Good day and welcome to the Capital Senior Living First Quarter 2017 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 first quarter 2017 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 congratulate you for achieving a 95% resident satisfactory rating on our 2016 surveys. I want to recognize two outstanding communities, The Waterford at Woodbridge for scoring a highest in resident satisfaction and Crosswood Oaks, our Community of the Year, for scoring highest in combined financial performance compared to budget, occupancy and resident satisfaction. With all the discussion about the effect of new competitive supply affecting our industry, I want to point out that Crosswood Oaks, our 2016 start performer is our oldest community, it opened in 1976. Kudos to Don Kraft, Lucy Steel, Lisa Holloway, Tina Tedford and all their team members. I also want to mention that this morning we recognized three corporate employees who are celebrating their 25th anniversary with Capital Senior Living. As you can tell, I’m extremely proud of the hard work and passion and dedication of our entire team, and our residents and family members frequently thank me for the meaningful impact they have on their lives. It is our exceptional and talented employees that differentiate Capital Senior Living and 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. The number of flu incidents reported in our assisted living and memory care units this flu season increased 43% compared to the prior year. Despite the headwinds from this heavy and prolonged flu season, which impacted our first quarter occupancy, as we discussed in…

Thank you, Larry, and good afternoon, everyone. Hopefully, you’ve had a chance to review our 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 e-mail if you’d like to do so. The company reported total consolidated revenue of $116 million for the first quarter of 2017. This is an increase of $6.8 million, or 6.2% over the first quarter of 2016. The increase in revenue is largely due to communities acquired during or since the first quarter of 2016. Revenue for consolidated communities, excluding the three communities that are undergoing repositioning lease up or significant renovation in conversion increased 6.3% in the first quarter of 2017, as compared to the first quarter 2016. Our operating expenses increased $6.3 million in the first quarter of 2017 to $72.8 million again due primarily to the acquisitions. Our general and administrative expenses for the first quarter of 2017 were $6.2 million, the same as in the first quarter of 2016. Excluding transaction costs from the first quarters of both 2017 and 2016, our G&A expense increased $300,000 over the first quarter of 2016. Net healthcare expense, which is the net of our healthcare claims and our employee benefit income increased by $300,000 in the first quarter of 2017, as compared to the first quarter of 2016, which explains the full increase in G&A. Regarding our healthcare benefit plans, we’ve made changes to the plans, which renew on June 1 of each year that we expect to meaningfully improve our net healthcare claims expense going forward, beginning in June. G&A expenses as a percentage of revenue under management was the same in the first quarter of 2017, as the first quarter of 2016 at 4.9%. As we noted in…

Thank you. [Operator Instructions] We’ll go first to Chad Vanacore with Stifel.

Good morning Larry and Carey, good afternoon.

Hey Chad.

Hey Chad. How are you doing?

Good, good. So I was thinking about average rent increases at your community. It looks like same-store rate was up 1.9%, is that right?

That’s right. It was up 1.9% versus the first quarter of 2016, versus the fourth quarter of 2016 just that one quarter-to-quarter increase it was 0.7%, which would equate to a 2.8% annual increase.

Oh, I’m sorry, Carey, can you say that again, 2.8% for the whole portfolio?

Well, it is 2.8% for the whole portfolio, but also just looking at the same community. If you look at what the increase was from the fourth quarter to the first quarter that sequential increase was 0.7%, so just annualizing that. Taking that on the whole would be 2.8%. Yes, just annualized rate of 2.8%.

Because we had been talking more about 3% rate increases and that’s in line with that, right?

It’s right.

Okay. Are you seeing any difference in rate growth between your IO and AO units?

Actually if you look at the rate of growth, our IO unit sequentially increased by 1% and AO is up by about 30 basis points.

Okay.

Year-over-year we see a little higher same-store, higher rate growth in IO than AO.

All right and then Larry you had mentioned that you discontinued discounts. What form did those discounts take prior to you discontinuing?

We would occasionally offer introductory specials, for independent living it would be $500 off of the first three months rent. For assisted living, it would be a $1000 off. Memory care would be about $1500. We typically run them on properties that occupancies typically below 85%, sometimes low to 90%. And then it get very rarely, but they were sort of boost up after for example some harsh weather or something happened like in October, we have it on all properties. So we did have that for example in December, but we have effective January 01 there were no specials or introductory pricing at any of our communities. And the other thing that’s important Chad is those concessions had now fully burned off. As I said, they rest for three months, so the January move-ins lasted the entire quarter. That will – it should show a further improvement in the average rent for April, since there are no longer any concessions coming through our financials.

All right, thanks and then I’m just thinking about CapEx, your investment CapEx was $11.4 million in a quarter, you had been running around $9 million a quarter. Where is that going to and should we expect that to normalize or is this a better run rate to use for the rest of the year?

Yes, we’ve been completing some projects that were started in 2016. We’re just finishing those up and so we’ve had a – and we’ve completed as of the end of April, we had completed our Canton project, which is one of our repositioned communities and a lot of that expenditure is in the first quarter. So, now we expect those to taper down as the year goes along. I still think it will be per the year at approximately $30 million and that’s before reimbursements from our REIT partners of about $5 million, so net-net, we probably have somewhere around $25 million in CapEx for the year. So it’s definitely higher in the first part of the year and it will taper off as the year goes along.

All right, thanks for the color Carey and I will hope back into queue. Thanks.

Thanks Chad.

And we’ll go next to Dana Hambly with Stephens.

Hey, this is Jacob Johnson on for Dana. I guess first question. Hey, hey, understanding that expenses were in line with your expectations that the 2.9% same-store expense growth in the first quarter looks like it was more than you’ve experienced recently. It sounds like this is driven by increased utilities, but was there anything else to call out there?

Yes. So Jacob, taken as a group, our three major cost categories labor, utilities and food were up approximately 2.5%, labor with that 2.5% right in line with our expectations. Food costs were up only 0.3% and utilities, as you know, they were up 3.7%. And they increase and decrease based on the severity of the weather. The weather in the first quarter of this year, while relatively mild in certain parts of our geography was a little more severe than in the first quarter of last year. So therefore, that expense was up some. And then we had – we did have a couple of unusual expense increases in a couple of other categories supplies, contracts consulting that we wouldn’t expect to occur in future quarters, but they were just kind of one-time cost in the first quarter.

Make sense.

I’d say, our expenses were where we expected them to be.

Got it. And then the COO role has been vacant since Keith passed away. You guys obviously have a deep bench. But looking forward, do you have any plans to fill that role?

Jacob, we are considering both internal and external candidates. And I would expect that the decision will be made in the near future.

All right. And then last one for me, Carey, a quick modeling question. Should we expect to see lease expense kind of tick down in the second quarter, as you had that that full three months of the owning those previously leased assets?

Yes, absolutely. So that – so we had about – if you look at it that’s about $600,000, $585,000 or so of lease expense per month will come out from the previously leased communities, and we had two months of that out. In the first quarter, we’ll have three months of that out in this – in the second quarter and beyond that.

Perfect. That’s it for me. Thanks for taking the questions.

Thank you, Jacob.

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

Hi, good afternoon. Thanks for taking the question. So in terms of the quarter, which you said that the CFO – CFFO came in above the high-end of the range that you provided. How would you describe what came in better than expected that drove that, I guess, a little bit better performance there?

Right. It was mostly due to lower operating expenses and G&A expense, as well as the fact that we initially projected that it would be about a $2 million increase in CFFO related to the four communities we purchased in the first quarter. And it was actually – it actually ends up being about a $3 million increase. So that added about $150,000 to the first quarter from that transaction. Those were really the reasons why we are a little bit better.

Okay. And what exactly is the instrument the last peak – of the last peak expectation that now it’s – those communities were $3 million versus $2 million previously, what exactly has come in better on that transaction?

What’s coming better? Well, and just working through their transaction, we – so we have – we were just being conservative, Joanna, until we work through it. We ended up being able to – we will reduce our lease expense by $7 million, and we’ll increase our interest expense by $4 million. So it’s just the way that it nets out and it just in that being better. We wanted to be conservative until we’ve completely worked through the transaction.

Okay. And then in terms of, you said the flu, I guess, instances increased, but were you able to quantify the weather impact in some form of fashion, or it was sort of, I guess, reflected just in the increased utilities costs?

Well, the weather, we had 85 units out of service in the first quarter. We had, I think, 18 properties that had freezing frozen pipes, water damage and actually because of that that was very disruptive. It’s not only the 85 units we had wings closed. We had moved residents around in the community to clean up the units and fix the pipes. So, that’s part of the loss of occupancy in the quarter and that was really from the ice storms that hit in December and January in Texas and some parts of the Midwest. In addition to that, if you look at the flu, as I said, we had in the quarter, so that’s – we had basically 621 reported incidents of the flu this year. That’s only AL and memory care, we don’t track the aisle, that compares about 400 the year prior. So it was a pretty big increase of almost 260 additional reported incidents of flu in just AL and memory care, which represents about 57% of our portfolio.

Great. In terms of – but in terms of the outlook for the year, so clearly, the Q1 occupancy was down, which I guess, we kind of knew it’s going to be the case for the quarter because of all these issues around flu and weather, but anything changing in terms of your outlook, or you still kind of view 100 basis points increase in occupants for the year?

From the increase in occupancy for the full-year, I mean, I think, we have starting from the base that we are in at the end of the first quarter. So as we go into the second quarter, I would expect us to be able to increase somewhere in that 80 to 100 basis points through the rest of the year.

Typically, Joanna, we expect no growth in the first quarter.

Correct.

We expect growth to grow during this second, third, and fourth quarters. We’re actually running ahead now. We had a really strong March, as I said. We had net gains in occupancy in eight of the last 10 weeks, and we’ve had very, very strong deposit taking out from 11 consecutive weeks. As we commented in early February on the fourth quarter call, we had a very challenging January because of the weather and flu. But the recovery is encouraging, particularly the pace at which we’ve seen the recovery really starting the week of February 17. So we’ve really had now really all of March now April and half of February with very, very strong performance that hopefully we’ll continue in July growth for the balance of the year.

And if I may lastly…

We’re starting at a lower – but we are starting at a lower occupancy on April 1…

Right.

That we have planned to-date.

Okay, because that’s what I was getting on. But I guess based on the commentary that Carey made on the Q2 outlook, right, so a sequentially expect increase, which is, I guess, what we would have expected about, it seems like it’s less than what we had expected during the past, it was $0.04, I guess, about $0.04 sequentially per share. But now it seems like it maybe about more like a 3. So is there something maybe also around acquisitions in the sense that, I guess, you’ve done the four communities that were previously leased, but other than that you haven’t really added versus maybe in five years that was more of a sequential left in Q2 from Q1 from acquisitions or something along these lines?

Yes, that is we – you’re right. Let me just walk you through the kind of sequentially first quarter to the second quarter how to think about it. We’re projecting an increase of, as I noted, approximately $600,000 to $1.2 million, which would equate to $0.02 to $0.04. And we’ll get one additional month of a contribution from our first quarter acquisition of the four previous leased communities, and that’s about $250,000. We don’t, as you noted, we don’t have any additional acquisitions that are closed in the second quarter. So there won’t be any incremental contribution from a new acquisition. We would expect our utilities costs to be lower by approximately $600,000, because the second quarter generally has milder weather in the first quarter. Our G&A expenses could be about $200,000 to $300,000 higher in the 2Q. in the second quarter versus first quarter based on just normal seasonal costs, including costs related to our proxy in our annual meeting that always happen in the second quarter among other items. And then the remainder of the increase from 1Q to 2Q will really depend on how much recovery in occupancy that we’re able to achieve in the second quarter, as well as the lease up of the units we previously had of service that come back on line – the ones that came back on line in the first quarter, and the ones that will come back online in the second quarter.

All right. Thank you so much.

You bet.

Thanks, Joanna.

[Operator Instructions] We’ll go next to Brian Hollenden with Sidoti.

Good evening, and thanks for taking my question.

You bet.

Absent the spike in the flu season, would you have expected the same community occupancy to have increased?

Typically, in the first quarter, we don’t expect an increase. We typically expect first quarter to be flat to slightly off. If you go back historically, there’s always seasonality. Last year, we did have a 30 basis points, I think, back in occupancy last year, we dropped first quarter on the same store basis by about 60 basis points. So we typically see a little bit of a drop in the first quarter. But we don’t expect to see an increase in the first quarter. We typically see it build the second or third quarter is usually the strongest quarter, and then we’ve always typically seen improvement in the fourth quarter as well.

Okay. Can you give us just a more specific timeframe for the 770 units, which will come back online. I think you mentioned the 139 units in 2017, can you talk more about how those come back online?

Sure. Yes, in fact, if you want to look at our company presentation, there’s a slide that breaks this out. I think it’s Slide 17, and you can see by quarter when the units come back. So in the second quarter of this year, which we are now, we’re expecting 311 units to reopen, 249 are the Canton Regency, we have – we’ve already opened the memory care 25 units, therefore, we’re now opening the assisted living then we have another 962 units on top of that opening, some of those are the properties we repurchased from Ventas that are reopening now in the second quarter. We had 19 units reopening in the third quarter and then 214 units in the fourth quarter, 202 of which will be Town Centre. Again, one of the properties that’s been out of numbers for major repositioning and then 12 units as other conversions that will be opened in the fourth quarter.

Thank you. And then one last question, can you talk a little bit about any geographic regions that are performing well? And then are any particular regions weak and what can you do to improve those results whether that and – to improve occupancy, or to lower costs there? Thanks.

Great question. The strongest regions are the Midwest central part of the country. We have one region that operate at 95% consistently, and that’s kind of Nebraska the central part of the country is very strong. We’ve seen a nice recovery in Texas. We did have, obviously, the weather impacted us. As we have said, we are impacted in a few of our Northern Dallas metro markets McKinney, Plano, here in Arapaho, those three locations. But they again have very strong teams and McKinney has recovered like 92%, Plano in Arapaho, they face some competition, but have very strong teams. The other weak area, I’d say, is South Carolina. If you look at Myrtle Beach and kind of the coastal part of Carolina, those markets have been weak for sometime, and there it’s really looking at some changes in personnel and then some capital improvements as well. One thing I would say is that, the conversions as they come on, they have really worked extremely well of improving occupancy at properties, particularly where we have a vacancy. So that’s been a very, very reliable solution that we’ve been able to utilize and take advantage of loss of occupancy we have the vacancy. We have a property in Ames, Iowa that we plan to do a memory care conversion three years ago. By the time we had all the approvals, we were a 100% occupied, and we actually now are starting to lease some units to get units down in order to start the renovations. So, as I think about the markets, there are a couple of pockets in Texas. Clearly, South Carolina, we’ve had some great experience in California. I mentioned the property that was the best performer was a property in Sacramento. But the central part of the country continues to be very, very solid.

Thank you.

And we’ll go next to Ryan Halsted with Wells Fargo.

Thanks. Good evening. Maybe just to approach the occupancy trend in a quarter of a little differently, it seem like the impact of flu hit early in a quarter maybe consistent with what the expectations were heading into the quarter. So can you break out intra-quarter what he – what your occupancy trends were? I think that’s always helpful just to give a sense of how you exited the quarter?

We actually had a pretty – just a minor drop in January. We had a more significant financial drop in February just giving an idea on flu. In December, we had about 60 more incidents of flu in AL memory care this year than last. In January comparing year-over-year, we had 200 – over 200 more flu incidents in January that kind of reflected themselves in February. In February, we were about 30 more, and actually in March, we were 90 less. We had a really strong April, I mean, sorry, March. We gained I think about 56 units in the month of March from beginning to end, financial occupancy will probably be higher growth in April based on that. So if you think about the trends January was not that bad a month, it really manifest itself in February financially, carried over into March. Physical occupancy in March actually grew, which means financial source of monumental ag that we should see a pickup in financial occupancy in April. And obviously we have very good deposits on hand. We have a good spread between deposits and move outs and we have a lot of good traffic and momentum that with good weather should continue throughout the second and third quarters.

Okay, that’s helpful. And then moving to your acquisition pipeline. What kind of visibility do you have sort of into the pipeline for the rest of the year, should we think about it kind of similar to last year or where it was a little bit more backend weighted the deal activity?

Let me just tell you, will be or in pipeline, I’ll let Carey talk about timing. In the first quarter we signed confidentiality agreements on about $300 million of properties. So we continued to track with over $1 billion of pipeline a year. And we typically buy 10% or 15% of what we look at. We have due diligence ongoing now in a couple of properties. I think earlier, we closed $85 million in the first quarter. For the back half of the year we’re probably looking about $15 million to do or more. To kind of stay on pace with last year, which was $138 million. We’ll have one closing in the end of the second quarter, early third and another closing that will take us into the end of third, early fourth quarter and that’ll have – we expect additional closings in the fourth-quarter.

Okay, great thanks. Maybe the last one, you know you talked a lot about obviously your strategy for increasing your real-estate ownership and you know how much of that strategy is becoming, I guess, increasingly more about getting your leases sort of either bought out or just terminated. Can you give any sense of what percentage of your leases, do you have purchase options in the next year to two years and how many of them have these sort of own risk escalators that you know you think might not make sense and maybe you have a chance to negotiate out of them in the near-term?

I think about 25% of our leases just run off in two years. We have a number of portfolios with one landlord that runs out in 1999 – in 2019, 2020, yes, and we have a one year notice period ahead of that. So call it two more years, we’re about 25% of the leases rollout. There is probably a handful three to five properties that we lease, that we would – it would in conjunction with our landlord consider selling, just some markets that we would like to exit. We think they don’t have the same growth prospects as others. The rest of these portfolio actually is performing pretty well. So, if you look at it, we are taking advantage of opportunities to convert some of those into ownership, obviously, we think it was very strategic to buy back the four that we did from Ventas with $85 million. Hopefully, we’ll increase cash flow by $5 million to $6 million. And if you think about real estate value, we think we could probably increase the value of those properties by maybe $30 million, $40 million once we complete the conversion. So there is a lot of benefit to doing that and we’re having conversations with our landlords about looking at selectively acquiring properties or reconverting them to equity versus leases. All of the leases have escalators, they typically have CPI escalators, some have floors of 3%, some have CPI. But that we’ve had them for over 10 years now and then we’ll continue.

That’s great. Thank you for taking my questions.

Thank you.

[Operator Instructions] And no one else is queuing for questions from the line.

Okay.

So I hand the call back over to Larry Cohen.

Well, thanks everybody for participating today. We appreciate your support and interest in our company. Feel free to contact Carey or myself, if you have any additional questions, and then we do have a pretty good schedule coming up of conferences that we expel, hopefully, we’ll see some of you over the next few weeks. Have a great evening. Thank you very much.

Thank you.

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