Good day, and welcome to the Capital Senior Living 2019 Q4 and Year-End Earnings Announcement 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 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 the reports that 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.

Thank you, and good morning to our shareholders, analysts, employees and other participants. Welcome to Capital Senior Living's Fourth Quarter 2019 Earnings Call. Joining me for today's call is Carey Hendrickson, our Chief Financial Officer; and Brandon Ribar, our Chief Operating Officer. 2019 was a reset year for Capital Senior Living as we focused the organization and our activities on the steps necessary to strengthen the business and establish the foundation for long-term success, while also navigating industry headwinds of oversupply, changing demographics and a very tight labor market. We've now completed the first of our 3-year strategy of Stabilize, Invest, Nurture and Grow, and we expect that the hard work and investments made in 2019 will begin to pay off in 2020 with improved employee retention, stable or improved occupancy and revenue, improved net operating income and improved cash flow. Of course, there is uncertainty now as a result of COVID-19 and it is difficult to predict when the overall operating environment will return to a more normal state. Nevertheless, we've already delivered some of these improvements in Q1, which we will talk more about throughout this call. First, I'll address our Q4 operating performance, focusing on the full portfolio of 126 communities, which includes 4 communities excluded from the same-store numbers in 2019, but that will be coming back online in 2020. Revenue for the 126 communities stabilized in the fourth quarter at $108.7 million, consistent with the third quarter. Occupancy was down 40 basis points sequentially from the third quarter, due primarily to a decline of 26 occupied units in independent living. Occupied units in assisted living and memory care remained consistent with the third quarter. As we've mentioned on our previous calls, we invested heavily in certain operational areas during the second half of 2019 to…

Thank you, Kim, and good morning. I continue to be inspired every day by the efforts of our frontline caregivers, local and regional leadership and our support team throughout the country. I want to recognize their efforts to keep our residents safe and their families and loved ones engaged and confident through these challenging circumstances. I have confidence in our ability to continue delivering great service and a warm caring environment to our residents, even as we have made significant adjustments in our operating model in response to this pandemic. The tenure instability of our highly valued local leadership teams and the improving operating results in Q4 and Q1 reinforce our ability to generate stable operating performance in these uncertain and turbulent times. Specifically, from October 2019 through February 2020, we experienced continued stability with retention of our executive directors in 94% of our communities. Total employee turnover decreased 6 percentage points in the second half of 2019, and that improvement continued in January and February of this year. We believe this strong level of retention positions CSL to maintain stability in the coming months and continue our improvement as and when the market returns to a stable state. One key indicator of operating improvement for CSL is the number of communities delivering revenue and NOI improvement on a quarter-over-quarter basis. This measure provides insight around the time to stabilization and the impact of our SING strategy. The number of communities with sequential revenue growth in Q4 was 27% higher than Q3, and the number of communities with sequential NOI growth in Q4 nearly doubled over Q3. As we entered Q1 with performance improving at a growing number of our communities, our regional and central leadership teams were able to increase focus on a more limited number of communities with…

Thank you, Brandon. In my remarks this morning, I'll discuss our non-GAAP measures, which exclude 2 communities that have been undergoing lease-up or -- after significant renovation and conversion, consistent with the prior quarters in 2019. Starting in the first quarter of 2020, so that you will know all communities will be included in all of our metrics going forward. In 2019 and in the first quarter of 2020, we've taken significant steps to build a platform for growth and long-term value creation. For example, during 2019, we made important capital investments to refresh high-impact areas within certain communities. We increased our spending on repairs and maintenance to make sure 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 benefits programs to attract and retain talent. We've disposed of 3 noncore communities with the fourth scheduled to close today, resulting in approximately $23 million in total net cash proceeds and eliminating $48.4 million of debt. And importantly, we have reached agreements with all 3 of our REIT partners for the early termination of all of our leases by December 31, 2020, at the latest through the release of our existing security deposits and letters of credits with these respective REITs, and we'll see meaningful reductions in our rent payments until that time. When all of the lease terminations are complete, our cash flow will improve by approximately $22 million on an annual basis and the related lease liabilities on our balance sheet, which were approximately $253 million at December 31, 2019 will be eliminated. This is a major step forward in the transformation of Capital Senior Living. We were further encouraged by the stabilization of our revenues…

Thank you, Carey. As the business begins to exit the trough, we are in a much better position operationally and financially today than we were 1 year ago. This is due to our relentless focus to improve our execution and stabilize our operational performance. As the business continues to show consistency and predictability, we will reinforce these actions while also investing in key areas for future growth. These investments do not involve large capital expenditures and are about taking specific actions in specific communities to effectuate predictable and timely improvement in performance. Our focus continues to be on executing the key elements of our strategy of Stabilize, Invest, Nurture and Grow to drive long-term value for all of our stakeholders. I'll now open the line for questions.

[Operator Instructions] And we will take our first question from Joanna Gajuk from Bank of America.

So a couple of questions. So the comment about the move on -- the move-outs actually also somewhat trending lower in the second half of March. So any color there? Is it because there are no voluntary move-outs and maybe residents prefer to stay in? Or maybe just the skilled nursing facilities are not able to take them if that's where normally they will go? So any color you might give, that will be helpful.

Yes, happy to do that, Joanna. I'll start and Brandon can jump in. What we're seeing in terms of move-outs is they're trending lower because people are choosing to stay in place. And it's very much what you described. They believe that our communities are a great option for them and a good place for them to continue to stay versus going to any other environment in the community. And the health care system is, as you know, somewhat overwhelmed by the COVID situation. So those folks are choosing to stay in our communities. Brandon any additional color on that?

I would just echo what Kim said is that people, at this point in time, are not seeking any level of disruption in their care and services that they're receiving and have a high level of confidence in the services and the protocols that we have in place to keep them safe.

Right. So just to get things into perspective, just, I guess, in normal situation outside of where we are now, when you think about the, kind of, their natural attrition in the business, so assuming their average length of stay is 2.5 years or so on average, right, so is it fair to say that natural attrition is kind of 10%? And then when you think about it, is there a way to think about the kind of the bucket -- the biggest buckets and what the percent of these move-outs are related to that versus other reasons?

Let me just pull up some -- in terms of the latter part of your question, Joanna, when you look at overall move-outs by quarter, generally, about 40% of those are for deaths. Another 20% for medical reasons, so they may need to go to a different type of care setting. And then the remainder are either relocating to be closer to family members or their health improved or things like that. But generally, those are the 4 main categories that would make a move-out by reason.

Okay. That makes sense. But is my math correct, roughly thinking about just -- on just, I guess, setting the move-ins outside -- aside and then thinking about just if there are no move-ins, how should we think about just the natural kind of attrition in the business given the length of stay on average is 2.5 years, maybe 3 years? So is it fair to say that 10% sort of natural attrition you have to overcome every quarter almost?

10% seems a little bit high, Joanna, but -- and I would also say that we -- you're saying no move-ins. I don't think -- we don't anticipate that there will be no move-ins.

No. We've actually -- we have continued to see people in the market, in every market where our communities are operating, continue to seek services. It's at a lower volume than -- certainly than we saw at the beginning of the quarter, but there -- it's a need-based business in a lot of cases and people do continue to seek out those services. So we are continuing to have move-ins. We're being very selective about those move-ins and also very careful with them. There are strict protocols in place. And those new residents also must be willing and able to self-quarantine for 14 days upon moving into one of our communities.

And Joanna, I'll also say just generally, that it's really early in this process to really think about trends and what may really occur with move-ins and move-outs. There's just too much unknown right now. We haven't had enough time to -- in this process to really gauge the impact on that.

Right. And then the other piece, I guess, you talked about in the press release and in your prepared remarks around some of the costs you're trying to reduce because you expect some other things that are going to be increasing apart from labor and supply. So any way to think about sort of what is the kind of going forward, let's say, G&A, excluding any of the discretionary spending items, what's the kind of run rate for G&A? And I guess, to that end, you're also talking about reducing CapEx. So what's the outlook, I guess, for the year at this point?

Yes, I'll start backwards and -- I'll start with the last question and go backwards. From a CapEx standpoint, going -- we spent about $20.3 million in 2019. In 2020, I would say we probably -- we were looking to spend $15 million to $18 million, maybe $20 million of capital expenditures in 2020, but with the COVID-19 situation that's occurred, we are -- we have cut back. And I think what we actually spend on CapEx this next year is going to depend on the extent and the duration of the COVID-19 situation. So I can't -- so I would say we were going to spend $15 million to $20 million, we'll just have to see as it relates to that. From a G&A standpoint and really on our expenses, we are monitoring that very closely, and we're going to work to mitigate the potential impact of the additional expenses. But again, it is too early. We don't have enough time here yet to have really determined how much the increases are going to be at the community level. G&A, I think will largely be relatively the same because we're continuing to support our communities in the same manner. So the run rate for G&A, I would expect to be pretty similar to what you saw in the fourth quarter, perhaps a bit lower because we are looking to reduce travel and some of those kinds of things to a bare minimum. And so we will probably see a little bit of a decrease, but it's hard to say just how much yet.

No, I appreciate it. That's helpful. And then the second, so of these potential offsets you mentioned in the press release, but on the call, you -- I guess, it wasn't mentioned, in terms of the stimulus package. So kind of what is your understanding of your ability because your business or the core is all private pay. So would you be able -- or the provider of health care services to access the $10 million direct funding that's been created under the stimulus package? Or are you more targeting these other pieces in terms of these loans or other venues? So any color in terms of how you understand your ability to access that funding will be great.

Yes. So Joanna, we've analyzed the CARES Act, and our financial and legal teams continue to work on that, given that it was just released late last week. But we believe that there are several items that can be helpful to us. I mean, certainly, the deferral of the 6.2% social security tax will be an important one. There are potential mortgage debt forbearance programs included in that package for a debt that's backed by Fannie or Freddie. And then as you mentioned, the possible access to capital to help with the incremental expenses and the operations in the environment, we don't have the specifics on all of those just yet. We're working through those and exactly what can be applicable to our business and what we'll be able to utilize. We intend to utilize as many of the provisions of that act as possible, and we'll know more in the coming days.

That's great. If I can just squeeze in the last follow-up. I think I've missed some of the commentary at the end from Carey in terms of the monthly progression for NOI. So if you could repeat that? And also, I guess, as it relates to that, I guess, it was a commentary about January and February. So I guess, as it relates to that, how should we think about the rent? So there is obviously that cut from your landlord. So if I think about kind of the, let's call it, after I guess takes effect quarterly with expenses, is it around $11 million would be a good number for the quality of expense going forward?

So let me start with the NOI progression. Yes, in December, our average monthly NOI was somewhere around just north of $10 million, and that bumped up by about $0.5 million, I believe, in January, and then bumped up by about -- close to $1 million in February versus January. So we've kind of had that nice progression of NOI increases. And that's in a difficult time of the year, too. It was really about some really disciplined management of our expenses that we've continued to do in the first quarter. So that's -- it was -- has been an improvement. As you think about the impacts of the lease transactions, I believe that was your next question. We've noted in the release that we -- that -- in our release that we did a couple of weeks ago about the transactions, all combined, that we expect our cash flow to improve about $22 million on an annual basis as a result of those lease transactions. From a revenue -- from an expense standpoint, it is a nice chunk of expenses. Our rent expense will be probably about, let's say, $12 million to $14 million -- actually even a little bit more than that, about $15 million less in rent expense going forward. And yes, so we'll have a nice increase in our CFFO as a result of this. Kim noted that the CFFO increase a little bit -- the CFFO contribution of the leases in the fourth quarter was negative $4 million, I believe, right?

Negative $4 million.

Okay. So just to rephrase, so you're saying that the annual lease expense will be $15 million less or the quarterly?

Annual.

Annual. Okay. Great.

We will take our next question from Steven Valiquette from Barclays.

So probably similar to Joanna, I mean, our conversations with investors right now are also dominated by questions around occupancy trends for yourselves and really for the industry going forward from here. And just to kind of set the stage a little bit, in my mind, I feel like based on historical trends in the senior living industry, it'd be a major deal if occupancy were to change by, let's say, 500 basis points, either up or down. That type of movement is pretty rare. But I've been pretty surprised by the number of discussions I've had with investors over the past few months where there seems to be some notion that occupancy could fall by as much as 2,000 to 2,500 basis points down into like the 60% range for some operators this year, maybe even for the industry. And this potential level of occupancy falloff is actually pretty hard for me to wrap my head around. So I'm wondering if you can maybe just perhaps spend a minute or 2 and address whether these types of occupancy declines are within the realm of possibility for this year, either for yourselves or for the industry, based on what you're seeing. And hopefully, an attempt to maybe at least calm down some of the extreme downside scenarios that are sort of floating around in the investment community right now. So we'll start with that.

Yes. Steve, it's -- as you know, we're early in this situation with the pandemic. So it's pretty difficult to predict what the impact will be. What I can say is that through the first -- through the middle of March, we really weren't seeing much change at all in terms of lead volume, tour volume or move-ins. In the last couple of weeks, as more of the stay-at-home or stay-in-place kind of regulations and guidelines have come out across the United States, we have seen those volumes decline. Leads as well as in-person tours and the move-ins have declined or they have slowed, I guess, is a better way of saying it. What we've done is we have -- we're utilizing our electronic and virtual means to really continue to engage with those families and those prospective residents. And where there is an interest and a desire to continue through that process with us, we are certainly happy to do that. So at this point in time, while we're seeing some slowing in that volume, I don't see any indication of the kinds of numbers that you just put forward. But again, we're early on, so it's difficult to predict what it might look like here in the coming weeks and months. Brandon, any other color you want to add?

I would just add that one outcome of what's going on right now in the overall market is a willingness to engage with our local leadership in discussion around our services on a more consistent basis. Again, with people being in their homes and not necessarily out and about, we are getting increased dialogue with individuals asking about our services or having discussions around just senior living in general. So when we talk to our local leadership and our local kind of business development folks, they are engaging in quite a few conversations over the phone and conducting virtual tours as well, which you might expect given the fact that people are spending a ton of time right now at home. And so we will see how that impacts overall the opportunities for us as we learn more about time lines around COVID-19 across the country.

Okay. So let's just say theoretically, if we fast forward, let's just say, I don't know, 9 months from now, and some facilities might see occupancy dip down into 60% range, again, all theoretical, how much flexibility is there to lower cost and still be profitable or at least breakeven in these facilities if occupancy were to dip down to those types of levels and avoid having to lose money? And then is there a certain rule of thumb if occupancy hits a certain point, you just say, "Hey, let's just shut down this facility because we're just going to lose too much money?" Are there any rules of thumb around that within your operations?

Well, I'll start and Carey and Brandon can jump in. One of the key elements of the cost equation in any community is the size of that community and the physical layout of that community and the ability to service residents with that particular community environment. So our portfolio is not homogenous. So we have a number of different floor plans across the portfolio. I would say for our smaller communities, there is absolute flexibility, I think strong flexibility to withstand those kinds of occupancy challenges. For a handful of communities that we have that are really quite large and have more of a diverse layout or footprint, it's more difficult because there's -- it's simply more difficult to have the staff in the right places when you may have lower occupancy and have them dispersed around the community. What we would do in those cases is certainly bring those residents together so that we could be flexible on the cost side of things and continue to serve them as we go about regenerating that top line and improving the occupancy.

Okay. Last question is, I guess, I'm just curious around your thoughts around pricing strategy and what may or may not work in this sort of environment. I mean, does it make sense to offer extra incentives for potential move-ins? Or do you feel like in this environment, if there's just fear factors on moving into the separate facility in general, maybe it doesn't make sense to offer any incentives that people are going to move in or not going to move in? I mean, so what are your thoughts on holding the line on pricing in this environment versus offering extra incentives to attract move-ins?

Yes. Well, we worked very hard during 2019 to reduce the level of discounting and concessions that we were utilizing in the organization because they had gotten quite high in 2018, and were not really -- while they were delivering some occupancy, they were not delivering the quality of revenue or long-term sustainable types of occupancy for the organization. So we worked hard to really bring that down. And in fact, we reduced the level of concessions by about 60% year-over-year from '18 through 2019. So in this environment, I don't think that reigniting the discounts and the concessions are the right strategy. I think people are -- if they have a need, they are continuing to explore that need and come into senior living. If it's not such an immediate need, we might see them waiting a little bit longer. But a discount or additional financial incentives for them probably are not going to encourage them to move in, in the current environment if they're not comfortable doing so.

[Operator Instructions]

Okay. I think we have no additional questions on the line. So in closing, I'd like to thank our shareholders, vendors and residents for their support. I'd also like to thank our 6,600 dedicated employees for all that they do each day to enhance and enrich the lives of our residents. This concludes today's conference. Thanks, everyone, and have a great day.