Good day, everyone and welcome to the Capital Senior Living Fourth 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 fourth quarter and full year 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. As announced in December, we were saddened to lose Keith Johannessen, our President and Chief Operating Officer. I had the good fortune of working with Keith for more than 20 years and witnessed firsthand, his empowering leadership and the enormous impact he had on mentoring and developing the finest operations team in our industry. Our solid fourth 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. Attrition and healthcare claims which were unusually high in the third quarter returned to more normal levels in the fourth quarter and we continue to be well insulated for new supply and wage in most of our markets. We also made steady progress on important operational and corporate objectives related to positioning the company for sustained growth, including the announcement of the acquisition of one community in the fourth quarter and the strategic purchase of four communities we previously leased as we look to continue to increase our real estate ownership. As we look forward to 2017 and beyond, we expect the continued execution of our strategic business plan to produce outstanding in all of our key metrics.…

[Operator Instructions] We take our first question from Chad Vanacore with Stifel.

Hi good evening, Larry and Carey.

Hey Chad.

Hey Chad.

So just figuring our Carey, you mentioned you had added some in first quarter which looks weaker than we expected. How much of that drag if from occupancy versus how much of it is from expenses?

Well there are few factors, one is we have got - you always have higher utility cost in the first quarter of the year then you would have in the fourth quarter sequentially think about the fourth quarter, the first quarter it’s usually about $600,000 or so higher in the first quarter than in the fourth. Our G&A expense, that’s going to depend on the increase there, it probably is going to be somewhere around $600,000 to $800,000 versus the fourth quarter as well because healthcare expense was benign in the fourth quarter, it has been a little higher, it was higher in January and just kind of projecting that with the full quarter, it could even out, but it could be something like $600,000 and $800,000 higher. And then we do have the acquisitions that will be added in the first quarter versus the fourth, but the one acquisition that was in November, will probably add about $100,000 of CFFO, the four communities that we purchased on January 31, that’s about $300,000 of CFFO that we added to the first quarter versus the fourth, so those things are positive. And then from a base stand point we expect that to be down slightly, depending on the rate of attrition that we have in the first quarter. We noted that there is higher than usual instant of flu. So far in the first quarter, we also have - normally expected attrition to be higher in the first quarter of any year. So that will impact kind of our base - our same community revenue going forward. Our expenses will be well in our control, I believe other than utility cost increase we always expect in the first quarter. We should be in good shape from an expense stand point. So really depends on the attrition and the weather as it relates to those base revenues and how that will come in the first quarter of the year.

All right, that’s excellent color. Now, thinking about - you took $15.6 million of loan in fourth quarter. How do you think about investing that cash, is that going towards CapEx, renovations or acquisitions or something else?

That was primarily to help us fund the $85 million acquisition that we had on January 31.

Okay and then since you are acquiring some properties from landlords. Do we think about any further opportunities to buy assets from other landlords?

Chad as I mentioned in my comments, we are in discussion with other landlords and hopeful that we can grow the ownership of those properties.

All right, thanks Larry. And then just thinking about wage inflation that your peers are seeing which you don’t seem to be experiencing the same. Why you - that is or do you doing something differently or the geography that you are located it?

Well, a few factors, I think one is first I noted in my remarks, we are not a healthcare companies, we don’t have same kind of wage pressure that really there was a lot of wage pressure is on health related jobs. So we are not seeing wage pressure related to that and it is the geographies that we are operated in. We are not in states where there is a lot of pressure on increasing the hourly wage and minimum hourly wage and as we noted before we really don’t have very minimum wage employees. We feel like we compensate them fairly and I think for 2017 I have included in my projection, something like 2.5% increase on labor so little more than we had in 2016. We have 1.9% increase as I noted for the full year of 2016. So I have included a bit of increase in that in 2017 and I included something like that last year there was well ended up little less than 2%. So we will just see how that turns out, we just - are in a good position as it relates to based on geography and our current situation.

Okay and then just one quick question for me. Rate increases - that makes you apart, in Q2017 you still seeing around 3% rate increases?

Yeah, actually in January our rates were up exactly few percent than the prior year. We also have discontinued any incentives that we had used last year. So we are hopeful that we’ll see some improvement on the actual rate increase, but also see the elimination of some short term incentives that we used about a year to those occupants.

All right, thanks a lot. I will hop in the queue.

Thanks Chad.

Thanks Chad.

We will go next to Joanna Gajuk with Bank of America.

Thank you. Actually on that last comment on the pricing and how you raised around 2% and you discontinued some incentives or you already did so. So the 1% or 1.3% increase of same store basis in Q4 is that - great deceleration from the recent trends. So that was the reflection of some incentives that you were doing towards the end of the year.

Yeah, there were incentives during the end of the year, where we give off typically some amount of first two months rents, that were off into the first quarter and it is not being continued. So that did have an impact on fourth quarter. We think it was helpful to build occupancy back up from the high attrition we experienced in the third quarter and fortunately that has not reoccurred and we are very pleased with type of these rates that typically have novelized. Because of the flu which we think temporary escalates to this period of time. And then so as I looked forward and as I said we are actually of 3.1% in January, actual rate increase and I think that’s a function of rent increases were getting plus, the burning lot of some of those concessions.

So but a little bit of bigger picture, in terms of the CFFO for the quarter, churn rate maybe came a little better than expected but seems the occupancy was down actually sequentially quarter-over-quarter. So would you characterize that it was - sort of the better CFFO was on the better cost control?

Well, it was a return to normal attrition Joanna as well as healthcare claims expense. Both of those will be returning to more normal levels to help that.

We actually projected a further reduction in occupancy where we guided last quarter. So it was actually a better performance that when we guided and obviously the normalization of our healthcare claims as Carey mentioned was about some hundred thousand dollars or so.

So then for sort of 2017, how should we think about pricing for the year and also occupancy, I know you suggested that you have a lower starting point because of the attrition in Q3 that flows through and also I guess the start of the year, January, February impacted by the flu but how should we think about those into occupancy for the year and similarly in terms of pricing. So you said you have raised 2% but I guess there is some seasonality and maybe some seasonality in terms of 7% things like that. So should we think about 3% kind of average for the year also any color you can give us kind of longer or rather outlook for the year?

So Joanna, I would expect, we having our projects about 3% rate increases for the year. We do build in some occupancy increase from there. I think where we end up at the end of first quarter we would expect to be able to grow occupancy from that point of about 100 basis point through their rest of the remainder of the year and so that will give you that plus, conversions that are being coming in as I noted. So we expect that revenue on a same community basis to be greater than 3% because of the occupancy increase as well as the units coming back in plus the 3% rate increase and then our expenses probably somewhere around 2.5% range, somewhere around there for the year.

So you are saying in terms of the labor - last note on the expense 2.5% so you are saying that you kind of model the labor cost growth similar to what you are experiencing 2016, correct?

Yeah, labor, up somewhere around 2.5%, we would say in 2017 and then overall total expenses about 2.5%.

Great and if you may just I would squeeze one last question with comment around buying back the four leased assets that were eliminated 3% escalator, so what is your weighted average rent escalators for the remaining portfolio or the leased portfolio?

Typically 3%, CPI with a floor of 3, so obviously we have been growing rent at 3%. There is a possibility with higher inflation over next five years or so, that could grow more. But the minimum rent escalator is 3%.

All right thank you, I will go back to the queue. Thanks so much.

Thank you.

[Operator Instruction] We will go next to Ryan Halsted with Wells Fargo Securities.

Hi. Good evening.

Good evening, Ryan.

Just want to go back to the occupancy point, so I know you have been very confident that new supply not impacting your markets. But just given that your occupancy has moved pretty largely in line with our broader market I just wondering what gives you kind of confidence that you know new supply has not as much of a threat and that you think you would be able to see some occupancy gains sort of ahead of what the broader market is looking at for 2017?

First of all when you look at the new slide that we just filed, we updated the slide as I mentioned if you look at the fourth quarter NIC MAP and look tenth highest concentration of construction, only in one market and we tracked this pretty regularly and there is a map that actually shows off communities compared to the industry and really is very little supply going in. I speak a lot about of $3500, month rent to start to support the cost of new supply. The other thing that I would comment over and I say commented earlier, it was very clear. It was very clear last month we attended meetings that everyone saying that they are construction lending is way down before new supply for construction. NIC MAP in fourth quarter showed starts were downs, so lowest level since 2012. So I do think that from the broader industry perspective we are seeing a tapering offer supply in general and just has not been an issue. Unfortunately we had higher attrition in the third quarter which we are recovering. We are not seeing and the other thing that we do see is outstanding response to the conversions and renovations of our building. Other properties that we brought back from Ventas we have one building in Arizona where there is no new supply. We have started moving on January for 21 new units memory care and we already have 16 residents and of the 12 older units which we are refurbishing right now we got deposits. So we have seen tremendous after one month, we had 21 units opened in memory care in Kent in Ohio, that is one of the properties out of our numbers, few quarters ago that’s 100 occupied. So if you look at units and former in October 100% occupied. Buffalo New York, 66 units have conversion where they have 80% occupied already. So we are just seeing around the country this type of growth. So we just don’t think that we are going to see some of the same pressure and hopefully the entire industry will start to benefit from lower starts, later part of 2017 and into 2018.

Okay that’s helpful. And then past couple of years you have certainly had a very robust deal pipeline and so I am just wondering what do you think you capacity is for acquisition spend in 2017 and maybe while your discussion kind of uses of capital what is your expectations for other CapEx in 2017 as well?

I’ll let Carey to CapEx project, again we spent a lot of money last two years both our sales and with our landlords on some of the renovations, that will be tapering down this year. We already closed $85 million acquisition in January, we kind of think that pipeline is actually terrific right now, but we are probably looking at another $100 million of acquisitions for the year. Last year we got 138 so we think about allocation of capital and then CapEx Carey you may want to talk about the level which we are at least two years and what we are projecting now for 2017.

Right, so in 2015 and 2016 it has been elevated from CapEx standpoint, as we completed these important renovations, refurbishments, conversions. We had those going on and in 2016 we spent a gross amount of $62.4 million and some of those expenditures are leased properties and we will reimburse by resource for those about $7.5 million where reimbursed the net on communities that CSL owned communities was about $55 million in 2016 and it was in the $40 million to $45 million range in 2015. In ‘17, that should tapper off considerably. Right now, we expect CapEx to be somewhere around $20 million to $25 million in 2017 exclusive of projects for which we have been reimbursed by our REIT partners which that could add about $3 million to $5 million. The gross might be somewhere around between $20 million and $30 million, the net being around $20 million to $25 million.

That’s helpful and then you filed the mix shelf, what’s your view of accessing the capital markets to I guess finance some of these projects?

As I mentioned, we have no current plans. That shelf which is the shelf that was filed three years ago and the shelf three years before that and shelf three years since, that expired and we just reduced the shelf, we had never used it, but again it’s just having that tool in our optional to the opportunity there that we have the access to capital, but that was only a function of the exploration of the prior shelf and the ordinary renewal in the same term, same amount for the current shelf.

Okay, maybe just last one for me. Your largest competitor was speculated to be approached by a strategic buyer, just wondering if you guys have been approached or if you’re seeing more strategic buyers or more private equity buyers in the space looking at putting money to work in the industry.

Yeah, we really don’t see a lot of that. Yeah, if you look at kind of the transactions, obviously Blackstone has announced a joint venture with the HCP portfolio with Brookdale. They’re all some of the acquisitions we look at. There are some smaller private equity investors we really had not seen. There are some Chinese investors that made some investments in the sector. Obviously, two or three - I mean PBG is very active, they brought more profile portfolios, so there’s always private equity in real estate, but nothing unusual, I don’t believe that we’re seeing out there.

Thanks for taking my questions.

Thank you.

We’ll go next to Dana Hambly with Stephens.

Hey, thanks. This is Jacob Johnson on for Dana. I guess first question is sticking with occupancy, your occupancy results seem to be a bit bifurcated between the owned and the leased portfolio. It looked like the owned ticked up about 40 bps sequentially and the leased declined 50 bps, is this just year mix or is there something to call out there?

Yeah, I think actually interesting, we have more independent living in the leased versus the owned and unusually the independent living occupancy, actually attrition is higher in the fourth quarter than assisted living. If you look at metrics, assisted living attrition fell 9 percentage points in the fourth quarter from the third quarter and down from the year before by 1%, independent living was up 3%. So it was just a portion of higher attrition for the quarter, where we actually had a loss in occupancy in independent into the quarter and a gain in independent living. So that’s really - and the difference being that the leased portfolio has more independent living than the owned is the reason for the change in occupancy.

Got it that’s interesting. Second question, how do you guys rank purchasing previously leased assets versus the acquisition of a new facility?

Great question, every dollar that we invest, we do an investment analysis looking at the return and looking at all the opportunity costs, whether it be in acquisition, whether it be a refurbishment, renovation, obviously we think that owning the real estate reduces leverage, it brings down recourse leases, it reduces the escalators over decade, so you got to take that into account. And the bottom line is that it gives a tremendous ability to increase the sustainable cash flow after lease burden and creating shareholder value for the ownership of the real estate and real estate value. I mentioned before purchased that from Ventas and gave you some stats on one of the conversions that just opened up in Arizona, the other properties would be done next quarter. If we raise as we project $3 million of cash flow, will increase the value of those real estate properties that we now own by $40 million. We prefer to do that for our shareholders and our landlords. So we just look at this as a strategy that is improving the balance sheet, reducing leverage and reducing those minimum escalators which could increase even greater in higher inflationary periods and gives us maximum flexibility of owning real estate that has a potential of really driving significant cash flow benefits like $5 million on the $85 million purchase and then the real estate value that goes along with that hopefully would also drive shareholder value.

Alright and then last one from me, Larry there’s been a lot of talk recently regarding senior housing’s role in the post that you continue, just would be interested in your thoughts on that. And have you guys had discussions with payers or health systems or is it still pretty early?

Jacob, great question. I had a meeting this morning on that exact topic. I think there’s a tremendous opportunity there. I think it’s something that the industry has laid behind. I’m hopeful that we will take a leadership position in looking at how we can - I mentioned something on the call. Again, the cost of living at one of our buildings and average rent of $3,535 is 60% less than the cost of homecare. If you compare it to the cost, still nourishing a 432 a day, hospital 1,800 a day, it’s significant. The opportunity for this industry to participate in this continuum as a setting that has better outcomes at lower cost is very, very dramatic. The challenge is getting the data because we’re private-pay and don’t deal with CMS, we don’t have the same data that post-acute providers have. We also have a strategy that we really speak about of partnering with the premiere post-acute care providers who reside in our buildings like Genesis, home healthcare companies, hospice companies. We just had a meeting today with our quality assurance committee, where we review a modified broad shelf index [ph], which is the index that Genesis provides for our residents, in our communities that measures independence. And in the capital senior living communities is the highest measurement of all of Genesis’ therapy rehab around the country. So we’re working on gathering the data, we’re talking - having great conversations on that, actually if I said, just sequentially spent this morning on that exact conversation and thinking of this as an opportunity that we definitely want to plan. It will take some time and above. There are hospital systems that are very focused on senior living right now, they’re looking at. So I do think there’s a great role and I’ll tell you Jacob, that’s a holy grill because we’re successful and the industry is successful. All we have to do is increase the penetration rate of this industry by one percentage point and if we do that, there will not be a vacant apartment in the entire United States.

Great, that’s it from me. Thanks.

Thank you.

There are no further questions in the queue. I would like to turn the conference back over to Mr. Larry Cohen for any additional or closing remarks.

Well, again I thank everybody for participating today. Please feel free to contact Carey or myself, if you have any further questions. We wish you good evening and hope to see you soon. Thank you very much. Have a good night.

Again, that does conclude today's presentation. Thank you for your participation.