Sonida Senior Living Inc (SNDA) 2014 Q3 法說會逐字稿

Good day and welcome to the Capital Senior Living Third 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, risk 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 would like to turn the call over to Mr. Larry Cohen, CEO. Please go ahead, sir.

Thank you. Good afternoon and welcome to the Capital Senior Living's Third Quarter 2014 Earnings Release Conference Call. Our third quarter results reflect the positive momentum that continues to build in all of our important metrics, with higher revenue growth and lower expense growth in the third quarter than in the first two quarters of this year and continued solid increases in occupancy, adjusted EBITDAR, and adjusted 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 generates meaningful increases in CFFO, earnings and real estate value.

In the third quarter, we completed the acquisition of three senior living communities for approximately $47.4 million. The communities were financed with approximately $36.6 million of non-recourse 10-year mortgage debt with a blended fixed interest rate of 4.62%. These acquisitions are expected to add adjusted CFFO of $0.06 per share, increase annual revenue by $11.6 million and add $4.8 million of EBITDAR. Through the first three quarters of the year, we have acquired seven communities for a combined purchase price of $145.6 million. These acquisitions are expected to generate a 17.6% cash-on-cash return on equity and add $0.21 of adjusted CFFO. We are conducting due diligence on additional acquisition opportunities involving high quality senior living communities in states with extensive operations, totaling approximately $75 million. Subject to completion of due diligence and customary closing conditions, at least one acquisition valued at approximately $14.5 million is expected to close by the end of the fourth quarter of 2014, with the remainder expected to close in the first quarter of 2015.

Same-community results continue to show significant sequential improvement in the third quarter of 2014. Same community revenues were up sequentially over the second quarter by 1.1% and were 1.8% higher than the first quarter. Same-community occupancies increased 40 basis points from the second quarter of 2014 and 70 basis points from the third quarter of 2013 to 87.4%. This was the fourth consecutive quarter to show a sequential gain in occupancy. Average monthly rent increased 60 basis points to $3,159 per occupied unit from the second quarter. This is in addition to the 70 basis point sequential increase in average monthly rent from the first quarter to the second quarter of 2014.

Third quarter same-community net operating income was 1.5% higher than the second quarter of 2014. Our improved third quarter results reflect the successful implementation of various initiatives during the third quarter, including selective introductory specials at lower occupied communities, increasing rates at higher occupancy communities, increasing level of care charges and disciplined expense management. Longer term, we are refurbishing communities and converting units to higher levels of care to gain occupancy, reduce attrition and increase rates.

We have also enhanced our private pay revenues by closing the only skilled nursing beds we had operated in two continuing care retirement communities. We are excited about the very attractive design plans that are developed to reposition these two communities, which include the addition of 56 memory care units in the space previously used for skilled nursing in the first half of 2015, as well as adding more assisted living units, as well as 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 this quarter.

Demand continues to increase as demonstrated by the 19% increase in third quarter 2014 same-community net move-ins, compared to third quarter 2013. And the difference between deposits on hand and move-out notices at the end of the third quarter increased 84% as compared to the same period in 2013. This map also recorded accelerated industry fundamentals for the third quarter of 2014. Demand as measured by unit absorption accelerated to 2.9% in the top 99 metro markets with construction starts remaining near flat at 2%. These positive indicators suggest that gains in demand and occupancy, as well as continued rent growth should continue.

As we've discussed on previous calls, new construction has been muted in most of our markets, confirming better value strategy acts as an economic barrier to entry for new developments with replacement costs averaging in excess of $175,000 per unit. Our average monthly rent of $3,211 will have to increase by about 50% in most of our markets to generate a reasonable return on the cost of development, indicating the opportunity to realize substantial rent growth before we expect to see new construction in these markets.

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 of our communities. We have received required licensure approvals for 97 units and these units are leasing up ahead of projections. We expect to receive the remaining licensure approvals over the next three quarters. 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.

With strong industry fundamentals and improving economy and housing market and virtually no new supply in our markets, we believe that our occupancies 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. Subject to completion of diligence and customary closing conditions, we expect to complete the sale of a select group of communities before year-end, which 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. 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 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 conversion and community refurbishments.

Since the beginning of 2010, successful execution of this plan has resulted in an 18% compounded annual growth rate in our EBITDAR on a 15.2% compounded annual growth rate in revenue. And over this time period, we increased our EBITDAR margin by 570 basis points. As we maximize our competitive strengths, we are lowering our cost of capital. We continue to grow through a disciplined and strategic acquisition program that began in 2011, and which has been funded exclusively from internally generated cash flow. In the past [three] years, we purchased 42 communities for a combined price of approximately $560 million. These acquisitions have generated a 16.4% 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.

As our cash flow continues to grow and our liquidity improves from our recent refinancings 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 2015 and in future years. We are well positioned to make meaningful gains in shareholder value, as a substantially private pay business in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market.

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

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

The Company reported total consolidated revenue of $98.5 million for the third quarter of 2014, an increase of $10.5 million or 11.9% over the third quarter of 2013 with resident and healthcare revenue up $12 million or 14.2%. The increase in revenue is mostly due to acquisitions the Company made during or after the third quarter of 2013. Since the second quarter of 2013, we've acquired 15 communities, including three communities that we purchased during the third quarter of this year. As expected, the increase in third quarter revenue was partially offset by a decrease in revenue at two communities that were repositioning from skilled nursing units to private pay AL&IL units.

Our operating expenses increased $7.1 million in the third quarter of 2014 to $60 million due to the acquisitions, net of reduced expenses at the communities that are being repositioned. Our general and administrative expenses for the third quarter of 2014 were only $200,000 higher than the third quarter of 2013 after excluding transaction and other one-time costs from both years. Excluding these transactions and other one-time cost, G&A expenses as a percentage of revenue under management were 4.9% in the second quarter of 2014, which is 30 basis points lower than the comparable measure for the third quarter of 2013.

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 that we acquired in 2013, which is now in the process of lease-up after recently receiving an upgraded license. During the third quarter of 2014, we began a significant renovation project at a community to convert IL units to AL units which required us to vacate 45 units at this community until construction is complete. As a result, we decided to remove this community from our non-GAAP measures beginning in the third quarter of 2014. The remaining conversion projects currently underway require minimal or no construction cost and if they do require units to be vacated, it is generally for a short period of time.

Our adjusted EBITDAR was $33.5 million in the third quarter of 2014, an increase of $4.2 million or 14.4% from the third quarter of 2013. This does not include EBITDAR of about $600,000 related to the four communities undergoing repositioning, lease-up or significant renovation and conversion. The Company's adjusted EBITDAR margin was 35.6% in the third quarter of 2014, which is 40 basis points higher than the third quarter of 2013.

Adjusted CFFO increased 24% or $2.2 million to $11.1 million in the third quarter of 2014, compared to the third quarter of 2013. On a per share basis, adjusted CFFO was $0.39 per share, which is $0.07 greater than the $0.32 of CFFO that the Company generated in the third quarter of 2013. The $0.39 of CFFO in the third quarter is also $0.05 higher than our second quarter CFFO and $0.11 higher than our first quarter CFFO. The contribution to CFFO from communities acquired during or since the third quarter of last year was $0.11, which is $0.03 ahead of our expectations and public announcements related to these communities.

Same-community revenue increased $1.1 million or [1.3%] over the third quarter of the prior year. Same-community expenses were up only $700,000 or 1.6% versus the third quarter of the prior year, due to the successful implementation of certain expense controls in the third quarter and utilities costs that were flat with the prior year due to a generally mild summer. In addition to utilities, our two other major cost categories, employee wages and benefits and food were well on line with employee cost up 2.3% and food cost up 1.8% versus the third quarter of the prior year.

Advertising and promotion expense increased $200,000 over the third quarter of the prior year, as we continue to invest in the initiatives to drive occupancy and revenue. However, this increase is $200,000 less than it was in the second quarter. As Larry noted previously, we're pleased that our same-community results showed continued sequential improvement in the third quarter. Building on the sequential improvement that we experienced from the first quarter to the second quarter, our third quarter same-community revenues were 1.1% greater than the second quarter, with same-community occupancies up 40 basis points to 87.4% and average rent up $19 or 60 basis points to $3,159. Versus the first quarter, our third quarter same-community revenues were 1.8% higher, with occupancy at 50 basis points and average rent up $41 or 130 basis points. We're making steady progress on the conversion of approximately 360 units to higher levels of care and currently expect roughly 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 6 to 12 months. Based on these assumptions, we expect the conversions to begin to have some impacts on our operating results in the first half of 2015, with the impact growing throughout the year and with the full impact of these conversions in 2016.

Looking briefly at the balance sheet, we ended the quarter with $39.3 million of cash and cash equivalents, including restricted cash. During the third quarter, we invested $10.8 million of cash as equity to complete the acquisitions of three communities and spent $5.5 million on capital improvements. Yet our cash balance only decreased $100,000 from June 30, 2014, due to cash flow generated by our operations and positive changes in working capital items. After the end of the third quarter, we received an expected $5 million refund from the IRS, which further improves our cash position.

Our debt balance at September 30 was $623.9 million at a weighted average interest rate of approximately 4.7%. We added approximately $37 million of debt in the third quarter related to the three communities we acquired at an average rate of approximately 4.62%. All of our debt is at fixed interest rates, except for six bridge loans that totaled $65.2 million, which are at variable rates, averaging approximately 3.9% and the average duration of our debt is approximately seven years.

And looking towards the fourth quarter, we expect our same-community revenue growth compares with the fourth quarter of the prior year to continue to improve and to be slightly higher than our same-community expense growth versus the prior year quarter.

Regarding the CFFO in the fourth quarter of 2014, there are a few items that I'd like to mention. First, one of the components of the adjusted CFFO calculation as shown on the non-GAAP reconciliation page of our press release, non-cash charges net, it includes an increase of approximately $500,000 in prepaid resident rents in the third quarter, which resulted in approximately $0.02 of enhancement to third quarter CFFO that we generally would not expect to repeat in future quarters. Also, food costs are usually approximately $250,000 higher in the fourth quarter than the third quarter, due to special events and holiday parties at the communities and note that our fourth quarter results will include a full quarter of the three committees that we acquired during the third quarter, which on a combined basis, we expect to contribute about $0.01 of incremental CFFO for the fourth quarter. Also, as a reminder, CFFO in the fourth quarter of last year included tax savings from a cost segregation study, which added $0.12 per share to CFFO, which will not repeat in the fourth quarter of 2014.

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

(Operator Instructions) Darren Lehrich, Deutsche Bank.

It's Dana Nentin in for Darren. First question on the same-community expense growth, up 1.6% in the quarter. What's really changed the most sequentially and maybe if you could talk about some of the expense controls that you mentioned earlier?

Actually we had expense decreases in several categories, just as a result of some of the [deals] and expense controls put into place that our operating folks do a really good job of that on a consistent basis, and really were very stringent on their controls. This quarter we had decreases in several categories, including contract labor, as well as advertising -- excuse me -- repairs and maintenance. And so, those were some of the places where we had some decreases. But other than that, which is really nominal increases (technical difficulty). The other thing that we implemented were reporting on overtime that goes to all of our regionals and our operational managers. Those are weekly reports that had definitely allowed us also to bring down our labor cost by having better information on overtime and the contract labor was the key component as well. In the first half of the year, specifically with bad weather and then with licensing of units, we had more contract labor than we typically do and it's back in line with more normal standards.

And I guess it's good to see same-store NOI in positive growth this quarter. Maybe what's more of a normal outlook for same-store NOI growth over the next few quarters?

As Carey said, we're projecting that revenue growth will actually exceed expense growth next quarter. That's a nice turn. If you look at the 1.5% same-store NOI growth that annualizes to over 6%, which is kind of within the scope that we expect. We're now preparing our budgets for 2015 at the property level. The matrix would assume rent growth of about 3%, expense growth of about 2%, [about] 100 basis point spread between rent and expenses and occupancy growth, which I think we'll probably forecast close to 100 basis points for next year. If we achieve that, the same-store net income growth should be in that 5% to 7% band, again consistent with the sequential growth that we saw this quarter, hopefully that will start to accelerate in the fourth quarter based on the fact that we actually expect to see better numbers.

The other thing I'll point out, we had higher expenses in the first half the year which we don't expect to repeat. And we also had discounting last year in the fourth quarter and the first quarter of this year. So I think that will start to show the comparisons will widen on revenue growth, as well as hopefully more moderate expense growth driving stronger NOI growth on the same store basis.

Joanna Gajuk, Bank of America Merrill Lynch.

Seems like the deal pipeline is pretty full there. There is $75 million you already have lined up for this quarter and the next, And can you talk about the types of assets, whether you're still just, I guess, doing more of a assisted living acquisitions, and I guess our average rents for the deal that you just announced, you closed lately in August was pretty high. So can you talk about rents for the assets in the pipeline and occupancy and the margins there?

They continue to be very strong, Joanna. The pipeline, if you look at where we are, through October, we have signed contracts on $242 million of acquisitions since the beginning of the year; that includes the $75 million that will close in the fourth quarter and expected to close in the first quarter of 2015, subject to completion on due diligence and other conditions. You can see that the quality of properties we are buying continues to improve. The operating margins on the properties we closed, the EBITDAR margin in the third quarter was 41%. If you look at the average rent, it was $4,600 a month. If you look at the transactions that we have under contract and plan to close over the next two quarters or this quarter and next quarter, they also will have higher than our average rate. Probably mid-90% type occupancies, and the margins will probably again be high-30%. So we continue to look at opportunities that are -- and the eight of the properties we are buying are very new. So we're really improving the quality of our portfolio by buying state of the art properties in very strong markets, with limited competition, with very, very strong financial and operating metrics.

And I guess, looks like the financing cost are still very attractive. So I don't know if you have a crystal ball to project it, but the [4.7%] is so pretty attractive there.

Yes. I mean, the 10 year right now is about 2.3%. That being said, we'd expect the financing cost to be 4.5% or lower. So looking at kind of mid-fours, with some competition we may get that price down a little bit. We've been pretty successful from looking at different sources of financing. But yes, we think that the rate environment is highly attractive, the valuations we are very pleased with the type of returns we are generating and we expect to continue to have very solid mid-to-high teen returns on these acquisitions at current levels of interest rates. So we're very pleased that the program continues to grow.

The other thing I'll comment is we talk frequently about our credibility and reputation. It's really rewarding to see how many sellers come to us that look to deal with us exclusively and because of the ease of transaction and the success that we've had, particularly in the transition of the operations to our management. So that has really done us very well and in this highly fragmented industry, we are very, very pleased that we're recognized as being a true credible quality buyer and operator that a lot of smaller operators prefer to deal with.

And then on the conversions, (inaudible) I guess you made a comment that at least one community, I guess, is already leasing up ahead of projection. So this is part --

Actually two communities. We have licenses received in October on two properties. We've received provisional licenses during the third quarter. We have permanent licensing, the process works in October and those two buildings are ahead of schedule. We actually had in the first month. We have 21 either movements or scheduled movements of 97 units. The other thing that's very interesting that we didn't expect was a very positive development. As everyone knows, I think, in our independent living properties, we've rented space to home healthcare providers to provide services. As we have received licensure, these providers have left the building. We were actually -- [won] these buildings, in addition to the new move-ins into assisted living, we are now providing additional services to 33 independent living residents that we never forecast or budgeted and that's in the first month. So we're seeing that, not only are we able to capture very attractive lease rates and occupancy gains by having the assisted living, as well as help us in marketing the property, the families are move-ins. The existing IL residents who don't yet need assisted living offer taking in services, which will also add additional revenue to the Company by able to provide those services throughout each of the residents with our assisted living staffing.

So then your comments around getting licenses for the rest of those 360 units, that's on schedule right. That's the same sort of view you had when we last spoke three months ago, right, when you said that you expect half this year and half first half of 2015?

Yeah, I mean, we said about [acquiring] 97, is a little over a quarter. So we feel we're very much on target. We're making good progress and we expect to continue the same rate of licensure through the first half of 2015.

And lastly briefly on that public, so the comment you made right that there is this one community that I guess you have to take out the 45 units, because of the convert, that's part of the 360 unit conversion that's happening right?

That's right. And that's the only one that really has any significant renovation and that kind of thing.

And what's interesting, the remaining 140 units that are open and operating are 95% occupied. And that's not in our occupancy numbers by the way, because we've taken that out. So, this is a building that we did a first phase of assisted living two years ago and the entire building is 95% and we're now starting the renovation and refurbishment of another 45 units. One thing we've realized and you can see the success we're having here and our track record in other conversions, when you upgrade these units, which are large with walk-in closets, full kitchens, one and two bedroom apartments, they have a strong competitive advantage in their market compared to the purpose-built assisted living, which are typically smaller, more studio, more institutional and that's been obviously reflected in about 10 percentage point gains that we've seen in prior conversions that we've completed.

Daniel Bernstein, Stifel.

Actually I want to ask a few more follow-ups on the conversions. Based on past conversions or what you're seeing now, are you pulling residents from your IL into those AL units or are you tracking people from outside the community? I'm trying to understand the move-ins, the nature of the move-ins on the unit conversions.

The move-ins are non-residents. These are people moving in from outside the community. But what's happening is the residents in the community are starting to receive services and we now start to assess those residents every 90 days. And based on those assessments they need, as those services will increase, we expect that we will begin providing assisted living services to the residents. What's very interesting is that in most of these buildings, the license that we receive is for the entire building, so residents have the luxury of staying in place in their home and then can receive additional services, which we can now -- we've implemented [vigil in] already in the converted units, our software technology to do the assessments and then start to appropriately bill for those services to those residents. But the gains we're talking about is all occupancy, because these are vacant units being filled from the outside.

What kind of services are you providing? I assume you don't want to be a home health or a therapy provider. Just trying to understand the services that you are moving into IL.

It's kind of lower level services to residents. It could be help with ambulation, bathing, it's not medication management, it's not assisted living. It's more of the kind of the services that relate to their limitations, where rather than have a home health care aid come in, they can contract with our staff to provide those services, the non-medical, purely non-healthcare.

And then in terms of the expenses, again on the quarter, I might have missed this, I hope I'm not asking something you already said, it was a fairly moderate summer in terms of temperature, at least on the East Coast it seemed like that in some of your main markets and geographies. How did that impact -- how did the seasonal weather utility costs compare to last year and what you expected?

So it was flat with last year. Our utilities cost were flat with last year and we certainly would have expected to have some kind of inflationary increase. Versus the second quarter, we've said that we expected to have maybe a $500,000 increase or so. It wasn't too far from that. It was around $450,000 increase from the second quarter to the third quarter in utility cost, but that certainly helped and it was a generally milder summer as you note.

So it seems on the expense side it wasn't just one item that came in maybe a little bit better than what you expected. It was really a lot of different items that helped out.

It was across the board. Yes. So we -- several categories in the third quarter were down versus the second quarter. Contract labor -- food was actually down about 1% versus the second quarter, advertising and promotion expense that was down about $150,000 from the second quarter, repairs and maintenance I mentioned were down, printing, supplies. So it's really just across the board several factors and there wasn't a significant increase in any particular category on the other side of things.

And then on the acquisition front, it seems to me that you look at the [net back] data, independent living, supply-demand fundamentals are actually better than assisted living. I might ask -- I think I asked this last quarter to you guys. Are you thinking about maybe doing some more independent living or IL/AL combo versus just the assisted living pipeline, given the fundamentals out there in IL?

We do continue to buy some IL/AL memory care. It's interesting that most of the properties that we see are more AL and memory care. It's a function of the newer construction, newer buildings in the last decade were predominantly AL versus IL. We've had some free standing IL purchases and again, some of the properties do have high IL, AL and memory care, but I would say probably 80% of these units that we're acquiring continues to be AL and it's more a function of the product that we see in the market.

Have you looked at any value-add IL, or older 1990s vintage IL where you may be able to do unit conversions, such as what you're doing in your legacy portfolio?

It's possible, it would be consistent with that. It depends on the state and the licensure of that state. So it's something that we do look at is the possibility. But as I said, there's just not a lot of freestanding IL that we see in the market.

Dana Hambly, Stephens.

Good quarter. Just on the recurring CapEx at $410 annualized, it seemed a little bit low to me, but is that a good run rate going forward?

Yes, I think it's a pretty good run rate, $410, it may be up to $500 or so, but that's in the range that we would expect.

Dana, I think it's pretty consistent with last quarter.

Yes, it was a little bit higher than the first and second quarter actually, which as I recall was around $390 or so.

We continue to go through upgrading properties. I mean we've got -- if you look at our website, you'll see the number of buildings that have been recently re-carpeted, refurnished, dining rooms, common areas, and I'll say something, we're seeing some very strong results in the leasing of those units as they are refurbished. That obviously is not recurring CapEx, but that's there, and remember that the recurring CapEx is in addition to the ordinary maintenance expense that we have as returned units on new residents moving in.

And a lot of our efforts right now are directed at conversion as well some of the more significant renovation projects we have going on.

Okay, that's helpful. Carey, couple of numbers too, on the CFFO, the $0.02 incremental in the quarter, what was that again?

We had prepaid resident rents that were higher. That's a balance sheet change and that's [certainly] non-cash charge is net number that sometimes it's difficult to predict, Dana, and we did have an increase in that of $500,000. That particular category goes up and down, but that we would not necessarily expect that kind of increase to occur again in the fourth quarter. So I just wanted to point that out.

No, that's helpful. Is there anything seasonal about -- seasonable -- seasonal about that?

Not really.

Okay, how do you control?

It's really not. It's just how many residents happen to walk in and give us a check prior to the end of the quarter. First, it's how many walked in and gave us a check prior to the end of the previous quarter. So it's very difficult to predict and we had a [$500,000] increase this time. I don't know what it will be next time, but we just generally expect that to be zero going on quarters --

It's really hard to forecast.

Yes, that's a good way to approach it. On the -- and then the $250,000, you said that was normally what you would see in fourth quarter food costs above and beyond the third quarter food cost, is that right?

Yes, that's normal and it's just holiday parties and special events that we have in the fourth quarter because of all the holidays that occur.

Larry, you gave something that I didn't catch it in your prepared remarks about at the end of the quarter, something to do with the move-outs and deposits on hand and 84% is what --

What we track every week is an important metric to kind of -- the good forward-looking indicator, is what we have as deposits on hand versus our move-out notices. Residents typically will give us 30 days notice if they're moving out, and if you look at the end of the quarter, September 30, that spread between deposits on hand and move-out notices was 84% higher than the same week in 2013. So the outlook for the fourth quarter is encouraging.

And just to get a little more clarity, you're just measuring one week versus one week in the prior year, but if we look at the progression of occupancy throughout the quarter, would you say you got stronger through September?

Yes, actually the third quarter occupancy with better move-ins was higher than second quarter. And the momentum -- September was fabulous. I mean September is usually one of our best months, we were up every week in September for four consecutive weeks, and with a very strong close. So it was -- it's good, I mean the momentum was there, and my experience has been that when we have a good September, it typically leads to a positive fourth quarter.

Okay, that's good news. Just last one to Larry, you talked about increasing the real estate value in the prepared comments. Given some of the large portfolio tracks -- portfolio acquisitions we've seen recently, and then there is a big healthcare REIT deal announced earlier this week, how are you feeling about your real estate value, you're a fairly large portfolio now, just kind of your discussions with the Board, any potential actions you could take or just how you are thinking about that these days?

I think that what we're seeing on the valuation of senior housing assets, typically the large portfolios is reflective of the interest from institutional investors recognizing that the best performing asset class for the last probably four, five years (inaudible). So it's really -- it's kind of basic supply and demand, if you will. What's happening is that -- which finally there is a compression of cap rates, the spread between multi-family cap rates and senior housing cap rates is compressing. I think that's reflective of the fact that we are maturing as an industry. With much more institutional capital interested in this sector, I think it's going to continue to compress. I think that fundamentals look extremely strong for next couple of years. The mid mass data is extremely encouraging when you look at -- if you look at our website, if you look at the chart that we have on absorption and you can see how absorption -- move-ins in the [top linear] markets is actually accelerating. So I think that as long as fundamentals continue to improve, I think interest rates -- I'm not an economist, but I think based on global factors will probably stay moderate for the foreseeable future. I actually think that cap rates may go lower for larger deals, specifically on scarcity. So we are looking at what we can do to improve the quality of our portfolio, select asset sales, enhancements to renovations, refurbishments, conversions, all of which will increase cash flow and since cap rate is a factor of cash flow, to the extent that we increase our cash flow and if cap rates compress, our real estate values will continue to grow. Right now we are fiduciaries to our shareholders. So we are always cognizant of shareholder value, but we have a big competitive advantage of having all this cash flow we generate to reinvest at very high returns and accelerating the real estate value. So I think that the real estate value is attractive today and I'm hopeful it will continue to be even more attractive in the future with a larger portfolio.

Great. Sounds like you've been asked that question before, Larry?

You know what, Dana, I give a lot of thought to it.

Todd Cohen, MTC Advisers.

Just kind of a bookkeeping item. On the 360 units that are out of -- you're converting and I guess that includes four properties now. What is the total number of units in those four properties?

360 is our 15 properties. Four properties that we took out the service are the [two TRCs], an acquisition we made that we bought with a bridge loan expecting to get higher life insured, and [re-sprinkled] building and things of that [fold]. And the last is the second phase of a conversion of AL that we had to close 45 units. So it's four buildings out of the 15 that are out of service.

How many total units do those four buildings represent?

I'd say the [PCRCs] are probably somewhere around 600 units.

Each? 300 each okay.

Out of service we have the two [PCRCs] that's about 600 units. We have 45 units out of service in that conversion. It's probably about 700 units Todd.

And then I am assuming that the building -- what you do in the 45 units, I'm assuming that's BOCA, because you've spoken about that before. So 45 out of the 190 is a lot of units. So I'm just trying to understand the process for how you get to 190 unit building with I don't know how many units -- I mean I don't know how long they've been unoccupied, but why weren't we doing this a lot sooner?

We started construction in September. Let me explains the Florida situation Todd, okay? There are four buildings that are interconnected of 45 units each. They total about 180 units roughly. One of the buildings was closed a few years ago. Our landlord invested $2.7 million. Those we converted 45 units from independent to assisted living, all new kitchens, new doorways, new bathrooms, I mean fairly significant. Those 45 units are full or substantially full, 95% or higher. We then have started not admitting new residents earlier this year in order to create vacancy. So we were able in August to get 45 vacant units in a building.

So, Larry, can you actually vacate residents?

We actually would vacate residents, more importantly we stop admitting new residents into that building. And that we actually would move residents to another building. So the entire building is vacant this way. We can now have all the construction that's necessary without being disruptive to anybody. The construction started in September and will take, I guess, four to six months to complete, and then those units will be re-opened and we'll start leasing those. We'll probably start pre-leasing those in the first, second quarter and hopefully, we'll have the same success as the first converted phase had a couple of years ago.

And then there's been a lot of numbers discussed, so I think I heard you say that there is 97 of the 360 that have been licensed now. Is that correct?

That is correct.

And then 150 are expected to be licensed before the end of the year?

No, we said roughly, you figure, it's about 90 a quarter or so.

Okay, 90 a quarter. So, you'll be able to license another 90 in the fourth quarter?

Fourth quarter, early first quarter, yes. Timing is never precise, because it is out of our control. There's a process. So again, you can tell. we actually -- the 97 -- what's interesting Todd, we received provisional licenses on July 15 and August 7 for those two buildings and then received permanent licensure on October 21 and October 3. So there's a process you go through where you are compliant with building codes, you've had your staff, you gave provisional license and then you have resurveys done by fire marshal, building [codes] and the licensing regulators. They'll come in and survey and then you get the license.

And then just to confirm again, I think I heard you say that when you get these licenses in these buildings that you're converting from IL to AL, the entire building is actually licensed for AL.

That is correct. We don't expect that it will utilize, but the entire building is licensed. In most dynamic cases, the ones we're doing now, we are typically licensing the entire building.

And then it's in those buildings that you're able to provide your IL residents with assistance from your AL staff, is that what you were saying?

Yes.

So is that something you can do in your other IL/AL properties?

In certain states, not everywhere, in certain states. It depends on the states. In Ohio and Indiana, we can do that.

And just with respect to the deposits versus move-outs, the 84% number, to get that into reference, how many more deposits is that actually in absolute numbers?

On a same-store basis, the number is around -- exactly how many more -- it is 31 more deposits. I'm going net. The actual deposits is say about 31.

The actual deposits is 31.

That was deposits versus move-outs.

You said you received the $5 million after the quarter-end. That is all unrestricted?

Yes, it's all unrestricted. It's available for us however we choose.

There are no further questions in the queue at this time. So I'd like to hand the call back off to Mr. Larry Cohen for any final or closing remarks.

Well, again, we thank you all and Carey and I look forward to seeing some of you over the next few weeks as we are presenting at various conferences and some other meetings we have scheduled over the next few weeks. As always, feel free to give us a call if you have any further questions. And we thank you very much for your interest in today's call. Have a good evening. Thank you.

Thank you.

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.