Good day, and welcome to the Capital Senior Living's Second Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded. The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially, including, but not without limitation, to the company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions, such as those pertaining to licensure, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretations among others, and other risks and factors identified from time-to-time in our reports filed by the Securities and Exchange Commission. At this time, I would like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you, and good morning. Welcome to Capital Senior Living's Second Quarter 2013 Earnings Release Conference Call. I'm very pleased to report continued positive results for the second quarter, as we recovered from the effects of the flu season in the first quarter. Second quarter same-community occupancies increased 50 basis points, revenue increased over 13% and CFFO grew 15% from the second quarter of the prior year. I am also pleased to report that we are further enhancing our private-pay revenues through a repositioning of our 2 continuing care retirement communities. After considering a number of alternatives, including a sale of these owned communities, we decided that a reconfiguration of the services we offer will enhance CFFO, improve operating metrics and enable meaningful gains in shareholder value. Complementing our organic growth is a robust pipeline that allows us to continue our disciplined and strategic acquisition program that increases our ownership of high-quality senior living communities in geographically concentrated regions and generates meaningful increases in CFFO earnings and real estate value. We differentiate Capital Senior Living as the value leader in providing quality seniors housing and care at reasonable prices. We are well-positioned to make meaningful gains in shareholder value as a substantially private-pay business in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market. In the second quarter, we completed the acquisition of 2 senior living communities in Missouri and Indiana for a combined purchase price of approximately $25.4 million. These transactions are expected to add CFFO of $0.03 per share, increase earnings by $0.02 per share and increase revenue by $5 million. These communities were financed with an aggregate of approximately $19.1 million of nonrecourse mortgage debt, consisting of $14.5 million of 12-year debt with an interest rate of 5.3% and…

Thanks, Larry, and good morning. I hope everyone has had a chance to see the press release, which was distributed last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the second quarter and first 6 months of 2013. A copy of the press release is available on our corporate website at www.capitalsenior.com. And if you would like to receive future press releases by email, there's a place on our website for you to provide your email address. For the second quarter of 2013, the company reported revenue of $87.2 million, compared to revenue of $77 million for the second quarter of 2012, an increase of $10.2 million or 13.2%. Resident and health care revenue increased from the second quarter of the prior year by $9.7 million or 12.9%. We consolidated 101 communities on our income statement this quarter versus 88 in the second quarter of the prior year. Financial occupancy of the consolidated portfolio averaged 85.9% in the second quarter of 2013, compared to 85.8% in the second quarter of 2012, an improvement of 10 basis points. Excluding the 2 continuing care retirement communities that are being repositioned, financial occupancy of 86.7% increased 40 basis points compared to the second quarter of the prior year. Average monthly rent was $3,043 per occupied unit in the second quarter of 2013, an increase of $75 per occupied unit, 2.5% higher than the second quarter of 2012. On a same-community basis, excluding the 2 CCRCs being repositioned, occupancies were 50 basis points higher than the second quarter of 2012 and same-community average rents were 2.5% higher. On a same-community basis, revenues increased 3.2% versus the second quarter of 2012, expenses increased 2% and net income grew 4.7%. As a percentage of resident…

[Operator Instructions] And we will first go to Darren Lehrich with Deutsche Bank.

Two areas of questions. First, just as it relates to occupancy trend, and then secondly, on the CCRC repositioning. So on volumes or occupancy, I guess, I heard your commentary pretty clearly. You had a nice recovery in assisted living, and that certainly makes sense given the impact from the flu. I guess, just around independent living, can you just expand a little bit more on maybe some of the softness that you think you might be seeing there? And just as it relates to the move-ins and deposits that you have for Q3, how that's progressing in IL specifically?

Okay. It's Larry. First of all, let me address the IL situation. As we talked last quarter, we had obviously a very high attrition in the first quarter caused by the flu epidemic. Luckily in the second quarter, we saw attrition drop from 44.4% in the first quarter to 40% overall. The biggest drop was in our IL/AL communities, which dropped from 43% in the first quarter to 34.9% in the second quarter. On the other hand, we saw a 39% attrition rate in independent living in the second quarter, compared to 37.5% a year ago. So we did see additional attrition in the quarter that caused the reduction in occupancy. I would say that I'm extremely couraged by what we're seeing in deposit-taking at both independent living and assisted living. I do think that the softness in independent living was caused by attrition and still, I think, relates to the flu from the first quarter. So we are very confident that we'll see a nice recovery in both independent living and assisted living. And the deposit-taking across-the-board is pretty even as far as the gains in both levels of care. So we think that the second half of the year -- it's interesting, I went back to look at the company's history in the last 3 years on same-store. And since 2010, we've had a robust recovery of occupancy in Q3 and Q4, which we expect to occur this year as well. We always have the fourth quarter as our highest occupancy level. Obviously, there's seasonality in this business that was heightened because of the flu in the first quarter. But if you go back the last 3 years, we saw gains of occupancy on a same-store basis in Q3 of 120 basis points in 2010. We saw a gain of 110 basis points in 2011. We saw gains in Q3 of 90 basis points -- I'm sorry, it was 60 basis points last year. And then we saw even better gains in the fourth quarter. So we're looking at a strong second half of the year, which is very typical. This year, we experienced 115 more move-outs in the first quarter same-store than we had -- actually, 100 more move-outs in the first quarter this year than we had last year. And that was because of the flu. And obviously, it's the remnants of that phenomenon that has kind of delayed the leasing. But we feel we're back in stride for the second half of the year.

That's helpful. And then just in terms of the attrition, you're not seeing any increase at all as it relates to move-outs from hardship or just assets being down, more financial reasons?

No. We've really seen an improvement in the financial wherewithal of our residents over the last couple of years. Unfortunately, the move-outs are typically caused by death or higher level of care to a very, very large percentage. So it's very much health-related.

Got it. And then if I could, I just -- I wanted to make sure I'm understanding the repositioning of the CCRC. So Ralph, did I hear you right that there was about a 2 point margin impact from that? Is that what this ended up being in the quarter? And then I guess, as we think about this in the progression of work that you have ahead of you. How long do you think it will take? What kind of impact on consolidated occupancy and rate growth do you think it might have as we think about the next 2, 3, 4 quarters?

Darren, you did understand correctly that if we had removed these 2 CCRCs from our results for the second quarter, the EBITDAR margin would have been almost 2 percentage points higher. So clearly, they've been a drag on our operating performance. And this repositioning is expected to improve that. It's going to take a couple of quarters before those results are fully realized. We are going to make investments in these communities to improve those operations along with the repositioning. And we expect that by the time we get through with that, these operating metrics will be much more similar to the rest of the portfolio. But I would say that during the next few quarters, while we're not going to classify these as discontinued operations, we're going to continue to report the results in our consolidated financial results. We will exclude them from our same-store trends so that all of our occupancy rate and margin trends will exclude them during the repositioning phase.

And Darren, I think the timeline right now, we're seeking approvals, working with families on the repositioning at these communities. We are hopeful that for 2014, it will probably result in an increase in cash flow of $0.02 to $0.03. So we do think that we'll start to see a benefit beginning probably the first quarter or second quarter of 2014.

Got it. And then just so I'm clear, we didn't see any of this impact in Q1. Is it correct that all the activity, the repositioning began in Q2? And can you maybe just describe the timeline of when that started?

Yes. We went through a process earlier this year to look to sell these 2 properties. We received about 5 or 6 offers. We selected one potential buyer. We were disappointed with their due diligence and the price at which they came back after their due diligence on the property. Before we started the process, we actually had a plan B, which was the repositioning of the property by enhancing the private-pay revenue. And we decided that we can probably double the value of the property from what the offer was by executing this plan. So while we were hopeful that we would have the proceeds to be reinvested in another transactions, we think that the more prudent measure would be to reposition, reconfigure the use of the buildings. We think by doing that, it will enhance our cash flow. And what's interesting, we believe that the strategy could actually double or triple the value of this property from the offer that we ended up receiving through the process.

And next, we go to Daniel Bernstein with Stifel. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: I just want to understand, did you actually close any units in those CCRCs this quarter? Did you actually start the repositioning in...

We started the repositioning. We've been working on approvals. We actually did not close them, but there was absolutely disruption in services through the process that it went through. So hence, we've decided to remove them because we did begin the process. There was disruption, but nothing has been closed. That will -- most likely, those changes will take place the second half of the year. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So there was a little bit of an impact on margins in the business in the second quarter. Okay. Because that -- I guess, my next question was going to be if you pulled out the health care, the high health care claim cost, your margins were still about like 40.5%, somewhere in there. And what else was in the margins? But was that all the CCRCs? Was there anything...

Well, it's also revenue. It's interesting, Dan, if you go back to your numbers and assume that our revenues were your revenues with our actual operating expenses, our margin would be below your projections. So it's not just the expenses. It's also the fact that the revenue was lower for the quarter. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Right, okay. The expenses were held -- you didn't fire anybody?

No. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: And you kept the employees and...

Exactly. And there will be some -- obviously, that's part of this process. We have plans in place for retaining employees during this process. So there will be some expenses that will continue second half of the year as we transition the buildings. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Did sequestration -- obviously, those units in the CCRCs are not a large part of your portfolio. But did that 2% sequestration on April 1 impact you at all during the quarter?

Not much. Our revenue from those 2 properties from Medicare is probably about -- I guess, in total about -- it's about, I guess, $3 million a year. So it's insignificant in the total base. What's happened there quite frankly, which is probably a bigger kind of fundamental issue of what's happening in the skilled nursing and the CCR world is the hospitals are no longer discharging their patients to our community. They're keeping them or directing them to their own facilities. That's really where we saw the change. It wasn't sequestration. We're just seeing a marked change in the discharge patterns of the local hospitals to these 2 CCRCs. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. No, the repositioning makes a lot of sense to me here. The other question on the IL properties. IL seems to be acting a little bit more like AL in terms of the impact from the flu. Are you seeing -- it's hard to tell, I guess going back many years. But are you seeing that, that creep-up in acuity in IL is kind of filtering in through to the occupancy when you have a harsh flu season? I'm just trying to understand, is IL acting like AL-lite and people are just a little bit more frail and being affected by the flu a little bit more?

Definitely. We have, for many years now, been renting space in our communities to home health care companies, therapy rehab. We have visiting physicians. We have a very active program that is run by third parties in our communities to several residents. What we saw kind of during the financial downturn is the price point became very compelling for independent living. People were coming in a little later, a little frailer. We saw -- it's interesting, if you go back on our properties over the last 3 years, we had sequential increases, significant increases in IL occupancies, really starting in the second quarter 2011, that ran all the way through the end of last year. And the first time we saw a drop was in the first quarter, which was very much flu-related, and then we saw the remnants carry over into the second quarter. But the good news is that we're seeing the pickup come back. The other interesting corollary is our rate growth has actually been on a percentage basis higher over the last 2 years in independent living than assisted living. So we see independent living as being a very viable alternative for residents. Obviously, there's about a $1,200 differential in our portfolio between independent living and assisted living rents. But as you pointed out about the frailty level, you'll note that we have also taken advantage of this attrition to now go back and implement conversion plans that were delayed as these properties were full. So we're actually taking advantage of the flu season and the attrition that's happened this year to now review another 10 properties that were kind of we had plans delayed because of properties that were 90%, 95% occupied. We're now going back and looking at licensing part or all those buildings later this year. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. I guess, so that means maybe for IL, we should expect a little bit more of a -- when the occupancies -- from thinking about [indiscernible] like to 2014 and beyond, that the first half of the year is going to end up being maybe a little weaker in occupancy relative to history and the second half is maybe going to be a little bit stronger. You're going to see a little bit...

Second half has always been stronger. But I'll tell you, this flu was the anomaly. If you go back last 3 years, we had some very nice -- I mean, sequential gains in IL occupancy on same-store basis is running 70 basis points, 100 basis points, 80 basis points, 20, 70, 130. But the highest was Q4. But this dropoff that we saw this year was unusual. We obviously had a very active and prolonged flu season. But you're right, if you go back and look at our same-store results, and I think that's true for the industry, this industry does perform better in the second half of the year. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And some of the health care REITs have been talking about the rising interest rate bringing out some sellers. I'm not sure that applies to you because you're going after some of the smaller, one-off market transactions. Are you seeing any change in seller -- in your sellers' motivations as a result of the rising interest rates? Or is it kind of business as usual for you?

Well, business has picked up. It's interesting. I kind of commented earlier, in the first 6 months of this year, we actually submitted offers twice the level of offers that we submitted in the first half of 2012. And we had more offers accepted and we have more transactions both in dollar volume, as well as number of transactions. And the pipeline is very continuous. But the motivations we're seeing for these one-off type deals doesn't seem to be really interest rate-driven. It's much more family situations, local family businesses selling. But we had definitely seen a marked increase in deals this year, some of which might relate to interest rates. But most of the sellers we're dealing with and many of them are -- it was interesting. The transaction that we're converting now from IL to AL was a gentleman that we bought a property from 18 month ago. He came to us early in this year because he needed the cash for another investment. That precipitated that transaction. 2/3 of the transactions that we are completing are off-market and a number of them are actually sales with sellers that we've dealt with previously.

And we will take our next question from John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: My sharp reading skills see that T-bills are up 100 basis points or so off the bottom and your financing costs are still cheap, but they're not as low as they were. How is that factored in, if at all, to your price talk in the market and your expected returns?

Expected returns are going to continue -- at current interest rates, remain above 17%. So we're very, very pleased with that. John, it's interesting. We developed a strategy to acquire properties at the end of 2010 when Fannie, Freddie financing was averaging 6.5%. We ended up buying properties at 100 to 200 basis points higher than we expected and borrowed money at 200 basis points plus lower than we expected. What's very interesting is expectations from sellers really hasn't changed as interest rates have risen. They're still -- and if I look at the metrics of the transactions we're scheduled to close currently, the quality assets are better. They're higher margins, higher average rent, very stable occupancies. But the cap rate and kind of returns are almost identical to what we've been buying over the last 2 years. Now we're disciplined. We could have acquired $500 million of properties in the first 6 months of this year if we just wanted to grow for the sake of growth. And that's just in the regions in which we operate. So there's a quite bit out there. But we are really maintaining a discipline to self-fund these transactions with our internally generated cash flow and cash balances, making sure that -- I mean, we've terminated a number of transactions that were under contract in the first half of the year in due diligence. So the interest rate environment may have caused more activity vis-à-vis just deal flow. But sellers' expectations really haven't changed much. And quite frankly, just observing other transactions in the market that we're seeing on a smaller scale doesn't really change buyers' expectations either. I think the interest rate environment today is still historically low. I think cap rates in this industry still are higher than other asset classes.…

In terms of the growth rate, CFFO growth this quarter was 15% over the second quarter of 2012. I would expect the rate to be stronger than that in the third and fourth quarters with some occupancy growth, some rate improvement. So I think that looking back, we'll see the second quarter of 2013 as possibly the lowest rate of CFFO growth in 2013.

The other thing is that these transactions have been -- closings have been pushed back because of seller needs. So as we close transactions in the next 30, 60 days, we'll start to see the benefit in the third quarter. And they really manifest in the fourth quarter. So that will supplement the organic growth. So unfortunately, we can't time the closing of the acquisitions as perfectly as the models would like. But we feel that we're very much on target -- in fact, ahead of schedule, to hit our goal for the year. And we'll start to see more contribution. The $25 million that we completed in the second quarter were again in the second half of the quarter, which normally you don't have that impact in the second quarter. So that, too, will build upon what we are seeing from deposit-taking and moving schedules of improved occupancies for the second half of the year. John W. Ransom - Raymond James & Associates, Inc., Research Division: What's a reasonable number to think about for a 3Q closings, in terms of revenue acquired?

Sorry, John, say it again? John W. Ransom - Raymond James & Associates, Inc., Research Division: For your third quarter upcoming, so I just decided to get the fourth quarter models...

Yes. I mean, we had $65 million of transactions scheduled to close. I'd say that probably all but one transaction will either close in the third quarter or early October. There's one transaction that will close end of October because of a seller requirement. So I think that if you think about the pipeline and the closing schedules, we're looking at most of the transactions being complete by the end of September or early October. John W. Ransom - Raymond James & Associates, Inc., Research Division: And think about a 4:1 ratio of price to revenue, something like that?

I think, John, if we look at our models right now, that $65 million of acquisitions would generate about $17 million of annual revenue.

And the kind of returns on that would be very consistent with what we've seen before as far as CFFO. And again, it's really -- I think of it, really it's probably around -- if you do the math, it's probably 85% will close in the third quarter and 15% will be a fourth quarter closing. John W. Ransom - Raymond James & Associates, Inc., Research Division: And just if we pulled the CCRC out, say, for the first half of last year, first half of this year, if we pull those 2 assets out, do you have an idea of kind of CFFO growth or just color? You did put it in discontinued ops. It's a little hard to get the pro forma exactly. But again, we were a little surprised with the magnitude of the falloff in 1Q to 2Q. And we were just wondering [indiscernible] just for that with the 2 CCRC effects.

Well, the CCRC, if we had completed this reposition a year ago, would've generated -- is that half year?

No, that's annualized.

About -- we would have had $800,000 of incremental cash flow. John W. Ransom - Raymond James & Associates, Inc., Research Division: For the half year?

For a full year. John W. Ransom - Raymond James & Associates, Inc., Research Division: For a full year. Okay.

That's, that $0.02 to $0.03 we're talking about.

So the $800,000 is a pretax number. If you tax-effect that, it's between $0.02 and $0.03 per share, just by not having them. John W. Ransom - Raymond James & Associates, Inc., Research Division: Yes. And then could you also just -- occupancy exiting the quarter versus entering the quarter?

Yes. As I mentioned, we saw the end of the quarter on occupancy 30 basis points higher than the beginning of the quarter, of which 70 basis point gain was in assisted living and we lost about 20 basis points in independent living.

[Operator Instructions] And we will go next to Dana Hambly with Stephens.

Just to clarify, the CCRCs, they were negative contribution to EBITDAR for the quarter?

A higher level of care that we're talking about is what we're focusing on.

Okay. And do you have -- do you know what the occupancy in the first quarter was x those 2 CCRCs?

I think occupancies in the first quarter x those 2 properties was -- I believe it was around 80% -- 85.5%.

I think that's right in my report here.

So it was 85.9%...

By 85% on same-store.

85%. Well, consolidated, it was 85.9%. Is that right?

Consolidated was 85.9%, yes.

Okay. So I'm saying -- then the second quarter is 85.9%. And if you had stripped out those 2 properties, it was 86.7%, right, in the second quarter of this year?

That's correct, yes.

I'm just trying to get what's the comparable number to that it 86.7% in the first quarter of this year, if you have it. If not...

It was probably around 80 basis points higher than that, Dana.

Overall, it was 87.1%. Consolidated, it was 87.4%.

Okay. All right. And on the -- so Larry, so you can fund all your remaining acquisitions, assuming you get to the $150 million target on balance sheet that didn't require that you might -- you weren't counting on selling those 2 properties to fund any of that?

We were not. We have enough cash on the balance sheet and cash flow that's generated over the second half of the year that should give us sufficient funds to complete these acquisitions.

Okay. All right. And just lastly, for me, I know, health care costs continue to be challenging. That's really beyond your control. I keep -- talk of some of your other baked costs just compensation, food, utilities, et cetera?

Food has been really very, very well controlled. We're running right now year-over-year on food less than 1% growth. We have a very effective food purchasing program that we've instituted years ago and it's got another, I think, 3, 4 years to run on an existing contract. So that's been very, very well maintained. There's been no pressure on wages. Obviously, it's interesting in Texas, it's going to be 106 today, if anybody would like to join us. So utility bills will start to kick up. But July was a little cooler than usual. So we might benefit a little bit on utilities. We always have a little higher utilities in the third quarter, but the heat really didn't pick until this past week. So we may get some benefit there. But that being said, we have fixed contracts on electricity at $0.05 a kilowatt hour in Texas and other big-league states. So we don't really see much pressure on expenses. Again same-store expense growth year-over-year was 2%, which is a nice number. It was lower than the first quarter because of lower attrition. So I think we will continue to maintain the discipline we have on expense management to control expenses that we have previously. And the other only number that I can think of for this quarter that might have some jump as it typically happens in the third quarter, utility costs because of the heat, particularly in the Central Southwest.

And it appears there are no further questions in the queue. At this time, I would like to turn the conference over to our presenters for any final and closing remarks.

We thank you again for participating in today's call, and welcome you to give Ralph or myself a call if you have any further questions. We wish you a good day and look forward to speaking again on the third quarter conference call. Thank you, all.

And that does conclude today's conference. We do thank you for your participation.