Sonida Senior Living Inc (SNDA) 2015 Q4 法說會逐字稿

Good day and welcome to the Capital Senior Living fourth-quarter and full-year 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; and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission. At this time, I would like to turn the call over to Mr. Larry Cohen. Please go ahead.

Thank you. Good afternoon and welcome to Capital Senior Living's fourth-quarter and full-year 2015 earnings release conference call. I would like to start by thanking our strong team of employees at Capital Senior Living communities across the country for providing our residents with exceptional service and care and to congratulate them on achieving an outstanding 95% resident satisfaction score for 2015.

I am extremely proud of the team's hard work and dedication. It is our talented employees that give us such great confidence in the future of our Company, in the continued quality care we provide our residents and the long-term value we are creating for all of our shareholders and other stakeholders.

We continue to demonstrate the advantages of our clear and differentiated strategy as we successfully execute on our multiple avenues of growth. Our focused execution produced growth in all of our key metrics in the fourth quarter, including revenue, occupancy, average monthly rent, NOI, adjusted EBITDAR and adjusted CFFO as compared to the prior year.

Our occupancy gains outpaced the industry with same community occupancy increasing 150 basis points since the flu-impacted first quarter of 2015. I am encouraged that the flu has been weaker and our attrition rate has been considerably lower thus far in 2016. Our strong occupancy growth is resulting in pricing power with a 1% sequential increase in fourth-quarter 2015 same-store average monthly rent reflecting the price increases we implemented this past fall at communities with occupancies of 93% or higher.

Another 3% market rate increase went into effect on January 1, 2016 at all communities and in-house rents will be increased by 3% on resident one-year anniversary dates. Our conversions of independent living units to assisted living and memory care units also continue to show timely progress.

Another important differentiator for Capital Senior Living is our Board of Directors and management team, both of which have unmatched healthcare and real estate experience. As a group, our Directors and Officers are among the top beneficial owners of our common stock. We are aligned with all of our shareholders and as we move through 2016 and beyond, our entire team will continue to advance the Company's stated strategy to enhance shareholder value and do what is in the best interest of all shareholders.

Our strong fourth-quarter results reflect the successful implementation of various initiatives that increase shareholder value both in the near and long term, including occasional introductory specials at lower occupied communities, increasing rates at higher occupancy communities, increasing level of care charges and disciplined proactive expense management.

We are also benefiting from the cash flow and value-enhancing renovations, refurbishments and conversion of units to higher levels of care that are in process at more than 60% of our communities. These enhancements, scheduled over the next 18 months, were already resulting in exceptional increases in occupancy, revenues and net operating income and we are confident that they will lead to further improvements in our operating and financial results. Furthermore, the transformation of our sales and marketing strategies continue to yield positive results.

As we have discussed on previous calls and as is evident in our consistent strong operating results, senior housing construction remains concentrated in select markets in which Capital Senior Living has a limited presence and competitive new supply continues to be constrained in our local markets.

With our average monthly rate of $3436 and average construction costs of approximately $200,000, the return on investment on a newly built community at 90% occupancy would be 5.5%. This low return on cost is an economic barrier that limits competitive new supply in most of our local markets. In fact, the only market where we are seeing noticeable competitive new supply is in the McKinney, Plano*, Allen Frisco submarket in North Dallas. This submarket represents less than 2% of our portfolio and has one of the fastest-growing populations in the United States with strong senior living demand.

With solid industry fundamentals, an improving economy and housing market, limited competitive new supply in our local markets and the gains we are recognizing from our unit conversions, community renovations and refurbishments, we believe that our occupancies can grow over the next few years to an optimal level of 92% to 93%, delivering significant organically-driven CFFO growth and increases in the long-term value we are creating in our owned real estate and for our shareholders.

Every 1% improvement in occupancy is expected to generate $4.5 million of revenue, $3 million of EBITDAR and $0.10 per share of CFFO. In the fourth quarter of 2015 and thus far in the first quarter of 2016, we completed acquisitions of six senior living communities for a combined purchase price of approximately $102.4 million. These acquisitions expand our operations in Virginia, Wisconsin and Florida and are expected to generate incremental annual CFFO of approximately $0.15 per share. We are conducting due diligence on additional acquisitions of high-quality senior living communities in states with extensive operations.

Our disciplined and strategic acquisition program is self-funded from internally generated cash. In the past four years, we've purchased 57 communities for a combined price of approximately $803 million and prudently finance them with long-term fixed-rate nonrecourse mortgages with a conservative 2.7 interest expense coverage ratio. These acquisitions have been highly accretive, generating a 16% cash-on-cash return on equity.

With a strong reputation among sellers, we source the majority of our acquisitions off market and at attractive terms. Our sustainable cash flow and robust pipeline allow us to continue our disciplined and strategic acquisition program, increasing our ownership of high-quality senior living communities in geographically concentrated regions and generating significant increases in CFFO, real estate value and shareholder value.

As the capital markets have tightened and become more volatile, the healthcare REITs and other public companies are reducing their allocation of capital to senior living acquisitions. Capital Senior Living is in an excellent position to benefit from this dislocation in the market as our differentiated business strategy allows us to fund our growth from internal sources without accessing the public capital markets.

And for our shareholders, we offer a more cost-efficient investment vehicle. A REIT typically pays a third-party operator a management fee of 5% of revenues in addition to the REIT's own G&A, which averages 3.8% of revenues. As one of the nation's largest owner operators with a geographically concentrated focus, Capital Senior Living's annual G&A is only 4.3% of revenues, which is less than half the combined administrative costs borne by the REIT and its third-party manager.

While we are large for our industry with all the benefits of scale, we are smaller than our larger peers and healthcare REITs. Our size is a real competitive advantage. Unlike our largest competitors, we don't need to make large portfolio acquisitions to move the needle. Our onesie-twosie acquisition approach allows us to self-fund our accretive growth and be selective and cherry pick.

Unlike others, we are not facing integration issues. We are not dealing with turning around bankrupt organizations or needing to dispose of non-core or underperforming communities. We are very proud of our high employee retention rates and we have a long tenured and highly experienced management team. Our senior management team averages 32 years of senior living experience and our corporate operations and marketing team has 523 combined years of senior living experience.

We are successful. We are focused. We are stable and we are growing prudently. We also have been proactive in enhancing the quality of our portfolio, increasing our substantially all private pay revenues to more than 95% and improving our balance sheet. We closed the only skilled nursing beds we had operated in two continuing care retirement communities and eliminated all Medicare revenue.

We sold five older nonstrategic communities and recycled approximately $26 million of cash into accretive acquisitions of newer, high-performing communities within our geographically concentrated regions. These sales also eliminated our operations in three states, which have allowed us to sharpen our focus and strengthen our operations in our geographically concentrated regions. These actions have improved our key operating metrics as is evident in our industry-leading and Company record high annual 2015 EBITDAR margin of 36.6%.

In the fourth quarter, we also capitalized on the appreciation we are creating in the value of our wholly-owned real estate through attractive nonrecourse fixed-rate long-term refinancings and supplemental financings at historically low interest rates, which have extended our mortgage loan maturities and increased our cash balances.

Capital Senior Living has a very clear and differentiated business strategy and benefits from numerous competitive advantages in a highly fragmented industry. Approximately 70% of the senior living operators in the United States are mom-and-pops. Most senior living operators are not well-capitalized and serve either as a fee manager for a third-party owner or as a tenant under a triple-net lease with minimal coverage and escalating lease payments.

In contrast, Capital Senior Living wholly owns more than 60% of our communities, which is the highest percentage of wholly-owned communities among the nation's top senior living operators. Our prudently financed owned communities create significant real estate value and sustainable cash flow, which we are investing in people, training, technology, systems, renovations, refurbishments, conversions of units to higher levels of care, accretive acquisitions and share repurchases while maintaining prudent reserves.

Our commitment to our most valuable resource, our people, limits turnover and strengthens resident satisfaction and length of stay. And our dominant competitive position in our highly fragmented local markets is a catalyst for further aggregation of smaller operators with limited resources, as well as an effective deterrent to possible new competitors.

As we move forward, we are uniquely positioned to continue creating long-term shareholder value as a financially strong company with scale, competitive advantages and a substantially all private pay business model in a highly fragmented and resilient industry that benefits from long-term demographics, need-driven demand, limited competitive new supply in our local markets, a solid housing market and a growing economy.

I would now like to introduce Carey Hendrickson, our Chief Financial Officer, to review the Company's financial results for the fourth quarter and full-year 2015.

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 $107.5 million for the fourth quarter of 2015. This was an increase of $7.4 million or 7.4% over the fourth quarter of 2014. The increase in revenue is largely due to acquisitions the Company made during or after the fourth quarter of 2014 net of dispositions. Since that time, we've acquired 10 communities, including one community that we purchased during the fourth quarter of 2015 and we've disposed of five nonstrategic communities.

Excluding the revenue of the five communities we've sold since the fourth quarter of 2014 from appropriate periods, our revenues increased $10.3 million or 11.1% in the fourth quarter of 2015 as compared to the fourth quarter of the prior year. For the full-year 2015, our revenue increased $28.3 million or 7.4% to $412.2 million. Revenue for consolidated communities, excluding the three communities that are undergoing repositioning lease-up or significant renovation and conversion increased 7.3% in the fourth quarter of 2015 as compared to the fourth quarter of 2014.

It's important to note that this 7.3% increase was achieved despite having 76 less units available for occupancy in the fourth quarter of 2015 than in the fourth quarter of 2014. Additions to available units from acquisitions were mostly offset by reductions to available units related to dispositions and then conversion of refurbishment projects currently in progress have temporarily taken out units out of circulation at certain communities.

Our net operating income for these communities increased 4.7% in the fourth quarter of 2015 as compared to the fourth quarter of 2014, again with 76 less units available for occupancy. These results clearly illustrate the effectiveness of our strategy to acquire high-performing communities in strong markets, dispose of nonstrategic underperforming communities and to convert units at our existing communities to higher levels of care while continuing to proactively manage our expenses. Operating expenses increased $5.4 million in the fourth quarter of 2015 to $65.1 million due primary to the acquisitions.

Our general and administrative expenses for the fourth quarter of 2015 were $200,000 lower than the fourth quarter of 2014 after excluding transaction and other one-time costs for both years. On that same basis, G&A expenses as a percentage of revenue under management were 3.7% in the fourth quarter of 2015, which is down from 4.1% in the fourth quarter of 2014. For the full year, G&A as a percentage of revenues was 4.3%, which is down from 4.6% for full-year 2014.

As we noted in the press release, the Company's non-GAAP and statistical measures exclude three communities that are undergoing repositioning, lease up of higher licensed units or significant renovation and conversion. In previous quarters, you will remember that we've excluded four communities. However, as expected, one of the communities reached 90% stabilized occupancy during the quarter -- fourth quarter 2015 -- so we are now including that one community in our non-GAAP financial results.

Our adjusted EBITDAR was $38.2 million in the fourth quarter of 2015, which is an increase of $2.2 million or 6.2% from the fourth quarter of 2014. This does not include EBITDAR of $1 million related to the three communities that we've discussed that are undergoing repositioning lease-up or significant renovation and conversion. The Company's adjusted EBITDAR margin was 37.1% in the fourth quarter of 2015. For full-year 2015, adjusted EBITDAR increased 8.9% to $144.5 million. The Company's full-year 2015 adjusted EBITDAR margin was 36.6%, a record high annual margin for the Company and a 70 basis point improvement from full-year 2014. Our adjusted CFFO was $12.8 million in the fourth quarter. On a per-share basis, CFFO was $0.45 compared to $0.44 on a comparable basis in the fourth quarter of 2014.

I want to note that the fourth quarter of 2014 included a workers' comp credit that represented about $0.015 per share of CFFO. The contribution to CFFO from communities acquired during or since the fourth quarter of last year was $0.06, which is in line with our expectations and public announcements related to these communities. Our adjusted CFFO for full-year 2015 was $47 million or $1.64 compared to $1.45 in 2014.

Our same community revenue increased $1.7 million or 1.8% over the fourth quarter of the prior year. However, as noted previously, due to conversion and refurbishment projects currently in progress at certain communities, there were fewer units available for lease in the fourth quarter of this year than the fourth quarter of last year. Approximately 140 units less on a same-store basis. With a like number of units available in both years, same community revenue would have increased approximately 3.2% versus the fourth quarter of the prior year.

Our same community expenses increased 3.2% in the fourth quarter of 2015 versus the fourth quarter of last year. Labor costs, including benefits, increased 4%. The increase was primarily due to a one-time workers' comp credit in the fourth quarter of 2014 and an increase in the number of employees with healthcare coverage in the fourth quarter of 2015 versus the fourth quarter of 2014 related to the increasing impact of the Affordable Care Act.

Adjusting for these items, our labor cost increased 2.9% and our total same-store operating expenses increased 2.5%. Both of our next two largest expense categories were down versus the prior year. Food cost decreased 0.8% and utilities cost decreased 5.9% due to milder weather. Over the past four quarters, our total same community expenses were up on average only 1.3% with labor costs up 1.7%, food costs down 0.8% and utilities costs down 2.8%, a result of our consistent disciplined proactive expense management efforts.

We do not anticipate significant wage pressure in 2016 due in large part to the location of our markets. Wage pressure, particularly on minimum wages, is primarily on the coast and our communities are primarily located in the central and southeastern areas of the United States where the economic and cost of living dynamics are very different than on the coast. Also, only 5% of our employees are paid minimum wage and those employees are mostly transient in nature, primarily high school and college students.

Our same community net operating income increased 0.3% in the fourth quarter of 2015 as compared to the fourth quarter of 2014. However, with a like number of units available in both years and adjusting for the unusual labor items previously noted, same community net operating income would have increased approximately 3.2% from the fourth quarter of last year.

Same community occupancy was 88.9% in the fourth quarter of 2015, an increase of 50 basis points versus the fourth quarter of last year and a 20 basis point increase from the third quarter of 2015. Our same community average monthly rent was up 2.6% versus the fourth quarter of 2014.

For our consolidated communities, average monthly rent was up 6.4% and our consolidated occupancy increased 130 basis points versus the fourth quarter of 2014 and increased 30 basis points versus the third quarter of 2015. The improvement in our consolidated metrics versus the fourth quarter of last year reflects our sale of 5 nonstrategic communities in 2015 and our accretive acquisitions of high occupancy communities with higher rents.

We continue to make steady progress on the conversion of independent living units to higher levels of care. Through the fourth quarter of 2015, the impact of the first phase of 400 units converted to a higher level of care that were completed by mid-year 2015 is approximately $0.06 per share of CFFO with $0.02 of that coming in the fourth quarter.

This includes one of the communities previously under conversion that reached stabilization in the fourth quarter and was added back to our fourth-quarter results. One other community remains in lease-up and will likely be added back in the first half of 2016. On an annualized basis, we now have achieved approximately $0.08 of the expected $0.20 of CFFO contribution from this first group of conversions.

Further, the impact of this first phase of 400 conversions on occupancy, revenue and NOI is outstanding and very much in line with our expectations. On a combined basis, occupancy at these communities has grown from 82.4% prior to conversion to 90.9% at December 31, 2015. Revenue at these communities in the fourth quarter of 2015 increased 15.3% compared to the fourth quarter of 2014 while net operating income increased 16.7% at these communities.

As expected, we completed another 100 conversions by the end of 2015 and we are now in the process of leasing those units. We are making steady progress on an additional 200 conversions that we expect to complete by the end of 2016 with the majority of those expected to be completed in the second half of the year and additional conversions at other properties are under consideration.

Looking briefly at the balance sheet, we ended the quarter with $69.2 million of cash and cash equivalents, including restricted cash, an increase of $21.4 million since September 30, 2015. We invested $10 million of cash as equity to complete the acquisitions of three communities and we spent $18.8 million on capital improvements.

Just to note that the $18.8 million of capital expenditures includes $3.7 million related to lease incentives for certain tenant leasehold improvements, for which we expect to receive full reimbursement from our leasors. We've been reimbursed about $2.5 million so far and we expect the remainder to be received as the projects are completed.

The cash received from operations, as well as from the refinance of the four-property loan pool and supplemental financings completed in the fourth quarter more than offset the outflows and resulted in the $21.4 million increase in cash reported during the fourth quarter.

Our mortgage debt balance at December 31, 2015 was $763.4 million at a weighted average interest rate of approximately 4.61%. We added approximately $53.9 million of debt in the fourth quarter related to the community required, the refinancing of the four-property loan pool and supplemental financings. At December 31, all of our debt was at fixed interest rates except for one bridge loan that totaled $11.8 million, which was at a variable rate of approximately 4.65% during the fourth quarter. The average duration of our debt is greater than eight years and 98% of our debt matures in 2021 and after.

Looking at our expectations for the first quarter of 2016, the first quarter of every year is generally the most challenging as the cold weather and winter conditions result in increases in costs such as utilities and snow removal services. Attrition rates are also generally highest in the first quarter of any given year; although, as Larry noted, our attrition rate thus far in 2016 is considerably better than the first quarter of last year, which is a good indicator for the first quarter of 2016.

However, heavier than usual attrition early in the fourth quarter of 2015 resulted in a little lower starting point for occupancy in the first quarter of 2016 even though we recovered nicely in December. Additionally, as I noted earlier, we go into the first quarter of 2016 with approximately 76 less units available for occupancy than in the first quarter of 2015, which is equivalent to the elimination of one community.

Also due to the leap year, we will have one extra day of expense in the first quarter of 2016 than in the first quarter of 2015. An extra day generally amounts to approximately $500,000 of incremental expense.

Still with all these things considered, we expect to see improvement in our key metrics in the first quarter of 2016 as compared to the first quarter of 2015, including an increase in CFFO per share of approximately $0.01 to $0.02 versus the first quarter of 2015 due to the core growth in occupancy and rate we've experienced since the first quarter of 2015 and the improvement in metrics associated with our acquisitions versus our dispositions. And the current key indicators in the first quarter of 2016, most notably lower attrition and strong deposit taking, are creating momentum leading into the second quarter.

In looking at the full year of 2016, we are very optimistic about our growth prospects. For our core operations, our goal is to grow average monthly rent at a rate at or near 2.5% with expense growth 50 to 100 basis points less than revenue growth. We also expect to improve our core occupancy by 100 basis points over the course of the year. Achieving these goals results in core NOI growth in the 4% to 6% range.

We expect additional growth from acquisitions and conversions during 2016. The acquisition pipeline is robust and the financing environment remains very favorable, so we'd expect to continue to add high-quality communities that are a good fit for our portfolio during the coming year. And we continue to expect an incremental $0.06 to $0.08 contribution to CFFO in 2016 related to our ongoing conversion projects.

We expect our capital expenditures to be similar to 2015 as we continue with our conversion renovation and refurbishment projects and then to normalize in 2017 and 2018. Taken altogether, as we execute on our strategic plan in 2016, we expect excellent growth in our operating and financial results.

At our Investor Day this past fall, we illustrated a path to $3 per share of CFFO in 2018 and we remain confident that we will reach that goal with growth over the next three years from our core operations, conversions of units to higher levels of care, acquisitions and the addition of two communities currently excluded from our non-GAAP results after repositioning is complete. And importantly, we would expect this significant growth in our operating and financial results to translate into excellent growth and shareholder value. That concludes our formal remarks and we'd now like to open the call for questions.

(Operator Instructions). Chad Vanacore, Stifel.

So I'm just looking at the acquisitions that you did in the fourth quarter and the first quarter. Seemed like the first-quarter acquisitions closed are a lot more accretive. Can you explain why that is?

The amount of debt on the properties is a little different. There was less debt on the property that we acquired in the fourth quarter. Fourth-quarter acquisition was a Class A building that was something that we thought fit very well geographically, a very strong building. But it's really a function of the financing looking at the amount of borrowing we had against that property as compared to the properties we closed this year.

All right. And then (inaudible) looking at that, it's higher average monthly rent than your overall portfolio, so what's the asset mix in the new acquisitions versus your current consolidated portfolio mix?

If you look at the acquisitions, they are predominantly assisted living with memory care. Right now, we are 55% independent living, 45% -- I'm sorry -- 45% independent, 55% assisted living. The average monthly rent, if you look by level of care, in the fourth quarter, our independent living rents average around $2500. Our assisted living rents are about $4000 and our memory care rents are about $5000. As I said, the average for the portfolio was $3436. If you look at the acquisitions, these average rents are higher and again more weighted towards assisted living and higher than our average mix right now.

All right. Then Larry, you also mentioned in the press release a robust pipeline. Do you want to go into any details about the size of that pipeline and what types of assets that you are looking at?

I said on the call that we really are in a unique position with a lot of the other natural buyers pulling back from the market. We always have hundreds of millions of dollars of acquisition opportunity in the pipeline. I mentioned in my comments about cherry picking. We typically only buy about 15% of the properties we look at right now. Right now, we have several hundred millions of dollars in our pipeline. They are typically one, two -- one situation is a three-property transaction. I'd say they are all A or B quality assets in our geographically concentrated region with a good mix of again AL and memory care.

Half off market, half coming to us from people we know. So again, the reputation we have and the relationships we have facilitate this and the pipeline keeps growing. So we continue to see high-quality properties that we are very selective and very encouraged by our position in the market right now since we don't have to access the public capital markets to fund our growth that we can continue a very strong acquisition program throughout this year and into the next few years.

All right. And then you allude to maybe the competitive environment for acquisitions being a little less so nowadays. How should be think about the cap rates and yields on those assets?

We've always been able to buy properties at attractive cap rates. That continues. We didn't typically bid up properties in portfolio transactions. The discipline that we have, the returns that we are able to achieve and the financing -- again, interest rates right now, a 10-year is down to 1.75%, so obviously it's a very, very attractive market. I will tell you that there's less transactions. Our lenders are more desirable to do business with us because we have a great relationship and are really some of the dominant borrowers from some of our lenders, so they are very competitive.

And as I said, we believe we can continue to allocate capital to acquisitions, as well as our share repurchase, as well as our renovations, conversions, all the other areas of growth that we are focusing on that will add to our significant increase in shareholder value and remain very disciplined as it relates to the pace and the quality of the acquisitions that we make.

All right. Thanks for taking my questions. I'll hop back in the queue.

Joanna Gajuk, Bank of America.

So on the comments about, I guess, the driver of growth that you expect or I guess that you aim for for the year, so you talk about rents close to 2.5% and occupancy at 100%, or 100 basis points -- sorry -- and then NOI 4% to 6%. So I guess the question is -- because it feels like -- I guess looking out for the average for the year, rents, I guess, were closer to maybe 2% rather than 2.5%, but I guess Q4 was very strong and then occupancy feels like maybe was less than that. So I guess what gives you the confidence that you can grow occupancy 100 basis points on a same-store basis for the full year?

And also in terms of same-store NOI, because I guess the average also is a little bit lower, which I guess is because of the issue in this quarter. So how do you feel with the same-store NOI in 2015 for you and also what gives you confidence in growing occupancy 100 basis points for the year?

I will take the first half of the question and I will let Carey take the second half. And Joanna, it's great to hear your voice. As I mentioned in my comments, we lost 90 basis points financial occupancy in the first quarter of 2015 because of the flu and we gained sequentially over three quarters 150 basis points. Right now, we are seeing a much weaker flu and the difference in our move-outs is about 90 fewer on a same-store basis than for the same period last year.

I have never seen better metrics from our sales and marketing team as it relates to our conversion rates to deposits. We have -- in January, for example, we had more properties. It was actually up 58% from what we saw in the fourth quarter for properties that gained five or more deposits in the month of January. I talked about Plano, the North Dallas market, what we are seeing as far as the supply. I'm happy to say that the demand is so strong that our two properties actually took 13 and 10 deposits each so far this month.

If I go around the country and look at our performance, I have a lot of confidence that this team is very focused. We have a fabulous team at the community level, the most seasoned and best regional corporate team in the country and we are not distracted by other issues. So I am highly confident that, barring something out of our control, whether it be illness or weather or something, that we have tightened our focus. We have enhanced our tools and resources and they are all generating terrific results.

In fact, we talk about our zones. We have green, yellow and red. Our green zones, which average 95%, we have more properties in the green zone than I've ever seen in the Company and the fewest in the red zone. Part of that was the decision to sell five buildings last year, but more importantly it's the effectiveness of our renovations, refurbishment and other tools that we are using.

So I just say Carey talked about momentum. We are seeing very strong momentum. The one area that we can't control is attrition. About 80% of move-outs in our communities are because of people passing away or moving to higher levels of care. But other than that, I have all the confidence in the world that the pace of which we are seeing these type of gains in occupancy should continue and possibly accelerate throughout the year. And then I will let Carey talk about, on the expense side, of that spread between rate and expense growth.

Right. So with that kind of -- if you think about rate increasing 2.5% or so and then another 100 basis points of occupancy, you are talking about revenue somewhere in the 3% range, in that 2.5% to 3% range for the year and we certainly think we can grow expenses at 50 to 100 basis points less than that. We've had a great track record of controlling our expenses. I noted in my remarks that our same community expenses were up on average over the past four quarters only 1.3%. I think it's hard to imagine we can continue at that rate, but certainly in the 2% to 2.5% rate I think for this next year we should be able to achieve that.

Labor, that was up a little bit more in the fourth quarter, but it was really related to those two items that I spoke about and after moderating for those two items, it was up about 2.9%. One thing I didn't note in my comments was that, with the increase in AL that we have, as Larry noted, versus IL, we are a little heavier AL and so we have more caregivers and so covering those holiday shifts also caused us a little bit extra cost in the fourth quarter 2015 versus the fourth quarter 2014 on the labor side.

But I'm confident -- just our operating team does a fantastic job of controlling expenses. They are very focused on that on an ongoing basis and so I feel good about being able to control our expenses and achieve that NOI growth.

Okay, so just to summarize, I guess so you expect same-store NOI, I guess, to accelerate from 2015 because you feel like the cost control will be there and more importantly I guess the top-line growth, the same-store occupancy combined with 2.5% rent increase will help that (multiple speakers)?

Joanna, one thing I also reiterate, our same-store rate growth in the fourth quarter was 1% higher than third quarter. As we discussed at the Investor Day, we implemented increases to our market rents and in-house rents for those communities that were 93% or higher occupied. Now we implemented a 10% increase in level of care fees. January 1 of this year, we just implemented another increase at all properties on all level of care and rents. So we feel that we have some pricing power and we will continue to push rate as well.

So I think that as long as we can continue to execute and get the gains in occupancy with these rate increases, we should see the top line grow as well and then obviously that all flows down to the NOI growth.

Great. And you mentioned marketing and sales, I guess, that you are seeing that they are doing pretty good job. So can you talk about the expenses associated with it in terms of either marketing spending, how it compares over the last couple of years and then any comment around your [withhold] sources, Internet versus others and where do you see this going forward?

Carey, go ahead.

I'll talk about advertising. Joanna, there's been rationalization within our advertising expenses. Some of the dollars we used to spend on newspaper and television and direct mail and Yellow Pages have really reduced dramatically and we've moved that expense more towards Internet kind of search methods. And so they've kind of moved that direction.

Referral fees, which is included in our advertising costs, have increased because we've gotten a greater number of leads from A Place for Mom and Caring.com, especially A Place for Mom. And so that has increased over the last couple of years and we expect that to continue to be that way going forward.

Joanna, let me give you some metrics. 67.6% of our leads are Internet referrals. The cost of those leads per move-in is $126. Our website captures another 10% of cost per lead is $105. Our call center that we implemented over the last year has been very effective in driving leads as well at a cost of $110 per lead.

So if you look at our advertising, it really is very little. What you see really in that category are the referral fees that we are paying to A Place for Mom, Caring.com and other sources on the Internet. But as Carey said, we have done -- our sales and marketing team has done an excellent job of really rationalizing the costs, cutting back on direct mail, cutting back on newspaper ads, Yellow Page, radio, all the traditional and really if you look at it, it's a highly efficient process at a very low cost. Most of the cost you see in that category is really referral fees, which we are happy to pay because we are getting a resident for two to three years with significant income revenue that's being generated.

Great. Thank you. That's all for me.

Brian Hollenden, Sidoti & Company.

With the stock sitting at about $16, any thoughts on conducting a larger share buyback program compared to further community acquisitions? (multiple speakers)

Well, let's go through the math.

(multiple speakers) talk about how we think about -- how you think about capital allocation.

Brian, I would be happy to do that. At today's closing stock price, a $10 million buyback would buy back about 630,000 shares. That would reduce our outstanding shares from 27.8 million to basically 27.4 million. We've earned $1.64 of cash flow for the year. It's $0.03 accretive. That same $10 million in acquisitions would generate cash flow of $1.6 million. That's $0.06 a share of CFFO. It would enhance our real estate value. Most importantly, that's $1.6 million of cash that we can apply for other investments, whether it be acquisitions, conversions. You heard the stats that Carey gave.

The accretive nature of our investing is so high, whether it be conversions, acquisitions, that it's interesting and maybe counter-intuitive. While we agree our stock is not reflecting our growth and our value and we will continue this repurchase program because we think it's good investment and shows the confidence and commitment we have to shareholder value, but the other allocations of capital are actually more accretive and more importantly actually create cash that we can then reinvest elsewhere and continue to enhance our shareholder returns.

Thanks for that color. Just one other question. Assisted living facilities making up about 55% of the operating portfolio at the end of the year, up from about 50% the prior year. Where do you see that number finishing come the end of 2016 as we move throughout the year with the conversions that you have in the pipeline?

It'll certainly inch up and with the conversions, as well as with acquisitions, which will have a significant component of AL. I don't think it will reach 60% by the end of this year, but it'll be in that 55% to 60% range.

All right. Thank you.

Ryan Halsted, Wells Fargo.

A question on the unit conversions. I think you said, in 2016, you are expecting $0.06 to $0.08 of CFFO from the unit conversions, is that correct?

An incremental $0.06 to $0.08. That's right.

And that's on the 400 that are leased up? Does that include the 200 or I guess the 300 total units that you are in the process of leasing up?

No, it does not. So we have -- the 100 that we finished by the end of this year, we probably have something like a penny of that in 2016 and then another $0.02 or so in 2017 incremental related to those. The 200 that we are working on for this year, they will primarily finish up in the last half of 2016, so they probably won't have much impact in 2016. They could later in the year just depending on the timing of when they happen, but probably most of the $0.05 that we expect from those 200 conversions will happen in 2017.

Okay, thanks. And then on CapEx, it's running a bit ahead of expectations. I know you kind of called it out last quarter, but continues to go up. I just wanted to make sure I understand. What projects is the CapEx going to?

It's going to the conversion projects, as well and the renovations and refurbishments, where we have to do some kind of modifications for conversions. Not all of them require that, but they have been higher and they will probably continue to be somewhat higher in 2017, probably around a similar amount -- excuse me -- 2016 -- and then they will moderate in 2017 and 2018.

One thing I will note, Ryan, that you bring up is that GAAP lease accounting requires us to gross up the balance sheet and the cash flow statement for CapEx related to -- some of these projects that are really related are lease properties that we are going to get fully reimbursed for, so it makes the CapEx number appear a little bit higher than it really is.

As I said earlier, Ryan, we have CapEx ongoing right now, major CapEx projects at 75 of our 126 properties. That's about 60% of the portfolio. Some of it is -- and we've seen the success and talked about San Antonio and other markets where we've refurbished properties, seen their properties even despite a lot of construction in markets that for the full year they maintained 95%, 100% occupancy with NOI growth of 12.5% and that's pretty consistent throughout the (inaudible).

So we think it's a good allocation of capital. We are doing some conversions where we are putting money in. We expect to get a 15% to 30% return on the investment for those investments and then the refurbishments, or renovations, modernization of properties, repositioning of the closed units at those two CCRCs we talk about. We think that's a good investment of capital to go into our properties to create significant value because we own most of them, but also enhance the cash flow. And as I said, the expected return on the investment is typically a mid-teen type of return unlevered.

Okay. That's helpful, but how should we think about the renovation projects? Are those somewhat defensive in nature or do you expect, at some point, you'd be able to take advantage of maybe faster rate increases or something along those lines?

Well, there are two answers here. One is we have grown the portfolio by 60 properties in the last five years through acquisitions. The acquisitions are typically very new or recently renovated. There's not a lot of CapEx there. Where we are investing the money are in some of the legacy properties, older properties that need to be refreshed. These are buildings that either we built 15 years ago or some of them are even older.

So these are offensive and defensive. It's really more offense because we are not trying to -- we're not doing this because of supply because we are not seeing much supply. We are doing it because it's the right thing to do for our residents. It's the time to do it. It's part of our business strategy and to freshen up the building. And I will tell you, when you look at the results and you see our occupancy gains and see the rate gains, it's a prudent investment.

It's hard to say that you can then push rent or something else. Clearly, we have now had two price increases in the last four months, so we feel we have some pricing power, but I think it's really just part of the nature of the business that, over a certain cycle, there's the opportunity to do this. Fortunately, the difference today is we have cash. We are not your typical operator leasing buildings with minimal cash flow or managing for a third party and not having cash.

So it really is the ability for us to allocate the cash resources that we have from operations from some of the refinancings and supplemental financings we can do with our properties that I feel really is offensive to enhance these buildings, to be able to improve their performance, hopefully push rents, obviously either improve or maintain occupancies.

And when I look at some of the markets where we did this and see NOIs increasing by 20%, 15% -- we have a building in Atlanta -- in North Georgia -- which is included in the Atlanta MSA, which I know is one of the hot buttons. This is a building we bought a couple years ago. We made an investment there last year. That building is 95% occupied. It had a 9% increase in revenue and in 2015, its NOI increased by 42%.

So I will say that we are investing the money wisely. We are seeing very strong steady performance and we think it will definitely bolster the cash flow and the value creation for both our real estate and our shareholders by making these investments, as well as we get tremendous -- we get 95% satisfaction from our residents. This goes far in really keeping residents happy. We don't lose resident competition.

One thing I will comment on, because there's so much talk about supply, I track every month every move-out. I talked about level of care. Moving to competition in this industry for Capital Senior Living is less than 1% and that's typically a price point where someone's moving to a less expensive community. So we are doing it because we think it's prudent and we think it will give us great long-term value creation and a very high return on the investments that we are making.

That's great. Thanks, Larry. On the rate growth guidance, the 2.5%, that seems a little bit lower than some of the recent rate increases. I just wanted to -- is there some level of conservatism in that outlook or is there something else that I should be considering?

I think that if you look at our rate increases, we are getting much higher rate increases on independent living. If I look at fourth quarter, January, February or actually rate increases on a same-store basis for independent living has been about 3.7%, actually 3.2%. Our AL is just below 3%. Memory care, we are finding rate increases of about 1.5% to 2%. Again, the average rate now is $4800, so there's a price point.

So as I said earlier, we have probably about 10 properties that are below 80% and there we will typically run specials and do things, so there may be a discount off that rate increase. And then we pushed the rates at the rest of the portfolio, so it's a bit of a blend and again, fourth quarter, we averaged 2.6%, but some of the rates actually were over 3% and it's a combination of mix and look, as we get more properties at 85% or 90% occupied, we probably can push rates a little more consistently throughout the portfolio.

Okay. That's great. And then maybe my last one, just a modeling question. Within the G&A, how much was the one-time workers' comp credit?

It was $400,000. That was in the fourth quarter of 2015.

Okay. You had a similar credit in the prior year --. I'm just trying to get at -- should I be -- is this G&A a good run rate? Is it -- are these one-time items or are these items recurring in nature?

No, they are not. We had the one credit in 2014 -- fourth quarter 2014. We didn't have one in 2015.

Yes, there was no credit in 2015. It was a 2014 credit.

Yes, but it caused that to show less of an increase because of that. Actually we were down in the fourth-quarter G&A if you take out the transaction and other one-time costs. But from a run rate standpoint, the fourth quarter of 2015 was a little lower because we did have favorable medical claims expense in the fourth quarter 2015 and you know that can vary from quarter to quarter. You'll have a really good experience one quarter and the next quarter it may be a little higher, so over time that evens out.

So our G&A as a percent of revenue in the fourth quarter was only 3.7%, but it's probably better to look at the full-year rate, which is more indicative at 4.3% and I'd expect going forward it would probably be somewhere in that 4.3% to 4.5% range of revenue. So does that help?

Yes, very much. Thanks for taking my questions.

(Operator Instructions). Dana Hambly, Stephens.

I appreciate all the comments and I was hoping, Carey, maybe you could help me bridge your comments on the first quarter. I think you said you'd expected the CFFO to be up $0.01 to $0.02 year-over-year. Is that correct?

That's right.

Okay. So that's kind of 3% to 5%. I thought the acquisitions alone that you did in 2015 after the first quarter would have added $0.03 to $0.04 and you announced more acquisitions today. So could you just help me bridge the guidance with where you were last year?

Yes, absolutely. So yes, if you think about what's happened since the first quarter of 2015, yes, we had acquisitions and that added about 750 units or so. We had dispositions that took out about almost 700 units. So it's fairly even, so it's a little bit of an increase from acquisitions as far as units added, but on the other side, as I noted on a same-store basis, we have 140 less units available for rent in the first quarter of 2015 versus -- excuse me -- 2016 versus 2015 because some of them are currently out of circulation because of the renovations, refurbishments and conversions that we are doing that we are kind of in the middle of.

So even with all of that, I feel good about the fact that we've got increases in the first quarter of 2016 versus 2015 with all of that kind of considered together and that just shows that the acquisitions have better metrics than the dispositions and that we've had good improvement in our core growth also during the year.

And Dana, four of those five buildings were sold I believe in the first quarter of 2015, so as you get to the second quarter and later, you'll see a bigger spread because then you'll see the full contribution of those acquisitions and on a comparable basis, those disposed-of properties will no longer be in our numbers.

Okay. All right. That's helpful. And again, leap year is another $0.02 pennies or so in expense?

Yes, it is. Yes, because we have an extra day this year because of that.

Actually, if it's Labor Day, [we will] give holiday, maybe we will save some money.

All right. I will have to factor that in too. Larry, you talked about the attrition rate or maybe, Carey, you had talked about it in the fourth quarter, how it was pretty high early on in the quarter. That seems to me fairly unusual. Any thoughts to explain that?

Residents unfortunately passing away. It does happen, as I said. It's something that you really can't predict. It happened pretty much in the month of October. I will say, however, we ended -- the last week of December we had over 200 move-ins, which is the highest I have ever seen in the Company history. So we really did recover. But, again, what happens on financial occupancy, there's a lag. So as occupancy rebuilds from the attrition that took place in October, we will start to see that as where we start in January. But the good news is we see very good momentum as we get through the quarter and we are seeing many fewer move-outs because of the weaker flu season.

So I think that we will end the quarter in a much better position than we did a year ago and have a lot of momentum going into the second quarter. But it is a function of the pace of move-outs in October. Since then, we've had a nice increase in all of our metrics. Deposits are consistently up. Move-ins are up. So all that should help.

Okay. That's helpful. And then last on the pricing, I get the annual base rate increases, but you guys have a higher AL portfolio these days and I know you've been more diligent on care plan charges. So can you just give a sense of your monthly rate, what percentage is the care plan charge and how should we think about the pricing growth just on care plan charges?

Well, we actually -- I think we had a $1 million increase in care plan in the fourth quarter and if I look at the breakout of the revenue -- again, I have it by variance. Let's see if I can get you the actual number. The care plan was up $1 million in the quarter.

That's year-over-year?

Year-over-year. So that clearly is the benefit of the increases that we implemented in September and October of 10%. If I look at -- I'm just looking at one month to give you some range of what it would be there -- I'd say that the rent level for the care plan is probably about 10% of the rent.

Of the total.

10%.

Great. Thanks very much.

At this time, I would like to turn the call back over to Larry Cohen for any additional or closing remarks.

Okay. Well, again, I want to thank everybody for your participation today. As always, feel free to contact Carey or myself if you have any further questions. Again, we want to thank our team's hard work and dedication for a very successful 2015 and have a lot of confidence in our ability to have a very bright future. I think that we've covered a lot of information today and again, we appreciate your participation and look forward to seeing many of you over the next couple of months at various conferences. Have a good evening.

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