Sonida Senior Living Inc (SNDA) 2015 Q2 法說會逐字稿

Good day and welcome to the Capital Senior Living Second 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, available 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 call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you. Good afternoon and welcome to Capital Senior Living's second quarter 2015 earnings release conference call. We are successfully executing on our strategic plan, which resulted in significant growth during the second quarter in all of our key metrics, including revenue, occupancy, average monthly rent, net operating income, adjusted EBITDAR and adjusted CFFO as compared to the prior year. Our same community NOI grew by 4.7%. Our adjusted cash flow from operations increased 22.3% and we reported a record high second quarter adjusted EBITDAR margin of 36.8%. We are particularly pleased with the growth in our second quarter same-store occupancy, which increased 60 basis points from the first quarter of 2015 and 40 basis points from the second quarter of 2014.

We continue to see limited new supply and construction in our local markets and our conversions of independent living units to assisted living and memory care units continued to show (inaudible) progress. In the second quarter, we completed the acquisition of three senior living communities in our geographically-concentrated regions for a combined purchase price of $26.9 million. In July, we completed the acquisition of a senior living community for approximately $13.3 million. Thus far this year, we have completed the purchase of six communities for approximately $88 million and they are expected to generate first-year CFFO of $0.13 per share and a 16.6% cash-on-cash return on equity.

Subject to completion of due diligence and customary closing conditions, acquisitions totaling approximately $74.5 million are expected to close by the end of September, which will bring the Company's total acquisitions in 2015 to approximately $163 million. We are conducting due diligence on additional acquisitions of high-quality senior living communities in states with extensive operations.

Our strong second quarter results reflect the successful implementation of various initiatives over the past 12 months including occasional introductory specials at lower-occupied communities, increasing rates at higher occupied communities, increasing level of care charges, and disciplined expense management. We are also benefiting from renovating and refurbishing communities and converting units to higher levels of care with significant gains in occupancy and average monthly rents, which Carey will discuss later on the call. Additional renovations, refurbishments and conversions are planned over the next 18 months and they should lead to further improvement in our operating and financial results.

Our recently-implemented sales and marketing initiatives are also 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 their database management system as well as branded vehicle wraps and property signage. These initiatives increased second quarter occupancies as we generated more leads and improved closing ratios. The positive growth in demand that we're experiencing is encouraging and we look forward to building occupancy throughout the balance of this year and over the next several years.

Successful execution of our business plan has improved the quality of our portfolio and enhanced our private pay revenues. We closed the only skilled nursing beds we had operated in two continuing care retirement communities at the end of 2013. In January of this year, we completed the sale of four older, non-strategic communities and are scheduled to close another non-strategic community sale this month. These actions have improved our operating metrics and allow us to accretively recycle approximately $26 million of cash proceeds into acquisitions of newer, better-performing communities within our geographically-concentrated regions. The sale of these five communities have eliminated our operations in three states, which has allowed us to sharpen our focus on our core strengths and bolster our operations in our geographically-concentrated regions.

Our acquisitions have transformed Capital Senior Living into an owner of newer, high-quality senior living communities that generate strong, sustainable results, which are exceeding our expectations. Industry fundamentals continue to improve and demand for our communities continues to grow as demonstrated by our second-quarter increases in occupancies and rates.

As we have discussed on previous calls, senior housing construction remains concentrated in select markets and continues to be needed in most of our local markets as our value strategy acts as an economic barrier to entry for new developments. Construction costs average in excess of $200,000 per unit . Our average monthly rents of $3,367 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 new construction will become viable in these local markets. We appreciate the recent in-depth research report analyzing construction in the top MSAs, which confirms our limited exposure to new construction.

With strong industry fundamentals, an improving economy and housing market, limited new supply in the local markets, and the gains we are recognizing from our unit conversions and community renovations and refurbishments, we believe that our occupancies can grow to an optimal level of 92% or 93%, providing significant opportunity for additional organically-driven CFFO growth and increases in our own to real estate value and stock price.

Every 1% improvement in the occupancy is expected to generate $4 million of revenue, $2.8 million of EBITDAR, and $0.06 per share of CFFO. Our selective and strategic acquisition program, which began in 2011, has been funded from internally-generated cash. In the past four years, we have completed the acquisition of 49 communities for a combined price of approximately $663 million. These acquisitions have generated a 16.2% cash-on-cash return with first-year EBITDAR totaling $63.2 million and first-year CFFO totaling $1.03 per share. Our consistent success in acquiring quality communities in both the 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 and increase our ownership of high-quality senior living communities in geographically-concentrated regions and generate meaningful increases in CFFO and shareholder value.

Many of you have asked us to comment about potential increases in interest rates as many economists expect the Fed to raise rates slowly over the next several years. First, I'd like to remind everyone that virtually all of our debt, which is assumable, is fixed at an average interest rate of 4.64% with an average duration of 8 years. In fact, 92% of our debt matures in 2021 or later. Currently, 10-year interest rates are nearly 200 basis points lower than they were when we initiated our acquisition program. Now we were excited about the expected returns at those rates. Therefore, even if rates rise slowly, acquisition financing should continue to be available at attractive rates for the foreseeable future. As evidenced by the historically-low interest rates on many of our recent financings, borrowing spreads are narrowing due to increased competition amongst lenders including Fannie Mae, Freddie Mac, and life insurance companies.

I would also like to note that most of our residents rely on fixed-income investments. So an increase in rates, particularly short-term rates, would give seniors greater disposable income. Prior to 2008, the senior living industry enjoyed same-store average annual rent increases of 4% to 6% for more than a decade. Since 2007, low interest rates have moderated rent increases. In a higher interest rate environment, I would expect to see better organic growth as larger rent increases would increase net operating income. Higher interest rates would also increase construction costs and reduce construction loan proceeds, which could limit new supply.

Because interest rates are still at historically-low levels and with increased interest from institutional investors and lenders, cap rates could compress further, even if interest rates begin to rise. Seniors housing proved to be very resilient during the Great Recession and today is becoming a core asset for many institutional real estate investors. I believe that strong industry fundamentals, especially the expected growth in demographically-driven demand will continue to make seniors housing an extremely attractive investment with sustainable long-term returns, even if interest rates begin to rise.

Our operating strategy is to provide value to our residents by delivering quality senior living services at reasonable prices. We have many competitive advantages as a larger, quality operator with economies of scale in a highly fragmented industry. However, I believe our most important competitive advantages are our people, our focus, our community empowerment philosophy, and our straight-forward, private-pay business model. As we strengthen these competitive advantages, we are also lowering our cost of capital. We are executing on the strategic plan that is focused on the very important objective of enhancing shareholder value through organic growth, disciplined 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.

Successful execution of this strategic plan has produced consistent solid results. Since 2010, we have increased our percentage of owned real estate from 32.5% to 58%. Adjusted CFFO has grown at a 22.5% compounded annual growth rate and once again we grew adjusted CFFO by 22.3% in the second quarter 2015. Adjusted EBITDAR has grown at a 17.9% compounded annual growth rate and our EBITDAR margin has increased by 690 basis points from the second quarter of 2010 to a record high second quarter margin of 36.8% in the second quarter of 2015.

This track record demonstrates that 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, an improving economy and housing market. The continued execution of our strategic plan is expected to generate sustainable, significant growth in cash flow, our owned real estate values 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 second 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 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 $101.6 million for the second quarter of 2015. This was an increase of $8.2 million or 8.7% over the second quarter of 2014. As a reminder, our consolidated revenue in the second quarter of 2014 included $1.8 million of reimbursement revenue and affiliated management revenue and a like amount of reimbursement expense associated with three Ohio communities in which we previously held a 10% interest as a joint venture prior to purchasing them in June of 2014. The second quarter of 2015 is the last quarter that we'll have an unfavorable revenue comparison related to that item.

Our resident and healthcare revenue was up $10 million or 10.9%. The increase in revenue is largely due to acquisitions the Company made during or after the second quarter of 2014, net of dispositions. Since that time, we've acquired 12 communities including 3 communities that we purchased during the second quarter of 2015 and disposed of 4 non-strategic communities. Our operating expenses increased $5.1 million in the second quarter of 2015 to $60.7 million due to the acquisitions.

General and administrative expenses for the second quarter of 2015 were $900,000 higher than the second quarter of 2014, after excluding transaction and other one-time costs for both years, due mostly to higher health insurance claims in the second quarter of 2015. Excluding $800,000 of transaction and other one-time costs, our G&A expenses as a percentage of revenue under management were 4.8% in the second quarter of 2015.

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 $35.7 million in the second quarter of 2015, an increase of $3.5 million or 11% from the second quarter of 2014. This does not include EBITDAR of another $900,000 related to the 4 communities undergoing repositioning, lease up, or significant renovation and conversion.

The Company's adjusted EBITDAR margin was 36.8% in the second quarter of 2015, which as Larry noted, is a record high second quarter margin for the Company and 120 basis points higher than the second quarter of 2014.

Our adjusted CFFO was $11.7 million in the second quarter, an increase of 22.3% versus the second quarter of the prior year. On a per share basis, CFFO was $0.41 compared to $0.34 on a comparable basis in the second quarter of 2014. The contribution to CFFO from communities acquired during or since the second quarter of last year was $0.09, which is $0.02 greater than our expectations and public announcements related to these communities.

Our same community revenue increased $1.9 million or 2.1% over the second quarter of the prior year. Same community expenses decreased slightly, 0.2%. This positive spread of 230 basis points between revenue and expense growth resulted in a 4.7% increase in our same community net operating income.

Looking at the three major expense categories, labor costs including benefits, increased only 0.6% in the second quarter while food costs decreased 1.5% and utility costs decreased 3.3% versus the second quarter of the prior year.

Our same community results also showed excellent growth in revenue and NOI on a sequential basis. Our second quarter 2015 same community revenue increased 1.1% over the first quarter of 2015. With the sequential decrease in operating expenses of 2.1%, due mostly to lower utility costs, same community NOI increased 4.9% in the second quarter of 2015 as compared to the first quarter of 2015.

Same community occupancy was 87.8% in the second quarter of 2015, an increase of 40 basis points versus the second quarter of last year and a 60 basis point increase from the first quarter of 2015. Our same community average monthly rent was up 2.5% versus the second quarter of 2014.

For our consolidated communities, average monthly rent moved up 6.6% and our consolidated occupancy increased 70 basis points versus both the second quarter of 2014 and the first quarter of 2015. The improvement in our consolidated metrics versus the second quarter of last year reflects our sale of the four non-strategic communities that we sold in the first quarter of 2015 and our accretive acquisitions of high-occupancy communities with higher rents.

We continued to make steady progress on the conversion of independent living units to higher levels of care. As expected, we licensed more than 400 units to assisted living or memory care by June 30 of this year. Approximately 215 of those units were vacant and available for lease up at the time of conversion and 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 of this first phase of conversions is approximately $0.20 per share of CFFO for a full year when the units lease up and reach stabilization.

Through the second quarter of 2015, the impact of the converted units is approximately $0.02 per share of CFFO with $0.015 of that coming in the second quarter. So they're right on pace with our expectation of a $0.05 per share CFFO contribution for the full year of 2015 with a greater impact to come in 2016 and a full impact in 2017 and beyond.

Two of the communities under conversion that are part of the expected $0.20 CFFO contribution are currently excluded from our operating and financial results. Those two communities are in lease up currently and one or both may reach stabilization and be added back to our results in the second half of the year. When added back, the combined annual contribution for these two communities will be approximately $0.04 per share of CFFO.

The impact of the conversions on occupancy and revenue at the communities where conversions are complete is outstanding. On a combined basis, occupancy for these converted communities has grown from 80.5% prior to conversion to 92.7% at June 30 and revenue at these communities increased 20.5% in the second quarter of 2015 as compared to the second quarter of 2014.

As we've mentioned previously, we're working on additional conversions beyond this initial group. The remaining conversions will mostly have an incremental financial impact. We currently expect an additional 100 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 the year. Additional conversions at other properties are under consideration.

Looking briefly at the balance sheet, we ended the quarter with $51.7 million of cash and cash equivalents, including restricted cash. We invested $6.6 million of cash as equity to complete the acquisitions of two communities and spent $8 million on capital improvements.

Our mortgage debt balance at June 30, 2015, was $679.8 million at a weighted average interest rate of approximately 4.64%. We added approximately $20.3 million of debt in the second quarter related to the communities that we acquired at an average rate of 4.68%. At June 30, 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%. We expect to refinance one of those bridge loans, which has a current balance of approximately $8.5 million with 10-year fixed rate debt during the third quarter of 2015.

Looking forward, we expect the momentum that we established in the second quarter to provide a strong foundation for growth in the second half of the year. The last week in June leading into the third quarter was the strongest week of the year for move in's for the Company and occupancy trends improved throughout July with the last week in July being the best week of the year for deposit taking.

Looking specifically at the third quarter, as is always the case, our utilities expenses are expected to be about $500,000 to $700,000 higher in the third quarter than the second quarter due to the hot summer months. Also, there's an extra day in the third quarter versus the second quarter, 92 days versus 91 days, which will add another $500,000 or so to our third-quarter expenses.

Together, these additional expenses will result in a reduction of approximately $0.04 per share of CFFO in the third quarter as it compares to the second quarter. However, increases related to core operations, conversions, and acquisitions will boost our third quarter operating and financial results. Excluding the seasonal increases, expense increases that we noted, we expect that our CFFO for current operations to increase approximately $0.02 per share in the third quarter as compared to the second quarter and continued momentum in our conversions. We also expect the acquisitions we made during the second quarter and the ones we expect to close in the third quarter to add approximately $0.02 to our CFFO in the third quarter versus the second quarter, net of the impact of the scheduled sale of that one non-strategic community in early August.

The third quarter is also typically when we see our most significant occupancy growth, which should enhance our growth prospects for the fourth quarter. Also utilities expense will be less and there will be one less day in the fourth quarter than the third quarter. Acquisitions we expect to close during the third quarter will benefit our fourth quarter CFFO.

From a big picture perspective, we have multiple avenues of growth, which we expect to continue to gain momentum in the coming quarters and result in significant growth in our operating and financial results over the next two to three years. In addition to core growth related to increases in rate and occupancy, we're working on three phases of conversions, as I noted previously, the 400 we've now completed, and another 100 incremental type conversions to be completed by the end of 2015 and then 200 more incremental conversions by the end of 2016.

We're also expanding three of our communities to add memory care and we currently expect at least two of these expansions to be completed and ready to begin lease up at some point during 2016. Major renovations are being done on more than half of communities which will enhance our ability to increase rate and occupancy over time. Also, we're repositioning two previous skilled nursing communities, which are currently excluded from operating and financial results. While it's a little early to be too definitive about the potential financial impact of the repositioning of these two communities, the incremental contribution to CFFO when they are stabilized and added back to our results should be significant, perhaps in the range of $0.10 to $0.15 per share of CFFO on a combined basis. Lease up will begin at these repositioned communities as phases are completed and their financial results will be added back to our reported numbers when they reach stabilization, which is currently expected also in phases in 2016 and 2017.

Then with the robust acquisition pipeline and a continued favorable financing environment, we expect to continue to add high-quality communities that are a good fit for our portfolio, which will further enhance our growth. Taken all together, successful execution of our strategic plan will result in 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 would like to now open the call for questions.

Thank you. (Operator Instructions) Ryan Halsted, Wells Fargo.

Thanks, good afternoon.

Good afternoon, Ryan.

So clearly the strong occupancy I think was the biggest surprise for the quarter or at least the big story of the quarter. So I'd be curious if you could provide just some color on how your occupancy trends took place across the quarter? Just any sort of color on move in's or net move in's and how that progressed from April through June? Even you talked about third quarter is obviously seasonally the strongest, what are your expectations do you think from this point on? What kind of occupancy growth you could see?

Ryan, we said at the end of the third quarter we had an outstanding March. That set the stage for a strong second quarter. We ended the best year of the -- the best week of the year in June, which sets a great stage for the third quarter as we saw in July and very high deposit taking.

If you want to look at the actual trends, our financial occupancy improved sequentially in April by 40 basis points. It dropped 10 basis points sequentially in May and increased 40 basis points sequentially in June. As Carey said, we -- the financial occupancies right now preliminarily appear to be up in July. Again, we're very encouraged by the strength of the last week of July. We had a terrific week with very high -- second highest level of move in's for the year. As Carey said, the highest level of deposits.

I think that the reason that we feel that the occupancy trends have improved and are continuing to improve is just we differentiate Capital Senior Living. We have a focus on private pay senior housing as a core business. I think that the straightforward nature of business model clearly helps with the community empowerment of having terrific onsite staff and executive directors and sales directors driving new business with oversight and the systems that we provide them. I think that the investments we're making in our assets are really paying off.

The outstanding returns on the conversions Carey mentioned in the second quarter, you know same store converted units had a terrific occupancy gain and 20.5% revenue gain in the second quarter versus the second quarter of last year. Selling off the underperforming properties help as well. We said when we did that we'd improve our metrics. So we have called out those properties that we feel are non-strategic or in weaker markets and the acquisitions. I'm very proud to report -- I just have an analysis of our acquisitions and those properties that we acquired in 1993 ended the quarter at 93%. Our 2014 acquisitions ended the quarter at 95%.

2013.

Our 2013 acquisitions end of the quarter at 93%. Our 2014 acquisitions ended the quarter at 95%. And our 2015 acquisitions ended the quarter at 95%. So, we have truly transformed Capital Senior Living as I said in my comments to a portfolio of newer, high-quality portfolio in underserved markets with limited supply. The investment we're making in our assets through the conversions and we haven't even begun to see the benefits from the renovations and refurbishments that we plan to complete over the next few years.

So, hopefully that gives you a better color of what's going on at the property level. As I said, I think the stage is very well set for continued growth in the third quarter, which typically is the best quarter for the industry and the fourth quarter, which we've actually enjoyed very great success over the last few years.

Yes, that's great. I wanted to also get your thoughts on the topic of the new supply. I mean I know you've been very consistent in stating that new supply and new construction has not been an issue in your markets. But, you know it's been certainly a topic that's gotten a lot of increased attention you know of the NIC data presented some significant or decent amount of pick up in new construction and suggested and might be pressuring occupancy across the broader industry. Just any additional color from you as to what makes your markets unique and that the barriers to entry are discouraging the new supply? Just what do you think is happening that's different I guess between some of these isolated markets and your markets?

As I said, it's economics. The average rent that we collect from our residents is $3,367 a month. The cost to build today is $200,000 a unit. At 90% occupancy at that rent level, it probably would generate just barely a 5% return on cost. No one is building.

I'll also point out that San Antonio, which clearly has a lot of supply coming on in its market is one of our strongest markets. We have two independent living properties. Again, very little independent living built. It's 1.9% versus 6% for AL but if you look at our San Antonio properties we ended July at 95% and 98% occupancy in San Antonio. There is a larger building being built but some of the problems that being built is not competitive because the builder built too big a building where it's too hard for residents to walk from the furthest unit to the dining room.

So as I said, it's people. It's systems. It's training. The San Antonio properties actually went through a refurbishment this year. It's on our website. So if you walk in, they're as nice as any new building being built. But they have a history. They have a presence in the market. They have the reputation. At the end of the day, I want to compliment every one of our onsite staff members and team members for the great job they're doing cause that's what makes the difference. So if you're in good markets with good people and a stable company with the focus and the attention that we have, I think the results are what we're seeing and why we differentiate Capital Senior Living.

Great. Thanks. I'll get back in the queue.

Thank you. Joanna Gajuk, Bank of America Merrill Lynch.

Good evening. Thanks for taking the question here. So, just coming back to the occupancy discussion, the property was so strong. So first is the 40 basis point sequential improvement as comparable to the financial occupancy data that the industry's talking about? That the NIC talking about?

Yes.

Okay and then so the occupancy strength I guess you talking about that sell the underperforming assets also helped, but is there a way to quantify I guess the benefit from conversions? I mean I get you guys some numbers for this particular portfolio, but were you able to say that of the 40 basis point improvement, you know this much is from conversions?

None of it I can say at that level of detail, Joanna, but in looking at the conversions, they certainly have a tremendous impact. I mean if you just -- in isolating the ones I isolated that the conversions that have taken place so far, just the increase in occupancy there has been tremendous and that certainly does help the overall impact.

You know it's a relatively small number of units when you're looking at the number of units over the Company as a whole. So, it does help increase that occupancy but there are other factors as well. But they're making a significant contribution I do believe to the overall trend of the company.

Actually, it's interesting. Our independent living, if you look at level of care, that we can give you. The second quarter of 2015 independent living occupancy sequentially improved to 1.2% with 1.1% rate growth. Assisted living sequentially actually dropped 10 basis points with 1.2% rate growth. So, you know what's happening on the independent living is through these conversions, it's interesting that we're seeing a pick up in the independent living occupancy because those buildings are becoming more attractive to families knowing that if their family members need more care, they can receive higher levels within the community. So that has been a big benefit that we're seeing in the portfolio.

But the conversions were great but again you know it's 400 units out of roughly 10,300 units. So it's a small piece of it. I would say it's very consistent. When I look at occupancies, I gave you some metrics. Actually I misspoke. San Antonio ended the week at 100% to the other property I said 95%. But it's just the -- we're seeing it really in virtually all of our markets. I said where we had challenges we're exiting those operations for those markets. So that is helping as well.

Okay, so you're saying that the occupancy improvement is just demand is varying in the markets that you said that you already seeing May I guess improvement. Cause the industry then I see all is they talk about, if it was weaker than there was an improvement in April and June but still the industry came out, the client down sequentially. So I'm just trying to understand what's different but I guess comes down to the market.

Let me clarify one thing, Joanna, for everybody. We met with the NIC MAP group a couple weeks ago. And I've been active as a member of the Operator Advisory Board of NIC for many years. NIC does a great job and tries to improve transparency for the industry. But I think that what people don't appreciate is the data for NIC comes in through the quarter. Capital Senior Living provides data on our properties, but again one thing that's interesting of the 99 markets that NIC covers, I think we're only in 30 or 40 of those markets. So the data I'm giving you isn't even in NIC data. It's a very small subset of what we give NIC.

The other component to understand is the timing. We provide the data for our second quarter information in early May. So all NIC picked up from Capital Senior was four to six weeks of operations. There was nothing in there from May or June, with June is actually our best, obviously best trends. I believe that's true with other companies.

Now I know that NIC is working on a new platform, trying to get rent walls and get financial data more timely from operators. It's not there yet. So I know that it's important to have transparency for this industry but I just caution the readers of NIC MAP data that it's, first of all it's not an average for the quarter. It's one date during the quarter, based on the last day that company reports. In many cases, it's only the first four or six weeks of the quarter. So hopefully based on our performance, some of the other reported performances you saw for some of the REITs on their portfolios, the third quarter will be better when NIC gets it because of the strength of the latter part of the second quarter.

Does that make sense?

Yes, that makes sense. That's very helpful, especially the comment that your markets are not even captured there. Then how to compare that it's different. That's very helpful. So the other interesting part I guess is you know the cost control, which had this you talk about labor being up only slightly so. Is there any color you can share with us in terms of the outlook there? Cause if there is some pressure on wages, you know different markets for different reasons. So, are you seeing cause I guess it doesn't feel like those numbers are showing that. But do you expect acceleration in labor costs going forward?

You know really, Joanna, we really are not seeing any significant wage pressure. As you noted our minimal increase in labor costs is evidence of that. When you look at where we operate, the states we operate, we're in, primarily in the mid-section of the United States and the Southeast United States and there's just not the same kind of wage pressure for increase in minimum wage like in some states on the coast. Really and even thinking about minimum wage, only about 5% of our employees are at minimum wage. So most of our employees--

And they are students. It's interesting. We talked earlier. We have an hourly wage distribution report that when I saw the articles, we talked about this last quarter a little bit on the call, you know when we saw what was happening with Wal-Mart, Target's about those companies with minimum wage, we did an analysis of our hourly field employees. As Carey said, 5% are minimum wage. Those are high school and college students working maybe 20 hours a week, mostly in wait staff. There's turnover cause they only work for the school year, but they have the balance of life where they have flexible hours. Many of our nurses are getting $25 an hour. That's 5%. I'd say the median of our hourly employee is probably in the $9 to $12 range. So, I think that we pay competitively. Obviously, we're seeing great success on retention of key people in our Company, both corporately and at the property level. But I do think part of our strategy of operating in the states in which we operate, just has less pressure at this, today, on minimum wage than you see in as Carey said in New York, California, some of the coastal cities.

I think it would be very difficult to keep our labor costs at only 0.6% up. Now and for the year to date, it's up 1.2%, our labor costs overall, which is still very impressive. But keeping it in that 1% to 2% range I think is possible going forward and I -- cause we don't see any significant pressure on wages.

The other thing that's very important is last year, talk about changes over the last 12 months and this is the big change. We did have some anomalies in the first half of 2014 on expenses. We have new systems now that actually track and monitor overtime, contract labor, again it's focused, which has reduced our costs by just better management of hours as well as technology we use for care plans and staffing that allows us to manage the labor costs much more efficiently than we did previously.

That's great color. Just lastly on the G&A on the flip side, it was 4.8% excluding some costs out, up from 4.2% year ago. So I guess did I hear right you mentioned some higher health insurance costs? So is that in G&A or that would be somewhat another line?

That was in G&A. It's about $600,000 of increase in higher medical claims expense. In the second quarter of this year compared to the second quarter of last year. Really it's really about last year more than this year. Our last year medical claims expense was unusually low in the second quarter. So this year's expense is more normal and in line with our expectations. So that was really the reason for the increase there.

So then going forward, how should we think about the G&A ratio in the 4.5% kind of range like you were talking before or is there any--?

Somewhere between the 4.5% and 4.8% is something kind of like what we think we would probably be at in that range. That's pretty much where we've been for the last several quarters and I think we'd probably continue in that range.

All right, thanks for -- I'll go back to the queue, thanks.

Thank you.

(Operator Instructions) Daniel Bernstein, Stifel.

Good evening. So I wanted to also talk about potential for better rate growth going forward. As the -- not simply just from the increase in rate from conversions from IL to AL, but being able to go ahead and start pushing rate maybe above 2% for the legacy units as portfolio occupancy pushes above 90% presumably later this year or next year. I mean that's the one thing I saw with the NIC MAP data was your cautioning on rate growth seems to be pretty subdued relative to where we were a couple years ago and more to think about your portfolio in particular whether you think you'll be able to push rates some more going forward?

Actually, Dan, we are right now in the process of doing that. We have hit that level of occupancy. We've recovered from the Great Recession. We are starting to look at increases in rate growth. Now I asked the analysts, don't change our models, okay, because it will be a gradual process. So please don't start putting numbers out there that we have to stretch for. But we are -- I mean physically we're at 90% by the way. We have ended the month of July, not financial and this is a difference and it's a lag time, but we are at 90%, which is a great accomplishment to this Company. We haven't been there since 2007, okay. So, we are actually starting as we speak to have the properties look at increasing rates because of the strength of our occupancies.

The other point is the level of care charges. You know we've talked in the past about vigilant with, the system we use for care level. In the second quarter, our care level fees on a same-store basis increased 15% over the second quarter of last year. That also will factor in. So I think a point (inaudible). It's something that we and the operating team have already implemented as -- I mean it's really is -- but again please be careful in your models because it will take some time to see that filter out through the -- through our portfolio. But I do think that we recognize the strength of where we are today and that will allow us to start to push rate. Again, not tremendously more. You know it was 2.5% same store, which is important. Consolidated the rate growth was 6.6%. So, clearly our strategy of buying better property, selling off the non-strategic assets makes a big difference. But we kind of target 3% and hopefully we'll be reporting close to that in the future compared to what we did this quarter.

I do think just from a commentary about what's happened in the industry. I talked about with my industry comments, you know seniors have been living on virtually no interest income for eight years now, seven, eight years. So, that's impacted. And I do think one of the benefits, if rates do start to rise, is our residents will have more income and we typically then can start to see rates increase, which would increase organic growth for the industry.

I guess historically you think it would have been more where the short-term rates are or where inflation has been or maybe it's been all of them. Remember back 2005, 2006, 2007, the occupancy was in the low 90's. So I guess it's a combination you look at it or is it people trying to push rates to keep up with inflation?

I think short-term rates. I think short-term rates cause that's what the residents are living on. You know they're living on deposits in the bank, maybe CDs. But I do think it's more short term.

Okay and then in terms of the acquisition platform. You know it looks like you've tilted some of the acquisitions more towards I guess combination facilities if, you know, it looks like you have IL and AL units you're picking up. Have you switched a little bit away from doing pure AL? Does that have anything to do with the supply/demand fundamentals in assisted living versus independent living? Obviously it's very vocal on construction but does look like IL has a little bit better demand versus supply, with very little supply coming on line. So how do you think about acquiring pure assisted living/memory care only versus buying combination facilities?

You know it's really a function of what we see. We're not that strategic in the acquisitions. It really is what the pipeline shows. I will tell you something though, I've become a real student of value, of real estate in seniors housing. On a per-unit basis, the highest costs I've seen on deals that we typically aren't successful in bidding for, but that we see out there combine IL, AL, and memory care. Those three components combined provide a rent level and a margin level that seems to generate the highest cash flow per unit that ends up having the highest cost per unit. We're seeing deals now over $300,000 a unit for that type of portfolio, that type of asset.

So, I do think that the mix makes a big difference and one of the hopeful comments I'll make about what we're doing with conversions that we don't even factor into our numbers is that when you do the actual operational models on staffing and costs and look at the revenue by having the three levels of care, you actually end up with the best performing asset and I think it generates the most cash flow and as I said, the highest real estate value.

Have you seen any more deals going your way? Are you winning any more marketed transactions? You know healthcare REIT valuations have pulled back a little. Interest rates are obviously up. So are you -- do you think you're winning some more deals? Do you think your investment volume could pick up a little bit you know at the expense of healthcare REITs or other competitors? Just trying to understand -- you're already doing 163. I mean it sounds like you're going to do a little more than that.

I'll tell you something. This is a very -- this is a new phenomena for Capital Senior Living. Of the $80 million that we have closed, $42.8 million was marketed and $45.15 million was off market, half. Of the $162 million, $96 million is marketed. So actually 60% of what we have right now in the hopper if you will through September is marketed. So we're becoming a little more competitive on marketed deals and that's why we're seeing the volume pick up on the acquisitions. I think you picked out the reason why.

Okay, okay. Thanks a lot for all the color, Larry. I'll hop off.

Thank you. Dana Hambly, Stephens.

Hey, thanks for getting me in. On the, Larry on the memory care, how much memory care does CSU have at this point?

Right now, we have roughly I think 1,200, 1,300 units of memory care. So it's about 10% of our portfolio, about 20% of our assisted living is. We have no free standing, Dana. It's all a component to an existing building and as Carey commented, we now have expansion plans for three properties that are full to add memory care or expand memory care at those buildings.

So that's adding new wings?

That's adding a new wing. Yes, it's actually a construction to add a new memory care wing at those three locations.

Okay and these are all owned properties where you're doing this?

They are owned properties, yes.

Okay, great. Carey, can you help me just on the third quarter relative to the second quarter. I caught $0.04 in increased expenses but there were some pluses too, which I didn't get all of those.

That's right. There's $0.04 in expenses because of the higher utilities and an extra day of expense in the third quarter. But then going the other way, we got improvements in core operations and that's related to conversions that's going to add us probably about $0.02 of CFFO per share. Then another $0.02 related to the acquisitions that we made during the second quarter, kind of the full impact in the third quarter plus the ones we've made -- that we'll make during the third quarter that will impact us in that quarter.

Okay so roughly -- yes, $0.04 on the bad side, $0.04 on the good side?

I mean hopefully occupancies may be a little higher than we're projecting based on where we are. We're not really forecasting that type of change. So I think we're being cautious in our outlook.

That's what we see today.

All right, yes that's so -- you know so the variables that could drive it one way or the other then occupancy and rate expense control, that about right?

Yes, exactly.

That's exactly right.

Okay. Then lastly for me on the repositioned properties, Carey I think you said that could add a potential $0.10 to $0.15 once they're back on line?

That's right. That's a combined basis for the two. They'll come in over phases as we get the -- as we complete the construction and then get them leased up and stabilized. Then we'll add those back in. It's probably going to be in -- start phasing some of that back in, in 2016, mid to late 2016 and then into 2017.

Okay. But if I just look at the EBITDAR contribution from the first quarter to the second quarter, it looked like it nearly doubled from those properties. It looks like we are getting pretty good traction at this point. Is that fair?

Yes, we are and yes we are. Especially some of that is at the two communities we may add back in the second half of this year.

Yes, I'll comment on one of those, which is our property in Florida, Veranda Club. That's been offline. We just completed the conversion of 45 units from independent to assisted living. We took it out of our numbers because the rest of the building is full and we thought it would kind of skew our numbers. We've just got a license last week for that property. We now have 33 move in's scheduled for the 45 units. So, that's why we're hopeful by the end of that year that property will be stabilized.

The other property was an acquisition of 49 units that needed to be upgraded with licensure. We have the upgraded license and right now it's about 80% occupied. So, it's only 49 units. So it doesn't take much more to get to that 90%. That's a standard we're going to use for those.

So, yes, and Canton Regency, by the way, which is one of those repositioned properties, the skilled nursing we're converting to memory care. We're converting IL to AL. But what's interesting there is the rest of the building that's open is still operating at 92%. So, even though these properties are repositioned, it's not like a new construction. We have very stable, very well occupied buildings that we think we will dramatically enhance through the repositionings and the conversions.

Okay, thanks very much. Good quarter.

Todd Cohen, MTC Advisers.

Good afternoon, nice quarter. Just a couple things. On the last question as it related to the negative and positives on the third quarter going forward, are you including in that $0.02 from acquisitions, acquisitions you're -- you may close, that you've suggested you'll close in the third quarter or it's just what's been closed thus far?

It's really mostly related to what's been closed so far including the one that we closed in July. Because the rest of the acquisitions that we would expect for this, in the third quarter, probably happen towards the end of the third quarter. So the only ones that will have impact will be the ones we made in the second and in the ones we made so far in third.

Okay. So that's going to benefit the fourth quarter, okay. Then Larry what was that figure you stated on the -- out of the $162 million of deals, what will have been marketed versus off market?

Of the $162 million, $96.3 million is marketed and $66.2 million is off market.

Okay and so was the larger deal --

(inaudible) that is marketed.

So the $26 million of the deal that was just completed I think in New York and Wisconsin, were those marketed or off line?

The deals that were just completed one was marketed, one was off market, 50/50.

50/50, okay because the one, you know the one, if my math's right, it looks like the ROI on one -- on the larger deal is almost 20% versus --

That's right and that was an off market deal. That's correct.

Okay, all right. Then the other thing, Carey could you just refresh me on this breakdown you gave of the three phases. I know it's 400, 100, and 200, but where are we on the 400 thus far?

Well the 400 is, that's complete. That was what we completed by the end of June of this year. So those are complete and in lease up. And the last batch of those were done kind of right at the end of the second quarter of this year. So, those will begin to impact us throughout the second half of this year and into 2016. Then the 100 that --

Carey? Carey of the 400, of the 400, how many have been leased up thus far?

Probably -- well so there's, of the 400, there's 215 that are -- that were empty prior to conversion and then there's another 175 that will come in, you know on an incremental basis. So as an IL resident moves out, we'll move in an AL resident at a higher rate. So, probably about a third of that has or a third or maybe a fourth to a third of those have been actually impacted our numbers so far. A good bit of that is still to come because we completed these conversions at the end of the second quarter.

Yes, the ones -- like I mentioned Florida. That's one that got completed end of second quarter. It's now available.

Okay and then what about the 100? What about the next 100 in that three phase thing?

The next 100 will be completed in the second half of this year, more towards the end of the year. But we're working towards those right now and so those will be completed at that time.

Okay --

And then the --

And then 200 out right now?

We have 200 coming on then in 2016. Those are weighted more to the second half of the year. Both the 100 and the 200 are more of the incremental type conversion where we have -- we're moving someone to a higher level of care. So there's that incremental rate for those, for those--

Okay and then I guess the last, well couple more, of the acquisition that appears that you will be complete through the third quarter I think you said $162 million, is that -- that's not net of the sales is it?

No.

No that's gross. That's a gross number.

So --

That's independent of the sales. The sales are -- this is what we're purchasing, the sales don't tally in this number.

Okay but that in a way, it's kind of been hurting us a little until we kind of like get beyond --

As you see in the press release, we're closing a sale right as we -- very shortly and within a week we'll be doing a like kind of exchange to acquire a building. The net effect will be accretive because what we're purchasing will generate more cash flow and better economics than what we're selling.

Right.

So it (inaudible).

Yes, in my comments about third quarter that increase from acquisitions included netting out the impact of the businesses with them.

Okay, great. Then is it safe to assume that there's an opportunity to do more acquisitions in the fourth quarter as well?

Pipeline looks good. We never -- you know it's deal by deal. There's always opportunities but we like to be very disciplined and selective. So, if it happens in the fourth quarter, the first quarter, it'll happen. But we have a really good pipeline right now, so it's still early. It's still early in August, so we have plenty of time to add to this in the fourth quarter.

Okay and then I guess the last question, on the CapEx it looks like it was $8 million and $6.6 million of investment. Is the $6.6 million component, is that what, refurbishing the front of the buildings, the dining rooms, what is that?

So the $6.6 million is really related to the cash that we paid towards acquisitions. That's the cash portion of the acquisitions.

Okay, cash portion, okay, okay.

The $8 million is for all the -- it is related to some of the conversion work, the renovations, the refurbishments as well as normal recurring CapEx. That's the $8 million.

Cause it looks like the recurring component went from like 400 to 495 and I know we've spoken in the past about freshening up some of the entrance, entrances and dining rooms and you know main room and you know I'm assuming that kind of helps with your occupancies. People come in see a, you know, more attractive building or is that, or is most of that going to be happening going forward?

Well there's some of that happening and there's more to come definitely because the renovations and refurbishments we're working on at a number of our properties.

Okay, great. Thank you.

Joanna Gajuk.

Hi, just quickly. I know you already (inaudible). On the acquisition commentary, the deals that you expect to close before the end of September, the $74.5 million that suggests like these are much bigger offers than the three assets that you purchased in second quarter. So is it fair to say that this $74.5 million of deals would be more like $0.12 to $0.14 annual CFFO accretion when they are completed, annual?

Well, you know if you look at we did $88 million. It's about $0.13. I would say that you know it's, you know proportionately probably similar to that. Again, you know look, we don't know what interest rate's going to be when we close the transactions. But you know the guidance that we have given is about $0.20 a share from the $150 million of acquisitions. Obviously, we did a little better than that in the first part of the year. You know I think that we're still looking for mid-teen cash-on-cash returns so you know if it's going to be another $75 million of deals at 25% equity, that's $18 million. At 15%, that's about $2.8 million of cash flow, about $0.10 a share. Again, that's just purely on the back of the envelope.

All right. Thanks.

Daniel Bernstein.

Real quick. You know it's hard to tell what the same-store performance of the owned assets were versus the leased. I don't know if you could talk about that at all, whether year over year, Q over Q. You obviously on the owned side, you've got a lot of -- added a lot of properties the last year or so. So if you could talk about some of the same-store owned versus leased performance, please?

Sure, I'd be happy to do that. Well, all the leased is same store cause we haven't leased anything new since 2010. As I gave some color earlier, the owned portfolio is doing better. Obviously, the acquisitions have been very, very strong. The leased portfolio is a little older, but there are significant plans for renovations and refurbishments and conversions that are ongoing now at those. So I think there's some opportunity as we complete those to bring the leased portfolio to the same standard as the owned portfolio.

You know in the supplement to the earnings release, you have the breakout of owned and the leased. You can see the operating margins of the leased were actually a little higher cause they're predominantly independent living but their rates are lower. So the income contribution is lower. But that's where we have a lot of conversions ongoing at the leased as well.

So, you know looking at the occupancies, the owned properties have 89.2% for the quarter. The leased had 86.5%. As I said, it's the leased more legacy type properties. Probably average age of those properties is the 25 to 35 years. I think with the renovations that we're doing, conversions, refurbishments, those properties should get back to occupancies comparable to the owned properties.

Sounds good. Thank you.

Thank you and that's all the time we have for questions today. I'll go ahead and turn things back over to our speakers for any additional or closing remarks.

Well, we thank everybody for participating on today's call. As always, please feel free to give Carey or myself a call if you have any further questions. We look forward to seeing many of you I guess September when we start with conferences and meetings again. In the meantime, enjoy your summer and again we're very happy to share any additional color if anyone has additional questions offline. Thank you very much.

Have a good evening.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.