Good day and welcome to the Capital Senior Living Third 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.

Thank you. Good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living's third 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. 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 third quarter 2016 results were supported by the continued implementation of our clear and differentiated real estate strategy to drive industry-leading growth and superior shareholder value. We also made steady progress in the third quarter on important operational and corporate objectives related to positioning the company for sustained growth, including the announcement of the strategic purchase of four communities we currently lease as we look to continue to increase our real estate ownership. Our third-quarter results were impacted by two non-controllable items attrition and healthcare claims. We experienced very strong demand in the quarter with same community move-ins increasing 5.4% of our strong third quarter of 2015. However same community attrition increased unusually high 9.5% during the quarter, which impacted occupancy and revenue. Our September results were outstanding with an increase in same-store net deposits of 6.4%, a 7% increase in move-ins and attrition kept pace with September of 2015. Our sustained level, strong demand is clearly evident as the three highest months for move-ins in the company's history occurred in June, August and then September of 2016. We had a company record of 500 move-ins, a milestone for Capital Senior Living in September. As I mentioned on our last earnings call,…

Thank you, Larry and good afternoon, everyone. Hopefully you have had a chance to review today's press release. If not, it's available on our website at www.capitalsenior.com. You can also sign-up on our website to receive future press releases by email if you'd like to do so. As Larry noted our third-quarter results were significant impacted by two non-controllable items unusually high healthcare claims and unusually high attrition, which together reduced our CFFO by approximately $1.5 million, which would represent $0.05 per share if one would have calculated on a per share basis. If not for these two non-controllable items, our CFFO again as calculated on a per share basis, would've been better than expectations at around $0.45. As Larry noted in his comments, the demand in our communities was very strong in the third quarter with a record number of move-ins in September. The number of move-ins in our communities during the third quarter was up 5.4% versus the third quarter of last year on a same community basis with normal attrition that strong demand would've translated into significant growth in occupancy and revenue. However our attrition was up at a greater rate than our demand up 9.5% over the third quarter of last year with 106 more move-outs on a same store basis in the third quarter of this year than last year. We've looked at the third quarter attrition closely and there's nothing specific we can identify as it relates to geography or specific health concern. As a result of an unusually high attrition, our consolidated occupancy for the third quarter was flat versus the second of 2016 and was down 50 basis points from the third quarter of 2015. In 2014 and 2015 with normal attrition in the third quarters of those years, our occupancy grew…

[Operator Instructions] We do have our first question Joanna Gajuk with Bank of America.

Hi Joanna.

Hi. How are you? Thanks so much for taking the question here. So I want to follow up on the comment that Larry made earlier about that [additional similar] accretion from converting and renovating against the assets that you're planning combined because of those previously leased assets or did I hear it right that you already are doing something there. So it separate from what you are doing previously in terms of conversions?

Joanna it's included in our conversions. What happened is these four buildings have an average occupancy of 82.7%. They are predominantly independent living properties that we have already begun the work on converting. And we realized that at their current occupancy they are not covering rent under the leases. And at the conversions while successful and we think will add $3 million of incremental CFFO will basically get us to more of a breakeven on the rent versus gaining from the conversion for our shareholders. So we had conversations with the landlords and our landlord agreed to sell the buildings to us. We had a signed contract. We'll expect it to close in January. We are working on financing and believe it will have the financing for the acquisition. So that the immediate accretion is $1.9 million and then our projections show that when their units are completed in the first half of the year and stabilized, we expect to generate an incremental $3 million of cash flow from operations in three of those buildings.

Okay. But you're saying that this $3 million was already in the conversions that you were preaching talking about.

It is, but what's happening we are now eliminating the lease expense as well the escalators on those building as well as the rent and escalators we would have paid the landlord for the cost of the conversions and renovations.

Got it. Okay. That makes sense. Okay and then so on that topic when you talk about the $1.9 million I guess initial accretion from buying by these four leases, does that reflect of a financing of the purchase price.

Yes after financing and CapEx, that’s a bottom line number after taking into account the interest expense on the financing and then the credit we get on the rent for the purchase of the number.

Okay. Great. And then just briefly I guess Carey on the outlook for fourth quarter, so you're saying that because of the -- I guess some additional interest expense costs pretty much there's not going to be any sequential growth and also you assume that, I guess the attrition is not going to improve much and then I guess the healthcare cost you are more conservative there right? Because I guess historically Q4 have been an improvement from the quarter-to-quarter. So that's what I'm trying to reconcile that these are the main items that interest expense and I guess the experience in the third quarter that led you to think about fourth quarter maybe differently?

Yes, some of the seasonal expenses also that we noted and the interest expense supplemental, but we certainly expect the healthcare claims to moderate and for the -- and for the attrition to moderate, but I'm at this point until we get further into the quarter when I see that happening, we tempered our projections related to those items, so as to be conservative related to those Joanna. And so I have not baked in much of an improvement in those, but if that happens as I noted in my remarks -- if that happens, that could have -- give us some potential upside if we have improvement there.

And Joanna going back to your point, historically over the last two years same-store fourth-quarter occupancies sequentially improved 20 basis points in the fourth of 2015 and the fourth quarter of 2014. On the attrition we have seen obviously in September it did come down. Hopefully we'll continue, but we’re trying to give some conservative outlook for the fourth quarter. So we don't get disappointed again on things that may be of out of our control.

Yes, one of the thing I will note to Joanna about the fourth quarter of last year is that how I talked about our health care expense this year being set an expense of $750,000. Last year in the fourth quarter we had the largest credit we've ever had. We had a $623,000 credit in that healthcare expense. We've got a significant -- a tough comparison in the fourth quarter as it relates to that so just, a note on that.

Great, that’s helpful. I'll go back to the queue.

[Operator Instructions] And our next question comes from Chad Vanacore with Stifel.

Chad?

Yes, hey how are you? So Larry I think you just touched on this but are you saying that we should expect occupancy to build in the fourth quarter about 20 basis points sequentially?

Historically with normal attrition that's been our experience. The financial occupancy has built 20 basis points in each of the fourth quarters of 2015 and 2014.

Got you. All right. And then just thinking about the attrition 9.5% it seems it's not flu season, is there anything that you could point to or it's just a one-time anomaly and then how long do you estimates till you can backfill those units?

We think it’s a one-time anomaly. If you look at the raw numbers as I mentioned, we picked up in the months of July and August it’s when we got the move outs we had 437, 463 move-outs in September same-store were identical to what they were the prior year. So we have definitely recovered. We actually had a -- what’s interesting on a physical occupancy level non-financial we gained for the quarter, we gain same-store 35 units from July 1 to September 30 on a physical occupancy. The reason for the financial drop is that the move-out occurred earlier in the quarter. So the occupancy average during the quarter was lower and then as you heard from Carey, the great week was the last week of the month we didn’t get the full quota of financial impact from there. So that's why the financial occupancy with a disappointment while on physical occupancy on same-store we had 1,250 move-ins and 1215 move-outs for a net gain of 35. So the starting point for October 1 is below where we thought it would be based on the number of move-outs extra 106 for the quarter same-store and that were being little conservative in building back that occupancy trying to see what happens with the attrition. But again there's nothing that we can see from geography. You’re correct there was no flu. There was no bronchitis. There was no pneumonia. There was nothing we can point our finger to other than the fact that perhaps it was just two bad months where randomly residents have said and what’s interesting too Chad is that the reason for move-outs, we track this every month, the percentage of move-outs for healthcare, for death and every other reason was right in line as to what they are every month. So there was nothing unusual. It just was a higher volume of move-outs particularly residents passing away or moving to higher levels of care.

Okay and then just one more for me, just to backfill that occupancy would you consider some discounting or how do you plan on getting that…

Well it’s a great question. We did do some discounting at the end of the quarter. We actually have pulled back on discounting. So going into the fourth quarter, we actually feel that we have pretty good visibility on deposits over move-outs, which are positive traffic. We actually have stopped the discounting in many of our properties for the balance of the quarter. So we're actually hoping to build back on right growth.

All right, thanks a lot for taking the questions.

Thank you, Chad.

Our next question is from Dana Hambly with Stephens.

Hey, thanks good afternoon. Larry just the 748 units, $7.5 million of CFFO, when will those all be back online?

Okay, if you -- by the way I invite everybody to look at on new slide presentation. We spent a lot of time reformatting our message and really focusing on our pure play senior housing and real estate focus and in the slides there shows when we expect those units to come back online, the properties out of service. I mentioned 21 units came online in the second quarter that was memory care at Canton Regency. The balance of that building will come online in the second quarter of 2017 and we had a great as I said 19 of 21 units were occupied presently in one quarter which is very, very positive. So we have 273 units opening in Q2 '17 and then we have 249 units coming back online meaning -- in Q3 '17 and then the contribution obviously will be recognized as they stabilize over six to nine months.

Okay, so I can look that up in the slide deck but stabilization….

The slide 17.

Okay. Full lease up six to nine months.

Typically that's what we expect.

Yes, and so Dana one point on that is three of those buildings are ones that we have completely out of our non-GAAP numbers right now. So the current plan is for us to wait until those are leased up to stabilization and then we'll add them back in the complete building back and we’ll see how that goes as we move along. But the other ones, the other units that come back on other than those three as they are put back into service and as they lease up, they will impact our numbers and that's the case for the 76 that came in late September and then will come in, in early November, excuse me, in early October they came in those will impact our fourth quarter numbers so as those lease out.

I believe that we're at an inflection point as it relates to these conversions and re-positionings. They've taken a while. We’ve been talking about it, but it's great now that they are open. The response has been outstanding as you can see from the numbers consistently filling much ahead of our expectations. Properties look great. So, we are optimistic that we'll start to include more of the economics from these conversions into our reported financial number.

Okay. Alright Carey can you on the CapEx I know -- can you just remind me it runs higher this year and is it most of next year as this start to tail off in the second half of next year?

Its start to tail off in the second half of next year. Right now as we look at it for -- I think it'll probably be relatively similar levels but a little less in the first couple quarters next year and then it should come back I would expect to more normalized numbers in the $4 million to $5 million a quarter range for the last half of the year.

That's for the second half of '17 okay.

This year so far -- this year the CapEx numbers on a gross basis are larger than our net basis because it get reimbursements from some of our least partners and so on a net basis right now we've spend about $42 million this year and so may be around $50 million to $55 million of the full year on a net basis it will be more than that on a gross basis, but net our dollars it will be $50 million to $55 million.

Okay. Okay. I get that and then on the lease portfolio you run a really good margin there and the rent eats up quite a bit of that. I am just wondering what other opportunities you might have beyond the four that you just announced in the next couple of years?

First of all on the margin, the reasons the margin on the lease portfolio is higher is it has a higher proportion of independent living properties which operate at a higher margin. So if you look at our press release today, you can see the lease portfolio has an operating margin of 44% versus our consolidated of 40% and that's primarily because of the large number of independent living. We are having productive conversations with other landlords about opportunities to either buyback or restructure some leases and as that develops further, we'll provide more comments.

Okay, I look forward to that and just I want to make sure I am getting the modeling right. so if going into the fourth quarter typically you would see a 20 basis points increase in occupancy relative to the third quarter, but that's assuming normal attrition, but guidance is assuming a higher level of attrition going into the fourth quarter is that correct?

That's right. That's what I've assumed at this point,

Okay. Thank you very much.

Until we see the attrition fall back as we get into the quarter, I am being conservative.

Got you. So assuming attrition stays high, we shouldn’t look for much of an occupancy increase into the fourth quarter.

That's right.

Okay. Thank you.

Our next question comes from Ryan Halsted with Wells Fargo Securities.

Hi. Good evening.

Good evening, Ryan.

Question on the same store rent growth of 2.2% that continues to lag the NIC data. What's a good bar for your rent growth expectations for your markets?

One of the reason for the mix is the mix of independent living, assisted memory care. If you look at the raw data for the quarter, you'll see that independent living rents actually year-over-year are up 3.7%. Okay. So what happens is because of the mix of the blend of revenue coming through, it mutes the absolute change in rate from quarter to quarter or year to year because of the mix because the independent living rent is in the third quarter is at $2,700 a month versus assisted-living, which is $3,800 and memory care $5100. So it's really the blend. We still look to increase rates about 3% both the level of care charges as well as in rate. As I mentioned earlier, we do get some specials occasionally to spark some occupancy. We've cut that back. So I do think that if you look at what we look at we still and as we did again this quarter, we would like to have about 50 to 100 basis points spread between the expense growth and the rate growth and that's exactly what happened this quarter. Rate grew at 2.2% on same-store and expenses were up 1.7%. So we're managing to our plan and it's something that we look at proactively every month as we look at the rate every week and the expense management programs and we haven't systems set out the I think they are for purposes of modeling, kind of 2.5% is probably a very fair number. I will comment on NIC map that NIC map now reports actual rents. The information that NIC map had the reporting was asking rents which are typically higher. So if you look at the actual rents that NIC map now reports it's about 8% lower than asking rents. So I don't think our numbers are that different than NIC map. I just think that we're given you actual numbers versus the asking rents that NIC map has traditionally provided.

All right. That's very helpful and then on the acquisition environment you guys are obviously moving forward with being very acquisitive while the rest of the industry seems to be moving in the opposite direction with some downsizing I guess or repositioning. What's the environment you're seeing in target?

Well first of all I like to differentiate Capital Senior Living from the rest of the industry. We have a healthier portfolio. We don't provide the healthcare side of the business. We're not taking facing a lot of wage and labor pressures. We'll have the reimbursement issues or the staffing issues, we have a lot of stability. So we're fortunate that we're not distracted by some of those challenges. We are disappointed that sometimes not controllable items like weather, healthcare claims or attrition can affect our numbers, but the core business and fundamentals are extremely sound and very strong. That being said we can continue to be very disciplined on acquisitions. To give you an idea in the third quarter of 2016, we signed 13 confidentiality agreements aggregating about $325 million of value of deals. In the first nine months we signed 43 CA's with a total value of $1.3 billion at both off market end market. We announced so far $130 million of acquisitions. So if you think about the pace we always say, we typically buy about 15% of the buildings that we underwrite, that gives us the ability to focus on our geographically concentrated regions buying very high performing, high quality recently built buildings and what's interesting, every market we buy has no new construction. That's the filter that we go through in due diligence. So there is no supply in any of those markets coming in. So we feel that we feel that we will continue to have this pace. We think we have the capital plan to find it. We have great lenders that we deal with. The other aspect of our business I would like to talk about is the supplemental loans. As Carey mentioned, we have plans for the fourth quarter. The one benefit we have of ownership of our real estate is the appreciation and the ability to go back to our lenders and take advantage of supplemental financing that have terms that are coterminous with the original loans. And in the last two years, we actually went out and took out $50.7 million of proceeds, not included what's planned in the fourth quarter on 16 properties. Those properties were purchased within three years of the supplemental and the average increase in value based on the amounts of proceeds we received from our lenders and appraisals was 43.9%. So I think that also gives a lot of confirmation and comfort that our discipline strategy is working. We are creating value in these buildings even though they are high-performing and high-quality. We put in our expense management programs, our expense management, our rate plans, our care plan etcetera. So we feel that we still have a very, very solid capital plan that can be funded from internally generated sources to continue this disciplined acquisition strategy.

That's very helpful. Maybe just a modeling question, on G&A it sounded like there was some one-time items in there. What's the good run rate? How should we be thinking about run rate G&A as a percentage of revenue?

In the fourth quarter I would expect it to be somewhere around $5 million to $5.1 million, again depending on how healthcare claims come out. I've got if it's $5.1 million that has a little bit of improvement in healthcare claims since the best of real factor. Our G&A as a percent of revenues has been pretty consistently right around 4.5%, 4.6%. I would expect it to remain there. It was a little higher than in the third quarter at 4.7%, but I think right around that 4.6% mark it's pretty consistent with where I think it will be.

Okay. Thanks for taking my questions.

You bet.

[Operator Instructions] And our next question comes from Todd Cohen with MTC Advisers.

Hey guys.

Hey Todd.

Hey just had a question regarding new properties and I would like to refer to the Brookdale press release, I didn't actually listen to the call or read the transcript as yet, but I thought there was kind of an interesting or odd statement that I believe it was Andy Smith may have made. He says that they grew occupancy by 40 basis points sequentially. However during the quarter we saw unprecedented number of new competitive openings in a midsize markets that caused us to fall short of our revenue expectations. So I am just wondering about that statement and how it could be to potentially relate to you guys and I don't get a sense that I don't know maybe they missed it because of all the moving parts…

Let me answer your question Todd and please look at the Slide 11 of our new company presentation. Slide 11 shows the top 10 MSAs in the third quarter according to NIC Map and the NIC Map data has changed to some of the market that Andy Smith may refer to and I'll go through each one and explain what our exposure is and where we do have properties and performances. The first one is 20% constructive versus inventory is Baton Rouge, Louisiana where we had zero properties. The second is Charleston, South Carolina 26% of properties. We had none. Austin Texas 21% of inventory, we had none. New Orleans, Louisiana 19.6% of inventory, we have none. Fort Myers Florida 18.9% of inventory, we have none. Columbus Ohio, 18.5%, we have one. 111 units that financial occupancy in the third quarter with 99%. So next to the Utah 18.2% of inventory Capital Senior Living has none. San Antonio Texas 15% of inventory we have two properties 238 units there 96% financial occupancy in the third quarter of this year. Portland Maine, 14.7%, Capital Senior Living has none and Charlotte, North Carolina, 14.2% we have one building 73 units that 86% financial occupancy in the quarter. So again we're not seeing it. I think that the evidence of the extremely strong and consistently strong demand in deposit taking and move-ins shows that there is no new supply we do a lot of analysis of these markets. we make acquisitions, but I do think that I would ask you to take a look at Slide 11 and perhaps and I can't speak for where Brookdale is reporting or where they're operating but perhaps they're referring to some of these other markets that's showing some growth in inventory. We don't see it because we do not operate in those markets.

Yes, so I guess the issue with the Brookdale statement is that I can't imagine that they weren’t aware of the competitive openings. So I guess that they just fell short given their expectations for the acceptance of these new properties in terms of…

Todd I suggest you call Brookdale Investor Relations and ask them their question.

Okay. Thanks.

Thank you, Todd.

All right, everybody. We thank you very much for your participation today. Again we are very proud of a lot of the progress we're making on multiple fronts. I ask you to take a look at our new slide presentation. It really does focus on our strategy as a pure play senior housing, owner operator with a real estate ownership focus and again we did have some non-controllable items, but overall I think our trajectory is strong and visible and we look forward to seeing many of you at various conferences over the next few weeks and feel free as always to give Carey or myself a call if you have any further questions. Thank you very much and have a great evening.

Once again, that does conclude today's call. And we appreciate your participation.