Sonida Senior Living Inc (SNDA) 2014 Q2 法說會逐字稿

Good day, and welcome to the Capital Senior Living second 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, 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. Good afternoon, and welcome to Capital Senior Living's second quarter 2014 earnings release conference call. I am pleased to report positive results for the second quarter with growth in revenue, occupancy, EBITDAR and CFFO. Complementing this 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 generate meaningful increases in CFFO, earnings and real estate value.

In the second quarter, we completed the acquisition of three senior living communities from our Ohio joint venture, which we previously held a 10% interest, for approximately $83.6 million. Two of the communities were financed with approximately $40.1 million of non-recourse 10-year mortgage debt with a blended fixed-interest rate of 4.41%. One community was financed with a $21.6 million two-year bridge loan with a variable interest rate of approximately 2.9%.

Net of management fees of approximately $900,000 and our portion of JV net income of approximately $200,000, this acquisition is expected to add adjusted CFFO of $0.11 per share, increase annual revenue by $16.9 million and add $6.8 million of EBITDAR.

Yesterday, we completed the acquisition of two senior living communities for a combined purchase price of $33.9 million. These communities add to our operations in Virginia and Wisconsin. They were financed with approximately $26.2 million of non-recourse 10-year mortgage debt at a blended fixed-interest rate of 4.59%. This acquisition is expected to add adjusted CFFO of $0.04 per share, increase annual revenue by $8.2 million and add $2.9 million of EBITDAR.

We are conducting due diligence on additional acquisitions of high-quality senior living communities in states with existing operations, and subject to customary closing conditions, expect to close an acquisition of approximately $13.5 million by the end of the third quarter. With this additional acquisition, we will have acquired seven communities for a combined purchase price of $145.6 million through the first three quarters of the year. These 2014 acquisitions are expected to generate greater than a 17% cash-on-cash return.

Our second quarter same-community revenue increased 1% compared to the second quarter of 2013, reflecting the cumulative effect of competitive pricing in 2013 while we dealt with higher levels of attrition.

Here is what we're doing to improve this. In the near term, we are using introductory specials at lower-occupancy communities, we are increasing rates at higher-occupancy communities, increasing level-of-care charges where we can, and moderating wage increases throughout the Company.

Longer term, we are refurbishing communities and converting units to higher levels of care to gain occupancy, reduce attribution and increase rates. And we are encouraged by some of the same-community improvement we saw in the second quarter.

We have implemented many initiatives that already are yielding positive results and we believe will further enhance our operations moving forward, including our integrated marketing program, a new responsive website and e-marketing campaign, an expansion of our search engine optimization strategies such as the implementation of pay per click. In addition, we are utilizing software programs at our assisted living communities that are helping us to 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'm excited about the very attractive design plans that have been developed to reposition these two communities, which include the addition of 56 memory care units in the space previously occupied for skilled nursing in the first half of 2015, as well as adding more interesting and appealing spaces for all of our residents, such as additional dining venues, Internet cafe, media room, theater and conversation clusters at each of the communities. We are awaiting permits for these projects and expect construction to begin in the fourth quarter of this year. While these two communities are being repositioned, they will be excluded from same-community results.

In the second quarter of 2014, our same-community average rent increased over the first quarter of 2014 by an annualized rate of nearly 3% to $3141 per occupied unit, and our same-community occupancy increased 20 basis points from the first quarter of 2014.

Second quarter 2014 same-community occupancy increased 30 basis points compared to the same period in 2013. This is the first year-over-year same-community occupancy increase since the second quarter of 2013. On a same-community basis, second quarter 2014 move-ins increased 12%, deposits increased 13%, and tours increased 7% compared to the second quarter of 2013. These results encourage us about the second half of the year.

We are focused on reducing attrition, improving occupancy and increasing cash flow by offering residents the ability to age in place through the conversion of approximately 360 vacant independent living units to assisted living and memory care at 15 communities. We have received required licensure approval and expect to receive additional licensure approvals for half these conversions during the third and fourth quarter of this year, with the balance of approvals expected to be received during the first half of 2015.

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. Additional conversions are planned for the second half of 2015.

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 occupancy gains of 10 percentage points at these communities.

Industry fundamentals continue to be solid, with demand outpacing supply. NIC MAP reported favorable supply demand trends for independent and assisted living communities during the second quarter of 2014 with positive unit absorption to supply.

As we have discussed on previous calls, new construction has been needed in most of our markets, confirming that our value strategy with average monthly rents of $3175 act 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 in most of our markets 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 these markets.

With strong industry fundamentals, an improving economy and housing market and virtually no new supply in our markets, we believe that our properties can grow to an optimal level of 92% to 93%, providing significant opportunity for additional organically-driven CFFO growth and increases in our real estate values. Every 1% improvement in occupancy is expected to generate $4 million of revenue, $2.8 million of EBITDAR 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 a strategic plan that is focused on the 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 refurbishments. As we maximize our competitive strengths, we are lowering our cost of capital.

We are growing through a disciplined and strategic acquisition program that began in 2011 and which has been funded by internally-generated cash flow. In the past three years, we have acquired 41 communities for a combined purchase price of nearly $550 million. These acquisitions have generated a 16.3% cash-on-cash return. Our success in acquiring quality communities in off-market, non-brokered transactions validates our competitive advantage as a highly respected, incredible owner-operator with the financial ability to complete transactions.

Ninety percent of the communities we have acquired or expect to acquire in 2014 are off-market transactions. Many local and regional operators tell us that they prefer to transact with Capital Senior Living, as they feel comfortable in trusting their residents and staff to the Capital Senior Living family. More than 50% of the communities we purchased in 2013 and 2014 are with sellers with whom we have completed previous transactions.

As our cash flow continues to grow and our liquidity improves from our recent refinancing and planned asset sales, our robust pipeline provides us with ample quality acquisition opportunities in a highly favorable financing market. We are excited about continuing our successful acquisition program in 2014 and the future years.

We are well positioned for growth in both the near term and long term. Our strategies are solid, and I am optimistic about the Company's prospects as we benefit from our substantially all-private-pay strategy in an industry that is benefitting from need-driven demand, limited new supply and an improving economy and housing market.

I would now like to introduce Carey Hendrickson, our Chief Financial Officer, to review the Company's financial results for the second quarter of 2014. Carey?

Thank you, Larry, and good afternoon, everyone. Hopefully, you've had a chance to review today's press release. If not, it is available on our website at www.capitalsenior.com. You can also sign up on our website to receive future press releases by email if you'd like to do so.

The Company reported total consolidated revenue of $93.4 million for the second quarter of 2014, an increase of $6.2 million, or 7.1%, over the second quarter of 2013, with resident and healthcare revenue up $6.3 million, or 7.4%. The increase is revenue is mostly due to acquisitions the Company made during or after the second quarter of 2013.

Since the first quarter of 2013, we have acquired 14 communities, 11 of which contributed to our second quarter 2014 results, and three of the acquisitions were completed on June 30th of 2014 and, therefore, did not have an impact on our second quarter 2014 results.

As expected, the increase in second quarter revenue was partially offset by a decrease in revenue at two communities we are repositioning from skilled nursing to private pay AL and IL units.

Operating expenses increased $4.5 million in the second quarter of 2014, to $55.6 million, due to the acquisitions net of reduced expenses at the communities being repositioned.

General and administrative expenses for the second quarter of 2014 were $400,000 less than the second quarter of 2013, mostly due to lower healthcare expenses. Healthcare expenses were $600,000 lower than the second quarter of last year, when we had an abnormally high level of medical claims expense.

Excluding $700,000 of transaction and other one-time costs, G&A expenses as a percent of revenue under management were 4.3% in the second quarter of 2014, which is 90 basis points lower than the comparable measure for the second quarter of 2013 and 60 basis points lower than the first quarter of 2014.

In the press release, we noted that the Company's non-GAAP and statistical measures exclude the two continuing-care retirement communities that are being repositioned, as well as one of the properties we acquired in 2013, which is now in the process of lease-up after recently receiving an upgraded license.

Adjusted EBITDAR, which excludes these three communities, was $32.2 million in the second quarter of 2014, an increase of $2.1 million, or 6.9%, from the second quarter of 2013. The Company's adjusted EBITDAR margin was 35.6% in the second quarter of 2014, which is 110 basis points higher than the second quarter of 2013 and 90 basis points higher than the first quarter of 2014.

Adjusted CFFO was $9.9 million, or $0.35 per share, compared to $9.5 million, or $0.34 per share, in the second quarter of 2013. The contribution to CFFO from communities acquired during or since the second quarter of last year, excluding the one community in lease-up, was $0.05, which is in line with our expectations and public announcements related to these communities.

The contribution from same communities was $0.04 less than the second quarter of last year. Same-community revenue increased $600,000, or 1%, over the prior year in the second quarter, while same-community expenses were up 3.5%, resulting in a decrease in the contribution of same communities to adjusted EBITDAR and adjusted CFFO.

The three major cost categories -- employee wages and benefits, food and utilities -- were well in line, with employee costs up 2.9%, food cost up 1.7% and utilities up 2.4%. Advertising and promotion expense increased $400,000 over the second quarter of the prior year, as we continue to invest in initiatives to drive occupancy and revenue.

While not significant components of our total operating expenses, repairs and maintenance and contract labor costs were also higher in the second quarter of 2014 as compared to the prior year, which contributed to the increase in same-community expenses.

As a point of information, we recently moderated the merit increase for employees going forward, and the new rate will be in place for the next 12 months.

As Larry noted in his remarks, we were pleased that our same-community results showed significant sequential improvement over the first quarter of 2014. Same-community revenues were greater than the first quarter by 0.6%, with same-community occupancies up 20 basis points to 87.1% and average rents up $22, or 0.7%, to $3141. The sequential increase in average rate in the second quarter equates to a nearly 3% annualized rate increase, which is more consistent with our growth goal on a same-community basis.

The conversion of approximately 360 units to higher levels of care is also expected to boost occupancy and rate once they're completed. We're making steady progress on the conversions, and as Larry noted, we currently expect about half of the conversions to be completed by year-end 2014, with the remainder completed in the first half of 2015. Once completed, they must be leased up, which will likely take six to twelve months.

Based on these assumptions, we would expect the conversions to begin to have some impact on our operating results in the first half of 2015, with the impact growing throughout the year, and the full impact of these conversions in 2016.

Looking briefly at the balance sheet, we ended the quarter with $39.4 million of cash and cash equivalents, including restricted cash. During the quarter, we received $36.5 million in cash proceeds related to refinance of debt on our 15 communities. We also invested $21.9 million of cash as equity to complete the acquisitions of three communities, and spent $4.7 million on capital improvements.

Our debt balance at June 30, 2014, was $589.2 million at a weighted average interest rate of approximately 4.7%, down significantly from an average rate of 5.25% in the first quarter of 2014.

The decrease in average rate was related to the refinance of debt on 15 communities that we completed in the second quarter. The debt on these communities moved from just under 6% down to a blended rate of approximately 4.3%. Also, the $40.1 million of debt for the Ohio JV communities was added at a blended rate of approximately 3.9%. All of our debt is at fixed-interest rates, except for six bridge loans that totaled $65.2 million, which were at variable rates averaging approximately 3.9%. And the average duration of our debt is now approximately seven years.

Speaking of the acquisition of the Ohio JV communities, in which we previously held a 10% interest through a joint venture, please note that the community reimbursement revenue and community reimbursement expense on our income statement were related to that joint venture. Now that we've acquired these properties, these two line items will be zero going forward. This will have no impact on the Company's bottom line, but it will reduce the absolute level of both revenue and expense for the Company going forward.

There was also a small amount of affiliated management revenue on our income statement, which was related to joint ventures, which will go away going forward, as will the line for equity and earnings of unconsolidated joint ventures. The elimination of affiliated management revenue and equity and earnings of unconsolidated joint ventures will be more than offset by the consolidation of these operations into our income statement and balance sheet.

Also, please note that one of the components of the adjusted CFFO calculation is shown on the non-GAAP reconciliations page of our press release, non-cash charges net, includes a few unusual items in the second quarter of 2014 that we would not expect to repeat in future quarters, including the $7 million write-off of deferred loan costs and prepayment premiums related to the refinance that we completed in the second quarter. Also, we recorded a $1.5 million gain associated with our joint venture as a result of buying the Ohio JV communities, which is also unique to the second quarter.

Another component, stock-based compensation expense, is higher than usual in the second quarter, which is mostly related to the accelerated vesting of stock awards due to the retirement of the former CFO. In future quarters of 2014, stock-based compensation expense should be more similar to the amount in the first quarter of 2014.

One of the components of non-cash charges net is the change in deferred income, which includes pre-paid resident rent. Our current expectation is that the change in this component should be relatively flat for the remainder of the year. For your reference, the components of non-cash charge net can be found in the statement of cash flows in the operating activity section. It's made up of all the adjustments necessary to reconcile net loss to net cash provided by operating activities prior to the changes in operating assets and liabilities.

A couple of other items to consider related to the third quarter is that, historically, our third quarter expenses have been higher than the second quarter due to summer utility costs, and there is an extra day in the third quarter, 92 days in the third quarter versus 91 in the second quarter and 90 in the first quarter, so that will impact expenses.

Also, our third quarter results will include the three communities acquired on June 30, as well as about two months of results for the properties we acquired August 4, which, on a combined basis, should contribute an incremental $0.03 to $0.035 to CFFO for the quarter versus the second quarter.

That concludes our formal remarks, and we would now like to open the call for questions.

Thank you. (Operator Instructions). Darren Lehrich, Deutsche Bank.

So, yes, just the question relates to your occupancy. You did have year-over-year gains, which was nice to see. I guess I'd love to just get some commentary from you about how you think that's developed over the course of the quarter, and really, I guess as it relates to the attrition topic, maybe update us on how you're thinking about that and how it might impact your occupancy over the next year as we think about the outlook.

Sure, Dan. First of all, if you look at the second quarter on same store, we had a 12% gain in move-ins, 127 more move-ins. We had about a 15% gain in independent living move-ins, a 9% gain in assisted living. Our deposits were up 13.4% year over year. And tours were up, as I mentioned, by about 9.5%.

We also saw gains from the second quarter compared to the first quarter. In move-ins, the gains were about 13.5%. Deposits were up approximately 16%. We're seeing good trends from the initiatives that we have implemented this year, some of which are increasing our costs, especially as it relates to referrals, advertising, pay-per-click, community call centers. On our (inaudible), for example, we now increased all our referrals and move-ins by about 41%.

The good news is we're taking market share, because obviously these are prospects that have other choices and are selecting Capital Senior Living, so I'm encouraged by the continued improvements in the third quarter over the second quarter. We're seeing continued trends upward in all of our metrics. Deposit taking is up -- deposits, move-ins. We're kind of seeing trends now so far in the first month of the quarter up about 6% from the prior quarter, so August is showing continued positive trends.

So we're expecting to see -- third and fourth quarter typically has the best occupancy growth during the course of the year. As we said last quarter, we forecast flat occupancy gains in the first quarter. We picked up about 20 basis points this year on a same-store basis, 20 basis points for the second quarter is very much in line, and we expect to see that improve in the third and fourth quarter, so we think that we will continue to be the occupancies.

Attrition in the first quarter was fairly moderate. It ticked up in the second quarter. Hopefully, we'll get back to the kind of normal level. It's somewhat out of our control. And as we spoke about, it's something that we've identified, starting last year with the initiatives on conversions. We have 360 units that we expect to be licensed through the first half of next year. Half of that will be completed this year. We're now looking at hundreds of additional units for the second half of next year, so we're working and planning on that right now.

So we think that the initiatives we have done -- we're encouraged by, obviously, better traffic, better move-ins, better deposit taking. We're sitting with a very nice net deposit gain coming into this quarter, which has grown in the month of August, so we're hopeful that that will continue to trend over the next 60 days. That's net move-ins versus notices to move out. So the trends should improve throughout the quarter, and our experience has been in the last couple of years that if we end strong in the third quarter, it typically results in a positive fourth quarter as well.

I hope I gave you some color.

No, that's great. I'll jump back in the queue and let someone else ask. Thank you.

Joanna Gajuk, Bank of America Merrill Lynch.

So just a follow up on the call you gave towards the end of the prepared remarks about what you call some unusual items that impacted CFFO. Can you quantify how much the impact would be overall to CFFO per share from all these items?

So they really don't have -- I just wanted to make sure and point to you that they were in that $20 million of (inaudible) non-cash charges net. They don't have impact on CFFO directly, because they -- for instance, the $7 million loss -- it's in that $7 million loss, remember, when you back it out in the adjustments to CFFO. Same thing with the gain. It doesn't really end up impacting the bottom line of CFFO, but I wanted to just note that those things were in there.

So they don't have specific impacts on it, but I -- again, I just wanted to make sure you know. And same thing with stock-based comp. It's in the loss number, but it comes back out as an add. I just was clarifying that.

Okay. And then, also, on the one facility that you're excluding from the consolidated and same-store numbers that's in the lease-up, what's the rest, I guess, revenue or EBITDAR or whatever you can give us in terms of the metrics for that facility that's coming up from --

Joanna, it's almost neutral. The EBITDAR contribution is very insignificant. This is a property that was acquired last year. We took a bridge loan when we made the acquisition in the third quarter, expecting to enhance the license of the building. The license was received this quarter. In the meantime, we stopped admitting residents and actually moved residents out because we felt they were inappropriate for the licensure that the building had at that time.

So because of the fact that we saw the kind of change in operations at that community, we decided to take it out from our numbers. If you look at EBITDAR, it basically breaks even, so it really has almost no change in the numbers by taking it out. We just thought it gives better clarity to the operating metrics that we discuss by not including that property because of its occupancy and the fact that we are now re-leasing that building since we have received the necessary license.

And then the last question, on the same-store expense growth. That was 2.5% year over year, but it's still -- I mean, well, if I understood some of these numbers, there were impacts on that, but as far as I can remember, in Q1, excluding the weather impact, the same-store expense growth was only 1%, so was there any acceleration in some of these cost items Q2 versus Q1? And also, are the higher referral fees that you called out in Q1 -- are they still impacting Q2 numbers?

Okay, let me talk briefly about the same-store expenses in the second quarter. In kind of comparing to the first quarter, they were actually better than the first quarter by about $400,000, and it -- we had an extra day of expense, for one thing, in the second quarter. You have 92 days in the second quarter versus 91 days in the first quarter, and that affects your labor costs, your hourly labor, your food, your utilities. It's usually about somewhere around $500,000 is what that means for the quarter.

Utilities, which we noted were up in the first quarter by about $1 million, they were down by about $1 million in the second quarter versus the first quarter. But as I said, labor and food costs were higher, and a lot of that offset some of the decrease in utilities.

We did also -- looking at the line where we talked about weather-related items, like snow removal costs, those kinds of things, we did have a lower service contract cost in that line in the second quarter versus the first quarter where it kind of took those out. So those things normalized pretty much in the second quarter, other than the extra day of expense, so the second quarter has -- I think has a pretty good base of expense from which to begin as we go forward.

Okay, I'll go back to the line now. Thank you.

(Operator Instructions). Daniel Bernstein, Stifel.

I have a question. How disruptive are the conversion and CapEx that you're putting into the properties? Is that impacting your ability to move occupancy or rates or anything else with your properties?

No, actually, once we start the CapEx, it actually helps because we'll have pictures in the lobby showing the work being done. You start getting some enthusiasm there, so it's really not disruptive. In this one case, it was a licensure issue. When we bought the building, we knew that it didn't have the appropriate license. It took us longer to -- the process to get the license when you're dealing with surveyors and fire marshals, et cetera, took a little longer than we anticipated, but we have the license now. So that building was somewhat unusual, where we had to basically stop admissions and increase staffing during that period of time, until we got the appropriate license.

But these other conversions, as we saw elsewhere, with the exception of a major rebuild, like Veranda Club, which is unusual -- most of these conversions, probably 90%, there's almost no CapEx required. These are -- we've already gotten in Ohio and Indiana the (inaudible) licensing independent living to assisted living -- we already are compliant with building codes, so now it's tweaking some systems, life safety issues, things like that during that process, but it's not -- we don't expect it to be disruptive at all.

The experience we had in the three Ohio JV properties that we acquired -- we went through this in 2010, 2011. We were licensing in 10 to 15 increments. They kept filling very quickly, and there was absolutely no disruption. So I don't expect to see disruption, with the exception of a building like in Florida where, again, it's easy there -- it's a separate building. We closed that building. We do the construction -- it takes about six months -- reopen it. It doesn't affect the rest of the property. But these other conversions, I don't expect to see any impact in our normal operations.

Do you think the AL units that you're -- or once you convert, are you pricing those units at what you think where the assisted living market -- that market within those geographies, or are you able to undercut competitors for a similar-quality property?

Well, the good news is we get market because we have something the competitors don't have. We have large apartments, one- and two-bedrooms. The Boca Raton experience was very interesting, and the reason we're doing phase 2 was because of the strong demand. The only assisted living in that market with large units is our property.

So what's happened is we're not discounting. We don't have to discount. We're able to get full rates on the market rate, particularly -- so the value we're offering is a larger unit for the same price by coming into a converted unit compared to the market. And we've seen that across all of the buildings that we've converted, Dan.

Okay, that's good to understand. And then in the quarter, how much was the extra non-stock comp or retirement cost for Ralph?

It was right at -- it was just over $1 million, $1.1 million or $1 million.

What happened is his non-vested share is vested under our plan because he retired over the age of 65.

In your normalized AFFO, are you taking that $1.1 million out, or is that --

Yes, we're -- so it's in that net loss number, and then we add the whole amount of stock-based comp back in the CFFO calculation. So this vote is not really impacted by stock-based compensation.

Okay. Okay. And then one or two more questions, if I can. We hear a lot about wage inflation starting to creep in, I guess, the national economy, and I've heard it from a few of your peers, both public and private. Are you seeing wage inflation and then -- or are you expecting wage inflation? And then, secondly, as a result of that, is this the right time to, I guess, hold back on wages for your employees? Are you worried about attrition from employees going to someplace else?

Well, we're still having increases in wages. We're just moderating that increase. Our wage increases have been 2.5% to 3%. We're coming down slightly from that, so we don't think it'll have an impact because there will still be an increase to our employees. And if you think about the math on a weekly, bi-weekly or semi-monthly type of payment, we don't think it will have an impact.

Okay. Okay.

I think it's a cumulative effect of 6000 employees that save the Company quite a bit of money, but we think to the corporate and property-level staff, they're still going to get increases that we think are attractive. It's just that we're moderating the growth of those increases.

Okay. And then on the pipeline, you're closing almost $150 million or expect to close almost $150 million before the end of 3Q. Can you talk a little bit more about the size of the pipeline that you're looking at? Is it all assisted living? Is it still continuing to be some of these one-off transactions, or are you looking at anything larger at this point?

It's a combination. We have a very active pipeline of single assets. We actually just made an offer today on a property that we actually -- it's interesting. We made -- it was a two-property opportunity. We made an offer on one. The seller was uninterested in selling. Of course, he didn't like the offers on it too. He just got an offer on the second building we didn't want to buy, so we came back today and made I think a very competitive offer.

There are some larger transactions that we're looking at and they're working on that could be larger than what we've done in the past, but, again, there's no way to handicap whether or not or when that may happen. There's a transaction that we've been talking to a potential seller for some time -- we'll see. So it's a mix if you look at that, but again, as I said earlier, about 90% of the activity that we're involved with is off market.

We're very pleased that we've had a good pace of acquisitions, have really benefited from lower interest rates. Obviously, there's a lot more competition from lenders today with life companies and the agency that have definitely helped us in narrowing spreads, as you saw on the pricing of the refinancing we did in June and the recent acquisitions, so we're excited about that.

So we're going to continue to be very disciplined in our acquisitions. We're not going to give guidance but feel that we have plenty of opportunity, and we think that we have increased our liquidity and will be able to continue the successful program.

Okay. And it's mainly AL at this point?

It's definitely AL, yes. The acquisitions we closed, yes, they were all AL -- small IL, but mostly AL with memory care.

Okay. All right, I'll hop off. Thank you.

Todd Cohen, MTC Advisors.

Larry, you referenced as part of your strategy early in this call that you wanted to drive occupancy and rates with a couple of initiatives. I guess you indicated you wanted to drive occupancy at some of your lesser-profile IL properties with maybe some type of promotions and that you were looking to increase rates at your better-occupied properties. Can you talk about that a little bit more?

I think you actually phrased it extremely well. That's exactly what we're doing, Todd. We have been giving some introductory promotions at the lower-occupied independent living. It typically is for a short period of time, and then it burns off and goes back to a rate, so we're building future revenue over some time. The average length of stay of independent living is 31 months, so when we give a slight reduction in the early months of that lease term, we think we capture it.

It does have an impact in this rate growth we're talking down in Q1, Q2 because it does -- for example, we had some promotions in December with bad weather, and obviously that impacted the first three months of the year, and then we saw revenues pick up again. So as we periodically have these promotions, it's targeted to these weaker performing, and I will tell you we're seeing very strong results. The hope is that as those occupancies gain and occupancies strengthen, that we can start eliminating those concessions and start driving better rate growth.

At the same time, we have looked at -- our green buildings are 90% or greater. It's interesting, Todd. Just to give you some point of reference, year over year, our yellow and green build properties, which is probably about 75%, 80% of our portfolio -- year over year, second quarter to second quarter, averaged occupancy gains of probably around -- almost 2% and rate gains of 2.5%. Where we're seeing the loss, which is about 3.3% year over year, was in those red-zone buildings with 1% rate growth.

So the good news is that we're seeing the green get greener. The count of our green continues to grow. The good news is the red zone, as of today -- we just got my numbers in for last week -- is the highest per-occupancy level I've seen in years, so we're seeing improvement in those properties. And we also have lots of sales (inaudible) as well, so we have a strategy that's focused on do we have the right people. If not, make a change. Do we have the right physical plans? Do we need to update and modernize that? Do we need to convert units to provide more levels of care for aging in place?

If it's a market, it's a good market to sell into and we're happy to take some very good properties that we feel could get attractive pricing and then take those proceeds and redeploy them to more core investments. So we are -- again, we'd prefer all the buildings were 90% occupied, but they're not, and we're taking action to remedy the situation, which we think will be very productive and profitable for our future.

Uh-huh. And then, Larry, just again on this IL side, I believe you've discussed publicly that you've got some assets that are for sale. I'm assuming it's the IL, and I was just kind of wondering, are those the properties that you're focused on with those promo sales? And is that also where you're spending CapEx?

We have not been spending CapEx there. I mean, nothing unusual. They're in good shape. They're in good condition. They have good staff. They're in markets that don't drive the types of returns that we see elsewhere, so they're selectively being disposed of in order to enhance the overall performance of the Company. We did have some promotions at some of those buildings to get the occupancy. They're done now. But again, we did do that in anticipation of a sale, so there was some promotion to that. That obviously is a very good question, because those will go away.

I think that the maintenance CapEx that we incurred there is a regular CapEx. Again, the feedback we received from the buyers and other interested parties was very positive about the physical plans, extremely complimentary about the staff, so they're well run and we wish a buyer extremely -- a lot of success with the building. We're happy to see them continue with the operations with a great staff. It's just a function that we feel that we're getting better returns on other assets that we own or other properties that we can acquire.

Right. So Larry, are these assets in effect sold at this point and it's just a matter of time right now?

They are not sold. There's a due diligence process. Our plan is to have them sold this year, but they are not sold yet.

Uh-huh. Okay, and then I know that there was some tax benefit potentially that you guys were going to accrue this year. Can we just talk about the status of that?

I don't think so. I think my recollection is that we took the cost segregation study, we recognized the full value in the fourth quarter of last year, and I think that we're pretty much done with it. We do a cross-allocation when we buy buildings, but there's no initiative that I'm aware of to create a -- we have an NOL that will carry forward many years. It actually has increased the prepayment penalty on the refinance. I'd just like to clarify that that refinance absorbed the cost of the penalty, so that was rolled into the new loan in addition to the $36.5 million of cash we took out from those loans, so there was no use of cash to the Company for that.

But it's just the fact that we have a carry -- we do have almost a $4.5 million tax refund that we're -- maybe that's what we're asking, Todd, that we're expecting --

That's what I'm referring to.

Yes, yes, the tax refund will be filed with the returns this summer, and we expect a tax refund, I believe, in October.

Okay. Yes, that's what I was referring to.

Yes, that refund is still -- again, it comes in, I think, October?

Yes, but that does not affect the P&L. That's a tax refund, but it does not affect --

Yes, it doesn't affect the P&L.

No, no, I know. It would affect the balance sheet.

Yes, to be casted as more liquidity. Exactly.

That's right. Exactly.

Right. Okay. And then, Carey, for you, I have a question. You're the new guy in town, and obviously you've taken a lot of time here to, I'm assuming, look at a lot of the property-level type operations and expenses, and I was wondering, with new eyes looking at this portfolio, as to whether or not you see respectable opportunities in terms of maybe new tools for the executive directors and the financial people onsite and whether or not there are some opportunities there for more productivity and efficiency, again, with new eyes.

Todd, thank you for that. Yes, I'd say what I've found, actually, is that the Company has very good tools in place. They have -- obviously, the main three expenses are labor costs, food costs and utility costs. We have very effective processes in place to control food and utilities, and labor is something that varies with the market by market and what the needs are in those communities as it relates to IL and AL.

Certainly, Todd, we're taking a look at all of that, but I think for the most part, what I have found, I've been very encouraged by the fact that the Company has good tools in place related to that. I think that's evident by -- the expense growth that they've seen over the past couple of years has actually been very modest expense growth. We have had some expense growth in the first two quarters of this year that's been greater than usual, but it's been a very modest expense growth in the last prior couple of years, so I think that speaks to their effective cost control.

Great. Thank you.

Dana Hambly, Stephens.

Larry, could you go back to the acquisition that you made last year that you pulled out of the same-store results? I'm not sure that you needed to get it relicensed. Is that something you knew going into the acquisition?

Yes. If you read the press releases, we took a bridge loan, and it was in the press release that we took the bridge because we were seeking a higher license for that property. We knew that.

Okay, and that -- so it's now been relicensed. That should come back in after it's leased up, and that's six to twelve months?

That should be probably within six months. That's not that big of one.

Okay. Are there any other assets that you've bought that we should be looking that that would happen to, or is that an isolated incident?

No, that is the only one that we actually knew when we purchased it that we wanted to enhance the license from where it was. We started working on it at the time of acquisition, and it was then because we expected that to be the case.

Okay. All right, and I just -- on the repositioned CCRCs, it looked like they were a positive contributor to consolidated adjusted EBITDAR of about $400,000. I think they were negative the last couple of quarters. Is that just an indication that it's starting to come online and kind of once you get all that done in the fourth quarter, it should immediately be accretive?

Yes. I mean, those properties -- the assisted living performs well. We obviously have some opportunity in independent living. We are -- part of the conversion strategy is, in addition to adding the memory care units in the skilled nursing space, which is now vacant, we are in the process and hope by the first quarter of the year to have converted some of the independent living units to AL and these memory care units.

So it's moving along, but the rest of the building operationally is positively cash flowing. Again, it's not at the level we expect. There's tremendous opportunity when you look at the number of units in these two buildings combined, so we think we can add significant value and cash flow. But even though they're out of our numbers, they do contribute positively to our EBITDAR and to the cash flow.

We've got the repositioning going on on one side, and then we also are doing conversions of these units as well, so the IL to AL. And as Larry mentioned, on just the repositioning part, where we're adding these memory care units, we expect ---Larry mentioned starting construction in the fourth quarter and done by the middle of next year is what we expect. So then you'd need to lease them up, which would be the six to twelve months, so from a timing standpoint, just to give you some fill for that, I'd say we'd expect to see some impacts on our results in the second half of 2015 related to the repositioning and then more in 2016.

Okay. All right, that's helpful. And then, Carey, I appreciate all the color you gave on the different line items. Maybe I could just ask one more from you on the interest expense line, that $7.4 million in the quarter. Is that the run rate we should be using, or is it a little bit lower from the refinancing you just did?

No, I think that'll be about the right run rate. Actually, our interest expense related to that financing -- even though it was a greater amount of debt, it was at a lower rate, so the interest expense related to those 15 communities stayed the same. It does -- we did reduce our overall interest payment -- or excuse me, overall debt service payment because we extended the amortization from 25 years to 30 years on those communities. But from an interest expense standpoint, that should be the run rate.

Yes, we're picking up that $1 million of less debt service because that's a positive to cash from the less amortization, but I think the interest, as Carey said, will be neutral.

Okay. All right. And just lastly for me, Larry, you talked a little bit about some of the incredible rates you guys are getting right now. Obviously, no one knows what interest rates are going to do, but right here, right here, you kind of feel like, all things being equal, that we could kind of see rates in [7.5%] for a while?

Well, I'm not an economist, but I will tell you that we were very pleased to see the spreads narrow considerably. It's interesting, we did a financing in the first quarter -- I believe it was 5.49%.

Right.

When we did the refi, I thought we refinanced at about 5.5%. It was more the sense of anticipating the potential for higher rates in the second half of 2015. And through this process, we saw better competition and interest rates -- the 10-year came down. The 10-year today is less than 250. Spreads have narrowed, so yesterday's low was 459. The refi -- and that's all AL. IL's were less. So, yes, I think right now we're very comfortable that rates should stay under 5% for the near term.

And where are you seeing the new competition from?

Life insurance companies.

Life insurance?

Yes.

Okay. Great. Thanks, guys.

Joanna Gajuk, Bank of America Merrill Lynch.

Just a follow-up question in terms of the comment you made about August, the positive trends you saw in August, and your commentary around the outlook for the year for (inaudible) to be up 100, 250 basis points and rates to be up 2%. So is there any change to that outlook for the year?

We picked up -- on a consolidated basis, we picked up, I think, 60 basis points the first half of the year, same-store up 40 basis points. Based on the activity we're seeing today, for the first month of the third quarter, deposits in our history, I would expect that if we can continue to grow at a slightly higher pace in Q3, Q4, we should be over 100 basis points. Again, it's not average for the year. It's from the beginning of the year to the end of the year, that growth, so the average for the year won't be 100 basis points. It's where we end the year compared to where we start the year. The same thing with rate growth. It won't be a flat 3% for the year. It's where rates end compared to where they start.

And as Carey mentioned, in the second quarter, sequentially, we're running on an annualized basis of about 3%, and our hope is to continue that over the balance of the year.

Right. So Joanna, I'd look at it, on the revenue side, from a sequential basis. From the second quarter to third quarter, our goal would be to grow that at a rate similar to what we did sequentially from the first quarter to the second quarter, because that would -- so I would really kind of start with second quarter rate and go forward from there on kind of that annualized 3% basis.

And then from an expense standpoint -- you did ask about that too -- I noted in my remarks that we do expense third quarter expenses to be affected by higher summer utility costs and then also an extra day of expense versus the second quarter, so sequentially, looking from the second quarter to the third quarter, there would be increases related to that.

But we've also moderated our wage increases for the next 12 months, and our goal is to try to keep the expense growth to that 2% level on a same-community basis, other than the summer utility costs and that extra day of expense because that will be an impact on that.

Great. Thanks.

Daniel Bernstein, Stifel.

One follow-up question here. You're really becoming more of an assisted living company with the acquisitions and the conversions, so I was trying to understand, are you having any additional operating expenses for training, hiring, higher-level nurses and RNs and so forth? And then a related question is how should I think about operating margin when we go out to 2015, 2016? You talked about 300 [bips] of occupancy, where traditionally assisted living has been a little bit lower operating margin in IL, so I'm just trying to understand how your expense patterns are changing.

Well, let me talk about training. We do have -- we use a third party for training for all of our caregivers at AL. That cost is not going to be -- will not be significant as to -- it won't affect your forecast on CFFO or anything else. It's going to be less than half a penny per year, so that should not be significant.

One thing we do see, Dan, and we're -- I think one of the opportunities we have is, as we are involved in more assisted living, we have had more contract labor. That's something we're very focused on to make sure that we are hiring the right nurses, nurse's aides, staff in the care setting, because we want to minimize contract labor. We saw that in the first and second quarter. That's something we're seeing in labor costs that went up, so there's a lot of focus there, and I think that we can get that under control.

If you look at this quarter, where our operating expenses were, it's probably a decent run rate. As Carey said, it was a pretty clean quarter.

Right.

Looking at that level, I think the expenses were 59.5% of revenue. EBITDAR margin was up 110 basis points over last year. Obviously, G&A was well controlled. And on the acquisitions, the good news is we're buying better -- one thing about occupancy, the operating leverage, even in assisted living -- every dollar of incremental revenue, whether it be IL or AL, generates a $0.70 contribution to EBITDAR.

So if you think about the -- really, as I look at this, if we're successful in growing occupancy, even though our costs may be higher because of more assisted living, the margin I would think would still improve because you're getting the operating leverage in those buildings, but through the higher-revenue source.

Okay. Okay. Okay. All right, I appreciate it. I'll hop off. Thanks.

And on the conversions, we're expecting the contribution to be up $0.60 on the dollar, on same stores about $0.70 on the dollar.

Okay.

(Inaudible)

Larry, you mentioned previously rates are at historic lows. Is there any opportunity on any of the other mortgages that you guys have coming due over the next 6 to 36 months where you can refinance those today and strip out some excess proceeds and use that --

There is opportunity. We're looking at that right now. As Carey said, the average maturity now is over seven years. We do have some loans that mature over the next couple of three years where there's equity and there's value, and it's actually something we're looking at. There are prepayment penalties and yield maintenance, so we have to kind of measure the cost of the refinance versus the benefit, but it's something we are very focused on.

Got it. And with the proceeds, if you were able to do anything in that scenario, the proceeds would be used for further acquiring other assets, I would imagine, correct?

Or refurbishing buildings. Again, for corporate purposes, so where we're allocating our capital is acquisitions, refurbishments and conversions, so it would be in one of those buckets. It will be somewhere that we think we can create value and enhance cash flow.

Got it. And then the last question I have is, given kind of where debt rates are today and financing is today for the product that you guys are buying and the product that you already own, where would you say market cap rates have trended for the underwriting that you're doing when you're buying an asset today? Since you're buying owned assets on your balance sheet, how should we think about -- what's the cap rate that you're looking at on new acquisitions today?

Well, because some of our buyers listen to these calls, we don't talk publicly about cap rates. I hope you appreciate that. So I'd rather not answer that, because I may get in trouble. So if you look at the numbers, though, I think we've still been -- cap rates have definitely come down. I think we still have been buying properties at a very attractive cap rate.

If you look at the -- what's interesting, the cash-on-cash return on our 2014 acquisitions is over 17%. The lower financing cost definitely helped.

Right.

And then, obviously, if you read the NAVs from the analysts or other kind of valuation metrics, clearly there's a lot more interest in this sector and it's having an impact on cap rates.

So would it be fair to assess that wherever the analyst NAVs were a year ago, they're substantially higher today, you'd say, or higher today?

I would think they should be higher today because they should be, I would think, using lower cap rates on the NAV, yes.

Great. Thanks, guys.

Todd Cohen, MTC Advisors.

Larry, on that property that you guys have pulled out from the results, the IL property -- I think you said you've kind of taken that off the books. Can you refresh me as to what's going on there? This is the one with the bridge loan.

Yes, when we bought the building -- it actually is AL, but it has a low level of AL. There's a higher level of AL licensure that is necessary for the acuity of some of the residents that were there. While we were waiting for the license, we moved those residents elsewhere because we didn't think it was appropriate for them to be in that building.

Larry, did you say it was predominantly IL or AL?

There are different levels of AL licensure, so in this case, it didn't have the heightened AL license that we would want for that building. There were services being rendered, but it was limited, so therefore we have now received the appropriate license for the building and are now going back now and looking to refill those units with the appropriate match of services to the level of needs of the residents.

Uh-huh, and so the occupancy metrics were pulled out of the results because of that?

Yes. Now, it's not a same store, because it was purchased after the second quarter, so it does not affect any of the same-store results. It's just on the supplemental schedules, looking at kind of our -- and again, it's a small piece of our -- I think it's less than 50 units, so it's a smaller building, so, again, it's not going to really impact much. We just thought that it was easier to take it out because of the fact that many of the units were out of service basically until we received the license.

A lot of the units were taken out of service?

About half the units, yes.

Half the units, okay, so half the building is not occupied.

Forty percent.

Okay. Okay, so then that should start to kick in. And then, just one last question. You've given us an indication of what closings you're going to have potentially in the third quarter. Is it safe to assume that you guys are still moving ahead with acquisitions going into the fourth quarter? You didn't talk about that, but I'm assuming that there should be some. Is that assumption okay?

Well, what we said in our release and what I said in my comments is we're conducting due diligence on additional transactions, so hopefully we'll have more in the fourth quarter.

Okay, great. Thank you.

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

Thank you very much. I want to thank everybody for your participation today. Welcome, Carey, and I congratulate you on your first call.

Thank you.

And again, please feel free, if you have any follow-up questions, to call Carey or myself. Have a great evening and great rest of the summer, and we look forward to seeing you at, I'm sure, many conferences coming up after Labor Day. Thank you very much.

Thank you. Bye-bye.

This concludes today's conference. Thank you for your participation.