Good day, and welcome to the Capital Senior Living Fourth 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; risk of downturns in 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 very much. Good afternoon, and welcome to Capital Senior Living's Fourth Quarter and Full Year 2017 Earnings Call. I am pleased to report a positive finish to the year for Capital Senior Living with growth in our same-community NOI, adjusted EBITDAR and adjusted CFFO on both a sequential and year-over-year basis. Last quarter, I spoke about the broad-based improvements we started making across our operating platform, including improving all areas of community operations to better serve our residents, enhancing our management team, leveraging our operational scale, eliminating rent concessions and simplified pricing and restructuring our incentive bonus and health benefit programs, among other actions. We have been diligently executing on those initiatives to sharpen our focus on the areas that are most important to us, namely maintaining a culture of high reliability, accountability and operational excellence every day and in everything that we do. Our goal is to improve our operational and financial performance, drive sustainable and profitable growth and ultimately deliver increasing value for our shareholders. The initiatives we have in place are not a 1-quarter event but an ongoing effort to improve every day to strive for excellence and commit ourselves to a culture of continuous improvement. Brett Lee, our new Chief Operating Officer, has been instrumental in helping drive this change, and we are beginning to see the fruits of our labor. Turning to some operational highlights from the quarter. Same-community occupancy increased 30 basis points sequentially from the third quarter and improved 60 basis points from our trough in the second quarter of 2017. We saw a progress across our portfolio, with 11 more communities averaging 90% or better occupancy since the third quarter, and fourth quarter median occupancy increased 70 basis points to over 90% compared to the third quarter 2017. We also…

Thank you so much, Larry, and good afternoon, everyone. During our last earnings call, I shared that Capital Senior Living has embarked on a journey to implement a new standardized operating model, which focuses on a centralized approach to creating more uniform performance around our five core pillars of quality, service, people, cost and growth. I'm excited to report that we have made great progress in our efforts. Over the last several months, we have implemented a lean daily management system, which facilitates daily discussions of key operational, financial and quality metrics among our on-site community leaders to drive continuous improvement. We have retrained all staff and leadership on our new customer service platform, which will create a uniform resident experience in every community across our portfolio and drive improvement in our already industry-leading resident engagement scores. We have hardwired the standard staffing grids and budget accountability templates that were rolled out in the third quarter to sustainably rebase our expenses to our current occupancy levels and grow our NOI margins. We also believe that it is a sacred trust that is placed in us by the residents that choose to call Capital Senior Living their home, and it is a responsibility that we take very seriously. I am proud of the national public health initiative Capital Senior Living has undertaken on behalf of our residents in an attempt to mitigate the negative effects of this year's particularly virulent flu season. As Larry discussed, the staff training, preventative measures and infection control protocols that were rolled out to all the 129 communities in advance of the flu season have raised our level of competency in preventing communicable diseases of all types and should serve to protect and keep our residents healthier for years to come. While we were able to…

Thank you, Brett, and good afternoon, everyone. I'm very pleased that the broad-based improvements across our operating platform that Larry and Brett have described are already translating into excellent financial results. In the fourth quarter, we achieved same-store NOI growth of approximately 3%, a result that is significantly better than our senior housing industry peers, and both sequential and year-over-year growth in EBITDAR and CFFO as a result of focused execution on our initiatives. In the results I'll discuss in the remainder of my comments, and as we note in the press release, the company's non-GAAP measures exclude 4 communities that are undergoing repositioning, lease-up of higher licensed units or significant renovation and conversion. The non-GAAP measures continue to include the 2 Houston communities impacted by Hurricane Harvey since our business interruption insurance restores their economic loss. However, the company's statistical measures, as shown on Page 12 of the earnings release, exclude the results of the 2 Houston communities since they currently have no residents or revenue and to include them would make the statistical measures less meaningful. The company reported total consolidated revenue of $117 million for the fourth quarter of 2017. This was an increase of $1.2 million or 1% over the fourth quarter of 2016. Including the lost revenue from the 2 Houston communities impacted by Hurricane Harvey of approximately $2.2 million, our fourth quarter revenue would have been approximately $119.2 million for the fourth quarter, which would have been an increase of approximately 2.9% over the fourth quarter of 2016. Prior to the hurricane, the average monthly revenue for these 2 communities was approximately $750,000. Our operating expenses decreased $500,000 in the fourth quarter of 2017 to $71.3 million, even with $500,000 of additional expense in the fourth quarter of this year due to the acquisition…

[Operator Instructions]. And our first question will come from Chad Vanacore with Stifel.

So I'm just thinking about your outlook on higher occupancy for 2018. So what factors are driving that? And then how has occupancy trended year-to-date so far?

Chad, as I said earlier, for the first two months of the year, we lost about 50 units. Just to give some comparison, in the first two months of '15, we lost 107 units; '16, 64 units; last year, 272 units. So we are still at a much better place. Carey mentioned that our move-ins in January -- we don't yet have the February numbers -- increased 36% over the average of last three years, actually increased 60% over last year. It was the highest we've seen in the last three years of any month. So Brett detailed a lot of the initiatives that we have begun. We will continue those initiatives. We have great reports on traffic. We have metric-driven results. We have very little supply in our markets. We updated our slides, showing that only 1.5% of our communities are in the NIC MAP areas with high construction. And we feel very good about where we are and are expecting to see growth in occupancy throughout the year, and are again, very encouraged by the strong position that we're already starting in perhaps the worst flu season we've experienced in our career.

So Larry, how do we qualify the impact of the flu season in the first quarter? Because it sounds like the trend is worse than last year but you expect a tighter recovery earlier in the second quarter.

Yes, no. I think although the industry as a whole and the general population was affected pretty significantly by the flu season, through the efforts that Larry did a great job of articulating around and the efforts that we had across our portfolio, we were able to minimize the impact to our residents. Now Carey did mention that January just statistically for the senior population, there tends to the other diseases that causes death and attrition. So we did have a higher attrition rate in January than our normal run rate. But because those trends tend to normalized throughout the course of the year and we've minimize the impact of flu itself, we anticipate a much quicker bounce-back than we had last year and that's starting to prove itself in February already.

Okay. And then the flu season seems to be breaking out a bit. Do you think it's a little bit early to call that? In other words, what could actually improve that experience from now till into the second quarter?

Yes, so that's a great question. When you look at our internal data, we actually peaked in terms of number of infections in mid-January and have seen a rapid decline since then in each week. And we think the fundamental protocols that we put in place in terms of appropriate hand hygiene, education of our staff, isolation protocols for symptomatic residents, shutting down public areas and common areas when we've got an outbreak in a community to mitigate the impacts of additional infections, those are protocols that we will have in place on a continuous basis even outside of flu season to protect us from other communicable diseases. So although the flu season may continue on for a few more weeks, we feel like we've got fundamental processes in place that will protect us going forward.

I invite everybody with the 8-K filing tonight. We filed a special issue brief that is in conjunction with the American Senior Housing Association, that provides great, detailed information, tracking information, education protocol with actually lessons learned and shows the weekly impact of the flu. The other thing I'll comment, while there was flu in almost 95% of our communities, it was limited to one resident, and that is the effectiveness of the protocol we have put in place. And the reason that we filed this brief is we feel so strongly that this will help the entire industry combat flu in future years. It's something that happens every year. It should not be an excuse. It's part of our business, it's part of our DNA, it's what we do. And to provide the right quality to our families and residents, we have the responsibility of taking precaution and having the best measures possible to protect the wellness and health of our residents and employees.

All right. And then you laid out a pretty proactive plan on operating expense. And if I'm right, I think in the third quarter, you garnered something like $3 million or $4 million of savings from the moves you made then. So given that you're rolling out a new purchasing platform in April and making other moves, how much incremental savings were in 4Q? And then what do we think the run rate savings by the end of 2018 get to?

Right. So in the fourth quarter versus the third quarter, we were able to maintain the decrease that we had in the third quarter. So I think we expect to continue to maintain those throughout 2018. They will compare favorably for the first 8 months of the year versus 2017's numbers. And then as we get to the last part of the year, then we'll have the lower comparables. And so there will be some variation there in expenses as we get there. But in the meantime, we will have these additional expense initiatives that we're going to put in place in the second quarter. So we haven't quantified yet fully the impact of these additional expense initiatives that are going to help us in 2018. As I said in my remarks, we think those could be as much as $500,000 to $750,000 per quarter in the third and fourth quarters. That could be more or could be less but just kind of in that range. So I hope that's helpful in answering your question.

I guess one more for me. On the $1.5 million credit that you received on the 2 properties that are closed. How long do you expect them to be offline? I think you had mentioned I thought second quarter but I might have missed that. And then when do you actually expect these properties to stabilize?

Right, so we expect to begin admitting residents in the second quarter of 2018. And I can actually let Brett speak to that in a bit more detail. And Brett, as to the timeline of how long you think that will take to fill up.

Yes, and so thank you for the question. We anticipate that we will begin admitting new residents, probably in the mid-to-late March time frame. We are already on the ground with a proactive public relations campaign and marketing effort and are already taking deposits for those communities. There is a significant component of the residents that were already in those communities that have gone home with families that have expressed a desire to come back to the communities. And so we anticipate that the ramp-up will be somewhat accelerated, but we will open those communities in phases. So we will have the benefit of the business interruption insurance to help to mitigate some of the ramp-up impact for the next 12 months, and our goal would be to -- be back to historical occupancy levels by the time that we transition off of that business interruption insurance.

Okay. And just one more piece of question on that.

Chad, to be clear about the 12 months on the BI, that begins once we have a CO for the communities. So it's actually longer than 12 months in total, but it begins when we have that CO for the community or certificate of occupancy.

Okay, got it. And then just the 4 communities that are closed now, did you say you opened up three starting January 1?

Yes, well they've been open. We just added them back to our non-GAAP results beginning January 1, 2018 because all the work on them was complete in the various levels of care. We had certain portion of their buildings open before. Now we're in the lease-up mode for all three of those. Actually, one of them is very well leased. Veranda Club is about 90%, and so that's back in our numbers January 1, as our town in Canton. Those will lease up as the year goes along and begin to impact our CFFO, as I described.

Okay. And then what's the incremental changes we should expect?

In 2018, approximately $1.5 million of CFFO impact from those three communities. You mentioned a fourth community. There is one other community that continues to be out of our numbers, and that will be out of our numbers throughout 2018. We would hope to be able to add that back in the first part of 2019.

[Operator Instructions]. Next we'll take a question from Joanna Gajuk from Bank of America.

So first on the quarter. It was better than your guidance in terms of the CFFO. So can you just talk about what was the surprise to the upside?

Yes, so it was at the high end of our guidance. Our revenues were really pretty much in line with what we expected for the fourth quarter, but we had a range of what we expected from an expense impact, and it was at the higher end of that range. So that's what really got us to the higher end of the range with the better expenses, Joanna.

Anything in particular on the expenses?

It's really labor cost. Labor was very impressive and what we're able to do on that end from that standpoint.

Joanna, it's Larry. And I'll let Brett speak more. We put in new systems and protocols in August on recovery and saving on expenses. It has been an effort that has really involved the entire enterprise, all the leaders at our 129 properties, our regional managers and our corporate staff. And they have templates every month of what they need to achieve. And it's been really incredibly successful and effective. And that's really what saved expenses and rebased our expenses going forward and why we feel so confident that we can accomplish the outlook that we spoke about for 2018. Brett, you want to give more color on that?

Yes, and I would want to emphasize one comment that Larry said. This is a project that we've taken on to systematize, to make it a core component of how we operate our communities going forward. And we went about creating and implementing standard staffing grids to make sure that we are staffing to our appropriate occupancy levels. We had a concerted effort around reducing contract labor, both in terms of oversight of general utilization so that regional approval is required for introduction of contract labor into a community, but also to try to shift that contract labor to more internal staff through the development of staffing pools in major markets, where we could have part-time employees that could flip between our communities and not rely so much on external labor. Those things are all sustainable that, as Carey said, have rebased our expenses around our labor that we've carried into 2018.

That's great. And on the full year outlook, can you just confirm the numbers? So the CFFO to grow 4% to 6.5% before deals, and the same-store NOI inside that is 2% to 4% increase, correct?

That is right, yes.

Okay. So then how should I think about the delta? Because I guess last time when we talked about the outlook for the year, you were talking about 10% CFFO growth, which I guess, included the deals in the second half of the year. So can you help us bridge between your commentary today versus 2 months ago in terms of the outlook for the year?

Yes, you're right. That did include -- that comment previously did include the acquisitions, $50 million of acquisitions, which the guidance today does not. Also, Joanna, we did say we were in the middle of kind of looking -- trying to compose our 2018 budget at the time. So we wanted to give an idea of where we could come out with that. And we'd probably at about 2 percentage points to our number to add those acquisitions, so it would be a little bit higher than that. But as far as where we are today, I think probably as we talked about this first -- the attrition in the first quarter, and January particularly being a little bit more than what we anticipated coming into the year is part of that, and -- but we feel very good about -- we still expect 40 to 60 basis points of occupancy growth in 2018. It just as -- it may happen a little bit differently. We may get some of that occupancy. We now expect to get a little bit more of that later in the first quarter and into the second quarter. So it kind of changes the timing of that a little bit, but we feel really good about that 40 to 60 basis points of occupancy growth.

Good because that was my second part of question. Because I thought that last time you talked about 60 to 90 basis points of occupancy increase, and now you say it's 40 to 60 maybe because the Q1 attrition so far you experienced was [indiscernible]. So then Q4, you made it sound like Q4 was sort of as expected. Was it the occupancy as expected or just the mix of that in terms of revenue as expected?

Yes, revenue was as expected. Occupancy really wasn't as expected. We've got 30 basis points of occupancy growth, and that was kind of the middle of our range of expectations for fourth quarter occupancy.

Okay. So then you're saying that occupancy, 40 to 60 basis points and pricing was pretty good this quarter. So you still expect kind of 3% range increase for '18?

Yes, we do.

Okay, great. And then if I may, just on this topic that you introduced in terms of doing more work with maybe acute care hospitals around ACOs. So can you just flesh it out? It sounds like there will be something -- that will be a first for the company in terms of doing something along these lines. So can you just give us as much detail, I guess, as you can? But first of all, are these Medicare ACOs? Are these commercial ACOs? Was it driven by the acute care hospitals? Or was it driven by CSU? And how far along are you in those discussions?

Yes, absolutely. I'll share with you what I can. And I think the great opportunity that we have as a company is to really truly define the role of senior living in the broader care continuum. We are serving an increasingly fragile seniors population that is the same population that hospitals, acute care systems and accountable care organizations are trying to put a supportive environment around. And we provide that medically supportive environment to coordinate care more effectively to manage chronic disease, effectively reduce hospital readmissions, and so there is a great interest from these acute care providers to help to work with us to define where we fit in that continuum. So these ACOs that we're talking with are typically sponsored by a large acute care system. And at this point, we're not talking about any kind of risk-sharing agreements. What we are talking about is sharing quality data with them to enhance our own outcomes. And then in exchange for that, we will essentially become a preferred referral source for their discharge planners, potentially even doing some work around respite care for folks who need to come out of the hospital for a period of time that are not safe to go home and are willing to pay a per diem rate. And what our experience has been is when people come in for a respite stay, many of them end up staying with us long term. So we anticipate that this can add a tremendous amount of value to the acute care systems because we can better coordinate care, we can reduce hospital readmissions, we can help them to manage down there post-acute spend overall for populations that they've assumed risk for. And it can also be a nice volume generator for us as well. So we're excited about the potential.

And Joanna, just to clarify, it will be only private pay.

That's right. Good to know that, Larry.

It's only private pay.

Only private pay. Okay. And you're saying so there would be more data? Or has it already started in a sense of exchanging the data or that's the goal for now and then at some point in the future, it will be more around risk-taking?

Yes. So we haven't contemplated risk-taking yet, but we are working with them collaboratively to develop a quality dashboard that we would both feel comfortable with would be a good representation of the value add that we can provide to an acute care system. We think that's going to be great for us as well and for our residents because it will challenge us to get even better at the care that we provide. So at this point, we're not contemplating taking risk. It will be more of a data sharing and a referral relationship. And we, again, think that we can help them to achieve some of their outcome goals in terms of reducing readmissions and coordination of care.

So was it initiated on their part or was it CSU active at pursuing those kinds of relationships with hospitals?

Yes, it was actually on our part pursuing these relationships both because we think we can truly add value to the overall senior experience as we look at that population, but also we believe that it will help us to get better in terms of the care that we provide by being proactive around measuring our quality and our outcomes. And acute care systems are well ahead of us in terms of the disciplines of data mining. And so we think this will really accelerate our efforts.

And I'll comment that Brett's background really is helpful. As you may know, Brett ran four of the largest children's hospitals in the country. He was the CEO of Tenet's North Dallas operations. So he brings a lot of experience and relationships with these organizations. So it's something that he's done very well in his career. And now we're formulating that to what we do on the private-pay senior living side.

Our next question will come from Brian Hollenden with Sidoti.

Can you provide some additional color on occupancy in December? How many communities were a 100% full and how many were below 80%?

I'll grab that data for a second. We're pulling it together.

Brian, I think that one we'll have to get back to you on. I don't think that the materials we have, have the breakout. I have some quarterly numbers but not the December numbers. But I have to find that as well.

Okay. And my last question is just more longer term. So given the guidance, just beyond 2018, is the right way to think about CFFO growth in mid to high single digits? Or are there opportunities to grow organically at a higher rate? And if so, is it how? By expense controls?

Yes, I mean, I think, we'll see greater growth. Just speaking broadly, Brian, I think that we could see greater growth even in '19 than in '18 given that we'll have a full year of some of the expense initiatives that we'll implement in 2018 in 2019. In addition, I think some of the things we'll be doing on the sales side and some of the talent that we're hiring on the sales side is really going to begin to impact the top line, and that's certainly the goal. And so I think we could see greater growth in '19. I'm not committing to that, but I believe that we certainly have the potential for that in '19 as we continue to make improvements on that side as well.

[Operator Instructions]. Next we'll take a question from Dana Hambly from Stephens.

Carey, do you have a full year all-in CapEx number for 2018?

In 2018, it was right at $40 million, $39.9 million prior to reimbursements from our REIT partners. With those reimbursements, it was $34 million.

No, for 2018?

Oh, 2018. I'm sorry. That's for 2017.

Yes, what are you projecting?

2018, I'm projecting about $20 million net of reimbursements and CapEx in 2018.

That's all-in. Okay. And kind of a similar amount on maintenance CapEx on a quarterly basis?

Yes. Yes, similar amount on forecast.

And you called out EBITDAR-enhancing capital expenditures in the press release. Without giving away any trade secrets beyond conversion of units, what would some of those enhancing CapEx projects entail?

Conversions are one of the things. Conversions certainly would be EBITDAR-enhancing kinds of capital. But we still believe there is some we can do on that front, Dana, and we'll be looking at that.

Ok. And then Carey, the $500 million to $750,000 in potential cost savings per quarter, is that contemplated in the $1.62 to $1.66 or any portion of that or is it all incorporated?

A portion of that is, yes.

But not everything?

That's generally what I have in there, Dana, before it. Some were probably in the lower end of that range. But again, we just -- we don't want to oversell on that, because we are still at the front end. And once we get those fully implemented, we actually feel very good about the promise of these expense initiatives. And it's part of the reason -- it's certainly part of the reason why we expect our expenses to be well under control and managed first in 2018 versus 2017 to have a minimal expense inquiries in '18 and certainly to be less than the revenue growth we anticipate, giving us that NOI growth on a same-store basis of 2% to 4%.

Okay, okay. So not baking everything in, but you've got reasonably good visibility on that number ramping up in the back half of the year.

Yes, we've got some early returns on it, and so we kind of have some idea of what those savings are going to be. But again, we're still in the front end of that. And so we want to wait to fully flesh that out before we get -- start providing guidance around those numbers.

Okay, all right. So last one for me, Larry. The GAO put out a report recently on assisted living. It read fairly innocuous as it relates to your business. But anytime these reports come out, I get a little bit nervous. So do you have any comments on that?

Dana, I saw the same report, had the same reaction and sent an e-mail to David Schless at ASHA. It is in innocuous. It is something that deals with their looking at certain states on Medicaid and getting more information. But one of them believes it's going to lead to any type of oversight regarding assisted living.

And that does conclude our question-and-answer session for today. And at this time, I'd like to turn the conference back over to Larry Cohen for any additional or closing remarks.

I want to thank everybody for your participation and support. As always, feel free to call any of us with any further questions. Carey and I will be at some investor conferences coming up, and we look forward to seeing many of you. Have a good evening, and thank you again.

That does conclude our conference for today. Thank you for your participation.