Lawrence A. Cohen - Vice Chairman and Chief Executive Officer Carey P. Hendrickson - Chief Financial Officer and Senior Vice President.

Dana Syrune Nentin - Deutsche Bank AG, Research Division Joanna Gajuk - BofA Merrill Lynch, Research Division Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division Dana Hambly - Stephens Inc., Research Division Todd Cohen.

Good day, and welcome to the Capital Senior Living Third Quarter 2014 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 would like to turn the call over to Mr. Larry Cohen, CEO. Please go ahead, sir..

Thank you. Good afternoon, and welcome to Capital Senior Living Third Quarter 2014 Earnings Release Conference Call.

Our third quarter results reflect a positive momentum that continues to build in all of our important metrics with higher revenue growth and lower expense growth in the third quarter than in the first 2 quarters of this year and continued solid increases in occupancy, adjusted EBITDAR and adjusted CFFO.

Complementing this growth is a robust pipeline that allows us to continue our disciplined and strategic acquisition program that increases our ownership of high-quality senior living communities in geographically concentrated regions and generates meaningful increases in CFFO, earnings and real estate value.

In the third quarter, we completed the acquisition of 3 senior living communities for approximately $47.4 million. The communities were financed with approximately $36.6 million of nonrecourse 10-year mortgage debt with a blended fixed interest rate of 4.62%.

These acquisitions are expected to add adjusted CFFO of $0.06 per share, increase annual revenue by $11.6 million and add $4.8 million of EBITDAR. Through the first 3 quarters of the year, we have acquired 7 communities for a combined purchase price of $145.6 million.

These acquisitions are expected to generate a 17.6% cash on cash return on equity and add $0.21 of adjusted CFFO. We are conducting due diligence on additional acquisition opportunities involving high-quality senior living communities in states with extensive operations, totaling approximately $75 million.

Subject to completion of due diligence and customary closing conditions, at least one acquisition valued at approximately $14.5 million is expected to close by the end of the fourth quarter of 2014 with the remainder expected to close in the first quarter of 2015.

Same-community results continue to show significant sequential improvement in the third quarter of 2014. Same-community revenues were up sequentially over the second quarter by 1.1% and were 1.8% higher than the first quarter.

Same-community occupancies increased 40 basis points from the second quarter of 2014 and 70 basis points from the third quarter of 2013 to 87.4%. This was the fourth consecutive quarter to show a sequential gain in occupancy. Average monthly rent increased 60 basis points to $3,159 per occupied unit from the second quarter.

This is in addition to the 70 basis point sequential increase in average monthly rent from the first quarter to the second quarter of 2014. Third quarter same-community net operating income was 1.5% higher than the second quarter of 2014.

Our improved third quarter results reflect a successful implementation of various initiatives during the third quarter, including selective introductory specials at lower occupied communities, increasing rates at higher occupancy communities, increasing level of care charges and disciplined expense management.

Longer term, we are refurbishing communities and converting units to higher levels of care to gain occupancy, reduce attrition and increase rates. We have also enhanced our private-pay revenues by closing the only skilled nursing beds we had operated in 2 continuing care retirement communities.

We are excited about the very attractive design plans that are developed to reposition these 2 communities, which include the addition of 56 memory care units in the space previously used for skilled nursing in the first half of 2015 as well as adding more assisted living units as well as interesting, appealing spaces for all of our residents such as additional dining venues, Internet café, media room, theater and conversation clusters at each of the communities.

We are awaiting permits for these projects and expect construction to begin this quarter. Demand continues to increase, as demonstrated by the 19% increase in third quarter 2014 same-community net move-ins compared to third quarter 2013.

And the difference between the deposits on hand and move-out notices at the end of the third quarter increased 84% as compared to the same period in 2013. NIC MAP also recorded accelerated industry fundamentals for the third quarter 2014.

Demand, as measured by unit absorption, accelerated to 2.9% in the top 99 metro markets with construction starts remaining near flat at 2%. These positive indicators suggest that gains in demand and occupancy as well as continued rent growth should continue.

As we discussed on previous calls, new construction has been needed in most of our markets, confirming that our value strategy acts as an economic barrier to entry for new developments, with replacement costs averaging in excess of $175,000 per unit.

Our average monthly rent of $3,211 would have to increase by about 50% in most of our markets to generate a reasonable return on the cost of development, indicating the opportunity to realize substantial rent growth before we expect to see new construction in these markets.

We are focused on reducing attrition, improving occupancy and increasing cash flow by offering residents the ability to age in place through the conversion of approximately 360 vacant independent living units to assisted living and memory care at 15 of our communities.

We have received required licensure approval for 97 units, and these units are leasing up ahead of projection. We expect to receive the remaining licensure approvals over the next 3 quarters. Once these converted units are stabilized, we expect overall occupancy to increase by approximately 300 basis points to 90%.

And when stabilized, these converted units are expected to add approximately $0.20 in annual CFFO and enhance the value of our owned real estate. Additional conversions are planned for the second half of 2015.

With strong industry fundamentals, an improving economy and housing market and virtually no new supply in our markets, we believe that our occupancies can grow to an optimal level of 92% to 93%, providing significant opportunity for additional organically driven CFFO growth and increases in our real estate values.

Every 1% improvement in occupancy is expected to generate $4 million of revenue, $2.8 million of EBITDAR and $0.06 per share of CFFO. We are also looking to improve the quality of our portfolio and increase our liquidity by selling certain non-core communities.

Subject to completion of due diligence and customary closing conditions, we expect to complete the sale of a select group of communities before year-end, which will improve our operating metrics and allow us to redeploy the proceeds to acquire better-performing communities in our geographically concentrated regions.

Our operating strategy is to provide value to residents by providing quality senior living services at reasonable prices. Our competitive advantage that allows us to achieve solid operating results and disciplined growth is our people and our culture.

We continue to execute on the strategic plan that is focused on a very important objective of enhancing shareholder value through organic growth, proactive expense management and utilization of technology as well as allocating capital to accretive acquisitions of high-quality senior living communities in our geographically concentrated regions, unit conversions and community refurbishments.

Since the beginning of 2010, successful execution of this plan has resulted in an 18% compounded annual growth rate in our EBITDAR on a 15.2% compounded annual growth rate in revenue. And over this time period, we increased our EBITDAR margin by 570 basis points. As we maximize our competitive strengths, we are lowering our cost of capital.

We continue to grow through a disciplined and strategic acquisition program that began in 2011 and which has been funded exclusively from internally-generated cash flow. In the past 3 years, we purchased 42 communities for a combined price of approximately $560 million. These acquisitions have generated a 15.4% cash on cash return.

Our success in acquiring quality communities in off-market non-brokered transactions validates our competitive advantage as a highly respected and credible owner-operator with the financial ability to complete transactions.

As our cash flow continues to grow and our liquidity improves from our recent refinancings and planned asset sales, our robust pipeline provides us with ample quality acquisition opportunities in a highly favorable financing market. We are excited about continuing our successful acquisition program in 2015 and in future years.

We are well positioned to make meaningful gains in shareholder value as a substantially private-pay business in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market.

I would now like to introduce Carey Hendrickson, our Chief Financial Officer, to review the company's financial results for the third quarter of 2013..

Thank you, Larry, and good afternoon, everyone. Hope that you've had a chance to review today's press release. If not, it is available on our website at www.capitalsenior.com. You can also sign up on our webcast to receive future press releases by email if you'd like to do so.

The company reported total consolidated revenue of $98.5 million for the third quarter of 2014, an increase of $10.5 million or 11.9% over the third quarter of 2013, with resident and health care revenue up $12 million or 14.2%. The increase in revenue is mostly due to acquisitions the company made during or after the third quarter of 2013.

Since the second quarter of 2013, we have acquired 15 communities, including 3 communities that we purchased during the third quarter of this year. As expected, the increase in third quarter revenue was partially offset by a decrease in revenue at 2 communities that we're repositioning from skilled nursing units to private-pay AL and IL units.

Our operating expenses increased $7.1 million in the third quarter of 2014 to $60 million due to the acquisitions, net of reduced expenses at the communities that are being repositioned.

Our general and administrative expenses for the third quarter of 2014 were only $200,000 higher than the third quarter of 2013 after excluding transaction and other onetime costs from both years.

Excluding these transactions and other onetime costs, G&A expenses as a percentage of revenue under management were 4.9% in the second quarter of 2014, which is 30 basis points lower than the comparable measure for the third quarter of 2013.

In the press release, we noted that the company's non-GAAP and statistical measures exclude the 2 continuing care retirement communities that are being repositioned as well as one of the properties that we acquired in 2013, which is now in the process of lease-up after recently receiving an upgraded license.

During the third quarter of 2014, we began a significant renovation project at a community to convert IL units to AL units, which required us to vacate 45 units at this community until construction is complete. As a result, we decided to remove this community from our non-GAAP measures beginning in the third quarter of 2014.

The remaining conversion projects currently under way require minimal or no construction costs, and if they do require units to be vacated, it is generally for a short period of time. Our adjusted EBITDAR was $33.5 million in the third quarter of 2014, an increase of $4.2 million or 14.4% from the third quarter of 2013.

This does not include EBITDAR of about $600,000 related to the 4 communities undergoing repositioning, lease-up or significant renovation and conversion. The company's adjusted EBITDAR margin was 35.6% in the third quarter of 2014, which is 40 basis points higher than the third quarter of 2013.

Adjusted CFFO increased 24% or $2.2 million to $11.1 million in the third quarter of 2014 compared to the third quarter of 2013. On a per share basis, adjusted CFFO was $0.39 per share, which is $0.07 greater than the $0.32 of CFFO that the company generated in the third quarter of 2013.

The $0.39 of CFFO in the third quarter is also $0.05 higher than our second quarter CFFO and $0.11 higher than our first quarter CFFO. The contribution to CFFO from communities acquired during or since the third of last year was $0.11, which is $0.03 ahead of our expectations and public announcements related to these communities.

Same-community revenue increased $1.1 million or 1.3% over the third quarter of the prior year.

Same-community expenses were up only $700,000 or 1.6% versus the third quarter of the prior year due to the successful implementation of certain expense controls in the third quarter and utilities costs that were flat with the prior year due to a generally mild summer.

In addition to utilities, our 2 other major cost categories, employee wages and benefits and food, are well in line, with employee cost up 2.3% and food cost up to 1.8% versus the third quarter of the prior year.

Advertising and promotion expense increased $200,000 over the third quarter of the prior year as we continue to invest in initiatives to drive occupancy and revenue. However, this increase is $200,000 less than it was in the second quarter.

As Larry noted previously, we're pleased that our same-community results showed continued sequential improvement in the third quarter.

Building on the sequential improvement that we experienced from the first quarter to the second quarter, our third quarter same-community revenues were 1.1% greater than the second quarter, with same-community occupancies up 40 basis points to 87.4% and average rent up $19 or 60 basis points to $3,159.

Versus the first quarter, our third quarter same-community revenues were 1.8% higher, with occupancy up 50 basis points and average rent up $41 or 130 basis points.

We're making steady progress on the conversion of approximately 360 units to higher levels of care and currently expect roughly half of the conversions to be completed by year-end 2014 with the remainder completed in the first half of 2015. Once completed, they must be leased up, which will likely take 6 to 12 months.

Based on these assumptions, we expect the conversions to begin to have some impact on our operating results in the first half of 2015, with the impact growing throughout the year and with the full impact of these conversions in 2016. Looking briefly at the balance sheet.

We ended the quarter with $39.3 million of cash and cash equivalents, including restricted cash. During the third quarter, we invested $10.8 million of cash as equity to complete the acquisitions of 3 communities and spent $5.5 million on capital improvements.

Yet our cash balance only decreased $100,000 from June 30, 2014 due to cash flow generated by our operations and positive changes in working capital items. After the end of the third quarter, we received an expected $5 million refund from the IRS, which further improves our cash position.

Our debt balance at September 30 was $623.9 million at a weighted average interest rate of approximately 4.7%. We added approximately $37 million of debt in the third quarter related to the 3 communities we acquired at an average rate of approximately 4.62%.

All of our debt is at fixed interest rates except for 6 bridge loans that totaled $65.2 million, which are at variable rates averaging approximately 3.9%. And the average duration of our debt is approximately 7 years. And looking towards the fourth quarter.

We expect our same-community revenue growth comparison to the fourth quarter of the prior year to continue to improve and to be slightly higher than our same-community expense growth versus the prior year quarter. Regarding CFFO in the fourth quarter of 2014, there are a few items that I'd like to mention.

First, one of the components of the adjusted CFFO calculation is shown on the non-GAAP reconciliation page of our press release.

Non-cash charges net includes an increase of approximately $500,000 in prepaid resident rents in the third quarter, which resulted in approximately $0.02 of enhancement in the third quarter CFFO that we generally would not expect to repeat in future quarters.

Also, food costs are usually approximately $250,000 higher in the fourth quarter than the third quarter due to special events and holiday parties at the communities.

And note that our fourth quarter results will include a full quarter of the 3 communities that we acquired during the third quarter, which on a combined basis, we expect to contribute about $0.01 of incremental CFFO for the fourth quarter.

Also, as a reminder, CFFO in the fourth quarter of last year included tax savings from a cost segregation study, which added $0.12 per share to CFFO, which will not repeat in the fourth quarter of 2014. That concludes our formal remarks. And we would now like to open the call for questions..

[Operator Instructions] And we'll now take our first question from Darren Lehrich with Deutsche Bank..

It's Dana Nentin in for Darren. First question on the same-community expense growth up 1.6% in the quarter. What's really changed the most sequentially? And maybe if you could talk about some of the expense controls that you mentioned earlier..

Sure. Actually, we had expense decreases in several categories just as a result of the some of the diligent expense controls put into place that our operating folks do a really good job of that on a consistent basis and really were very stringent on their control this quarter.

We had decreases in several categories, including contract labor as well as advertising -- excuse me, advertising -- excuse me, I'm reading the wrong line, repairs and maintenance. And so those were some of the places where we had some decreases, but other than that, it's just really nominal increase..

Dana, the other thing that we implemented were reporting on overtime that goes to all of our regional and our operational managers. Those are weekly reports that have definitely allowed us also to bring down our labor cost by having better information on overtime. And the contract labor was a key component as well.

In the first half of the year, typically with bad weather and then with licensing of units, we had more contract labor than we typically do, and it's back in line with more normal standards..

Okay, great. And then I guess good to see same-store NOI and positive growth this quarter.

Maybe what's more of a normal outlook for the same-store NOI growth over the next few quarters?.

As Carey said, we're projecting that revenue growth will actually exceed expense growth next quarter..

Right..

That's a nice turn. If you look at the 1.5% same-store NOI growth, that annualizes to over 6%, which is kind of within the scope that we expect. We're now preparing our budget for 2015 at the property level. The matrix would assume rate growth of about 3%, expense growth of about 2%, 100 basis point spread between rate and expenses.

And occupancy growth was -- I think we'll probably forecast close to 100 basis points for next year. If we achieve that, the same-store net income growth should be in that 5% to 7% band, again consistent with the sequential growth that we saw this quarter.

Hopefully, that will start to accelerate in the fourth quarter based on the fact that we actually expect to see better numbers. The other thing I will point out, we had higher expenses in the first half of the year, which we don't expect to repeat. And we also had discounting last year in the fourth quarter and the first quarter of this year.

So I think that will start to show that our comparisons will widen on revenue growth as well as hopefully more moderate expense growth, driving stronger NOI growth on a same-store basis..

And we'll now take our next question from Joanna Gajuk with Bank of America Merrill Lynch..

It seems like the deal pipeline is pretty full there. There's $75 million you already have lined up for this quarter and the next.

And can you talk about types of assets, whether you're still just, I guess, doing more of assisted living acquisitions and I guess our average rent for the deal that you just announced you closed late in August was pretty high.

So can you talk about rents for the assets in the pipeline and occupancy and the margins there?.

Sure. They continue to be very strong, Joanna. The pipeline, if you look at where we are through October, we have signed contracts on $242 million of acquisitions since the beginning of the year.

That includes the $75 million that will close in the fourth quarter and expected to close in the first quarter of 2015 subject to completion of due diligence and other conditions. You can see that the quality of properties we're buying continues to improve.

The operating margins on the properties we closed -- the EBITDA margin in the third quarter was 41%. If you look at the average rate, it was $4,600 a month. If you look at the transactions that we have under contract and plan to close over the next 2 quarters or this quarter or next quarter, they also will have higher than our average rates.

Probably mid-90% type occupancies and the margins will probably again be high 30%. So we continue to look at opportunities that are -- and the age of the properties we're buying are very new.

So we're really improving the quality of our portfolio by buying state-of-the-art properties in very strong markets with limited competition, with very, very strong financial and operating metrics..

And I guess it looks like the financing costs are still very attractive, right? So I don't know if you have a crystal ball to project that, but the 4.7% is still pretty attractive there..

Yes. I mean, the 10-year right now is about 2.3%. With that being said, we'd expect the financing cost to be 4.5% or lower. So looking at kind of mid-4s. With some competition, we may get that price down a little bit. We've been pretty successful from looking at different sources of financing.

But yes, we think that the rate environment is highly attractive. The valuations, we're very pleased with the type of returns we're generating. We expect to continue to have very solid mid to high teen returns on these acquisitions at current levels of interest rates. So we're very pleased that the program continues to grow.

The other thing I'll comment is we talk frequently about our credibility and reputation. It's really rewarding to see how many sellers come to us that look to deal with us exclusively because of the ease of transaction and the success that we've had, particularly in the transition of the operations to our management.

So that is really done us very well. And in this highly fragmented industry, we're very, very pleased that we're recognized as being a true credible, quality buyer and operator that a lot of smaller operators prefer to deal with..

And then on the conversions, did I hear you right that -- I guess you've made a comment that at least one community, this is already leasing up ahead of projection? So this part of the....

Actually, 2 communities. We have licenses received in October on 2 properties. We've received provisional licenses during the third quarter. We have permanent licensing. The process works in October. And those 2 buildings are ahead of schedule. We actually have -- in the first month, we have 21 either move-ins or scheduled move-ins at 97 units.

The other thing that's very interesting that we didn't expect was a very positive development. As everybody knows, I think, in our independent living properties, we've rented space to home health care providers to provide services. As we have received licensure, these providers have left the building.

We were actually -- in one of these buildings, in addition to the new move-ins into assisted living, we are now providing additional services to 33 independent living residents that we never forecast or budgeted. And that's in the first month.

So we're seeing that not only are we able to capture a very attractive lease rate and occupancy gain by having the assisted living as well as help us in marketing the property to families on move-in.

The existing IL residents who don't yet need assisted living offer taking in services, which will also add additional revenue to the company by able to provide those services to the residents with our assisted living staffing..

So then your comments around getting licenses for the rest of those 30 -- 360 units, that's on schedule, right? That's the same sort of view you had when we last spoke 3 months ago, right, when you said that you expect half this year and half first half of 2015?.

Yes. I mean, we said that acquiring 97 is a little over a quarter. So we feel we're very much on target. We're making good progress, and we expect to continue the same rate of licensure through the first half of 2015..

And just last thing, briefly, on that topic.

So the comment you made, right, that there was this one community that I guess you had to take out the 45 units because of the conversion, that's part of the 360-unit conversion that's happening, right?.

And that's the only one that really has any significant renovation or that kind of thing..

And what's interesting, the remaining 140 units that are open and operating are 95% occupied. So -- and that's not in our occupancy numbers by the way because we've taken that out. So it's very -- this is a building that we did a first phase of assisted living 2 years ago, and the entire building is 95%.

And we're now starting the renovation and refurbishment of another 45 units.

One thing we've realized, and you can see the success we're having here in our track record and other conversions, when you upgrade these units, which are large, with walk-in closets, full kitchens, 1- and 2-bedroom apartments, they have a strong competitive advantage in their market compared to the purpose-built assisted living, which are typically smaller, more studio, more institutional.

And that's been, obviously, reflected in about 10 percentage points gain that we've seen in prior conversions that we have completed..

And we'll now take our next question from Daniel Bernstein with Stifel..

Actually, I want to ask a few more follow-ups around the conversions. Based on past conversions or what you're seeing now, are you pulling residents from your IL into those AL units? Or are you tracking people from outside the community? I'm trying to understand the move-ins -- the nature of the move-ins on the unit conversions..

Actually, it's a good question, Dan. The move-ins are nonresidents. These are people moving in from outside the community. But what's happening is the resident in the community are starting to receive services. And we now start to assess those residents every 90 days.

And based on those assessments they need, as those services will increase, we expect that we will begin providing assisted living services to those residents. What's very interesting is that in most of these buildings, the license that we received is for the entire building.

So residents have a luxury of staying in place in their home and then can receive additional services, which we can now -- we've implemented digital in already in the converted units or software technology to do the assessments and then start to appropriately bill for those services to those residents.

But the gains we're talking about is all occupancy because these are vacant units being sold from the outside..

What kind of services are you providing? I assume you don't want to be a home health or therapy provider. I'm just trying to understand the services that you're moving into IL..

Yes. It's kind of lower-level services to residents. It could be help with ambulation, bathing. It's not medication management. It's not assisted living. It's more of the kind of the services that relate to their limitations where rather than have a home health care aid come in, they can contract with our staff to provide those services.

They're non-medical and really non-health care..

Okay, okay. And then in terms of the expenses again on the quarter, I might have missed this. I hope I'm not asking something you already said. It was a fairly moderate summer in terms of temperature, at least on the East Coast. And it seemed like that in some of your main markets and geographies.

How did that impact -- how did the seasonal weather utility costs compared to last year and what you expected?.

Yes. So it was flat with last year. Our utility costs were flat with last year, and we certainly would have expected to have some kind of inflationary increase. First to the second quarter, we said that we expected to have maybe a $500,000 increase or so. It wasn't too far from that.

It was around $450,000 increase from the second quarter to the third quarter in utility costs. But that certainly helped, and it was a generally milder summer, as you know..

Okay, okay. There seems -- go ahead. Go ahead..

That's okay. Go ahead..

So it seems on the expense side, it wasn't just one item that came in maybe a little bit better than what you expected. It was really a lot of different items that helped out..

It was across the board, yes. So we -- several categories in the third quarter were down versus the second quarter. Contract labor -- food was actually down about 1% versus the second quarter. Advertising and promotion expense, that was down about $150,000 from the second quarter. Repairs and maintenance, I mentioned, were down, printing, supplies.

So it was really just across the board, several factors, and it wasn't a significant increase in any particular category on the other side of things..

Okay. And then on the acquisition front, it seems to me that you look at the NIC MAP data, independent living. Supply and demand fundamentals are actually better than assisted living. I might have asked this. I think I asked this last quarter to you guys.

Are you thinking about maybe doing some more independent living or IL/AL combo versus just the assisted living pipeline given the fundamentals out there in IL?.

We do continue to buy some IL/AL, IL/AL memory care. It's interesting that most of the properties that we see are more AL and memory care. It's a function of the newer construction, newer buildings in the last decade were predominantly AL versus IL. We've had some free-standing IL purchases.

And as again, some of the properties do have IL/AL and memory care. But I would say, probably 80% of the units that we're acquiring continue to be AL. And it's more a function of the product that we see in the market..

Okay.

Have you looked at any value-add IL or older 1990s vintage IL where you may be able to do unit conversions such as what you're doing with your legacy portfolio?.

It's possible. It would be consistent with that. It depends on the state and the licensure of that state. So it's something that we do look at as the possibility. But as I said, there's just not a lot of free-standing IL that we see in the market..

And we'll now take our next question from Dana Hambly with Stephens..

Just on the recurring CapEx at $410 annualized, it seemed a little bit low to me.

Is that a good run rate going forward?.

Yes, I think that's a pretty good run rate. $410, I mean, it may be up to $500 or so, but that's in the range that we would expect..

Dana, I think it's pretty consistent with last quarter..

Yes, it was a little bit higher than the first and second quarter, actually..

Yes, yes..

Which, as I recall, was around $390 or so..

We continue to go through upgrading properties. I mean, we got -- if you look at our website, you'll see a number of buildings that have been recently recarpeted, refurnished dining rooms, common areas. And I'll tell you something, we're seeing some very strong results in the leasing of those units as they are refurbished.

Obviously, it's not recurring CapEx, but that -- they are -- and remember that the recurring CapEx is in addition to the ordinary maintenance expense that we have as we turn units on new residents moving in..

And a lot of our efforts right now are directed at conversion as well as some of the more significant renovation projects we have going on..

Okay, okay, that's helpful. On the -- Carey, a couple of numbers, too.

On the CFFO, the $0.02 incremental in the quarter, what was that again?.

We had prepaid resident rents that were higher. So that's a balance sheet change and that funny non-cash charges net number. That's -- sometimes it's difficult to predict, Dana, and we did have an increase in that of $500,000.

That particular category goes up and down, but that -- we would not necessarily expect that kind of increase to occur again in the fourth quarter. So I just wanted to point that out..

No, no, that's helpful. Is there anything seasonable -- seasonal about that? Or is that -- okay.

How do you control that?.

It's really not. It's just how many residents happen to walk in and give us a check prior to the end of the quarter versus how many walked in and gave us a check prior to the end of the previous quarter. So it's very difficult to predict. And we had a $500,000 increase this time.

I don't know what it'll be next time, but we just generally expect that to be 0 going -- on a quarter..

It's very hard to forecast..

Yes, that's a good way to approach it. And then the $250,000 you said that was normally what you would see in fourth quarter food costs above and beyond the third quarter food costs.

Is that right?.

That's right, yes. That's normal, and it's just holiday parties and special events that we have in the fourth quarter because of all the holidays that occur..

Okay. And then, Larry, you gave -- I didn't catch it in your prepared remarks, about the end of the quarter, something to do with the move-outs and deposits on hand and 84%....

Yes. What we track every week and is an important metric to kind of be a good forward-looking indicator is what we have as deposits on hand versus our move-out notices. Residents typically will give us 30 days' notice if they're moving out.

And if you look at the end of the quarter, September 30, that spread between deposits on hand and move-out notices was 84% higher than the same week in 2013. So the outlook for the fourth quarter is encouraging..

All right. And just to get a little more clarity, you're just measuring 1 week versus 1 week in the prior year.

But if we look at the progression of occupancy throughout the quarter, would you say it got stronger through September?.

Yes. Actually, the third quarter occupancy was better move-ins was higher than second quarter. And the momentum, September was fabulous. I mean, September is usually one of our best months. We were up every week in September for 4 consecutive weeks and with a very strong close. So it's good.

I mean, the momentum was there, and my experience has been that when we have a good September, it typically leads to a positive fourth quarter..

Okay. That's good news. Just last one, Larry, you talked about increasing the real estate value in the prepared comments.

Given some of the large portfolio acquisitions we've seen recently, and then there is a big health care REIT deal announced earlier this week, how are you feeling about your real estate value, your fairly large portfolio now? Just kind of your discussions in the board -- with the board, any potential actions we -- you could take.

Or just how are you thinking about that these days?.

I think that what we're seeing on the valuation of senior housing assets, typically the large portfolios, is reflective of the interest from institutional investors, recognizing that the best-performing asset class in the last probably 4, 5 years has been senior's housing. So it's really -- it's kind of the basic supply and demand, if you will.

What's happening is finally, there is compression of cap rate. The spread between multi-family cap rates and senior housing cap rates is compressing. I think that's reflective of the fact that we are maturing as an industry with much more institutional capital interested in the sector. I think it's going to continue to compress.

I think that the fundamentals look extremely strong for next couple of years. The NIC MAP data is extremely encouraging. When you look at -- if you look at our website, if you look at the chart that we have on absorption, and you can see how absorption -- move-ins in the top 99 markets is actually accelerating.

So I think that as long as fundamentals continue to improve, I think interest rates -- I'm not an economist -- but I think based on global factors, we'll probably stay moderate for the foreseeable future. I actually think that cap rates may go lower for larger deals, particularly on scarcity.

So we're looking at what we can do to improve the quality of our portfolio, select asset sales, enhancements or renovations, refurbishments, conversions, all of which will increase cash flow.

And since cap rate is a factor of cash flow, to the extent that we increase our cash flow, and if cap rate is compressed, our real estate values will continue to grow. Right now, we are fiduciary to our shareholders.

So we are always cognizant of shareholder value, but we have a big competitive advantage of having all this cash flow we generate to reinvest at very high returns and accelerating the real estate value. So I think that the real estate value is attractive today.

And I'm hopeful it will continue to be even more attractive in the future with a larger portfolio..

Great. It sounds like you've been asked that question before, Larry..

You know what, I give a lot -- Dana, I give a lot of thought to it..

[Operator Instructions] We will now take our next question from Todd Cohen with MTC Advisers..

Just kind of bookkeeping item.

On the 360 units that are out of -- that you're converting, and I guess that includes 4 properties now, what is the total number of units in those 4 properties?.

The 360 is at 15 properties. The 4 properties that we took out of service are the 2 CCRCs, and the acquisition we made that we bought with the bridge loan, expecting to get higher licensure and [indiscernible] building and things of that sort. And the last is the second phase of a conversion of AL that we had to close 45 units.

So it's 4 buildings out of the 15, let's say, that are out of service or....

How many total units do those 4 buildings represent?.

Well, I'll say the CCRCs are probably somewhere around 600 units..

Each?.

300 each..

300 each, okay..

No, no, excluding out of service. Out of service, we have the 2 CCRCs, that's 600 units. We have 45 units out of service in that conversion. I would say it's probably around 700 units, Todd..

Okay, great. And then on the -- I'm assuming that the building where you're doing the 45 units, I'm assuming that's Boca. You've spoke about that before. So 45 out of the 190 is a lot of units.

So I'm just trying to -- I'm just trying to understand the process for how you get to 190-unit building with I don't know how many units that -- I don't know how long they've been unoccupied, but why weren't we doing this sooner?.

We started construction in September. Let me explain the Florida situation, Todd, okay? There are 4 buildings that are interconnected of 45 units each. So it's 180 units, roughly. One of the buildings was closed a few years ago. Our landlords invested $2.7 million. Those -- we converted 45 units from independent to assisted living.

All new kitchens, new doorways, new bathrooms, I mean, fairly significant. Those 45 units are full and -- or substantially, 95% or higher. We then have started not admitting new residents earlier this year in order to create vacancy. So we were able in August to get 45 vacant units in a building..

So Larry, can you actually vacate residents?.

We actually would vacate residents. More importantly, we stop admitting new residents into that building. And then we actually would move residents to another building. So the entire building is vacant this way. We can now have all the construction that's necessary without being disruptive to anybody. The construction started in September.

And we'll take, I guess, 4 to 6 months to complete. And then those units will be reopened, and we'll start leasing those -- we'll probably start preleasing those in the first, second quarter. And hopefully, we'll have the same success as the first converted phase had a couple of years ago..

Okay, great. And then there's been a lot of numbers discussed. So I think I heard you say that there is 97 of the 360 that have been licensed now.

Is that correct?.

That is correct..

That's right..

Okay.

And then 150 are expected to be licensed before the end of the year?.

No. We said....

Roughly half..

Roughly -- the figure is about 90 a quarter or so..

90 a quarter or so.

So you'll be able to license another 90 in the fourth quarter?.

Fourth quarter or early first quarter, yes..

Yes..

Okay, all right. Got it. And....

The timing is never precise because it's out of our control. There's a process -- so again, you can tell, we actually -- the 97, what's interesting, Todd, we receive provisional licenses on July 15 and August 7 for those 2 buildings and then we received permanent licensure on October 21 and October 3.

So there's a process that goes through where you are compliant with building code, you've had your staff, you gave provisional license and then you have resurveys done by fire marshal, building codes and the licensing regulators. They'll come in and survey, and then you'll get a full license..

Okay. And then just to confirm again, you -- I think I heard you say that when you get these licenses in these buildings that you're converting from IL to AL, the entire building is actually licensed for AL..

That is correct..

Okay. And then ....

We don't expect that it will be utilized, but the entire building is licensed. But the ones we're doing now, we are typically licensing the entire building..

Okay. And then it's in those buildings that you're able to provide your IL residents with assistance from your AL staff.

Is that what you were saying?.

Yes..

Okay. Got it. So is that something you can do in your other IL/AL properties or you've just....

In certain states, not everywhere, in certain states. It depends on the states. In Ohio and Indiana, we can do that..

Okay.

And just with respect to the deposits versus move-outs, the 84% number, to get that into reference, how many more deposits is that actually in absolute numbers?.

On a same-store basis, the number is around -- [indiscernible] exactly how many more. It is 31 more deposits -- no, I'm sorry, the actual deposits is, say, about 31..

So the actual deposits is 31..

That depends on -- deposits versus move-outs..

Okay, okay. Got it. Let me just see. And then the 5 -- you said you received the $5 million after the quarter-end.

That is all unrestricted?.

Yes, it's all unrestricted. It's available for us however we choose....

There are no further questions in the queue at this time. So I'd like to hand the call back off to Mr. Larry Cohen for any final or closing remarks..

Well again, we thank you, all. And Carey and I look forward to seeing some of you over the next few weeks as we are presenting at various conference and some other meetings we have scheduled over the next few weeks. As always, feel free to give us a call if you have any further questions. And we thank you very much for your interest in today's call.

Have a good evening..

Thank you..

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation..