Larry Cohen - CEO Brett Lee - COO Carey Hendrickson - SVP and CFO.

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

Good day everyone and welcome to the Capital Senior Living Third 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..

Thank you and good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living’s third quarter 2017 earnings call. I am proud that Capital Senior Living has developed a track record of operational excellence over the years.

That said, more recently, I have been disappointed by the operational and sales challenges that we faced. It is frustrating for all of us to experience these headwinds. Though I am confident in our key initiatives and I'm pleased with the progress that is already underway to improve performance.

We have made a number of broad based [Indiscernible] and operational changes that are restoring and strengthening a culture of high reliability.

We are taking immediate action to overcome challenges, drive sustainable profitable growth, and enhance shareholder value as we execute a comprehensive strategy to deliver higher revenues, enhanced cash flow, and maximize the value of our owned real estate. Let me outline a few actions we have actually [Indiscernible].

We eliminated rent concessions and simplified pricing. We restructured incentive bonus programs for Regional Managers, Sales Directors, and Executive Directors to allow performance with corporate financial goals and enhance accountability.

We're restructuring our sales and marketing organization to instill greater accountability and drive operational excellence. We also introduced a formal sales training to develop stronger skills and increase closing ratios.

These initiatives have focused and empowered our sales organization by providing metrics-driven objective growth targets to build and sustain occupancy. We strengthened our leadership team by hiring tritely as Brett Lee as Chief Operating Officer.

Brett has a proven record of operational success within the healthcare services sector and brings valuable experience leading operations with complex care delivery environments. We're building a global centralized robust operating platform to improve all facets of community operations to better serve residents.

We have implemented immediate occupancy growth plans and budget recovery goals for each community. We are leveraging our operational scale to further optimize supply chain at large expense items. We restructured our health benefit programs to reduce and drive more consistent expenses.

And we began implementing a new integrated system for sales, CRM, care assessment, census accounts receivable, electronic medical records, and billing into one platform to give us consistent data and greatly enhance our reporting capabilities while creating efficiencies.

The execution of these recovery initiatives has already shown improvement in many of our key performance metrics. We have experienced gains in net move-ins for five consecutive months through September, which is the longest period of sustained monthly gains I can recall.

Third quarter 2017 same-store occupancy increased 30 basis points compared to the second quarter and improvement in occupancy throughout the quarter resulted in a 90 basis point increase in September's same-store occupancy compared to the month of June.

Moreover September median same-store occupancy increased 180 basis points to 89.4% compared to June. Occupancies improved across our portfolio with a number of 100% occupied communities increasing to 12 from seven at the end of June.

The number of communities with 90% or better occupancy increased 30% to 65 from 50 at the end of June and a number of communities with occupancy is below 80% declined 27% to 16 from 22 at the end of June.

This widespread improvement across our communities shows the effectiveness of our simplified pricing strategy, the positive the results of the restructuring and training of our sales professionals, and the resiliency of our portfolio. It also sets a solid foundation for fourth quarter results.

Other improvements in the quarter include an increase in third quarter 2017 same-store average monthly rent of 2.6% or 3.7% annualized since the fourth quarter of 2016. Implementation of our budget recovery goals resulted in approximately $3.6 million in total expense savings in the month of August and September compared to July.

The combination of improved occupancy, higher average monthly rent, and expense savings resulted in a 10% improvement in September's same-community net operating income compare to June. In addition, third quarter net healthcare expenses decreased $1.2 million as compared to the second quarter.

These initiatives are expected to produce further improvement in our key metrics for the remainder of 2017 and beyond, and provide a strong foundation to execute our long-term growth strategy focused on organic growth, completed acquisitions, the conversion of units to higher levels of care, and EBITDAR enhancing capital expenditures.

By diligently executing this strategy we expect to increase revenues, reduce operating expenses, and increase EBITDAR and CFFO. We do not intend to pursue any new acquisitions until the middle part of 2018, so we can focus on implementing these initiatives and executing on our plan that is working.

We are committed to returning Capital Senior Living to operational excellence.

With a disciplined focus on our growth strategy and driving operational improvements, we will be well-positioned to enhance shareholder value as well as the value of our owned real estate and further capitalize on our competitive advantages as a leading pure-play private-pay senior housing owner/operator.

I also want to say how proud and thankful I am for the heroic efforts of our onsite region and corporate during the recent hurricanes in Houston and Florida. Their preparation was excellent and they safely evacuated residents at two communities and securely sheltered in place at five others.

Our team also remained in constant communication with family members throughout the storms and their expressions of gratitude have been heartwarming. It is now my pleasure to introduce Brett Lee, our Chief Operating Officer. Bret has been a great addition to our leadership team.

He will provide more details about our more centralized operating platform and why we believe these improvements are sustainable. Following Brett's comments, Carey Hendrickson, our Chief Financial Officer will discuss our third quarter financial results.

Brett?.

All right. Thanks so much Larry and good afternoon everyone. I am excited to join Capital Senior Living at such a dynamic time in our history.

This company has grown significantly over the past several years both in terms of our physical footprint, but also in terms of the acuity of the residents we serve as we have shifted more of our available capacity to assisted living and memory care units.

Capital Senior Living has traditionally espoused a decentralized operating model with a great deal of autonomy held at the individual community leadership level.

Well, there are significant benefits to empowering local leaders to thrive within their unique markets, too much decentralization does not allow us to take advantage of the economies of scale that come with being a larger company and can also lead to variation in resident experience and financial performance.

We have, therefore, decided to implement a new standardized operating model which focuses on a centralized approach to creating more uniform performance around five core pillars of quality, service, people, cost, and growth.

Some key elements of this operating model include initiating daily safety hurdles that each community that focus on tracking and improving performance in key operational and financial metrics, rolling out a uniform customer service platform across all communities, evaluating all major expense categories to maximize GPO utilization, and opportunities for aggregation into regional or national contracts to gain economies of scale; centralizing certain support functions such as accounts payable to optimize our supply chain functionality and reduce the administrative burden on local operators; establishment of budget management templates, focused training for Executive Directors on a real-time financial management, comprehensive sales training for Sales Directors, and the creation of detailed metric-driven growth plans for each community.

While we are still early in the rollout of this operating model, having begun a majority of the initiatives in mid-August, we are greatly encouraged by the results today.

The financial management training and budget management plans establish for each community yielded nearly $3.6 million of savings in August and September when compared compared to our July expenses.

A majority of these savings have come from the implementation of a standard staffing grid and more effective management of staff levels to correspond with our current occupancy levels, reduction of contract labor and menu adjustments to reduce food wastage in our communities.

We feel that a majority of these initiatives are sustainable in the long-term and will continue to improve our financial performance into the fourth quarter and beyond. We also expect that of broader scale initiatives will produce tangible economies of scale that will further reduce expenses across the company in late 2017 and into 2018.

The organizational restructure of our sales organization coupled with the focus sales training for community-based Sales Directors has resulted in five consecutive months of positive gains in net move-ins.

We've also partnered with a well-respected local marketing firm to optimize our electronic marketing approach in the fourth quarter for our recently repositioned communities and properties that have failed to meet their sales targets.

Throughout all of these changes, I have been incredibly impressed with our operations and sales leaders and how this exercise has galvanized them around a common goal of making Capital Senior Living an even stronger organization.

They all share a passion for providing outstanding care to our residents and their focus has created a tremendous momentum over the last half of the third quarter that will carry us into what I know will be a very successful finish to 2017.

It is now my pleasure to hand off the call to our CFO, Carey Hendrickson who will discuss our financial results for the third quarter.

Carey?.

Great. Thank you, Brett, and good afternoon, everyone. We're pleased to report third quarter results that exceeded our expectations coming into the quarter as a result of the excellent job our operating team did and executing on the revenue and expense initiatives that Larry and Brett have noted.

Our same-store occupancy and revenues increased and our operating expenses decreased as the third quarter progressed, resulting in a strong finish to the third quarter in September.

In addition, the changes through our employee healthcare plans that took effect in June of this year resulted in significantly lower net employee healthcare expense in the third quarter as compared to the first two quarters in 2017 and of the third quarter of last year.

Two of our communities in Houston were impacted by Hurricane Harvey, sustaining flood damage that's resulted in the temporary suspension of their operations. We've proactively evacuated our residents in these communities to ensure their safety.

Most of the residents went home with their families, while 20 transferred to other Capital Senior Living communities in Houston and other cities in Texas. Remediation is in progress at these communities and both are currently expected to begin admitting residents in early 2018.

Our property and casualty insurance is expected to cover all the damage to the buildings and our business interruption coverage is expected to restore the economic loss related to the suspension of operations. Our deductible for the total claim was $100,000, which we recorded in the third quarter.

In the third quarter, we recorded a business interruption or BI adjustment of $658,000 to cover the last seven days of August and the month of September.

The intent of the BI adjustment is to cover our lost revenue and any continuing expenses that we have with the goal to restore the average net operating income that we've had at these two communities over the first seven months of 2017. The $658,000 was recorded as a credit to our operating expenses.

The net CFFO contribution from these two communities was approximately $450,000 in the third quarter, including the contribution from residents that transferred to other Capitals Senior Living communities, which is in line with their average CFFO contribution in the first seven months of 2017.

The BI coverage will continue for 12 months after we complete the restoration of our communities or until we reach our previous level of revenue from these communities, whichever comes first.

In the results, I'll discuss in the remainder of my comments and as we note in the press release, the company's non-GAAP measures exclude four communities that are undergoing repositioning, lease-up of higher licensed units, or significant renovation and conversion.

This includes one additional community as compared to previous quarters, a community in Massachusetts, which is undergoing significant renovation to respond to changes in state regulations. We currently expect that community to be excluded from our results until the middle of 2018.

The non-GAAP measures continue to include the two Houston communities impacted by Hurricane Harvey since the BI adjustment restores their economic loss.

However, our statistical measures as shown on page 12 of the earnings release exclude the results of those two Houston communities, since they currently have no residents or revenue and to include them would make the statistical measures less meaningful. The company reported total consolidated revenue of $117.3 million for the third quarter of 2017.

This was an increase of $5.9 million or 5.3% over the third quarter of 2016.

Including the lost revenue from the two Houston communities impacted by Hurricane Harvey of approximately $900,000, our third quarter revenue would have been approximately $118.2 million for the third quarter, which would have been an increase of approximately 6.1% over the third quarter of 2016.

Prior to the hurricane, the average monthly revenue for these two communities was approximately $750,000. Our operating expenses increased $5 million in the third quarter of 2017 to $74.6 million, due again primarily to the communities we've acquired since the third quarter of 2016.

As I noted earlier, our expenses decreased as the quarter progressed, including contract labor costs, which were higher than usual in the first two quarters of this year. Our contract labor cost decreased $200,000 from the second quarter, but importantly, had returned to historical normalized levels by September.

General and administrative expenses for the third quarter of 2017 were $5.4 million compared to $5.7 million in the third quarter of 2016. Excluding transaction cost from both years, our G&A expense decreased $300,000 as compared to the third quarter of 2016, due mostly to having lower net employee healthcare expense.

We had a net employee healthcare credit of $100,000 in the third quarter of this year as compared to net employee healthcare expense of $800,000 in the third quarter of 2016, so, a $900,000 decrease year-over-year. This is also a $1.2 million increase compared to the second quarter of 2017.

Since our new employee healthcare plans went into effect on June 1, we've had a small credit in net employee healthcare expense every month. G&A expense as a percentage of revenue under management was 4.3% in the third quarter of 2017 compared to 4.7% in the third quarter of 2016.

Our adjusted EBITDAR was $37.9 million in the third quarter of 2017 compared to $38 million in the third quarter of 2016. This does not include EBITDAR of $900,000 related to the four communities that are undergoing repositioning, lease-up, or significant renovation and conversion.

Our adjusted CFFO was $11.1 million in the third quarter of 2017, which is above the range for third quarter's CFFO that we provided on our second quarter earnings call of $9.6 million to $10.8 million. Same-community revenue increased $1.6 million or 1.6% over the third quarter of the prior year.

Our same-community occupancy was 87.2% in the third quarter, which was an increase of 30 basis points from the second quarter and a decrease of 140 basis points from the third quarter of last year. Our same-community average monthly rent increased 2.6% from the third quarter of 2016.

Same-community operating expenses increased 4.2% versus the third quarter of last year. Our employee labor costs increased 4% in the third quarter 2017 versus the prior year. Excluding communities that have converted units to higher levels of care over the last year, our employee labor costs were up 3.5%.

Labor costs were higher in July and August as we transitioned away from contract labor by covering shifts with existing employees prior to hiring additional permanent staff. Our September labor costs were flat with the previous year.

Our two other major expense categories continue to be well managed with food cost increasing only 1.1% versus the third quarter of the prior year and utilities increasing 0.4%. Our same-community net operating income decreased 2.4% in the third quarter of 2017 as compared to the third quarter of 2016.

As I noted earlier, our same-community results improved as the third quarter progressed, finishing with a strong September. In the month of September, our same-community revenues increased 2.3%, our expenses decreased 2.3%, and our net operating income increased 9.1%.

Looking briefly at the balance sheet, we ended the quarter with $22.6 million of cash and cash equivalents including restricted cash. During the third quarter, we spent $8.2 million on capital expenditures, $1.5 billion of which was for recurring CapEx.

We received reimbursements totaling $1.5 million from our REIT partners for capital improvements at our leased communities and expect to receive additional reimbursements as projects are completed. Our mortgage debt balance at September 30, 2017 was $960.2 million at a weighted average interest rate of approximately 4.7%.

At September 30, all of our debt was at fixed interest rates except for two bridge loans that totaled approximately $76.6 million and the average duration of our debt is approximately seven years with 92% of our debt maturing in 2021 and after.

Looking to the fourth quarter, we expect the momentum established in the third quarter to carry into the fourth quarter even as we enter a time of year where occupancy growth is typically more muted as compared to the spring and summer months.

Still, we expect the occupancy gains we had in September to carry into the fourth quarter and we also continue to expect to experience healthy increases in our average monthly rent. We believe the lower expense levels we achieved in August and September, as we've noted, are largely sustainable.

We expect our labor cost increase moderately as they have in the first nine months of the year, contract labor costs are expected to continue to come down in the fourth quarter, and our net healthcare expense is expected to continue at the lower levels or similar lower levels we've experienced since our new employee healthcare plans went into effect in June.

Utilities are historically approximately $400,000 less in the fourth quarter than the third quarter, but typically about half of those savings are offset by higher food costs related to holiday parties and the beginning of snow removal costs late in the fourth quarter.

We also historically have higher expenses in December related to year-end adjustments to various accruals and the covering of employee shifts due to the holidays and vacation time taken at the end of the year.

Taking all these things into account, we currently expect our fourth quarter CFFO to be in a range of approximately $11.5 million to $12.6 million depending on the strength of occupancy during the quarter and the degree to which we're able to sustain the lower expense level achieved in August and September.

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 our portfolio.

And the impact of the return of units currently out of service at our three large reposition communities will be significant.

Rather than waiting for full stabilization of these communities, we've decided to add them back to our non-GAAP results at the beginning of 2018 since the renovation work will be complete in all three communities by the end of this year, allowing for greater transparency of our progress on these communities.

The initial impact will be modest, but it will grow as we lease-up these communities. We anticipate stabilization of the 637 units at these three communities to take approximately 12 to 18 months from the beginning in 2018.

When they reach stabilization, we expect these three communities to add more than $20 million to revenues around $6.5 million to $7.5 million to EBITDAR, and $4 million to $5 million to CFFO.

We're currently in the process of budgeting for 2018, but as we think at a high level about 2018; our goal would be to increase our occupancy by 60 to 90 basis points with average rents increasing around 3%.

We would expect our expenses to continue at the new lower levels based on the initiatives already implemented and others to be implemented in 2018.

We expect our G&A to increase for some important investments that we will make in people, primarily, in the operations team and other corporate initiatives, partially offset by lowering net healthcare expense.

And as Larry noted, we won't begin pursuing acquisitions until the second half of the year, so we may have approximately $50 million in acquisitions in 2018 weighted more toward the end of the year.

While we're still refining our projections for 2018 with all these things considered, we currently believe our CFFO should increase somewhere around 10% over where we finished 2017.

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 supply in our local markets, a strong housing market, and a growing economy.

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

[Operator Instructions] We'll go first to Chad Vanacore with Stifel. Your line is open..

Hey, good evening all..

Good evening Chad..

Hey, Carey, I just want make sure I heard you right.

2018 expectations average rent up 3%, average occupancy 60 to 90 basis points gain?.

That's right. [0.4].

Okay. And then just to get back here occupancy--.

Like I said Chad we are -- that is our goal, yes..

Okay. All right. Just thinking that occupancy in the fourth quarter, you said you expect to maintain the gains from the third quarter.

Should we expect that to increase from here or just stay flat?.

As I think about -- we ended the third quarter at a higher level than we began the third quarter -- than we averaged in the third quarter. So, I would expect our occupancy to increase in the fourth quarter as it relates to the third quarter..

All right.

And then what have you seen as far as the first month of occupancy in 4Q?.

We're up about 20 basis points financially in October versus September. We don't have the full financials yet, but that's a pretty good estimate of where we are. And again we anticipate that typically there's some seasonality around Thanksgiving, so that we typically pick-up around the holiday seasons in December.

But we are off to an increase in October over September. And again, we continue this trajectory of improvement from the trough that we hit back in February..

All right. Sounds like a pretty good trajectory. And then just thinking on the expense side, you mentioned that use of contract labor as being an issue.

Have you been addressing that? Also I think in the past, healthcare claims have been an issue, have we lapped that challenge as well?.

This is Brett Lee, I'll be happy to address the contract labor issue. What we've done systematically to drive down contract labor cost is to create more regional and market-based labor pools that are our own employees where we can share that staff between our existing facilities within a market and have less reliance on external contract labor.

We're also finalizing a contract with a third-party that will serve essentially as a middleman to negotiate lower rates for contract labor for us with our existing vendors. So, when it becomes evident that we have to use contract labor for short periods of time, the rate itself will be lower.

But we were very excited through those strategies to see our contract labor returned to our historical levels. In September, we anticipate that it will be maintained going forward at that level or less. And I'll let Carey talk about the healthcare claims..

On the healthcare side, Chad, we have had a really good experience since we changed those plans on June 1 and since that point in time, we've had a small credit in each month. That's the net of our employee reimbursement that we receive for the healthcare and the healthcare claims that we have to pay out.

And so that's been a credit on a month-to-month basis since June. I would expect that kind of experience to continue as we go forward, maybe not having credits, maybe there will be some level of expense in that category. It's hard to project that going for that kind of positive experience for -- [Indiscernible].

So, I think that will be very good -- especially as compared to the previous year..

Yes, I mean I think that the restructuring, Chad, of the healthcare program back in June has demonstrated for five consecutive months that is effective, both in reducing costs and becoming more sustainable as far as an expense item..

All right. So, last question from me. Historically, you've averaged around $150 million annual acquisitions; you don't expect anything until mid-2018 this year.

Should we stick basically about half that historical average or a large ramp up in the second half? And then just as an entire [ph] question, what's the best you shifting your capital at this point?.

Chad, as Carey said, we're looking probably about $50 million of acquisitions in the second half of the year. Obviously, we'll be in the market to start the due diligence process and have transactions closing in mid-year. Right now, the best use of our cash is to grow the cash in the balance sheet. CapEx will come down quite a bit next year.

We have spent, I think, $130 million in the last three years on properties. I think one of the benefit that we're seeing in these nice improvement in our occupancy and rate is just the improvement in our physical plan because of all the investments we've made.

So, we are going to build up the balance sheet, strengthening the balance sheet and I think be in a very, very strong position to be acquisitive stoning in the middle part of next year..

All right. Sounds good. That's it for me. Thanks..

Thank you..

And our next question comes from the line of Joanna Gajuk from Bank of America. Your line is open..

Thank you.

Yes, so, the question I had first had it's around third quarter performance since it came better than expected than your guidance, what were the drivers for that better performance?.

Well, Joanna we had good occupancy growth in the third quarter and our expenses came in better than we would have expected coming into the quarter. Also as we came into the third quarter, we just had one month of experience on our new healthcare plan.

So, I was not yet comfortable projecting that level of experience with a full quarter and we actually did have that level experience for the third quarter. So, those are the main drivers. Just a real focus on expenses and occupancy growth that was good in the quarter..

And Joanna, hi, it's Larry. I mean the initiatives that we introduced in August really made a difference. We've put out templates. We've put out recovery goals and objectives to each of the communities.

I want to thank Brett and the whole operational team, the corporate staff, the regional staff worked really hard in putting out numbers and I want to congratulate and thank the on-site staff for outstanding performance.

They actually exceeded expectations in the savings and what's really encouraging is there's a culture shift where as we said this level of expense management and expenses should be sustainable into the future..

Okay. And I guess on that front, when Carey talked about the outlook for -- or your goal, I guess, for occupancy for next year is 60 to 90 basis points, but obviously since much better traction down in August, is it going to be for this year, but nevertheless I guess it's somewhat lower than maybe what you would have been talking about in five years.

So, can you just flush out exactly what you expect the drivers to be for this occupancy program? And just confirm that this is a year-over-year increase or this is from the end of 2017 to the end of 2018?.

It’s a year-over-year increase, the 60 to 90 basis points..

Joanna, I think the big difference in the outlook is more conservatism in the first quarter. We've had a couple of years, typically this past year, with the prolonged flu season where we really lost significant occupancy, as did the entire industry.

So, we have reduced the occupancy growth that we anticipate in the first quarter because of flu or potential weather. Hopefully, we'll be better than that, but that's what we're being cautious and being conservative and then rebuilding. Again, I am very encouraged by the fact that in 90 days, we improved occupancy by 90 basis points from June.

It's grown more in October and we're looking for I think nice growth over next year. I'm also again really pleased with how widespread the improvement has been throughout the portfolio.

So, I think that all of the initiatives, the training, the accountability, the investment we've made in the real estate, the staff, and other changes we'll be making should yield a nice increase in occupancy and rate for 2018..

All right.

So, you're saying that you expect a sort of another strong flu season or you're just kind of more conservative on Q1, I guess [Indiscernible] from just month?.

We're more conservative. There's nothing to indicate that the -- about flu season. We're just being conservative as today -- as the outlook goes..

Okay.

And then the last piece in terms of the commentary around next year, so when you talk about the CFFO increase of 10%, are that similar -- that's a year-over-year increase you're talking about here for the year?.

A year-over-year increase from wherever we finish 2017, growing that by about 10% in 2018..

And then you were saying that you're going to include those three large communities despite the fact that they were not stabilized at this within 2018, correct? So, are you saying there is going to be a drag to CFFO? Or they are going to contribute something?.

No, there will not be a drag to CFOO. There will be -- they will start out -- their contribution will be modest at the beginning of the year, it will grow through the year and be more significant at -- obviously, in the fourth quarter and into 2019.

By the middle to end of 2019, we should see most of that full contribution that I noted of the $4 million to $5 million in CFFO from those communities..

Okay. And then if I may just -- a last one on different topic. In terms of [Indiscernible], you still have families, so it's very I mean -- it's great that you own more than 60% of your assets, but there are still some leases you have.

So, can you just remind us in terms of where you stand on your lease escalators?.

Yes, our lease escalators, they're generally 2.5% to 3% depending on the particular lease agreement..

Great. That's all from me for now. Thank you..

Okay Joanna..

[Operator Instructions] We'll go next to Dana Hambly from Stephens. Your line is open..

Hey, thanks. And Brett, welcome. My first question is for you Brett. Thanks for all the details on centralizing the model.

And it actually does sound a little overwhelming and it sounds like its producing good results, but I wonder if you notice any difference in employee turnover at either the Executive Director level or the Sales Director level as you implement a lot of these changes?.

Yes. No. Thank you for the welcome. I'm excited to be with the company and really I have been incredibly impressed with how the leaders across the organization have responded to what we've put in place over the last couple of months.

We have tried to arm them with the tools that they need to be successful as we've rolled out these budget recovery templates, the very metric-driven sales goals.

We've accompanied that with a significant amount of training both around financial management and the ability to track their P&Ls in real-time for the Executive Directors and this very focused sales training for the Sales Directors. And I think they have really appreciated the investment that this company is making in them.

I have a weekly call with all the Executive Directors as well as the Sales Directors across the company where we have an opportunity to talk through what's going well and what we need to be doing to help them more globally.

And then I think the overarching message that we are trying to create organic value here at the home office through some of these broader scale initiatives as we look to create economies of scale where we can regionalize or even nationalize some of these large expense categories and take the entire burden of saving expense from the local level to the home office level with some of these large expense categories has resonated well with them.

So, we really haven't had any increase in turnover in any of our leadership levels and I think the tenor across the company is incredibly positive as we move into the fourth quarter..

Okay. Good to hear.

And then either Brett or Carey, on the G&A expenses going up next year, you mentioned some investments, what kind of magnitude are we talking and what type of investments are you talking about?.

Yes, we're still working on the magnitude side of that, Dana, but it's -- I can let Brett and/or Larry speak to -- Larry speak to it, but we need -- there are some investments we need to make on the people side, both in my area and IT area. There are some IT initiatives we need to put in place.

We've been working on and we have those schedules for implementation next year.

And then Larry you might want to speak?.

Yes. So, as Carey said earlier, there are some things in the operational teams that we're going add to support the movement to a more centralized process. As Carey said, accounts payable is one area as well, take that odd, so that would more in corporate office and more staff to accommodate.

There should be obviously the ability to see some benefits at the property level because of the fact that the Executive Directors and Sales Directors won't have to worry about some of these [Indiscernible] of issues that will be handled properly.

But again, as part of this strategy, there will be some costs that are planned to be incurred in 2018, which we think will be beneficial. And I think almost every investment that we made will have a very attractive payoff -- payback. So, they really should pay for themselves in increasing revenue and cash flow..

Okay. Okay.

And then Carey, again, I was a little confused on the deductible and the BI adjustment and I think you mentioned it was a net positive of about $450,000 to cash flow, is that correct?.

Well, I was actually -- that was for the whole quarter, $450,000 for those two communities with that are -- or those two eastern communities. Just speaking of the BI itself that we got in the third quarter was $658,000.

And the net impact to us from a positive standpoint in the third quarter just related to BI would have been somewhere around $180,000..

Okay.

So, -- but that's normal course for those two communities. It's just -- that's just replacing what we would have had to them in restoring that loss..

Got you..

[Indiscernible] it restores a loss cash flow from those properties or the income, while they are closed and while they are re-leasing up until stabilization. Basically--.

That makes sense. Yes, all right..

Yes, that's all right..

That's all..

Yes, all right.

So, had those has been open, the net impact on cash flow is really negligible, right? Had those facilities been open, that would have been the contribution?.

Basically the deduction of $100,000 deductible, we are reimbursed for all -- to put us back in the same position we would have been had those properties continue to operate..

Got you. Sorry, I made that more complicated than it was.

Lastly for me, you mentioned one facility in Massachusetts due to state regulations, what's going on in Massachusetts? And are you seeing any other states REIT operate having similar discussions?.

It's, I think, unique to Massachusetts. There's a new regulation that was put into effect in 2017 regarding staffing on memory care. We have a building that has two floors of memory care. We have been working on expanding the memory care at this building, which was about 90% occupied earlier this year.

So, we had demand that we wanted to fill up by adding another five units, 10 beds.

And based on the regulation, there was an interpretation that we would have to triple the staffing each shift because the state believes that having two floors and fire doors separating the existing operation of beds with an additional 10 beds will be three distinct units that would put in six FTEs per shift versus two.

That obviously would be very expensive. So, what we're doing is we're moving everything to one level and one contained unit to be able to staff more traditionally and not be impacted by the new regulation..

Okay. That's it for me. Thank you..

Great. Thank you..

And we'll go next to Brian Hollenden from Sidoti. Your line is open..

Hey guys. Thanks for taking my call..

Hello Brian..

As you move from a historically decentralized organization, what are the largest drivers of savings that you expect to realize in 2018?.

Yes. I think in addition to just some of the continued labor savings that we experienced and will continue to experience going into 2018, our biggest opportunity is around our large expense categories like food, which is our second largest expense category, utilities and the like.

When you look at utilities, telecom, cable, we have 130 different contracts today. If we centralize those, we can not only get more reliable service, but we can get better rates going forward. So, we anticipate through some of the consolidation and centralization, we should be able to become much more competitive there going into 2018.

Around food cost, although, we participate in a GPO and have for years, because we've been so decentralized, we've got tremendous variations across the company. In terms of our compliance with those contracts, our cost per meal varies across our company significantly from a low of $2.50 per meal to a high of $10.

So, we'll be looking to standardize our menus more effectively, trying to continue our process that we've done over the last couple of months in reducing our food wastage.

But by centralizing some components like accounts payable, it also allows us to make sure that we're maximizing utilization of our GPO contracts, but also taking advantage of prompt pay discounts that that will more than offset the cost of adding those at the ease here -- at the home office.

And so it's really just this general concept of being more thoughtful about how we act as a larger company and in these large expense categories really trying to centralize that spend so that we can reduce variation and maximize the opportunities that we have under a GPO relationship..

Thanks for that color.

So, what is driving your decision not to make acquisitions until the middle of 2018?.

Brian, the way that we have pursued the acquisitions involves the regional staff, corporate staff. These initiatives are so valuable and if you look at even with the improvement of occupancy, we still have 1,400 units that we could sell.

The return on cash flow, EBITDAR our contribution, improving the performance, and training those units far exceeds the return on the investment we make on acquisitions.

So, we really want to have this focus of the recovery we've seen to be sustainable and other improvements that we plan to implement into 2018 and really have a position where we're much better established with a stronger foundation to take on additional acquisitions, which also will benefit from these other initiatives that we're speaking about once we acquire them.

So, we think it's prudent to take a pause right now, focus on these various initiatives, keep people focused on carrying for residents, operating the communities, improving the occupancies, and then setting a very strong foundation to continue the acquisition in the second half of next year..

All right. Thanks. And then last one for me.

Can you give an update on any new supply growth in your geographic regions?.

If you look at the slides that we just filed, the slide 11, we update this every quarter. I would say that, we again, have been fairly well insulated from supply in most of our markets.

If you look at the top 10 highest construction markets in the country, we're only in about -- only about 2% of our units are a one market, Columbus, Ohio, where we have 111 property community --- 111 unit community, that's 97.4% occupied. So, we -- again, we still see the North Dallas market is being competitive.

One thing that's interesting is we had -- I talked about the improvements in the quarter. Occupancy and properties that maintained 100%, a lot of those are in Texas and other markets that people consider as being over-built. Houston, which had been a focus market, the day before Hurricane Harvey, we were 91% occupied in the Houston Metroplex.

So, I think that the widespread improvement in occupancy that we're seeing, the fact that our median occupancy is 89.4%, highlights the fact that that's not an issue, again, in most of our markets.

And quite frankly, those properties still are lagging, with the exception of one property in the North Dallas market really are not [Indiscernible] in markets with their supply. So, we continue to be very well-insulated.

The other thing I would just reiterate, our supply, it is very clear in speaking to our lenders, feedback from the conference that for those two years now, banks have really cut back on construction lending and those developers who are getting money, they're finding that they're run to cost is increasing.

There's more equity going into properties up to 40%. Their pricing has increased by 50 to 100 basis points.

And the other effect of Hurricane Harvey and the hurricanes in Florida and other disasters, California, really have increased all the cost of the components like lumber and other parts that just make it even more expensive to build and delay building because there's such a shortage of construction workers.

So, I think for the industry, the outlook is pretty encouraging, that we'll see a slowdown in supply. [Indiscernible] has reported for a number of quarters now that starts are down. I think starts are down to less than half where they were two years ago.

But, again, I think the widespread benefit that we have seen in the quarter in improvements around our portfolio demonstrates once again that we're not being impacted by new supply..

All right. Thank you..

[Operator Instructions] We have a follow-up question from Joanna Gajuk from Bank of America. Your line is open..

Hi, thanks so much.

So, on the commentary around 2018 outlook, I know you are not able to quantify the G&A increase, but you were saying that it would be offered by expenses, but can you just give us some color on what you expect for labor costs? Because I know this year you've training higher, so what do you expect, I guess, the increase to be next year? And how does it compare to either year-to-date or what do you think it's going to be for 2017?.

I think on a -- Joanna, they should be somewhere around 2.5% to 3% level. I think that's going to be a pretty normal level for us in 2018. And the level whether it's 2.5% or 3% is going to depend on how much of the sustainability of the expenses we're able to achieve. So, I think that should be the range for labor..

Okay.

And then so for -- but then for 2017, what do you think is going to be for all four quarters, I guess?.

All four quarters, probably in -- closer to the 3% level..

Okay. And then if I may on the front [ph] line on the quarter, in terms of your commentary about how September was very strong.

So, it seems like pretty much versus July, August, they were weak, but what I'm just now thinking about is in September, typically the best month for -- off to three months in the Q3?.

It is typically a good month, partly because it has 30 days as opposed to 31. And July and August both have 31 days. So, you have $600,000 less in expenses just from having that one less day. And then we had the improvement that we had and in so many areas because of the initiatives that were put into place.

So, while it is typically better, we were much better this year than in the previous years in September versus the other two months..

Very good. You said that expenses were actually down right in the month of September..

They were. They were down 2.3% in the month of September..

Yes. Just say -- again, September-over-September was up 9.1%..

That's right..

September over June, another 30-day month, was up 10%..

Right..

We actually had the best NOI per unit in the history of the company in September..

Great. Thank you. That's all for me for now. Thanks..

Thank you..

And that concludes the question-and-answer portion of the call. I'd now like to turn it back to Larry Cohen for any closing remarks..

Well, first of all, I want to, again, thank and welcome Brett to the call today. I thank you all for participating. As always, feel free to give us a call if there's any follow-up questions. And we look forward to seeing you over the next few weeks at some conferences that we'll be attending.

Have a great afternoon, and thank you again for participating in today's call..

And that does conclude our call for today. Thank you for your participation. You may now disconnect..