Sonida Senior Living Inc (SNDA) 2016 Q3 法說會逐字稿

Good day, and welcome to the Capital Senior Living third quarter 2016 earnings release conference call.

Today's conference is being recorded.

The forward-looking statements in this release are subject to certain risks and uncertainties that could [cause] results to differ materially, including, but not without limitation to, the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business condition, risks of downturns in economic conditions, generally, satisfaction of closing conditions, such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Mr. Larry Cohen. Please go ahead.

Thank you. Good afternoon to all of our shareholders and other participants, and welcome to Capital Senior Living's third quarter 2016 earnings call.

I want to thank our strong team at Capital Senior Living communities across the country for providing our residents with exceptional service. I am extremely proud of their 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 a long-term value we are creating for all of our stockholders and other stakeholders.

Our third quarter 2016 results were supported by the continued implementation of our clear and differentiated real estate strategy to drive industry-leading growth and superior shareholder value. We also made steady progress in the third quarter on important operational and corporate objectives related to positioning the Company for sustained growth, including the announcement of the strategic purchase of four communities we currently lease as we look to continue to increase our real estate ownership.

Our third quarter results were impacted by two non-controllable items: attrition and healthcare claims. We experienced a very strong demand in the quarter, with same-community move-ins increasing 5.4% over a strong third quarter of 2015. However, same-community attrition increased an unusually high 9.5% during the quarter, which impacted occupancy and revenue.

Our September results were outstanding, with an increase in same-store net deposits up 6.4%, a 7% increase in move-ins, and attrition kept pace with September of 2015. Our sustained level of strong demand is clearly evident, as the three highest months for move-ins in the Company's history occurred in June, August, and then September of 2016.

We had a Company record of 500 move-ins, a milestone for Capital Senior Living, in September. As I mentioned on our last earnings call, our prior Company record number of move-ins occurred in June, with 478 move-ins, and we had 469 move-ins in August. These continuous strong demand metrics are a testament that we are not facing new supply pressures in our geographically concentrated regions.

It also appears that the high attrition experienced in July and August were anomalies. Not counting these two months, we have averaged 404 monthly move-outs over the past 12 months, including September of 2016. Uncharacteristically, we had 437 move-outs in July and 468 move-outs in August, with 106 more same-store move-outs in the third quarter of 2016 compared to the same quarter in 2015.

Third quarter 2016 move-out reasons were in line with third quarter 2015, with 71% of move-outs in both quarters resulting from death or higher levels of care, and move-outs to competition dropped from 4.1% in third quarter 2015 to only 2.5% in third quarter 2016.

Capital Senior Living is well positioned to drive growth and long-term shareholder value, and our outlook is supported by the fundamental strength of our business model. We are attractively positioned in the highly fragmented senior housing market, and we are uniquely positioned for continued success. We have a capital plan that supports our long-term growth initiatives and a track record of strong growth.

We remain laser focused on executing on our long-term sustainable real estate-focused growth strategy. The main pillars of our strategy include continuing to pursue accretive acquisitions, increasing our owned portfolio, and converting units to assisted living and memory care. The management team and I firmly believe that these three areas of focus will pave the way for sustainable organic growth over the long term.

From an operational perspective, achieving core organic growth is at the center of everything we do. Increasing occupancy rates, driving pricing improvements, and executing on cost containment initiatives are all key to that objective.

We are pursuing occupancy improvement where opportunity exists, and increasing average rents to market [in-house] rent increases, as well as level of care charges. We are also diligently and proactively managing our expenses. And through renovations and refurbishments, we are enhancing our cash flow, maximizing our real estate value, and driving higher overall revenue.

Acquisitions continue to remain a core component of our plan to drive shareholder value. We have a proven track record of strategically aggregating local and regional operators in geographically concentrated regions, and our success in acquiring high-performing communities at attractive terms is a testament to our ability to effectively source and close deals. This disciplined and strategic acquisition strategy leverages our strong reputation among sellers, our robust pipeline of near- to medium-term targets.

We're deploying our cash into strategic, immediately accretive acquisitions that are projected to generate more than a 15% annual return on equity. With the scheduled closing of a transaction tomorrow, we will have completed more than $138 million of acquisitions this year and announce today an additional $85 million of acquisitions expected to close in January 2017.

We are conducting due diligence on additional acquisitions of high-quality senior housing communities in states with extensive existing operations. Going forward, acquisitions will remain a key component of our capital allocation strategy.

With these announced transactions, we continue to increase our owned real estate portfolio, and we continue to believe that the ownership-versus-lease model provides significant strategic and financial benefits. Capital Senior Living is one of the largest senior housing owners by percentage, and since 2010 our real estate ownership has increased from 32.5% of our total portfolio to 61.2%.

By increasing our owned portfolio, we will be better positioned to generate significant and sustainable cash flow and real estate value, optimize our asset management and financial flexibility, and enhance our margin profile. We are confident that increasing our owned portfolio over time is an effective way to increase the long-term value we are delivering to our shareholders as a focused real estate Company.

We also have a long history of driving significant occupancy improvements through accretive conversions. Currently, approximately 784 units are out of service. When stabilized, these units are expected to contribute approximately $31 million of revenue, $11 million of EBITDAR, and $7.5 million of CFFO on an annual basis.

And the lease-up of our recently opened conversions has been excellent. During the second quarter of 2016, we opened 21 units of memory care at one of our communities that is being repositioned, of which 19 units are currently occupied. We opened 10 units of memory care at another community earlier in October, and nine units are currently occupied. And 66 units of assisted living and memory care opened at a third community in October, and we already have 40 scheduled move-ins or deposits.

The senior housing market offers attractive long-term fundamentals, including supportive population and demographic trends, a highly fragmented industry, and a constructive operating environment. Senior housing occupancy levels are stabilizing across the United States. Senior housing rent growth is at a seven-year high. And we are seeing a tapering off in industry supply across the senior housing market. Capital Senior Living is well positioned at the intersection of these industry trends.

With that said, our positioning extends beyond just the senior housing industry. Given the pure-play, private-pay nature of our business model, we are in many respects supported by the same industry-wide drivers that impact the multifamily and lodging sectors, while historically providing investors with higher returns. In fact, over the past 10 years senior housing has yielded an 11.9% annualized total return on investment versus lodging, with a 6.5%, and multifamily, with 7.3% returns.

While competition is a factor in any healthy industry, we benefit from a concentrated portfolio that is geographically situated outside the top 10 MSAs with the highest level of construction activity. In fact, more than 96% of our portfolio is situated in MSAs with limited new construction. And in those markets with the highest level of construction activity, our average occupancy is 94%, as our average monthly rents are significantly below those of newly constructed communities.

Furthermore, we operate in markets with high barriers to entry. When comparing our average rates in many of our local markets versus the cost per unit of new builds, it's clear that any new entrant in our core markets will be challenged to generate a sufficient return on investment to justify creating any new supply.

Our differentiated strategy of providing only affordable high-quality senior housing, and not healthcare ancillary services, enhances our competitive advantages, as our monthly average rents compare favorably to the cost of living at home with the additional cost of home healthcare.

And recent studies show that the cost of home healthcare is rising more rapidly than the cost of seniors housing. As Carey will discuss, we are not facing the same wage and expense pressures that Brookdale announced today nor that Home Health and other healthcare companies are facing. And our private-pay strategy insulates us from government reimbursement risk.

With strong industry fundamentals, an improving economy, and limited exposure to new supply, we see a large runway of growth opportunity ahead of us as we execute on our plan.

Turning to the transactions we announced in our press release, we recently completed the acquisition of two senior housing communities for a combined purchase price of $45 million in late September. We are scheduled to purchase another community tomorrow, for $29 million. We expect these transactions to be immediately accretive, resulting in approximately $3 million of increased annual CFFO and increased revenue of approximately $18.4 million. They'll also increase our geographic footprint, expanding our operations in Texas, Massachusetts, and Ohio.

In addition, we announced a transaction with one of our landlords to purchase four communities that we currently lease, for a total purchase price of $85 million. This transaction increases our owned communities, and we are having discussions with other landlords that might further this strategic goal.

Importantly, this transaction will result in incremental CFFO of approximately $1.9 million and provides us the flexibility to reposition communities and pursue accretive capital expenditures while eliminating expensive leases with approximately 3% annual rent escalators, which ultimately means that we will generate more sustainable cash flow, maximizing our real estate value, and create a stronger margin profile.

We are currently working on conversions of 169 units and renovations at three of these communities that are expected to be completed in the first half of 2017. When stabilized, we project that these conversions will contribute an additional $3 million in CFFO.

This transaction will also increase the percentage of our owned real estate, from 61.2% to 64.3% of our portfolio.

Touching briefly on capital allocation, each of the key strategies we discussed create value through either organic or accretive growth and margin enhancement. The acquisitions and conversions we described will contribute to enhance cash flow. And by strategically allocating capital back into our owned real estate, we'll improve revenue growth for years to come.

Importantly, this means funding growth without raising equity or accessing the capital markets. And we are confident that our disciplined approach will create the most value for our shareholders over the long term.

In conclusion, we remain focused on our growth plan to maximize financial flexibility through portfolio ownership, improving profitability through margin enhancement, and improving the cash flow generation of our existing portfolio. As we continue to evaluate strategic opportunities and invest back into the business, we are creating a solid foundation for long-term growth and value creation.

It is my pleasure now to introduce Carey Hendrickson, our Chief Financial Officer, to review our Company's financial results for the third quarter of 2016. 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.

As Larry noted, our third quarter results were significantly impacted by two non-controllable items -- unusually high healthcare claims and unusually high attrition -- which together reduced our CFFO by approximately $1.5 million, which would represent $0.05 per share if one were to calculate it on a per-share basis. If not for these two non-controllable items, our CFFO, again if calculated on a per-share basis, would have been better than expectations, at around $0.45.

As Larry noted in his comments, the demand in our communities was very strong in the third quarter, with a record number of move-ins in September. The number of move-ins in our communities during the third quarter was up 5.4% versus the third quarter of last year on a same-community basis. With normal attrition, this strong demand would have translated into significant growth in occupancy and revenue.

However, our attrition was up at a greater rate than our demand, up 9.5% over the third quarter of last year, with 106 more move-outs on a same-store basis in the third quarter of this year than last year. We've looked at the third quarter attrition closely, and there is nothing specific we can identify as it relates to geography or a specific health concern.

As a result of the unusually high attrition, our consolidated occupancy for the third quarter was flat versus the second quarter of 2016, and it was down 50 basis points from the third quarter of 2015.

In 2014 and 2015, with normal attrition in the third quarters of those years, our occupancy grew 60 basis points and 90 basis points versus the previous quarter. With normal attrition in the third quarter of this year, we estimate our occupancy would have grown approximately 60 basis points over the second quarter of 2016, which would have added approximately $800,000 of revenue and approximately $500,000 of CFFO to our third quarter results.

Healthcare claims expense was also unusually high, causing our G&A expense to increase considerably. As a self-insured plan, our healthcare benefit expense has two components: the medical claims that we incur, which includes a reserve for incurred but not reported claims, and the income that we receive from employees related to their coverage. The income we receive from employees is steady and predictable, while the claims expense fluctuates from quarter to quarter.

Since 2014, the net of these two items has averaged to be a credit of approximately $130,000 per quarter. However, in the third quarter of 2016, due to an unusually high level of claims, the net of these two items was an expense of approximately $780,000. The actual variance in healthcare expense in 3Q 2016 versus 3Q 2015 was $985,000.

There have been no changes in our healthcare plans that we offer that would account for this variance. It appears we simply had an unusually high amount of claims in the third quarter, particularly in our number of individual claims at $20,000 or greater.

Our healthcare benefit plan year begins in June of each year. So, our stop-loss provisions are expected to offset some of this large claims expense in the coming quarters.

As I noted previously, on a combined basis these two non-controllable items resulted in a reduction in our third quarter CFFO of approximately $1.5 million, which translates into a reduction of approximately $0.05 if one were to calculate this on a per-share basis.

It's important to note that we had a very strong finish to occupancy in September, which provided us momentum as we started the fourth quarter. In the last week of September, we had a record 288 move-ins on a same-store basis. And during the month of September, attrition moderated versus July and August.

Looking at some of the key details for the third quarter, the Company reported total consolidated revenue of $111.4 million for the third quarter of 2016. This was an increase of $7 million, or 6.7%, over the third quarter of 2015.

The increase in revenue is largely due to acquisitions the Company made during or after the third quarter of 2015, net of a disposition made in the third quarter of 2015. During or since the third quarter of 2015, we've acquired 11 communities.

Revenue for consolidated communities, excluding the three communities undergoing repositioning, lease-up, or a significant renovation and conversion, increased 7.3% in the third quarter of 2016 as compared to the third quarter of 2015. It's important to note that this 7.3% increase was achieved with fewer units available for lease in the third quarter of 2016 than the third quarter of 2015, exclusive of acquisitions, due to the disposition of one community in the third quarter of 2015 and conversion or renovation projects currently in progress at certain communities.

Our operating expenses increased $5.9 million in the third quarter of 2016, to $69.2 million (sic - see press release, "$69.6 million"), again primarily due to the acquisitions.

General and administrative expenses for the third quarter of 2016 were $5.9 million (sic - see press release, "$5.7 million"), compared to $4.8 million in the third quarter of 2015. Excluding transaction costs for both years, our G&A expense increased $1 million over the third quarter of 2015, all of which was related to the unusually high healthcare claims. On the same basis, G&A expenses as a percentage of revenue under management were 4.7% in the third quarter of 2016 and are 4.6% on a year-to-date basis.

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 a significant renovation and conversion. Our adjusted EBITDAR was $38 million in the third quarter of 2016, an increase of $1.6 million, or 4.3%, from the third quarter of 2015. This does not include EBITDAR of approximately $800,000 related to the three communities undergoing repositioning, lease-up, or a significant renovation and conversion.

Our adjusted EBITDAR margin was 35.5% in the third quarter of 2016.

Adjusted CFFO was $11.6 million in the third quarter of 2016. The contribution to CFFO from communities acquired during or since the third quarter of last year was $1 million, with $600,000 being incremental to the third quarter of 2016, as three of the acquisitions occurred during the third quarter of the prior year.

Our same-community revenue increased $1.3 million, or 1.4%, over the third quarter of the prior year. As noted previously, due to conversion and refurbishment projects currently in progress at certain communities, there were fewer units available for lease in the third quarter of this year than the third quarter of last year: 49 units less on a same-store basis. With a like number of units available in both years, same-community revenue would have increased approximately 1.8% versus the third quarter of the prior year.

Importantly, units that have been out of service due to significant renovation and refurbishment are now beginning to come back online. Approximately 140 units in total were out of service in the third quarter, as compared to units available for rent prior to the beginning of the various renovation projects.

We completed 76 units during the third quarter and early October, which are comprised of 10 memory care units at one community and 66 assisted living units at another community, and those are now available for rent and in the process of lease-up. We've already experienced an outstanding response to these converted units: nine of the 10 memory care units filled during October, and we've either filled or received deposits for 40 of the 66 AL units already.

Another 18 converted units are expected to be completed and available for rent in November, and we're working on another 160-plus units that we expect to come back in the first half of 2017, and additional conversions are under consideration.

As Larry noted in his remarks, Capital Senior Living has a clear and differentiated real estate strategy. We are focused on executing a long-term, sustainable growth strategy with a focus on real estate ownership as a leading pure-play, private-pay senior housing owner and operator. We are not a healthcare company. And as a result, we are not facing the labor and other expense pressures that Brookdale and other healthcare companies are facing.

Our same-community expenses remained very well under control in the third quarter, increasing only 1.7% versus the third quarter of last year, excluding conversion costs in both periods.

Labor costs, including benefits, increased 2.5% in the third [year], but this includes expected labor increases at communities with recent conversions to higher levels of care. Excluding those communities, our same-store labor costs were up only 1.3%, continuing to confirm that we do not have the wage pressure that Brookdale, with their multiple ancillary businesses, and healthcare companies are experiencing. And we do not expect a noticeable impact from the Department of Labor changes. We addressed this issue head on in 2015 and made changes at that time.

In our two other major expense categories, food costs increased only 0.7% in the third quarter versus last year, and utilities costs increased only 0.5%.

Our same-community net operating income increased 0.8% in the third quarter of 2016, as compared to the third quarter of 2015. For the like number of units in both years, third quarter NOI would have increased approximately 1.6%.

Same-community occupancy was 88.6% in the third quarter of 2016, which was an increase of 10 basis points from the second quarter and a decrease of 30 basis points from the third quarter of 2015.

Our same-community average monthly rent was up 2.2% versus the third quarter of 2015. Our average monthly rent for our consolidated communities increased 3.2% versus the third quarter of 2015.

Looking briefly at the balance sheet, we ended the quarter with $43.1 million of cash and cash equivalents, including restricted cash. During the third quarter, we received $9.3 million in net cash proceeds related to supplemental loans for three communities, and we spent $17.6 million on capital expenditures. We received reimbursements totaling $2 million for capital improvements at our leased communities and expect to receive additional reimbursements as projects are completed.

Our mortgage debt balance at September 30, 2016, was $873.5 million at a weighted-average interest rate of approximately 4.6%. At September 30, all of our debt was at fixed interest rates, except for one bridge loan that totaled $11.8 million. The average duration of our debt is approximately eight years, with 99% of our debt maturing in 2021 and after.

As noted in the release and as Larry discussed, we closed on two acquisitions totaling approximately $45 million in late September and are scheduled to close on a third acquisition with a purchase price of approximately $29 million tomorrow. These acquisitions bring our total acquisitions for the year to $138.4 million.

We also announced that we expect to close on the acquisition of four additional communities that we currently lease in January 2017, for a total purchase price of approximately $85 million. The purchase of these four leased communities is consistent with our real estate-focused strategy and will increase the annual CFFO contribution of these communities to the Company by approximately $1.9 million. It will also free us from annual rent escalations, will significantly increase our flexibility related to these real estate assets, and will further increase our percentage of owned real estate assets.

Looking at our expectations for the fourth quarter, the fourth quarter will be positively impacted by our late-September and November acquisitions, which we expect to add approximately $600,000 for our fourth quarter CFFO, with $1.1 million of incremental EBITDAR net of $500,000 of incremental interest expense.

As in the fourth quarter of each year, the fourth quarter of 2016 will include approximately $300,000 of incremental costs related to holiday events and snow removal costs at our communities.

While we expect our healthcare claims and attrition to moderate in the fourth quarter from their unusual third quarter levels, we are taking a conservative approach related to those items in our fourth quarter projections.

Also, as I noted previously, we completed supplemental loans in the third quarter and anticipate closing additional supplemental loans totaling $12 million in the fourth quarter. When the proceeds from these supplementals are deployed into acquisitions and other growth initiatives, they will be accretive, but the supplemental loans will result in the fourth quarter in incremental interest expense of approximately $200,000 relative to the third quarter.

All together, we expect our fourth quarter CFFO to be relatively similar to our third quarter CFFO, with potential upside with improved healthcare claims and attrition.

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

(Operator Instructions) Joanna Gajuk, Bank of America.

So, I want to follow up on the comment Larry made earlier about the additional [CFFO] accretion from converting and renovating the assets that you are planning to buy in terms of those previously leased assets. So, did I hear it right, that you already are doing something there? So, is it separate from what you were doing previously in terms of conversions?

Joanna, it's included in our conversions.

Okay.

What happened is these four buildings have an average occupancy of 82.7%. They are predominantly independent living properties that we have already begun the work on converting. And we realized that at their current occupancy they are not covering rent under the leases and that the conversions, while successful and we think will add $3 million of incremental CFFO, will basically get us to more of a breakeven on the rent, versus gaining from the conversion for our shareholders.

So, we had conversations with the landlord, and our landlord agreed to sell the buildings to us. We have a signed contract. We will expect it to close in January. We are working on financing and believe that we'll have the financing for the acquisition.

So that the immediate accretion is $1.9 million. And then, our projections show that when their units are completed in the first half of the year and stabilized, we expect to generate an incremental $3 million of cash flow from operations in three of those buildings.

Okay. But you're saying that this $3 million was already kind of in the conversions that you were previously talking about?

It is. But what's happening, we are now eliminating the lease expense as well as the escalators on those buildings, as well as the rent and escalators we would have paid the landlord for the cost of the conversions and renovations.

Got it. Okay. That makes sense. Okay. And then, on that topic, when you talk about the $1.9 million initial accretion from buying these four leases, does that reflect a cost of financing [of] the purchase price?

That's after financing and CapEx. That's the bottom line number after taking into account the interest expense on the financing and then the credit we get on the rent for the purchase.

[That's a net number.]

Okay. Great. And then, just briefly, Carey, on the outlook for fourth quarter, you're saying that because of some additional interest expense costs, pretty much there's not going to be any sequential growth? And also, you assume that the attrition is not going to improve much. And then, the healthcare costs, you're kind of more conservative there, right?

Because historically, Q4 has been sort of an improvement from the third quarter. So, that's what I'm trying to reconcile, that these are the main items -- the interest expense and kind of the experience in third quarter -- that led you to think about fourth quarter maybe differently?

So, some of the seasonal expenses also that we noted and the interest expense for supplementals. But we certainly expect the healthcare claims to moderate and for the attrition to moderate. But at this point, until we get further into the quarter and I see that happening, we've tempered our projections related to those two items so as to be conservative related to those, Joanna.

And so, I have not baked in much of an improvement in those. But if that happens -- as I noted in my remarks, if that happens, that could give us some potential upside if we have improvement there.

And Joanna, going back to your point, historically over the last two years, same-store fourth quarter occupancy sequentially improved 20 basis points in the fourth quarter of 2015 and the fourth quarter of 2014.

On the attrition, we have seen, obviously, in September, it did come down. Hopefully, it will continue, but we're trying to give some conservative outlook for the fourth quarter so we don't get disappointed again on things that may be out of our control.

One other thing I'll note, too, Joanna, about the fourth quarter of last year is that you know how I talked about our healthcare expense this year being an expense of $750,000. Last year in the fourth quarter, we had the largest credit we've ever had; we had a $623,000 credit in that healthcare expense. So, we've got a significant -- a tough comparison in the fourth quarter as it relates to that. So, just to note on that.

Great. That's helpful.

(Operator Instructions) Chad Vanacore, Stifel.

So, Larry, I think you just touched on this, but are you saying that we should expect occupancy to build in the fourth quarter about 20 basis points sequentially?

Historically, with normal attrition, that's been our experience. The financial occupancy has built at 20 basis points in each of the fourth quarters of 2015 and 2014.

Gotcha. All right. And then, just thinking about the attrition, 9.5% seems high. It's not flu season. Is there anything that you can point to? Or, it's just a one-time anomaly? And then, how long do you estimate until you can backfill those units?

We think it's a one-time anomaly. If you look at the raw numbers, as I mentioned, we picked up in the months of July and August, which is when we got the move-outs. We had 437 and 463. Our move-outs in September, same-store, were identical to what they were the prior year.

So, we have definitely recovered. We actually had a -- what's interesting, on a physical occupancy level, non-financial, we gained for the quarter. We gained, same-store, 35 units from July 1 to September 30 on a physical occupancy.

The reason for the financial drop is that the move-outs occurred earlier in the quarter. So, the occupancy average during the quarter was lower. And then, as you heard from Carey, the great week was the last week of the month. We didn't get the full quarter financial impact from there.

So, that's why the financial occupancy was a disappointment, while on a physical occupancy on same store we had 1,250 move-ins and 1,215 move-outs, for a net gain of 35.

So, the starting point for October 1 is below where we thought it would be based on the number of move-outs, an extra 106 for the quarter, same-store. And now, we're being a little conservative in building back that occupancy, trying to see what happens with the attrition.

But again, there's nothing that we can see from a geography. You're correct: there was no flu. There was no bronchitis. There was no pneumonia. There was nothing we can point our finger to other than the fact that perhaps it was just two bad months where randomly residents (inaudible).

And what's interesting, too, Chad, is that the reason for move-outs -- we track this every month -- the percentage of move-outs for healthcare, for death, and every other reason was right in line as to what they are every month. So, there was nothing unusual; it just was a higher volume of move-outs, particularly residents passing away or moving to higher levels of care.

Okay. And then, just one more for me. Just to backfill that occupancy would you consider some discounting? Or, how do you plan on getting that back?

Well, it's a great question. We did do some discounting at the end of the quarter. We actually have pulled back on discounting. So, going into the fourth quarter, we actually feel that we have pretty good visibility on deposits over move-outs, which were positive, traffic. We actually have stopped the discounting in many of our properties for the balance of the quarter. So, we're actually hoping to build back on rate growth.

All right. Thanks a lot for taking the questions.

Dana Hambly, Stephens.

Larry, just the 748 units, $7.5 million of CFFO, when will those all be back online?

Okay. If you -- by the way, I invite everybody to look at our new slide presentation. We spent a lot of time reformatting our message and really focusing on our pure-play senior housing and real estate focus.

And in the slides, there shows when we expect those units to come back online for properties out of service. I mentioned 21 units came online in the second quarter. That was memory care at Canton Regency. The balance of that building will come online in the second quarter of 2017. And we've had a great -- as I said, 19 of 21 units are occupied presently in one quarter, which is very, very positive.

So, we have 273 units opening in Q2 2017. And then, we have 249 units coming back online, meaning in Q3 2017. And then, the contribution, obviously, will be recognized as they stabilize over six to nine months.

Okay. So, yes, I can look that up in the slide deck, but stabilization --.

It's slide 17.

Okay. Full lease-up, six to nine months?

Typically, that's what we would expect.

Okay.

And so, Dana, one point on that is three of those buildings are ones that we have completely out of non-GAAP numbers right now.

Right.

The current plan is for us to wait until those are leased up to stabilization, and then we'll add them back in, the complete building back in. And we'll see how that goes as we move along.

But the other ones, the other units that come back on, other than those three, as they're put back into service and as they lease up, they will impact our numbers. And that's the case for the 76 that came in late September and will come in in early November -- excuse me, in early October they came in. Those will impact our fourth quarter numbers [as those lease up; 10 are] already filled.

I believe that we're at an inflection point as it relates to these conversions and repositionings. They've taken a while. We've been talking about it. But it's great now that they are open. The response has been outstanding, as you can see from the numbers consistently filling much ahead of our expectations. The properties look great.

So, we are optimistic that we'll start to include more of the economics from these conversions into our reported financial numbers.

Okay. All right. And Carey, on the CapEx, I know it -- can you just remind me, it runs higher this year? And is it most of next year? Or, does it start to tail off in the second half of next year?

It starts to tail off in the second half of next year. Right now, as we look at it, I think it will probably be relatively similar levels, but a little less in the first couple of quarters of next year. And then, it should come back, I would expect, to more normalized kind of numbers, in the $4 million to $5 million a quarter kind of range for the last half of the year, each quarter.

For the second half of 2017? Okay.

And this year, it's about $45 million. So, that's a --.

Yes. This year, so far, this year on a net -- it's hard. The CapEx numbers on a gross basis are larger than on a net basis, because we get reimbursements from some of our lease partners.

Right.

So, on a net basis right now, we've spent about $42 million this year. And so, it may be around $50 million to $55 million for the full year on a net basis; it will be more than that on a gross basis. But net to us, our dollars, it will be $50 million to $55 million.

Okay. Okay. And then -- okay, I got that. And then, on the leased portfolio, you run a really good margin there. But the rent eats up quite a bit of that. I'm just wondering what kind of other opportunities you might have beyond the four that you just announced in the next couple of years?

First of all, on the margin, the reason the margin on the leased portfolio is higher is it has a higher proportion of independent living properties, which operate at a higher margin. So, if you look at our press release today, you can see the leased portfolio has an operating margin of 44% versus our consolidated of 40%, and that's primarily because of the large number of independent living.

We are having productive conversations with other landlords about opportunities to either buy back or restructure some of the leases. And as that develops further, we'll provide more comment.

Okay. I'll look forward to that. And just, I want to make sure I'm getting the modeling right. So, you said going into the fourth quarter typically you'd see a 20-basis-points increase in occupancy relative to the third quarter. But that's assuming normal attrition. But guidance is kind of assuming a higher level of attrition going into the fourth quarter. Is that correct?

That's right. That's what I've assumed at this point.

Okay. Thanks very much.

Until we see the attrition fall back as we get into the quarter, I'm being conservative.

Gotcha. So, assuming attrition stays high, we shouldn't look for much of an occupancy increase into the fourth quarter.

That's right.

Okay. Thank you.

Ryan Halsted, Wells Fargo.

A question on the same-store rent growth of 2.2%. That continues to lag the NIC data. What's a good bar for your rent growth expectations for your markets?

Well, part of the reason for the mix is the mix of independent living, assisted living, memory care. If you look at the raw data for the quarter, you'll see that independent living rents, actually year over year, were up 3.7%.

So, what happens is because a higher -- because of the mix of the blend of revenue coming through, it mutes the absolute change in rate from quarter to quarter or year to year because of the mix. Because the independent living rent in the third quarter is at $2,700 a month versus assisted living, which is $3,800, and memory care at $5,100. So, it's really the blend.

We still look to increase rates about 3%, both the level of care charges as well as in rate. As I mentioned earlier, we do do some specials occasionally to spur some occupancy. We've cut that back.

So, I do think that if you look at what we look at, we still, and as we did again this quarter, we like to have about a 50- to 100-basis-point spread between the expense growth and the rate growth. And that's exactly what happened this quarter. Rate grew at 2.2% on same store, and expenses were up 1.7%.

So, we're managing to our plan, and it's something that we look at proactively every month as we look -- we look at rate every week and the expense management programs that we have in systems. So, I think that for purposes of modeling, kind of a 2.5% is probably a very fair number.

I will comment on NIC MAP. NIC MAP now reports actual rents. The information that NIC MAP had been reporting was asking rents, which are typically higher. So, if you look at the actual rents that NIC MAP now reports, it's about 8% lower than asking rents. So, I don't think our numbers are that different than NIC MAP. I just think that we're giving you actual numbers versus the asking rents that NIC MAP has traditionally provided.

All right. That's very helpful. And then, on the acquisition environment, you guys are obviously moving forward with being very acquisitive while the rest of the industry seems to be moving in the opposite direction, with some downsizing, I guess, or repositioning. What's the environment you're seeing in targets?

Well, first of all, I like to differentiate Capital Senior Living from the rest of the industry. We have a healthier portfolio. We don't provide the healthcare side of the business. We're not facing a lot of the wage and labor pressures. We don't have the reimbursement issues or the staffing issues. We have a lot of stability.

So, we're fortunate that we're not distracted by some of those challenges. We are disappointed that sometimes non-controllable items like weather, healthcare claims, or attrition can affect our numbers. But the core business and fundamentals are extremely sound and very strong.

That being said, we continue to be very disciplined on acquisitions. To give you an idea, in the third quarter of 2016 we signed 13 confidentiality agreements aggregating about $325 million of value of deals. In the first nine months, we've signed 43 CAs, with a total value of $1.3 billion. That's both off-market and market.

We announced so far $138 million of acquisitions. So, if you think about the pace, we always say we typically buy about 15% of the buildings that we underwrite. That gives us the ability to focus on our geographically concentrated regions, buying very high-performing, high-quality, recently built buildings.

And what's interesting, every market we buy has no new construction. That's a filter that we go through in due diligence. So, there's no supply in any of those markets coming in.

So, we feel that we will continue to have this pace. We think we have the capital plan to fund it. We have great lenders that we deal with.

The other aspect of our business that I like to talk about is the supplemental loans. As Carey mentioned, we have plans for the fourth quarter. But one benefit we have of ownership of our real estate is the appreciation and the ability to go back to our lenders and take advantage of supplemental financing that have terms that are coterminous with the original loans.

And in the last two years, we actually went out and took out $50.7 million of proceeds, not including what's planned in the fourth quarter, on 16 properties. Those properties were purchased within three years of the supplemental, and the average increase in value based on the amounts of proceeds we received from our lenders and appraisals was 43.9%.

So, I think that also gives a lot of confirmation and comfort that our disciplined strategy is working. We are creating value in these buildings, even though they're high performing and high quality. We put in our expense management programs, our expense management, our rate plans, our care plans, et cetera.

So, we feel that we still have a very, very solid capital plan that can be funded from internally generated sources to continue this disciplined acquisition strategy.

That's very helpful. Maybe just a modeling question. On G&A, it sounded like there was some one-time items in there. What's a good run rate? How should we be thinking about a run-rate G&A as a percentage of revenue?

I have -- in the fourth quarter, I would expect us to be somewhere around $5 million to $5.1 million, again depending on how healthcare claims come out. I've got -- if it's at $5.1 million, that has a little bit of improvement in healthcare claims expense, but that's the real factor.

Our G&A as a percent of revenues has been pretty consistently right around 4.5% to 4.6%. I'd expect it to remain there. It was a little higher than that in the third quarter, at 4.7%. But I think right around that 4.6% mark is pretty consistent with where I think we'll be.

Okay. Thanks for taking my questions.

(Operator Instructions) Todd Cohen, MTC Advisers.

I just had a question regarding new properties, and I'd like to refer to the Brookdale press release. I didn't actually listen to the call or read the transcript as yet, but I thought there was kind of an interesting or odd statement that, I believe it was, Andy Smith may have made. He says that they grew "occupancy by 40 basis points sequentially. However, during the quarter we saw an unprecedented number of new competitive openings in our mid-sized markets that caused us to fall short of our revenue expectations."

So, I'm just kind of wondering about that statement and how it could potentially relate to you guys. And I don't get a sense that -- maybe they missed it because of all the moving parts.

Todd, let me answer your question, Todd. Let me answer your question. And please look at slide 11 of our new Company presentation. Slide 11 shows the top 10 MSAs in the third quarter according to NIC MAP. And the NIC MAP data has changed to some of the markets that Andy Smith may refer to.

And I'll go through each one and explain what our exposure is and, where we do have properties, what our performance is.

The first one, 28% construction versus inventory, is Baton Rouge, Louisiana, where we have zero properties. The second is Charleston, South Carolina: 26% of properties; we had none. Austin, Texas: 21% of inventory; we had none. New Orleans, Louisiana: 19.6% of inventory; we have none. Fort Myers, Florida: 18.9% of inventory; we have none.

Columbus, Ohio: 18.5%; we have one, 111 units that financial occupancy in the third quarter was 99%.

Salt Lake City, Utah: 18.2% of inventory; Capital Senior Living has none.

San Antonio, Texas: 15% of inventory; we have two properties, 238 units. They are 96% financial occupancy in the third quarter of this year.

Portland, Maine: 14.7%; Capital Senior Living has none.

And Charlotte, North Carolina: 14.2%; we have one building, 73 units. That is 86% financial occupancy in the quarter.

So, again, we're not seeing it. I think that the evidence of an extremely strong and consistently strong demand in deposit taking and move-ins shows that there's no new supply. We do a lot of analysis of these markets when we make acquisitions. But I do think that I'd ask you to take a look at slide 11.

And perhaps -- and I can't speak for where Brookdale is reporting or where they're operating, but perhaps they're referring to some of these other markets that are showing some growth in inventory. We don't see it, because we do not operate in those markets.

So, I guess the issue with the Brookdale statement is that -- I can't imagine that they weren't aware of the competitive openings. So, I guess that they just fell short, given their expectations for the acceptance of these new properties in terms of (multiple speakers).

Todd, I suggest you call Brookdale Investor Relations and ask them that question.

Okay. Thanks.

All right, everybody. We thank you very much for your participation today. Again, we are very proud of a lot of the progress we're making on multiple fronts.

I ask you to take a look at our new slide presentation. It really does focus on our strategy as a pure-play senior housing owner/operator with a real estate ownership focus.

And again, we did have some non-controllable items, but overall, I think our trajectory is strong and visible.

And we look forward to seeing many of you at various conferences over the next few weeks. And feel free, as always, to give Carey or myself a call if you have any further questions.

Thank you very much, and have a great evening.

Once again, that does conclude today's call, and we appreciate your participation.