Sonida Senior Living Inc (SNDA) 2015 Q1 法說會逐字稿

Good day and welcome to the Capital Senior Living first quarter 2015 earnings release conference call. Today's call is being recorded. The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitation to, the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns, and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles, and interpretations among others as well as 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 conference over to Mr. Larry Cohen. Please go ahead, sir.

Thank you. Good afternoon and welcome to Capital Senior Living's first quarter 2015 earnings release conference call. We are pleased to report significant growth in revenue, adjusted EBITDAR, and adjusted CFFO in the first quarter of 2015 as compared to the prior year. March was the strongest month in the quarter providing momentum for the second quarter and the remainder of 2015. Despite a harsh winter and strong flu season, which resulted in high attrition levels and affected our same community occupancy and revenue, we were able to achieve a 60 basis point positive spread between same community revenue and expense growth and achieved a first quarter record high adjusted EBITDAR margin of 36.2%.

Move-ins were up 15% and deposits were up 16% in the first quarter over the prior year due to the marketing initiatives we have implemented over the last year, which allowed us to offset most of the attrition by the end of the first quarter. We achieved a net increase of 89 residents in the month of March alone. In the first quarter, we completed the acquisition of two senior living communities for a combined purchase price of $47.9 million. These communities are expected to add first year EBITDAR of $3.9 million and incremental annual CFFO of $0.06 per share. Subject to completion of customary closing conditions, acquisitions totaling approximately $27 million are expected to close by the end of May. We are conducting due diligence on additional acquisitions of high-quality senior living communities in states with extensive operations.

Our first quarter results reflect the successful implementation of various initiatives during the second half of 2014 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 renovating and refurbishing communities and converting units to higher levels of care to gain occupancy, reduce attrition, and increase rates. We also continue to implement numerous sales and marketing initiatives 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 wraps and new property signage.

Despite high attrition during the quarter due to the harsh winter weather and the strong flu season, strong demand kept us from suffering the severe impact that the flu had had in the first quarter of 2013. Demand as measured by first quarter same-store move-ins increased 25% at our independent living units and increased 3.5% at our assisted living units as compared to the first quarter of 2014. This resilient demand is encouraging and we look forward to building occupancy over the remainder 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 continuing care retirement communities. We also completed the sale of four non-core communities in January.

These actions have enhanced our operating metrics and allow us to redeploy approximately $18 million of proceeds to accretively acquire newer and better performing communities in stronger markets within our geographically concentrated regions. Eliminating these operations also helped sharpen our focus on our core strengths as we continue to successfully execute on our strategic plan. We are making steady progress on the work to convert independent living units to assisted living and memory care. The lease-up of our converted units has been strong and their financial results are excellent. And as you will hear from Carey shortly, our pipeline for additional conversions continues to grow. We also are planning expansions of two high quality performing communities to add memory care and assisted living units, which are expected to be completed in the first half of 2016.

As we have discussed on previous calls and confirmed by recent equity research reports, new construction remains needed in most of our markets confirming that our value strategy acts as an economic barrier to entry for new development with replacement costs averaging in excess of $200,000 per unit. Our average monthly rents of $3,294 would have to be about 50% higher in most of our markets to produce 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 solid industry fundamentals, an improving economy in the housing market, limited new supply in our markets, ongoing renovations and refurbishments at our communities, and strong demand; 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 owned real estate value and stock price.

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. Our disciplined and strategic acquisition program, which began in 2011, has been funded from internally generated cash. In the past four years, we have acquired 45 communities for a combined purchase price of approximately $625 million. These acquisitions have generated greater than a 16% cash-on-cash return with first year EBITDAR of more than $59 million and first year CFFO of $0.96 per share. Our success in acquiring quality communities in off market non-broker transactions validates our competitive advantage as a highly respected incredible 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 newer high quality senior living communities in geographically concentrated regions and generates meaningful increases in CFFO and shareholder value. 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 56.5%, 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 22.5% compounded annual growth rate, and our first quarter 2015 EBITDAR margin has increased by 630 basis points. We have also made significant improvements to our balance sheet.

We have increased our cash balance, extended loan maturities, reduced our fixed interest rates, and improved our financial ratios. Over the past four years, the weighted average interest rate on our mortgage debt has decreased 137 basis points to a current average rate of 4.63% and the average maturity of our mortgage debt is now eight years with approximately 92% of our loans maturing in 2021 and thereafter. And as evidenced by the historically low interest rates on our recent financings, we are benefiting from increased competition amongst lenders including Fannie Mae, Freddie Mac, and life insurance companies. Our operating strategy is to provide value to our 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 management, 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 and community renovations and refurbishments. We are well positioned to continue to make significant gains with 96% of our revenues derived from private-pay sources in an industry that benefits from need-driven demand, limited new supply, as well as an improving economy and housing market. We believe that continuing the successful execution of this plan will materially increase our cash flow, our owned real estate value, and most importantly shareholder value.

I would now like to introduce Carey Hendrickson, our Chief Financial Officer, to review the Company's financial results for the first quarter of 2015. Carey?

Thank you, Larry, and good afternoon, everyone. Hopefully 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 signup on our website to receive future press releases by email if you'd like to do so. The Company reported total consolidated revenue of $98.6 million for the first quarter of 2015. This was an increase of $6.8 million or 7.4% over the first quarter of 2014 with resident and healthcare revenue up $8.5 million or 9.4%. The increase in revenue is largely due to acquisitions the Company has made during or after the first quarter of 2014. Since that time, we've acquired 10 communities including two communities that we purchased during the first quarter of 2015. Our operating expenses increased $4.4 million in the first quarter 2015 to $60.1 million due to the acquisitions.

Our general and administrative expenses for the first quarter of 2015 were about $100,000 lower than the first quarter of 2014 after excluding the transaction and other one-time costs from both years. Excluding $500,000 of transaction and other one-time cost, our G&A expenses as a percentage of revenue under management were 4.6% in the first quarter of 2015, which is 30 basis points lower than the comparable measure for the first quarter of 2014. As we noted in the press release, the Company's non-GAAP and statistical measures exclude the four communities that are undergoing repositioning, lease-up of higher licensed units, or significant renovation and conversion. Adjusted EBITDAR was $34.1 million in the first quarter of 2015, an increase of $3.2 million or 10.2% from the first quarter 2014.

This does not include EBITDAR of another $0.5 million related to the four communities that are undergoing repositioning, lease-up, or significant renovation and conversion. The Company's adjusted EBITDAR margin, as Larry noted, was 36.2% in the first quarter of 2015, which again is a record high first quarter margin for the Company and it's 150 basis points higher than the first quarter of 2014. Our adjusted CFFO was $10.5 million in the first quarter or $0.37 per share compared to $0.29 on a comparable basis in the first quarter of 2014, which was in line with the guidance markers that we provided for the first quarter. As we noted in the press release, beginning in the first quarter of 2015, we're no longer including the change in prepaid resident rent in the calculation of CFFO. That item is simply a timing item and is noneconomic.

The contribution to CFFO from communities that we acquired during or since the first quarter of last year was $0.08, which is $0.02 greater than our expectations and public announcements related to these communities. Our same community revenue increased $1.2 million or 1.4% over the first quarter of the prior year. With same community expenses just $0.4 million or 0.8% higher than the first quarter of the prior year, we achieved a positive spread of 60 basis points between revenue and expense growth, which resulted in a 2.0% increase in our net operating income. Looking at the three major expense categories; labor cost including benefits increased only 1.4%, food costs were up only 0.5%, and utilities cost decreased 3.2% versus the first quarter of the prior year.

You'll recall that we noted in the first quarter of last year that we had unusually high utilities and snow removal cost due to the harsh winter in 2014 along with higher real estate taxes and higher referral fees. We were hopeful that we would see significant reductions in those categories, primarily utilities and snow removal cost, in the first quarter of this year. Unfortunately the nation experienced another harsh winter so we only saw a small decrease in utilities and snow removal. Our real estate taxes were flat with the prior year and our referral fees were a bit higher, which is positive because it means we are filling units. Same community occupancy was down 30 basis points versus the first quarter of last year due to the high attrition that Larry noted. Our average monthly rent was 1.8% versus the first quarter of 2014.

For our consolidated communities, our average monthly rent was up 5.3% and our consolidated occupancy increased 20 basis points. The improvement in our consolidated metrics versus the first quarter of last year reflects our sale of the four underperforming communities and our acquisitions of high occupancy communities at higher rents. We're making steady progress on the conversion of independent living units to higher levels of care. As we are now close to the finish line on the estimated 360 units that we've been working to convert by the middle of this year, we have a much clearer picture of the impact of the conversions. By the end of the second quarter, the licenses on more than 400 units will have been upgraded. Approximately 225 of those units were vacant and available for lease-up at the time of conversion.

The remaining units will have an incremental financial impact as current residents are replaced with new residents at higher levels of care. The financial impact remains at approximately $0.20 per share of CFFO for a full year when the units lease-up and reach stabilization. We continue to expect the conversions to have an impact of around $0.05 per share on CFFO in 2015 with greater impact in 2016 and a full impact in 2017 and beyond. The impact of the conversions on the communities is outstanding and clear to see. By illustration here's what's happened at the first four communities to undergo conversion, which were converted by the end of the third quarter of 2014. Occupancy at one community has increased from 69% prior to conversion to 93.1% at March 31 of 2015. Another has increased from 84.5% to 95.7%.

At another community when we acquired it, it did not have the proper license for AL so we had to move residents out and the occupancy dropped to the mid 50%s. Now approximately six months after conversion, it's at 80% occupancy. And at the fourth community with the prospect of expanded AL and memory care coming to the community, the community filled to 95% occupancy before the conversion was even complete. That community is currently at 96% occupancy and the number of IL residents at the community is decreasing and the number of AL residents is increasing. On a combined basis, the revenue at those four communities was approximately 19% higher in the first quarter of 2015 than in the first quarter of the prior year. As we've mentioned previously, we are working on additional conversions beyond this initial group. The remaining conversions will mostly have an incremental financial impact.

We currently expect approximately 90 more incremental conversions to be completed in the second half of this year with another approximately 200 incremental conversions in 2016 with the majority of those expected to be completed in the second half of 2016. And additional conversions at another half dozen or so properties are under consideration currently. Looking briefly at the balance sheet. We ended the quarter with $63.3 million of cash and cash equivalents including restricted cash, an increase of $11.9 million from December 31, 2014. We generated cash flow from operations during the quarter of $12.8 million and we received net proceeds from asset sales and debt refinances of $20.2 million. We invested $12.4 million of cash as equity to complete the acquisitions of the two communities that we acquired in the first quarter and spent $5.5 million on capital improvements.

Our mortgage debt balance at March 31, 2015 was $661.9 million at a weighted average interest rate of approximately 4.6%. We added $35.5 million of debt in the first quarter related to the communities we acquired at an average rate of 3.87% and had decreases in debt related to the sale of four properties and refinances of approximately $16.1 million. At March 31, all of our debt was at fixed interest rates except for two bridge loans that totaled $20.3 million, which were at variable rates averaging approximately 4.3%. In looking at the second quarter, the strong finish to the first quarter provides us momentum for both the second quarter and the remainder of the year. On a sequential basis, we expect our second quarter CFFO to gain about $0.01 due to revenue increases aided by the significant net increase in occupancy in March.

We also expect our utilities cost to decrease approximately $750,000 versus the first quarter. However, we will have one extra day of expense in the second quarter versus the first quarter, which typically equates to approximately $500,000. And we expect the acquisitions that we closed in the first quarter and the pending acquisitions that we expect to close by the end of May to add another approximately $0.02 to our second quarter CFFO versus the first quarter. We continue to be very optimistic about our prospects for 2015. We expect our core operations to continue to improve through the year with nice occupancy increases through the spring and summer months as is typically the case and a continued focus on expense controls.

The conversions will further enhance our operations and are expected to add approximately $0.05 to 2015 CFFO with much of that coming in the back half of the year. The acquisition pipeline is robust and the financing environment remains favorable so we expect to continue to add high-quality communities that are a good fit for our portfolio during the remainder of the year which will add to our 2015 CFFO. Taken all together as we execute on our strategic plan in 2015, we expect solid growth in our operating and financial results which we expect to translate into excellent growth and shareholder value.

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

Thank you. (Operator Instructions) Joanna Gajuk, Bank of America Merrill Lynch.

First one on the occupancy, I didn't hear you providing or commenting on same-store occupancy's sequential change. Would you be willing to talk about that because we have the industry data that showed 20 bps decline sequentially so I'm just trying to see what was it for the Company?

Sequentially on a same community basis, our occupancy was 40 basis points higher than the fourth quarter.

Okay. So, you're saying that the weather and flu was pretty much offset by the strong demand. So can you talk about this demand, whether there is any particular regions? I guess you mentioned products that there was a great deal of more demand for the independent living versus assisted living. So, is there any geographic variation in those trends or not really?

Joanna, it's really interesting. Let me give you some specifics between independent and assisted living on a same-store basis for the first quarter, I think it's very telling both to the occupancy and the attrition. Our first quarter same-store independent living occupancy, we had 143 more move-ins overall; of which 127 were gains in independent living, 16 gains in assisted living on a same-store basis, and then move-outs we had 120 more move-outs in IL from attrition and 35 more move-outs in AL again versus first quarter. So, we did see more gains in independent living.

We also saw some trends that Carey mentioned on the buildings that are being converted that actually improved independent living occupancy as families were comforted by the fact that there'd be more levels available if their parents were to age so they could age in place. Geographically I would say that it was fairly consistent, no area of the country stands out particularly. We did have some strength in some of the Texas markets. We saw some strength actually on the Midwest again. So, I think what we're seeing is that if we look at our core markets, they have been fairly consistent to where we're seeing the gains, I'd say that the Southeast was actually very strong this quarter quarter-over-quarter as well as looking at some of the Texas and Midwest markets.

And Joanna, I have to correct myself. I was looking at rate earlier and actually the occupancy quarter-over-quarter was down about 80 basis points to 90 basis points.

Okay. So it was actually down more than the industry because when I was looking at the Q4 data you provide on same-store basis and that's not comparable, right, because the count of facilities changes so that's helpful. So, you said 80 to 90 basis points sequentially?

What we saw, Joanna, was a peak in move-outs in January. We saw a pickup in December, a peak in January, we think that tracks with flu particularly in our geographies; and then saw a drop off in the attrition in February, a further drop off in March. And obviously we saw a continued demand and the reason we saw such a strong March with 89 move-ins was really more reflective of the slower attrition in the back part of the quarter versus December and January on the move-outs.

Great, thanks. I'll go back to the queue.

Daniel Bernstein, Stifel.

Are there any start-up losses in the first quarter or should we expect start-up losses in the second quarter for the conversions to higher acuity?

I don't think so, Dan. That really has not been a problem. The staffing obviously starts before we open the buildings as we go through the licensure process and that's already in there in our numbers. But no, there really aren't any start-up costs I can think of on these conversions and again the speed at which they have filled has actually exceeded our expectations so we are very pleased with that.

Okay. And then I just want to get back to the occupancy just a little bit, was 80 basis points, 90 basis points lower; was that same-store or was that overall and if you could just give the overall quarter-to-quarter as well?

That was same-store, Dan, and overall --.

Comes all the way down to 50 basis points, Dan.

Okay. And again the flu typically I think impacts AL worse, it didn't seem like AL was impacted a little bit worse for you than IL?

For the attrition, it's interesting. IL attrition in the first quarter was pretty comparable to what we saw in the flu in 2013, down slightly from the fourth quarter. We did see a pick up in the AL attrition and AL memory care both over fourth quarter as well as a little higher than we saw in the first quarter of 2013. But that's to where we saw. I think what's happening is that the frailty of the AL resident caused more move-outs in AL than IL and we see that in the numbers on the attrition rate.

Should we generally be thinking about higher seasonality in the portfolio given the amount of assisted living you now have, just model that harsher? If you look in NIC MAP data, assisted living is down 60 bps sequentially so is that the kind of just a more significant occupancy drop in the portfolio in 1Q than historical and then ramping up a little bit harder than historical as well?

That's consistent. Our assisted living loss of occupancy was higher than independent living. One thing I'll say about going back to 2013, which was a very strong flu season, we actually saw a nice recovery in the second quarter and lower attrition across all levels. I mean in 2013 the AL attrition actually dropped by about 66 percentage points, which is pretty good; AL was down about 4 percentage points and we're seeing good trends this quarter as well so hopefully we'll see that coming to fruition. But I do think that the change in our portfolio, which is now majority assisted living, and having multiple levels of care typically will have a higher acuity resident and for seasonality is probably going to have more of an impact than it did when we were predominantly Independent living.

Dan, I was just going to say what we're really pleased about though is that we were able to from a physical occupancy get back to pretty close to where we were at the beginning of the quarter because of the solid increase that we had in March.

And in fact the net change in occupancy for the full quarter was only 17 residents so when you look at the same-store loss financially for the quarter, I'm very encouraged that we had such a strong end to the quarter and recovered all but 17 of those residents and that should turn positive for the year in April.

So, that will definitely help us as we move into the second quarter.

Okay. Facility lease expense just a little bit higher than what we had expected. Does most of your lease expense bump up the first of the year or is it weighted to any one quarter?

It's ratable through the year, but we increase it and recalculate it consistently. But it's just based on the normal rate increases that are built into the contracts.

Okay. I'll hop out here and may be get back into queue.

(Operator Instructions) Ryan Halsted, Wells Fargo.

I wanted to start with just going back to some of the sequential pickup you're expecting in CFFO if you don't mind, I kind of wrote down some of it. But you were expecting some sequential increase obviously on occupancy as well as a $0.02 CFFO increase from acquisitions so are you expecting $0.03, is that the total or how did you lay that out?

So, we expect to gain about $0.01 from the increases in occupancy that we had related to that increase in March in occupancy. So, that will give us about a $0.01 in the second quarter more than we had in the first quarter. Then we've got some expense things. Utilities will be down $750,000 which will help us, but we will have an extra day of expense of about $500,000 that nets to maybe [$250,000] which is about a $0.01. And then we expect the acquisitions that we closed in the first quarter and the pending acquisitions that we expect to close by the end of May to add about $0.02 to our second quarter CFFO versus the first quarter. So netting all that together, it's about $0.04.

Okay. And then going to I typically think I guess you guys have spoken in the past to like a core NOI growth of 4% to 6% with 2% revenue growth, 1.5% operating expenses, and then an outlook of potentially 100 basis points on occupancy. I mean how do you feel about that outlook for 2015 at this point?

I think for the remainder of the year we feel good about that that we expect our revenue growth to exceed our expense growth in that 50 basis points to 100 basis points kind of spread.

Ryan, the seasonality in our business, we actually had a worse first quarter in last two years so last year the first quarter CFFO was I think just at $0.29 and for the full year were $1.44. So, we had a strong recovery throughout the year with the fourth quarter being our strongest. The same thing occurred actually in 2013. So, there is definitely seasonality which maybe, as Dan said, heightened even more so because of the frailty of our resident base. But clearly as we get into the spring as the weather clears, we think that there's some strong fundamentals as far as housing, the economy, consumer confidence, job growth; which bodes well.

I would tell you that one comment I really want to point out is a lot that was written after the NIC MAP data suggested soft demand, but we're not seeing that. We're seeing very strong demand at just higher attrition and I think when you look at net absorption, people have to look at both the front door and the back door and recognize what's very encouraging I think for the industry is we are seeing the strongest demand we've ever seen out there both in deposit-taking and move-ins. Unfortunately we did have high attrition in the quarter, but that has abated now so I think the outlook for the balance of the year is going to be consistent with what the commentary we gave on the fourth quarter call.

On acquisitions, so I think you mentioned previously that you expect to spend maybe $150 million on acquisitions, you've obviously sort of circled about half of that already. I mean what's the pipeline behind it look like?

The pipeline is outstanding. We have been very disciplined. We're very proud of the quality and the financial performance as Carey mentioned again. This is the third consecutive quarter that Carey has commented that our acquisitions have outperformed the guidance we've given on their outlook for the first year so we think that's very positive. Again we're very comfortable that even though we don't give guidance, we're happy that we basically have $75 million completed with what's closing this month in a couple of weeks in the first five months of the year and the pipeline behind what we have currently is even larger than what we've done so far. So, there are deals that through due diligence we may decide not to move forward on in the future, but I think right now we are extremely pleased with the volume of the business, the quality of the deals, the kind of [appreciation] we have for our off-market transactions continues to really differentiate us. So, I think that the contribution that we have been able to generate from acquisitions we think should continue for the balance of the year.

Then my last question just on a topic that's obviously gotten a lot more attention recently with your largest competitor making some very public comments about some of the increased interest around real estate. I just wanted to get an update from you guys on how you're thinking about your real estate, if it's something that you're starting to evaluate strategically more so now than you have in the past?

We have fairly regularly reviewed both with management and our Board looking at the real estate and looking at long-term value for our shareholders. We have updated ourselves and the Board regularly quarterly on what we see as real estate values. We get input from outside bankers and other consultants so we are pretty much aware of what's going on in the industry around us and other industries. We think that the real estate we have does create a lot of shareholder value. We think right now that our strategy of owning real estate with this pipeline and very attractive financing allows us, which by the way is assumable so if we ever wanted to monetize the real estate it would probably add more value to the real estate, provides the Company with the maximum flexibility and options and we will continue to evaluate strategies and look at the tax implications.

But right now we are not a taxpayer, we have sheltered cash flow for many years through the NOLs that we have. If you look at the growth that I talked about where over the last four years, we have averaged a compounded annual growth rate of 22.5%. I think if we execute on our strategy, we can continue that and if we can double our cash flow in two or three years, we think the stock price will reflect that as well. So, we think we're in a very attractive situation where we control our destiny, we continue to own more real estate and we will continually monitor the situation and evaluate our strategies looking at all the options that will be available to enhance shareholder value.

That's great. Thanks for taking my questions.

Dana Hambly, Stephens.

Just want to clarify, Larry, on the 89 residents that you're up in March that that's relative to your February?

That's actually a net gain for the month of March from March 1 to March, 31. Correct.

Okay. So, end of February to end of March. If I'm just thinking about that as a percent --?

We gained 89 residents in March and from the end of December to the end of March. The 89 units that we gained was for the month of March, end of February to end of March. For the quarter looking at end of December to end of March, we lost 17 residents.

Right, okay. But just thinking about March is the strongest, it sounds like it was up 60 basis points to 80 basis points occupancy over February so that's kind of starting April a good bit higher than we were for the average (multiple speakers).

I think that's, Dana, very important that typically when we end a quarter as strong as we did in March, it typically flows through to a nice gain in the sequential quarter.

And I thought the rate growth was excellent over 5% so is that the effect of acquisitions on a year-over-year basis? Could you just remind us where you are with the vigilant roll out or maybe anything else that would have been contributing to that?

Well, it's also rationalizing the portfolio. As Carey mentioned in his comments, we are selling off some of the lower performing properties improving operating metrics, clearly the acquisitions are very, very strong both as to occupancy and rate, and then the vigilant has been a very effective tool. We've seen nice increases in the revenue that vigilant has generated like each of the last couple of quarters. I'll tell you something else that's really impressive, Carey mentioned it. The revenue on those four buildings that we had those conversions completed increased 19% March over March that's in one year so that is also very, very strong. So I think it's a combination of higher-quality assets, newer properties, higher rate, higher occupancy, recycling capital by selling off some of the weaker performing assets that are non-core, and then our strategy of conversions.

And the last thing I like to talk about is I've been traveling and visiting a lot of our buildings and will continue to do so. We are in the process of refurbishing more than half of our buildings this year and I will tell you that the impact of the refurbishments is just outstanding; to walk into our buildings with new carpets, new lighting, new fixtures. And so that also, I think we didn't even talk about that, is going to be another driver to increase our demand and hopefully our financial performance as those are completed this year, but the response from the market has been outstanding. The staff is thrilled with it and I'll tell you having seen some of them, they really just changed the whole look of the property so we're very excited about that as well.

So, just as I think about the modeling so over 5% obviously a great quarter, but that's not really the long-term outlook so maybe we get that for a few more quarters from you guys. But do you still think about pricing more of around kind of 3% type growth?

Yes. I think 2.5%, 3% is a reasonable growth rate. As Carey mentioned earlier, we look to get a lower growth on expenses and that's that spread that gives a 4% to 6% NOI growth.

And then, Carey, on the labor cost; been managing those really well. I wonder with minimum wages creeping up, what kind of pressure that puts on your labor costs or have there been any benefit changes or reduction in employee turnover that could keep that low for a pretty long time?

Really, Dana, we feel good about where our labor costs are. In the first quarter versus first quarter of last year, our direct labor costs were up only 1.1% when you just look at direct labor itself. So we have not seen a lot of pressure on that and I know Larry has spoken in the past that we've looked at the minimum wage situation in our communities and our states and we really just don't see a lot of pressure there. Larry?

I'll just give you some more color, Dana. I had analysis run about a month ago when we started to see what's happening with minimum wage to look at the mix of our hourly wage employees, less than 5% of our hourly employees are at minimum wage and then the bulk of our hourly staff are considerably higher than minimum wage with another 5% at $25 an hour or higher obviously nurses and others. So I think that when we look at the mix of our labor force and the wages we're paying and the states, as Carey correctly just pointed out the states where we operate; Texas, Ohio, Indiana, South Carolina; those are very large states, you just don't see the same type of prices. So, obviously the numbers don't reflect it and we're not seeing any unusual turnover or other changes out there that would suggest that would that be an issue.

Alright. Thanks very much.

Joanna Gaujk.

Can you just repeat the conversion bed numbers you gave out in terms of how many beds you already converted and then what do you expect on the timing for additional conversions you mentioned?

So by the end of the second quarter, which we're almost there, the licenses on more than 400 units will have been upgraded and about 225 of those were vacant and available for lease-up at the time of conversion and the remainder of those were incremental so 175 incremental where as the current residents are replaced with the new residents at higher rates, then you'll get incremental financial impact there. And then beyond that, we have another 90 or so incremental conversions we would expect in the second half of 2015 and then another approximately 200 incremental conversions in 2016, most of that in the back half of the year, but again those are more incremental. And then we have another half dozen or so that are also under consideration for doing some conversion at those communities. Did that help, Joanna?

Yes. So the nine incremental in second half of this year, that's included in the 360 that you described before?

No, it's not. That's on top of that.

The 360 I think actually equate now to 400 plus units. In addition to that, there is another 90 in the second half of this year and another 200 that we are projecting to be in 2016 and then there are another half dozen buildings that we are now looking at legal review, building code, other considerations to see whether they can be converted as well.

And then just quickly on the new sort of conversion of reporting adjusted CFFO plus you're excluding the change in prepaid resident spend. So what was the number this quarter? I remember last quarter you said it was $0.04 I believe positive in fourth quarter? What would the number be?

It was not included in the first quarter of this year so this change related to resident rent. It would have been a $0.02 decrease. We had a $0.01 decrease in the first quarter of 2014 so pretty similar there first quarter this year versus first quarter of last year.

What we found is that it's really a timing issue of whether rents are paid at the end of the prior month or on the first day of the month. So, what happens is it goes quarter-to-quarter and creates some volatility that we didn't think was helpful so we thought it was a good time to just take it out. Over the course of the year, it's neutral because it will just basically roll quarter-to-quarter so if you're up one quarter, you could be down the next quarter and vice versa. So we thought that it's noneconomic, it doesn't change obviously the recording of revenues, it's just CFFO and thought it's probably better to have transparency without that so that you have less volatility quarter-to-quarter in that CFFO number.

So, you were saying that $0.04 in fourth quarter so only $0.02 came back this quarter and then the next $0.02 will come back later?

They would, but we're not going to have it in our CFFO numbers. Over time, CFFO is the same regardless of whether you include change in prepaid resident rent or not, but it's just that quarter-to-quarter volatility that really didn't speak to our real operations and so it's noneconomic so we decided it's just really just a timing item, it's better to just not have that in the CFFO calculation.

So, the comparable number for 2014 full year excluding I guess this item now so you mentioned -- I think I heard you say $1.44, right?

$1.44, that's right. So there is a $0.06 positive impact in 2014, $0.04 of it was in the fourth quarter.

Okay. That's helpful.

(Operator Instructions) Todd Cohen, MTC Advisers.

So on the conversions, would it be possible to go back and talk about the 360 that we started thinking about I don't know a year or year-and-a-half ago. I'm little bit confused on all the different numbers.

So Todd, the 360 now that we are closer to reality because we're almost at the end of the second quarter of 2015 and that's when we said they will be done. We have actually had 400 licenses that have been upgraded instead of 360 so it's been a total of 400 licenses or so that we've had upgraded. Originally we talked about vacant IL moving into AL. There are 225 of those units that were vacant and available for lease-up at the time of conversion and the remaining 175 or so have an incremental financial impact. So as a current resident leaves and we replace that new resident at a higher rate, but the financial impact is $0.20 per share just like we've said all along after one year.

On the 400?

That's right. That's the first step that we've always talked about.

Okay. So the 225 that are converting from IL to AL and obviously they must have the licenses and the license must be upgraded. Are those all able to lease up now?

They will be by the end of the second quarter, most of those are ready today. They weren't necessarily at the end of the first quarter, but most of those are ready today and they will all be ready by June 30.

Okay. So just let me ask this another way. Out of the 400 potential, how many of those are now occupied?

So of the 225 plus the 175 incremental, about 70 of those have already been occupied.

Okay. CapEx I know, Larry, you just spoke about renovating a lot of the properties this year so how do we break the CapEx down?

If you look at the recurring CapEx this quarter, I think it was around $360 a unit. Obviously as we do more refurbishment, that stays low. The CapEx that we're putting into the buildings will be fairly consistent throughout the year. I think our budget for the year for CapEx is around $80 million in total, Todd, that's both refurbishments as well as the ongoing recurring CapEx. That's a fairly normalized number that we've had over previous years so that dollar amount should cover these refurbishments that are planned in 2015 as well as what we consider recurring CapEx on a regular basis at our properties.

And then it looks like you financed these most recent acquisitions at like 3.9%, 3.87%. How do rates look currently and if you're able to lock something in today, what do you think you'd be locking something in at?

Well, clearly the tenure has gone up since then. Today I looked earlier and I saw that the tenure today I think close around [218] so that's up probably almost 40 basis points from what we did previously. So looking at 20 basis points increase this week so today we'd probably be in the 4%s for sure, probably 4.25%, 4.5% somewhere in that range if we were to lock rate today. Obviously it changes day to day and the market will have some bearing. But I would say today 4.25%, 4.5% is probably a good estimate of where we would price (inaudible) today.

Okay. And then, Carey, if I heard you right on the incremental earnings for the second quarter or cash flow for the second quarter; I guess that everything being equal not really including any growth in rate or occupancy?

That does include growth and rate and occupancy that we would expect in the second quarter. Yes, so that's how we get the extra $0.01 or so in the second quarter related from kind of core operations.

Okay. Got it. Thanks a lot.

Daniel Bernstein.

Did you see any impact in Texas from the drop in oil in terms of your move-ins?

No, we are not in the oil patch. If you look at, Dallas is a very diversified economy. We have two buildings in Houston that actually are not oil related; one's petrochemical, the other is (inaudible). It's interesting in Houston we're seeing no new supply at all and no impact from oil. So we sold our building in Oklahoma City so that takes us out, we sold our building in Louisiana so we're out of that market. We're just not seeing any impact at all from oil, obviously maybe a little reduction in costs, but it's not meaningful. So fortunately the locations in Texas have never been oil dependent and we're not seeing any impact from the lower price of oil.

Okay. And one more quick one in terms of your pipeline, has that changed at all in terms of the mix of say marketed deals you're looking at or buying versus relationship driven one-offs off market?

We look at both, but most of the acquisitions are off-market and repeat transactions. If you look at the first quarter, the two properties that we acquired; one was with a seller that we had dealt with previously, the other was a property that we had that was marketed, but we have relationships with the broker. Sometimes they'll come to us first because of that relationship, they know that we are a good buyer and sometimes they'll have sellers ask them to come to us first before it goes to market. So I'd say that it's likely that we'll continue with the successful off market program, it's been very effective. I know of some properties that we'll see later this year from relationships that we have so I think that will remain where we have a fairly robust pipeline that we're not getting involved in a bidding process and think that with the cash we have and kind of the pace of acquisitions that we demonstrated over the last three, four years; we can continue to add meaningful increases in value and cash flow by being very disciplined on acquisitions.

Okay. That's all from me. Thanks.

Thank you. And with no additional questions in the queue, I'd like to go ahead and turn the conference back over to our presenters for any additional or closing remarks.

Well, we thank everybody for your participation today. Carey and I will be speaking in the city and probably see many of you over the next few weeks. It seems like a very active season for conferences so we look forward to seeing you in the next number of weeks and of course you always feel free to give Carey or myself a call if you have any follow-up questions. Again, thank you very much and we wish you a good evening.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. Hopefully you all have a good evening. Thank you.