Good day and welcome to the Capital Senior Living Second Quarter 2017 Earnings Release 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 and good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living’s second quarter 2017 earnings call. It is truly a pleasure to welcome Brett Lee to our management team as Executive Vice President and Chief Operating Officer. Brett will join us on August 14 from Tenet Healthcare where he serves as Chief Executive Officer of the North Texas and Dallas markets. Brett's experience also includes serving in senior leadership positions in four of the nation's top 10 children's hospitals. We are excited to have someone with Brett's outstanding leadership abilities and strong record of operational success within the healthcare services sector to join our company. He is a passionate and committed healthcare executive with the results oriented focus. His experience as a clinician, clinical leader, and executive will be a tremendous asset to our management team and our residents. Our occupancy improved in the second quarter following the severe and prolonged flu season earlier this year and our average monthly rent increased a robust 2.1% in the first six months of the year which annualizes to a 4.2% rate of growth. Despite the impact this year severe and prolonged flu season had on our first half 2017 occupancy in revenue, we are encouraged by strong second quarter demand trends as evidenced by a 6.3% increase in same-store net deposits and a 3.6% increase in same-store move-ins compared to the second quarter of 2016. This follows a record number of deposits and move-ins in March for this year and since February we have enjoyed a net gain of 104 units of occupancy through July 31 as we continue to rebuild occupancy across our portfolio. It is important to remember that financial occupancy gains lag physical occupancy results and I am pleased to report…

Thank you, Larry and good afternoon everyone. The Company reported total consolidated revenue of $116.7 million for the second quarter of 2017. This was an increase of $5.7 million or 5.1% over the second quarter of 2016. The increase in revenue is largely due to communities acquired during or since the second quarter of 2016. Revenue for consolidated communities excluding the three communities undergoing repositioning lease up or significant renovation and conversion increased 5% in the second quarter of 2017 as compared to the second quarter of 2016. Our operating expenses increased $6 million in the second quarter of 2017 to $72.9 million due primarily to the communities we have acquired second quarter 2016, as well as an increase in contract labor cost versus the second quarter of 2016. Most of the increase in contract labor cost was isolated to 10 communities, several of which were recently completed conversions of units high levels of care and were required as staff on hand before they could admit residents. The contract labor was needed to cover open nursing assistant’s aids and orderly positions. Regulations required such staff in place so we had these contract labor to temporarily fill those gaps. We expect contract labor costs to come down from the second quarter levels in the third quarter as these roles are filled with permanent staff. Our general and administrative expenses for the second quarter of 2017 were $6.1 million compared to $5 million in the second quarter of 2016. Excluding transaction cost from both years, our G&A expense increased $1.1 million of the second quarter of 2016 primarily due to an increase in net healthcare expense which is a net of our healthcare claims and our employee benefit income. Our net healthcare expense was $1.125 million in the second quarter of 2017…

[Operator Instructions] We will go first to Chad Vanacore with Stifel.

Carey, did I just hear you say, guidance, CFFO, or $9.6 million to $10.8 million and that was higher than this quarter - or didn't I hear that completely?

It’s $9.6 million to $10.8 million. We have the - kind of a $2 million that we’re starting off lower in the third quarter versus the second quarter because of the seasonal expenses and the workers comp credit that we had in the second quarter to compare the third quarter to second quarter. But then will benefit from improvement in contract labor cost, the improvement in net healthcare expense. And then we expect nice growth in occupancy in the third quarter based on the increase we had in physical occupancy in June and then again in July. So, our revenues should be - should increase associated with those financial occupancy gains in the quarter. So, just exactly where we’re going to end up in that range will depend on the strength of our financial occupancy growth and just how much savings, we’re able to achieve in the contract labor cost and healthcare expense versus the second quarter.

Just thinking about third quarter CFFO again, is that down because of seasonality or is it down because of this genuine labor cost?

It’s down primarily because of the seasonal incremental cost, which is the same thing we have in every third quarter - third quarter of every year. So we always start off with that kind of $1.5 million bogey if you will every third quarter.

And just thinking about the demand expectations, how do you reconcile that improved demand expectations with any drop in occupancy you saw this quarter. It looks like you expect 30 basis points of increase in occupancy in 3Q. Both move-ins were up 3.4%. Can you reconcile all that for us?

If you look at the monthly performance, we had a net gain, again we lost about 270 units of occupancy in January and February. We gained 56 units in March. We lost about 30 in April. We picked up 17 in May, 42 in June, and we’re up from that in July. Over the period since February, we have a net gain of well including July over 100 units and that is what has translated into the financial occupancy of about 30 basis points that we expect for July.

That’s for just for July, not for the third quarter. It could increase more than that as the quarter goes along.

If you look historically in the third quarter, we typically in 2015 we picked up 80 units in the third quarter. Last year we picked up about 50 units. We had some attrition it was in July which is unusual, we lost 45, so a nice swing there. We had 88 gain in September of '16 and a gain of about 76 in August '15, and 40 in September. So, if you look at right now, the demand we’re seeing with our lead bank has a nice spread between deposits on hand and move-out, now, this is - obviously we can anticipate presence that move-out because they pass away or higher lows of care. Other than that, if you look at basically the tours, the traffic, the lead generation and conversion, as I mentioned, we had a record in the second quarter of conversion ratios of almost 33%, our target had been 30, so we’ve outperformed that. And that what we’re hearing from the field is very positive. So, I think that we clearly had a deep holes come out. I think we're very - we are disappointed that the revenue is off as much of it is. We did had discounting in the second half of last year because of higher attrition that we saw last year in the third quarter. We stopped the discounts, we stopped concessions. We got great rate growth since January and still building demand. So as I said, it's really what happened in January that filters through the balance of the second and third quarter because of the fact that we had a deep hole of the fundamentals in the quarter we’re actually very good in all aspects. Quite frankly this the first quarter, first month in July in sometimes that we have a sequential gain in financial occupancy, and as I said, it sounds pretty encouraging from the field based on the numbers we’re seeing through the close of business yesterday, which is July 31. As I say, we have a nice spread right now in deposits on hand to move that notices. That should manifest for the month of August.

And then just one more question for me now, hop back in the queue. On the $20 million acquisition if I may. Can you just describe location at the type in occupancy?

Sure, I can. The asset is in Northeast, it in one of our states. I don't want to get too specific of locations, okay. I believe it's 94% occupied. It's relatively newbuilding, it’s independent and assisted living and is very consistent with other acquisition we made in that part of the country and the seller we have high regard for. So we know we're getting up well performing property.

What kind of cap rate does that work out to you?

We don’t really give cap rates. But typically if you look at our acquisitions, we continue to be very consistent buying things on effective cap rate kind of mid 7s. And the cash on cash yield on investment consistently is that, 15% mid teen type of return and that is consistent with what we expect from this acquisition.

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

So in terms of the Q2 performance, so, it was just tiny - a little bit above the - what you outlined on the last third quarter calls. Can you just flush out, what would be sort of surprise versus what you are expecting for the third quarter?

Joanna, if you look at on - like on a per share basis the guidance was $0.39 to $0.42, we ended up at $0.39. So, it was within the range we provided, it was on the lower end. A couple of things, I think our occupancy has stabilized in the second quarter but if we had a little bit of growth that would have certainly improved our - and got us a little bit into higher end of that range. And we also anticipate higher health care cost in the second quarter. But that big spike in May – in May claims related to switching our healthcare plans was a little bit greater than we had anticipated. We also knew that we're going to have an increase in contract labor cost because of the additional staffing required for some of the newly licensed units and we kind of had a range for that and it ended that being at the higher end of our range for the contract labor cost. So, it was on the higher end of that. So, if that come in a little better that would help us reach the higher end of what we've guided to as well. So, kind of those three things are the things I would point to.

On the last point on this higher temporary labor, so you pretty much saying that Q3 is going to moderate from the Q2 levels on that cost just because you‘re going to sell the unit so to speak or just simply, temporary labor, I think you’re going to replace the labor with more permanent. So, is there any kind of additional cross or some fiction because of you had temporary labor, now we have to switch to permanent labor. I am trying to process, how to think about cost, for that kind of bucket in Q3 versus Q2?

So, the contract labor cost are going to - that wasn't they were temporary, as we knew we had to have staff in place for regulatory requirements related to the newly licensed unit. But we do plan on filling those positions with permanent staff and that will bring those costs down in the third quarter versus second quarter.

And Joanna to give you some perspective, the contract labor hourly rate is about 2.5 times the permanent hourly rate. We will have benefits for the hourly permit. But if you think about a net savings of 50% of that cost, that’s probably a reasonable assumption on the differential.

I was moving on to the next subject too. If you have something to add, we have to hear that first?

Thank you, Joanna, I think we got it.

So, the other question that I have was - we heard today from - agreed talking about some issues that are booked on, this specifically talk about some turnover that, they seem to at communities in terms of their excess I believe. So, can you just talk about any incremental pressure you are seeing there because it seems to me that this is caused by new supply. So, I guess, you are not competing for residential with this new communities that are opening out there but are you may be competing for employees with these other guys and if you do, how do you address that?

Fortunately, we’re not having that pressure. I give stock awards, the compensation into the grants awards to it’s best directors every four years. And we just had grants approved for the current third quarter and in that class we have an Executive Director that has been with us since 1988. We had an Executive Director that’s been with us since 1996. The turnover of Our Executive Directors is one the lowest threshold of our staff and it's been very, very consistent. I think that we’re very fortunate to have a culture in the company that really promotes longevity. Today, we had our quarterly town hall meeting and the corporate office I gave out awards going up to 20 years. We have a 25th anniversary of employee - corporate employee as well this month. I do think it's a difference of our investment in people and training. There is tremendous enthusiasm I mentioned about the sales training, that includes the Executive Directors. It’s very interesting. As an owner of the real estate that we operate 54% we generate a lot more cash flow then our competitors do. If you think about Brookdale with order leases if you think about that idea joint ventures and all those companies earning at management state. I know the CEOs of those companies pretty well, been around this industry we serve on boards together. They really are impressed that we have the ability to make investments in time management in systems, in training and that really sustains because people grow. The other thing that's really interesting is almost every one of our regional managers we made changes this year in regional managers to improve performance they all were Executive Directors that were promoted. We now have developed a plan to develop our own internal Executive Directors…

We’ll go next to Brian Hollenden with Sidoti.

As we move in to the back half of the year and considering your third quarter guidance are you guys anticipating year-over-year CFFO growth?

First it’s hard to say because we haven't got into the end of the year yet we’re not sure what the third quarter is going to do actually standpoint the fourth quarter. But I'd say the dip in January that it does really as Larry noted does carry through the balance of the year and it does make it – a challenge to grow year-over-year in CFFO.

And then just switch a little bit how sensitive is your acquisition program to rising interest rates?

Well as you know we borrow permanent financing long-term rates and 12-year financing that is off the treasury. Treasury really has moderated at a level that has been very consistent with what we’ve seen over the last six, seven years. Spreads continued to be attractive so we’re seeing that fortunately we have maturity that extend out six seven years on average so we don't have a lot of exposure of resetting rates as far as the permits of our existing debt which is our 4.6% and I say that’s very consistent with where the market is today and I'm not an economist, and I know people talk about growth in economy, but it doesn't sound like there is going to be a big spike in rates anytime soon. I will tell you that when we started the acquisition program in 2010 rates we’re probably about 200 basis points higher than they are today. And we were excited about the returns that we could generate at that level so I think that we feel pretty comfortable that we can continue borrow at attractive rates and terms and have that nice spread between effective cap rate on the yield of the acquisitions. The cost of our financing and as I said I think we’re pretty well protected from any movement I’ll also comment if rates really do move up because the economy starts to grow its the short-term rate that move faster and that is where pricing power lies because our residents to took view about fixed income. And we have to remember that we’re dealing with resident base that has been living on extremely low interest rates on their savings accounts and other fixed income since 2008. So organically we probably would see better organic growth if rates were to rise but I just don't sense. And Gloria Holland our VP in Finance, so I’ll ask Gloria if you read but I just don’t sense that well anyone's talking about much movement in the rates.

No, I would agree we're not hearing that in the market we’re in.

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

I just wanted to ask about the owned versus the leased portfolio. I don't know how you guys think about but I think your shareholders so because seemingly there is a lot of value most of the values in the owned portfolio which in the second quarter performed much better than the lease portfolio just looks like occupancy was better, NOI 5.5% growth versus a 4% sequential decline in the first relative to the lease portfolio. So can you tell anything that’s going on between the two or even if you think about them differently?

We don’t only see about them differently they are different. The leases are typically older buildings there is more independent living in the leased portfolio. But the acquisitions have been newer than the markets, better performing. I will tell you that going through the leased portfolio and we’ve spoken to some landlords about it, there is probably three or four buildings that we would like to sell. We think the market have turned and it’s point to sell it’s not competition, it’s just change of local economies and there is couple of buildings where it always been competitive for the duration of the lease. And then we did have the attrition in the first quarter. The feedback I guess I asked the same question Dana is that most of those buildings are recovering in occupancy and probably will recover most of the occupancy throughout this year just taking a little longer but it just has to do. We don't think about them differently. There are some leased properties in Texas that do have some competition in submarkets which we spoke about previously, but they have actually started to recover. But I think it's really maybe even more random than anything else that we just had higher attrition in some of the lease portfolio and it’s taking longer to rebuild than the own. But there is no difference in the way that we think about it. And then are couple lease properties I know also who had some conversions that was very disruptive that caused some loss of occupancy and as that changes that will rebuilt. And we've seen I mean yes, some of these buildings have actually seen a very significant increase over the last couple of quarters. The others have to catch up, but my sense is that these buildings with the exception of the three or four that we probably would like to sell our landlord to sell because of change in market. We think we’ll get back to the same level of the owned portfolio.

Switching gears on the conversion Carey, I think you said they could stabilize in a matter of minutes, but then I think you corrected?

That was not a Freudian slip either.

I was just looking at your - you got the updated slide deck here and it look like completions by quarter - so the 214 do complete in the fourth quarter of this year they should be your expectation would be stabilization within 12 months correct?

That's right.

And that holds true of the bucket completed in 1Q, 2Q and then I guess a small amount 3Q?

Yes, so it's actually the three that are undergoing repositioning and lease up those are - those will be added back when they reach stabilization which is the - I don’t have the time permit, it's 186 plus 249 units - that are completed as of the second quarter. And we also come back in as re-stabilization now the other units on top of that are ones that there are 84 units that had been completed as they lease up they’ll add to our numbers. They’ll add to our revenues in our EBITDAR and CFFO. And the same for the 24 units in the third quarter and then in the fourth quarter there is 202 units that are related to one of those - the third repositioned community and that will add back after it stabilizes in approximately 12 months. The other 31 units will add back as their lease step over time.

And remind me stabilization is 90% occupancy?

Yes, approximately 90% occupancy yes.

And then and - your CapEx has been accelerated last few years. What's the expectation for full year CapEx this year and then how should we think about that in the 2018 and beyond.

So we had $21.9 million of CapEx in the first six months of this year. As I noted on the call I think it will taper down quite a bit in the second half. We currently project somewhere around $12 million to $13 million of CapEx in the second half of the year versus $21.9 million. Now that’s on a gross basis so on a gross basis that’s somewhere around $30 million to $35 million but on a net basis we will get reimbursed for some of this - at some of the leased communities by our REIT partners. So on a net basis through the first six months, our CapEx has been $18.2 million and I think that the year it will be probably between $25 million and $30 million on a net basis. So $30 million to $35 million gross, $25 million to $30 million net in 2017. As we go forward to 2018 and 2019, they’re going to moderate quite a bit. I think back down into the more $15 million kind of range on an annual basis in 2018 and 2019 forward.

So at this point no big projects prepared for 2018?

This is coming end of it. I mean the Canton town centers obviously Canton is now complete, shall be completed later in the year. We meet every other week we go through this with our operational and asset management team. Now they just kind of 10 units of memory care at a building lot of them are just license share or fairly insignificant cost related to it. And the other thing it's nice is that because we put so much money into our buildings over the last two years, they’re pretty good shape. So as far as recurring CapEx we don't have many big projects that have to be out there to refurbish and renovate. Now over the last two years we spent over $100 million in CapEx so we spent the money and now would like to see the results obviously on the lease up and in the profitability. So I think we’re pretty good position over the next few years that we can moderate the CapEx. We do have kind of a three-year plan we go through and look that - so I think that will remain pretty well controlled over the last several years.

Just last one, the M&A pipeline looks like you’ll probably be lower this year in what you've typically allocated for M&A. Anything change in the pipeline or anything changed in your appetite for acquisitions?

No, we had $85 million acquisition in the first quarter. I think we said in the second half of the year about $50 million. We have announced 20, there's other things out there. So that’s probably a reasonable number, it’s kind of what we did last year. We just stay very disciplined. We’ve underwritten about $0.5 billion of acquisitions to the first six months. Our pipeline continues to be steady there are other buyers out there. We've lost some marketed deals to other buyers that are paying more than we are and we had a number of deals that we actually kicked out in due diligence that we went in and just felt that the maturity level of the residents some of the aspects of the buildings, we just knock things that we wanted to purchase so we backed off them. So we’ll remain disciplined we have so much growth to the convergence and other repositioning right now that we have a nice balance of those growth drivers. The organic the conversions and the acquisitions that we can sustain high double-digit type of cash flow growth as we execute and just remain disciplined on the acquisition side.

[Operator Instructions] It appears there are no further questions at this time. So I’d like to hand the call back over to Mr. Larry Cohen for any additional or closing remarks.

We thank everybody for your participation. As always feel free to contact Carey or myself if any questions. I wish everybody a good end of summer and sure we'll see many of you as the conferences start to pick up again in September. Thank you very much and have good night.

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