Larry Cohen - CEO Carey Hendrickson - SVP & CFO Gloria Holland - VP, Finance.

Chad Vanacore - Stifel Joanna Gajuk - Bank of America Brian Hollenden - Sidoti Dana Hambly - Stephens.

Good day and welcome to the Capital Senior Living Second Quarter 2017 Earnings Release 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..

Thank you and good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living’s second quarter 2017 earnings call. It is truly a pleasure to welcome Brett Lee to our management team as Executive Vice President and Chief Operating Officer.

Brett will join us on August 14 from Tenet Healthcare where he serves as Chief Executive Officer of the North Texas and Dallas markets. Brett's experience also includes serving in senior leadership positions in four of the nation's top 10 children's hospitals.

We are excited to have someone with Brett's outstanding leadership abilities and strong record of operational success within the healthcare services sector to join our company. He is a passionate and committed healthcare executive with the results oriented focus.

His experience as a clinician, clinical leader, and executive will be a tremendous asset to our management team and our residents.

Our occupancy improved in the second quarter following the severe and prolonged flu season earlier this year and our average monthly rent increased a robust 2.1% in the first six months of the year which annualizes to a 4.2% rate of growth.

Despite the impact this year severe and prolonged flu season had on our first half 2017 occupancy in revenue, we are encouraged by strong second quarter demand trends as evidenced by a 6.3% increase in same-store net deposits and a 3.6% increase in same-store move-ins compared to the second quarter of 2016.

This follows a record number of deposits and move-ins in March for this year and since February we have enjoyed a net gain of 104 units of occupancy through July 31 as we continue to rebuild occupancy across our portfolio.

It is important to remember that financial occupancy gains lag physical occupancy results and I am pleased to report that we expect about 30 basis points net gain in financial occupancy for the month of July.

We also achieved a company record number of quarterly net deposits as well as a company record high closing ratio of towards to net deposits in the second quarter.

Most encouraging is the fact that our demand is strengthening even though we stopped incentives and pricing specials on January 1, as reflected in the robust gain in average monthly rate for the first six months of the year. These positive metrics result from the implementation of a number of initiatives earlier this year.

Our refreshed Capital Senior Living University sales training provides a uniform sales system throughout Capital Senior Living that focuses on capturing all incoming leads and increasing conversions towards, a bigger planning system to high end customer experience, a follow-up in closing system and better benchmarking and holding our Executive Directors and Sales Directors accountable for the sales process.

We also restructured incentive compensation programs for our regional and on-site operations in sales and marketing teams that focus on enhanced performance and accountability.

We developed recognition programs for our store achievers, as well as training programs and succession plans to develop the next level of executive directors in our organization. Our improved demand metrics give us excellent momentum for occupancy and rate growth going forward.

These results also demonstrates that Capital Senior Living is generally 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, EBITDA and CFFO and we continue to be well protected from significant wage pressure in most of our markets.

As Carey will discuss further, certain expenses were higher in the second quarter. These increases are temporary in nature and we have already seen them moderate in the third quarter. We expect the continued execution of our strategic business plan to produce outstanding growth in all of our key metrics for the remainder of 2017 and beyond.

We remain laser focused on executing on our long-term sustainable real estate focus growth strategy. The main pillars of our strategy include core organic growth, continuing to pursue accretive acquisitions, increasing real estate ownership, and converting units to assisted living and memory care.

The management team and I firmly believe that these four areas of focus will pave the way for sustainable organic growth over the long-term driving higher overall revenue, enhancing our cash flow, maximizing our real estate value, and enhancing shareholder value. 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 a robust pipeline of near to medium term targets. We're deploying our cash into strategic immediately accretive acquisitions.

We have completed more than $960 million of acquisitions since 2010 and these have generated a 16% first year return on equity. We announced today we have agreed to purchase a committee for total purchase price of approximately $20 million which subject to due diligence and customary closing conditions is expected to close in mid-October.

We have a strong pipeline of near to medium term targets and we are conducting due diligence on additional acquisitions of high-quality senior housing communities in states with existing operations. We continue to believe that our ownership for leased strategy provides us with significant operational and financial benefits.

Capital Senior Living is the nation's third-largest senior housing owner operator by a percentage of ownership and since 2010, our real estate ownership has increased from 32.5% to 34.3% of our total portfolio.

By increasing our owned portfolio, we generate significant, 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 senior housing owner operator. 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 to the second quarter of 2015.

Comparing results pre-conversion from the second quarter of 2014, these communities achieved revenue growth of 24.6% and NOI growth of 28.3%. With the completion of the final phase of renovation and conversion of 249 total units and one of our reposition communities in April, we currently have 519 units up recently completed conversions and lease up.

Another 257 units are scheduled to reopen over the next two quarters. When stabilized, the 776 units that were out of service at the beginning of 2017 are expected to contribute $32 million of revenue, $11 million of EBITDA and $7.5 million of CFFO on an annual basis.

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 near a 7-year high, second quarter absorption was a record high and construction starts continue to fall for the sixth consecutive quarter.

The industry will benefit from the continued reduction in construction starts as construction capital is constrained and the approaching demographic tailwind of a rapidly growing senior population.

While the 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 98% of our portfolio is situated in MSAs with limited new construction and the two markets where we operate within the top 10 highest construction markets, our average occupancy is 93% 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 newbuilds, it's clear that any new entrant in our core markets will be challenged to generate a sufficient return on investment to justify creating new supply.

Our differentiated strategy of providing only affordable high-quality senior housing and non-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.

Our 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 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 in housing market, high consumer confidence 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 through either organic or 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 to real estate 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 straightforward private pay business model.

We are 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 value for our shareholders.

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

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

Thank you, Larry and good afternoon everyone. The Company reported total consolidated revenue of $116.7 million for the second quarter of 2017. This was an increase of $5.7 million or 5.1% over the second quarter of 2016. The increase in revenue is largely due to communities acquired during or since the second quarter of 2016.

Revenue for consolidated communities excluding the three communities undergoing repositioning lease up or significant renovation and conversion increased 5% in the second quarter of 2017 as compared to the second quarter of 2016.

Our operating expenses increased $6 million in the second quarter of 2017 to $72.9 million due primarily to the communities we have acquired second quarter 2016, as well as an increase in contract labor cost versus the second quarter of 2016.

Most of the increase in contract labor cost was isolated to 10 communities, several of which were recently completed conversions of units high levels of care and were required as staff on hand before they could admit residents. The contract labor was needed to cover open nursing assistant’s aids and orderly positions.

Regulations required such staff in place so we had these contract labor to temporarily fill those gaps. We expect contract labor costs to come down from the second quarter levels in the third quarter as these roles are filled with permanent staff.

Our general and administrative expenses for the second quarter of 2017 were $6.1 million compared to $5 million in the second quarter of 2016.

Excluding transaction cost from both years, our G&A expense increased $1.1 million of the second quarter of 2016 primarily due to an increase in net healthcare expense which is a net of our healthcare claims and our employee benefit income.

Our net healthcare expense was $1.125 million in the second quarter of 2017 compared to a credit of $240,000 in the second quarter of 2016 so was $1.4 million increase year-over-year. As we noted on our call last quarter, we revised the healthcare plans offered to our employees effective June 1 for the third month of this quarter.

The new healthcare plans have higher deductible, they have higher employee out-of-pocket percentages we also increased the premiums paid by employees for all plans with the greatest premium increase in our most benefit risk plan. This resulted in some employees moving to one of our other healthcare plans with lower benefit levels.

In anticipation of moving to the new plans with lower benefit levels, some of our covered employees accelerated our healthcare services into the month of May resulting in unusually high claims in that month.

As expected, we experience significant improvement in net healthcare claims expense in June, the first month of the new plans with much lower healthcare claims which were fully offset by employee benefit income.

Our healthcare claims have remained at this lower level in July 2 so we expect a similar result for our net healthcare expense in the month of July and continue to improve the results going forward. G&A expense as a percentage of revenue under management was 4.8% in the second quarter of 2017 compared to 4.1% in the second quarter of 2016.

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 licensed units or significant renovation and conversion. Adjusted EBITDAR was $38.2 million in the second quarter of 2017 which compares to $39 million in the second quarter of 2016.

This does not include EBITDAR of $1.1 million related to the three communities that are undergoing repositioning lease up or significant renovation and conversion.

our adjusted CFFO was $11.5 million in the second quarter of 2017 which is right at the range for second quarter's CFFO that that we provided on our first quarter earnings call of $11.6 million to $12.2 million. Our same community revenue increased $800,000 or 0.8% over the second quarter of the prior-year.

Our same community occupancy was 86.8% stabilizing after the high attrition we experienced in the first quarter related to a heavy and prolonged flu season. In March, our financial occupancy was 86.8% and it remained at that level through the second quarter.

As Larry noted, we had a nice net gain and physical occupancy in June but the normal lag between physical and financial occupancy we expect this increase to translate into an approximate 30 basis point gain in financial occupancy from June to July.

July is also showing an increase in physical occupancy which should result in an incremental boost in August financial occupancy and we expect the momentum to continue into September. Our same community average monthly rent increased 2.5% from the second quarter of 2016 with 2% of that growth coming in the first and second quarters.

The second quarter sequential average monthly rent increase in the first quarter was 1.3% which is 4.2% on an annualized basis. Our same community operating expenses increased 3.4% versus the second quarter of last year. As I noted earlier, our employee labor cost increased 2.6% in the second quarter of 2017 versus the second quarter of 2016.

We did receive our Workers Comp credit in the second quarter of approximately $500,000 which benefited our labor cost.

Without the Workers Comp credit our labor costs were about 3.7% due to an expected increase in labor costs for additional staffing at 14 committees were conversion of units a higher level of care have been completed over the last year. These 14 communities are also benefiting from an increased rate revenue and NOI associated with conversions.

Of the remaining 108 same-store committees, labor costs were up only 1.3% or 2.2% excluding the workers comp credit associated with these communities which is well within our expectations for labor increases across our portfolio of assets without conversions.

Our two other major expense categories continue to be well managed with food costs increasing only 0.2% versus the second quarter of the prior year and utilities increasing 2.3%.

Our contract labor cost as I noted were up significantly in the second quarter versus last year mostly for additional staffing required for newly licensed assisted living and memory care unit but again we expect those cost to decrease in the third and fourth quarters.

Our same community net operating income decreased 2.9% in the second quarter of 2017 as compared to the second quarter of 2016.

The contribution from acquisitions that we've made since the second quarter of 2016 are in line with our initial projections for these acquisitions of $1.4 million of CFFO contributed by these communities and the second quarter of 2017.

Looking briefly at the balance sheet, we ended the quarter with $29.6 million of cash and cash equivalents including restricted cash. During the second quarter we spent $9.2 million on capital expenditures, $1.5 million which was for recurring CapEx.

We received reimbursements totaling $1.4 million from our REIT partners for capital improvements at our lease communities and we expect to receive additional reimbursements as projects are completed. Our capital expanding was down from the first quarter of the year and we expect to continue to taper down as the year progresses.

Our mortgage debt balance at June 30, 2017 was $964.1 million at a weighted average interest rate of approximately 4.6%. At June 30 all of our debt was at fixed interest rates except for two bridge loans that totaled approximately $76.6 million.

The average duration of our debt is approximately seven years with 93% of our debt maturing in 2021 and after.

While our results in the first half of 2017 have been impacted by the decrease in occupancy in the first quarter related to heavy and prolonged flu season, we see momentum beginning to accumulate and firmly believe that all the right pieces are coming together to improve our performance in the second half of the year.

Occupancy is beginning to grow, the increase in our average monthly rent is accelerating, contract labor costs which increased in the first half of the year are expected to come down in the third and fourth quarters, our net healthcare expense which has been up significantly in the first half of the year is expected to decrease significantly in the second half of the year with our updated employee health care plans.

And we expect to close on acquisition early in the fourth quarter which will boost result. Then as we look forward to 2018 and 2019, we expect the execution of our strategic business plan to produce growth in all of our key metrics.

We expect our core growth to be enhanced by the significant renovations and refurbishments we've made and are continuing to make across the portfolio and the impact of the return of units currently out of service due to conversions and repositioning's will be in greater particularly as our three large repositioning communities will return to a non-GAAP results after stabilization.

These three communities have 637 units.

One community has been in lease up and we expect to reach stabilization by the end of this year or early 2018 during the second quarter of 2017 the final phase of conversion renovation was completed on the largest of the three with 249 units and is now in lease up and we currently expect it to be stabilized in 2018.

The final phase of renovation and conversion of the other community, the third community with 202 units is underway with an expected completion date of November 2017. We anticipate stabilization to take approximately 12 months, so would likely be added back to our non-GAAP results in early 2019.

When added back to our non-GAAP results upon stabilization. We expect these three communities had more than $20 million revenue around 6.5 million to 7.5 million to EBITDAR and 4 million to 5 million to CFFO.

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. Looking specifically at the third quarter. The third quarter will be impacted by incremental seasonal expenses as is the case every third quarter.

Utilities are generally about $1 million higher in the third quarter than the second quarter, due to the hot summer months and we have also have one more day in the third quarter than the second quarter, which equates to approximately $500,000 in incremental expenses.

So in total, these incremental expenses will reduce our third quarter CFFO by approximately $1.5 million as compares to the second quarter or $0.05 per share upon which calculated on a per-share basis. As is the case in third quarter every year.

As I noted earlier, we also had a $500,000 workers comp credit benefit in the second quarter that we don't expect to repeat in the third quarter. Third quarter of each year is also generally our best quarter for occupancy growth and as Larry and I noted, we’re off to a good start in the third quarter.

Also our contract labor costs are expected to come down in the third quarter as permanent staff are hired. There will be some corresponding increase in employee labor cost, but we should sizeable savings and the move from contract labor to employee labor. Our net healthcare expense is also expected to decrease significantly from the second quarter.

So, taking all these things into account, we currently expect our third quarter CFFO to be in the range of approximately $9.6 million to $10.8 million depending on the strength of our occupancy during the quarter and the amount of improvement we’re able to achieve in contract labor and net healthcare expense.

Also as look to the fourth quarter, our utility should decrease. There is no difference in the number of days versus the third quarter and our occupancy is expected to continue to accelerate based on the positive trends we’re seeing. So, we expect very good growth in our fourth quarter CFFO versus the third quarter.

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 position us well to create long-term shareholder value as the larger company with scale, competitive advantages and substantially all private pay business model and a highly fragmented industry that benefits from long term demographics, need driven demand, limited competitive new supply in our local markets, a strong housing market and a growing economy.

Finally, as Larry noted we’re excited add Brett Lee to our team. He will be an outstanding addition as Chief Operating Officer. He comes with a wealth of experience in leading operations and highly complex, care delivery environment and a strong record of operational success which will serve us well.

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

[Operator Instructions] We will go first to Chad Vanacore with Stifel..

Carey, did I just hear you say, guidance, CFFO, or $9.6 million to $10.8 million and that was higher than this quarter - or didn't I hear that completely?.

It’s $9.6 million to $10.8 million. We have the - kind of a $2 million that we’re starting off lower in the third quarter versus the second quarter because of the seasonal expenses and the workers comp credit that we had in the second quarter to compare the third quarter to second quarter.

But then will benefit from improvement in contract labor cost, the improvement in net healthcare expense. And then we expect nice growth in occupancy in the third quarter based on the increase we had in physical occupancy in June and then again in July.

So, our revenues should be - should increase associated with those financial occupancy gains in the quarter.

So, just exactly where we’re going to end up in that range will depend on the strength of our financial occupancy growth and just how much savings, we’re able to achieve in the contract labor cost and healthcare expense versus the second quarter..

Just thinking about third quarter CFFO again, is that down because of seasonality or is it down because of this genuine labor cost?.

It’s down primarily because of the seasonal incremental cost, which is the same thing we have in every third quarter - third quarter of every year. So we always start off with that kind of $1.5 million bogey if you will every third quarter..

And just thinking about the demand expectations, how do you reconcile that improved demand expectations with any drop in occupancy you saw this quarter. It looks like you expect 30 basis points of increase in occupancy in 3Q. Both move-ins were up 3.4%.

Can you reconcile all that for us?.

If you look at the monthly performance, we had a net gain, again we lost about 270 units of occupancy in January and February. We gained 56 units in March. We lost about 30 in April. We picked up 17 in May, 42 in June, and we’re up from that in July.

Over the period since February, we have a net gain of well including July over 100 units and that is what has translated into the financial occupancy of about 30 basis points that we expect for July..

That’s for just for July, not for the third quarter. It could increase more than that as the quarter goes along..

If you look historically in the third quarter, we typically in 2015 we picked up 80 units in the third quarter. Last year we picked up about 50 units. We had some attrition it was in July which is unusual, we lost 45, so a nice swing there. We had 88 gain in September of '16 and a gain of about 76 in August '15, and 40 in September.

So, if you look at right now, the demand we’re seeing with our lead bank has a nice spread between deposits on hand and move-out, now, this is - obviously we can anticipate presence that move-out because they pass away or higher lows of care.

Other than that, if you look at basically the tours, the traffic, the lead generation and conversion, as I mentioned, we had a record in the second quarter of conversion ratios of almost 33%, our target had been 30, so we’ve outperformed that. And that what we’re hearing from the field is very positive.

So, I think that we clearly had a deep holes come out. I think we're very - we are disappointed that the revenue is off as much of it is. We did had discounting in the second half of last year because of higher attrition that we saw last year in the third quarter. We stopped the discounts, we stopped concessions.

We got great rate growth since January and still building demand. So as I said, it's really what happened in January that filters through the balance of the second and third quarter because of the fact that we had a deep hole of the fundamentals in the quarter we’re actually very good in all aspects.

Quite frankly this the first quarter, first month in July in sometimes that we have a sequential gain in financial occupancy, and as I said, it sounds pretty encouraging from the field based on the numbers we’re seeing through the close of business yesterday, which is July 31.

As I say, we have a nice spread right now in deposits on hand to move that notices. That should manifest for the month of August..

And then just one more question for me now, hop back in the queue. On the $20 million acquisition if I may.

Can you just describe location at the type in occupancy?.

Sure, I can. The asset is in Northeast, it in one of our states. I don't want to get too specific of locations, okay. I believe it's 94% occupied. It's relatively newbuilding, it’s independent and assisted living and is very consistent with other acquisition we made in that part of the country and the seller we have high regard for.

So we know we're getting up well performing property..

What kind of cap rate does that work out to you?.

We don’t really give cap rates. But typically if you look at our acquisitions, we continue to be very consistent buying things on effective cap rate kind of mid 7s. And the cash on cash yield on investment consistently is that, 15% mid teen type of return and that is consistent with what we expect from this acquisition..

We will go next to Joanna Gajuk with Bank of America..

So in terms of the Q2 performance, so, it was just tiny - a little bit above the - what you outlined on the last third quarter calls.

Can you just flush out, what would be sort of surprise versus what you are expecting for the third quarter?.

Joanna, if you look at on - like on a per share basis the guidance was $0.39 to $0.42, we ended up at $0.39. So, it was within the range we provided, it was on the lower end.

A couple of things, I think our occupancy has stabilized in the second quarter but if we had a little bit of growth that would have certainly improved our - and got us a little bit into higher end of that range. And we also anticipate higher health care cost in the second quarter.

But that big spike in May – in May claims related to switching our healthcare plans was a little bit greater than we had anticipated.

We also knew that we're going to have an increase in contract labor cost because of the additional staffing required for some of the newly licensed units and we kind of had a range for that and it ended that being at the higher end of our range for the contract labor cost. So, it was on the higher end of that.

So, if that come in a little better that would help us reach the higher end of what we've guided to as well. So, kind of those three things are the things I would point to..

On the last point on this higher temporary labor, so you pretty much saying that Q3 is going to moderate from the Q2 levels on that cost just because you‘re going to sell the unit so to speak or just simply, temporary labor, I think you’re going to replace the labor with more permanent.

So, is there any kind of additional cross or some fiction because of you had temporary labor, now we have to switch to permanent labor.

I am trying to process, how to think about cost, for that kind of bucket in Q3 versus Q2?.

So, the contract labor cost are going to - that wasn't they were temporary, as we knew we had to have staff in place for regulatory requirements related to the newly licensed unit. But we do plan on filling those positions with permanent staff and that will bring those costs down in the third quarter versus second quarter..

And Joanna to give you some perspective, the contract labor hourly rate is about 2.5 times the permanent hourly rate. We will have benefits for the hourly permit. But if you think about a net savings of 50% of that cost, that’s probably a reasonable assumption on the differential..

I was moving on to the next subject too.

If you have something to add, we have to hear that first?.

Thank you, Joanna, I think we got it..

So, the other question that I have was - we heard today from - agreed talking about some issues that are booked on, this specifically talk about some turnover that, they seem to at communities in terms of their excess I believe.

So, can you just talk about any incremental pressure you are seeing there because it seems to me that this is caused by new supply.

So, I guess, you are not competing for residential with this new communities that are opening out there but are you may be competing for employees with these other guys and if you do, how do you address that?.

Fortunately, we’re not having that pressure. I give stock awards, the compensation into the grants awards to it’s best directors every four years. And we just had grants approved for the current third quarter and in that class we have an Executive Director that has been with us since 1988. We had an Executive Director that’s been with us since 1996.

The turnover of Our Executive Directors is one the lowest threshold of our staff and it's been very, very consistent. I think that we’re very fortunate to have a culture in the company that really promotes longevity. Today, we had our quarterly town hall meeting and the corporate office I gave out awards going up to 20 years.

We have a 25th anniversary of employee - corporate employee as well this month. I do think it's a difference of our investment in people and training. There is tremendous enthusiasm I mentioned about the sales training, that includes the Executive Directors. It’s very interesting.

As an owner of the real estate that we operate 54% we generate a lot more cash flow then our competitors do. If you think about Brookdale with order leases if you think about that idea joint ventures and all those companies earning at management state.

I know the CEOs of those companies pretty well, been around this industry we serve on boards together. They really are impressed that we have the ability to make investments in time management in systems, in training and that really sustains because people grow.

The other thing that's really interesting is almost every one of our regional managers we made changes this year in regional managers to improve performance they all were Executive Directors that were promoted.

We now have developed a plan to develop our own internal Executive Directors from Business Directors and other employees having succession plans for Executive Directors. So I think we have a different culture, a different thought and different focus of our on-site staff to really promote careers and not jobs.

Now when it comes to wages in the kitchen, housekeeping you can have a lot of turnover we see that turnover clearly there has been some pressures in some markets on getting orderly and aides the contract labor and that we are able to fill those positions.

But fortunately at the Executive Director level we've been very fortunate not to have the pressures that I guess were discussed I listened to the AGT call I know announced this morning we’re not seeing that issue.

The other thing Joanna we’re not propelled and I’m not trying to be disrespectful but we're not going through all the integration challenges and all the other issues that propel a space and quite frankly we've seen a lot of resumes from Brookdale staff for a long time but this maybe accelerated but not new.

And it just that I'm very proud of our organization and our management team and structure, very excited about Brett on board I think it will be a great addition to the team.

But fortunately we really do have in fact I spent this morning reviewing the ranking of our Executive Directors and regional managers with our VPs of Operations and they both commented that we've never had a better team than we have currently both regionally and on-site and I think our results demonstrate the difference.

We’re disappointed with a big loss in the first quarter which was very much flu related but I’ll tell you since February I get weeklies they’ve been very consistent.

And by eliminating those concessions we’re finally getting some rate growth that I really believe we’re positioned to get us in a position where we can start to have actual results with revenue increases significantly above expense growth and if we can do that and gain occupancy the math is really, really appealing..

We’ll go next to Brian Hollenden with Sidoti..

As we move in to the back half of the year and considering your third quarter guidance are you guys anticipating year-over-year CFFO growth?.

First it’s hard to say because we haven't got into the end of the year yet we’re not sure what the third quarter is going to do actually standpoint the fourth quarter. But I'd say the dip in January that it does really as Larry noted does carry through the balance of the year and it does make it – a challenge to grow year-over-year in CFFO..

And then just switch a little bit how sensitive is your acquisition program to rising interest rates?.

Well as you know we borrow permanent financing long-term rates and 12-year financing that is off the treasury. Treasury really has moderated at a level that has been very consistent with what we’ve seen over the last six, seven years.

Spreads continued to be attractive so we’re seeing that fortunately we have maturity that extend out six seven years on average so we don't have a lot of exposure of resetting rates as far as the permits of our existing debt which is our 4.6% and I say that’s very consistent with where the market is today and I'm not an economist, and I know people talk about growth in economy, but it doesn't sound like there is going to be a big spike in rates anytime soon.

I will tell you that when we started the acquisition program in 2010 rates we’re probably about 200 basis points higher than they are today.

And we were excited about the returns that we could generate at that level so I think that we feel pretty comfortable that we can continue borrow at attractive rates and terms and have that nice spread between effective cap rate on the yield of the acquisitions.

The cost of our financing and as I said I think we’re pretty well protected from any movement I’ll also comment if rates really do move up because the economy starts to grow its the short-term rate that move faster and that is where pricing power lies because our residents to took view about fixed income.

And we have to remember that we’re dealing with resident base that has been living on extremely low interest rates on their savings accounts and other fixed income since 2008. So organically we probably would see better organic growth if rates were to rise but I just don't sense.

And Gloria Holland our VP in Finance, so I’ll ask Gloria if you read but I just don’t sense that well anyone's talking about much movement in the rates..

No, I would agree we're not hearing that in the market we’re in..

[Operator Instructions] And we’ll go next to Dana Hambly with Stephens..

I just wanted to ask about the owned versus the leased portfolio.

I don't know how you guys think about but I think your shareholders so because seemingly there is a lot of value most of the values in the owned portfolio which in the second quarter performed much better than the lease portfolio just looks like occupancy was better, NOI 5.5% growth versus a 4% sequential decline in the first relative to the lease portfolio.

So can you tell anything that’s going on between the two or even if you think about them differently?.

We don’t only see about them differently they are different. The leases are typically older buildings there is more independent living in the leased portfolio. But the acquisitions have been newer than the markets, better performing.

I will tell you that going through the leased portfolio and we’ve spoken to some landlords about it, there is probably three or four buildings that we would like to sell.

We think the market have turned and it’s point to sell it’s not competition, it’s just change of local economies and there is couple of buildings where it always been competitive for the duration of the lease. And then we did have the attrition in the first quarter.

The feedback I guess I asked the same question Dana is that most of those buildings are recovering in occupancy and probably will recover most of the occupancy throughout this year just taking a little longer but it just has to do. We don't think about them differently.

There are some leased properties in Texas that do have some competition in submarkets which we spoke about previously, but they have actually started to recover. But I think it's really maybe even more random than anything else that we just had higher attrition in some of the lease portfolio and it’s taking longer to rebuild than the own.

But there is no difference in the way that we think about it. And then are couple lease properties I know also who had some conversions that was very disruptive that caused some loss of occupancy and as that changes that will rebuilt.

And we've seen I mean yes, some of these buildings have actually seen a very significant increase over the last couple of quarters. The others have to catch up, but my sense is that these buildings with the exception of the three or four that we probably would like to sell our landlord to sell because of change in market.

We think we’ll get back to the same level of the owned portfolio..

Switching gears on the conversion Carey, I think you said they could stabilize in a matter of minutes, but then I think you corrected?.

That was not a Freudian slip either..

I was just looking at your - you got the updated slide deck here and it look like completions by quarter - so the 214 do complete in the fourth quarter of this year they should be your expectation would be stabilization within 12 months correct?.

That's right..

And that holds true of the bucket completed in 1Q, 2Q and then I guess a small amount 3Q?.

Yes, so it's actually the three that are undergoing repositioning and lease up those are - those will be added back when they reach stabilization which is the - I don’t have the time permit, it's 186 plus 249 units - that are completed as of the second quarter.

And we also come back in as re-stabilization now the other units on top of that are ones that there are 84 units that had been completed as they lease up they’ll add to our numbers. They’ll add to our revenues in our EBITDAR and CFFO.

And the same for the 24 units in the third quarter and then in the fourth quarter there is 202 units that are related to one of those - the third repositioned community and that will add back after it stabilizes in approximately 12 months. The other 31 units will add back as their lease step over time..

And remind me stabilization is 90% occupancy?.

Yes, approximately 90% occupancy yes..

And then and - your CapEx has been accelerated last few years. What's the expectation for full year CapEx this year and then how should we think about that in the 2018 and beyond..

So we had $21.9 million of CapEx in the first six months of this year. As I noted on the call I think it will taper down quite a bit in the second half. We currently project somewhere around $12 million to $13 million of CapEx in the second half of the year versus $21.9 million.

Now that’s on a gross basis so on a gross basis that’s somewhere around $30 million to $35 million but on a net basis we will get reimbursed for some of this - at some of the leased communities by our REIT partners.

So on a net basis through the first six months, our CapEx has been $18.2 million and I think that the year it will be probably between $25 million and $30 million on a net basis. So $30 million to $35 million gross, $25 million to $30 million net in 2017. As we go forward to 2018 and 2019, they’re going to moderate quite a bit.

I think back down into the more $15 million kind of range on an annual basis in 2018 and 2019 forward..

So at this point no big projects prepared for 2018?.

This is coming end of it. I mean the Canton town centers obviously Canton is now complete, shall be completed later in the year. We meet every other week we go through this with our operational and asset management team.

Now they just kind of 10 units of memory care at a building lot of them are just license share or fairly insignificant cost related to it. And the other thing it's nice is that because we put so much money into our buildings over the last two years, they’re pretty good shape.

So as far as recurring CapEx we don't have many big projects that have to be out there to refurbish and renovate. Now over the last two years we spent over $100 million in CapEx so we spent the money and now would like to see the results obviously on the lease up and in the profitability.

So I think we’re pretty good position over the next few years that we can moderate the CapEx. We do have kind of a three-year plan we go through and look that - so I think that will remain pretty well controlled over the last several years..

Just last one, the M&A pipeline looks like you’ll probably be lower this year in what you've typically allocated for M&A.

Anything change in the pipeline or anything changed in your appetite for acquisitions?.

No, we had $85 million acquisition in the first quarter. I think we said in the second half of the year about $50 million. We have announced 20, there's other things out there. So that’s probably a reasonable number, it’s kind of what we did last year. We just stay very disciplined.

We’ve underwritten about $0.5 billion of acquisitions to the first six months. Our pipeline continues to be steady there are other buyers out there.

We've lost some marketed deals to other buyers that are paying more than we are and we had a number of deals that we actually kicked out in due diligence that we went in and just felt that the maturity level of the residents some of the aspects of the buildings, we just knock things that we wanted to purchase so we backed off them.

So we’ll remain disciplined we have so much growth to the convergence and other repositioning right now that we have a nice balance of those growth drivers. The organic the conversions and the acquisitions that we can sustain high double-digit type of cash flow growth as we execute and just remain disciplined on the acquisition side..

[Operator Instructions] It appears there are no further questions at this time. So I’d like to hand the call back over to Mr. Larry Cohen for any additional or closing remarks..

We thank everybody for your participation. As always feel free to contact Carey or myself if any questions. I wish everybody a good end of summer and sure we'll see many of you as the conferences start to pick up again in September. Thank you very much and have good night..

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