Good day, and welcome to the Capital Senior Living Third Quarter 2019 Earnings Release Conference Call. Today's conference is being recorded. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. These statements are made as of today's date, and the company expressly disclaims any obligation to update these statements in the future. Actual results and performance may differ materially from those forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well as in the reports the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly reports on Form 10-Q. Please see today's press release for the full safe harbor statement, which may be found, at capitalsenior.com/investor-relations, and was furnished in an 8-K filing this morning. Also, please note that during this call, the company will present non-GAAP financial measures. For Reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release. At this time, I would like to turn the call over to Capital Senior Living's President and CEO, Ms. Kimberly Lody. Please go ahead, ma'am.

Thank you, and good morning to our shareholders, analysts, employees and other participants. Welcome to Capital Senior Living's conference call to discuss our third quarter 2019 results. Joining me for today's call is Carey Hendrickson, our Chief Financial Officer; and Brandon Ribar, our Chief Operating Officer, who joined Capital Senior Living about eight weeks ago. Brandon has an extensive background and impressive track record in finance and operations in the senior housing and skilled nursing sectors. He has already lodged many hours with our operational teams and has visited more than 20 of our communities. These have been in-depth visits to work with the community teams and learn more about the unique opportunities in each of our markets. We are delighted to have Brandon onboard and look forward to his operational leadership in further executing our turnaround strategy. While Brandon will not have prepared remarks on today's call, he will be available for your questions during the Q&A period. 2019 is a transformative year for Capital Senior Living, as our top priority is to rebuild the foundational practices and discipline necessary to strengthen our day-to-day business. We are now about nine months into our strategy of Stabilize, Invest, Nurture and Grow to improve the operating performance and financial foundation of the company. The expectations we set for 2019 were built with a deliberate focus on restoring the discipline required to grow occupancy, stabilize rates, manage operating expenses and improve performance in the coming periods. We mentioned during our second quarter earnings call that we expected Q3 results to be lower as we continue the actions necessary to reverse the declining occupancy trend that began nearly two years ago. And while the results reported today reflect decisions we've made to improve our long-term success, we firmly believe Q3 was the low…

Thank you, Kim. In my remarks, I'll discuss our non-GAAP measures, which exclude two communities that are undergoing lease-up after significant renovation and conversion, which is consistent with our prior quarters and 2019. Our non-GAAP measures include the two Houston communities impacted by Hurricane Harvey. However, the statistical measures that we included in the press release exclude the results of these two Houston communities since they are in lease-up and to include them would make the statistical measures less meaningful. As a point of information, we will include all communities starting in the first quarter of 2020. In the first nine months of this year, we've made purposeful investments in our people and our product, knowing that these investments would cause some level of disruption and impact our financial results in 2019. But the investments have been made with an eye to the future to building the platform for growth in our future financial performance and creating the foundation for long-term value creation. For example, knowing that leadership in our communities is the most important element for success, we've made necessary changes in the most critical leadership positions at our communities, our executive directors and sales directors. We've revised incentive plans to make sure that our executive directors and our sales directors are properly motivated to increase revenue and NOI. We've made important capital investments to refresh high-impact areas within certain communities. We've increased spending on repairs and maintenance to make sure that the critical systems at our communities are working well for our residents and that our communities present well at all times. We've made market wage adjustments in certain markets and improved our benefit programs to attract and retain talent. We've increased the number of regional operations managers to create greater support for our communities. We've added sales…

Thanks, Carey. Reestablishing the fundamentals of our business will be an ongoing process as we execute on the key elements of our transformational strategy of Stabilize, Invest, Nurture and Grow to drive long-term value for all of our stakeholders. For the past several months, we've been operating with laser focus, precision and urgency on five key areas of stabilization: one, improving the quality of our product and services by investing in our people and our communities; two, establishing robust systems and analytics to provide real-time insights to the business and achieve sustainable forecast accuracy; three, enhancing and upgrading our operational leadership; four, implementing programs and tools to attract, retain and develop high-quality talent; and five, utilizing our unique scale and best practices to drive sustainable long-term operational efficiencies. It will take time to fully realize these improvements across the enterprise, but we firmly believe in the strength and execution of our plan. Our actions are beginning to deliver the impact we want and that will be evident in future period results. I'll now open the lines for questions.

Thank you. [Operator Instructions] We'll now take our first question from Chad Vanacore from Stifel. Please go ahead. Your line is open.

Hi, good morning.

Good morning, Chad.

Good morning, Chad.

All right. So I'm thinking about occupancy, and normally, there is a seasonal lift in Q3. There are some sequential declines, but you had warned us that would happen. Now I want to think about how much of that occupancy do you get back in the fourth quarter. So where does occupancy stand today? And is it continuing a trend of moving up from Q3 lows?

Chad, this is Carey. It has – it increased a bit in October, about 20 to 30 basis points is what we anticipate, that will happen in October versus September. So – and we – as we noted, we've had increases in August, September and October. So the August increase was less than the September increase, and the September and October increases were both meaningful increases. And so we saw some lift in this in September and more lift in October. And we would expect, again, another lift in November in our occupancy. And I will just say, November, obviously it's very early November, but it is trending similar to how October and September trended in the first part of the month.

Okay. That's good color. Just thinking about margins, they were weak in Q3. Should we be thinking about any nonrecurring cost that we can consider that might normalize going forward? Anything related to your cost-savings initiatives?

What we've had – and if you look at our cost, we – I think for the most part, there's not much on the operating expense side. There is some nonrecurring, if you will, cost in our G&A, but not really from an operating standpoint. So most of those costs are pretty fixed and set going forward. Now we are doing a lot to try to manage those contract labor costs, as we noted, which will result in improvements in our margin.

Yes. Chad, I'll just jump in here. From an operating perspective, we are very focused on decreasing contract labor to a very minimal point by the end of this year. So we expect to continue to see improvements in that over the fourth quarter. And we've already made the wage adjustments and investments in our direct labor that we think will allow us to deliver those reductions in the contract labor.

All right. Just staying with labor for a second. And how's your full-time employee turnover trending?

Turnover spiked early in the year as you might imagine. As we've mentioned, we've made quite a lot of changes in the operational and sales team. So we did have a spike in turnover back in the March-April time period, but it has been steadily declining since that period, and we're very happy with our employee turnover and retention here in the last three months. So we feel like we are in a period of stabilization of our employee base, and we actually expect that will continue to get even better.

All right. And then since you welcomed Brandon aboard, Brandon, welcome aboard. You're actually available for questions, so they've put a target on you. You've been to 20 communities to-date. What are some of common low-hanging fruits that you're seeing across those communities? And where can you actually improve performance?

Well, I think, as Kim mentioned, so much of what's been done earlier in the year is beginning to have an impact to the positive. So I think for our team, really focusing on continued practices around community outreach and lead generation and then also the speed to respond, those are areas that we've seen recent success as Kim mentioned. And so continuing to focus on those is really important. And then I would also say just on the labor side of the world, the investments that have been made and the increasing of wages in specific markets, ensuring that those are returning on a very near-term basis to stabilize our workforce and to realize those, as Kim mentioned, those continued declines in contract labor utilization.

So what do you want to do to take that lead generation increase and convert those to new move-ins?

So I'd say we're already seeing it, as Kim and Carey have both mentioned, in terms of the month-over-month net move-in increases. So the – with the increased community outreach and seeing additional lead generation through both kind of internal and external sources, and then just sticking with the practices that some of the newer executive directors and sales directors have been implementing. I know we will continue to see what we expect to be ongoing improvement in those areas.

And Chad, I'll just add that we saw really great results with the pilot program that we did over that 12-week period in those 12 communities. And that was a lot about blocking and tackling, and like Brandon mentioned, speed to response – to respond and making sure that our responses really nurture those leads through the process and results in move-ins, which we saw a significant lift in those 12 communities. So one of our main priorities here in the fourth quarter and the coming months is to ensure that we anchor those same principles from that pilot in the rest of our portfolio, so they can see the same types of benefits.

All right, I’ll leave it there. Thanks a lot.

All right, thank you.

Thanks Chad.

Thank you. We'll now take our next question from Joanna Gajuk from Bank of America. Please go ahead.

Thank you. Good morning. So thanks for the color around occupancy improvements in the last three months and I guess into November. So on that front, can you talk about pricing in terms of your rent increases you anticipate for in-place residents? And any color on the level of the discounting that you've seen this quarter and you're planning to Q4?

Yes. I'll jump in first, and then Carey can add some color as well. So Joanna, we have – we've been sort of fighting this occupancy decline here over the course of the year. And generally speaking, those residents as they are moving out, they have a higher rate associated with them because they are at a higher acuity level and need more levels of care. So the move-ins, the folks that are coming in are coming in with less acuity and less of those care needs. So the rate is lower on the move-in side. Now we have implemented about a 3% in-place rate increase throughout the year. But when you take the combination of all of those things together, the net is that rates have been flat, which we're really pleased with. We feel good that our level of discounting is appropriate and well managed. Our teams are selling the value of our communities and the services we provide versus engaging in sort of a price battle in the marketplace because that's not constructive, and certainly, not helpful for the long term. So we feel good about that. And then on the concession side of things, those are also very well managed. We've mentioned a couple of times before, our sales teams have a toolbox that they are able to utilize that sort of put some guardrails on those concessions, but allows them the flexibility that they need to encourage move-ins and occupancy with the prospects that they're working with.

So would you say that next year you would expect all-in rates growing?

Yes. I mean we plan to have similar in-place rent increases. One thing to note is that ours occur on a rolling basis. So that doesn't all occur on January 1. So the rent – in-place rent increases occur as the leases end and roll-off and then renew. So we would expect to have a similar three-ish percent rent increase. But of course, it very much depends on the market conditions in which each of our communities operate. Where we have occupancy challenges, we probably will have lesser increases, and where we are operating in a really stabilized fashion and have high occupancy, we'll probably take a bit higher of rent increases.

Yes. And Joanna, we'll talk more about 2020 on our next call, our fourth quarter earnings call, but I think if – to Kim's point about the move-outs having really higher rates than the move-ins because of the level of care fees that are associated with those move-outs, if we continue to decrease the move-outs, that's going to help lift our rates in 2020 as well. So we'll provide more color on that as we get into the fourth quarter conference call, but we look forward to discussing 2020 then.

That's right. And then just to stay on that topic, as Kim just mentioned something about different, I guess, rents, I guess, procedures depending on the asset. So last quarter, you kind of gave us some stats around the mix in our portfolio of those assets with above 85% occupancy and below. So I don't know whether I missed that or can you provide a similar kind of stat as of third quarter?

Yes. We didn't provide that information this time, Joanna, but I can look that up and get that to you, certainly, after the call.

Okay, that's helpful. And the last question for me would be in terms of CapEx. Your plans, I guess going forward in terms of what you're budgeting for the upcoming quarter and going forward?

Yes. So we've had about $14.3 million in CapEx so far this year. I think that we'll probably end up near the – probably the $17 million to $18 million range for 2019. And that's going to allow us to continue to, obviously, take care of our buildings, but importantly, do some – continue to do some high-impact refreshes at certain communities that are not very overly expensive, but are impactful. And so we think we'll be able to do a little bit more of that in the fourth quarter, but be it somewhere around $18 million, I'd say, for the full year.

Okay, great. And just one quick follow-up. Did I hear right, you talk about the revenue contribution of the two assets that you sold October 1, was it $700,000?

The $750,000 is related – that is how much their CFFO contribution was on a quarterly basis.

And the revenue…

Yes. And the revenue for those two communities – the revenue for those two communities on an annual basis was about $9.5 million.

$9.5 million. All right, that's annual. Okay. And the $750,000 is a quarterly CFFO contribution?

That's right. Yes. So about $3 million on annual basis.

Right, right. Great. I’ll go back to the queue. Thanks.

Thank you, Joanna.

Thanks Joanna.

Thank you. I now would like to pass the call back to our speakers.

Okay, great. Thank you. In closing, I'd like to thank our shareholders, vendors and residents for their support. I'd also like to thank our 7,000 dedicated employees for all that they do each day to enhance and enrich the lives of our residents. You are the centerpiece of our success. This concludes today's conference. Thank you, everyone, and have a great day.