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Healthcare - Medical - Care Facilities - NYSE - US
$ 21.56
-4.77 %
$ 411 M
Market Cap
-5.42
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q3
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Executives

Larry Cohen - Chief Executive Officer Carey Hendrickson - Senior Vice President and Chief Financial Officer.

Analysts

Joanna Gajuk - Bank of America Merrill Lynch Daniel Bernstein - Stifel, Nicolaus & Co. Ryan Halsted - Wells Fargo Securities, LLC.

Operator

Please standby, we’re about to begin. Good day, and welcome to the Capital Senior Living Third 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 material, 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 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..

Larry Cohen

Thank you. Good afternoon, and welcome to Capital Senior Living’s third quarter 2015 earnings release conference call. First, I want to thank those of you who attended last month’s Investor and Analyst Day for your positive feedback and your overwhelming support for our sustainable growth strategies.

I invite those of you who are unable to attend to listen to the replay on our website and discover the difference. I think, you will find it worthwhile. You will learn about Capital Senior Living’s transformation and how our differentiated strategy positions us for sustainable growth.

I was proud to introduce key members of our management team who had been instrumental in transforming Capital Senior Living into the nation’s largest percentage owner of wholly-owned communities among top Senior Living operators. I also want to thank our lender partners for their gracious and valuable participation.

We continue to demonstrate the advantages of our differentiated business strategy, as we successfully execute on the multiple avenues of growth under our straightforward strategic plan.

This produced substantial growth in all of our key metrics in the third quarter, including revenue, occupancy, average monthly rent, NOI, adjusted EBITDAR, and adjusted CFFO, as compared to the prior year.

Our occupancy gains continue to outpace the industry with same-community occupancy increasing 70 basis points from the second quarter of 2015 and 60 basis points from the third quarter of 2014. This increase is on top of the 60 basis point sequential increase we achieved in the second quarter of this year.

Our strong occupancy growth is resulting in pricing power. Effective September 1, we increased market rents by 3% on all communities with occupancies of 93% or greater. We increased in-house rents by 3%, our resident one-year anniversary dates at all communities, and we increased market level of care charges 10%.

In the second quarter, we completed the acquisition of three senior living communities for a combined purchase price of $49.8 million. These communities expand our operations in Ohio, Indiana, and Illinois, and are expected to generate incremental annual CFFO of approximately $0.07 per share.

In October, we completed the acquisition of another senior living community for approximately $38 million. This acquisition expands our operations in Virginia and is expected to generate incremental annual CFFO of approximately $0.04 per share. Thus far this year, we have completed the purchase of nine communities for approximately $162.5 million.

They are expected to generate incremental annual CFFO of approximately $0.22 per share and a 16% cash on cash return on equity.

Subject to completion of customary closing conditions, acquisitions totaling approximately $17 million are expected to close by the end of December 2015, which will bring the company’s total acquisitions for the year to approximately $180 million.

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

Our strong third quarter results reflect the successful implementation of various initiatives that increase shareholder value, both in the near-term and in the long-term, including occasional introductory specials at lower occupied communities, increasing rates at higher occupied communities, increasing level of care charges and disciplined proactive expense management.

We are also benefiting from the cash flow and value enhancing renovations, refurbishments, and conversion of units to higher levels of care that are in process at 78 of our communities. They are resulting in exceptional increases in occupancy and revenues.

These renovations, refurbishments, and conversions are scheduled over the next 18 months and should lead to further improvements in our operating and financial results. The transformation of our sales and marketing strategies is also yielding positive results.

We have redesigned a website launched call centers, improved sales training and lead tracking, enhanced search engine optimization strategies, integrated Internet leads with our database management system, and unveiled branded vehicle reps and property signage.

Internet leads now represents 64% of our total leads compared to an industry average of 50%. Our various sales and marketing initiatives resulted in the improvement in our third quarter closing ratios to 28%, 40% higher than the industry average.

Our net leasing occupancy during the third quarter represents one of the highest absorption rates in the company’s history and follow robust gains in the second quarter of this year. We achieved further occupancy increases in October, an encouraging sign for solid fourth quarter results.

As we’ve discussed on previous calls, senior housing construction remains concentrated in select markets and continues to be needed in most of our local markets due to low investment returns.

With our average monthly rate of $3,382 and average construction costs of approximately $200,000, the return on investments on a newly built community at 90% occupancy would only be 5.5%.

This low return on cost is an economic barrier that limits new supply in most of our local markets with strong industry fundamentals, an improving economy in housing market, limited new supply in our local markets, and the gains we’re recognizing from our unit conversions, community renovations, and refurbishments, we believe that our occupancies can grow to an optimal level of 92% to 93%, delivering significant organically driven CFFO growth and increases in our owned real estate value and shareholder value.

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. Our disciplined and strategic acquisition program has been funded from internally generated cash. In the past four years, we purchased 52 communities for a combined purchase price of $738 million.

These acquisitions have generated better than a 16% cash on cash return on equity and first-year CFFO that aggregates $1.12 per share.

Our success in acquiring high-performing communities in off-market non-broker transactions validates our differentiated competitive advantage as a highly regarded and credible owner operator with the financial capability to complete transactions.

As our cash flow grows and our liquidity improves, our robust pipeline allows us to continue our disciplined and strategic acquisition program and increase our ownership of high-quality senior living communities in geographically concentrated regions and generate additional significant increases in CFFO, real estate value, and shareholder value.

We have been proactive enhancing the quality of our portfolio and increasing our private pay revenues. We closed the only skilled nursing beds we had operated in two continuing care retirement communities. We sold five older non-strategic communities this year.

These actions have improved our operating metrics and we have successfully recycled approximately $26 million of cash into accretive acquisitions of newer high-performing communities within our geographically concentrated regions.

The sale of these five communities also eliminated our operations in three states, which has allowed us to narrow our strategic focus and strengthened our operations in our geographically concentrated regions. Our operating strategy is to deliver value to a residents by providing quality senior living services at reasonable prices.

We are a large senior living operator with economies of scale and operating efficiencies competing in a highly fragmented industry. As we strengthened our competitive advantages, we continue to lower our cost of capital. Our greatest competitive advantages are our talented team in our differentiated business strategy.

Most senior living operators serve as the fee manager or a tenant under triple net lease with minimal coverage.

In contrast, Capital Senior Living’s industry-leading percentage ownership of wholly-owned communities generate significant and sustainable cash flow, which we are investing in people, training, technology, systems, renovations, refurbishments, conversions of units to higher levels of care, and accretive acquisitions.

Our commitment to a most valuable resource are people, limits turnover and strengthens resident satisfaction and length of stay. And our dominant competitive advantages serve as a catalyst for further aggregation of smaller operators with limited resources in our geographically concentrated regions.

Capital Senior Living is transformed and continues to improve. Our track record is proven. As we continue to successfully execute on a straightforward strategic plan with multiple avenues of growth, we expect to generate sustainable meaningful gains in shareholder value for many years to come.

I would now like to introduce Carey Hendrickson, our Chief Financial Officer to review the company’s financial results for the third quarter of 2015.

Carey?.

Carey Hendrickson

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

The company reported total consolidated revenue of $104.4 million for the third quarter of 2015. This is an increase of $5.9 million, or 6% over the third quarter of 2014. The increase in revenue was largely due to acquisitions the company made during or after the third quarter of 2014, net of dispositions.

Since that time, we’ve acquired 12 communities, including three communities that we purchased during the third quarter 2015 and have disposed of five non-strategic communities.

Excluding the revenue of the five communities we’ve sold since the third quarter of 2014 from all appropriate periods, revenues increased $8.9 million, or 9.4% in the third quarter of 2015, as compared to the third quarter of the prior year.

Revenue for consolidated communities, excluding the four communities undergoing repositioning lease up for significant renovation and conversion also increased 6% in the third quarter 2015, as compared to the third quarter of 2014.

It’s important to note this 6% increase was achieved despite having less units available for occupancy in the third quarter of 2015 than the third quarter of 2014.

Additions to available units for acquisitions were mostly offset by reductions related to dispositions, and then the conversion of refurbishment projects currently in progress have temporarily taken some units out of circulation at certain communities.

Net operating income for these committees increased 6.4% in the third quarter of 2015, as compared to the third quarter of 2014, again, generated with less of units available for occupancy.

These results clearly illustrate the effectiveness of our strategy to acquire high-performing communities in strong markets, dispose of non-strategic underperforming committees, and to convert units at our existing communities to higher level of care, while continuing to proactively manage our expenses.

Our operating expenses increased $5.1 million in the third quarter of 2015 to $60.7 million, due to the acquisitions. General and administrative expenses for the third quarter of 2015 were $600,000 lower than the third quarter of 2014, after excluding transaction and another one-time costs for both years due mostly to lower health insurance claims.

Excluding transaction and other one-time cost, G&A expenses as a percentage of revenue under management were 4.1% in the third quarter of 2015.

As we noted in the release, the company’s non-GAAP and statistical measures exclude four communities that are undergoing repositioning lease up of higher lease license units or significant renovation and conversion.

Our adjusted EBITDAR was $36.4 million in the third quarter of 2015, an increase of $2.9 million, or 8.7% from the third quarter of 2014. This does not include EBITDAR of approximately $800,000 related to the four communities that are undergoing repositioning lease up or significant renovation and conversion.

The company’s adjusted EBITDAR margin was 36.5% in the third quarter of 2015, which is a record high third quarter margin for the company and 90 basis points higher than the third quarter of 2014. Our adjusted CFFO was $12 million in the third quarter, an increase of 14.4% versus the third quarter of the prior year.

On a per share basis, CFFO was $0.42 compared to $0.37 on a comparable basis in the third quarter of 2014. The contribution to CFFO from communities acquired during or since the third quarter of last year was $0.07, which is $0.02 greater than our expectations in public announcements related to these communities.

Same-community revenue increased $1.4 million, or 1.5% over the third quarter of the prior year. However, as I noted previously, due to conversion of refurbishment projects currently in progress at certain communities, fewer units were available for lease in the third quarter at the same communities this year than the third quarter of last year.

With a like number of units available in both years, same-community revenue would have increased approximately 2.5% versus the third quarter of the prior year. Same-community expenses increased 1.4% in the third quarter of 2015 versus the third quarter of last year.

Looking at the three major expense categories, labor costs, including benefits increased only 0.8%, while food costs decreased 1.5%, and utilities costs increased 1.4% versus the third quarter of the prior year.

Over the past four quarters, our total same-community expenses were up on average only 0.3% with labor costs at 0.8% over this period, food costs down 0.3%, and utilities costs down 1.7%, a result of our consistent disciplined proactive expense management efforts.

We’re not experiencing wage pressure in our markets as evidenced by the continued modest increases in labor costs over the past several quarters. In the last four quarters, our same-community labor costs have increased 0.8%, 0.6%, 1.4%, and 0.4%. The location of our markets is one of the primary drivers.

Wage pressure particularly on minimum wages is primarily on the coast and our communities are primarily located in the central and southeastern areas of the United States, where the economic and cost of living dynamics are very different than on the coast.

Also, only 5% of our employees are paid minimum wage, and those employees are mostly transient in nature, primarily high school and college students. Our same-community net operating income increased 1.7% in the third quarter of 2015, as compared to the third quarter of 2014.

However, with a like number of units available in both years, same-community net operating income would have increased approximately 3.5% from the third quarter of last year.

Same-community occupancy was 88.6% in the third quarter of 2015, an increase of 60 basis points versus the third quarter of last year and a 70 basis point increase from the second quarter of 2015. Our same-community average monthly rent was up 1.8% versus the third quarter of 2014.

For our consolidated communities, average monthly rent was up 5.3% and our consolidated occupancy increased 110 basis points versus the third quarter of 2014, and increased 90 basis points versus the second quarter of 2015.

The improvement in our consolidated metrics versus the third quarter of last year reflects our sale of five non-strategic communities in 2015 and our accretive acquisitions of high occupancy communities with higher rents. We continue to make steady progress on the conversion of independent living units to higher levels of care.

In the third quarter 2015, the impact of the first phase of 400 units converted to a higher level of care that were completed at June 30, 2015, is approximately $0.04 per share of CFFO with $0.015 of that coming in the third quarter.

So they’re right on pace with our expectation of a $0.05 per share CFFO contribution for the full-year of 2015, with of course, a greater impact come in 2016 and a full $0.20 per share impact in 2017 and beyond.

Two of the communities under conversion that are part of that expected $0.20 CFFO contribution are currently excluded from our operating and financial results. Those two communities are in lease up and one of the communities may reach stabilization during the fourth quarter and be added back to our results in the fourth quarter.

The other will likely be added back in the first part of 2016. When added back, the combined annual contribution from these two communities will be approximately $0.04 per share of CFFO. The impact of the conversions on occupancy and revenue at the communities where conversions are complete is outstanding.

On a combined basis, occupancy for communities with conversions completed by December 31 of last year has grown from 80.5% prior to conversion to 92.1% at September 30, and revenue of these communities increased 22.8% in the third quarter of 2015, as compared to third quarter of 2014.

We continue to make progress on additional conversions beyond this initial group.

We currently expect an additional 100 incremental conversions to be completed by the end of this year with another approximately 200 incremental conversions to be completed in 2016, with the majority of those expected to be completed in the second-half of the year, and additional conversions in other properties are under consideration.

Looking briefly at the balance sheet, we ended the quarter with $47.8 million of cash and cash equivalents, including restricted cash. We invested $15.5 million of cash as equity to complete the acquisitions of three communities and spent $10.1 million on capital improvements.

However, we had only a small decrease in our cash balance at September 30 compared to June 30, due to the cash flow generated from operations and net proceeds from the sale of a community and supplemental financings, which together totaled $21.7 million.

Our mortgage debt balance at September 30, 2015 was $709.5 million at a weighted average interest rate of approximately 4.64%. We added approximately $29.7 million of debt in the third quarter related to the communities we’ve acquired in supplemental financings.

At September 30, all of our debt was at fixed interest rates except for one bridge loan that totaled $11.8 million, which was at a variable rate of approximately 4.65%. The average duration of our debt is eight years and 94% of our debt matures in 2021 and after.

Looking to the fourth quarter, our utilities expenses are expected to be about $300,000 lower in the fourth quarter than the third quarter. Third quarter, as you know, is always our highest quarter for utilities expense due to the hot summer months.

However, we expect this decrease to be offset by higher food costs in the fourth quarter, as compared to the third quarter related to holiday parties in November, December at our communities, and some snow removal costs, which typically begin in the latter part of the year.

Also, our corporate expenses were about $400,000 lower in the third quarter related to favorable health claims experienced and we would expect that to return to a more normal level in the fourth quarter. Taken together, we expect these expense items to reduce our fourth quarter CFFO by about $0.01, as compared to the third quarter.

However, we expect increases from our core operations and from continued progress on our conversions, as well as the impact of acquisitions made during the third quarter and the acquisitions we expect to close in the fourth quarter to add approximately $0.04 to our fourth quarter CFFO.

As I noted at our recent Investor and Analyst Day, we have multiple avenues of growth, which we expect to continue to gain momentum in the coming quarters and result in significant growth in our operating financial results over the next two to three years.

We expect core growth related to increases in rate and occupancy to add approximately $0.12 to $0.15 per share in our – to our CFFO each of the next few years. 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 are working on three phases of conversions as I noted previously. The 400 units we completed at the end of the second quarter of this year, which we expect to add a total of $0.20 per share to CFFO when they reach stabilization, about $0.15 of that would be incremental to this year.

Another 100 incremental type conversions to be completed by the end of 2015, which we expect to add approximately $0.03 per share to CFFO and 200 more incremental conversions by the end of 2016, which we expect to add approximately $0.05 per share to CFFO.

Also, we’re repositioning two previous continuing care retirement communities, which are currently excluded from operating 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’re stabilized and added back to our results should be significant perhaps $0.10 per share of CFFO or greater on a combined basis.

Lease up will begin at 33 position communities as phases are completed and their finance results will be added back to our reported numbers when they reach stabilization, most likely in 2017 and 2018.

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

At our Investor and Analyst Day, we showed a chart, which is also included in our company presentation, which you can find on the Investor Relations section of our website, which illustrates what the potential financial impact of successful execution of our strategy would look like over the coming three years.

With successful execution on our multiple avenues of growth, we would expect CFFO to grow to approximately $3 per share in 2018 with compounded annual growth in CFFO of 22% from 2016 through 2018. And importantly, we would expect this significant growth in our operating and financial results to translate into excellent growth in shareholder value.

That concludes our formal remarks. And we would now like to open the call for questions..

Operator

Thank you very much. [Operator Instructions] We’ll take our first question from Joanna Gajuk from Bank of America Merrill Lynch..

Joanna Gajuk

Hi, good afternoon. Thank you for taking the question. So couple of questions here. So first on the comments about pricing or rather the rent increases that you were able to implement the 2% and the 10%, I guess, care charges at the community level.

So how does it compare to recent history, I mean, what I’m getting on is, are you already seeing ability to base rents in those converted, or I guess operated units, or is that just typical increases there?.

Larry Cohen

We usually have, as we prepare budgets for the year, we will increase rents on our anniversary date about 2.5%, 3%. This is an additional increase to what is a normal increase because of the strength in occupancy.

And so every property by level of care that is 93% are occupied or more, about 60 plus properties – we have about 60% of our properties operate at around 95%, 96% every week. And those properties will get a 3% rent increase. We also increased in-house level of care fees by 10% on all properties.

And then starting in October, our in-house rents for our residents on their renewal – on their anniversary date have also gotten a 3% rate increase. So that’s an kind of an earlier start of the rent increase that normally would got into into place next January.

So we’ve accelerated by four months – three, four months those rent increases because of the strength..

Joanna Gajuk

And the level of those increases you are saying, these are comparable to a recent history, I guess, for the company?.

Larry Cohen

The are incremental, Joanna. These are higher than we typically….

Joanna Gajuk

Okay..

Larry Cohen

…implemented over the last few years. These are incremental increases..

Joanna Gajuk

All right. So you would have a typical rent increase and then on top of that you will increase 3% for those – in those properties where you’re seeing great demand [Multiple Speakers]….

Larry Cohen

Exactly..

Joanna Gajuk

And then –so the – we had a comment, I was interesting, I guess, so clearly you’re not seeing wage pressure in your markets, I mean, labor cost increasing only less than 1%, that’s great. But are you seeing also the commentary around, you’re not seeing the new construction order in your market there.

But are you seeing any increased turnover in employees, i.e…..

Larry Cohen

No..

Joanna Gajuk

…maybe new construction taking away in place from your communities, maybe you’re not – they’re not taking away your rate band, but maybe they’re competing for your staff?.

Larry Cohen

We have great stability in our on-site staff. Our turnover of our executive directors averages about 20% a year, that’s very consistent. Again, we’re not seeing in the construction that you’ll hear about in our markets. So we don’t have that pressure.

I had visited numerous properties, so I had the benefit of visiting with many of you, our property in Southern New Jersey. We talked about the law in New Jersey that basically precludes new supply. We were in Ohio with a Board meeting at Richmond Heights, a building that’s a 100% occupied. There’s nothing being built in that market.

Every quarter, this morning, we had our telephone meeting, where the entire corporate office we celebrated the success of the quarter, recognized the accomplishments, and we give them pins for years of service and anniversary dates. We have gentlemen sitting in the room right today that celebrated his 15th anniversary, about 60 quarters, okay, today.

Every quarter we’re getting up 15 and 20-year pins. If you look at the slide from our Investor Day, would look at the corporate team and the regional teams, we have a corporate team that averages about 32 years of experience in the industry, about 17 years of experience with Capital Senior Living.

One of the reasons that we have been able to retain people is the strength of our company.

I can’t trust enough how we are different as owning our real estate with significant cash flow and the reinvestments that we’re making in training, in systems, in refurbishment, it gives our staff tremendous pride to represent Capital Senior Living and serve our residents.

The best comment I heard in New Jersey was a resident who came up to Carey on the way out and she asked Carey, who is in charge, so Carey introduced me. She said I thought I would be here for two months. I lived here for eight years and your employees are exceptional. They’re [indiscernible] his dad lived in the property.

He wanted to go see [Clare] our nurse, who served his father four or five years ago, [Clare] was still there. So we have tremendous stability in our company throughout the organization and most importantly at our properties. The other point I’ll point out for the retention is our ability to promote from within.

10 of our 12 regional Directors of operations managers with 17 years of experience were promoted from EDs of our communities to be regional managers. Six of our nine regional marketing directors were promoted from Capital Senior Living sales directors.

So we are very fortunate that our community empowerment philosophy, which provides greater autonomy to executive directors, but also the responsibility and the accountability is working. So we really are different, and I’m pleased to report that, we’ve got a great team with tremendous stability throughout the ranks..

Joanna Gajuk

Great. And the last question, and I’ll go back to the queue. But in terms of the occupancy very, very strong performance there. So is there a way to kind of break it down into pieces and then to kind of say how much is coming from selling their underperforming assets versus conversions versus demand? Thank you..

Larry Cohen

I can give you by level of care. I don’t know that we have, again, we take out those properties up – the properties we sell at 82%. The good news is that 70 basis point sequential is really same-store, because we did sell one property Wichita in July, that’s one another 120.

The four properties we sold in January were our numbers both in the second quarter and the third quarter. The number of units comparing second quarter to third quarter were up by about 50 units as one property where we are going through a major Amberley [ph] up and moving to New York, we’re doing a major conversion to assisted-living.

But really there wasn’t much change as far as the numbers. The growth we’re seeing by the way is predominantly in independent living, both in rate and occupancy. Our conversions are definitely having a great impact on what we expected on occupancy.

Our independent living occupancies ended the year on a same-store basis at 86.2% and ended the third quarter at 89%. The average rate was 24.40 at the end of the year. The average rate at the end of the third quarter is up 6.4% at 25.96, and assisted living was up about 20 basis points this quarter.

So we’re seeing good demand throughout our levels of care, but the conversions are making a change, Carey talked about going from 80% to 92.5%, obviously, that’s a significant change over last year.

But if you look at the sequential quarter, there really isn’t that much change in the mix, one sale couple of acquisitions, but now in the same store, so and the same-store numbers exclude that. So, as I said, I think, it’s fairly consistent throughout the company..

Joanna Gajuk

Great. Thank you..

Operator

We’ll go next to Daniel Bernstein with Stifel..

Daniel Bernstein

Hi, good evening..

Larry Cohen

Hi, Dan..

Carey Hendrickson

Hi, Dan..

Daniel Bernstein

Hi.

I got a question of trying to understand the impacts of the conversion used potentially 4Q in early 2016, particularly if you can talk about what – how occupied, what’s the occupancy on those conversion units themselves where they stand today? How do you think that’s going to progress? And same thing, were there any in terms of how I should think about the operating margin of those units whether startup operating expenses that you’re still trying to cover for the ones that were already came online in the first-half of 2015.

But also how to think about the impact of the 100 units that you’re converting later this year, is that – is there any impact on 4Q 2016 numbers?.

Larry Cohen

Let me just address first the performance of the properties we’re bringing back. First, the first one is a property that was an acquisition. It was a property that didn’t have the license commensurate with the care level needed for the residents. We spoke previously that we actually discharge residents.

In July of 2014, we received a provisional license or occupancy, it’s a 49 unit building, it was 55%. We received a permanent license in October 2014. It currently is 92% occupied, that’s why we’ll come back in the fourth quarter.

The other property that’s about to come back is our property in Florida the Veranda Club that just underwent a second conversion of units from independent to assisted-living. We received a license on July 28, 2015 building the four conversion of the units that were open and available was a 100% occupied.

The converted units of 45 have ended – they now have 37 move-ins since July. So the building right now is 85 – overall building is 85% occupied. We typically strive to achieve 90% stabilization before we bring it back on, so that’s why we think they’ll come back in the first part of the year. But both of these buildings are performing very, very well.

And I think they’ll be – I think, Carey mentioned $0.04 accretive…..

Carey Hendrickson

Right..

Larry Cohen

Additional CFFO, those two buildings when they come back on to our internal numbers. And now I’ll let Carey talk about the 100 units of conversions in the second-half of this year..

Carey Hendrickson

Yes, the 100 units for the second-half this year. So those are really mostly begin to have some kind of impact in the last part of 2016, the 100 units. So they’ll be completed by the – most of them towards the very end of this year, so in the November, December timeframe. So they won’t have a lot of impact.

They’ll lease up through the year, but may have like a – overall, they’ll have about a $0.03 impact, maybe about $0.01 per share incremental to 2016, and then the rest of it in 2017, because these are more incremental kinds of conversions where there’s – they’re already occupied within independent living resident.

And as the independent living resident moves out, we’re moving in assisted living resident into that and the incremental rent will come with that..

Daniel Bernstein

Okay. Okay. And is there any, I think about the margins in the second-half of the year, you talked about it’s 1.1 penny negative impact from expenses, I guess, it was $0.04 operations.

Is there anything else that we should be thinking about? It’s basically we try to figure out, okay, you did $0.42, so that means you’re essentially forecasting $0.45 for the fourth quarter, or is there something else that’s going to be that we need to think about in our number besides that one penny and the four pennies?.

Carey Hendrickson

I really – those are the primary things, Dan, as I pointed out. There’s always some variability related to health claims experience in that.

But really that and utilities depending on what happens with weather – from a weather standpoint, but most of that, I think, I outlined the major things that would really impact the fourth quarter as it relates to the third..

Daniel Bernstein

Okay.

And then in terms of the the pipeline just try to understand in terms of the acquisitions of the third and fourth quarter, how much of that is a mix of – what’s the mix of, I guess, marketed transactions versus non-marketed? What are you seeing in that mix in terms of the existing pipeline we’ve heard from a couple of healthcare REITs that they may be kind of repeat of the second quarter that they may be pausing a little bit more on the acquisition front, particularly in seniors housing.

So just trying to get a sense of what you see as the opportunities in the pipeline for 2016?.

Larry Cohen

Let me first talk about the three properties we acquired in the third quarter. The three properties, one was closed in July; one August; one in September; the Ohio, Indiana, Illinois, respectively Iowa AL, Memory Care and the total purchase price was $49.8 million. Actually, one of the $20 million acquisition in Indiana was off-market.

And then the other two properties, Ohio and Illinois were marketed, when I say, marketed, they were narrowly marketed to a select group of qualified buyers. If I look at the activity for the year, we signed 75 CAs this year from January to September.

We made 15 offers, so 20% of what we’ve looked at we made an offer, of which we accepted seven of those offers were accepted, so it’s 10% of what we looked at was an accepted offer, and 25% of the offers were accepted. This year, we’re tracking right now of the $124.5 million, it’s about $70 million off-market and about $55 million marketed.

And then in the fourth quarter, we have another transaction that we expect to close and that is an off-market transaction. So, I will tell you that our pipeline for 2016 is very active and robust. We’re conducting due diligence as we speak in various parts of the country.

And I’m also pleased as you look at the results for the quarter that the consistency of our churns this year continued to be very consistent with what we’ve accomplished since 2011 with high-performing newer buildings with, again, we have $0.22 of share of CFFO, not including the fourth quarter, the December acquisition so far projected and we had a 16% return on equity on the investment..

Daniel Bernstein

Okay.

The only other question I have here is, did you see any fluctuation in occupancy from month-to-month in the quarter, that the stock market did not do so well in September, did you see any fluctuation in your occupancy, or even if you think about your closing of leads or move-ins in that month of September?.

Larry Cohen

We had a really strong September. We did have a – as typically, the weakest September for us. But we had – actually we had a very strong move-in in deposit taking. No, we did not. As I said, we ended September strong. September was actually one of our strongest months of the year as is typical.

And we did not see any impact from the volatility of the stock market on our leads, our move-ins, or deposits, or occupancies..

Daniel Bernstein

That’s all from me. I’ll hop back off. Thanks..

Larry Cohen

Okay..

Carey Hendrickson

Thanks, Dan..

Operator

We’ll go next to Ryan Halsted with Wells Fargo..

Ryan Halsted

Good evening. Just following along with the – I guess, the seasonal occupancy build. You mentioned October you were seeing some good move-ins.

Can you just provide more color, I mean, how is that relative to prior year?.

Larry Cohen

It’s relative to prior month and prior quarter. We get financial occupancies, I have been through Thursday, October 29, they are material.

So, again, as I said, we had a – the best, I think is probably the first or second best attrition on rate positive attrition rate that we had or absorption rate rather during the third quarter with net 79 move-ins in the quarter, which is very strong and that improved by about 37 basis points in October.

So it was a really strong October both year-over-year, quarter-over-quarter, and month-over-month. So we now have a very strong record on occupancy gains starting with really in March. We had a flu season.

We’ve also had 90 basis points in the first quarter, but recovered strongly in March that led to a 60 basis point sequential gain in the second quarter.

We talked on the last call how strong our deposit taking was in July and good June that led to 70 basis points in the third quarter, and the strong performance in the third quarter for the month of October increased occupancy by about 37 basis points, and we never had the last couple of days in the month in there, which typically is a slight improvement.

So we expect that the fourth quarter will show continued improvement both year-over-year, as well as sequentially from the third quarter..

Ryan Halsted

Okay. That’s helpful. And you mentioned flu I guess that was….

Larry Cohen

That was definitely first quarter of this year..

Ryan Halsted

Yes.

I mean, last year I – if I can recall, there was an early start to the flu season that was somewhat detrimental to move-ins, I was curious if you’re seeing a much milder flu season so far this year that that could be a benefit occupancy?.

Larry Cohen

You’re right last year we start to see flu hit in December, it’s still early, we have not seen flu. I will tell you that the reports I have read suggests that the flu shot appears to be effective. There’s actually a boost for this year is a four and a three flue shot. So the more robust flu shot, which is typically given to people over the age of 65.

The CDCs believes that the vaccine will be effective. It’s something that we have been very proactive on to get our staff the residents vaccinated. And I also note that the southern hemisphere the Australian flu actually peaked early, so that may be a miles, again, we don’t know we’ll see – it’s – that correlation is about 70% accurate every year.

So we’ll see, but hopefully, the flu will be modest. What we saw by the way just historically, we had a very harsh 2013 because of flu and we had a very benign 2014. So if history repeats itself, we hope that it will be benign flu season, but we’re taking whatever precautions we can to get our residents and our staff vaccinated..

Ryan Halsted

That’s great.

I wanted to go back to new supply I realize, you’re not seeing much or any impact in your markets, but as you’re evaluating acquisition opportunities in new markets, but just curious if you are seeing new supply as a pressuring occupancy on some of the properties that you’re looking at?.

Larry Cohen

Ryan, when we do our due diligence and review a property before we submit a letter of intent, we get a full study on the supply in that market. And those property – those markets that have supply coming on, we’re not making offers.

So the properties that we were buying are in markets that have high-performing properties, with strong occupancies, where we have extensive operations, and there’s no new supply. So I don’t expect to see any change in our business from these acquisitions. We bought a building in Baytown Texas in the first quarter just anecdotally.

When I saw Houston from the e-mail I got from Joe, I sent back an e-mail don’t let me waste your time, I don’t want to buy anything in Houston. He said, yes, I think you should look at this. Before we bought the building, we had a third-party come in and do extensive market study on supply and the economies.

And you may know that’s where a mobile Exxon has their petrochemical plant Target and Wal-Mart had big major distribution centers, there is major healthcare in that market, there’s a zero supply that building we acquired at 92% occupied it ended in March, it ended the third quarter at 98% occupancy.

So we are extremely selective as I said we only made offers on 20% of buildings that we sign confidentiality agreements for.

And we only actually bought about 10% of what we looked at and part of our due diligence, which we’re conducting right now on the five buildings as we speak is going through an extensive analysis from all sources, local, and national of what supply is either ongoing or planned in each of those markets..

Ryan Halsted

That’s great. Maybe last one from me you mentioned G&A is a little lower than expected and you highlighted some lower health insurance claims.

If there is any color you can provide on that that’s just was a little different than some of the other healthcare companies that have reported so far in particular, some company is citing higher pharmaceutical costs NOI, I’d just be curious any color you can provide on your G&A costs and what sort of drove that?.

Carey Hendrickson

Yes, just like at our operating units, we at our communities, we keep a tight control on our expenses here at our corporate offices in G&A. And really as I look at the various expenses in G&A, there really were very few increases, I mean, the categories are the only thing of any real variance was in benefits.

And as I talked about, we had a just a better experience from the health claims experience in the third quarter. And on average they’ve been about $4.5 million or so on the year, if you exclude transaction costs each of the quarters this year. And so that’s a pretty close to where we were this time..

Larry Cohen

Ryan, in June of 2015, we have a June renewal on our healthcare. We self-insure over our healthcare claims with catastrophic policies for claims exceeding $175,000. Through June 2015, which was the first year under the Affordable Care Act, we revamped all of our policies.

We – I’m sorry 2014 I take you back and I’m really rushing to 2016, 2014 thanks, Carey. So what we did was we introduced four categories of policies basically upon silver, gold, and platinum for all employees. We also reallocated the costs sharing between the communities, our employees and corporate.

And we now have I guess about 15 months of experience and it continues to be working extremely well. So I think it’s really the structure of our claims, our history, and the structure of our program that continue to moderate our claims.

Obviously this quarter was an exceptionally good quarter where we had a larger savings than we anticipated, but the good news is for 15 months it’s been very, very reliable where the and again we self-insure, but the claims have all been coming in at very narrow than monthly kind of $600,000 a month.

And they are more than covered by the surplus that we have in our reserves from our insurance program..

Ryan Halsted

That’s great. Thank you for taking my questions..

Larry Cohen

Thank you..

Operator

We’ll go next to Dana Hambly with Stephens..

Unidentified Analyst

This is Jacob in for Dana..

Larry Cohen

Hi, Jacob..

Unidentified Analyst

Hey. So on the sort of the past the $3 of CFFO in 2018 that’s not official guidance, but you guys have laid out.

The $0.15 a year of organic growth do you guys break that out between sort of pricing increases, and occupancy growth?.

Larry Cohen

Well, we typically in that include about a 100 basis points or so of occupancy per year of an increase that’s in there and the rest of that is rate..

Unidentified Analyst

Okay, the rest is right.

And then this the 3% rate increase you guys did for sort of the high occupancy properties, is that something you guys foresee being sustainable in the future or should we sort of view as one time?.

Carey Hendrickson

I would do as one time and we plan to increase rates on anniversary dates, but this was a market rate increase that we think is right now a one time adjustment kind of accelerating what normally would have taken place in January into September..

Unidentified Analyst

Okay. And last question on CapEx.

You guys are sort of I think $23 million year-to-date, which is maybe a little higher than it’s been historically is this renovation and conversions and if so is that something we should foresee continuing from even next 18 months or so at this rate?.

Carey Hendrickson

Yes that’s good question Jacob. So the higher capital expenditures are related to conversions as well as the renovations in refurbishment projects that we had going on and they’re likely continue to be somewhat higher than normal in the fourth quarter, it maybe for the year it maybe somewhere in the $30 million to $35 million range.

And probably a similar amount next year. And as Larry, mentioned these are projects that we’re going to completed over the next 18 months or so. So after the end of 2016 I think it will probably revert back to our more normal levels of CapEx of the $15 million to $20 million per year. Okay, that’s it. Thanks, guys..

Carey Hendrickson

Thank you very much, Jacob..

Operator

With no further questions in the queue, I’d like to turn the call back over to management for any additional or closing remarks..

Larry Cohen

Well, again we want to thank everybody for your participation today as always feel free to follow-up with Carey, or myself. And we look forward to seeing many of you at the various investor conferences and some [on your] road shows that we have scheduled over the next couple of months.

And again I would ask you to, if you have the time please listen to our website for the replay of the Investor and Analyst Day I do think you’ll find it worth your while. Have a great evening, and thank you so much for participating on today’s call. Have a good night..

Carey Hendrickson

Thank you..

Operator

This does conclude today’s conference. We thank you for your participation..

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