Sonida Senior Living Inc (SNDA) 2016 Q4 法說會逐字稿

Good day everyone and welcome to the Capital Senior Living fourth 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 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 to all of our shareholders and other participants and welcome to Capital Senior Living's fourth quarter and full-year 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 and the continued quality care we provide our residents and the long-term value we are creating for all of our stockholders and other stakeholders.

As we announced in December, we were saddened to lose Keith Johannessen, our President and Chief Operating Officer. I had the good fortune of working with Keith for more than 20 years and witness first hand his empowering leadership and the enormous impact he had on mentoring and developing the finest operations team in our industry.

Our solid fourth 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. Attrition and healthcare claims, which were unusually high in the third quarter returned to more normal levels in the fourth quarter and we continue to be well insulated from new supply and wage pressure in most of our markets.

We also made steady progress on important operational and corporate objectives related to positioning the Company for sustained growth including the announcement of the acquisition of one community in the fourth quarter and the strategic purchase of four communities we previously leased as we look to continue to increase our real estate ownership.

As we look forward to 2017 and beyond, we expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics. In addition to core growth in our operations, our growth will be enhanced by the significant renovations and refurbishments we have made across our portfolio and even greater by the return throughout this year of 776 total units currently out of service due to conversions and repositionings and we have a robust acquisition pipeline.

We are conducting due diligence on a number of acquisitions that will allow us to continue to increase our ownership of high quality senior housing communities in geographically concentrated regions. 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 our cost containment initiatives are all key to that objective. We are pursuing occupancy improvement where opportunity exists and increasing average rents through market and 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 and our robust pipeline of near to medium-term targets.

We're deploying our cash into strategic immediately accretive acquisitions. We completed more than $138 million of acquisitions in 2016 and they are expected to generate a 15.8% first year return on equity. We closed an additional $85 million acquisition in January 2017 and 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 64.3%. 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. We converted 400 units from independent living to assisted living or memory care through the second quarter of [2015]. Since conversion, these communities have achieved revenue growth of 21.2% and NOI growth of 18.6%, and the lease-up of our recently opened conversions has been excellent. An additional 209 units have been completed since the second quarter of 2015 and these communities are currently 90% occupied. In fact, adding the recently opened additions at the three communities currently as of our non-GAAP statistical and financial measures for all of our communities during the fourth quarter resulted in a 20 basis point increase in occupancy compared to the third quarter.

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 the industry will benefit from a material reduction in senior housing construction starts, which has slowed to their weakest pace since 2012. 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 one, three, five and 10-year periods, senior housing has yielded greater than a 50% higher investment return than lodging or multifamily. While competition is a factor in any healthy industry, we benefit from a concentrated portfolio that is geographically situated outside the top MSAs with the highest level of construction activity. In fact, more than 99% of our portfolio is situated at MSAs with limited new construction and in the one market where we operate within the Top 10 highest construction markets, our average occupancy is 99% 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 are approximately 60% of the average 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 are impacting Brookdale, Home Health and other healthcare companies 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 completed the acquisition of one senior housing community for a purchase price of $29 million. We expect this transaction to be immediately accretive resulting in approximately $1.1 million of increased annual cash flow from operations and increased revenue of approximately $6.4 million. This acquisition will also increase our geographic footprint expanding our operations in Ohio. In addition, in January, we completed a transaction with Ventas in which we acquired four communities that we previously leased 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 $2 million and provides us the flexibility to reposition communities and pursue accretive capital expenditures while eliminating expensive leases with minimum 3% annual rent escalators, which ultimately means that we will generate more sustainable cash flow, maximize 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.

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 will 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 fourth quarter and full-year 2016.

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 capitalsenior.com and as always, 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 $115.8 million for the fourth quarter of 2016. This was an increase of $8.3 million or 7.7% over the fourth quarter of 2015. The increase in revenue was largely due to the acquisition of nine communities during or since the fourth quarter of 2015.

Attrition, which was unusually high in the third quarter of 2016 returned to more normal levels in the fourth quarter as Larry noted. For full-year 2016, total consolidated revenue was $447.4 million, an increase of 8.6% over full-year 2015 and our revenue for consolidated communities, excluding the three communities undergoing repositioning, lease-up or significant renovation and conversion increased 7.9% in the fourth quarter of 2016 as compared to the fourth quarter of 2015.

For full-year 2016, revenue for consolidated communities excluding these three, increased 9% to $429.7 million. Our operating expenses increased $6.7 million in the fourth quarter of 2016 to $71.8 million due again primarily to the acquisitions. Our general and administrative expenses for the fourth quarter of 2016 were $6.7 million, which includes approximately $1.1 million in one-time costs associated with the passing of our former Chief Operating Officer, Keith Johannessen.

Excluding transaction cost and these costs associated with our former COO, from the fourth quarters of 2016 and 2015, our G&A expense increased $600,000 over the fourth quarter of 2015. On the same basis, G&A expenses as a percentage of revenue under management were 4.1% in the fourth quarter of 2016 as compared to 4.3% in the fourth quarter 2015. For full-year 2016, G&A was 4.4% of revenue under management as compared to 4.6% for full-year 2015. Our healthcare claims, which we noted were unusually high in the third quarter of 2016 and resulted in an unusual increase in our third quarter G&A also returned to more normal levels in the fourth quarter. Our healthcare claims net of employee benefit income was a credit of $3,000 in the fourth quarter, so almost flat, compared to an increase of $782,000 in the third quarter. For the full-year, our net healthcare claims expense was $700,000, all of which is related to the $782,000 expense that we had in the third quarter. For the three other quarters combined then, our net healthcare expense was a credit of approximately $75,000. We had unusually good experience in net healthcare claims in 2015, which resulted in a credit of $1.1 million for full-year 2015. So the change in net healthcare expense year-over-year 2016 over 2015 was $1.8 million, which explains all of the $1.5 million increase for the full-year and our total G&A after you exclude transaction and conversion costs.

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 license units or significant renovation and conversion. Our adjusted EBITDAR was $38.6 million in the fourth quarter of 2016, an increase of $400,000 from the fourth quarter of 2015. This does not include EBITDAR of $700,000 related to the three communities undergoing repositioning, lease-up or significant renovation and conversion.

For full-year 2016, adjusted EBITDAR increased [$8.5 million] to $152.9 million which again does not include $3.2 million of EBITDAR associated with the three excluded communities. Our adjusted CFFO was $12.2 million in the fourth quarter of 2016. The contribution to CFFO from communities acquired during or since the fourth quarter of last year was $1.5 million. For full-year 2016, our adjusted CFFO was $48.3 million. Same-community revenue increased $700,000 or 0.6% over the fourth quarter of the prior year. Our same-community expenses remained very well under control in the fourth quarter increasing only 1.6% versus the fourth quarter of last year excluding conversion costs in both periods.

Our same-community net operating income decreased 0.7% in the fourth quarter of 2016 as compared to the fourth quarter of 2015. As we've noted in previous quarters, we're not experiencing wage pressures that Brookdale with their multiple ancillary businesses and healthcare companies are experiencing. We're 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 operator, we're not a healthcare company. As a result, our labor cost including benefits increased only 2.1% in the fourth quarter. In our two other major expense categories, food costs decreased 3.8% in the fourth quarter versus last year and utilities costs increased 3.3%.

For the full-year of 2016, our same-community revenue increased 1.6% and our same-community expense increased 1.7% resulting in same-community NOI growth of 1.4% and for the full-year, labor cost increased only 1.9% with food costs down 0.3% and utilities down 1.4%. Our same-community occupancy was 88.5% in the fourth quarter of 2016, a decrease of 10 basis points from the third quarter and a decrease of [60 basis points] from the fourth quarter of 2015. Our same-community average monthly rent was up 1.3% versus the fourth quarter of 2015. Average monthly rent for our consolidated communities increased 2.2% versus the fourth quarter of 2015.

Looking briefly at the balance sheet, we ended the quarter with $47.3 million of cash and cash equivalents including restricted cash. During the fourth quarter, we received $15.6 million in net cash proceeds related to supplemental loans for four communities and we spent $15.1 million on capital expenditures. We received reimbursements totaling $1.7 million for capital improvements at our leased communities and expect to receive additional reimbursements as projects are completed.

For the full-year, we invested $62.4 million in capital expenditures related to repositioning, refurbishing, and renovating communities across our portfolio and we expect to begin realizing the benefits of these investments in the second half of this year. Our mortgage debt balance at December 31, 2016 was $907.2 million at a weighted average interest rate of approximately 4.6%. At December 31, all of our debt was at fixed interest rates except for one bridge loan that totaled [$11.7 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 noted also, we closed on one acquisition totaling approximately $29 million in early November, which brought our total acquisitions for 2016 to $138.4 million.

Subsequent to year-end 2016, on January 31, we closed on the acquisition of four additional communities that we previously leased 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 $2 million. It will also free us from annual rent escalations, will significantly increase our flexibility related to these real estate assets, increases our percentage of owned real estate assets, and increases our real estate and shareholder value.

Looking forward, the first quarter of the year is always the most challenging with high utilities and other winter-related cost and is generally the most challenging quarter from an occupancy standpoint as well. The first quarter of any year, traffic of potential residents visiting our communities is generally lower and attrition is expected to be higher. In January and February, attrition has been elevated above what could be considered a normal higher first quarter attrition level due to a more severe flu than normal.

Also, we had weather-related damage due to cold weather events in late December and early January that resulted in 83 units being out of service across 15 communities for three weeks or more in January and February. Sequentially, the first quarter will benefit from one additional month of results related to our fourth quarter acquisition and two months of results related to the acquisition we closed at the end of January.

Also, while it could even out over the course of the first quarter, our net healthcare claims expense returned to a higher level in January. Taking all of these things into account, we currently believe our first quarter CFFO will be in a range of approximately $9.75 million to $10.75 million depending on our experience related to our three primary non-controllable factors attrition, weather, and healthcare claims.

As we think about 2017 and beyond, we expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics particularly as we look to the second half of 2017 and into 2018. We expect our core growth to be enhanced by the significant renovations and refurbishments we've made and are continuing to make across our portfolio and the impact of the return of 776 units currently out of service due to conversions and repositionings will be even greater particularly as our two large [repositioned] communities are completed this year and added back to our non-GAAP results after stabilization in 2018, one most likely in the middle of 2018 and the other toward the end of 2018.

In 2017, we'll benefit from the return of approximately 139 units that have been out of service with the lease-up of these units beginning primarily in the second half of the year and we expect to add back one community with 186 units that's been excluded from our non-GAAP results in the first half of 2017.

As a leased community, it will have a greater impact on revenue and EBITDAR than on CFFO. When all of these 776 units are leased-up and stabilized, we currently expect them to contribute incremental revenue of approximately $32 million and CFFO of approximately $7.5 million on an annual basis. We do start 2017 at a lower level of occupancy than we started 2016 mostly due to the unusually high attrition we experienced in the third quarter of 2016. Also, we'll have approximately $1.6 million in additional interest expense in 2017 related to supplemental loans completed during 2016, the proceeds of which were invested in repositioning, refurbishing, and renovating our communities and again, we expect to see the benefit of these investments in the second half of this year and beyond.

In 2017, we'll benefit from a full year of the acquisitions that we completed during 2016 and we'll receive 11 months of benefit from the January 2017 purchase of the four previously leased communities. In addition, we have a robust acquisition pipeline that will allow us to continue to acquire high quality senior housing communities in our geographically concentrated regions. We believe the successful execution of our clear and differentiated real estate strategy will result in outstanding growth in our key metrics over time and positions us well to create long-term shareholder value as a larger company with scale, competitive advantages, and a substantially all private pay business model in a highly fragmented industry that benefits from long-term demographics, need-driven demand, limited competitive new supply in our local markets, a strong housing market, and a growing economy. That [concludes] our formal remarks and we would now like to open the call for questions.

(Operator Instructions) Chad Vanacore, Stifel.

So thinking about, Carey you mentioned the CFFO guidance in first quarter, which looks a bit weaker than we expected. How much of that drag is from occupancy versus how much of it is from expenses?

Well, there are few factors there. One is we've got -- you always have higher utilities cost in the first quarter of the year than you would have in the fourth quarter. So as you sequentially think about the fourth quarter and the first quarter, it's usually about $600,000 or so higher in the first quarter than the fourth. Our G&A expense, that's going to depend on -- the increase there, it probably is going to be somewhere around $600,000 to $800,000 versus the fourth quarter as well because our healthcare expense was benign in the fourth quarter. It's been a little higher. It was higher in January and just kind of projecting that for the full quarter, it could even out, but it could be something like $600,000, $800,000 higher.

And then, we do have the acquisitions that will be added in the first quarter versus the fourth, but the one acquisition that was in November will probably add about $100,000 of CFFO. The four communities that we purchased on January 31, that's about $300,000 of CFFO that we added to the first quarter versus the fourth. So those things are positive. And then from a base standpoint, we expect that to be down slightly depending on the rate of attrition that we have in the first quarter. We noted that there is a higher than usual instance of flu so far in the first quarter, we also normally expect attrition to be higher in the first quarter of any year. So that will impact kind of our base -- our same-community revenue going forward.

Our expenses will be well under control I believe. Other than utilities cost increase that we always expect in the first quarter, we should be in good shape from an expense standpoint. So it really depends on the attrition and the weather as it relates to those base revenues and how that will come in the first quarter of the year.

All right, that's the excellent color. Thinking about, you took a $15.6 million loan in the fourth quarter, how are you thinking about investing that cash, is that going toward CapEx, renovations or acquisitions or something else?

That was primarily to help us fund the $85 million acquisition that we had on January 31.

Okay and then since you're acquiring some properties from landlords, do we think about any further opportunities to buy assets from other landlords?

Chad as I mentioned in my comments, we're in discussions with other landlords and hopeful that we can grow the ownership of those properties.

All right, thanks Larry and then just thinking about just the wage inflation that your peers are seeing which you don't seem to be experiencing the same. Why you suppose that is? Are you doing something differently or is it just the geographies that you're located in.

It's a few factors. I think one is, first, as I noted in my remarks, we're not a healthcare company, so we don't have the same kind of wage pressure that really though a lot of the wage pressure is on health-related jobs and so we're not seeing the wage pressure related to that and it is the geographies we operate in. We're not in states where there is a lot of pressure on increasing the hourly wage -- a minimum hourly wage and as we've noted before, we really don't have very many minimum-wage employees.

We feel like we compensate them fairly and I think for 2017, I've included in my projections something like a 2.5% increase in labor. So a little more than we had in 2016. We had 1.9% increase as I noted for the full-year of 2016. So I've included a bit of an increase in that in 2017. I included something like that last year though as well and we ended up a little less than 2%. So we'll just see how that turns out, but we just are in a good position as it relates to that based on our geography and our current situation.

Okay and then just one quick question for me, rate increases that you've seen so far into 2017, are you still seeing around 3% rate increases?

Yes, actually in January, our rents were up exactly 3% over the prior year. We also had discontinued any incentives that we may have used last year. So we're hopeful that we'll see some improvement going in the actual rate increase, but also elimination of some short-term incentives that we used throughout the year to build occupancy.

Joanna Gajuk, Bank of America.

Thank you. So actually on that last comment on the pricing and how you raised rents 3% and you will discontinue some incentives or you already did, so the 1% or 1.3% [increases same-store basis in Q4], is that -- because that was a clear deceleration from recent trends, so that was the reflection of some incentives that you were doing towards the end of the year?

Yes, there were incentives during the end of the year where we give off typically some amount of the first three months' rent, that burns off into the first quarter. That's not being continued, so that did have an impact on fourth quarter. We think it was helpful to build occupancy back up and the higher attrition we experienced in the third quarter. Fortunately, that has not reoccurred and we're very pleased with the kind of the attrition rate that we typically have normalized, but for the flu, which is we think temporary as it relates to this period of time and then -- so as I look forward, as I said, we're actually up 3.1% in January, actual rate increase and I think it's a function of the rent increases we're getting plus the burning off of some of those concessions.

But a little bit bigger picture, in terms of the CFFO for the quarter, came back -- maybe it came a little better than expected, but seems occupancy was down actually sequentially quarter-over-quarter. So would you characterize that it was sort of better CFFO was on the cost control -- better cost control.

Well, it was, it returned to more normal attrition, Joanna as well as healthcare claims expense, both of those returning to more normal levels helped that.

I mean we actually projected a further reduction in occupancy when we guided last quarter. So it was actually a better performance than what we guided and obviously the normalization of our healthcare claims as Carey mentioned was $700,000 or so.

So then for sort of 2017, how should we think about pricing for the year and also occupancy? I know you suggested that you have a lower starting point because of the attrition in Q3 that flows through but also I guess the start of the year January, February impacted by the flu, but how should we think about those in the occupancy for the year and similarly in terms of pricing, so you said you raise rents [2%], but I guess there is some seasonality in terms of some incentives and things like that. So should we think [about 3%] kind of average for the year. So any color you can give us kind of longer or rather the outlook for the year?

So Joanna I would expect -- we have in our projections about 3% rate increases for the year. Then we do build in some occupancy increase from there. I think wherever we end up at the end of the first quarter, we would expect to be able to grow occupancy from that point about 100 basis points through the remainder of the year and so that will give you -- plus we'll have conversions that will begin coming in as I noted. So we expect that revenue on a same-community basis to be greater than 3% because of the occupancy increase as well as the units coming back in, plus the 3% rate increase and then our expenses, probably somewhere around the 2.5% range somewhere around there for the year.

So you're saying in terms of the labor, I'm sorry so just on that last note on the expense 2.5%, so you're saying that you kind of model the labor costs growth similar to what you experienced in 2016, correct?

Yes, labor up somewhere around 2.5% we would say in 2017 and then overall total expenses about 2.5% up.

Great and can I just one last question, the comment around buying back the four leased assets that will eliminate a 3% escalator. So what's your weighted average rent escalators for the remaining portfolio -- the lease portfolio.

Typically 3%, it's CPI with a floor of three, so obviously, we've been growing the rent at 3%. There is a possibility with the higher inflation over the next five years or so that that could grow more, but the minimum rent escalator is 3%.

(Operator Instructions) Ryan Halsted, Wells Fargo.

Just wanted to go back to the occupancy point. So I know you've been very confident that new supply is not impacting your markets, but just given that your occupancy has moved pretty largely in line with the broader market, I was just wondering what gives you kind of the confidence that new supply is not as much of a threat and that do you think you'd be able to see some occupancy gains sort of ahead of what the broader market is looking at for 2017?

First of all, when you look at the new slides that we just filed, we updated the slides. As I mentioned, if you look at the fourth quarter NIC map data and look at the 10 highest concentration of construction, we're only in one market. We track this pretty regularly, there's a map that actually shows our communities compared to the industry and there really is very little supply going in. I speak a lot [about $300 or $500 a month rent does not support] the cost of new supply.

The other thing that I will comment over -- and as I commented earlier, it was very clear the last month when we attended the [Osher] meetings that everyone is saying that their construction lending is way down for new supply for construction. NIC map fourth quarter showed starts are down to the lowest level since 2012. So I do think that from the broader industry perspective, we're seeing a tapering off of supply in general and it just now has been an issue. Unfortunately, we had higher attrition in the third quarter, which we are recovering from, but we're not seeing it and the other thing that we do see is outstanding response to the conversions and renovations of our building.

Of the properties we bought back from Ventas, we have one building in Arizona, where there is no new supply. We had started move-ins on [January 2016] for 21 new units of memory care and we already had 16 residents. And of the 12 older units we are refurbishing right now, we have deposits.

We've seen a tremendous -- that's in one month. We had 21 units opened in memory care in Ohio, that's one the properties out of our numbers two quarters ago, that's 100% occupied. If you look at 10 units in Trumbull, Connecticut in October, 100% occupied. Buffalo, New York, [56] units of conversion, about 80% occupied already. So we're just seeing around the country this type of growth. So we just don't think that we're going to see some of the same pressures and hopefully the entire industry will start to benefit from lower starts in latter part of 2017 into 2018.

Okay, that's helpful. And then the past couple of years you've certainly had a very robust deal pipeline and so I'm just wondering, what do you think your capacity is for acquisition spend in 2017 and maybe while you're discussing kind of your uses of capital, what's your expectations for other CapEx in 2017 as well?

Yes, I'll let Carey talk about CapEx because again we spent a lot of money last two years both ourselves and with our landlords on some of the renovations. That will be tapering down this year. We already closed an $85 million acquisition in January. We kind of think that pipeline is actually terrific right now, but we're probably looking at another $100 million of acquisitions for the year. Last year, it was [about $138 million], so we think about allocation of capital and then CapEx, Carey you may want to talk about the level which we were at the last two years and what we're projecting now for 2017.

So in 2016 and for 2015 and 2016 it's been elevated from a CapEx standpoint as we completed these important renovations, refurbishments, and conversions, we've had those going on. In 2016, we spent a gross amount of $62.4 million and some of those expenditures were at our leased properties and we were reimbursed by [lessors] for those, about $7.5 million were reimbursed. So the net on communities that are CSL owned communities was about $55 million in 2016 and it was in the $40 million to $45 million range in 2015. In 2017, that should taper off considerably. Right now, we expect CapEx to be somewhere around $20 million to $25 million in 2017 exclusive of projects for which we're being reimbursed by our REIT partners, which that could add about $3 million to $5 million. So the gross might be somewhere around between $20 million and $30 million, the net being around $20 million to $25 million.

That's helpful and then you filed the [mix shelf]. What's your view of accessing the capital markets to I guess finance some of these projects?

As I mentioned, we have no current plans. That shelf was just a shelf that was filed three years ago and the shelf three for years before that, a shelf three years before that expired and we just renewed the shelf. We have never used it but again, it's just having that tool in our arsenal should the opportunity be there that we have the access to capital but that was only a function of the expiration of the prior shelf and the ordinary renewal in the same terms, same amount for the current shelf.

Okay maybe just last one from me. Your largest competitor was speculated to be approached by a strategic buyer. Just wondering if you guys have been approached or if you're seeing more strategic buyers or more private equity buyers in the space looking at putting money to work in the industry.

We really don't really see a lot of -- if you look at kind of the transactions, obviously Blackstone has announced a joint venture with the HCP portfolio with Brookdale. Some of the acquisitions we look at, there are some smaller private equity investors. We really have not seen -- there are some Chinese investors that made some investments in the sector. Obviously two or three, I mean, TPG has been very active. They bought more Brookdale portfolios. So there's always private equity in real estate, but nothing unusual I believe that we're seeing out there.

Dana Hambly, Stephens.

This is Jacob Johnson on for Dana. I guess first question sticking with occupancy. Your occupancy results seem to be a bit bifurcated between the owned and the leased portfolio. It looked like the owned picked up about 40 bps sequentially and the leased declined 50 bps, was this shift due to the mix or is there something to call out there?

I think actually it's interesting, we have more independent living in the leased versus owned and unusually the independent living occupancy actually attrition was higher in the fourth quarter than assisted living. If you look at metrics, our assisted living attrition fell 9 percentage points in the fourth quarter from the third quarter and down from the year before by 1%. Independent living was up 3%. So it was just a function of higher attrition for the quarter where we actually had a loss in occupancy in independent living for the quarter and [again in independent living] and the difference being that the leased portfolio has more independent living than the owned is the reason for the change in occupancy.

Got it. That's interesting. Second question, how do you guys rank purchasing previously leased assets versus the acquisition of a new facility?

Great question. Every dollar that we invest, we do an investment analysis looking at the return and look at all the opportunity costs whether it be in acquisition, whether it be a refurbishment, renovation. Obviously, we think that owning the real estate reduces leverage, it brings down that was recourse leases, it reduces the escalators over a decade. So you got take that into account. And the bottom line is it gives us a tremendous ability to increase the sustainable cash flow without the lease burden and creating shareholder value through the ownership of the real estate and real estate value. I mentioned before, we purchased back from Ventas. I gave you some stats on one of the conversions that just opened up in Arizona, the other properties will be done next quarter or so. If we raise as we project, $3 million of cash flow, we'll increase the value of those real estate properties that we now own by $40 million. We prefer to do that for our shareholders than our landlords. So we just look at this as a strategy that is improving the balance sheet, reducing leverage, and reducing those minimum escalators, which could increase even greater in higher inflationary periods and gives us maximum flexibility of owning real estate that has the potential of really driving significant cash flow benefit like $5 million on the $85 million purchase and then the real estate value that goes along with that that hopefully will also drive shareholder value.

All right and then last one from me, Larry there's been a lot of talk recently regarding senior housing's role in the post-acute continuum, just would be interested in your thoughts on that and have you guys had any discussions with payers or health systems or is it still pretty early?

Jacob, great question, I had a meeting this morning on that exact topic. I think there is a tremendous opportunity there. I think it's something that the industry has lagged behind. I'm hopeful that we will take a leadership position in looking at how we can -- I mentioned something on the call, again the cost of living at one of our buildings an average rent of [$3535] is 60% less than the cost of home care. If you compare it to the cost of skilled nursing at [$432 a day, hospital $1,800 a day], it's significant. The opportunity for this industry to participate in this continuum has a setting that has better outcomes at lower cost is very, very dramatic.

The challenge is getting the data because we are private pay and don't deal with CMS, we don't have the same data that other post-acute providers have. We also have a strategy that we really speak about are partnering with the premier post-acute care providers who reside in our buildings like Genesis, home healthcare companies, hospice companies, [know directors]. We just had a meeting today with our quality assurance committee where we review a modified Barthel Index which is the index that Genesis provides for our residents in our communities that measures independence and that Capital Senior Living communities is the highest measurement of all of Genesis therapy rehab around the country. So we are working on gathering the data, we are talking, having great conversations on that actually as I said just coincidentally spent this morning on that exact conversation and thinking that this is an opportunity that we definitely want to play in. It will take some time and evolve. There are hospital systems that are very focused on senior living right now. So I do think there is a great role and I'll tell you Jacob that's the holy grail because if we're successful and the industry is successful, all we have to do is increase the penetration rate of this industry by 1 percentage points and if we do that, there would not be a vacant apartment in the entire United States.

And with no further questions in the queue, I'd like to turn the conference back over to Mr. Larry Cohen for any additional or closing remarks.

Well, again I want to thank everybody for participating today. Please feel free to contact Carey or myself if you have any further questions. We wish you good evening and hope to see you soon. Thank you very much, have a good night.

Good night.

Again that concludes today's presentation. We thank you for your participation.