 2013. Excluding the two CCRCs being repositioned, EBITDA margin for the first quarter of 2014 was 34.7%. EBITDA margin would have been approximately 36.5% for the quarter, excluding the unusual costs referred to earlier.

Adjusted net income for the first quarter of 2014 was $0.2 million, $0.01 per share, excluding the nonrecurring and non-economic items reconciled in the press release. Adjusted CFFO was $7.9 million, or $0.28 per share in the first quarter of 2014. Adjusted CFFO would have been approximately $0.07 per share higher, or $0.35 per share, if not for the unusual weather-related costs, real estate taxes, and referral fees mentioned earlier.

Capital expenditures for the quarter were approximately $3.1 million, representing $2.2 million of investment spending and $0.9 million of recurring CAPEX. If annualized, the company spent approximately $325 per unit on recurring CAPEX in the first quarter of 2014.

The company ended the quarter with $23 million of cash and cash equivalents, including restricted cash. As of March 31, 2014, the company financed its 60 owned communities with mortgages totaling $485 million with a blended average interest rate of 5.25%. None of the company's mortgages mature before July of 2015. The company's mortgage debt includes a loan portfolio 15 committees totaling approximately $112.7 million as of March 31st. Originally structured as 10-year fixed-rate mortgages with a maturity date of July 2015, this loan portfolio has a blended fixed-rate of 5.96%. The company's pursuing a refinance of this loan portfolio to take advantage of lower interest rates and the appreciation in value of these owned communities.

Based on current rates, the company expects to lower the interest rate on this portfolio approximately 150 basis points. This anticipated refinance is expected to close at the end of the second quarter of 2014, generating approximately $30 million in additional proceeds, and actually lowering the company's overall borrowing costs.

Additional cash is expected to be generated upon the planned sale of certain non-core owned communities in the third quarter of this year. Cash-on-hand, cash flow from operations, net proceeds from this anticipated refinancing, and community sales are expected to be sufficient for working capital, prudent reserves, and equity needed to fund the company's acquisition program.

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

Thank you. [Operator Instructions] We'll take our first question from Darren Lehrich with Deutsche Bank.

Thanks. Good afternoon, everybody. And, Ralph, congratulations. Thanks for all your help over the years here.

Thank you.

I wanted to ask a couple things. You know, I guess just going back to last quarter, you talked on the conference call about, you know, some very strong momentum, particularly in January, with regard to move-ins. I'm wondering if you can just characterize a little bit more about how the quarter progressed relative to move-ins and whether you saw, you know, any weather disruptions. I know you were calling out more from the expense side, but relative to just activity in the communities.

Darren, hi. You know, it's interesting, despite the weather, we had two weeks where deposit-taking was low. We had the second week of January, particularly low deposit-taking, which we think was weather-related. The rest of the quarter, actually -- and then we had -- we saw two weeks. That week and then the week of January 24th that had move-ins that was probably half of our normal pace. But we kind of boarded those with very strong move-ins the first week and last week of January.

We saw momentum pick up during the quarter, as well as this quarter. It's interesting. If you look at this quarter compared to last year, we -- as I said, we ended up net about 110 move-ins higher than last year. We had better deposit-taking, better move-ins, and much lower attrition. So, you know, despite the weather, you know, I think that the pace during the quarter was pretty encouraging, and as I said, we could identify a few weeks that, you know, clearly because of weather we saw some impact on weekly move-ins, but we seemed to kind of recapture that in the succeeding weeks.

Got it. And did you say that continued through April? Is that what I heard?

April, actually -- the month of April has move-ins a little higher than our average in the first quarter. Deposit-taking is up also in April, so as I said, we're hopeful that we'll have an improvement in the second quarter, as well.

Okay. Thanks. And then I guess just wanted to hear from you whether there's any, you know, change in your thinking about the timeline for the repositioned communities in terms of, you know, when they might reach stabilization and how that's progressing?

Sure. We're making good progress on the conversions. As I mentioned, there are 15 buildings that are in the process. We actually have gotten license on a couple. I would expect that target dates for the balance of the properties are either the second or third quarter. You know, the CCRCs will be fourth quarter repositioning. As you can tell, those are really retrofitting and much more significant work that's going on in those properties, but we have schematics and are now bidding out the costs for those conversions.

So we think that we will continue to see improvement in the revenue from the conversions, starting in the second half of the year and progressing and improving through the first three quarters of 2015.

Okay. Thanks for that. And then just last thing from me. You know, you're calling out higher referral fees, and I just want to make sure I understand. I mean, obviously, you know, higher move-ins is a good thing, and that's what we're hoping for, but was there something about the structure of your referral fees in terms of what you needed to pay out this quarter that is different? And if not, why should we be thinking about higher referral fees, you know, differently, if it's generating demand?

It's a good question, Darren. Referral fees were up 19% this quarter. It was unusually high. You know, those fees are paid upfront. The resident income is earned over two to three years, so we felt that this was much higher than we've ever seen in other quarters. We thought it was a little bit of an aberration, so we called it out. It wasn't a significant part of the overall increase in costs compared to the weather-related and real estate taxes, but was an aberration. And as I said in the quarter, the fees were up about 19%, which we thought was high.

Okay. That's helpful. Thanks once again. Ralph, good luck and take care.

Thank you, Darren.

And we'll go next to [Joanna Kujuk] with Bank of America.

Good evening. Thank you so much. So on this last point, can you quantify a little bit more the breakdown between the three elements, the weather, real estate taxes, and the referral fees? That doesn't mean that this $1.6 million is pretty much all weather and real estate taxes?

[Joanna], the largest of the three items that we cited was the utilities. Heating costs were up significantly. Many of our communities are located in cold climates. And as we said, we also had the heavy snow removal, which we classify as part of those winter costs.

Real estate taxes were actually not unusually high, only relative to the first quarter the prior year, which was unusually low, based on some multi-year tax credits that we received based upon property tax assessments that took us a long time to bring back into line. And then the smallest of the three were the referral fees that Larry just discussed.

And to break it down, of the -- the referral fees were about $150,000, [Joanna]. The balance of about -- talking about roughly $1.3 million, half of that was utilities and snow removal, and the other half was real estate taxes.

I'm sorry. It was two-thirds, one-third. Two-thirds -- so about $800,000 was snow removal and utilities, and about $450,000 in real estate taxes.

Great, thanks. And then coming back to what was discussed last quarter and how you talk about the outlook for the year in terms of occupancy increases and rate increases, cost increases. So any change to those items? Do you still think that occupancy will be up 100 to 150 basis points for the year and rate will be up 3% for the year?

Occupancy we think is actually tracking ahead of our plans. When we budget internally, because the first quarter usually is the most challenging, we expect flat occupancy in the first quarter, so our assumptions are we see progression in the second, third and fourth quarter. So picking up 20 basis points is a little better than we had projected internally.

On rate growth, we're still budgeting 3%. This quarter, the rate growth was a little lower. We did have some promotions in December that resulted in the temporary reductions in rent in the first quarter that will come back in the second quarter, the balance of the year. So, you know, we're -- and I think our consolidated revenue was up a little over 2%, but we're still budgeting 3% rate growth for the year.

And then on the NOI growth, 6% to 8%, I guess, still?

Yeah, based upon those factors for occupancy and rate and expense growth, that would translate to about a 6% to 8% NOI growth rate.

Great. And then it seems like the deal that you just did in the first quarter, very high-quality asset there, so the -- and I guess the commentary (inaudible) on the call suggested the deals that you're working on are also high-quality, but are they similar? I mean, the -- the average rent for this asset was pretty high, so are you looking at assets comparable to that or more, you know -- more looking like those that you did in 2013?

The $84 million of transactions we're closing this quarter have average rents probably in the $3,600 to $3,800 a month range. The transactions that we'd mentioned, the $34 million, will have rents probably in the mid-$3,000 range. There, again -- if you're looking at the acquisitions on property type, we're looking at independent and assisted living mix on the $84 million, and then on the other properties, it's probably about two-thirds assisted living, one-third independent living.

But the -- the quality is very consistent with what we've acquired. I mean, we're very excited about the quality of the properties that we continue to have the ability to buy, and I think 2014 -- so far, we are -- I guess we've talked about $133 million of acquisitions through the third quarter. There's more that we're working on. Obviously, this is just the first week of May, so we're on a pretty good track. And I would say that the quality and the average rent of what we're buying this year is higher than what we've done previously.

Great. Thank you so much. That's all from me for now.

Thank you.

[Operator Instructions] And we'll go next to Daniel Bernstein with Stifel.

Good evening.

Hey, Dan.

Hello, Dan.

Hey. I wanted to make sure I understood that that extra $800,000 utility and snow removal, is that the actual dollar amount that you spent in the quarter or how much you -- how much above your normal accruals or expectations you would have for winter costs?

The actual cost of utility was $4.6 million. Snow removal was about -- I'm sorry, $1,070,000. So that's -- the number we gave is what was higher than what was expected.

Okay, $800,000 variance over normal?

Yes, over normal.

Okay. Okay. I just want...

Last year, there were five -- yeah, it's really looking at the variance off budget and off of last year.

Okay, okay. And I also wanted to ask about the performance of the non-core assets you want to sell. You know, if I look at the overall impact on the 1Q earnings, was that a significant impact on the operating margin? You know, if we took out the non-core assets that you're going to sell, you know, would earnings -- how much earnings would have been higher? I mean, I'm just trying to understand how much those -- are those assets making money? Are they losing money?

They're making money, but they're our lowest margin. The margin of those properties run -- you know, we're talking properties that are probably in low double-digit margins, kind of 15%, 20% margins. They have the lowest average monthly rents in our portfolio. Some of the incentives we spoke about in the fourth quarter coming through this quarter was on those buildings, because we wanted to see some better improvement in occupancy, as we're in the market. We have been getting very strong interest from buyers, so we've very encouraged by that.

But I can't give you the dollar amount, Dan, but they're kind of the assets that fall at the bottom of our average monthly rates, as well as NOI per unit and margin.

Okay. And...

So, you know, these are non-core, but they're also -- and they're all making money, by the way, but, again, they're probably performing at less than half of our core properties.

Okay. And are they all owned or is there a mix of owned and leased in there?

They're all owned properties.

Okay. And then also, just looking at the consolidated -- trying to understand sequentially, they looked like to me that if you took the consolidated assets, which had one extra asset from last quarter, it looks like occupancy was up 50 BIPS. Is that really the right way to think about it, that occupancy was up about 50 BIPS Q over Q and not 20? Just wanted to understand your overall performance.

Well, it -- you know, what we -- yeah, what we did, Dan, you know, we tried this year in response to some of the requests we received from investors and analysts to be -- have a way to have a better stable same community count of units. We have a number of buildings that have shared suites. And the way they are billed was the way we would calculate those as units, so if they were two residents in the unit, they would count as two units, even though there's one doorknob.

What we've done this year to have consistent -- and that's why adjusted the numbers -- we now -- the number of units is actually what is the doorknobs, and the way that we report the occupancy is what our financial -- our lenders do is, for example, if you have a shared suite with one doorknob and there are two bedrooms, it'd be 0.5 occupied for each bedroom.

So it had some -- you know, if you look at the numbers, it's slightly lower as far as a unit count and occupancy, so when we ran the comparison, rather than looking at last year quarter's report, year over year and sequential is using apples to apples, using the same unit count, same occupied unit, and we expect this will be a fairly consistent count throughout the year.

Okay. Okay. So 20 BIPS is a better indication of (inaudible)

That's a -- that's a true number.

Okay, still up, but -- okay, just to understand it. And then one last question. You know, we listened to the REIT earnings calls, most of the REITs are really talking about further competition from assets, maybe even some more cap rate compression in seniors housing. While you do most of your acquisitions off-market, what are we seeing in terms of any pricing pressure on those off-market transactions? Just trying to understand whether your investment spreads are compressing or not.

Not really. You look at the returns that we're achieving, it's been very consistent. 90% of our transactions are off-market. We do bid on marketed deals, and we're seeing kind of some of the marketed numbers and some of the offers we're starting to get in some of our sales, which is a marketed transaction.

So, you know, we've been very disciplined in our approach. I'd say that the relative pricing to us has really remained relatively constant. The other phenomenon that you kind of heard on the refi, but I think was subtle, we're seeing a more competitive financing market where spreads are narrowing and interest rates are coming down considerably. So we're looking to borrow money now for acquisitions at levels we haven't seen, you know, really, going back for over a year.

So, you know, it's interesting to see that, as Ralph mentioned in the refinancing, we're expecting 150 basis points reduction off 596. That suggests like a 4.5% rate. So we're starting to see rates coming back in that range, which we hadn't seen sometime. So we actually think that it will accelerate the cash flow growth on these acquisitions and improve the returns on our equity because of the lower financing, but we've been able to maintain a lot of discipline and -- as I said, you know, in these off-market transactions, the sellers are coming to us and really only want to deal with us.

So we've been fortunate. We've been very selective. We are only buying typically, you know, maybe 15%, 20% of what's in the market. And we feel very, very fortunate that this year looks like an excellent year. We have a really great pipeline for the second half of the year, also off-market, which we think will continue to have similar pricing to what we've seen in the past.

You know, again, every deal is going to be a little different, but in the relative basis, it's very different than we're hearing from the REITs or hearing about in some of the marketed transactions.

Okay, that's very good. One last question, I'm sorry. I just thought of this. But are you doing anything to offset future referral costs? I mean, what are you -- I mean, I kind of thought that you were doing some of that with your website and other sales and marketing initiatives. But, you know, just trying to think about how you could mitigate referral costs in the future, you know, what...

Well, I think -- we're investing in the website. Now, our costs on the website this year are up, because we have expanded the -- and we're seeing -- as I mentioned, this quarter alone, in the first quarter, the website visits were up 30%, Dan, which is very encouraging. We have developed new strategies this quarter on better search engine optimization, better stickiness, repeat e-mails, so we're continuing to invest and enhance the user of the website and the Internet so that hopefully we can start to reduce some of those referral costs.

This quarter was really an anomaly. I've never seen it this high. The good news is, we had a lot of move-ins, but, you know, it was a place (inaudible) that really, you know, those fees came up quite a bit, and we are combating that by expanding the utilization and the different initiatives we're using and techniques to get better visits and leads from our website...

Okay, thanks.

... and other local initiatives.

Okay. I figured I'd just ask the question. That's all for me. Thank you.

Thanks, Dan.

And we'll go next to Dana Hambly with Stephens.

Hey, thanks, good afternoon. Congratulations to you Ralph and good luck in the next phase.

Thank you, Dana.

This is a question, again, on the loan portfolio that you're going to refinance. If it's a 10-year fixed-rate, you're going to refinance that into a new 10-year fixed-rate?

Yes.

Yes.

All right. So that'll push the maturity out for -- you know, another 10 years from now. And so -- and this is probably a naive question, but you're getting 150 basis points savings off of that portfolio. So you -- I think you mentioned, Larry, more in the kind of 4.4 range, 4.5 range, and -- but you just financed a building at 5.4%. I'm just trying to understand the discrepancy.

Well, that was a single asset $11 million loan versus a portfolio. This portfolio is very aggressively being bid on by various lenders. The Fannie-Freddie life companies want to do business with us, so there's an expansion. The other thing about this portfolio, it's predominantly independent living. There's definitely a lower cost borrowing on IL versus AL. The spread is, what, 30, 40 basis points? So that had a big factor, because this was predominantly independent living portfolio. And it's just the fact that it's a large portfolio where we have been fortunate to have a very active process with lenders very desirous of financing this portfolio.

Yeah, it's a no-brainer of a deal. Are there any more that you can do?

Well, I'll tell you, the acquisition financing is coming in very similar, so we'll keep our fingers crossed. It's nice to see the market kind of where it is today. And, again, I caution that it's based on current interest rates. The 10-year today is like 2.60, so it's come down 40 BIPS, but the spread's narrowed, but the spread we're confident about the -- again, rates could vary over the next couple of months, but that's why the other reason we want to accelerate this refi is to take advantage of current rates, as opposed to waiting to next year.

Okay. That's helpful. And, again, just talk about your cash needs this year. Are you still able to finance deals at about, you know, 75%?

Yes.

Or 25% equity? Okay. And then what will you need this year for retrofitting and repositioning assets?

You know, our CAPEX budget this year, I think, is about $14 million. And that combines both -- what's interesting about the retrofitting, obviously, we're still getting bids on the Town Center and Canton Regency retrofit, which is more significant. We are looking at retrofitting other buildings, but a lot of those buildings are leased, so we expect -- just like we're seeing at Veranda Club in Boca Raton, that a lot of those buildings which are at least owned by REITs, the REITs we expect will finance the retrofit and just build it into our rent, so it doesn't require a lot of cash.

The acquisitions are relatively new or have mostly been refurbished, so there's -- the acquisitions, which, you know, represent today about 30% of our portfolio, really don't requirement much as far as the CAPEX is concerned. So -- and we've got 50 properties, we lease a lot of those buildings that we would look to rent (inaudible) leased asset.

So, you know, we don't think it's going to require unusual amounts of cash. As I say, Town and Canton we know we're still waiting for bids maybe higher than the most, because we're doing a more aggressive plan there.

But we are interesting -- and the retrofit's an interesting word, because in addition to our normal refurbishments, which are carpets and furnishings, we are looking at changing some of these buildings as far as lighting, landscaping, units, countertops, bathrooms, you know, really modernizing the buildings so they become, you know, more competitive in the market. And with that, we hope we get a very good return in those investments, because we think we'll gain both occupancy and rates.

Okay, it leads to my next question. On, you know, the -- the conversions from IL to AL, do you feel -- you know, you guys have a pretty high IL concentration. Do you feel in a lot of buildings, are you at a competitive disadvantage if you can't have your residents age in place? Is that more attractive, do you think, to potential move-ins, to need the IL and the AL in the same building?

You know, the IL market is -- we're seeing the IL market, there's really less on the front end. It's just higher attrition, so they're moving out sooner, because they're coming in frailer. Don't forget, in our IL properties, we have therapy, rehab. We're actually talking now on a corporate-wide program with a large health care company to expand some of the therapy and rehab in our buildings. We have home health. We have wellness. We have visiting physicians.

So, you know, there's a lot of services in those buildings that can supplement the resident. And what's -- you know, what's compelling to those residents is the average rate is about $1,200 a month lower than the assisted living in more residential, larger units. So there's still a fit for that.

What we're finding is, it's not so much on the front end. It's they're moving out sooner. So it's the retention where those residents can transfer in place as opposed to moving someplace else that captures and meets that need, and that's where we see we have the ability to probably, you know, pick up 300 basis points of occupancy at a much higher rent.

Right, okay. And when -- when do you anticipate that all those units will be converted and then stabilization for those units?

With the -- the only retrofit that we're talking about in this whole program are the two CCRCs, which we hope to have done by the fourth quarter, Veranda Club in Florida, which is a REIT-owned asset, which is going through a second phase. That would probably be completed in the first part of -- you know, we're looking for construction starts this August, probably finished by year end.

The others should start to take residents in the second and third quarter. So, you know, we expect to see -- and what's nice about those conversions, Dana, there's very minimal cost. The buildings don't need any retrofit. There's no refurbishment. There's no CAPEX. It's really just making sure that we have an architect, that we're compliant with building codes, do the licensure application, we have to get the -- our executive director's license as administrators.

So the cost there is really not significant at all. And, you know, we have -- most of these have applications filed or completed, and we're working with fire inspectors, you know, those type of issues on the local building code issues, but our target dates for those are predominantly Q3 and Q2. So, you know, we think that those will start to see occupancy and revenue gains in the second half of the year. We expect -- because the unit sizes on these conversions range from an average of 14 units to about 30, so we would hope that those will be filled, you know, within six to nine months, so they should be pretty well occupied, and hopefully the benefit financially should be seen throughout 2015.

Okay. And, yeah, on that last point, Larry, I think you mentioned that that should be an incremental $0.20 or so in CFFO?

That's correct.

When stabilized? Okay, great, thank you.

Thank you, Dana.

[Operator Instructions] And we'll go next to Todd Cohen with MTC Advisers.

Good afternoon.

Hey, Todd.

Hi.

Hi. On the conversion question we've been talking about, there's 360 that you've referenced. Is the Veranda and the retrofitted CCRCs, any of that included in the 360?

They are.

They are?

They're (inaudible) 360, yes.

Okay. And then how much of that 360 are the retrofits at the CCRCs?

As I mentioned earlier, we're looking at the CCRCs. Each one will -- looking to have approximately 40 independent, 21 memory care units. That's 120. Veranda will have 45 units. And then the other properties, as I said, we're looking at ranges of 14 to 30.

We're actually licensing over 800 units. So when -- we're trying to be very conservative in our guidance here, in our outlook, because we're looking at many of these independent living buildings, of licensing the entire building, but expect that in the first year only about 30 units will be utilized.

So, you know, when you do the full count, it's about 360 of what we expect to be utilized in the first year. But the actual number of licensed assisted living units will increase by at least 800 units.

Okay. And when you said 360 was in the first year, you're talking about everything we've just spoken about, Veranda, retrofits, and the others?

That's correct.

Okay. Also, you know, obviously, the 360 conversions are hindering your occupancy opportunity right now.

It does have an impact. I mean, you know, Veranda Club, we've stopped admitting residents. You know, we actually -- because we're getting ready for construction this August, and we -- we've done -- the first conversion is 95% occupied. So, you know, to convert 45 units, we actually are now keeping units vacant for that.

So, you know, we don't take those out of our numbers. They're in our numbers. But we do have -- from these buildings, we're starting to prepare for conversions and keeping units off-market so that we can prepare them.

Okay, and then I just want to make sure that I understood the metrics you referenced on the assets you're thinking of selling. You were referring to EBITDA margins in the 15%-plus range?

Those -- those are facility-level NOI. That's before EBITDA. That's before the G&A. So the EBITDA margin, you know, you could spread across those buildings is, you know, not going to be that significant, but it would be a little lower, the EBITDA margin. I'm looking at the facility level and then operating income number.

Okay. And is there a way to get a sense for the size of the assets, in terms of dollars and range that you might be able to dispose of?

When we have contracts, we will announce what the sales prices are, and we're expecting these to be sales in third quarter, and we'll update everybody at the time that we have contracts in place. It's a process right now. They're being competitively bid. We're having offers coming in, but we're not giving indications of expected proceeds or a value at this time.

Uh-huh. Okay. I think that has it. Thanks.

Thanks, Todd.

It appears there are no further questions at this time. I'd like to turn the conference back over to the speakers for any additional or closing remarks.

Well, again, we want to thank everybody. I look forward to seeing many of you at conferences in the next several months. And Ralph will be around this week, and we'll be available for phone calls and e-mails, and so -- and we'll -- you know, again, he'll keep his phone number for a while, so he'll be available for those of you who want to give him a call, but we do wish Ralph the best on his retirement and thank him very much for 15 strong years.

Thanks, everybody. Have a great afternoon.

That does conclude our conference. Thank you for your participation.