Sonida Senior Living Inc (SNDA) 2017 Q1 法說會逐字稿

Good day, and welcome to the Capital Senior Living First Quarter 2017 Earnings Release 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'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 First Quarter 2017 Earnings Call. I want to thank our strong team at Capital Senior Living communities across the country for providing our residents with exceptional service and congratulate you for achieving a 95% resident satisfactory rating on our 2016 surveys.

I want to recognize 2 outstanding communities, the Waterford at Woodbridge, for scoring highest in resident satisfaction; and Crosswood Oaks, our Community of the Year, for scoring highest in combined financial performance compared to budget, occupancy and resident satisfaction. With all the discussion about the effective new competitive supply affecting our industry, I want to point out that Crosswood Oaks, our 2016 strong performer, is our oldest community. It opened in 1976. Kudos to Dawn Kraft, [Lucy Steele], [Lisa Holloway], [Tina Tefford] and all their team members. I also want to mention that, this morning, we recognize 3 corporate employees who are celebrating their 25th anniversary with Capital Senior Living. As you can tell, I am extremely proud of the hard work and passion and dedication of our entire team, and our residents and family members frequently thank me for the meaningful impact they have on their lives. It is our exceptional and talented employees that differentiate Capital Senior Living and 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.

The number of flu incidents reported in our assisted living and memory care units this flu season increased 43% compared to the prior year, despite the headwinds from this heavy and prolonged flu season, which impacted our first quarter occupancy as we discussed in our fourth quarter and full year 2016 earnings call. The focused execution of our clear and differentiated real estate strategy yielded increases in first quarter key metrics, including revenue, average monthly rent and EBITDAR, as compared to the first quarter of the previous year.

We are keenly focused on rebuilding occupancy across our portfolio following the heavy flu attrition and are encouraged by the strong demand we have experienced since mid-February, as evidenced by excellent above-average deposit taking in each of the last 11 weeks. We had the highest number of net deposits for the year last week and a company record of number of monthly deposits and move-ins in the month of March. We have a lot of momentum entering our best-selling season. Most encouraging is the fact that our demand is strengthening, even though we stopped all incentives and pricing specials effective January 1. This clearly demonstrates that Capital Senior Living is insulated from competitive new supply in most of our markets and is benefiting from the focus of our talented team and their successful execution of our differentiated strategy. Rebuilding occupancy at higher effective rents will lead to higher revenue, EBITDAR and CFFO. And we continue to be well insulated from significant wage pressure in most of our markets.

We also continue to make steady progress on important operational and corporate objectives related to positioning the company for sustained growth, including increasing our real estate ownership with the strategic acquisition of 4 communities we've previously leased and the reopening of units previously out of service. As we look forward to the remainder of 2017 and beyond, we expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics. We remain laser-focused on executing on our long-term sustainable real estate focus 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 3 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 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 amongst 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 $960 million of acquisitions since 2010 and these have generated a 16% first year return on equity. We closed an $85 million acquisition in January of 4 communities we previously leased from Ventas. This transaction will result in incremental annual CFFO of approximately $3 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 completing conversions of 169 units and renovations at these 3 communities that are expected to be completed over the next 2 quarters. When stabilized, we project that these conversions will contribute an additional $2 million to $3 million in CFFO. The stabilized CFFO from this transaction is expected to result in a 20% or greater return on equity, including the cost of conversions. This transaction increases our owned communities, and we are having discussions with other landlords that might further this strategic goal.

We also have a robust acquisition pipeline and are conducting due diligence on additional acquisitions of high-quality senior housing communities in states with extensive existing operations. We continue to believe that the ownership first lease model provides us with significant strategic and financial benefits.

Capital Senior Living is now the nation's third largest senior housing owner-operator by percentage of ownership. And since 2010, our real estate ownership has increased from 32.5% to 64.3% of our total portfolio. By increasing our owned portfolio, we are 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. Going forward, acquisitions will remain a key component of our capital allocation strategy.

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 23% and net operating income growth of 21.5%, 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. Another 776 units have been out of service for significant renovations, refurbishments and repositioning. 232 of these units have reopened and their lease-up has been outstanding, and the remaining 544 units are scheduled to reopen over the next 3 quarters. 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 rent growth is at a 7-year high, and the industry will benefit from a material reduction in senior housing construction starts, which have 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. 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 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 non-health care ancillary services enhances our competitive advantages as our monthly average rents are approximately 60% of the average cost of living at home, plus the additional cost of home health care. And recent studies show that the cost of home health care 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 Home Health and other health care companies are facing, and our private pay strategy insulates us from government's 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.

Touching briefly on capital allocation. Each of the key strategies we discussed create value, either organic or through accretive growth, and margin enhancements. The acquisitions and conversions we described will contribute to enhanced 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 sustainable and growing cash flow as well as 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 enhancements and improving the cash flow generation of our existing portfolio. And our outlook is supported by the fundamental strength of our business model. We are attractively positioned in a highly fragmented senior housing market, and we have a capital plan that supports our long-term growth initiatives and a track record of strong growth. Capital senior living is uniquely positioned to drive sustainable growth and long-term shareholder value. It is now my pleasure to introduce Carey Hendrickson, our Chief Financial Officer, to review our company's financial results for the first quarter of 2017.

Thank you, Larry, and good afternoon, everyone. Hope you've had a chance to review our 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 e-mail, if you like to do so.

The company reported total consolidated revenue of $116 million for the first quarter of 2017. This is an increase of $6.8 million or 6.2% over the first quarter of 2016. The increase in revenue is largely due to communities acquired during or since the first quarter of 2016. Revenue for consolidated communities, excluding the 3 communities that are undergoing repositioning, lease-up or significant renovation and conversion, increased 6.3% in the first quarter of 2017 as compared to the first quarter of 2016.

Our operating expenses increased $6.3 million in the first quarter of 2017 to $72.8 million, again, due primarily to the acquisitions. Our general and administrative expenses for the first quarter of 2017 were $6.2 million, the same as in the first quarter of 2016.

Excluding transaction costs from the first quarter of both 2017 and '16, our G&A expense increased $300,000 over the first quarter of 2016. Net health care expense, which is the net of our health care claims and our employee benefit income, increased by $300,000 in the first quarter of 2017 as compared to the first quarter of 2016, which explains the full increase in G&A.

Regarding our health care benefit plans, we've made changes to the plans which renew on June 1 of each year that we to expect meaningfully improve our net health care claims expense going forward beginning in June. G&A expenses as a percentage of revenue under management was the same in the first quarter of 2017 as the first quarter of 2016 at 4.9%. As we noted in the press release, the company's non-GAAP and statistical measures exclude 3 communities that are undergoing repositioning, lease-up of higher license units or significant renovation and conversion.

Our adjusted EBITDAR was $37.7 million in the first quarter of 2017, which is an increase of $400,000 from the first quarter of 2016. This does not include EBITDAR of $700,000 related to the 3 communities undergoing repositioning, lease-up or significant renovation and conversion.

Our adjusted CFFO was $11 million in the first quarter of 2017, which is above the range of $9.75 million to $10.75 million that we provided on our fourth quarter and year-end earnings call.

Our same-community revenue increased $800,000 or 0.8% over the first quarter of the prior year. Our same-community occupancy was 87.6%, a decrease of 100 basis points from the first quarter of 2016. We expected the decline in occupancy, as we noted in our fourth quarter and year-end earnings call, due to a heavy and prolonged flu season as well as 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 3 weeks or more in January and February. Our same-community average monthly rent increased 1.9% versus the first quarter of 2016 and increased 0.7% from the fourth quarter of 2016, which would equate to an annual increase of approximately 2.8%.

Our average monthly rent for our consolidated communities increased 2.8% versus the first quarter of 2016. Same-community operating expenses increased 2.9% versus the first quarter of last year, excluding conversion costs in both periods. Our labor costs continue to increase in line with our expectations, up 2.5% in the first quarter versus the first quarter of last year. As we've noted in previous quarters, and as Larry said today, we are not a health care company, so we're not experiencing the wage pressures that health care companies and some senior housing companies with multiple health care-related ancillary services are experiencing.

Our 2 other major expense categories also continued to be well managed, with food costs increasing only 0.3% versus the first quarter of the prior year and utilities increasing 3.7%. Our same-community net operating income decreased 2.4% in the first quarter of 2017 as compared to the first quarter of 2016.

On January 31, we completed the acquisition of 4 communities that we've previously leased for a purchase price of $85 million. We also incurred a $12.9 million noncash lease termination charge associated with the transaction. The previous total lease expense in the 4 communities was approximately $7 million annually. We received a rent credit of $5 million in association with the transaction. The noncash lease termination charge is effectively the discounted value of these payments to be made over the remaining approximately 8.5 years of master lease agreements with our REIT partner. The annual net impact of the transaction going forward is a positive $3.0 million increase in CFFO. Our lease expense decreases by approximately $7 million, while our interest expense increases by approximately $4 million.

On the fourth quarter call, we conservatively estimated that the positive CFFO impact to be approximately $2 million (sic) [$3 million] while we work through the details of the transaction. The purchase of these 4 leased communities is consistent with our real estate focus strategy. In addition to the $3 million increase to our CFFO, that will 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 enhances our real estate and shareholder value. And as Larry noted, we're currently working on conversions of 169 units and renovations at 3 of these communities, which, when stabilized, we project will contribute an additional $2 million to $3 million in CFFO.

Looking briefly at the balance sheet, we ended the quarter with $25.9 million of cash and cash equivalents, including restricted cash. During the first quarter, we invested $20 million in the acquisition of the 4 communities we've previously leased, and we spent $12.7 million on capital expenditures, $1.3 million of which was for recurring CapEx. We received reimbursements totaling $2.3 million for capital improvements of our lease communities and expect to receive additional reimbursements as projects are completed.

In the first quarter, we completed or nearing completion on several projects and expect our quarterly cash capital expenditures to taper down as the year progresses. Our mortgage debt balance at December 31, 2017 -- or March 31 -- excuse me, 2017, was $968.1 million at a weighted average interest rate of approximately 4.6%. At March 31, all of our debt was at fixed interest rates, except for 2 bridge loans that totaled approximately $76.7 million. The average duration of our debt is approximately 7 years, with 92% of our debt maturing in 2021 and after.

Looking forward, we expect occupancy to begin to rebuild in the second quarter. As Larry noted, we've had above-average deposit taking for the last 11 weeks and we had a record number of move-ins in the month of March. Also, the second quarter of the year generally has the mildest weather, and therefore, the lowest utilities expense. We'll also have 3 months of benefit from the acquisition of 4 communities we've previously leased versus the 2 months of benefit we had in the first quarter. We continue to project our net health care claims expense at a higher level in the second quarter, due to our experience over the past few quarters. However, as I noted previously, we expect this expense to begin to moderate starting in June.

Taking all these things into account, we currently expect our second quarter CFFO to increase versus the first quarter and to be in a range of approximately $11.6 million to $12.2 million, depending on our experience related to our 3 primary noncontrollable factors: attrition, weather and health care 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, the benefits from which we expect to begin seeing in the second half of this year and beyond. And the impact of the return of 776 units currently out of service, or out of service as the year began, due to conversions repositionings will be even greater particularly as our 2 large repositioned communities are completed this year and added back to our non-GAAP results after stabilization in 2018 and 2019. In 2017, we'll benefit from the return of approximately 139 units that have been out of service, with a lease-up of these units beginning primarily in the second half of the year, and we expect to add back 1 community with 186 units that's been excluded from our non-GAAP results in 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 continue to expect them to contribute incremental revenue of approximately $32 million and CFFO of approximately $7.5 million on an annual basis.

We'll also benefit in 2017 from a full year of the acquisitions we completed during 2016 and will receive 11 months of benefit from the January 2017 purchase of the 4 previously leased communities. In addition, we have a robust acquisition pipeline that allows 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 includes our formal remarks, and we'd like to now open the call for questions.

(Operator Instructions) We'll go first to Chad Vanacore with Stifel.

So I was thinking about the average rent increases at your community. It looks like same-store rate was up 1.9%. Is that right?

That's right. It's up 1.9% versus the first quarter of '16, versus the fourth quarter of 16. Just that 1 quarter-to-quarter increase was 0.7%, which would equate to a 2.8% annual increase.

I'm sorry, Carey, can you say that again? 2.8% for the whole portfolio?

Well, it is 2.8% for the whole portfolio. But also, just looking at same-community, if you look at what the increase was from the fourth quarter to the first quarter, that sequential increase was 0.7%. So just annualizing that, taking that (inaudible) would be 2.8%. Annualized rate of 2.8%.

Yes, got it. We had been talking more about 3% rate increases, and that's in line with that. Right?

Right.

Okay. Are you seeing any difference in rate growth between your IL and AL units?

Actually, if you look at the rate growth, our IL units sequentially increased by 1% and AL is up by about 30 basis points. Year-over-year, we see a little higher -- same-store higher rate growth in IL than AL.

All right. And then, Larry, you had mentioned that you discontinued discount. What form did the discount take prior to you discontinuing it?

We would, occasionally, offer introductory specials. For independent living, the $500 off for the first 3 months' rent; for assisted living, it would be $1,000 off; memory care, it would be about $1,500. We, typically, run them on properties, the occupancies typically below 85%, sometimes below 90%. And then, very rarely, but they were to boost off after, for example, some harsh weather or something happened, like in October, we have it on all properties. So we did have that, for example, in December. But we have, effective January 1, there are no specials or introductory pricing at any of our communities. And the other thing that's important, Chad, is those concessions have now fully burned off. As I said, they lasted for 3 months. So the January move-ins lasted the entire quarter. That will -- should show a further improvement in their average rent for April, since there are no longer any concessions coming through our financials.

All right. And then, just thinking about CapEx. Your investment CapEx was $11.4 million in the quarter. You had been running around $9 million a quarter. Where is that going to you? And should we expect that to normalize? Or is this a better run rate used for the rest of the year?

Yes, we were -- we'd been completing some projects that were started in 2016, so we're just finishing those up. And so we've had -- and we've completed -- as of the end of April, we had completed our Canton project, which is one of our repositioned communities, and a lot of that expenditure is in the first quarter. So now we expect those to taper down as the year goes along. I still think it will be for the year at approximately $30 million, and that's before reimbursements from the REIT partners of about $5 million. So net-net, we probably have somewhere around $25 million in CapEx for the year. So it's definitely higher in the first part of the year and it'll taper off as the year goes along.

And we'll go next to Dana Hambly with Stephens.

This is Jacob Johnson, on for Dana. I guess, first question -- hey, hey, understand that expenses were in line with your expectations. The 2.9% same-store expense growth in the first quarter looks like it is more than you've experienced recently. It sounds like this was driven by increased utilities. But was there anything else to call out there?

Yes. So Jacob, taken as a group, our 3 major cost categories, labor, utilities and food, were up approximately 2.5%. Labor was up 2.5%, right in line with our expectations. Food costs were up only 0.3%; and utilities, as you know, they were up 3.7%. And they increase and decrease based on the severity of the weather. The weather in the first quarter of this year, while relatively mild in certain parts of our geography, was a little more severe than in the first quarter of last year. So therefore, that expense was up some. And then we had -- we did have a couple of unusual expense increases and a couple of other category supplies, contracts, consulting that we wouldn't expect to occur in future quarters, but they were just kind of onetime costs in the first quarter. So I'd say, our expenses were where we expected them to be.

Got it. And then, the COO role has been vacant since Keith passed away. You guys, obviously, have a deep bench. But looking forward, do you have any plans to fill that role?

Jacob, we are considering both internal and external candidates, and I would expect that a decision will be made in the near future.

All right. And then, last one for me. Carey, a quick modeling question. Should we expect to see lease expense kind of tick down in the second quarter as you have that full 3 months of owning those previously leased assets?

Yes, absolutely. So we had about -- if you look at -- that's about $600,000, $585,000 or so of lease expense per month that will come out from the previously leased communities, and we had 2 months of that out in the first quarter. We'll have 3 months of that out in the second quarter and beyond that.

We'll go next to Joanna Gajuk with Bank of America.

So in terms of the quarter, which you said that the CFO -- CFFO came in above the high end of the range that you've provided. How would you describe what came in better than expected that drove that, I guess, a little bit better performance there?

Right. It was mostly due to lower operating expenses and G&A expense, as well as the fact that we initially projected that it'd be about a $2 million increase in CFFO related to the 4 communities we purchased in the first quarter. And it was actually -- it actually ends up being about a $3 million increase. So that added about $150,000 to the first quarter from that transaction. Those were really the reasons why we were a little bit better.

Okay. And what exactly is the [instrument], the last -- on the last few debt [certification] that now those communities were $3 million versus $2 million previously. What exactly has come in better on that transaction?

What's come in better? Well, just working through the transaction, we've -- so we have -- we were just being conservative, Joanna, until we work through it. We ended up being able to -- we will reduce our lease expense by $7 million and we'll increase our interest expense by $4 million. So it's just the way that it nets out and it just ends up being better. We want to be conservative until we've completely worked through the transaction.

Okay. And then in terms of -- you said the flu, I guess, instances increased. But were you able to quantify the weather impact in some form or fashion? Or it was sort of, I guess, reflected just in the increased utilities costs?

Well, the weather, we had 85 units out of service in the first quarter. We had, I think, 18 properties that had freezing frozen pipes, water damage, and actually because of that, that was very disruptive. It's not only the 85 units. We had wings closed. We had moved residents around in the community to clean up the units and fix the pipes. So that's part of the loss of occupancy in the quarter, and that was really from the ice storms that hit in December and January in Texas and some parts of the Midwest. In addition to that, if you look at the flu, as I said, we had, in the quarter -- so that's -- we had basically 621 reported incidents of the flu this year. That's only AL and memory care. We don't track the IL. That compares to the 400 the year prior. So it was a pretty big increase of almost 260 additional reported incidents of flu in just our AL and memory care, which represents about 57% of our portfolio.

Great. In terms -- but in terms of the outlook for the year, so clearly, the Q1 occupancy was down, which I guess would be kind of new. But it's going to be the case for the quarter because of all these issues around flu and weather, but anything changed in terms of your outlook? Or you still kind of view a 100 basis point increase in occupancy for the year?

So from the increase in occupancy for the full year, I mean, I think we have -- starting from the base that we are in at the end of the first quarter, so as we go into the second quarter, I would expect us to be able to increase somewhere in that 80 to 100 basis points through the rest of the year.

Typically, Joanna, we expect no growth in the first quarter.

Right.

We expect growth to grow during the second, third and fourth quarters. We're actually running ahead now. We had a really strong March, as I said. We had net gains in occupancy in 8 of the last 10 weeks, and we'd had very, very strong deposit taking now for 11 consecutive weeks. As we commented in early February on the fourth quarter call, we had a very challenging January, because of weather and flu. But the recovery is encouraging, particularly the pace at which we've seen the recovery really starting the week of February 17. So we've really had now, really all of March now, April and half of February with very, very strong performance that hopefully will continue and drive growth for the balance of the year. We are starting at a lower -- but we are starting at a lower occupancy on April 1 than we had planned to be.

Right. Okay, because that's what I was getting on. But I guess, based on the commentary that Carey made on the Q2 outlook, right, so a sequential increase, which is, I guess, what we would have expected. But it seems like it's less than what we had expected. So in the past, it was $0.04, I guess, about $0.04 sequentially on per share. But now, it seems like it's maybe a little more like $0.03. So is there something maybe also around acquisitions in a sense that I guess you've done the 4 communities that were previously leased, but other than that you haven't really added versus maybe in prior years that was more of sequential lift in Q2 from Q1 from acquisitions or something along these lines?

Yes. That is -- you're right. Let me just walk you through kind of sequentially first quarter to second quarter, how I think about it. We're projecting an increase of, as I noted, approximately $600,000 to $1.2 million, which would equate to $0.02 to $0.04. And look at 1 additional month of contribution from our first quarter acquisition of the 4 previous leased communities, and that's about $250,000. We don't, as you know, that we don't have any additional acquisitions that will close in the second quarter, so there won't be any incremental contribution from a new acquisition. We would expect our utilities cost to be lower by approximately $600,000 because the second quarter generally has milder weather than the first quarter. Our G&A expenses could be about $200,000 to $300,000 higher in the 2Q -- in second quarter versus first quarter based on just normal seasonal costs, including costs related to our proxy and our annual meeting. They always happen in the second quarter, among other items. And then the remainder of the increase from 1Q to 2Q will really depend on how much recovery in occupancy that we're able to achieve in the second quarter, as well as the lease-up of the units we previously had out of service that came back online, the one that came back online in the first quarter and the ones that will come back online in the second quarter.

(Operator Instructions) We'll go next to Brian Hollenden with Sidoti.

Absent the spike in the flu season, would you have expected that the same community occupancy to have increased?

Typically, in the first quarter, we don't expect an increase. We, typically, expect first quarter to be flat to slightly off. If you go back historically, there's always seasonality. Last year, we did have a 30 basis points -- I take it back. In occupancy last year, we dropped, first quarter, on the same-store basis, by about 60 basis points. So we, typically, see a little bit of a drop in the first quarter, but we don't expect to see an increase in the first quarter. We, typically, see it build the second -- the third quarter is usually the strongest quarter. And then, we've always, typically, see an improvement in the fourth quarter as well.

Okay. Can you give us a more specific time frame for the 770 units, which will come back online? I think you mentioned the 139 units in 2017. Can you talk more about how those come back online?

In fact, if you want to look at our company presentation, there's a slide that breaks this out. I think it's Slide 17. And you can see by quarter when the units come back. So in the second quarter of this year, which we're in now, we're expecting 311 units to reopen, 249 of the Canton Regency we have. We've already opened the memory care, 21 units. They're full. We're now opening the assisted living. Then, we have another 62 units on top of that opening. Some of those are the properties we repurchased from Ventas that are reopening now in the second quarter. We have 19 units reopening in the third quarter and then 214 units in the fourth quarter, 202 of which will be Town Centre. Again, one of the properties that's been out of our numbers for a major repositioning and then 12 units [as other] conversions that will be opened in the fourth quarter.

And then, one last question. Can you talk a little bit about any geographic regions that are performing well? And then, are any particular regions weak? And what can you do to improve those results, whether that to improve the occupancy or to lower costs there?

Great question. The strongest regions are the Midwest-Central part of the country. We have one region that operates at 95% consistently, and that's kind of Nebraska. The Central part of the country is very strong. We've seen a nice recovery in Texas. We did have -- obviously, the weather impacted us. As we have said, we are impacted in a few of our Northern Dallas metro markets, McKinney, Plano, here in Arapaho, those 3 locations. But they, again, have very strong teams, and McKinney has recovered to, like, 92%. Plano and Arapaho, they're facing competition, but have very strong teams. The other weak area, I'd say, is South Carolina. If we look at Myrtle Beach and kind of the coastal part of Carolina, those markets have been weak for some time and they are -- it's really looking at some changes in personnel and then some capital improvements as well. One thing I would say is that the conversions, as they come on, they have really worked extremely well at improving occupancy at properties, particularly [where we have a] vacancy. So that's been a very, very reliable solution that we've been able to utilize and take advantage of loss of occupancy where you have the vacancy. We have a property in Ames, Iowa that we planned to do a memory care conversion 3 years ago. By the time we had all the approvals, we were 100% occupied, and we actually now are stopping to lease some units to get units down in order to start the renovation. So if I think about the markets, there are a couple of pockets in Texas; clearly, South Carolina. We'd had some great experience in California. I mentioned the property that was the best performer. It was a property in Sacramento. But the central part of the country continues to be very, very solid.

And we'll go next to Ryan Halsted with Wells Fargo.

Maybe just to approach the occupancy trend in the quarter a little differently. It seemed like the impact of flu hit early in the quarter, maybe consistent with what the expectations were heading into the quarter. So can you break out intra-quarter what your occupancy trends were? I think that's always helpful, just to get a sense of how you exited the quarter.

We actually had a pretty -- it's just a minor drop in January. We had a more significant financial drop in February. Just to give you an idea on flu, in December, we had about 60 more incidents of flu in AL memory care this year than last. In January, comparing year-over-year, we had over 200 more flu incidents in January that kind of reflected themselves in February. In February, we were about 30 more. And actually, in March, we were 90 less. We had a really strong April -- I mean, sorry, March. We gained, I think, about 56 units in the month of March from beginning to end. Financial occupancy will probably be higher growth in April based on that. So if you think about the trends, January was not that bad a month. It really manifests itself in February, financially, carried over into March. Physical occupancy in March actually grew, which means, financially -- so there's a 1 month lag, that we should see a pickup in financial occupancy in April. And obviously, we have very good deposits on hand. We have a good spread between deposits and move-outs, and we have a lot of good traffic and momentum that, with good weather, should continue throughout the second and third quarters.

Okay, that's helpful. And then moving to your acquisition pipeline. What kind of visibility do you have sort of into the pipeline for the rest of the year? Should we think about it kind of similar to last year, where it was a little bit more back-end weighted, the deal activity?

Let me just tell you where we are in pipeline. I'll let Carey talk about timing. In the first quarter, we signed confidentiality agreements on about $300 million of properties. So we continue to track with over $1 billion pipeline a year. And we typically buy 10% or 15% of what we look at. We have due diligence ongoing now in a couple of properties. I think, earlier, we closed $85 million in the first quarter. For the back half of the year, we're probably looking about $50 million, maybe a little more to kind of stay on pace with last year, which was $138 million. We'll have one closing in the end of the second quarter, early third, and another closing that will take us into the end of third, early fourth quarter. And that will have -- we expect additional closings in the fourth quarter.

Great. Maybe last one. You talked a lot about, obviously, your strategy for increasing your real estate ownership. And how much of that strategy is becoming, I guess, increasingly more about getting your leases sort of either bought out or just terminated? Can you give any sense of what percentage of your leases? Do you have purchase options in the next year to 2 years? And how many of them have these sort of owners-escalators that you think might not make sense and maybe you have a chance to negotiate out of them in the near term?

I think about 25% of our leases just run-off in 2 years. We have a number of portfolios with 1 landlord that runs out in 99 -- in 2018, 2020. And we have a 1 year notice period ahead of that. So call it 2 more years, we're about 25% of the leases rolled out. There's probably a handful, 3 to 5 properties that we lease that we would -- in conjunction with our landlord, consider selling just on markets that we'd like to exit. We think they don't have the same growth prospects as others. The rest of the lease portfolio actually is performing pretty well. So if you look at it, we are taking advantage of opportunities to convert some of those into ownership. Obviously, we think it was very strategic to buy back the 4 that we did from Ventas. We paid $85 million; hopefully, we'll increase cash flow by $5 million to $6 million. And if you think about real estate value, we think we could probably increase the value of those properties by maybe $30 million, $40 million once we complete the conversions. So there's a lot of benefits to doing that. And we're having conversations with our landlords about looking at selectively acquiring properties or reconverting them to equity versus leases. All the leases have escalators. They typically have CPI escalators. Some have floors of 3%, some have CPI. But we've had them for over 10 years now and they will continue.

(Operator Instructions) And no one else is queuing for questions at this time. So I'll turn -- hand the call back over to Larry Cohen.

Well, thanks, everybody, for participating today. We appreciate your support and interest in our company. Feel free to contact Carey or myself if you have additional questions. And then we do have a pretty good schedule coming up of conferences that we expect, hopefully, we'll see some of you over the next few weeks. Have a great evening. Thank you very much.

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