Sonida Senior Living Inc (SNDA) 2017 Q2 法說會逐字稿

Good day, and welcome to the Capital Senior Living Second 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 company's ability to find suitable acquisition properties at favorable terms; financing; licensing; business conditions; risks of downturns in economic conditions, generally; satisfaction of closing conditions, such as those pertaining to licensure; availability of insurance at a commercially reasonable rate; 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, and good afternoon to all of our shareholders and other participants, and welcome to Capital Senior Living's Second Quarter 2017 Earnings Call. It is truly a pleasure to welcome Brett Lee to our management team as Executive Vice President and Chief Operating Officer. Brett will join us on August 14 from Tenet Healthcare, where he serves as Chief Executive Officer of the North Texas and Dallas markets. Brett's experience also includes serving in senior leadership positions in 4 of the nation's top 10 children's hospitals. We are excited to have someone with Brett's outstanding leadership abilities and strong record of operational success within the health care services sector join our company. He is a passionate and committed health care executive with a results-oriented focus. His experience as a clinician, clinical leader and executive will be a tremendous asset to our management team and our residents.

Our occupancy improved in the second quarter following the severe and prolonged flu season earlier this year, and our average monthly rent increased a robust 2.1% in the first 6 months of the year, which annualizes to a 4.2% rate of growth. Despite the impact this year's severe and prolonged flu season had on our first half 2017 occupancy and revenue, we are encouraged by strong second quarter demand trends as evidenced by a 6.3% increase in same-store net deposits and a 3.6% increase in same-store move-ins compared to the second quarter of 2016.

This follows a record number of deposits and move-ins in March for this year. And since February, we have enjoyed a net gain of 104 units of occupancy through July 31 as we continue to rebuild occupancy across our portfolio. It is important to remember that financial occupancy gains lag physical occupancy results, and I am pleased to report that we expect about a 30 basis point net gain in financial occupancy for the month of July.

We also achieved a company record number of quarterly net deposits as well as a company record high closing ratio of tours to net deposits in the second quarter. Most encouraging is the fact that our demand is strengthening even though we stopped incentives and pricing specials on January 1 as reflected in the robust gain in average monthly rate for the first 6 months of the year. These positive metrics result from the implementation of a number of initiatives earlier this year. Our refreshed Capital Senior Living University sales training provides a uniform sales system throughout Capital Senior Living that focuses on capturing all incoming leads and increasing conversions to tours, (inaudible) planning system to heighten customer experience, a follow-up and closing system and better benchmarking and holding our executive directors and sales directors accountable for the sales process. We also restructured incentive compensation programs for our regional and on-site operations and sales and marketing teams that focus on enhanced performance and accountability. We developed recognition programs for our star achievers as well as training programs and succession plans to develop the next level of executive directors in our organization.

Our improved demand metrics give us excellent momentum for occupancy and rate growth going forward. These results also demonstrate that Capital Senior Living is generally 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 protected from significant wage pressure in most of our markets. As Carey will discuss further, certain expenses were higher in the second quarter. These increases are temporary in nature, and we have already seen them moderate in the third quarter. We expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics for the remainder of 2017 and beyond.

We remain laser-focused on executing on our long-term sustainable real estate-focused growth strategy. The main pillars of our strategy include core organic growth, continuing to pursue accretive acquisitions, increasing real estate ownership and converting units to assisted living and memory care. The management team and I firmly believe that these 4 areas of focus will pave the way for sustainable organic growth over the long term, driving higher overall revenue, enhancing our cash flow, maximizing our real estate value and enhancing shareholder value.

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 are deploying our cash into strategic, immediately accretive acquisitions. We have completed more than $960 million of acquisitions since 2010, and these have generated a 16% first year return on equity. We announced today we have agreed to purchase a community for a total purchase price of approximately $20 million which, subject to due diligence and customary closing conditions, is expected to close in mid-October.

We have a strong pipeline of near- to medium-term targets, and we are conducting due diligence on additional acquisitions of high-quality senior housing communities in states with existing operations. We continue to believe that our ownership versus lease strategy provides us with significant operational and financial benefits. Capital Senior Living is 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 generate significant, 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 senior housing owner-operator. 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 to the second quarter of 2015. Comparing results preconvention from the second quarter of 2014, these communities achieved revenue growth of 24.6% and NOI growth of 28.3%. With the completion of the final phase of renovation and conversion of 249 total units at one of our repositioned communities in April, we currently have 519 units of recently completed conversions in lease-up. Another 257 units are scheduled to reopen over the next 2 quarters.

When stabilized, these 776 units that were out of service at the beginning of 2017 are expected to contribute $32 million of revenue, $11 million of EBITDAR and $7.5 million of CFFO on an annual basis.

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 near a 7-year high, second quarter absorption was a record high and construction starts continue to fall for the sixth consecutive quarter. The industry will benefit from the continued reduction in construction starts as construction capital is constrained and the approaching demographic tailwind of a rapidly growing senior population. 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 98% of our portfolio is situated in MSAs with limited new construction, and in the 2 markets we'll operating within the top 10 highest construction markets, our average occupancy is 93% 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 new supply.

Our differentiated strategy of providing only affordable, high-quality senior housing and nonhealth 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. A recent study showed 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 home health and other health care companies are facing. And our private-pay strategy insulates us from government reimbursement risk.

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

Talking 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 sustainable and growing cash flow as well as the most value for our shareholders over the long term.

In conclusion, we remain focused on a growth plan to maximize financial flexibility through real estate ownership, improving profitability through margin enhancement and improving the cash flow generation of our existing portfolio. And our outlook is supported by the fundamental strength of our straightforward private-play -- private-pay business model. We are attractively positioned in the 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 value for our shareholders. Our exceptional and talented employees differentiate Capital Senior Living and give us great confidence in the future of our company and the continued quality of care we provide our residents and the long-term value we are creating for all of our stockholders and other stakeholders.

It is my pleasure now to introduce Carey Hendrickson, our Chief Financial Officer, to review our company's financial results for the second quarter of 2017.

Thank you, Larry, and good afternoon, everyone. The company reported total consolidated revenue of $116.7 million for the second quarter of 2017. This was an increase of $5.7 million or 5.1% over the second quarter of 2016.

The increase in revenue is largely due to communities acquired during or since the second quarter of 2016. Revenue for our consolidated communities excluding the 3 committees undergoing repositioning lease-up or significant renovation and conversion increased 5% in the second quarter of 2017 as compared to the second quarter of 2016.

Our operating expenses increased $6 million in the second quarter of 2017 to $72.9 million due primarily to the communities we've acquired since the second quarter of 2016 as well as an increase in contract labor costs versus the second quarter of 2016.

Most of the increase in contract labor costs was isolated to 10 communities, several of which have recently completed conversions of units to higher levels of care and were required to have staff on hand before they could admit residents. Contract labor was needed to cover open nursing assistants, aides and orderlies positions. Regulations require such staff be in place so we had to use contract labor to temporarily fill those gaps. We expect contract labor costs to come down from the second quarter levels in the third quarter as these roles are filled with permanent staff. Our general and administrative expenses for the second quarter of 2017 were $6.1 million compared to $5 million in the second quarter of '16. Excluding transaction costs from both years, our G&A expense increased $1.1 million over the second quarter of 2016 primarily due to an increase in net health care expense, which is a net of our health care claims and our employee benefit income.

Our net health care expense was $1.125 million in the second quarter of 2017 compared to a credit of $240,000 in the second quarter of 2016, so it was a $1.4 million increase year-over-year. As we noted on our call last quarter, we revised the health care plans offered to our employees effective June 1 for the third month of this quarter. The new health care plans have higher deductibles, they have higher employee out-of-pocket percentages, and we also increased the premiums paid by employees for all plans with the greatest premium increase in our most benefit-rich plan.

This resulted in some employees moving to one of our other health care plans with lower benefit levels. In anticipation of moving to the new plans with lower benefit levels, some of our covered employees accelerated their health care services into of the month of May, resulting in unusually high claims in that month. As expected, we experienced significant improvement in net health care claims expense in July -- excuse me, in June, the first month of the new plans with much lower health care claims, which were fully offset by employee benefit income. Our health care claims have remained at this lower level in July so we expect a similar result for our net health care expense in the month of July and continued improved results going forward.

G&A expenses as a percentage of revenue under management was 4.8% in the second quarter of 2017 compared to 4.1% in the second quarter of 2016.

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 licensed units or significant renovation and conversion.

Adjusted EBITDAR was $38.2 million in the second quarter of 2017, which compares to $39 million in the second quarter of 2016. This does not include EBITDAR of $1.1 million related to the 3 communities that are undergoing repositioning, lease-up or significant renovation and conversion. Our adjusted CFFO was $11.5 million in the second quarter of 2017, which is right at the range for second quarter CFFO that we provided on our first earnings call -- first quarter earnings call of $11.6 million to $12.2 million.

Our same-community revenue increased $800,000 or 0.8% over the second quarter of the prior year. Our same-community occupancy was 86.8%, stabilizing after the high attrition we experienced in the first quarter related to a heavy and prolonged flu season. In March, our financial occupancy was 86.8%, and it remained at that level through the second quarter. As Larry noted, we had a nice net gain in physical occupancy in June. With the normal lag between physical and financial occupancy, we expect this increase to translate into an approximate 30 basis point gain in financial occupancy from June to July.

July is also showing an increase in physical occupancy, which should result in an incremental boost in August financial occupancy. And we expect the momentum to continue into September. For same community, average monthly rent increased 2.5% in the second quarter of 2016 with 2% of that growth coming in the first and second quarters. The second quarter sequential average monthly rent increase from the first quarter was 1.3%, which is 4.2% on an annualized basis.

Our same-community operating expenses increased 3.4% versus the second quarter of last year. As I noted earlier, our employee labor cost increased 2.6% in the second quarter of 2017 versus the second quarter of 2016.

We did receive a worker's comp credit in the second quarter of approximately $500,000, which benefited our labor costs. Without the worker's comp credit, our labor costs were up 3.7% due to an expected increase in labor cost for additional staffing at 14 communities where conversion of units to higher levels of care have been completed over the last year. These 14 committees are also benefiting from increased rate, revenue and NOI associated with the conversions. At the remaining 108 same-store communities, labor costs were up only 1.3% or 2.2%, excluding the worker's comp credits associated with these communities, which is well within our expectations for labor increases across our portfolio of assets without conversions.

Our 2 other major expense categories continued to be well managed with food costs increasing only 0.2% versus the second quarter of the prior year and utilities increasing 2.3%.

Our contract labor costs, as I noted, were up significantly in the second quarter versus last year mostly for additional staffing required for newly licensed assisted living and memory care units, but again we expect those costs to decrease in the third and fourth quarters.

Our same-community net operating income decreased 2.9% in the second quarter of 2017 as compared to the second quarter of 2016.

The contribution from acquisitions that we've made since the second quarter of 2016 are in line with our initial projections for these acquisitions of $1.4 million of CFFO contributed by these communities in the second quarter of 2017.

Looking briefly at the balance sheet, we ended the quarter with $29.6 million of cash and cash equivalents including restricted cash. During the second quarter, we spent $9.2 million on capital expenditures, $1.5 million which was for recurring CapEx. We received reimbursements totaling $1.4 million from our REIT partners for capital improvements at our leased communities, and we expect to receive additional reimbursements as projects are completed. Our CapEx spending was down from the first quarter of the year, and we expect it to continue to taper down as the year progresses. Our mortgage debt balance at June 30, 2017, was $964.1 million at a weighted average interest rate of approximately 4.6%.

At June 30, all of our debt was at fixed interest rates except for 2 bridge loans that totaled approximately $76.6 million. The average duration of our debt is approximately 7 years with 93% of our debt maturing in 2021 and after.

While our results in the first half of 2017 have been impacted by the decrease in occupancy in the first quarter related to the heavy and prolonged flu season, we see momentum beginning to accumulate and firmly believe that all the right pieces are coming together to improve our performance in the second half of the year. Occupancy is beginning to grow. The increase in our average monthly rent is accelerating. Contract labor cost, which increased in the first half of the year, are expected to come down in the third and fourth quarters. Our net health care expense, which has been up significantly in the first half of the year, is expected to decrease significantly in the second half of the year with our updated employee health care plans. And we expect to close on an acquisition early in the fourth quarter, which will boost results. Then as we look forward to 2018 and 2019, we expect the execution of our strategic business plan to produce growth in all of our key metrics.

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 units currently out of service due to conversions and repositioning will be even greater, particularly as our 3 large repositioning communities are returned to our non-GAAP results after stabilization.

These 3 communities have 637 units. 1 community has been in lease-up, and we expect it to reach utilization by the end of this year or early 2018. During the second quarter of 2017, the final phase of conversion renovation was completed on the largest of the 3 with 249 units and is now in lease-up. And we currently expect it to be stabilized in 2018.

The final phase of renovation and conversion of the other community, the third community, with 202 units, is under way with an expected completion date of November 2017.

We anticipate stabilization to take approximately 12 minutes -- 12 months, so it would likely be added back to our non-GAAP results in early 2019. When added back to our non-GAAP results upon stabilization, we expect these 3 communities to add more than $20 million revenue, around $6.5 million to $7.5 million to EBITDAR and $4 million to $5 million to CFFO.

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.

Looking specifically at the third quarter, the third quarter will be impacted by incremental seasonal expenses as is the case every third quarter. Utilities are generally about $1 million higher in the third quarter than the second quarter due to the hot summer months, and we have also had one more day in the third quarter than the second quarter, which equates to approximately $500,000 in incremental expenses. So in total, these incremental expenses will reduce our third quarter CFFO by approximately $1.5 million as compared to the second quarter or $0.05 per share if one were to calculate it on a per share basis as is the case in the third quarter of every year.

As I noted earlier, we also had a $500,000 worker's comp credit that benefitted the second quarter that we don't expect to repeat in the third quarter. Third quarter each year is also generally our best quarter for occupancy growth. And as Larry and I noted, we are off to a good start in the third quarter of this year. Also our contract labor costs are expected to come down in the third quarter as permanent staff are hired. There'll be some corresponding increase in employee labor cost, but we should see sizable savings in the move from contract labor to employee labor. Our net health care expense is also expected to decrease significantly from the second quarter. So taking all of these things into account, we currently expect our third quarter CFFO to be in the range of approximately $9.6 million to $10.8 million depending on the strength of our occupancy during the third -- during the quarter and the amount of improvement we're able to achieve in contract labor and net health care expense.

Also, as we look to the fourth quarter, our utilities should decrease, there's no difference in the number of days versus the third quarter and our occupancy is expected to continue to accelerate based on the positive trends that we're seeing. So we expect very good growth in our fourth quarter CFFO versus the third quarter.

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 position 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.

Finally, as Larry noted, we're excited to add Brett Lee to our team. He'll be an outstanding addition as Chief Operating Officer. He comes with a wealth of experience in leading operations in highly complex care delivery environment and a strong record of operational success, which will serve us well. That concludes our formal remarks, and we'd now like to open the call up for questions.

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

Carey, did I just hear you say guided CFFO or $9.6 million to $10.8 million, and that was higher than this quarter? I didn't hear that completely.

Yes. It was $9.6 million to $10.8 million. We have the kind of a $2 million that we're starting off lower in the third quarter versus the second quarter because of the seasonal expenses and the worker's comp credit that we had in the second quarter if you compare the third quarter to the second quarter. But then we'll benefit from improvement in contract labor cost, the improvement in net health care expense, and then we expect nice growth in occupancy in the third quarter based on the increase that we've had in physical occupancy in June and then again in July, so our revenues should increase associated with those financial occupancy gains in the quarter. And so just exactly where we're going to end up in that range will depend on the strength of our financial occupancy growth and just how much savings we're able to achieve in that contract labor cost and the health care expense versus the second quarter.

So just thinking about third quarter CFFO again, is that down because of seasonality or is it down because of these continuing labor costs?

It's down primarily because of the seasonal incremental cost, which is the same thing we have in every third quarter, third quarter of every year. So we always start off with that kind of $1.5 million bogey, if you will, every third quarter.

All right. Then just thinking about the demand expectations. How do you reconcile that improved demand expectation with the drop in occupancy you saw this quarter? It looks like you expect 30 basis points of increased occupancy 3Q, but move-ins were up 3.4%. Can you reconcile all that for us?

Yes, I can give you some numbers. If you look at the monthly performance, we had a net gain. Again, we lost about 270 units of occupancy in January and February. We gained 56 units in March. We lost about 30 in April. We picked up 17 in May, 42 in June. And we're up from that in July. So over the period since February, we have a net gain of, well, including July, over 100 units. And that is what has translated into the financial occupancy of about 30 basis points that we expect for July.

Yes, that's for -- just for July, not for the third quarter. It can increase more than that as the quarter goes along.

But if you look historically in third quarter, we typically in 2015, we picked up 80 units in the third quarter. Last year, we picked up about 50 units. We had some attrition in July, which is unusual. We lost 45 so we had a nice swing there. We had 88 gained in September of '16 and a gain of about 76 in August '15 and 40 in September. So if you look at right now, the demand we're seeing with the lead bank has a nice spread between deposits on hand and move-out notices. Obviously we can't anticipate residents that move out because they pass away or higher loads of care. But other than that, if you look at basically the tours, the traffic, the lead generation and the conversion, as I mentioned, we had a record in the second quarter of conversion ratios of almost 33%. Our target has been 30% so we've outperformed that. So and what we're hearing from the field is very positive. So I think that we clearly had a deep hole to come out of. I think we're very -- we are disappointed that the revenue is off as much as it is. We did have discounting in the second half of last year because of higher attrition that we saw last year in the third quarter. We stopped the discounts. We stopped concessions. We've had great, great growth since January and still building demand. So we, as I said, it's really what happened in January that filters through the balance of the second and third quarter because of the fact that we had the deep hole, but the fundamentals in the quarter were actually very good in all aspects. Quite frankly, this is the first quarter or first month in July in some time that we have a sequential gain in financial occupancy. And as I said, it sounds pretty encouraging from the field based on the numbers we're seeing through the close of business yesterday, which is July 31. And as I said, we have a nice spread right now in deposits on hand to move-out notices that should manifest for the month of August.

All right then just one more question for me, then I'll hop back in the queue. On this $28 million acquisition you plan on making, can you just describe location, asset type and occupancy?

I sure can. The asset is in the Northeast. It's in one of our states. I don't want to get too specific of locations, okay. I believe it's 94% occupied. It's a relatively new building. It's independent and assisted living. And it's very consistent with other acquisitions we've made in that part of the country. And the seller we have high regard for, so we know we're getting a well performing property.

And what kind of cap rates does that work out to?

We don't give really give cap rates. But typically if you look at our acquisitions, we continue to be very consistent buying things on effective cap rates kind of mid-7s. And the cash-on-cash yield on investment consistently is that 15%, mid-teens type of return, and that is consistent with what we expect from this acquisition.

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

So in terms of the Q2 performance, so it was just tiny, a little bit below what you outlined on the last quarter calls. Can you just flesh out what was the biggest sort of surprise versus what you were expecting for the quarter?

Joanna, if you look at on a like on a per share basis, we -- on a per share basis, the guidance was $0.39 to $0.42. And we ended up at $0.39, so it was within the range we provided. It was in the lower end. A couple of things. I think our occupancy stabilized in the second quarter, but if we'd had a little bit of growth, that would have certainly improved our -- and got us a little bit higher into that range. And we also anticipated higher health care costs in the second quarter but that big spike in May claims related to switching our health care plans was a little bit greater than we had anticipated. And we also knew that we were going to have an increase in contract labor costs because of the additional staffing required for some of the newly licensed units. And we've kind of had a range for that, and it ended up being at the higher end of our range with that contract labor cost, so it was on the higher end of that. So if that had come in a little bit better, that would've helped us reach the higher end of what we had guided to as well. So kind of those 3 things are the things that I would point to.

All right. So on the last point on this higher temporary labor, so you're pretty much saying that Q3 is going to moderate from the Q2 levels on that cost just because you're going to fill the units so to speak? Or just simply temporary labor and then you're going to replace the labor with more permanent? So is there any kind of additional cost or some friction because of you had temporary labor and now you have to switch it to permanent labor? I'm trying to (inaudible) how to think about cost for that kind of bucket in Q3 versus Q2.

Yes, you're right. So the contract labor costs are going to -- that was -- they were temporary as we knew we had to have staff in place for regulatory requirements related to the newly licensed units, but we do plan on filling those positions with permanent staff, and that will bring those costs down in the third quarter versus the second quarter.

And Joanna, to give you some perspective, the contract labor hourly rate is about 2.5x the permanent hourly rate. We will have benefits for the hourly permanent. But if you think about a net savings of 50% of that cost, that's probably a reasonable assumption on the differential.

Okay, that's helpful. No, no, no. Moving on to the next subject. So if you have something to add, I will be happy to hear that first.

That's fine. Thank you, Joanna. I think we got it.

Okay, so the other question that I -- we heard today from a REIT talking about some issues at Brookdale. And they specifically talk about some turnover that they've seen at the communities in terms of executive directors I believe. So can you just talk about any incremental pressure you're seeing there because it seems to me that this is caused by new supply so I guess, you're not competing for residents with these new communities that are opening out there. But I do -- are you maybe competing for employees with these other guys? And if you do, how do you address that?

Yes, great question. Fortunately, we're not having that pressure. I give stock awards -- the compensation committee grants awards to executive directors every 4 years. And we just had grants approved for the current quarter. And in that class, we have an executive director that has been with us since 1988. We have an executive director that has been with us since 1996. The turnover of our executive directors is one of the lowest thresholds of our staff and has been very, very consistent. I think that we're very fortunate to have a culture in the company that really promotes longevity. Today, we had our quarterly town hall meeting in the corporate office. I gave out awards going up to 20 years, so we have a 25th anniversary of an employee, corporate employee as well this month. And I do think it's a difference of our investment in people, in training. There's tremendous enthusiasm. I mentioned about the sales training that includes the executive directors. Our ability -- it's very interesting. As an owner of the real estate that we operate, 64%, we generate a lot more cash flow than our competitors do. If you think about Brookdale with all their leases, if you think about RIDEA joint ventures and all those companies earning a management fee, I know the CEOs of these companies pretty well. I've been around this industry. We serve on boards together. They really are impressed that we have the ability to make investments in time management, in systems, in training, and that really sustains because people grow. The other thing that is really interesting is almost everyone of our regional managers, we've made changes this year in regional managers to improve performance. They all were executive directors that were promoted. We now have developed a plan to develop our own internal executive directors from business directors and other employees having succession plans for executive directors. So I think we have a different culture, a different thought and different focus of our on-site staff to really promote careers and not jobs. Now when it comes to wages in the kitchen, housekeeping, you're going to have a lot of turnover. We see that turnover. Clearly, there's been some pressures in some markets on getting orderlies and aides for contract labor, and now we are able to fill those positions. But fortunately, at the Executive Director level, we have been very fortunate not to have the pressures that I guess were discussed -- I didn't listen to the ATP call but I know they announced this morning. We're not seeing that issue. The other thing, Joanna, we're not Brookdale. And I'm not trying to be disrespectful, but we're not going through all the integration challenges and all the other issues that Brookdale has faced. And quite frankly, we've seen a lot of resumes from Brookdale staff for a long time. But this is maybe accelerated but not new. And it's just that I'm very proud of our organization and our management team and structure, very excited about Brett coming onboard. I think he will be a great addition to the team. But fortunately, we really do have -- in fact, I spent this morning reviewing the rankings of our executive directors and regional managers with our VPs of operations. And they both commented that we've never had a better team than we have currently both regionally and on-site and I think our results demonstrate the difference. We're disappointed with the big loss in the first quarter, which was very much flu-related. But I will tell you since February, I get weeklies. They have been very consistent. And by eliminating those concessions we're finally getting some rate growth that I really believe we are positioned to get us in a position where we can start to have excellent results with revenue increases significantly above expense growth. And if we can do that and gain occupancy, the math is really, really appealing.

We'll go next to Brian Hollenden with Sidoti.

As we move into the back half of the year and considering your third quarter guidance, are you guys anticipating year-over-year CFFO growth?

The first -- it's hard to say because we haven't gotten to the end of the year yet, and we're not sure what the third quarter is going to do from an occupancy standpoint in the fourth quarter. But I'd say that the dip in January it does really -- as Larry noted, does carry them through the balance of the year, and it makes it -- it does make it difficult to grow -- does make it a challenge to grow year-over-year in CFFO.

Okay. And then just switching a little bit. How sensitive is your acquisition program to rising interest rates?

Well, as you know, we borrow permanent financing long-term rates, 10-, 12-year financing that is off the treasury. Treasury really has moderated at a level that has been very consistent with what we've seen over the last 6, 7 years. Spreads are continuing to be very attractive. So we're seeing that. Fortunately, we have maturities that extend out 6, 7 years on average, so we don't have a lot of exposure of resetting rates as far as the permanence of our existing debt, which is about 4.6%. And I'd say that's very consistent with where the market is today. And I'm not an economist, and I know people talk about growth in the economy but it doesn't sound like there's going to be a big spike in rates anytime soon. I will tell you that when we started the acquisition program in 2010, rates were probably about 200 basis points higher than they are today. And we were excited about the returns that we could generate at that level. So I think that we feel pretty comfortable that we can continue borrow at attractive rates and terms and have that nice spread between effective cap rate on the yield of the acquisitions, the cost of our financing. And as I said, I think we're pretty well protected from any movement. I would also comment, if rates really do move up because the economy starts to grow, it's the short-term rate that move faster. And that is where pricing power lies because our residents typically live on fixed income, and we have to remember that we are dealing with a resident base that has been living on extremely low interest rates on their savings accounts and other fixed income since 2008. So organically, we probably would see better organic growth if rates were to rise. But I just don't sense -- and Gloria Holland is here, our VP of Finance, so I'll ask Gloria if you agree. But I just don't sense that will -- anyone is talking about much movement in the rates.

No, I would agree. We are not hearing that in the markets we are in.

(Operator Instructions) And we'll go next to Dana Hambly with Stephens.

I just wanted to ask about the owned versus the leased portfolio. I don't know how you guys think about that but I think your shareholders do because seemingly there is a lot of value, most of the value is in the owned portfolio, which in the second quarter performed much better than the leased portfolio. Just looks like occupancy was better, NOI, 5.5% growth versus a 4% sequential decline in the first relative to the leased portfolio. So is there, can you tell anything that's going on between the 2 or even if you think about them differently?

Yes, we don't only think about them differently, they are different. The leases are typically older buildings. There's more independent living in the leased portfolio. But the acquisitions have been newer, better markets, better performing. I will tell you that going through the leased portfolio, and we've spoken to the landlords about it, there's probably a few, 4 -- 3, 4 buildings that we would like to sell. We think the markets have turned and it's primed to sell. It's not competition. It's just change of local economies and just -- and there's a couple of buildings where they've always been competitive for the duration of the lease. And then we did have the attrition in the first quarter. The feedback I get, because I ask the same question, Dana, is that most of those buildings will -- are recovering in occupancy and probably will recover most of the occupancy throughout this year, just taking a little longer. But it just has to do -- I don't think -- we don't think about them differently. There are some leased properties in Texas that do have some competition in submarkets, which we've spoken about previously but they've actually started to recover. But I think it's really maybe even more random than anything else that we just had higher attrition in some of the leased portfolio and it's taking longer to rebuild than the owned. But there's no difference in the way that we think about it. There are a couple of leased properties I know also had some conversions that were very disruptive that caused some loss of occupancy. And as that changes, that will rebuild. And we've seen a -- some of these buildings have actually seen a very significant increase over the last couple of quarters. The others have to catch up. But my sense is that these buildings with the exception of, I said, 3 or 4 that we probably would like to sell or landlord to sell because of change in market, we think we'll get back to the same level of the owned portfolio.

Okay. Okay, understood. Switching gears, on the conversions, Carey, I think you said they could stabilize in a matter of minutes. But then I think you corrected yourself.

Actually, that was not a Freudian slip either.

I wish (inaudible).

I was just looking at your -- you got the updated slide deck here, and it looked like completions by quarter -- and so the 214 do complete in the fourth quarter of this year, they should be -- your expectation would be stabilization within 12 months, correct?

That's right. That's right. Yes.

And that holds true of the buckets completed in 1Q, 2Q and then I guess just a small amount in 3Q?

Yes, so actually, the 3 that are undergoing repositioning and lease-up, those are -- those will be added back when they reach stabilization, which is the -- I don't have the slide in front of me, but its 186 plus 249 units in that, that are -- that are completed as of the second quarter. And they also come back in as they reach stabilization. Now the other units on top of that are ones that -- the other 84 units that have been completed, as they lease up, they'll add to our numbers. They'll add to our revenues and our EBITDAR and CFFO. And the same for the 24 units in the third quarter. And then in the fourth quarter, there's 202 units that are related to one of those, the third repositioned community, and that will add back after it stabilized in approximately 12 months. The other 31 units will add back as they are leased up over time.

Okay, all right. Remind me, stabilization is 90% occupancy?

Yes, approximately 90% occupancy, yes.

Okay, all right. And then the CapEx has been accelerated last few years. What's the expectation for full year CapEx this year? And then how should we think about that into '18 and beyond?

Absolutely. So we had $21.9 million of CapEx in the first 6 months of this year. As I noted on the call, I think it will taper down quite a bit in the second half. We currently project somewhere around $12 million to $13 million of CapEx in the second half of the year versus the $21.9 million. Now that's on a gross basis. So on a gross basis, it's -- that's somewhere around $30 million to $35 million. But on a net basis, we will get reimbursed for some of this for -- at some of the leased communities by our REIT partners. And so on a net basis, through the first 6 months, our CapEx has been $18.2 million and I think for the year, it will be probably between $25 million and $30 million on a net basis. The $30 million to $35 million gross, $25 million to $30 million net in 2017 as we go forward to '18 and '19, they're going to moderate quite a bit. I think back down into the more $15 million kind of range on an annual basis in '18 and '19 forward.

Okay, all right. That's helpful. So at this point, no big projects prepared for 2018?

Dana, this is kind of the end of it. I mean the Canton Towne Centres, obviously Canton is now complete. TALA will be completed later in the year. We meet every other week and we go through this with our operational and asset management team. Now they're just kind of 10 units of memory care at the building. A lot of them are just licensure or fairly insignificant costs that are related to it. And the other thing that is nice is that because we put so much money into our buildings over the last few years, they're in pretty good shape. So as far as recurring CapEx, we don't have many big projects that have to be out there to refurbish or renovate. Now the last few years, we spent over $100 million in CapEx. So we spent the money. Now we'd like to see the results obviously on the lease-up and the profitability. But I think we're in pretty good position over the next few years that we can moderate the CapEx. We do have a kind of a 3-year plan we go through and look at that, so I think that will remain pretty well controlled for the next couple years.

Okay, okay. Just last one. For the M&A pipeline, it looks like you'll probably be lower this year than what you've typically allocated for M&A. Does that -- anything changed in the pipeline or anything changed in your appetite for acquisitions?

No. We had $85 million acquisition in the first quarter. I think we've said in the second half of the year about $50 million. We have announced $20 million. There's other things out there. So that's probably a reasonable number. It's kind of what we did last year. We just stay very disciplined. We've underwritten about $0.5 billion of acquisitions through the first 6 months. Our pipeline continues to be steady. There are other buyers out there. We've lost a market of deals to other buyers that are paying more than we are. And we've had a number of deals that we actually kicked out in due diligence that we went in and just felt that the acuity level of the residents, some of the aspects of the buildings were just not things that we wanted to purchase. So we backed off them. So we'll remain disciplined. We have so much growth through the conversions and other repositionings right now that we have a nice balance of those growth drivers, the organic, the conversions and the acquisitions, that we can sustain high double-digit type of cash flow growth if we execute and just remain disciplined on the acquisition side.

(Operator Instructions) It appears there are no further questions at this time. So I'd like to hand the call back over to Mr. Larry Cohen for any additional or closing remarks.

We thank everybody for your participation. As always, feel free to contact Carey or myself with any questions. I want to wish everybody a good end of summer. And I'm sure will see many of you as the conferences start to pick up again in September. Thank you very much, and have a good night.

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