Sonida Senior Living Inc (SNDA) 2014 Q4 法說會逐字稿

Good day and welcome to the Capital Senior Living Fourth Quarter and Full-Year 2014 Earnings 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 material, 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'd like to turn the call over to Mr. Larry Cohen. Please go ahead.

Thank you. Good afternoon and welcome to Capital Senior Living's fourth quarter and full-year 2014 earnings release conference call. Our fourth-quarter results reflect the continuing momentum in our operations. Our revenue increased at the highest rate of the year in the fourth quarter, while our expenses declined, resulting in excellent growth in adjusted EBITDAR and adjusted CFFO. We also experienced solid increases in occupancy and average monthly rent.

Our same-community occupancy increased for the fifth consecutive quarter, gaining 20 basis points sequentially from the third quarter of 2014 to the fourth quarter of 2014. Our same-community average monthly rent increased by 30 basis points in the fourth quarter of 2014 as compared to the third quarter, building on the 70 basis point sequential increases in average monthly rent in the two previous quarters. We completed the acquisition of two senior living communities, one in mid-December and the other in mid-January, for a combined purchase price of approximately $32.8 million. These communities are expected to add incremental annual CFFO of $0.04 per share.

For the full-year 2014, we acquired eight communities for a combined purchase price of $160.2 million. These acquisitions are expected to generate a 16.5% cash-on-cash return on equity with first-year EBITDAR of [$13 million] and first-year CFFO of $0.23 per share. We are conducting due diligence on additional acquisitions of high-quality senior living communities in states with extensive operations totaling approximately $57 million. Subject to completion of due diligence and customary closing conditions, at least one acquisition valued at approximately $30 million is expected to close by the end of the first quarter with the remainder expected to close in the first through second quarter of 2015.

I am happy to announce that we executed an early rate lock agreement on approximately $21 million of debt associated with the $30 million acquisition at a fixed interest rate of 3.55% with a 10-year maturity. Our improved fourth-quarter results reflect the successful implementation of various initiatives during the second half of 2014, including selected introductory specials at lower occupied communities, increasing rates at higher occupied communities, increasing level of care charges and disciplined expense management. Longer-term, we are renovating and refurbishing communities and converting units to higher levels of care to gain occupancy, reduce attrition and increase rates.

We also implemented numerous sales and marketing initiatives in 2014 that are yielding positive results. These include improvements to our website, the launch of call centers, enhanced sales training, improved lead tracking, enhanced search engine optimization strategies, integration of Internet leads with our database management system as well as branded vehicle reps and property signage. These initiatives increased fourth quarter same community leads by 25%. And thus far in 2015, despite winter weather and the flu season, our same community move-ins increased 29% and deposits increased 24% over the same period in 2014.

In fact, the weekly average number of move-ins and deposits thus far in the [first quarter of 2014] is greater than the weekly average of any quarter during 2014. While attrition has been higher thus far this quarter and last, the year's first quarter, we are hopeful that we will end the first quarter at least at the same occupancy level that we ended December. Fortunately, we are not experiencing the severe impact that the flu had in the first quarter of 2013 or that the harsh winter weather had in the first quarter of 2014. The positive growth and demand that we are experiencing is encouraging and we look forward to building occupancy over the balance of the year.

We have improved the quality of our portfolio and enhanced our private-pay revenues by closing the only skilled nursing beds we had operated in two continuing care retirement communities. We also completed in January the sale of four non-core communities. These actions will enhance our operating metrics and allow us to redeploy approximately $18 million of proceeds to accretively acquire newer, better-performing communities in stronger markets within our geographically concentrated regions. Eliminating these operations also helps sharpen our focus on our core strengths as we continue to successfully execute on our strategic plan.

We are making steady progress on our work to convert approximately 360 vacant independent living units to assisted living and memory care units with more than half of the conversions compete at the end of 2014. I am pleased to report that the lease-up of our fourth-quarter conversions has been strong. Two communities received their permanent assisted living licenses in October and the third received its license in December. The two communities that received their permanent licenses in October received provisional licenses in July and August. The three communities have 135 combined license units.

Since July of 2014, occupancy levels have improved from 52% to 75% at one community, from 70% to 91% at another and from 85% to 96% at the third. Industry fundamentals continue to improve and demand for our communities continues to increase as demonstrated by our strong increase in move-ins and deposits. NIC MAP also reported accelerated industry fundamentals for the fourth-quarter 2014 as occupancy and rate growth improved while construction starts remained muted resulting in absorption outpacing new supply. These positive indicators suggest that gains in demand should lead to further improvement in occupancy as well as continued rate growth.

As we had discussed on previous calls, new construction has been muted in most of our markets, confirming that our value strategy acts as an economic barrier to entry for new development with replacement costs today averaging in excess of $200,000 per unit. Our average monthly rents of $3,229 would have to be about 50% higher 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 and improving economy in the housing market and limited new supply in other markets, we believe that our occupancies continue to grow to an optimal level of 92% to 93%, providing significant opportunity for additional, organically driven CFFO growth and increases in our owned real estate value and stock price.

Every one percent improvement in occupancy is expected to generate $4 million of revenue, $2.8 million of EBITDAR and $0.06 per share of CFFO. Our disciplined and strategic acquisition program, which began in 2011, has been funded from internally-generated cash. In the past 3.5 years, we purchased 44 communities for a combined price of approximately $593.6 million. These acquisitions had generated a 16.2% cash-on-cash return with first-year EBITDAR of $57 million and first-year CFFO of $0.92 per share.

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 the financial ability to complete transactions. As our cash flow continues to grow and our liquidity improves, our robust pipeline allows us to continue our disciplined and strategic acquisition program that increases our ownership of high-quality senior living communities in geographically concentrated regions and generates meaningful increases in CFFO and shareholder value.

In addition to reporting excellent operating and financial results, we have also made significant improvements to our balance sheet, which Carey will discuss shortly. We have increased our cash balance, extended low maturities, reduced our fixed interest rates and improved our financial ratios. The average maturity of our mortgage debt is now eight years with approximately 92% of our loans maturing in 2021 and after. And as evidenced by the historically low interest rates on our recent financing and rate locks, we are benefiting from the narrowing of borrowing spreads due to increased competition amongst lenders, including Fannie Mae, Freddie Mac and life insurance companies.

Our operating strategy is to provide value to residents by providing quality senior living services at reasonable prices. Our fundamental competitive advantage that allows us to achieve solid operating results is our people and our culture. As we strengthen our competitive advantages, we are also lowering our cost of capital. We continue to execute on a strategic plan that is focused on a very important objective of enhancing shareholder value through organic growth, proactive expense managements and utilization of technology, as well as allocating capital to accretive acquisitions of high-quality senior living communities in our geographically concentrated regions and cash flow and value enhancing unit conversions as well as community renovations and refurbishments.

Successful execution of our strategic plan has produced strong results. Since 2010, we have increased our percentage of owned real estate from 32.5% to 56.1%. We have generated a 17.9% compounded annual growth rate in EBITDAR on a 17.9% compounded annual growth rate in revenue. Adjusted CFFO has grown at a 23.5% compounded annual growth rate and our EBITDAR margin has increased by 350 basis points to a record high quarterly margin of 37.5% in the fourth quarter of 2014.

In addition, over this time period, the weighted average interest rate on our mortgage debt has decreased 136 basis points to a current average of 4.63%. We believe that continuing the successful execution of this strategic plan will materially increase our cash flow, our owned real estate value and most importantly, shareholder value. Our track record demonstrates that we are successfully executing on our strategic plan and I believe that we are well positioned to continue to make meaningful gains in shareholder value with 96% of our revenues derived from private-pay sources in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market.

At this time, I would like to introduce Carey Hendrickson, our Chief Financial Officer, to review the Company's financial results for the fourth quarter and full-year 2014.

Thank you, Larry, and good afternoon, everyone. I hope 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 $100.2 million for the fourth quarter of 2014, which was the first time in the Company's history that quarterly revenue has exceeded $100 million. This was an increase of $11.2 million or 12.6% over the fourth quarter of 2013 with the resident and healthcare revenue up $13.1 million or 15%. The increase in revenue is largely due to acquisitions the Company made during or after the fourth quarter of 2013. Since that time, we have acquired 14 communities, including one community that we purchased during the fourth quarter of 2014.

Operating expenses increased $5.9 million in the fourth quarter of 2014 to $59.7 million due to the acquisitions. Our general and administrative expenses for the fourth quarter of 2014 were about $400,000 lower than the fourth-quarter 2013 after excluding the transaction and other one-time costs for both years. Excluding those transaction and other one-time costs, our G&A expenses as a percentage of revenue under management were 4.1% in the fourth quarter of 2014, which is 110 basis points lower than the comparable measure for the fourth quarter of 2013.

As we noted in the press release, the Company's non-GAAP and statistical measures exclude four communities that are undergoing repositioning, lease-up of higher licensed units or significant renovation and conversion. Our adjusted EBITDAR was $36 million in the fourth quarter of 2014, an increase of $6.2 million or 20.9% from the fourth quarter of 2013. This does not include EBITDAR of about $700,000 related to the four communities that we are currently excluding from operations -- from our results.

The Company's adjusted EBITDAR margin was 37.5% in the fourth quarter of 2014, which as Larry noted, is a record high quarterly margin for the Company and it's 290 basis points higher than the fourth quarter of 2013. Our full-year 2014 adjusted EBITDAR margin was 35.9%, which was also a record high annual margin and was 100 basis points higher than the full-year 2013 adjusted EBITDAR margin.

Adjusted CFFO was $13.5 million in the fourth quarter or $.48 per share compared to $0.52 in the fourth quarter of 2013. However, the fourth quarter of 2013 included tax savings from a cost segregation study of approximately $0.12 per share. So, on a comparable basis, our adjusted CFFO in the fourth quarter of 2014 was $0.08 higher or 20% greater than the fourth quarter of 2013. The contribution to CFFO from communities that we acquired during or since the fourth quarter of last year was $0.09, which is $0.01 greater than our expectations and public announcements related to these communities.

Same community revenue increased $1.6 million or 1.9% of the fourth quarter of the prior year. Same community expenses were about $400,000 less or 0.9% than the fourth quarter of the prior year. Looking at the three major expense categories, labor costs, including benefits, increased only 0.4%, food costs were up only 1.4% and utilities cost decreased 1.7% versus the fourth quarter of the prior year.

We're pleased that our same community results showed sequential improvement in the fourth quarter. Our same community revenues were up 0.6% over the third quarter, building on the 0.6% sequential improvement that we experienced from the first quarter to the second quarter and the 1.1% sequential improvement we experienced from the second quarter to the third quarter.

Our same community expenses were $300,000 lower in the fourth quarter than the third quarter, resulting in same community NOI growth of 2% from the third quarter to the fourth quarter. Our same community occupancy was up 20 basis points from the third quarter to the fourth quarter. This was the fifth consecutive quarter that our same-store occupancy as increased. Our average rent was up 30 basis points.

As Larry noted, we are making steady progress on the conversion of approximately 360 units to higher levels of care. Approximately 200 conversions were completed at year-end 2014 with the remainder expected to be completed in the first half of 2015. The lease-up of the units that have been converted to-date is going very well. As Larry also noted, still we don't expect to see noticeable impact from the conversions until the second half of the year with a more complete impact from these conversions in 2016.

Looking briefly at the balance sheet, we ended the quarter with $51.5 million of cash and cash equivalents, including restricted cash. An increase of $12.2 million from September 30, 2014. Approximately $9 million of increase was due to net proceeds received and the refinance we completed during the fourth quarter. Otherwise, we generated approximately $12 million in cash related to our operations and changes in working capital. And we invested $4.1 million of the cash as equities completed the acquisition of one community and spent $5.3 million on capital improvements.

Our mortgage debt balance at December 31, 2014 was $642.5 million at a weighted average interest rate of approximately 4.7%. We added approximately $10.9 million of debt in the fourth quarter related to the community that we acquired at a rate of 4.5% and we had a net increase in debt of approximately $10.5 million related to the previously noted fourth-quarter refinance. At December 31, all of our debt was in fixed interest rates except for six bridge loans that totaled $65.2 million, which were variable rates averaging approximately 3.9%.

By the end of the first quarter of 2015, we expect to have paid off or refinanced four of the bridge loans and therefore expect to have only two remaining bridge loans totaling approximately $20 million. And with our new first-quarter financings at sub-4% rates, including the one at 3.55%, our weighted average interest rate will continue to decline to approximately 4.6% at the end of the first quarter.

Looking at our expectations for the first quarter, the first quarter of every year is generally the most challenging as the cold weather and winter conditions result in increases in costs such as utilities and snow removal services. Attrition rates are also generally highest in the first quarter of the year. That said, we expect the first quarter of this year to compare very favorably to the first-quarter 2014. During or since the first quarter of last year, we have acquired nine communities that we expect to contribute and incremental $0.05 to $0.06 per share of CFFO in the first quarter of 2015 compared to the first quarter of last year.

Also, we had higher-than-usual winter-related expenses in the first quarter of 2014 due to a particularly harsh weather and we would expect improvement in the first quarter of this year as the weather in most of our locations so far has been more in line with normal expectations. This is tempered slightly by an approximate $0.02 decrease in CFFO in the first quarter of this year versus last year related to our recent dispositions. But overall, we expect healthy improvement in CFFO in the first quarter of 2015 as compared to the $0.28 of CFFO that we reported in the first quarter of 2014.

When considering the sequential comparison of the first quarter of 2015 to the fourth quarter of 2014, we previously noted the $0.02 decrease in CFFO in the first quarter from the sale of four non-core communities. Also the fourth quarter of 2014 included a $0.04 contribution to CFFO from an increase in prepaid resident rent that we would not expect to repeat in the first quarter. And as is normally the case, we expect the first quarter to have utilities and other winter-related costs that are around $700,000 to $800,000 higher than the fourth quarter.

In looking at the full year of 2015, with the continued positive momentum in our operations and successful execution of our strategic plan, we are very optimistic about our prospects for 2015. For our core operations, our goal is to grow revenue at a rate at or near 2.5% with expense growth 50 basis points to 100 basis points less than revenue growth. We also expect to improve our core occupancy by 100 basis points over the course of the year. Achieving these goals will result in core NOI growth in the 4% to 6% range.

We'll also have a full year of contribution from the acquisitions that we made during 2014. As such, we would expect an incremental $0.11 in CFFO from our 2014 acquisitions in 2015. The four assets we sold contributed approximately $0.08 to CFFO in 2014, but we expect to accretively reinvest in net proceeds from the sale into better performing new communities.

We noted in today's release that we've already acquired one community in the first quarter of 2015 and are conducting due diligence on an additional $57 million of acquisitions that we currently expect to close in the first or second quarter. And while we don't have a target for acquisitions in 2015, the acquisition pipeline is robust and the financing environment remains very favorable. So, we'd expect to continue to add high-quality communities that are a good fit for our portfolio during the coming year. So we should have a nice contribution to 2015 results from acquisitions that we'll make in 2015.

Also, we expect to begin to see the impact of the 360 IL to AL conversions on operating results and occupancy as the year moves along, particularly in the second half of the year. We expect the full impact of the conversions to be approximately $0.20 per share of CFFO once the units are fully online and leased up. And we think we could see somewhere between $0.05 to $0.10 of that this year. Taken all together, as we execute on our strategic plan in 2015, we expect significant growth in our operating and financial results, which we expect to translate into excellent growth in shareholder value.

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

(Operator Instructions) Darren Lehrich, Deutsche Bank.

Hi, it's actually Dana Nentin in for Darren. I guess, first, I was wondering if you could provide color on occupancy levels in your assisted-living facilities versus your independent facilities at year-end and maybe how that compares to last year.

Yes. Hi, it's Larry. If you look at our AL occupancies at the end of the year, on a consolidated basis, the AL communities were occupied at 89.6%. That compares to 89.3% at the end of the fourth quarter of 2013. The IL were 86.4% compared to 84.9% the prior year. So, we saw 150 basis point improvement in independent living. It's a combination of some of those units being converted to AL.

And the one thing that I will comment on the conversions that has been a pleasant surprise in the fourth quarter was the improvement in the attractiveness and demand for independent living units in those converted buildings, as families are comforted to know that if their parent needs more levels of care, they could be accommodated in the community.

We also found that 50 or 60 of our IL residents in those communities have now asked if we can provide services to them. So, we are getting additional revenue sources by providing more services in those communities to our independent living residents.

Okay. Great. And then, just on the move-ins, it's great to see continued strong move-ins. I'm wondering though that given the increasing mix of assisted living, which typically comes with lower length of stay than the independent living and that you may need to move more people and to keep pace of occupancy gains. So I'm wondering if there is any other metric you think might be more helpful to focus on just in light of that dynamic.

Well, if you look at the attrition levels, they clearly were better in the fourth quarter. We do see higher levels. I will tell you though that by having multiple levels of care in our communities, where residents can transfer from IL to AL and AL to memory care, we actually think that we extend the length of stay of that resident and we think that also will have the effect of improving our overall occupancies.

Okay, great. And then, one last housekeeping item. Can you just update us on the timing of when those four communities that are being repositioned will come back online?

Yes, we would expect them to come back online sometime towards the end of 2015. They are being ready, but then we'll have to lease them up at that point. So, from a financial impact standpoint, when we might actually add them back into our numbers is going to be after we get them leased up, which could be probably sometime in late 2016, I would say, when we would actually begin to add them back to our numbers.

Okay. Great. Thanks a lot.

(inaudible) on those attrition rates, just to give you, it's interesting. Our IL attrition rates in the fourth quarter were 37.6%, down 70 basis points from Q3. In those properties that have IL and AL, the attrition was only 38% and they are down 4.7% from the prior quarter. So, we obviously see that the ability to have multiple levels actually extends length of stay and over -- the entire operation will actually reduce attrition.

Okay, thanks.

Joanna Gajuk, Bank of America Merrill Lynch.

Hi, how are you? Thanks for taking the question here. So, in terms of the cost control, very impressive this quarter, but still I want to ask here your outlook going forward, because there seems to be -- maybe some pressure on labor cost issue due to just, I guess, improving economy and tightening labor force there, but also maybe as you -- you changed your portfolio, to your earlier comment about more sort of AL and that requires higher activity and that's more labor. So how do you view that dynamic and what's your outlook for labor cost expense growth this year or going forward over the long term as well?

Joanna, let me just give you some stats on January and the fourth quarter and then my view and then Carey will have to contribute as well. It's interesting. One of the most important metrics I track every month is our cost per meal of food and labor and I see particularly at the lower level minimum wage, where that is. Cost per meal in January 2015 per labor per meal was $2.64, up $0.01 over $2.63 in January 2014. And you saw in the press release that our labor costs were up 50 basis points, I think, year-over-year. So, I believe that we find that we are not sensing at this point pressure in labor. We happen to operate in states. 73% of our operations are in seven states, Texas, Indiana, Ohio, Nebraska, Missouri, Illinois and South Carolina.

Five of those states have not had any changes in their minimum wage. There is CPI judgments in Ohio and in Missouri. And the [hour rate] that we have at the dietary level, which is mostly students working 20 hours or so a week. So we are not sensing the pressure. Carey can talk more about our outlook for the year, but in our budgeting, we're expecting wage growth to be very consistent what we saw this past year. I will say, I want to give credit to the team and Carey's leadership, with him coming on board in May. And really operations and marketing, very successfully executing on better controls. We did have higher overtime, higher contract labor last year, that has really been reduced significantly.

So I feel very good that the team is executing well. That for regional's' onsite staff, we had new systems in place that are better assessing on a timely basis the overtime and other wage dynamics. So I think overall our systems are working extremely well. We have been proactive in this area and I think that wage costs and labor costs will be very well controlled and I'll let Carey talk more about it.

I agree, Joanna, and Larry said it well. When we look at labor cost going forward, I would expect it to continue to be in the same 2.5% to 3% range of general increase, just for labor, over the next at least 18 months, 18 to 24 months as far as we can see out at this point.

And then, what about the other major cost item, food and utilities? Any color you can --?

We are very lucky. I spoke with Keith Johannessen, our COO, today at lunch about this. We implemented about five years ago, a food purchasing plan with Premier, our group purchasing organization with U.S. Foods. And our raw food cost again is up I think 1%.

1% for the full year.

For the full year and we have contracts for five more years. So, we're not seeing any pressure on food. I can give you the January numbers as well. It's funny how I get a lot of reports every month and the second report I look at is the food report, because it's a very early indicator just to see any changes in our raw food and labor costs. And, again, year-over-year, they are very well controlled. I think the raw food costs were up a couple of pennies per meal this January compared to last January. So, we're not seeing any change and we actually have a lot of contracts on food.

The other strategy that's helping us is the fact that we operate in geographically concentrated regions. So distribution costs are coming down, because we are getting food deliveries in concentrated markets. So that also has added some benefit in our costs, but if you look at our food costs over January, they are up exactly 1%, it was exactly a 1% increase. And I would tell you that, if I look at the full year, there was really no surprises in any month. So it's been very well controlled and very consistent and we expect that to continue, Joanna.

Great. And then on a different topic, thanks for the color in terms of the outlook for the year for occupancy, but I don't think -- did you mention what do you think that the pricing growth would be for the year?

We said that our rates would probably increase around at or near 2.5% on overall basis for next year

All right. Because it sounds like this quarter, definitely things improved there, but I guess it's still sort of much lower than 2%, it was up -- you know same store pricing up 1%. So just want to --

Same store was up 1.9%. Same store revenue --

And sequentially, also Joanna, (inaudible) as we've spoken previously, we had some pressures in occupancy in 2013 and the first part of 2014, where we had a number of quarters where we were dropping rate. So, it's accelerated as we sort of pick up. So, when you look at the comparison, I think the sequential rates are actually going to be more helpful, because of the fact that we did have some drops in the earlier part of this year. So, when you look at last year, rates dropped from the fourth quarter into first quarter. So, they are recovering, but I think we've talked about that we had about, I think it was about 170 basis points -- 180 basis points over last three quarters. So we are trending pretty close we think to that target.

Daniel Bernstein, Stifel.

So, when I think about your acquisition pipeline, looking at your geography concentrated in Texas, when you are looking at acquisitions, are you thinking about -- how are you thinking about diversifying into other geographies? Do you any set goals, do you want to bring Texas NOI down to 10% or 15% in new geographies to reduce geography risk or is there some other strategy in terms of the acquisitions?

Well, actually, Dan, I don't think we have bought a property in Texas since 2011. I think the last portfolio was the (inaudible) six properties in Texas. Our acquisitions have really been in other parts of the country. We just closed on a property this quarter in Wisconsin. I'm pleased to say that we bought a property that opened in April of 2014. It's 100% occupied with a waitlist and we're receiving over 16% return on the investment with the financing in that place.

We have bought and now we continue to grow Wisconsin. We have bought last year in Green Bay. We bought outside of Kohler, Wisconsin. We bought in Georgia, Canton. We bought in really Ohio, Indiana. We really have not grown much in Texas. So, we took on this signature portfolio in the third quarter of 2010. Those were 12 Texas properties. We had a six property acquisition in Texas. And we may selectively have one here, there, because they still are a very good market, but actually we had been really diversifying quite well, both geographically in regions and within the regions with the number of new states. Grew in Massachusetts, we've grown in South Carolina, Georgia, I have mentioned Wisconsin. So most of the growth over the last couple of years has actually been out of Texas.

Okay. And then in terms of acquisition size, you really haven't done a large portfolio like $200 million or $300 million. Are you looking at those, are you comfortable doing those or would you rather stick to these -- stick to the more smaller one-off acquisitions, where you get a better yield and you don't have to issue any capital? Just trying to think, again strategically, what you are comfortable doing in the pipeline.

We are focusing on the smaller transactions. I will say that the size of the individual acquisitions, we mentioned a $30 million acquisition, that's larger than typical. Our typical acquisition has been about say [$15 million]. We are looking at things even larger than $30 million single assets. I got to tell you, I have never been more proud and more pleased with the quality of the acquisitions that we are seeing.

Sellers are coming to us. Almost all relationships are repeats. Right now, the Wisconsin property is relationship oriented with those other properties. Property we're closing this quarter is with the seller that we have a great relationship with that we have done other transactions. We're now looking at a larger transaction from a seller that we have bought a property from in 2011. We also bought a property from an affiliate last year. They have come to only us.

So, as long as we are -- and I've never seen better interest rates. It's amazing to see how desirous our friendly lenders are. I mean we have wonderful relationships with Fannie Mae. The life companies now have gotten into the mix. We've been involved with Freddie over the years. And [Arcadia, Wells and KeyBank], all of the lenders that we deal with. As I mentioned earlier, it's unusual, when rates come down usually spreads widen. We are now seeing for the first time in my career that spreads have narrowed as rates have come down. And when you look at our 3.55% 10-year fixed-rate, the 3.85% that we just completed, it's terrific.

So, last year, we bought eight properties for $160 million. We paid $195,000 a unit and we generate on first year cash flow about 16.5% return and about first-year EBITDAR of $15 million. When I look at the cap rates in this industry and we won't talk about cap rates for obvious reasons, but I will tell you that we feel that there is value that we have I never appreciated the quality of our management, the repetition and the ease and efficiency of transactions of being the buyer versus having to deal with the joint venture partner or a REIT.

A lot of these sellers find that the transactions with their idea or REIT structures are just too complex. They have to have an OTA for the [chunk] of the operations. They have a real estate agreement. They are negotiating with multiple lawyers. It's very costly. We are dealing with less sophisticated, smaller, operators that are very passionate about the business. And it's very easy for them to come to us as well as the fact that the cost of our relationship with lenders, we have sellers coming to us knowing that we will be approved if we assume their debt.

The other thing I'll touch upon is the debt that we are borrowing at, which we've reduced down to a 4.6% rate, is assumable. And the maturities now go out mostly after 2021. So, when I think about the real estate value we are creating for our shareholders and we look at this quite a bit with our Board, we'll also think that there is tremendous value longer-term, because those interest rates which are fixed, if we ever sell those assets, we'll go with those assets. So, we are very comfortable with our strategy. We have plenty of opportunity to make meaningful gains.

Last year, we increased $0.23 a share. 2013 first year cash flow was $0.20, 2012 was $0.34. So if we can continue that type of pace of growth and to continue our focus. The other thing, Dan, we are not distracted. We sell off properties that are challenged. We are getting a much more homogenous portfolio. We are streamlining the operations geographically and we are seeing results.

So, I think that if we continue with that strategy, we won't have the confusion and complexities that other companies have that have taken on larger transactions. We can focus on our competitive strengths and our resources and let our people execute very well to create significant value to our shareholders.

Thanks, Larry. And Larry and just one more quick question on the operations side. How do you compare this flu season in terms of move-outs you've seen to the 2013 season? Is it as tough as that season you think or is it a little too early to tell, we won't know for another month or two where the virulence of the flu is actually going to impact move-outs more than normal?

We have had move outs, I mentioned that, but I would tell you, it's lower. The biggest change, Dan, 2013, we quarantined dozens and dozens of buildings, because the flu was so widespread within the building. I have only heard of one building out of 117 that had no quarantine. So, we're not seeing it and the traffic has been terrific. I mean so that's really telling when we see the large increase in move-ins and deposits despite the flu season. It did start earlier in Texas. So that's pretty much subsided.

And again, it's truly the call, I mean it's still continuing, we will keep our fingers crossed, but the good news is, we lost 115 net residents in the first quarter of 2013. We are now projecting to be flat if not slightly up for the quarter. That makes a big difference. And hopefully we have the momentum and encouraging demand for the balance of the year.

(Operator Instructions) Ryan Halsted, Wells Fargo.

So, I wanted to, I guess, go back to the rate question. You mentioned that you have a number of communities where you are looking at rent increases when occupancy gets to some point versus others where you are looking at rent decreases. How are you thinking about this coming year in that sort of balance? You think there is more opportunity where you might be able to push rate, where there's that kind of opportunity?

We implemented a 3% rate increase in our street rents in January in most of our buildings. We've spoken previously how we categorize our buildings by occupancy in green zone, red zone and yellow zone. And I'd say that probably 65% to 70% of our buildings are in that green zone, average about 95%. What we're doing on the red zone, which are the ones that have that below 85% occupancy and that's where you start to see some specials and discounts, but we typically do it for a very short window. For example, if we see in a month that we need to create some more demand in those units, we'll have a special on a reduction in rate for the first three months, but they have to move in within a couple of weeks. And then it's removed. So it's a very short-term phenomenon.

But what we're finding is that in those markets, where we feel that we have to do some discounting to increase rate, we question, is there a fundamental issue, is it the staff, is it the physical plan, is it level of care? If it's any of those, we've take action to make changes, converting units make a huge difference. Look at the numbers I gave earlier on the fourth quarter. I mean the 52% occupied building was a building we acquired that was not appropriately licensed. And we actually evicted residents, because -- we moved residents out, because we thought that we needed to get the license to care for them and are obviously making strides.

You see that we had a property in July that was 70%, it's now 91%. So the conversions make a lot of difference. And then if we feel that it doesn't improve our situation by allocating resources to the asset, we are selling them. We mentioned the four properties that we sold earlier this year. It's interesting when you look at their performance compared to our portfolio. Their average occupancies were about 550 basis points below our average. Their margins were considerably below our margin. In fact, if you look at those four buildings, in the fourth quarter, their average occupancy was 550 basis points below our average. Their average rate was 44% lower than our average and their operating margin was 10.5 percentage points below our average.

So, where we -- we feel that there is a very good time to be selling assets in this market and to the extent that asset is not strategic because of geography or the market, we will be more proactive in making sales and then using that cash to reinvest in higher-performing accretive acquisitions. So, as I said, we have a game plan, the strategy for every asset in the portfolio. We as a management team review it every month. We met this week on Monday. It was a little cold and icy in Dallas. So, we did it by phone, but we have a meeting, we talk about these issues and I'm pleased to see in our fourth quarter and expect to continue to see very solid results from implementation of those strategies.

Very helpful. I guess for the bulk of your communities, I mean it seems like you are increasing your expectations for the rate outlook in 2015. So, I mean you do feel pretty strongly about the rate opportunity that you are looking at sort of for the all the communities outside of the conversions as well as those that you have rationalized.

Exactly. As I said, we implemented 3% rate increases. The other thing I talk about is level of care charges. We implemented software technology couple years ago that better allow us to assess care for the residents and then make sure that we are billing appropriately. In August, as part of the strategies I talked to earlier, we increased level of care charges. We did it again in January. We saw those revenues increase by over $2 million in the fourth quarter from the August implementation.

So, in addition to the rate growth, we are, I think, doing a better job and our on-site staff is doing a better job, really implementing the use of our technology to make sure that we are properly billing for the care levels and we are increasing -- we have increased the fee levels across the board. That also should be a driver of some revenue growth.

All right, great. So you spoke in the past about the unit conversions, adding additional services as ways also to drive -- I assume that's sort of different from what you are just describing. I just want to clarify, those additional services, are they reimbursed under a state waiver program?

No. These are all private-pay. There is no waiver program. The services I'm talking about, it's interesting. Three years ago, we began to rent offices in our building or [felony] buildings to third-party home healthcare companies. And we have a wide array of services that third parties are available, whether it'd be medical, services, dietary, home health, we have therapy rehab, different programs in the communities. As we got licenses in these buildings that have independent assisted living, a lot of the independent residents asked if we could provide those services rather than taking them from the home healthcare companies.

So, we are probably receiving on average about [$250] a month incremental revenue from that resident to do lower level care, maybe doing some reminders on medication to maybe helping with bathing, but they are not at the level of limitations of ADLs, where they require assisted living. It's kind of an intermediate level between the independent and assisted and we are seeing more and more of our residents ask for those services and we are able to charge for that. That's different than the care plan, which is specifically dedicated to our assisted living. Another new stack for our Company is we now have 52% majority AL and 48% majority IL.

The first time in the Company's history that the majority of our units are assisted living. And there is, where we are getting level of care charges in addition to the base rate for the services that we provide, our residents where we have the assisted living license.

Got it. And the lastly, on the conversions, just sort of the outlook for the contributions, just wanted to maybe clear or better understand, I mean the range that you gave, is that assuming much, if any contribution from the additional conversions that are still unlicensed?

You mean the ones that have only started being licensed in 2015?

Right.

The impact from those will mostly come in 2016, because it takes six to 12 months to lease them up and that's when you really begin to see contributions. So most of the contributions for things we are doing now, like right now on the first and second quarters 2015, we'll see that impact in 2016. The 2015 impact we'll see will be primarily from those we have already done to this point. As the year goes on and they lease out, so we will have more impact from those towards the end of 2015.

Okay. And you bought out provisional licenses, are any of the remaining [three-star 160] nearing getting a provisional license?

At this point, I don't think so, because I think those were properties where we convert the entire building. It's state by state, it's differs. So, I don't believe that this point, the additional conversions have provisions license. They are just getting permanent licensing. We are working right now for example, where we had to put a sprinkler system into a building. That would be completed in February and we are hopeful -- it's out of our control but that should be licensed by late in April, maybe a little earlier. It depends how quickly we can get the fire marshals into the building and make sure that the new sprinkler is compliant with code.

But the other licenses that we are doing for the balance for the remaining [2 to 360], I don't believe there are provisional licenses. Those were somewhat unique, those cases, where we decided to license the entire building and got a provisional license. It was part of the process before you get the permanent license.

Dana Hambly, Stephens. Dana, your line is open. Todd Cohen, Mtc Advisers.

Larry and Carey, the G&A number looked really good. I was curious, I don't have the models in front of me, but I was curious as to how that compared to the third quarter? And are you going to be able to kind of maintain these types of levels?

Yes, they were lower than the third quarter by about $300,000 or $400,000 and we feel really good about our run rate on G&A. We look at that as a percentage of revenues under management and certainly there will be some things that we will need to do in 2015 to grow G&A a bit to accommodate the growth we've experienced. Now, when you have the growth, you sometimes need additional management and accounts and that kind of thing to accommodate the growth. So, we'll have some growth in that, but as a percentage of revenues, it should continue to be very well in line and we do feel really good about G&A and how we are controlling that. We are being proactive in controlling that expense just like we are of all our other expenses in the Company.

Yes. This year, we had selected new hires. We hired (inaudible) on quality assurance that began in December. As Carey mentioned, every 10 or so -- [each 10] buildings, we need more accounting staff, maybe some more regional staff. But one of the questions about Dan Bernstein part of our strategy in these acquisitions is to be in the geographies where we already operate, so we can level off the infrastructure and make sure we are efficiently using our regional infrastructure of operations and marketing. And that's worked very well, but there is nothing that I can think of that will stand up for making changes this year. As Carey said, there are some new hires across the Company, but it's fairly minor. And again, as the revenue increase, that should continue to help make that percentage look very much better, because you're just dealing with a higher denominator on the revenue base.

And then, did we get a little bit of help on the medical side, on the medical loss side? Was that a bit more controlled in the fourth quarter than it was a year ago?

Yes, I odd to tell you, Todd, we took a proactive approach to healthcare. We self-insure. We implemented new plans and new programs in June of 2014. We introduced two new lines of insurance for our staff. Obviously, under the ACA, we have more employees throughout the country, partaking in coverage. We reallocated the sharing of contributions through payroll withholding on different plans and knock wood, it's really worked extremely well. Our actual healthcare costs have gone down. Our reserves have gone up. And even January, we just got very, very favorable numbers to report in January. I think we are running $200,000, $300,000 below kind of what we used to run normally.

And this is not something -- again, this is now the seventh month of the new program. So, month-to-month, something could be there. We do have [cash drop insurance] for claims in excess of $175,000. So I think that the structure that we spent a lot of time on with our consultants and the new plan has been well-received by our employees and has really brought down our healthcare cost and gives as much better control than we had previously.

Dana Hambly, Stephens.

Sorry, phone confused me. Could you -- Larry, just on the transactions you announced January 29, I'm just trying to get a sense of what your pro forma cash balance is now for everything that you have done?

Yes, I believe we can tell you right now. We have it. I can tell you right now.

Our unrestricted cash is about $50 million and including the restricted cash, it's a little over $60 million right now from a cash standpoint. So, we are in very good position.

I think that's up from maybe $28 million in third quarter. I mean what's really -- I am very pleased with, Dana, is that, and I think Carey covered in his remarks, with all the acquisitions we're making, with all the CapEx we're making, operating cash flow is covering that. And then, these transactions, the refinance, the sales is in addition to that. So, right now, we have unrestricted cash of $50 million, total cash is probably about $62 million. We're looking at ways of maybe freeing up some of the restricted cash as well, but last quarter, cash flow I think was $12 million. So, we are running now at a higher rate on generation of cash as well. So, we feel comfortable that we have the cash to fuel growth and can continue to fund this growth from internal sources.

Okay. Yes, that leads to the next question. I know you don't guide anymore, but you had in the past talked about an annual spend of about $150 million for acquisitions. You are a bigger company now and you have plenty of cash to do more than that. I just wonder should we be expecting a record year or is there something operationally that just prohibits you from just bringing on too many buildings in one particular year or it's the pipeline not supported? Just trying to get a sense there.

There is nothing operationally to limit our growth as far as acquisitions. It's really our strategy and discipline. I am very pleased every quarter that we are reporting results that beat our estimates. So, we really buy high-quality. I'd say the properties we acquired in the last year are nearing 100% occupancy with very strong margins. So, they've been great. We are off to a great start this year. We have never had a first quarter like we have now, which is about, [$57 million and $15 million that's $62 million right now -- $72 million]. So, we already have kind of $70 million circled. We have a much bigger pipeline behind that. So, I feel very comfortable that we have a very good year on acquisitions.

We are just a little cautious in giving guidance, because we want to keep our alignment of interest where we buy for the right reason, which is what's right for our shareholders, right for our Company is that really -- of course, cash is very precious to us. So we want to spend it wisely. And I don't want to be in a situation where we give guidance and we are rushing to do deals, because we don't want to disappoint.

So, I feel very good about our cash position. I feel better about our pipeline, quite frankly, both on the quality and how robust it is. So, I mean I think we can put cash to work pretty well. And don't forget, we're doing some expansion of buildings, we're doing conversions, we're putting money back into our assets as well, because we also think a very strong driver of our growth is the renovations and refurbishments of our buildings. We have a very high return on that investment to complement the acquisitions.

So, we will be able to use that cash, I think, prudently. I think it will add a lot of shareholder value as well as real estate value and cash flow.

Okay. That's helpful. And then, just on that last point, Larry, for CapEx, one could -- can you just remind me what we should be using for routine on a per unit basis and are there some big projects this year on top of that?

Yes. Dan, this is Carey. From a CapEx standpoint, I'd expect a recurring CapEx, that maintenance CapEx have continued to be in that same range, it was about $400 per unit this year. And it'd be in that $400 to maybe $500 at the max kid of per unit this year, with total capital expenditures, which include those in the same kind of range we had this year. They were $18.7 million this year, probably $16 million to $18 million in 2015.

One thing I'll point out, which is interesting on acquisitions, the fact is that in the last three years, we made these acquisitions of 44 properties. That's about, I guess, a third of our portfolio. Most of these buildings are five years or newer. So, they really don't require (inaudible) they were all refurbished. I mean, Dana, we buy building and the immediate repairs is striping a couple of parking spots, $3,000 or $5,000, that's it. And we are selling some of the properties that we don't have to renovate or refurbish. So, we are being judicious in how we allocate our capital to our portfolio. So, if we are going to spend money on the assets because we have the conviction that we can get an above-average return quite frankly, give you better returns than the acquisitions. If not, we will dispose off the asset.

But what's interesting is that 44 of our buildings and the 12 signature buildings, that's 56, half of our portfolio is probably five to seven years old. I think we probably have the newest portfolio of any of the companies. I think that's something that no one is really focuses on, but we don't have bankrupt acquisitions. We don't have older properties in despair. We have nothing in distress. I mean I invite everyone on this call at your leisure to have lunch with any community any day you want. It's our Capital hosted and I am sure that you will be very pleased with the setting, the food and the staff. And if not, please let me know, but I really do feel very -- it's really interesting that so much of our portfolio really is young. I mean we have really changed this Company in the last four or five years in every way. And probably the most -- one of growth telling features in why we are outperforming our peers is we are buying newer better-quality portfolios that really continue to outperform.

I like the enthusiasm, Larry.

Thanks, Dana.

Just a couple of more, Carey. Just talking about the first quarter this year versus last year. I want to say last year, there were $0.06 or $0.07 from the weather, but there were some other things in there as well, referral fees and stuff like that. How much was the weather, the bulk of that $0.07, $0.08 or whatever it was?

Right. So, it was $0.07 that we actually pointed out last year and about $0.04 of it was related to higher-than-usual weather-related cost. The remaining $0.03 for real estate tax and referral fees were really about comparisons to the previous year, the first-quarter 2013, because there was an unusual property tax credit that was in the first-quarter 2013, which wasn't in the first-quarter 2014. And then referral fees were higher in the first-quarter 2014 than 2013. As our leads from Internet sources like a Place for Mom have increased. And so, really it's the $0.04 related to higher-than-usual weather-related costs that we'd expect to get back, if you will, on the first-quarter 2015 versus the first-quarter 2014.

All right. Very helpful. And then in this quarter, the fourth quarter, there was $0.04 that was unusual or what did you call out there?

Well, that was from the prepaid resident rent. That's that ongoing -- as it relates to prepaid resident, it's just how many people come in and give us a check at the end of the year. With the holidays, sometimes people will come in and give us a check before they leave, because they are with their families and so they want to make sure that we have their payment for the next month prior to the end of the year. So we had an increase in that. You never know at the end of any quarter whether that's going to be a positive or a negative for you. This quarter was a positive for us. So, we don't -- in our forecasting, we don't project those to be either positive or negative. We just assume they are going to kind of a zero basis for those, but it was positive this quarter and we will take it. I mean it's real fast.

Tyler Pearson, Stephens.

You guys answered my questions. Thank you very much.

Joanna Gajuk, Bank of America Merrill Lynch.

The question that I had was asked, but I want to follow up on the G&A ratio, because clearly, this was the lowest ever if you exclude transaction expense, transaction cost, it was below 4%. So, are you saying that you feel comfortable about this level going forward or you are saying there could be some pickup, but, I guess, if we are talking about as a percentage of revenues, that's how we should be thinking about it?

Well, as a percentage of revenue excluding the transaction cost, it was the 4.1%. And really, one of the main reasons it was down this quarter was because of the better health plans experienced that we had. And so those can go from quarter-to-quarter, you don't know what's expected. We have had very good experiences we spoke about. And so I would expect that good experience to continue and with the increase in revenues we have, I don't think that our corporate costs will increase as much as our revenues will. If that makes sense to you. So I think that we'll stay in a very good position from a percentage of revenues standpoint.

Great, thanks. And just lastly, with all this refinancing activities and all that, do you have a run rate, sort of interest expense number to think about probably?

Well, it will be similar to what we had in the fourth quarter, because we had some that came out, because of the dispositions, but then we added some in because of new acquisitions. So I think it'd be still somewhat similar to the fourth quarter.

And 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.

Well, again, we are very pleased with the fourth quarter. I apologize for enthusiasm, but I think if it was a quarter to be enthusiastic, this is it. I think it does demonstrate that we have really turned the curve and seen some very positive results from a lot of the hard work and I want to thank all of our team members for a very, very job well done. And we are very excited about the outlook for the balance of the year and I look forward to seeing many of you over the next few months. If any follow-up, always feel free to give Carey or myself a call. And we wish you a good evening. Thank you very much.

Thank you.

This does conclude today's conference. Thank you for your participation.