Larry Cohen - CEO Carey Hendrickson - SVP and CFO.

Ryan Halsted - Wells Fargo Joanna Gajuk - Bank of America Merrill Lynch Daniel Bernstein - Stifel, Nicolaus Dana Hambly - Stephens Todd Cohen - MTC Advisors.

Good day, and welcome to the Capital Senior Living Second Quarter 2015 Earnings Release Conference Call. Today's call 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 as well as 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, sir..

Thank you. Good afternoon and welcome to Capital Senior Living’s second quarter 2015 earnings release conference call.

We are successfully executing on our strategic plan which resulted in significant growth during the second quarter in all of our key metrics, including revenue, occupancy, average monthly rent, net operating income, adjusted EBITDAR and adjusted CFFO as compared to the prior year.

Our same-community NOI grew by 4.7%, our adjusted cash flow from operations increased 22.3% and we reported a record-high second quarter adjusted EBITDAR margin of 36.8%.

We were particularly pleased with the growth in our second quarter same store occupancy, which increased 60 basis points from the first quarter of 2015 and 40 basis points from the second quarter of 2014.

We continue to see limited new supply and construction in our local markets and our conversions of independent living units to assisted living and memory care units continue to show timely progress In the second quarter, we completed the acquisition of three senior living communities in our geographically concentrated regions for a combined purchase price of $26.9 million.

In July, we completed the acquisition of a senior living community for approximately $13.3 million. Thus far this year we have completed the purchase of six communities for approximately $88 million and they are expected to generate first year CFFO of $0.13 per share and a 16.6% cash on cash return on equity.

Subject to completion due diligence and customary closing conditions, acquisitions totaling approximately $74.5 million are expected to close by the end of September 2015, which will bring the company’s total acquisitions in 2015 to approximately $163.4 million.

We are conducting due diligence on additional acquisitions of high-quality senior living communities in states with extensive operations.

Our strong second quarter results reflect the successful implementation of various initiatives over the past 12 months, including occasional introductory specials at lower occupied communities, increasing rates at higher occupied communities, increasing level of care charges and disciplined expense management.

We are also benefiting from renovating and refurbishing communities and converting units to higher levels of care with significant gains in occupancy and average monthly rents which Carey will discuss later on the call.

Additional renovations, refurbishments and conversions are planned over the next 18 months and they should lead to further improvement in our operating and financial results. Our recently implemented sales and marketing initiatives are also yielding positive results.

These include improvements to our website, the launch of call centers, enhanced sales training, improved lead tracking, enhanced search engine optimization strategies, integration of Internet leads with our database management system as well as branded vehicle reps and property signage.

These initiatives increased second-quarter occupancy as we generated more leads and improved closing ratios. A positive growth in demand that we're experiencing is encouraging and we look forward to building occupancy throughout the balance of this year and over the next several years.

Successful execution of our business plan has improved the quality of our portfolio and enhanced our private pay revenues. We closed the only skilled nursing beds we had operated in two continuing care retirement communities at the end of 2013.

In January of this year, we completed the sale of four older non-strategic communities and are scheduled to close another non-strategic community sale this month.

These actions have improved our operating metrics that allow us to accretively recycle approximately $26 million of cash proceeds into acquisitions of newer better performing communities within our geographically concentrated regions.

The sale of these five communities have eliminated our operations in three states which has allowed us to sharpen our focus on our core strengths and bolstered our operations in our geographically concentrated regions.

And our acquisitions have transformed Capital Senior Living into an owner of newer high quality senior living communities that generate strong sustainable results which are exceeding our expectations.

Industry fundamentals continue to improve and demand for our communities continues to grow as demonstrated by our second-quarter increases in occupancies and rates.

As we have discussed on previous calls, senior housing construction remains concentrated in select markets and continues to be needed in most of our local markets as our value strategy acts as an economic barrier to entry for new development. Construction costs averaged in excess of $200,000 per unit.

Our average monthly rents of $3,367 would have to be about 50% higher in most of our markets to produce a reasonable return on the cost of development indicating the opportunity to realize significant rent growth before new construction would become viable in these local markets.

We appreciate the recent in-depth research reports analyzing construction in the top MSAs which confirms our limited exposure to new construction.

With strong industry fundamentals and improving economy and housing market, limited new supply in our local markets and the gains we are recognizing from our unit conversions and community renovations and refurbishments, we believe that our occupancies can grow to an optimal level of 92% or 93% providing significant opportunity for additional organically driven CFFO growth and increases in our own real estate value and stock price.

Every 1% improvement in occupancy is expected to generate $4 million of revenue, $2.8 million of EBITDA and $0.06 per share of CFFO. Our selective and strategic acquisition program which began in 2011 has been funded from internally generated cash.

In the past four years, we have completed the acquisition of 49 communities for a combined price of approximately $663 million. These acquisitions have generated a 16.2% of cash on cash return with first year EBITDAR totaling $63.2 million and first-year CFFO totaling $1.03 per share.

Our consistent success in acquiring quality communities in most of the off-market non-broker 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, our robust pipeline allows us continue our disciplined and strategic acquisition program and increase our ownership of high quality senior living communities in geographically concentrated regions and generate meaningful increases in CFFO and shareholder value.

Many of you have asked us to comment about potential increase in interest rates as many economists expect the Fed to raise rates slowly over the next several years. First, I’d like to remind everyone that virtually all of our debt which is assumable is fixed at an average interest rate of 4.64% with an average duration of 8 years.

In fact, 92% of our debt matures in 2021 or later. Currently 10-year interest rates are nearly 200 basis points lower than they were when we [ph] initiated our acquisition program and we were excited about the expected returns at those rates.

Therefore even if rates rise slowly, acquisition financing should continue to be available at attractive rates for the foreseeable future and as evidenced by the historically low interest rates on many of our recent financings, borrowing spreads are narrowing due to increased competition amongst lenders, including Fannie Mae, Freddie Mac and life insurance companies.

I also would like to note that most of our residents are [ph] in fixed income investments. So an increase in rates particularly short-term rates would give seniors greater disposable income. Prior to 2008, the senior living industry enjoyed same-store average annual rent increases of 4% to 6% for more than a decade.

Since 2007, low interest rates have moderated rent increases. In a higher interest rate environment, I would expect to see better organic growth as larger rent increases would increase net operating income. Higher interest rates would also increase construction costs and reduce construction loan proceeds which could limit new supply.

Because interest rates are still at historically low levels and with increased interest from institutional investors and lenders, cap rates could compress further even if interest rates begin to rise.

Seniors housing proved to be very resilient during the great recession and today it’s becoming a core asset for many institutional real estate investors.

I believe that strong industry fundamentals, especially the expected growth in demographically driven demand will continue to make seniors housing an extremely attractive investment with sustainable long-term returns even if interest rates begin to rise.

Our operating strategy is to provide value to our residents by delivering quality senior living services at reasonable prices. We have many competitive advantages as a larger quality operator with economies of scale in a highly fragmented industry.

However I believe our most important competitive advantages are our people, our focus, our community empowerment philosophy and our straightforward private pay business model. As we strengthen these competitive advantages, we are also lowering our cost of capital.

We are executing on a strategic plan that is focused on a very important objective of enhancing shareholder value through organic growth, disciplined 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 and cash flow and value enhancing unit conversions and community renovations and refurbishments.

Successful execution of this strategic plan has produced consistent solid results. Since 2010 we have increased our percentage of owned real estate from 32.5% to 58%. Adjusted CFFO has grown at a 22.5% compounded annual growth rate and once again we grew adjusted CFFO by 22.3% in the second quarter 2015.

Adjusted EBITDAR has grown at a 17.9% compounded annual growth rate and our EBITDAR margin has increased by 690 basis points from the second quarter of 2010 to a record high second-quarter margin of 36.8% in the second quarter of 2015.

This track record demonstrates that we are well-positioned to continue to make significant gains with 96% of our revenues derived from private pay sources in an industry that benefits from need-driven demand, limited new supply and improving economy and housing market.

The continued execution of our strategic plan is expected to generate sustainable significant growth in cash flow, our owned real estate values and most importantly shareholder value. I would now like to introduce Carey Hendrickson, our chief financial officer, to review the company's financial results for the second quarter of 2015.

Carey?.

the 400 we’ve now completed, another 100 incremental type conversions to be completed by the end of ‘15 and then 200 more incremental conversions by the end of 2016. We’re also expanding three of our communities to add memory care.

We currently expect at least two of these expansions to be completed and ready to begin lease up at some point during 2016. And major renovations are being done at more than half of our communities which will enhance our ability to increase rate and occupancy over time.

Also, we’re repositioning two previous skilled nursing communities which are currently excluded from operating and financial results.

While it’s a little early to be too definitive about the potential financial impact of the repositioning of these two communities, the incremental contribution to CFFO when they are stabilized and added back to our results should be significant perhaps in the range of $0.10 to $0.15 per share of CFFO on a combined basis.

Lease up will begin at these repositioned communities as phases are completed and their financial results will be added back to our reported numbers when they reach stabilization which is currently expected also in phases in 2016 and ’17.

And then with a robust acquisition pipeline and continued favorable financing environment, we expect to continue to add high quality communities that are a good fit for our portfolio which will further enhance our growth.

Taken all together, successful execution of our strategic plan will result in significant growth in our operating and financial results which we expect to translate into excellent growth and shareholder value. That includes our formal remarks and we would like to now open the call for questions. .

[Operator Instructions] And we have a question from Ryan Halsted with Wells Fargo..

So clearly the strong occupancy, I think, was the biggest surprise for the quarter or at least, the big story of the quarter. So I would be curious if you could provide just some color on how your occupancy trends took place across the quarter, just any sort of color on move-ins, or net move-ins and how that progressed from April through June.

And even you talked about third quarter as obviously seasonally the strongest, what are your expectations do you think from this point on what kind of occupancy growth you could see?.

Ryan, we said at the end of the first quarter, we had an outstanding March. That set the stage for a strong second-quarter. We ended the best year of – the best week of the year in June which set a great stage for the third quarter as we saw in July and very high deposit taking.

If you want to look at the actual trends, our financial occupancy improved sequentially in April by 40 basis points. It dropped 10 basis points sequentially in May and increased 40 basis points sequentially in June. And as Carey said, the financial occupancies right now preliminarily appear to be up in July.

And again we’re very encouraged by the strength of the last week of July. We had a terrific week with a very high – second highest level of move-ins for the year and as Carey said, the highest level of deposits.

I think that the reason that we feel that the occupancy trends have improved and are continuing to improve is just we differentiate Capital Senior Living. We have a focus on private pay senior housing as our core business.

I think that the straightforward nature of our business model clearly helps with the community empowerment of having terrific on-site staff and executive directors and sales directors driving their business with their oversight and the systems that we provide them. And I think that the investments we’re making in our assets are really paying off.

The outstanding returns on the conversions, as Carey mentioned, in the second quarter, same-store converted units had a terrific occupancy gain and 20.5% revenue gain in the second quarter versus the second quarter of last year. Selling off the other performing properties helped as well. We said, when we did that, we improved our metrics.

So we have called out those properties that we feel are non-strategic are [ph] in weaker markets and the acquisitions, I am very proud to report, I just have a analysis of our acquisitions and those properties that we acquired in 1993 ended the quarter at 93%.

Our 2014 acquisitions ended the quarter at 95% -- I am sorry, our 2013 acquisitions ended the quarter at 93%, our 2014 acquisitions ended the quarter at 95%. And our 2015 acquisitions ended the quarter at 95%.

So we have truly transformed Capital Senior Living as I said in my comments to a portfolio of newer high quality portfolio in underserved markets with limited supply and the investment we’re making in our assets through the conversions and we haven't even begun to see the benefits from the renovations and refurbishments that we plan to complete over the next two years.

So hopefully that gives you a better color of what's going on at the property level, and as I said I think the stage is very well set for continued growth in the third quarter which typically is the best quarter for the industry and the fourth quarter which we’ve actually enjoyed very – great success over the last few years. .

That’s great. I wanted to also get your thoughts on the topic of the new supply. I mean I know you've been very consistent in stating that new supply and new construction has not been an issue in your markets.

But it’s been certainly a topic that's gotten a lot of increased attention, the NIC data presented some significant or a decent amount of pick-up in new construction and suggested they might be pressuring occupancy across the broader industry.

Just any additional color from you as to you what makes your markets unique in that the barriers to entry just are discouraging the new supply and just what do you think are happening that's different I guess between some of these isolated markets and your markets?.

As I said it’s economics. The average rent that we collect from our residents is $3,367 a month. The cost to build today is $200,000 a unit. At 90% occupancy at that rent level it probably would generate just only a 5% return on cost. No one is building.

I’ll also point out that San Antonio which clearly has a lot of supply coming on in its market is one of our strongest markets. We have two independent living properties, again very little independent living built a 1.9% versus 6% for AL but if you look our San Antonio properties we ended July at 95% and 98% occupancy in San Antonio.

And there is a larger building being built but some of the ones [ph] that are being built is not competitive because the builder built too good a building where it’s too hard for residents to walk from the furthest unit to designing room. So as I said it's people, it’s systems, it’s training.

The San Antonio properties actually went through a refurbishment this year. It’s on our website, so if you walk in, there is nice as new building being built but they have a history, they have a presence in the market.

They have a reputation and at the end of the day I want to compliment everyone of our on-site staff members and team members for the great job they are doing, because that's what makes the difference.

So if you're in good markets with good people and a stable company with a focus and the attention that we have, I think the results are what we’re seeing and while we differentiate Capital Senior Living. .

Thank you. We’ll continue on to Joanna Gajuk with Bank of America Merrill Lynch..

So just coming back to the occupancy question, the fact that it was strong, first, it’s the 40 basis point sequential improvement, that’s comparable to the financial occupancy data that the industry is talking about, that the NIC is talking about?.

Yes..

And then so on the occupancy strength, I guess you’re talking about that the sale of your under-performing assets also helped.

But is there a way to quantify, I guess, the benefit from conversions? I mean you gave some numbers for this particular portfolio, but are you able to say now that, of the 40 bps improvement, this much is from conversions?.

I don’t know that I can say with that level of detail, Joanna. But – and looking at the conversions, they certainly have a tremendous impact.

I mean if you just -- and isolating the ones I isolated that, that the conversions that have taken place so far, just the increase in occupancy there has been tremendous and that certainly does help the overall impact. It’s a relatively small number of units when you're looking at the number of units over the company as a whole.

So it does help increase that occupancy but there are other factors as well. But they are making a significant contribution, I do believe, to the overall trend of the company. .

Yes, actually it’s interesting. Our independent living – if you look at the level of care that we can give you, the second quarter 2015 independent living occupancy sequentially improved to 1.2% with 1.1% rate growth. Assisted-living sequentially actually dropped 10 basis points with 1.2% rate growth.

So what’s happening on the independent living is that through these conversions, it's interesting that we’re seeing a pickup in the independent living occupancy because those buildings are becoming more attractive to families, knowing that if their family members need more care, they can receive higher levels within the community.

So that has been a big benefit that we’re seeing in the portfolio. But the conversions were great but again it's 400 units of roughly 10,300 units. So it’s a small piece of it. I would say it’s very consistent. When I look at our occupancies, I gave you some metrics.

Actually I misspoke San Antonio ended the week at 100%, the other property was at 95% but it's just – we’re seeing it really in virtually all of our markets and I said, where we had challenges we’re exiting those operations from those markets. So that is helping as well. .

So you’re saying that the occupancy improvement is just on demand that is in the market, so you said that you’ve already seen in May, I guess, improvement because the industry, the NIC, they talk about April was weaker than – that there was some improvement in April and June but still the industry came out down sequentially.

So I am just trying to understand what’s different but I guess it comes down –.

Let me clarify one thing, Joanna, for everybody. We met with the NIC MAP group a couple weeks ago and I have been active as a member of the operator advisory board at NIC for many years, and NIC does a great job and tries to improve transparency for the industry.

So I think that what people don't appreciate is the data for NIC comes in through the quarter. Capital Senior Living provides data on our properties but again what it’s interesting, of the 99 markets that NIC covers, I think we are only in 30 or 40 of those markets. So the data I am giving you isn't even in NIC data.

It’s a very small subset of what we give NIC. The other component to understand is the timing. We provide the data for our second quarter information in early May. So all NIC picked up from Capital Senior was 4 to 6 weeks of operations, there was nothing in there for May or June which was actually our best – obviously best trends.

And I believe that's true of other companies. Now I know that NIC is working on a new platform trying to get rent rolls and get financial data more timely from operators, if not there yet.

So I know that it's important to have transparency for this industry but I just caution the readers at NIC MAP data that first of all it’s not an average for the quarter, it’s one date during the quarter based on the last data that the company reports and in many cases it's only the first 4 or 6 weeks of the quarter.

So hopefully based on our performance, some of the other reported performance as you saw from some of the REITs on their portfolios, the third quarter will be better when they get it because of the strength of the latter part of the second-quarter. .

So the other interesting part I guess, the cost control -- you talked about the labor being up only slightly. So is there any color you can share with us in terms of the outlook there because I guess there's some pressure on wages in different markets for different reasons.

So are you seeing it because I guess it doesn’t feel like those numbers are showing that but do you expect acceleration in labor costs going forward?.

Joanna, we really are not seeing any significant wage pressure and yes, you know that our minimal increase in labor costs is evidence of that.

When you look at where we operate, the states we operate, we’re primarily in the midsection of the United States and the southeast United States and there is just not the same kind of wage pressure for increase in minimum wage like in some states on the coast and really – and even thinking about minimum wage, only about 5% of our employees are at minimum wage.

So most of our employee –.

And they are students. It’s interesting – we talked earlier, we have an hourly wage distribution report that when I saw the articles, we talked to this last quarter a little bit on the call. When we saw what was happening with Walmart, Target, some other companies with minimal wage, we did an analysis of our hourly field employees.

As Carey said, 5% in minimum wage but those are high school and college students working maybe 20 hours a week, mostly in wait staff and there is turnover because they only work for the school year but they have the balance of life where they have flexible hours. Many of our nurses are getting $25 an hour. That’s 5%.

I say the median of our hourly employee is probably in the $9 to $12 range. So I think that we pay competitively. Obviously we’re seeing great success in our retention of key people in our company both corporately and at the property level.

But I do think part of our strategy of operating in the states in which we operate just has less pressure at this – today on minimum wage in your city and as Carey said in New York, California, some of the coastal cities. .

And I think it’d be very difficult to keep our labor costs at only 0.6% now. And for the year, year to date it's up 1.2% our labor costs overall, which is still very impressive. But keeping in that 1% to 2%, I think is possible going forward and – because we don’t see any significant pressure on wages. .

The other thing that's very important is last year – I talked about changes over the last 12 months and this is a big change.

We did have some anomalies in the first half of 2014 on expenses and we have new systems now that actually track and monitor over-time contract labor, again it’s focused which has reduced our costs by just better management of hours as well as technology we use for care plans and staffing that allows us to manage the labor costs much more efficiently than we did previously.

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Just lastly on the G&A on the flipside, it was 4.8%, excluding some costs, it’s up from 4.2% a year ago.

So I guess did I hear right, you mentioned some higher health insurance costs, so is that in G&A or will it be in some other line?.

That was in G&A. That’s about $600,000 of increase related to higher medical claims expense and in the second quarter of this year compared to the second quarter of last year and it's really about last year more than this year. Our last year medical claims expense was unusually low in the second quarter.

So this year's expense is more normal and in line with our expectations. So that was really the reason for the increase there..

So then going forward, how should we think about the G&A ratio in the 4.5 kind of range like you were talking before or is there any –.

Yes. Certainly it’s somewhere between the 4.5% and 4.8% is something kind of like what we think we would probably be at in that range. It’s just pretty much where we’ve been for the last several quarters and I think we’d probably continue in that range. .

We’ll go to Daniel Bernstein with Stifel..

So I wanted to also talk about potential for better rate growth going forward. As the -- not simply just from the increase in rate from conversions from IL to AL but being able to go ahead and start pushing portion rate maybe above 2% for the legacy units as portfolio occupancy pushes above 90% presumably sometime later this year next year.

I mean that’s the one thing I still look at the NIC MAP data which you are cautioning on, rate growth seems to be pretty subdued relative to where we were couple years ago and wanted to think about your portfolio in particular whether you think you will be able to push rates some more going forward?.

Actually, Dan, we are right now in the process of doing that. We have hit that level of Occupancy. We've recovered from the great recession and we are starting to look at increases in rate growth. Now I ask the analysts don't change your models, okay, because it will be a gradual process.

So please don't start putting numbers out there that we have to stretch for. But we are – intrinsically we at 90% by the way. We have ended the month of July – it’s not financial and there is a difference and there is a lag time. But we are at 90% which is a great accomplishment for this company. We haven’t been there since 2007.

So we are actually starting as we speak to have the properties look at increasing rates because of the strength of our occupancies. The other point is the level of care charges. We've talked in the past about Vigilant – the system we use for care level.

In the second quarter our care level fees on a same-store basis increased 15% over the second quarter of last year and that also will factor in. So I think a point extremely well taken, it’s something that we and the operating team have already implemented.

I mean it really is – but again please be careful in your models because it will take some time to see that filter out through our portfolio but I do think that we recognize the strength of where we are today and that will allow us to start to push rate, again not tremendously more.

It was 2.5% same-store, what’s important, consolidated rate growth was 6.6%. So clearly our strategy of buying better properties, selling off the non-strategic assets makes a big difference. But we kind of target 3% and hopefully we will be reporting close to that in the future compared to what we did this quarter.

I do think just from a commentary about what’s happened in the industry, I talked about with my interest rate comments, seniors have been living on virtually no interest income for years now, seven or eight years.

So that has impacted and I do think one of the benefits, if rates do start to rise, is our residents will have more income and we typically then can start to see rate increase which would increase organic growth for the industry. .

I guess historically do you think it was the more where the short-term rates are or where inflation has been or maybe it’s been all if I remember back ’05, ‘06 or ’07 occupancy was in the low 90s.

So I guess it’s a combination you look at it or is it the people trying to push rates to keep up with inflation?.

I think short-term rates. I think short-term rates because that's what’s the residents are living on. They are living on deposits in the bank, AD, CDs but I do think it’s more short-term. .

And then in terms of the acquisition platform, it looks like you’ve tiled some of the acquisitions more towards I guess combination facilities, it looks like you have IL and AL units you are picking up.

Have you switched a little bit away from doing pure AL, does that have anything to do with the supply demand fundamentals in assisted living versus independent living and obviously you’re very vocal on construction but does look like IL has a little bit better demand versus supply or very little supply coming online.

So how do you think about acquiring pure assisted-living memory care only versus combination facilities?.

It's really a function of what we see. We’re not that strategic in the acquisitions. It really is what the pipeline shows. I will tell you something, though.

I’ve become a real student value of real estate in seniors housing and on a per unit basis the highest cost I’ve seen on deals that we typically aren’t successful in bidding for but that we see out there, combined IL, AL and memory care.

Those three components combined provide a rent level and the margin level that seems to generate the highest cash flow per unit. That ends up having the highest cost per unit. We’re seeing deals now over $300,000 a unit for that type of portfolio, that type of assets.

So I do think that the mix makes a big difference and one of the hopeful comments I will make about what we’re doing with conversions that we don’t factor into our numbers is that when you do the actual operational models on staffing and costs and look at the revenue by having the three levels of care, you actually end up with the best performing asset and I think it generates the most cash flow and as I said the highest real estate value.

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And have you seen any more deals going your way or are you winning any more market transactions, healthcare REIT valuations have pulled back a little, interest rates are obviously up some.

So do you think you’re winning some more deals? Do you think your investment volume can pick up a little bit at the expense of healthcare REITs or other competitors? Just trying to understand – I mean you are already doing 163, I mean it sounds like you’re going to do more than that?.

I will tell you something. This is a new phenomenon for Capital Senior Living. Of the $88 million that we have closed, 42800 was marketed and 45150 was off market, half. Of the 162 million, 96 million is marketed. So actually 60% of what we have right now and the half if you will, through September is marketed.

So we’re becoming little more competitive on marketed deals and that's why we’re seeing the volume pickup on the acquisitions and I think you pick out the reason why. .

Thank you. Our next question will come from Dana Hambly with Stephens..

Larry, on the memory care, how much memory care do you see if you have at this point?.

Right now we have roughly I think 1200, 1300 units of memory care. So it’s about 10% of our portfolio, about 20% of our assisted living is – we have no freestanding, Dana.

It’s all a component to an existing building and as Carey commented we now have expansion plans for three properties that are full to add memory care or expand memory care at those buildings. .

That’s adding new wings?.

It’s adding a new wing, yes. It’s actually a construction to add a new memory care wing at those three locations. .

And these are all owned properties where you are doing this?.

They are owned properties, yes..

And Carey, can you help me just on the third quarter relative to the second quarter, I caught $0.04 in increased expenses but there were some pluses too which I think in all of those?.

That’s right. There is $0.04 in expense because of higher utilities and the extra day of expense in the third quarter.

But then going the other way we’ve got improvements in core operations and that's related to conversions and that’s going to add us probably about $0.02 of CFFO per share and then another $0.02 related to the acquisitions we made during the second quarter, kind of the full impact in the third quarter, plus the ones we’ve made -- that we will make during the third quarter, that will impact us in that quarter.

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So $0.04 on the bad side, $0.04 on the good side..

I mean hopefully occupancies may be a little higher than we’re projecting based on where we are. We’re not really forecasting that type of change. So I think we’re being cautious in our outlook. That’s what we see today..

So the variables that could drive it one way or the other than occupancy and rate expense control, is that about right?.

That’s exactly right..

And then lastly for me on the repositioned properties.

Carey, I think you said that could add a potential $0.10 to $0.15 once they are back online?.

That’s right. That’s our combined basis for the two. And they will come in over phases as we get – as we complete the construction and then get them leased up and stabilized and we’ll add those back in. And it’s probably going to be -- start phasing some of that back in, in 2016, mid-to-late 2016 and then into ’17. .

But if I just look at the EBITDAR contribution from the first quarter to the second quarter, it looked like it nearly doubled from those properties.

So it looks like we are getting pretty good traction at this point, is that fair?.

Yes we are and – yes we are, and especially some of that is at the two communities that we may add back in the second half of this year. .

I'll comment on one of those which is our property in Florida, Veranda Club that's been off-line. We just completed the conversion of 45 units from independent to assisted-living. We took it out of our numbers because the rest of the building is full and we thought it would kind of skew our numbers.

We’ve just gotten license last week for that property. We now have 33 move-ins scheduled for the 45 units. So that's why we’re hopeful by the end of the year that property will be stabilized. The other property was an acquisition of 49 units that needed to be upgraded with licensure, we have the upgraded license and right now it’s about 80% occupied.

So it’s only 49 units, it doesn’t take much more to get that 90%. That’s the stand that we are going to use for those. So – and Canton Regency by the way, which is one of those repositioned properties, the skilled nursing we’re converting to memory care, we’re converting IL to AL.

But what’s interesting there is the rest of the building that's open is still operating at 92%. So even though these properties repositioned it's not like a new construction. We had very stable very well occupied buildings that we think we will dramatically enhance through the repositionings and the conversions. .

And we will continue on to Todd Cohen with MTC Advisors..

Just a couple of things. On the last question as it related to the negative and positives on the third quarter going forward.

Are you including in that $0.02 from acquisitions -- acquisitions you may close that you’ve suggested you’d close in the third quarter or is it just what's been closed thus far?.

It's really mostly related to what’s been closed so far including the one that we closed in July. Because the rest of the acquisitions that we would expect in the third quarter probably happen towards the end of the third quarter.

So the only ones that may have impact will be the ones we made in the second and then the ones we made so far in the third. .

So that’s going to benefit the fourth quarter.

And then Larry, what was that figure you stated on the 162 million of deals -- what will have been marketed versus off market?.

Of the 162, 96.3 is marketed and 66.2 is off market. .

So the 26 million of the deal that was just completed, I think in New York, it was Canton.

Were those marketed or off-line?.

The deals that were just completed, one was marketed, one was off market. 50:50. .

50:50. Okay. Because the one if my math is right, looks like the ROI on the larger deal is almost 20% versus –.

That's right. That was an off-market deal, that's correct. .

And then other thing, Carey, could you just refresh me on this – this breakdown you gave of the three phases, I know it’s 400, 100 and 200.

But what are we on the 400 thus far?.

For the 400, that’s complete, that was what we completed by the end of June of this year. So those are complete and in lease up and the last batch of those were done kind of right at the end of the second quarter of this year. So those will begin impact us throughout the second half of this year and into 2016. And then 100 that – those are going to --.

Carey, of the 400, how many have been leased up thus far?.

Probably, well, of the 400, there is 215 that were empty prior to conversion and then there's another 175 that will come in – on incremental basis, so as an IL resident moves out, we will move in an AL resident at a higher rate.

So probably about a third of that has – a third and maybe a fourth to a third of those have been actually impacting our numbers so far. A good bit that is still to come because we completed this conversion at the end of the second quarter. .

Yes, the one – like I mentioned Florida, that's one that got completed at the end of the second quarter, it’s now available. .

What about the next 100 in that to be phased in --.

The next 100 will be complete in the second half of this year more towards the end of the year. And so we’re working towards those right now and those will be complete at that time..

And then the 200 –.

We’ve got 200 – we have 200 coming on then in 2016 and those are weighted more to the second half of the year. And so -- both the 100 and 200 are more of the incremental type conversions where we have – we’re moving it somewhat to a higher level of care. So there is that incremental rate for those –.

And then I guess last – well it’s couple more. Of the acquisition that appears that you will be complete through the third quarter, I think you said 162, is that – that’s not net of the sales –.

That’s gross. That’s a gross number. That’s independent of the sales. The sales – this is what we’re purchasing, the sales don’t tally in this number. .

But that in a way has been hurting us a little until we currently kind of like get beyond this level –.

Until we’re going to anniversary –.

As you see in the press release we’re closing a sale like, very shortly and within a week we will be doing a light kind of exchange to acquire a building. The net asset will be accretive because what we’re purchasing will generate more cash flow and better economics than what we are selling. .

And comments about the third quarter that increase from acquisitions included netting out the impact of the disposition. .

And then is it safe to assume that there's an opportunity to do more acquisitions in the fourth quarter as well?.

Pipeline looks good. We never – you know what it’s deal by deal. There is always an opportunity but we would like to be very disciplined and selective and so if that happens in the fourth quarter or first quarter, they will happen but we have a really good pipeline right now.

So it’s still early, it’s still early in August, so we have plenty of time to add to this in the fourth quarter. .

And then I guess the last question, on the CapEx, it looks like it was 8 million, 6.6 million of investment.

Is the 6.6 million component – is that what the refurbishing some of the buildings, dining rooms, what is that?.

The $6.6 million is really related to the cash that we paid towards acquisitions, that’s the cash portion of the acquisitions. 8 million is for all -- it is related to the some of the conversion work of renovations or refurbishment as well as normal recurring CapEx and that’s the 8 million. .

Because it looks like the recurring component went from like 400 to 495 and I know we spoke in the past about freshening up some of the entrances and dining rooms and main room and I am assuming that can helps with your occupancies, people come and see a more attractive building is, or is most of that going to be adding going forward?.

Some of that has been happening and there is more to come, definitely because the renovations refurbishments are working on at a number of our properties. .

Thank you, and we will go for a follow up with Joanna Gajuk. .

Just quickly, on the acquisition commentary, the deals that you expect to close by the end of September 74.5, that suggests like these are much bigger assets than the three assets that you purchased in the second quarter.

So is it fair to say that the 74.5 million of deals would be more like $0.12 to $0.14 annual CFFO accretion when they are completed annual?.

Well, you know what, if you look at, we did million 88 million, it’s about $0.13, I would say that it’s proportionally probably similar to that. Again we don’t know if low interest rate is going to be when we close the transactions. But look, the guidance that we have given is about $0.20 a share from $150 billion of acquisitions.

Obviously we did a little better than that in the first part of the year. I think that we’re still looking for mid-teen cash on cash returns. So if it’s going to be another $75 million in deals at 25% equity, that’s 18 million, at 15% that’s about 2.8 million of cash flow, that’s $0.10 a share. Again that’s just truly on the back of the envelope. .

Thank you. Our final question comes as a follow up from Daniel Bernstein..

Real quick. It’s hard to tell what the same-store performance of the owned assets were versus the leased, I don’t know if you could talk about that at all whether year over year, Q over Q, obviously on the owned side, you’ve got a lot of – added a lot of properties the last year.

So if you could talk about some of the same same-store owned versus leased performance please..

Sure, I will be happy to. All the leased is same store, because we haven’t leased anything new since 2010. As I gave some earlier, the owned portfolio is doing better. Obviously the acquisitions have been very very strong.

The leased portfolio is a little older but there are significant plans for renovation and refurbishments and conversions that are ongoing now at those. So I think there is some opportunity as we complete those to bring the leased portfolio to the same standard as the owned portfolio.

In the supplement to the earnings release, you have the breakout the owned and leased. You can see the operating margins of the leased were actually a little higher because they are predominantly independent living but their rates are lower. So the income contribution is lower.

But that’s where we have a lot of conversions ongoing at the leased as well. So looking at the occupancies, the owned properties have 89.2% for the quarter, the leased at 86.5%. As I said it’s the leased more legacy type properties, probably average age of those properties is 25 to 35 years.

I think with the renovations that we’re doing conversions, refurbishments, those properties should get back to occupancies comparable to the owned properties. End of Q&A.

Thank you. That’s all the time we have for questions today. I am going to turn it back over to our speakers for any additional or closing remarks..

Well, we thank everybody for participating on today’s call. As always, please feel free to give Carey or myself a call if you have any further questions. We look forward to seeing many of you I guess September when we start with conferences and meetings again.

In the meantime enjoy your summer and again we’re very happy to share any additional color if anyone has additional questions off-line. Thank you very much..

Have a good evening. .

Thank you ladies and gentlemen. That does conclude today's conference. Thank you all again for your participation..