Good day and welcome to the Capital Senior Living Second Quarter 2016 Earnings Release Conference Call. Today's conference is being recorded. The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitation to, the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission. At this time, I'd like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you. Good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living's second quarter 2016 earnings call. I want to thank our strong team at Capital Senior Living communities across the country for providing our residents with exceptional service and care. I am extremely proud of their hard work and dedication. It is our talented employees that give us such great confidence in the future of our Company and the continued quality care we provide our residents, and the long term value we are creating for all of our stockholders and other stakeholders. Our strong second quarter 2016 results demonstrate the advantages of our clear and differentiated strategy to drive superior shareholder value, as we successfully execute on our multiple avenues of growth. Our focused execution of our strategic plan produced solid growth in all of our key metrics in the second quarter as compared to the prior year, including revenue, occupancy, average monthly rent, NOI, adjusted EBITDAR and adjusted CFFO, despite the heavy rains and flooding in Texas and in the Midwest that impacted our traffic in May and early June. Rainfall in Texas during the quarter was 25 inches above average and we saw the effect on weekly move-ins and deposits in those weeks with heavy rainfall and flooding. Our occupancy gains, despite the weather, continue to outpace the industry, with same community occupancy increasing 50 basis points since the second quarter of 2015 and increasing 10 basis points from the first quarter of 2016. Same community average monthly rate increased 60 basis points from the first quarter of 2016. We achieved a Company record number of move-ins in the last week of June and June's end of month financial occupancy was 100 basis points greater than our June average. We also…

Thank you, Larry, and afternoon everyone. Hope you've had a chance to review today's press release. If not, it's available on our Web-site at www.capitalsenior.com. You can also sign up on our Web-site to receive future press releases by e-mail, if you'd like to do that, there. The Company reported total consolidated revenue of $111 million for the second quarter of 2016. This was an increase of $9.4 million or 9.3% over the second quarter of 2015. The increase in revenue was largely due to acquisitions the Company made during or after the second quarter of 2015, net of a disposition that we made in the third quarter of 2015. During or since the third quarter of 2015, we've acquired 12 communities. Excluding the revenue of the community that we sold in the third quarter of 2015, our revenues increased $10.1 million or 10.4% in the second quarter of 2016 as compared to the second quarter of the prior year. Revenue for our consolidated communities, excluding the three communities that are undergoing repositioning, lease-up or significant renovation and conversion, increased 9.4% in the second quarter of 2016 as compared to the second quarter of 2015. It's important to note that this 9.4% increase was achieved with fewer units available for lease in the second quarter of 2016 than the second quarter of 2015, exclusive of acquisitions, due to conversion or renovation projects currently in progress at certain communities. Net operating income for these communities increased 8% in the second quarter of 2016 as compared to the second quarter of 2015. These results clearly illustrate the effectiveness of our strategy to acquire high performing communities in strong markets, dispose of non-strategic underperforming communities and to convert units at our existing communities to higher levels of care, while continuing to proactively manage…

[Operator Instructions] At this time, we'll take our first question from Chad Vanacore with Stifel.

In the comments, you mentioned record move-ins in June. Can you give us a little more color on that?

The last week of June, we had 224 move-ins to our properties. Our average for the year is 95 a week. So that is quite an improvement. And as I mentioned on the call, when you look at financial occupancies for the month of June, which were 88.5%, the financial occupancy of our properties on June 30 was actually 100 basis points higher, 89.5%. And we saw that in all three levels of care, independent living end of month occupancies improved 110 basis points, assisted living up 90 basis points, and memory care up 130 basis points. So we had extremely strong end of the month. The rains I mentioned really impacted four weeks during the second quarter. There was heavy rain and flash flooding around May 8th, the 15th, 22 inches of rain on May 26 and 27, and then some more rains hitting in early June. So that kind of were the weeks where we saw less deposit taking and move-ins, but as I said, this was a Company record number of move-ins, the last week of June.

All right. So did the $3 million or so lease incentives drive a portion of that or was this just natural or is there something going on geographically aside from the rain that we should be thinking about?

I think demand continues to be strong, I would say that's pent-up demand, for people moving in at the end of June. We continue to show growth in occupancies and rate, and expect that to continue. I think it has to be with the fact that we provide excellent care and service, have very strong reputations and great staff in our local communities with limited competition, and the most important driver is just growing demand.

Okay. And so with that in mind, should we expect occupancy to build more in the third quarter with all these new move-ins and then moderate in the fourth quarter, or would it be more an upward trend throughout the balance of the year?

If you look historically, the best quarter is the third quarter. The best month of the year actually is typically September, which drives very strong results in fourth quarter. Going back a couple of years, if you look at same-store quarterly occupancy growth in the third quarter of 2014, it was 50 basis points, in 2015 it was 70 basis points. And then we saw a growth in the fourth quarter about half of what we achieved in the third quarter.

Okay. And then just one other question, how should we expect the delay in closing of acquisitions to actually impact CFFO, and did that push back any subsequent acquisitions that you may have had planned?

It does not push back any other acquisitions. As I mentioned, in due diligence one property that was expected to close in the second quarter, we desired to increase the certification to take – for Memory Care residents. The survey has been complete. We're expecting to close that in a couple of weeks. The other property, an incident occurred. So that got delayed. But it does not affect the rest of the year as far as our pipeline. Typically these properties were expected to generate, if you look at our customary returns of 15% cash on cash on equity, it'd be like nine-tenths a share for the full year. So you have one coming-in in middle of the third quarter. That's an $18 million transaction. The $56 million of transactions should occur at the end of this quarter and early fourth quarter. They will move back basically on average by almost a quarter on the contribution to cash flow.

Okay. Thanks Larry.

We'll take a question from Joanna Gajuk with Bank of America.

So I just want to follow-up on this last comment about delay in deals. So was there any I guess meaningful impact to the actual Q2 CFFO [indiscernible] because I know you outlined the impact from the weather, you think that's what's driving some of the shortfall or was there anything quantifiable on the deal delay or it was just meant to be closed late in the quarter anyway so it wouldn't be much of an impact?

That's right, Joanna, they were intended to close late in the second quarter, so we had minimal impact on the second quarter itself. It was really about the heavy rains and flooding that happened in the second quarter that impacted our traffic and then therefore impacted our top line a bit.

But they do impact third quarter numbers based on our original expectations because they will be closed during the quarter or later in the quarter as opposed to the end of the second quarter.

Right.

Okay. So how would you describe, because it seems like even despite this weather, occupancy improved sequentially which Q2 doesn't necessarily seem as a very strong quarter historically, so is there anything in particular you would point to, any market or any business line that kind of was driving this improvement?

As you heard from my comments about the month of June, we saw gains in all levels of care. I'd say that growth was really pretty consistent throughout the country, without looking to geographies. Midwest was particularly strong, but I think the whole country. If you look at quarterly results based on level of care, for the quarter we saw an improvement in occupancy in independent living as well as our memory care and assisted living properties. The best actually improvement in occupancy was in our – sequentially it was in memory care, followed by independent living and then assisted living.

Okay, that's helpful. And then on a different topic, clearly the cost control is still very solid and labor costs specifically seems to be like they are under control, but is there any comment or any quantification around the overtime rule that I guess seems like it's still going to take effect later this year?

We have looked at that and really expect very minimal impact related to that. Most of our employees that are hourly make more than that minimum that's going to be required. So I think we're going to be in good shape as it relates to that, so [indiscernible] no impact.

Joanna, it's interesting, we looked at this issue two years ago and we look at our exempt and non-exempt status at all of our communities and corporate staff. So this new Department of Labor regulation is something that we were probably two years ahead of and we don't expect to see much of an impact from that.

Great, that's very helpful. I'll go back to the queue. Thank you.

We'll now move to Ryan Halsted with Wells Fargo.

A question on average monthly rent growth. So it was a little lighter than I guess we were expecting. It seemed like it also kind of trailed the NIC data. So I was just wondering if you could comment on any trends you saw on the pricing during the quarter.

If you look at the quarterly performance, actually the pricing this quarter was a little better than last quarter. As Carey mentioned, the sequential gains annualized were right at or better than NIC data. Our consolidated portfolio was 90 basis points for the quarter compared to the first quarter. That's 3.6% for the year. Our same-store numbers were about 2.4 annualized for the year, little behind. That's more in the mix. Our greatest gains this year, year-over-year, have been in independent living. Our average independent living rates are about $2,600 a month versus our assisted living rates of $3,800 and memory care of $5,157. So when you look at the fact that there was a larger percentage of new residents moving in independent living, since we don't breakout the changes in rates by level of care, it moderates our rate growth, but actually I thought that the second quarter results were actually stronger than first quarter, and again, we saw growth throughout all business lines.

Okay. And so was there any – in the past you've commented on use of incentives, I mean did you see any change in the use of move-in incentives during second quarter and are you seeing or do you expect there to be some fairly competitive rates in the third quarter during the higher occupancy, higher move-in periods of the year?

If you look at our incentives, what we've done typically is we will have spot incentives for properties typically red zone which are properties below 85% occupancy, and sometimes yellow zone which are between 85% and 89%. We typically don't do it for green. If it comes out from some change we want to jumpstart, we might do that. As I mentioned, what's interesting is we increased the number of green zone properties by 15% from June 2015 to June 2016 and we shrunk the number of yellow and red zone. So those properties do have incentives. They typically are for a limited duration. It's typically a reduction in the first three months' rent and they graduate based on level of care. So we saw that again in the quarter and that's something that we will use sporadically throughout the year to drive occupancy. And I think that the rate growth we're showing on a consolidated basis or even same-store annualized at 2.6% or 3.6% are pretty much in the range of our targeted 3% for the year for rent growth. So, there is some specials, we really [indiscernible] specials than discounting [indiscernible] that we provide that will moderate that, that typically is not reflected in renewals because the in-house rents we grow at the state it increases, it's really incentives to get people move-in sooner into the property. As a result, one thing we've seen which is a marked change in our business is that move-ins from deposits are averaging weeks versus months. So it really has accelerated the move-in and that's the reason for most of these incentives is to incentivize the residents to move-in earlier than they typically would.

Okay. How do you feel about your core NOI growth target of 4% to 6% for the full year?

Because of the little downtick that we had in the second quarter related to our NOI growth, it's probably on the lower end of that, but we still expect to reach in that level for the year, Ryan.

Okay. Last question for me is, how should we think about the equity that you're able to tap on some of your owned real estate that you are able to take these supplemental loans against? What's sort of the best use of that and how does that compare I guess with your more traditional sources of capital?

Ryan, it's something we've done over time, we've been doing it the last few years. It allows us to recognize the appreciation in our properties. And that money is then being recycled particularly in new acquisitions, which are highly accretive. Again, you look at the interest rates on the supplementals, they've been low 4% to high 4% range. We're also using it for some of the cost of the renovations and conversions. One thing that Carey spoke about is our capital expenditures are greater this year than historically. That will continue into the first half of 2017 and that will come back down to more normalized levels which will free up cash. So it's really we are reinvesting those proceeds accretively typically in acquisitions or in our physical plan to either convert to higher levels of care or reposition or renovate properties which hopefully will generate higher revenue through increases in occupancy and rate.

We'll take a question from Dana Hambly with Stephens.

This is Jacob Johnson on for Dana. First question, I think last year you guys raised rates in September by about 3%. Is that something you guys believe you'll be able to capture again this year?

We raised rates again t in January which are effective throughout the year on the renewal of leases on move-ins. So right now we are not forecasting an additional rate increase in this September. That rate increase actually got accelerated to January is the point. We did rate increase in September of 2015. The 2016 increase didn't go in effect a year later, it went into effect four months later and has been effective throughout the year for 2016. So we actually accelerated that increase starting in January rather than waiting till September.

Got you. And then, Larry, you just mentioned CapEx being elevated through 2017. I think earlier you talked about some renovations. I thought maybe CapEx was going to slow down in the fourth quarter. Should we sort of think about it continuing at this second quarter pace sort of through the first quarter of 2017?

You're right, Jacob, it will decrease in the fourth quarter. We've got higher capital expenditures in the second quarter. The third quarter will be similar probably to the second quarter and in the fourth quarter it will begin to moderate, and then it will still be somewhat higher than normal, if you will, in the first half of 2017 and then really come down to more normal levels in the last half and then into 2018.

Got it. Thank you.

One thing to note about these CapEx numbers that we talk about, Jacob, is that they are gross numbers, they are gross and they include the reimbursements we are making at our leased communities even though we're going to be reimbursed for those expenditures. So on a net basis, our full year CapEx will be somewhere around $40 million, even though it will look higher than that on a gross basis, it may look like $50 million to $55 million, but on a net basis it will be about $40 million.

And that $3 million of the lease reimbursement, is that a good way to think about the next couple of quarters?

It should be higher than that in the third and fourth quarters, because as these projects become complete, and even along the way, we're reimbursed and we're coming into some more of those reimbursements now. So I would expect those reimbursements to increase in the second half of the year.

Okay. And one last one for me, and I don't know if you guys have ever disclosed this, but Larry, you guys talk about these green, yellow and red properties, have you ever quantified what percentage of your properties fall in each of those buckets?

Yes, typically we see about 65% to 70% of the properties are green, and then the balance is split between yellow and red. I will tell you, I just looked at last week's numbers, our green zones which are the 85% to 89% occupancy, their leased to occupancy in totality was 90% last week. So that's very encouraging. That was last week's numbers. The red zones are actually averaging right now in the low 80% range. So that's where we are looking at conversions, renovations, repositionings. We sold some of those buildings. But the nice number that I was very, very pleased to see this quarter was an improvement in the number of green zone properties by 15% over a year ago. That's pretty dramatic.

Awesome. Thank you guys very much.

I think we have a question from Brian Hollenden with Sidoti.

Just wanted to get a sense on the acquisition environment, are we expecting more acquisitions in total compared to last year and then how do we think about that for 2017, and then just your general thoughts on multiples, competition, if you could just talk about that, that'd be helpful.

I'd be happy to. Just to give you some framework, so far in the first six months of this year, we signed confidentiality agreements on 30 transactions. Their gross value is close to $1 billion. The properties, we've closed on five buildings for $65 million and the other three is $74 million, we spoke about earlier. That takes us to about $139 million. We have other offers outstanding. We're in negotiations in other transactions. We typically have not provided guidance on acquisitions, as you can tell. We remain very disciplined. The pipeline is extremely active and robust. We've also been very disciplined on pricing. So you can see the consistency in the returns on the equity that we invest. We don't chase deals. So, we like to have that discipline and balance. We have other ways to allocate our capital profitably, which we're doing through the capital expenditure program and refurbishments and renovations, repositionings. And we have been extremely consistent now for five years of maintaining some range of the $150 million to $200 million of transactions a year, and I would expect that we probably will continue that pace as our cash flow increases. As our CapEx starts to reduce, it may give us more dry powder to do more acquisitions in the future, but right now it's really balancing the money that we're spending on all these different initiatives, which we think all drive superior shareholder value and also maintaining prudent reserves for the operations.

At this time, we have no further questions in the queue. I'll turn it back over to management for any additional or closing remarks.

We thank everybody for your participation today. As always, feel free to give Carey or me a call if you have any follow-up questions. We look forward to seeing many of you over the next couple of months as we start to attend various conferences and some non-deal road-shows that Carey and I will be on, and if not, we wish you all a very, very good end to the summer. Thank you very much and have a good afternoon. Thank you.

Again, this does conclude today's conference call. Thank you all for your participation.