Good day everyone and welcome to the Capital Senior Living Third 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 and good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living’s third quarter 2017 earnings call. I am proud that Capital Senior Living has developed a track record of operational excellence over the years. That said, more recently, I have been disappointed by the operational and sales challenges that we faced. It is frustrating for all of us to experience these headwinds. Though I am confident in our key initiatives and I'm pleased with the progress that is already underway to improve performance. We have made a number of broad based [Indiscernible] and operational changes that are restoring and strengthening a culture of high reliability. We are taking immediate action to overcome challenges, drive sustainable profitable growth, and enhance shareholder value as we execute a comprehensive strategy to deliver higher revenues, enhanced cash flow, and maximize the value of our owned real estate. Let me outline a few actions we have actually [Indiscernible]. We eliminated rent concessions and simplified pricing. We restructured incentive bonus programs for Regional Managers, Sales Directors, and Executive Directors to allow performance with corporate financial goals and enhance accountability. We're restructuring our sales and marketing organization to instill greater accountability and drive operational excellence. We also introduced a formal sales training to develop stronger skills and increase closing ratios. These initiatives have focused and empowered our sales organization by providing metrics-driven objective growth targets to build and sustain occupancy. We strengthened our leadership team by hiring tritely as Brett Lee as Chief Operating Officer. Brett has a proven record of operational success within the healthcare services sector and brings valuable experience leading operations with complex care delivery environments. We're building a global centralized robust operating platform to improve all facets of community operations to better serve residents. We…

All right. Thanks so much Larry and good afternoon everyone. I am excited to join Capital Senior Living at such a dynamic time in our history. This company has grown significantly over the past several years both in terms of our physical footprint, but also in terms of the acuity of the residents we serve as we have shifted more of our available capacity to assisted living and memory care units. Capital Senior Living has traditionally espoused a decentralized operating model with a great deal of autonomy held at the individual community leadership level. Well, there are significant benefits to empowering local leaders to thrive within their unique markets, too much decentralization does not allow us to take advantage of the economies of scale that come with being a larger company and can also lead to variation in resident experience and financial performance. We have, therefore, decided to implement a new standardized operating model which focuses on a centralized approach to creating more uniform performance around five core pillars of quality, service, people, cost, and growth. Some key elements of this operating model include initiating daily safety hurdles that each community that focus on tracking and improving performance in key operational and financial metrics, rolling out a uniform customer service platform across all communities, evaluating all major expense categories to maximize GPO utilization, and opportunities for aggregation into regional or national contracts to gain economies of scale; centralizing certain support functions such as accounts payable to optimize our supply chain functionality and reduce the administrative burden on local operators; establishment of budget management templates, focused training for Executive Directors on a real-time financial management, comprehensive sales training for Sales Directors, and the creation of detailed metric-driven growth plans for each community. While we are still early in the rollout of…

Great. Thank you, Brett, and good afternoon, everyone. We're pleased to report third quarter results that exceeded our expectations coming into the quarter as a result of the excellent job our operating team did and executing on the revenue and expense initiatives that Larry and Brett have noted. Our same-store occupancy and revenues increased and our operating expenses decreased as the third quarter progressed, resulting in a strong finish to the third quarter in September. In addition, the changes through our employee healthcare plans that took effect in June of this year resulted in significantly lower net employee healthcare expense in the third quarter as compared to the first two quarters in 2017 and of the third quarter of last year. Two of our communities in Houston were impacted by Hurricane Harvey, sustaining flood damage that's resulted in the temporary suspension of their operations. We've proactively evacuated our residents in these communities to ensure their safety. Most of the residents went home with their families, while 20 transferred to other Capital Senior Living communities in Houston and other cities in Texas. Remediation is in progress at these communities and both are currently expected to begin admitting residents in early 2018. Our property and casualty insurance is expected to cover all the damage to the buildings and our business interruption coverage is expected to restore the economic loss related to the suspension of operations. Our deductible for the total claim was $100,000, which we recorded in the third quarter. In the third quarter, we recorded a business interruption or BI adjustment of $658,000 to cover the last seven days of August and the month of September. The intent of the BI adjustment is to cover our lost revenue and any continuing expenses that we have with the goal to restore the…

[Operator Instructions] We'll go first to Chad Vanacore with Stifel. Your line is open.

Hey, good evening all.

Good evening Chad.

Hey, Carey, I just want make sure I heard you right. 2018 expectations average rent up 3%, average occupancy 60 to 90 basis points gain?

That's right. [0.4]

Okay. And then just to get back here occupancy--

Like I said Chad we are -- that is our goal, yes.

Okay. All right. Just thinking that occupancy in the fourth quarter, you said you expect to maintain the gains from the third quarter. Should we expect that to increase from here or just stay flat?

As I think about -- we ended the third quarter at a higher level than we began the third quarter -- than we averaged in the third quarter. So, I would expect our occupancy to increase in the fourth quarter as it relates to the third quarter.

All right. And then what have you seen as far as the first month of occupancy in 4Q?

We're up about 20 basis points financially in October versus September. We don't have the full financials yet, but that's a pretty good estimate of where we are. And again we anticipate that typically there's some seasonality around Thanksgiving, so that we typically pick-up around the holiday seasons in December. But we are off to an increase in October over September. And again, we continue this trajectory of improvement from the trough that we hit back in February.

All right. Sounds like a pretty good trajectory. And then just thinking on the expense side, you mentioned that use of contract labor as being an issue. Have you been addressing that? Also I think in the past, healthcare claims have been an issue, have we lapped that challenge as well?

This is Brett Lee, I'll be happy to address the contract labor issue. What we've done systematically to drive down contract labor cost is to create more regional and market-based labor pools that are our own employees where we can share that staff between our existing facilities within a market and have less reliance on external contract labor. We're also finalizing a contract with a third-party that will serve essentially as a middleman to negotiate lower rates for contract labor for us with our existing vendors. So, when it becomes evident that we have to use contract labor for short periods of time, the rate itself will be lower. But we were very excited through those strategies to see our contract labor returned to our historical levels. In September, we anticipate that it will be maintained going forward at that level or less. And I'll let Carey talk about the healthcare claims.

On the healthcare side, Chad, we have had a really good experience since we changed those plans on June 1 and since that point in time, we've had a small credit in each month. That's the net of our employee reimbursement that we receive for the healthcare and the healthcare claims that we have to pay out. And so that's been a credit on a month-to-month basis since June. I would expect that kind of experience to continue as we go forward, maybe not having credits, maybe there will be some level of expense in that category. It's hard to project that going for that kind of positive experience for -- [Indiscernible]. So, I think that will be very good -- especially as compared to the previous year.

Yes, I mean I think that the restructuring, Chad, of the healthcare program back in June has demonstrated for five consecutive months that is effective, both in reducing costs and becoming more sustainable as far as an expense item.

All right. So, last question from me. Historically, you've averaged around $150 million annual acquisitions; you don't expect anything until mid-2018 this year. Should we stick basically about half that historical average or a large ramp up in the second half? And then just as an entire [ph] question, what's the best you shifting your capital at this point?

Chad, as Carey said, we're looking probably about $50 million of acquisitions in the second half of the year. Obviously, we'll be in the market to start the due diligence process and have transactions closing in mid-year. Right now, the best use of our cash is to grow the cash in the balance sheet. CapEx will come down quite a bit next year. We have spent, I think, $130 million in the last three years on properties. I think one of the benefit that we're seeing in these nice improvement in our occupancy and rate is just the improvement in our physical plan because of all the investments we've made. So, we are going to build up the balance sheet, strengthening the balance sheet and I think be in a very, very strong position to be acquisitive stoning in the middle part of next year.

All right. Sounds good. That's it for me. Thanks.

Thank you.

And our next question comes from the line of Joanna Gajuk from Bank of America. Your line is open.

Thank you. Yes, so, the question I had first had it's around third quarter performance since it came better than expected than your guidance, what were the drivers for that better performance?

Well, Joanna we had good occupancy growth in the third quarter and our expenses came in better than we would have expected coming into the quarter. Also as we came into the third quarter, we just had one month of experience on our new healthcare plan. So, I was not yet comfortable projecting that level of experience with a full quarter and we actually did have that level experience for the third quarter. So, those are the main drivers. Just a real focus on expenses and occupancy growth that was good in the quarter.

And Joanna, hi, it's Larry. I mean the initiatives that we introduced in August really made a difference. We've put out templates. We've put out recovery goals and objectives to each of the communities. I want to thank Brett and the whole operational team, the corporate staff, the regional staff worked really hard in putting out numbers and I want to congratulate and thank the on-site staff for outstanding performance. They actually exceeded expectations in the savings and what's really encouraging is there's a culture shift where as we said this level of expense management and expenses should be sustainable into the future.

Okay. And I guess on that front, when Carey talked about the outlook for -- or your goal, I guess, for occupancy for next year is 60 to 90 basis points, but obviously since much better traction down in August, is it going to be for this year, but nevertheless I guess it's somewhat lower than maybe what you would have been talking about in five years. So, can you just flush out exactly what you expect the drivers to be for this occupancy program? And just confirm that this is a year-over-year increase or this is from the end of 2017 to the end of 2018?

It’s a year-over-year increase, the 60 to 90 basis points.

Joanna, I think the big difference in the outlook is more conservatism in the first quarter. We've had a couple of years, typically this past year, with the prolonged flu season where we really lost significant occupancy, as did the entire industry. So, we have reduced the occupancy growth that we anticipate in the first quarter because of flu or potential weather. Hopefully, we'll be better than that, but that's what we're being cautious and being conservative and then rebuilding. Again, I am very encouraged by the fact that in 90 days, we improved occupancy by 90 basis points from June. It's grown more in October and we're looking for I think nice growth over next year. I'm also again really pleased with how widespread the improvement has been throughout the portfolio. So, I think that all of the initiatives, the training, the accountability, the investment we've made in the real estate, the staff, and other changes we'll be making should yield a nice increase in occupancy and rate for 2018.

All right. So, you're saying that you expect a sort of another strong flu season or you're just kind of more conservative on Q1, I guess [Indiscernible] from just month?

We're more conservative. There's nothing to indicate that the -- about flu season. We're just being conservative as today -- as the outlook goes.

Okay. And then the last piece in terms of the commentary around next year, so when you talk about the CFFO increase of 10%, are that similar -- that's a year-over-year increase you're talking about here for the year?

A year-over-year increase from wherever we finish 2017, growing that by about 10% in 2018.

And then you were saying that you're going to include those three large communities despite the fact that they were not stabilized at this within 2018, correct? So, are you saying there is going to be a drag to CFFO? Or they are going to contribute something?

No, there will not be a drag to CFOO. There will be -- they will start out -- their contribution will be modest at the beginning of the year, it will grow through the year and be more significant at -- obviously, in the fourth quarter and into 2019. By the middle to end of 2019, we should see most of that full contribution that I noted of the $4 million to $5 million in CFFO from those communities.

Okay. And then if I may just -- a last one on different topic. In terms of [Indiscernible], you still have families, so it's very I mean -- it's great that you own more than 60% of your assets, but there are still some leases you have. So, can you just remind us in terms of where you stand on your lease escalators?

Yes, our lease escalators, they're generally 2.5% to 3% depending on the particular lease agreement.

Great. That's all from me for now. Thank you.

Okay Joanna.

[Operator Instructions] We'll go next to Dana Hambly from Stephens. Your line is open.

Hey, thanks. And Brett, welcome. My first question is for you Brett. Thanks for all the details on centralizing the model. And it actually does sound a little overwhelming and it sounds like its producing good results, but I wonder if you notice any difference in employee turnover at either the Executive Director level or the Sales Director level as you implement a lot of these changes?

Yes. No. Thank you for the welcome. I'm excited to be with the company and really I have been incredibly impressed with how the leaders across the organization have responded to what we've put in place over the last couple of months. We have tried to arm them with the tools that they need to be successful as we've rolled out these budget recovery templates, the very metric-driven sales goals. We've accompanied that with a significant amount of training both around financial management and the ability to track their P&Ls in real-time for the Executive Directors and this very focused sales training for the Sales Directors. And I think they have really appreciated the investment that this company is making in them. I have a weekly call with all the Executive Directors as well as the Sales Directors across the company where we have an opportunity to talk through what's going well and what we need to be doing to help them more globally. And then I think the overarching message that we are trying to create organic value here at the home office through some of these broader scale initiatives as we look to create economies of scale where we can regionalize or even nationalize some of these large expense categories and take the entire burden of saving expense from the local level to the home office level with some of these large expense categories has resonated well with them. So, we really haven't had any increase in turnover in any of our leadership levels and I think the tenor across the company is incredibly positive as we move into the fourth quarter.

Okay. Good to hear. And then either Brett or Carey, on the G&A expenses going up next year, you mentioned some investments, what kind of magnitude are we talking and what type of investments are you talking about?

Yes, we're still working on the magnitude side of that, Dana, but it's -- I can let Brett and/or Larry speak to -- Larry speak to it, but we need -- there are some investments we need to make on the people side, both in my area and IT area. There are some IT initiatives we need to put in place. We've been working on and we have those schedules for implementation next year. And then Larry you might want to speak?

Yes. So, as Carey said earlier, there are some things in the operational teams that we're going add to support the movement to a more centralized process. As Carey said, accounts payable is one area as well, take that odd, so that would more in corporate office and more staff to accommodate. There should be obviously the ability to see some benefits at the property level because of the fact that the Executive Directors and Sales Directors won't have to worry about some of these [Indiscernible] of issues that will be handled properly. But again, as part of this strategy, there will be some costs that are planned to be incurred in 2018, which we think will be beneficial. And I think almost every investment that we made will have a very attractive payoff -- payback. So, they really should pay for themselves in increasing revenue and cash flow.

Okay. Okay. And then Carey, again, I was a little confused on the deductible and the BI adjustment and I think you mentioned it was a net positive of about $450,000 to cash flow, is that correct?

Well, I was actually -- that was for the whole quarter, $450,000 for those two communities with that are -- or those two eastern communities. Just speaking of the BI itself that we got in the third quarter was $658,000. And the net impact to us from a positive standpoint in the third quarter just related to BI would have been somewhere around $180,000.

Okay

So, -- but that's normal course for those two communities. It's just -- that's just replacing what we would have had to them in restoring that loss.

Got you.

[Indiscernible] it restores a loss cash flow from those properties or the income, while they are closed and while they are re-leasing up until stabilization. Basically--

That makes sense. Yes, all right.

Yes, that's all right.

That's all.

Yes, all right. So, had those has been open, the net impact on cash flow is really negligible, right? Had those facilities been open, that would have been the contribution?

Basically the deduction of $100,000 deductible, we are reimbursed for all -- to put us back in the same position we would have been had those properties continue to operate.

Got you. Sorry, I made that more complicated than it was. Lastly for me, you mentioned one facility in Massachusetts due to state regulations, what's going on in Massachusetts? And are you seeing any other states REIT operate having similar discussions?

It's, I think, unique to Massachusetts. There's a new regulation that was put into effect in 2017 regarding staffing on memory care. We have a building that has two floors of memory care. We have been working on expanding the memory care at this building, which was about 90% occupied earlier this year. So, we had demand that we wanted to fill up by adding another five units, 10 beds. And based on the regulation, there was an interpretation that we would have to triple the staffing each shift because the state believes that having two floors and fire doors separating the existing operation of beds with an additional 10 beds will be three distinct units that would put in six FTEs per shift versus two. That obviously would be very expensive. So, what we're doing is we're moving everything to one level and one contained unit to be able to staff more traditionally and not be impacted by the new regulation.

Okay. That's it for me. Thank you.

Great. Thank you.

And we'll go next to Brian Hollenden from Sidoti. Your line is open.

Hey guys. Thanks for taking my call.

Hello Brian.

As you move from a historically decentralized organization, what are the largest drivers of savings that you expect to realize in 2018?

Yes. I think in addition to just some of the continued labor savings that we experienced and will continue to experience going into 2018, our biggest opportunity is around our large expense categories like food, which is our second largest expense category, utilities and the like. When you look at utilities, telecom, cable, we have 130 different contracts today. If we centralize those, we can not only get more reliable service, but we can get better rates going forward. So, we anticipate through some of the consolidation and centralization, we should be able to become much more competitive there going into 2018. Around food cost, although, we participate in a GPO and have for years, because we've been so decentralized, we've got tremendous variations across the company. In terms of our compliance with those contracts, our cost per meal varies across our company significantly from a low of $2.50 per meal to a high of $10. So, we'll be looking to standardize our menus more effectively, trying to continue our process that we've done over the last couple of months in reducing our food wastage. But by centralizing some components like accounts payable, it also allows us to make sure that we're maximizing utilization of our GPO contracts, but also taking advantage of prompt pay discounts that that will more than offset the cost of adding those at the ease here -- at the home office. And so it's really just this general concept of being more thoughtful about how we act as a larger company and in these large expense categories really trying to centralize that spend so that we can reduce variation and maximize the opportunities that we have under a GPO relationship.

Thanks for that color. So, what is driving your decision not to make acquisitions until the middle of 2018?

Brian, the way that we have pursued the acquisitions involves the regional staff, corporate staff. These initiatives are so valuable and if you look at even with the improvement of occupancy, we still have 1,400 units that we could sell. The return on cash flow, EBITDAR our contribution, improving the performance, and training those units far exceeds the return on the investment we make on acquisitions. So, we really want to have this focus of the recovery we've seen to be sustainable and other improvements that we plan to implement into 2018 and really have a position where we're much better established with a stronger foundation to take on additional acquisitions, which also will benefit from these other initiatives that we're speaking about once we acquire them. So, we think it's prudent to take a pause right now, focus on these various initiatives, keep people focused on carrying for residents, operating the communities, improving the occupancies, and then setting a very strong foundation to continue the acquisition in the second half of next year.

All right. Thanks. And then last one for me. Can you give an update on any new supply growth in your geographic regions?

If you look at the slides that we just filed, the slide 11, we update this every quarter. I would say that, we again, have been fairly well insulated from supply in most of our markets. If you look at the top 10 highest construction markets in the country, we're only in about -- only about 2% of our units are a one market, Columbus, Ohio, where we have 111 property community --- 111 unit community, that's 97.4% occupied. So, we -- again, we still see the North Dallas market is being competitive. One thing that's interesting is we had -- I talked about the improvements in the quarter. Occupancy and properties that maintained 100%, a lot of those are in Texas and other markets that people consider as being over-built. Houston, which had been a focus market, the day before Hurricane Harvey, we were 91% occupied in the Houston Metroplex. So, I think that the widespread improvement in occupancy that we're seeing, the fact that our median occupancy is 89.4%, highlights the fact that that's not an issue, again, in most of our markets. And quite frankly, those properties still are lagging, with the exception of one property in the North Dallas market really are not [Indiscernible] in markets with their supply. So, we continue to be very well-insulated. The other thing I would just reiterate, our supply, it is very clear in speaking to our lenders, feedback from the conference that for those two years now, banks have really cut back on construction lending and those developers who are getting money, they're finding that they're run to cost is increasing. There's more equity going into properties up to 40%. Their pricing has increased by 50 to 100 basis points. And the other effect of Hurricane Harvey and the hurricanes in Florida and other disasters, California, really have increased all the cost of the components like lumber and other parts that just make it even more expensive to build and delay building because there's such a shortage of construction workers. So, I think for the industry, the outlook is pretty encouraging, that we'll see a slowdown in supply. [Indiscernible] has reported for a number of quarters now that starts are down. I think starts are down to less than half where they were two years ago. But, again, I think the widespread benefit that we have seen in the quarter in improvements around our portfolio demonstrates once again that we're not being impacted by new supply.

All right. Thank you.

[Operator Instructions] We have a follow-up question from Joanna Gajuk from Bank of America. Your line is open.

Hi, thanks so much. So, on the commentary around 2018 outlook, I know you are not able to quantify the G&A increase, but you were saying that it would be offered by expenses, but can you just give us some color on what you expect for labor costs? Because I know this year you've training higher, so what do you expect, I guess, the increase to be next year? And how does it compare to either year-to-date or what do you think it's going to be for 2017?

I think on a -- Joanna, they should be somewhere around 2.5% to 3% level. I think that's going to be a pretty normal level for us in 2018. And the level whether it's 2.5% or 3% is going to depend on how much of the sustainability of the expenses we're able to achieve. So, I think that should be the range for labor.

Okay. And then so for -- but then for 2017, what do you think is going to be for all four quarters, I guess?

All four quarters, probably in -- closer to the 3% level.

Okay. And then if I may on the front [ph] line on the quarter, in terms of your commentary about how September was very strong. So, it seems like pretty much versus July, August, they were weak, but what I'm just now thinking about is in September, typically the best month for -- off to three months in the Q3?

It is typically a good month, partly because it has 30 days as opposed to 31. And July and August both have 31 days. So, you have $600,000 less in expenses just from having that one less day. And then we had the improvement that we had and in so many areas because of the initiatives that were put into place. So, while it is typically better, we were much better this year than in the previous years in September versus the other two months.

Very good. You said that expenses were actually down right in the month of September.

They were. They were down 2.3% in the month of September.

Yes. Just say -- again, September-over-September was up 9.1%.

That's right.

September over June, another 30-day month, was up 10%.

Right.

We actually had the best NOI per unit in the history of the company in September.

Great. Thank you. That's all for me for now. Thanks.

Thank you.

And that concludes the question-and-answer portion of the call. I'd now like to turn it back to Larry Cohen for any closing remarks.

Well, first of all, I want to, again, thank and welcome Brett to the call today. I thank you all for participating. As always, feel free to give us a call if there's any follow-up questions. And we look forward to seeing you over the next few weeks at some conferences that we'll be attending. Have a great afternoon, and thank you again for participating in today's call.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.