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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 2017 - Q1
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Executives

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

Analysts

Chad Vanacore - Stifel, Nicolaus & Co. Jacob Johnson - Stephens Inc. Joanna Gajuk - Bank of America Merrill Lynch Brian Hollenden - Sidoti & Company, LLC Ryan Halsted - Wells Fargo.

Operator

Good day and welcome to the Capital Senior Living First Quarter 2017 Earnings Release Conference Call. Today’s conference is being recorded.

The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitation to, the Company’s ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time, I’d like to turn the call over to Mr. Larry Cohen. Please go ahead..

Larry Cohen

Thank you. Good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living’s first quarter 2017 earnings call.

I want to thank our strong team at Capital Senior Living Communities across the country for providing our residents with exceptional service and congratulate you for achieving a 95% resident satisfactory rating on our 2016 surveys.

I want to recognize two outstanding communities, The Waterford at Woodbridge for scoring a highest in resident satisfaction and Crosswood Oaks, our Community of the Year, for scoring highest in combined financial performance compared to budget, occupancy and resident satisfaction.

With all the discussion about the effect of new competitive supply affecting our industry, I want to point out that Crosswood Oaks, our 2016 start performer is our oldest community, it opened in 1976. Kudos to Don Kraft, Lucy Steel, Lisa Holloway, Tina Tedford and all their team members.

I also want to mention that this morning we recognized three corporate employees who are celebrating their 25th anniversary with Capital Senior Living.

As you can tell, I’m extremely proud of the hard work and passion and dedication of our entire team, and our residents and family members frequently thank me for the meaningful impact they have on their lives.

It is our exceptional and talented employees that differentiate Capital Senior Living and give us such great confidence in the future of our company and the continued quality care we provide our residents, and the long-term value we are creating for all of our stockholders and other stakeholders.

The number of flu incidents reported in our assisted living and memory care units this flu season increased 43% compared to the prior year. Despite the headwinds from this heavy and prolonged flu season, which impacted our first quarter occupancy, as we discussed in our fourth quarter and full year 2016 earnings call.

The focused execution of our clear and differentiated real-estate strategy yielded increased in first quarter key metrics, including revenue, average multi rent and EBITDAR as compared to the first quarter of the previous year.

We are keenly focused on rebuilding occupancy across our portfolio following the heavy flu attrition and are encouraged by the strong demand we have experienced since mid February, as evidenced by excellent above average deposit taking in each of the last 11 weeks.

We have the highest number of net deposits for the year last week and a company record of number of mostly deposits and move-ins in the month of March.

We have a lot of momentum entering our best selling season, most encouraging is the fact that our demand is strengthening even though we stopped all incentives and pricing specials effective January 1.

This clearly demonstrates that Capital Senior Living is insulated from competitive new supply in most of our markets and is benefiting from the focus of our talented team and their successful execution of our differentiated strategy.

Rebuilding occupancy at higher effective rents will lead to higher revenue, EBITDAR and CFFO and we continue to be well insulated from significant wage pressure in most of our markets.

We also continue to make steady progress on important operational and corporate objectives related to positioning the company for sustained growth, including increasing our real-estate ownership with the strategic acquisition of four communities we previously leased and the reopening of units previously out of service.

As we look forward to the remainder of 2017 and beyond, we expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics. We remain laser focused on executing on our long-term sustainable real-estate focus growth strategy.

The main pillars of our strategy include continuing to pursue accretive acquisitions, increasing our owned portfolio and converting units to assisted living and memory care. The management team and I firmly believe that these three areas of focus will pave the way for sustainable organic growth over the long-term.

From an operational perspective, achieving core organic growth is at the center of everything we do. Increasing occupancy rates, thriving pricing improvements and executing on cost containment initiatives are all key to that objective.

We are pursuing occupancy improvement where opportunity exists and increasing average rents through market and in-house rent increases, as well as level of care charges. We are also diligently and proactively managing our expenses.

And through renovations and refurbishments, we are enhancing our cash flow, maximizing our real estate value and driving higher overall revenue. Acquisitions continue to remain a core component of our plan to drive shareholder value.

We have a proven track record of strategically abrogating local and regional operators in geographically concentrated regions and our success in acquiring high-performing communities at attractive terms is a testament to our ability to effectively source and close deals.

This disciplined and strategic acquisition strategy leverages our strong reputation among sellers and our robust pipeline of near-to-medium term targets. We’re deploying our cash into strategic immediately accretive acquisitions. We completed more than $960 million of acquisitions since 2010 and these have generated a 16% first year return on equity.

We closed an $85 million acquisition in January of four communities we previously leased from Ventas.

This transaction will result in incremental annual CFFO of approximately $3 million and provides us the flexibility to reposition communities and pursue accretive capital expenditures, while eliminating expensive leases with minimum 3% annual rent escalators, which ultimately means that we will generate more sustainable cash flow, maximize our real-estate value and create a stronger margin profile.

We are currently completing conversions of 169 units in renovation to these three communities that are expected to be completed over the next two quarters. When stabilized, we project that these conversions will contribute an additional $2 million to $3 million in CFFO.

The stabilized CFFO from this transaction is expected to result in a 20% or greater return on equity, including the cost of conversions. This transaction increases our owned communities and we are having discussions with other landlords that might further this strategic goal.

We also have a robust acquisition pipeline and are conducting due diligence on additional acquisitions of high-quality senior housing communities in states with extensive existing operations. We continue to believe that the ownership versus lease model provides us with significant strategic and financial benefits.

Capital Senior Living is now the nation’s third-largest senior housing owner-operator by percentage of ownership and since 2010 our real-estate ownership has increased from 32.5% to 64.3% of our total portfolio.

By increasing our owned portfolio, we are better positioned to generate significant and sustainable cash flow and real-estate value, optimize our asset management and financial flexibility and enhance our margin profile.

We are confident that increasing our owned portfolio over time is an effective way to increase the long-term value we are delivering to our shareholders as a focused real-estate company. Going forward, acquisitions will remain a key component of our capital allocation strategy.

We also have a long history of driving significant occupancy improvements through accretive conversions. We converted 400 units from independent living to assisted living or memory care through the second quarter of 2015.

Since conversion, these communities have achieved revenue growth of 23% and net operating income growth of 21.5%, and the lease up of our recently opened conversions has been excellent. An additional 209 units had been completed since the second quarter of 2015 and these communities are currently 90% occupied.

Another 776 units have been out of service for significant renovations, refurbishments, and repositioning. 232 of these units have reopened and their lease up has been outstanding, and the remaining 544 units are scheduled to reopen over the next three quarters.

The senior housing market offers attractive long-term fundamentals, including supportive population and demographic trends, a highly fragmented industry and a constructive operating environment.

Senior housing rent growth is at a seven-year high and the industry will benefit from a material reduction in senior housing construction starts, which had slowed to a weakest pace since 2012. Capital Senior Living is well-positioned at the intersection of these industry trends.

With that said, our positioning extends beyond just the senior housing industry. Given the pure-play private-pay nature of our business model, we are in many respects supported by the same industry-wide drivers that impact the multifamily and lodging sectors, while historically providing investors with higher returns.

While competition is a factor in any healthy industry, we benefit from a concentrated portfolio that is geographically situated outside the top 10 MSAs with the highest level of construction activity.

In fact more than 99% of our portfolio is situated in MSAs with limited new construction and in the one market where we operate within the top 10 highest construction markets, our average occupancy is 99%, as our average monthly rents are significantly below those of newly constructed communities.

Furthermore, we operate in markets with high barriers to entry. When comparing our average rates in many of our local markets versus the cost per unit of new builds, it’s clear that any new entrant in our core markets will be challenged to generate a sufficient return on investment to justify creating any new supply.

Our differentiated strategy of providing only affordable high-quality senior housing and not healthcare ancillary services enhances our competitive advantages as our monthly average rents are approximately 60% of the average cost of living at home plus the additional cost of home healthcare.

And recent studies show that the cost of home healthcare is rising more rapidly than the cost of seniors housing. As Carey will discuss, we are not facing the same wage and expense pressures that Brookdale, home health and other healthcare companies are facing, and our private pay strategy insulates us from government reimbursement risk.

With strong industry fundamentals and improving economy and limited exposure to new supply, we see a large runway of growth opportunity ahead of us as we execute on our plan. Touching briefly on capital allocation, each of the key strategies we discussed create value either organic or through accretive growth in margin enhancements.

The acquisitions and conversions we described will contribute to enhance cash flow, and by strategically allocating capital back into our owned real estate will improve revenue growth for years to come. Importantly, this means funding growth without raising equity or accessing the capital markets.

And we are confident that our disciplined approach will create sustainable and growing cash flow, as well as the most value for our shareholders over the long term.

In conclusion, we remain focused on our growth plan to maximize financial flexibility through portfolio ownership, improving profitability through margin enhancement, and improving the cash flow generation of our existing portfolio, and our outlook is supported by the fundamental strength of our business model.

We’re attractively positioned in the highly fragmented senior housing market and we have a capital plan that supports our long-term growth initiatives and a track record of strong growth. Capital Senior Living is uniquely positioned to drive sustainable growth and long-term shareholder value.

It is my pleasure now to introduce Carey Hendrickson, our Chief Financial Officer to review our company’s financial results for the first quarter of 2017..

Carey Hendrickson

Thank you, Larry, and good afternoon, everyone. Hopefully, you’ve had a chance to review our 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 $116 million for the first quarter of 2017. This is an increase of $6.8 million, or 6.2% over the first quarter of 2016. The increase in revenue is largely due to communities acquired during or since the first quarter of 2016.

Revenue for consolidated communities, excluding the three communities that are undergoing repositioning lease up or significant renovation in conversion increased 6.3% in the first quarter of 2017, as compared to the first quarter 2016.

Our operating expenses increased $6.3 million in the first quarter of 2017 to $72.8 million again due primarily to the acquisitions. Our general and administrative expenses for the first quarter of 2017 were $6.2 million, the same as in the first quarter of 2016.

Excluding transaction costs from the first quarters of both 2017 and 2016, our G&A expense increased $300,000 over the first quarter of 2016.

Net healthcare expense, which is the net of our healthcare claims and our employee benefit income increased by $300,000 in the first quarter of 2017, as compared to the first quarter of 2016, which explains the full increase in G&A.

Regarding our healthcare benefit plans, we’ve made changes to the plans, which renew on June 1 of each year that we expect to meaningfully improve our net healthcare claims expense going forward, beginning in June. G&A expenses as a percentage of revenue under management was the same in the first quarter of 2017, as the first quarter of 2016 at 4.9%.

As we noted in the press release, the company’s non-GAAP and statistical measures exclude three communities that are undergoing repositioning, lease up of higher license units, or significant renovation and conversion. Our adjusted EBITDAR was $37.7 million in the first quarter 2017, which is an increase of $400,000 from the first quarter of 2016.

This does not include EBITDAR of $700,000 related to the three communities undergoing repositioning, lease up, or significant renovation conversion. Our adjusted CFFO was $11 million in the first quarter 2017, which is above the range of $9.75 million to $10.75 million that we provided on our fourth quarter and year-end earnings call.

Our same community revenue increased $800,000, or 0.8% over the first quarter of the prior year. Our same community occupancy was 87.6%, a decrease of 100 basis points from the first quarter of 2016.

We expect the decline in occupancy, as we noted in our fourth quarter earnings call due to a heavy and prolonged flu season, as well as weather-related damage due to cold weather events in late December and early January that resulted in 83 units being out of service across 15 communities for three weeks or more in January and February.

Our same community average monthly rent increased 1.9% versus the first quarter of 2016 and increased 0.7% in the fourth quarter of 2016, which would equate to an annual increase of approximately 2.8%. Our average monthly rent for consolidated communities increased 2.8% versus the first quarter of 2016.

Same community operating expenses increased 2.9% versus the first quarter of last year, excluding conversion costs in both periods. Our labor costs continue to increase in line with our expectations up 2.5% in the first quarter versus the first quarter of last year.

As we’ve noted in previous quarters and as Larry said today, we’re not a healthcare company, so we’re not experiencing the wage pressures that healthcare companies and some senior housing companies with multiple healthcare-related ancillary services are experiencing.

Our two other major expense categories also continue to be well managed with food costs increasing only 0.3% versus the first quarter of the prior year and utilities increasing 3.7%. Our same community net operating income decreased 2.4% in the first quarter of 2017, as compared to the first quarter of 2016.

On January 31, we completed the acquisition of four communities that we previously leased for purchase price of $85 million. We also incurred a $12.9 million non-cash lease terminations charge associated with the transaction. The previous total lease expense in the four communities was approximately $7 million annually.

We received a rent credit of $5 million in association with the transaction. The non-cash lease termination charge is effectively the discounted value of these payments to be made over the remaining approximately 8.5 years Master Lease Agreement with our REIT partner.

The annual net impact of the transaction going forward is a positive $3.0 million increase in CFFO. Our lease expense decreases by approximately $7 million while our interest expense increases by approximately $4 million.

On the fourth quarter call we conservatively estimated that the positive CFFO impact will be approximately $2 million while we work through the details of the transaction. The purchase of these four lease committees is consistent with our real-estate focus strategy.

In addition to the $3 million increase to our CFFO, it will free us from annual rent escalations, will significantly increase our flexibility related to these real-estate assets, increases our percentage of owned real-estate assets and enhances our real-estate and shareholder value.

And as Larry noted, we’re currently working on conversions of 169 units and renovations at three of these communities, which when stabilized we project will contribute an additional $2 million to $3 million in CFFO. Looking briefly at the balance sheet, we ended the quarter with $25.9 million of cash and cash equivalents including restricted cash.

During the first quarter we invested $20 million in the acquisition of the four communities we previously leased and we spent $12.7 million on capital expenditures, $1.3 million of which was for recurring CapEx.

We received reimbursements totaling $2.3 million for capital improvements at our release communities and expect to receive additional reimbursements as projects are completed. The first quarter we completed or nearing completion on several projects and expect our quarterly capital expenditures to taper down as the year progresses.

Our mortgage debt balance at December 31, 2017 or at March 31, 2017 was $968.1 million at a weighted average interest rate of approximately 4.6%. At March 31 all of our debt with fixed interest rates except for two bridge loans that totaled approximately $76.7 million.

The average duration of our debt is approximate seven years with a 92% of our debt maturing in 2021 and after. Looking forward, we expect occupancy to begin to rebuild in the second quarter. As Larry noted, we’ve had above-average deposit taking from the last 11 weeks and we had a record number of move-ins in the month of March.

Also the second quarter of the year generally has the mildest weather and therefore the lowest utilities expense. We’ll also have three months of benefit from the acquisitions of four committees we previously leased versus the two months benefit we had in the first quarter.

We continued to project our net healthcare claims expense at a higher level in the second quarter due to our experience over the past few quarters. However, as I noted previously, we expect this expense to begin the moderate starting in June.

Taking all of these things into account, we currently expect our second quarter CFFO to increase versus the first quarter and to be in a range of approximately $11.6 million to $12.2 million depending on our experience related to our three primary non-controllable factors, attrition, weather and healthcare claims.

As we think about 2017 and beyond, we expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics, particularly as we look to the second half of 2017 and into 2018.

We expect our core growth to be enhanced by the significant renovations and refurbishments we’ve made and are continuing to make across our portfolio. The benefits from which we expect to being seeing in the second half of this year and beyond.

And the impact of the return of 776 units currently out of service, were out of service as the year began due to conversions, repositioning will be even greater, particularly as our two large repositioned communities are completed this year and added back to our non-GAAP results after stabilization in 2018 and 2019.

In 2017, we’ll benefit from the return of approximately 139 units that had been out of service, with the lease-up of these units beginning primarily in the second half of the year. And we expect to add back one community with 186 units that’s been excluded from our non-GAAP results in 2017.

As a leased community, it will have a greater impact on revenue and EBITDAR than on CFFO. When all of these 776 units are leased up and stabilized, we continue to expect them to contribute incremental revenue of approximately $32 million and CFFO of approximately $7.5 million on an annual basis.

We’ll also benefit in 2017 from a full year of the acquisitions we completed during 2016 and will receive 11 months of benefit from the January 2017 purchase of the four previously leased communities.

In addition, we have a robust acquisition pipeline that will allow us to continue to acquire high-quality senior housing communities in our geographically concentrated regions.

We believe the successful execution of our clear and differentiated real-estate strategy will result in outstanding growth in our key metrics over time and positions us well to create long-term shareholder value as a larger company with scale, competitive advantages and substantially all private-pay business model in a highly fragmented industry that benefits from long term demographics, need driven demand, limited competitive new supplier in our local markets, a strong housing market and a growing economy.

That includes our formal remarks and we’d like to now open the call for questions..

Operator

Thank you. [Operator Instructions] We’ll go first to Chad Vanacore with Stifel..

Chad Vanacore

Good morning Larry and Carey, good afternoon..

Larry Cohen

Hey Chad..

Carey Hendrickson

Hey Chad.

How are you doing?.

Chad Vanacore

Good, good. So I was thinking about average rent increases at your community.

It looks like same-store rate was up 1.9%, is that right?.

Carey Hendrickson

That’s right. It was up 1.9% versus the first quarter of 2016, versus the fourth quarter of 2016 just that one quarter-to-quarter increase it was 0.7%, which would equate to a 2.8% annual increase..

Chad Vanacore

Oh, I’m sorry, Carey, can you say that again, 2.8% for the whole portfolio?.

Carey Hendrickson

Well, it is 2.8% for the whole portfolio, but also just looking at the same community. If you look at what the increase was from the fourth quarter to the first quarter that sequential increase was 0.7%, so just annualizing that. Taking that on the whole would be 2.8%. Yes, just annualized rate of 2.8%..

Chad Vanacore

Because we had been talking more about 3% rate increases and that’s in line with that, right?.

Carey Hendrickson

It’s right..

Chad Vanacore

Okay.

Are you seeing any difference in rate growth between your IO and AO units?.

Larry Cohen

Actually if you look at the rate of growth, our IO unit sequentially increased by 1% and AO is up by about 30 basis points..

Chad Vanacore

Okay..

Larry Cohen

Year-over-year we see a little higher same-store, higher rate growth in IO than AO..

Chad Vanacore

All right and then Larry you had mentioned that you discontinued discounts.

What form did those discounts take prior to you discontinuing?.

Larry Cohen

We would occasionally offer introductory specials, for independent living it would be $500 off of the first three months rent. For assisted living, it would be a $1000 off. Memory care would be about $1500. We typically run them on properties that occupancies typically below 85%, sometimes low to 90%.

And then it get very rarely, but they were sort of boost up after for example some harsh weather or something happened like in October, we have it on all properties. So we did have that for example in December, but we have effective January 01 there were no specials or introductory pricing at any of our communities.

And the other thing that’s important Chad is those concessions had now fully burned off. As I said, they rest for three months, so the January move-ins lasted the entire quarter. That will – it should show a further improvement in the average rent for April, since there are no longer any concessions coming through our financials..

Chad Vanacore

All right, thanks and then I’m just thinking about CapEx, your investment CapEx was $11.4 million in a quarter, you had been running around $9 million a quarter.

Where is that going to and should we expect that to normalize or is this a better run rate to use for the rest of the year?.

Carey Hendrickson

Yes, we’ve been completing some projects that were started in 2016. We’re just finishing those up and so we’ve had a – and we’ve completed as of the end of April, we had completed our Canton project, which is one of our repositioned communities and a lot of that expenditure is in the first quarter.

So, now we expect those to taper down as the year goes along. I still think it will be per the year at approximately $30 million and that’s before reimbursements from our REIT partners of about $5 million, so net-net, we probably have somewhere around $25 million in CapEx for the year.

So it’s definitely higher in the first part of the year and it will taper off as the year goes along..

Chad Vanacore

All right, thanks for the color Carey and I will hope back into queue. Thanks..

Larry Cohen

Thanks Chad..

Operator

And we’ll go next to Dana Hambly with Stephens..

Jacob Johnson

Hey, this is Jacob Johnson on for Dana. I guess first question. Hey, hey, understanding that expenses were in line with your expectations that the 2.9% same-store expense growth in the first quarter looks like it was more than you’ve experienced recently.

It sounds like this is driven by increased utilities, but was there anything else to call out there?.

Carey Hendrickson

Yes. So Jacob, taken as a group, our three major cost categories labor, utilities and food were up approximately 2.5%, labor with that 2.5% right in line with our expectations. Food costs were up only 0.3% and utilities, as you know, they were up 3.7%. And they increase and decrease based on the severity of the weather.

The weather in the first quarter of this year, while relatively mild in certain parts of our geography was a little more severe than in the first quarter of last year. So therefore, that expense was up some.

And then we had – we did have a couple of unusual expense increases in a couple of other categories supplies, contracts consulting that we wouldn’t expect to occur in future quarters, but they were just kind of one-time cost in the first quarter..

Jacob Johnson

Make sense..

Carey Hendrickson

I’d say, our expenses were where we expected them to be..

Jacob Johnson

Got it. And then the COO role has been vacant since Keith passed away. You guys obviously have a deep bench.

But looking forward, do you have any plans to fill that role?.

Larry Cohen

Jacob, we are considering both internal and external candidates. And I would expect that the decision will be made in the near future..

Jacob Johnson

All right. And then last one for me, Carey, a quick modeling question.

Should we expect to see lease expense kind of tick down in the second quarter, as you had that that full three months of the owning those previously leased assets?.

Carey Hendrickson

Yes, absolutely. So that – so we had about – if you look at it that’s about $600,000, $585,000 or so of lease expense per month will come out from the previously leased communities, and we had two months of that out. In the first quarter, we’ll have three months of that out in this – in the second quarter and beyond that..

Jacob Johnson

Perfect. That’s it for me. Thanks for taking the questions..

Larry Cohen

Thank you, Jacob..

Operator

We’ll go next to Joanna Gajuk with Bank of America..

Joanna Gajuk

Hi, good afternoon. Thanks for taking the question. So in terms of the quarter, which you said that the CFO – CFFO came in above the high-end of the range that you provided.

How would you describe what came in better than expected that drove that, I guess, a little bit better performance there?.

Carey Hendrickson

Right. It was mostly due to lower operating expenses and G&A expense, as well as the fact that we initially projected that it would be about a $2 million increase in CFFO related to the four communities we purchased in the first quarter. And it was actually – it actually ends up being about a $3 million increase.

So that added about $150,000 to the first quarter from that transaction. Those were really the reasons why we are a little bit better..

Joanna Gajuk

Okay.

And what exactly is the instrument the last peak – of the last peak expectation that now it’s – those communities were $3 million versus $2 million previously, what exactly has come in better on that transaction?.

Carey Hendrickson

What’s coming better? Well, and just working through their transaction, we – so we have – we were just being conservative, Joanna, until we work through it. We ended up being able to – we will reduce our lease expense by $7 million, and we’ll increase our interest expense by $4 million.

So it’s just the way that it nets out and it just in that being better. We wanted to be conservative until we’ve completely worked through the transaction..

Joanna Gajuk

Okay.

And then in terms of, you said the flu, I guess, instances increased, but were you able to quantify the weather impact in some form of fashion, or it was sort of, I guess, reflected just in the increased utilities costs?.

Larry Cohen

Well, the weather, we had 85 units out of service in the first quarter. We had, I think, 18 properties that had freezing frozen pipes, water damage and actually because of that that was very disruptive. It’s not only the 85 units we had wings closed. We had moved residents around in the community to clean up the units and fix the pipes.

So, that’s part of the loss of occupancy in the quarter and that was really from the ice storms that hit in December and January in Texas and some parts of the Midwest. In addition to that, if you look at the flu, as I said, we had in the quarter, so that’s – we had basically 621 reported incidents of the flu this year.

That’s only AL and memory care, we don’t track the aisle, that compares about 400 the year prior. So it was a pretty big increase of almost 260 additional reported incidents of flu in just AL and memory care, which represents about 57% of our portfolio..

Joanna Gajuk

Great.

In terms of – but in terms of the outlook for the year, so clearly, the Q1 occupancy was down, which I guess, we kind of knew it’s going to be the case for the quarter because of all these issues around flu and weather, but anything changing in terms of your outlook, or you still kind of view 100 basis points increase in occupants for the year?.

Carey Hendrickson

From the increase in occupancy for the full-year, I mean, I think, we have starting from the base that we are in at the end of the first quarter. So as we go into the second quarter, I would expect us to be able to increase somewhere in that 80 to 100 basis points through the rest of the year..

Larry Cohen

Typically, Joanna, we expect no growth in the first quarter..

Carey Hendrickson

Correct..

Larry Cohen

We expect growth to grow during this second, third, and fourth quarters. We’re actually running ahead now. We had a really strong March, as I said. We had net gains in occupancy in eight of the last 10 weeks, and we’ve had very, very strong deposit taking out from 11 consecutive weeks.

As we commented in early February on the fourth quarter call, we had a very challenging January because of the weather and flu. But the recovery is encouraging, particularly the pace at which we’ve seen the recovery really starting the week of February 17.

So we’ve really had now really all of March now April and half of February with very, very strong performance that hopefully we’ll continue in July growth for the balance of the year..

Joanna Gajuk

And if I may lastly….

Larry Cohen

We’re starting at a lower – but we are starting at a lower occupancy on April 1….

Joanna Gajuk

Right..

Larry Cohen

That we have planned to-date..

Joanna Gajuk

Okay, because that’s what I was getting on. But I guess based on the commentary that Carey made on the Q2 outlook, right, so a sequentially expect increase, which is, I guess, what we would have expected about, it seems like it’s less than what we had expected during the past, it was $0.04, I guess, about $0.04 sequentially per share.

But now it seems like it maybe about more like a 3.

So is there something maybe also around acquisitions in the sense that, I guess, you’ve done the four communities that were previously leased, but other than that you haven’t really added versus maybe in five years that was more of a sequential left in Q2 from Q1 from acquisitions or something along these lines?.

Carey Hendrickson

Yes, that is we – you’re right. Let me just walk you through the kind of sequentially first quarter to the second quarter how to think about it. We’re projecting an increase of, as I noted, approximately $600,000 to $1.2 million, which would equate to $0.02 to $0.04.

And we’ll get one additional month of a contribution from our first quarter acquisition of the four previous leased communities, and that’s about $250,000. We don’t, as you noted, we don’t have any additional acquisitions that are closed in the second quarter. So there won’t be any incremental contribution from a new acquisition.

We would expect our utilities costs to be lower by approximately $600,000, because the second quarter generally has milder weather in the first quarter. Our G&A expenses could be about $200,000 to $300,000 higher in the 2Q.

in the second quarter versus first quarter based on just normal seasonal costs, including costs related to our proxy in our annual meeting that always happen in the second quarter among other items.

And then the remainder of the increase from 1Q to 2Q will really depend on how much recovery in occupancy that we’re able to achieve in the second quarter, as well as the lease up of the units we previously had of service that come back on line – the ones that came back on line in the first quarter, and the ones that will come back online in the second quarter..

Joanna Gajuk

All right. Thank you so much..

Larry Cohen

You bet..

Carey Hendrickson

Thanks, Joanna..

Operator

[Operator Instructions] We’ll go next to Brian Hollenden with Sidoti..

Brian Hollenden

Good evening, and thanks for taking my question..

Larry Cohen

You bet..

Brian Hollenden

Absent the spike in the flu season, would you have expected the same community occupancy to have increased?.

Larry Cohen

Typically, in the first quarter, we don’t expect an increase. We typically expect first quarter to be flat to slightly off. If you go back historically, there’s always seasonality. Last year, we did have a 30 basis points, I think, back in occupancy last year, we dropped first quarter on the same store basis by about 60 basis points.

So we typically see a little bit of a drop in the first quarter. But we don’t expect to see an increase in the first quarter. We typically see it build the second or third quarter is usually the strongest quarter, and then we’ve always typically seen improvement in the fourth quarter as well..

Brian Hollenden

Okay. Can you give us just a more specific timeframe for the 770 units, which will come back online.

I think you mentioned the 139 units in 2017, can you talk more about how those come back online?.

Larry Cohen

Sure. Yes, in fact, if you want to look at our company presentation, there’s a slide that breaks this out. I think it’s Slide 17, and you can see by quarter when the units come back.

So in the second quarter of this year, which we are now, we’re expecting 311 units to reopen, 249 are the Canton Regency, we have – we’ve already opened the memory care 25 units, therefore, we’re now opening the assisted living then we have another 962 units on top of that opening, some of those are the properties we repurchased from Ventas that are reopening now in the second quarter.

We had 19 units reopening in the third quarter and then 214 units in the fourth quarter, 202 of which will be Town Centre. Again, one of the properties that’s been out of numbers for major repositioning and then 12 units as other conversions that will be opened in the fourth quarter..

Brian Hollenden

Thank you. And then one last question, can you talk a little bit about any geographic regions that are performing well? And then are any particular regions weak and what can you do to improve those results whether that and – to improve occupancy, or to lower costs there? Thanks..

Larry Cohen

Great question. The strongest regions are the Midwest central part of the country. We have one region that operate at 95% consistently, and that’s kind of Nebraska the central part of the country is very strong. We’ve seen a nice recovery in Texas. We did have, obviously, the weather impacted us.

As we have said, we are impacted in a few of our Northern Dallas metro markets McKinney, Plano, here in Arapaho, those three locations. But they again have very strong teams and McKinney has recovered like 92%, Plano in Arapaho, they face some competition, but have very strong teams. The other weak area, I’d say, is South Carolina.

If you look at Myrtle Beach and kind of the coastal part of Carolina, those markets have been weak for sometime, and there it’s really looking at some changes in personnel and then some capital improvements as well.

One thing I would say is that, the conversions as they come on, they have really worked extremely well of improving occupancy at properties, particularly where we have a vacancy. So that’s been a very, very reliable solution that we’ve been able to utilize and take advantage of loss of occupancy we have the vacancy.

We have a property in Ames, Iowa that we plan to do a memory care conversion three years ago. By the time we had all the approvals, we were a 100% occupied, and we actually now are starting to lease some units to get units down in order to start the renovations. So, as I think about the markets, there are a couple of pockets in Texas.

Clearly, South Carolina, we’ve had some great experience in California. I mentioned the property that was the best performer was a property in Sacramento. But the central part of the country continues to be very, very solid..

Brian Hollenden

Thank you..

Operator

And we’ll go next to Ryan Halsted with Wells Fargo..

Ryan Halsted

Thanks. Good evening. Maybe just to approach the occupancy trend in a quarter of a little differently, it seem like the impact of flu hit early in a quarter maybe consistent with what the expectations were heading into the quarter.

So can you break out intra-quarter what he – what your occupancy trends were? I think that’s always helpful just to give a sense of how you exited the quarter?.

Larry Cohen

We actually had a pretty – just a minor drop in January. We had a more significant financial drop in February just giving an idea on flu. In December, we had about 60 more incidents of flu in AL memory care this year than last.

In January comparing year-over-year, we had 200 – over 200 more flu incidents in January that kind of reflected themselves in February. In February, we were about 30 more, and actually in March, we were 90 less. We had a really strong April, I mean, sorry, March.

We gained I think about 56 units in the month of March from beginning to end, financial occupancy will probably be higher growth in April based on that. So if you think about the trends January was not that bad a month, it really manifest itself in February financially, carried over into March.

Physical occupancy in March actually grew, which means financial source of monumental ag that we should see a pickup in financial occupancy in April. And obviously we have very good deposits on hand.

We have a good spread between deposits and move outs and we have a lot of good traffic and momentum that with good weather should continue throughout the second and third quarters..

Ryan Halsted

Okay, that’s helpful. And then moving to your acquisition pipeline.

What kind of visibility do you have sort of into the pipeline for the rest of the year, should we think about it kind of similar to last year or where it was a little bit more backend weighted the deal activity?.

Larry Cohen

Let me just tell you, will be or in pipeline, I’ll let Carey talk about timing. In the first quarter we signed confidentiality agreements on about $300 million of properties. So we continued to track with over $1 billion of pipeline a year. And we typically buy 10% or 15% of what we look at. We have due diligence ongoing now in a couple of properties.

I think earlier, we closed $85 million in the first quarter. For the back half of the year we’re probably looking about $15 million to do or more. To kind of stay on pace with last year, which was $138 million.

We’ll have one closing in the end of the second quarter, early third and another closing that will take us into the end of third, early fourth quarter and that’ll have – we expect additional closings in the fourth-quarter..

Ryan Halsted

Okay, great thanks. Maybe the last one, you know you talked a lot about obviously your strategy for increasing your real-estate ownership and you know how much of that strategy is becoming, I guess, increasingly more about getting your leases sort of either bought out or just terminated.

Can you give any sense of what percentage of your leases, do you have purchase options in the next year to two years and how many of them have these sort of own risk escalators that you know you think might not make sense and maybe you have a chance to negotiate out of them in the near-term?.

Larry Cohen

I think about 25% of our leases just run off in two years. We have a number of portfolios with one landlord that runs out in 1999 – in 2019, 2020, yes, and we have a one year notice period ahead of that. So call it two more years, we’re about 25% of the leases rollout.

There is probably a handful three to five properties that we lease, that we would – it would in conjunction with our landlord consider selling, just some markets that we would like to exit. We think they don’t have the same growth prospects as others. The rest of these portfolio actually is performing pretty well.

So, if you look at it, we are taking advantage of opportunities to convert some of those into ownership, obviously, we think it was very strategic to buy back the four that we did from Ventas with $85 million. Hopefully, we’ll increase cash flow by $5 million to $6 million.

And if you think about real estate value, we think we could probably increase the value of those properties by maybe $30 million, $40 million once we complete the conversion.

So there is a lot of benefit to doing that and we’re having conversations with our landlords about looking at selectively acquiring properties or reconverting them to equity versus leases. All of the leases have escalators, they typically have CPI escalators, some have floors of 3%, some have CPI.

But that we’ve had them for over 10 years now and then we’ll continue..

Ryan Halsted

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

Larry Cohen

Thank you..

Operator

[Operator Instructions] And no one else is queuing for questions from the line..

Larry Cohen

Okay..

Operator

So I hand the call back over to Larry Cohen..

Larry Cohen

Well, thanks everybody for participating today. We appreciate your support and interest in our company. Feel free to contact Carey or myself, if you have any additional questions, and then we do have a pretty good schedule coming up of conferences that we expel, hopefully, we’ll see some of you over the next few weeks. Have a great evening.

Thank you very much..

Carey Hendrickson

Thank you..

Operator

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

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