Lawrence Cohen - Vice Chairman & CEO Brett Lee - EVP & COO Carey Hendrickson - CFO & Senior VP.

Chad Vanacore - Stifel, Nicolaus & Company Joanna Gajuk - Bank of America Merrill Lynch Brian Hollenden - Sidoti & Company Dana Hambly - Stephens Inc..

Good day, and welcome to the Capital Senior Living Fourth 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; risk of downturns in 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 very much. Good afternoon, and welcome to Capital Senior Living's Fourth Quarter and Full Year 2017 Earnings Call. I am pleased to report a positive finish to the year for Capital Senior Living with growth in our same-community NOI, adjusted EBITDAR and adjusted CFFO on both a sequential and year-over-year basis.

Last quarter, I spoke about the broad-based improvements we started making across our operating platform, including improving all areas of community operations to better serve our residents, enhancing our management team, leveraging our operational scale, eliminating rent concessions and simplified pricing and restructuring our incentive bonus and health benefit programs, among other actions.

We have been diligently executing on those initiatives to sharpen our focus on the areas that are most important to us, namely maintaining a culture of high reliability, accountability and operational excellence every day and in everything that we do.

Our goal is to improve our operational and financial performance, drive sustainable and profitable growth and ultimately deliver increasing value for our shareholders.

The initiatives we have in place are not a 1-quarter event but an ongoing effort to improve every day to strive for excellence and commit ourselves to a culture of continuous improvement. Brett Lee, our new Chief Operating Officer, has been instrumental in helping drive this change, and we are beginning to see the fruits of our labor.

Turning to some operational highlights from the quarter. Same-community occupancy increased 30 basis points sequentially from the third quarter and improved 60 basis points from our trough in the second quarter of 2017.

We saw a progress across our portfolio, with 11 more communities averaging 90% or better occupancy since the third quarter, and fourth quarter median occupancy increased 70 basis points to over 90% compared to the third quarter 2017. We also saw an increase in same-community average monthly rent of 3.1% since the fourth quarter of 2016.

As always, we are focused on driving efficiencies and maintaining a durable cost structure. To that end, we maintained the lower expense base that we achieved in the last couple of months of the third quarter, with same-community operating expenses increasing 1.7% from the fourth quarter of the prior year.

The combination of improved occupancy, higher average monthly rent and expense savings resulted in approximately a 3% improvement in same-community net operating income compared to the same period last year. The health and safety of our residents is our #1 priority, and we consistently work to increase the level of care in our communities.

As you all know, this has been the most severe flu season that we have seen in many years. Having experienced a significant attrition event in the wake of last year's devastating flu season, we undertook the company's first national public health initiative to better protect our residents from the impact of communicable diseases going forward.

As soon as the CDC issued a health advisory on the 2017-'18 flu epidemic, we launched a comprehensive prevention and response plan across our 129 communities to combat the outbreak.

Through these proactive systems and protocols, we have been able to protect our residents and employees resulting in significant reductions in infections, hospitalizations and deaths nationwide.

We always expect to lose occupancy in the first couple of months of the year as attrition increases during the winter months, and even with our flu protocols, we experienced an increase in resident deaths from other diseases that occur during the winter months.

However, our flu protocols kept our residents healthier and allowed our communities to continue touring and leasing during the flu season.

As a result, despite the worst flu season since 2009, year-to-date, we had the lowest amount of occupancy loss over the past 3 years, and our net loss of approximately 50 net units in February is considerably better than the net loss of 272 units in the first 2 months of 2017. We should also benefit from the fact that this year flu hit early.

As a result, we are in a much better position from an occupancy standpoint than we had been in the previous three years and are projecting occupancy growth for the full year 2018.

This afternoon, we issued an industry special brief with the American Senior Housing Association, that details our highly-effective flu prevention and response plan in order to educate the senior living industry on how to mitigate the effects of the flu in future years.

Through our efforts, we have been able to limit the number of flu infections to 2.7% of residents with less than 0.5% of residents hospitalized. All hospitalizations, other than unfortunately two death of high-risk residents, were short term in nature, and all residents subsequently returned to their respective Capital Senior Living community.

I'd like to take a moment to sincerely thank all Capital Senior Living employees for their dedication and efforts to make sure that we have the right preventative measures in place so that our residents continue to receive the best care in a healthy environment.

I also want to thank our residents' families for taking the time to write frequent letters of appreciation for the tremendous job that our employees do in helping their loved ones every day. Delivering in a rich lifestyle for our senior residents with high-quality care is core to our mission at Capital Senior Living.

That's why I am thrilled to share with you all that we have been ranked third in the recent J.D. Power 2018 Senior Living Satisfaction Study and well above the industry average. The inaugural study measured resident and family satisfaction with the nation's largest providers of residential communities for seniors.

Overall satisfaction was measured across 6 factors of the resident's experience, including caregiver and staff; services and activities; cost given services; rooms, building and grounds; food and beverage; and service setup and new resident orientation. The report provides interesting information as to key factors in resident satisfaction.

For instance, quality of staff is twice as important as price, and convenience of location is the top reason a community is selected. Similarly, Capital Senior Living recently received the result of its own annual resident satisfaction survey, which was conducted by an independent third party.

The results of the study showed 94.6% satisfaction among all residents across our 129 communities. The results of these surveys are a testament to the hard work of our staff across the country and highlight what we believe our focus on quality and customer service as the true differentiator for CSU.

I'd like to touch briefly on recent tax reform and the economic outlook.

Our strategy of operating at the intersection of real estate and senior care with ownership of 64% of our operated communities allows us to participate in the favorable tax treatment afforded real estate under the Tax Cuts and Jobs Act, including the election to continue to have our interest expense fully deductible.

And we believe, we are well positioned to benefit from expected stronger economic growth and improved consumer confidence. Our residents, most of whom live on fixed income, would benefit from higher interest rates.

Higher interest rates would also constrain new supply, so we would expect to see higher occupancies and higher rents at our communities, driving more robust organic growth. This growth is expected to be further supported by near-term demographic growth and expected increases in penetration rates.

As an owner of most of our communities, we expect to further benefit from having in place fixed rate, long-term, nonrecourse mortgages at attractive low rates. This positive leverage would magnify stronger economic performance, resulting in higher EBITDAR, CFFO and real estate values.

We entered 2018 from a position of strength and remain committed to further improving our organizational and operational platform.

We have a number of key focus areas for the year, including continued implementation of a common electronic information platform; seeking out additional service and value-enhancing opportunities through healthcare affiliations; continuing to strengthen our leadership team; and as always, driving organic growth while also prudently considering potential accretive acquisitions.

We expect to see progress in these areas, giving us a strong foundation to execute our long-term strategy and capitalize on our competitive advantage as a leading pure-play, private-pay senior housing owner/operator.

We believe that the end result of these focused actions will be more consistent and sustainable full results over time, including increases in revenues, reduced operating expenses and increases in EBITDAR and CFFO. I would now like to hand the call over to our Chief Operating Officer, Brett Lee.

Brett will provide more details about our efforts to improve Capital Senior Living's operational excellence and why we believe we have the right platform in place for growth in 2018 and beyond. Following Brett's comments, Carey Hendrickson, our Chief Financial Officer, will discuss our fourth quarter financial results.

Brett?.

Thank you so much, Larry, and good afternoon, everyone. During our last earnings call, I shared that Capital Senior Living has embarked on a journey to implement a new standardized operating model, which focuses on a centralized approach to creating more uniform performance around our five core pillars of quality, service, people, cost and growth.

I'm excited to report that we have made great progress in our efforts. Over the last several months, we have implemented a lean daily management system, which facilitates daily discussions of key operational, financial and quality metrics among our on-site community leaders to drive continuous improvement.

We have retrained all staff and leadership on our new customer service platform, which will create a uniform resident experience in every community across our portfolio and drive improvement in our already industry-leading resident engagement scores.

We have hardwired the standard staffing grids and budget accountability templates that were rolled out in the third quarter to sustainably rebase our expenses to our current occupancy levels and grow our NOI margins.

We also believe that it is a sacred trust that is placed in us by the residents that choose to call Capital Senior Living their home, and it is a responsibility that we take very seriously.

I am proud of the national public health initiative Capital Senior Living has undertaken on behalf of our residents in an attempt to mitigate the negative effects of this year's particularly virulent flu season.

As Larry discussed, the staff training, preventative measures and infection control protocols that were rolled out to all the 129 communities in advance of the flu season have raised our level of competency in preventing communicable diseases of all types and should serve to protect and keep our residents healthier for years to come.

While we were able to minimize the effects of the flu, we were impacted by the historically bad winter in our communities in the Northeast and Midwest as traffic of potential residents slowed in these areas, with temperatures dipping below 0 for several weeks in December and January.

This weather pattern also caused a rise in our utility expenses and snow removal costs. We expect that this is a transient issue and have already seen an increase in sales activity in recent weeks as the weather has begun to improve in a corresponding normalization of our expenses.

We have also implemented several company-wide initiatives designed to reignite our growth engine as we move into 2018.

Our recent organizational structure change that moved the field-based sales team into a dedicated vertical reporting structure to the regional sales leaders has been very helpful in driving a metric-based accountability process for sales activity in our communities.

We continue to optimize our organization-wide sales training based on the results of monthly secret shopping initiatives to ensure that evidence-based sales tactics are being employed in every interaction with prospective residents.

We have work to optimize our digital sales platform with the concerted effort to enhance social media outreach and electronic marketing, particularly in those markets were occupancy has dipped below our expectations. These efforts led to over 6,000 new prospect leads in January alone.

We have recently enhanced our centralized call center, resulting in more rapid response to potential leads as well as creating a proactive outreach program to reconnect with older cold leads, while our community-based sales staff continue to focus their efforts on newer referrals.

We've also initiated discussions with three large acute care systems for potential accountable care affiliations and anticipate that these relationships will result not only in enhanced occupancy but also in improved coordination of care and overall health status for the residents that we serve.

We hope to have more details of these partnerships to share in future earnings call later this year. We believe that these recent improvements will drive consistent growth in the coming months and will serve to systematically grow occupancy throughout the course of 2018.

We also believe that the only sustainable competitive advantage that a company can hope to enjoy is the quality of our people. We are excited to share that we have recruited Mr. Jeremy Falke to serve as our new Senior Vice President of Human Resources for the company.

Jeremy brings a wealth of experience in the fields of talent development, employee engagement, compensation strategy and retention. In the coming months, we will embark on our company's first employee engagement survey, which will be conducted by an independent third party.

The feedback we receive from this survey will be translated into targeted retention plans for each major market to reduce turnover and enhance employee satisfaction.

We believe that taking a personal interest in the feedback of those who work with and for us will allow us to continue to minimize wage pressures across the company and improve resident experience. Finally, we continue to work diligently in identifying and achieving economies of scale to reduce expenses and add value to our operators in the field.

Since our last conversation, we have executed a national contract to reduce our rates for contract labor.

While we have greatly decreased the utilization of contract labor overall to an average of 0.4% of revenue in the fourth quarter from our high of 1.1% of revenue in July of 2017, this agreement will make our costs more predictable in the unusual circumstance when contract labor must be used.

We are excited to announce that we have also finalized an agreement to revolutionize our supply chain through the implementation of a uniform procurement platform that will reduce variation in purchasing, drive down our food costs and use a more limited supply formulary to enhance compliance with our GPO contracts.

This platform will also eliminate our current paper invoicing systems and allow for the accounts payable centralization that we discussed in our last earnings call.

The purchasing platform will also have budget accountability guardrails built in so that operators in the field can track their spend in realtime against their approved budget rather than relying on manual spend-down sheets. We anticipate that this program will go live across the company in early April.

We have also engaged a third party to evaluate all of our fixed cost spend with the goal towards migrating from local agreements in categories such as utilities, IT, telecommunications and waste management into regional and national agreements to reduce costs and enhance services.

While we are still early in the process, we have already identified significant savings opportunities and expect this initiative will produce a material reduction of our fixed costs when their review of our current agreements is completed in the coming months.

While we work to implement these fundamental changes to our operations, I have continued to be incredibly impressed with our leadership and frontline staff, the energy that they have shown to embrace the changes that we have just discussed and the excitement that they have for the future of our company.

Most importantly, I am humbled by the passion that they demonstrate every day to provide outstanding care to the residents that we serve. It is now my pleasure to hand off the call to our CFO, Carey Hendrickson, to discuss the financial results for the fourth quarter..

Thank you, Brett, and good afternoon, everyone. I'm very pleased that the broad-based improvements across our operating platform that Larry and Brett have described are already translating into excellent financial results.

In the fourth quarter, we achieved same-store NOI growth of approximately 3%, a result that is significantly better than our senior housing industry peers, and both sequential and year-over-year growth in EBITDAR and CFFO as a result of focused execution on our initiatives.

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 4 communities that are undergoing repositioning, lease-up of higher licensed units or significant renovation and conversion.

The non-GAAP measures continue to include the 2 Houston communities impacted by Hurricane Harvey since our business interruption insurance restores their economic loss.

However, the company's statistical measures, as shown on Page 12 of the earnings release, exclude the results of the 2 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 million for the fourth quarter of 2017. This was an increase of $1.2 million or 1% over the fourth quarter of 2016.

Including the lost revenue from the 2 Houston communities impacted by Hurricane Harvey of approximately $2.2 million, our fourth quarter revenue would have been approximately $119.2 million for the fourth quarter, which would have been an increase of approximately 2.9% over the fourth quarter of 2016.

Prior to the hurricane, the average monthly revenue for these 2 communities was approximately $750,000. Our operating expenses decreased $500,000 in the fourth quarter of 2017 to $71.3 million, even with $500,000 of additional expense in the fourth quarter of this year due to the acquisition of a senior housing community in November of 2016.

We maintained the lower expense base that we created in August and September throughout the fourth quarter. Our contract labor costs, which were high in the first three quarters of the year, were generally flat with last year after returning to historical normalized levels in September.

Our operating expenses in the fourth quarter of this year included a $1.5 million business interruption insurance credit related to our 2 Houston communities impacted by Hurricane Harvey.

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 had at these 2 communities prior to the hurricane.

The BI coverage will continue for 12 months after we complete the restoration of these communities or until we reach our previous level of revenue from these communities, whichever comes first. Remediation of these communities is on schedule, and we expect to begin admitting residents at both communities early in the second quarter of 2018.

Our general and administrative expenses for the fourth quarter of 2017 were $5.9 million compared to $6.7 million in the fourth quarter of 2016. Excluding transaction costs from both years, our G&A expense increased $900,000 in the fourth quarter as compared to the fourth quarter of last year, partially due to higher net employee healthcare expense.

Our G&A expense as a percentage of revenue under management was 4.8% in the fourth quarter of 2017 compared to 4.1% in the fourth quarter of 2016.

As we noted in our earnings release, we did record a $1.9 million noncash charge as a direct result of our assessment of the impacts of tax reform, particularly as it relates to the matching of our deferred tax assets and liabilities in future years and the related limitation of future NOLSs.

Our adjusted EBITDAR was $39.4 million in the fourth quarter of 2017, which is up from $38.6 million in the fourth quarter of 2016. This does not include EBITDAR of $1 million related to the 4 communities that are undergoing repositioning, lease-up or significant renovation and conversion.

Our adjusted CFFO was $12.3 million in the fourth quarter of 2017, which was at the high end of the guidance that we provided coming into the fourth quarter. This compares to $12.2 million in the fourth quarter of 2016. Our same-community revenue increased $2.3 million or 2.1% over the fourth quarter of the prior year.

Our same-community occupancy was 87.4% in the fourth quarter, which was an increase of 30 basis points from the third quarter and a decrease of 120 basis points from the fourth quarter of last year. Our same-community average monthly rent increased 3.1% from the fourth quarter of 2016.

Same-community operating expenses increased only $1.1 million or 1.7% versus the fourth quarter of last year. Our employee labor costs increased only 1.4% in the fourth quarter versus the fourth quarter of 2016.

Excluding communities that have converted units to higher levels of care over the last year, our employee labor costs actually decreased 0.6%. Our food costs decreased 2.3% in the fourth quarter, while our utilities increased 3% over the fourth quarter of 2016.

As a result of our revenue growth and the excellent management of our expenses by our ops team, our same-community net operating income increased approximately 3% in the fourth quarter of 2017 as compared to the fourth quarter of 2016, reversing the trend of year-over-year decreases in NOI that we experienced in the first 3 quarters of 2017.

Looking briefly at the balance sheet. We ended the quarter with $31 million of cash and cash equivalents, including restricted cash. During the fourth quarter, we spent $9.8 million on capital expenditures, $1.5 million, of which was for recurring CapEx.

We received $500,000 of reimbursements from our REIT partners for capital improvements at our leased communities, and we expect to receive additional reimbursements as projects are completed. Our mortgage debt balance at December 31 was $963.1 million at a weighted average interest rate of approximately 4.7%.

At December 31, all of our debt was at fixed interest rates except for two bridge loans that totaled approximately $76.5 million. The average duration of our debt is approximately 6.3 years, with 92% of our debt maturing in 2021 and after.

Looking to 2018, we expect the operating momentum that we established in the last several months of 2017 to continue into 2018. And as Brett noted, we have additional expense initiatives that we're implementing in the second quarter of 2018, which we expect to have a growing impact as we go through the year.

As Larry noted, our demand started very strong this year, with January move-ins up 36% compared to average January move-ins for the previous 3 years.

On the attrition side of the equation, as Larry also noted, we've had a low level of flu incidents and deaths so far this year, which importantly, has allowed us to keep our communities open for touring.

However, there are other diseases that also seasonally occur at their highest rates in the winter months, the effects of which did result in higher attrition in the month of January. However, due to the strong demand, the decrease in residents was significantly less than last year or the average of the previous three years.

So while our occupancy is seasonally lower, we're in a considerably better position from an occupancy standpoint going forward in 2018 than at any -- at this time in any of the last 3 years. We also expect the addition of 3 repositioned communities to our non-GAAP numbers beginning January 1, 2018 to add approximately $1.5 million to our 2018 CFFO.

All things considered, we currently expect our CFFO to grow in the range of 4% to 6.5% before acquisitions for full year 2018 as compared to 2017, with same-community NOI growth in the 2% to 4% range for full year 2018.

If one were to calculate our 2018 CFFO range on a per share basis, it would translate into a range of $1.62 to $1.66 per share before acquisitions for full year 2018. When we report our quarterly results in 2018, we'll provide updates on our full year 2018 CFFO range.

We will not provide specific quarterly guidance, but we do plan to provide information on things to consider for each quarter as we go along.

Currently, as we look at the quarters, we expect the first quarter to decrease from the fourth quarter of 2017 and to be the lowest quarter of the year due to a normal seasonal decrease in occupancy and seasonally higher utilities related to cold winter weather.

January utilities, as Brett noted, were even higher-than-usual this year due to the historically harsh winter in the upper Midwest and colder-than-usual temperatures in Texas. The remaining quarters of the year are expected to each increase sequentially over the previous quarter.

In line with seasonal trends, we currently expect our financial occupancy to decline in the first quarter and then to begin to grow in the second quarter. We expect our most significant growth in the third quarter, with growth continuing into the fourth quarter but to a seasonally lesser degree.

Fluctuations in utilities on a number of days will also impact our quarters as will the implementation of the additional expense initiatives. Utilities are always highest in the first and third quarters due to weather extremes.

The second quarter is typically the quarter with the mildest weather and the lowest utilities, with second quarter utilities generally approximately $1 million lower than the first quarter.

Our utilities then increased in the third quarter by approximately $1 million as compared to the second quarter, followed by a decrease of approximately $400,000 in the fourth quarter as compared to the third quarter.

Each additional day in a quarter represents approximately $600,000 of additional expense due mostly to an additional day of labor for hourly workers and additional food costs. The first quarter has 90 days, the second quarter has 91 days, but 92 days in the third and fourth quarters.

Our revenues are not impacted by the number of days as our rates are monthly rates, not daily rates.

While we can't yet fully quantify the impacts of the additional expense initiatives, we currently expect them to show some impact in the second quarter and a more complete impact in both the third and fourth quarters of the year, perhaps as much as $500,000 to $750,000 per quarter, all combined. Other items to consider for 2018.

We expect our labor cost to increase at a continued moderate level in 2018, increasing approximately to 2% to 2.5% year-over-year. We expect our net employee healthcare costs to continue at the lower levels we've experienced since our renewal in June of 2017.

The contributions from the 3 repositioned communities that we're adding to our non-GAAP results beginning January 1 will be minimal in the first quarter and will grow through the year as those communities are leased up. We expect our G&A to increase in 2018 for some important investments in people, primarily in the operations team and in systems.

These G&A initiatives are expected to result in improved financial results that exceed the additional cost. Also of note, we 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.

From an acquisition standpoint, we do expect to begin pursuing acquisitions in 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. But those acquisitions are not included in the CFFO guidance that I provided.

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 a 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, strong housing market and a growing economy.

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

[Operator Instructions]. And our first question will come from Chad Vanacore with Stifel..

So I'm just thinking about your outlook on higher occupancy for 2018.

So what factors are driving that? And then how has occupancy trended year-to-date so far?.

Chad, as I said earlier, for the first two months of the year, we lost about 50 units. Just to give some comparison, in the first two months of '15, we lost 107 units; '16, 64 units; last year, 272 units. So we are still at a much better place.

Carey mentioned that our move-ins in January -- we don't yet have the February numbers -- increased 36% over the average of last three years, actually increased 60% over last year. It was the highest we've seen in the last three years of any month. So Brett detailed a lot of the initiatives that we have begun. We will continue those initiatives.

We have great reports on traffic. We have metric-driven results. We have very little supply in our markets. We updated our slides, showing that only 1.5% of our communities are in the NIC MAP areas with high construction.

And we feel very good about where we are and are expecting to see growth in occupancy throughout the year, and are again, very encouraged by the strong position that we're already starting in perhaps the worst flu season we've experienced in our career..

So Larry, how do we qualify the impact of the flu season in the first quarter? Because it sounds like the trend is worse than last year but you expect a tighter recovery earlier in the second quarter..

Yes, no. I think although the industry as a whole and the general population was affected pretty significantly by the flu season, through the efforts that Larry did a great job of articulating around and the efforts that we had across our portfolio, we were able to minimize the impact to our residents.

Now Carey did mention that January just statistically for the senior population, there tends to the other diseases that causes death and attrition. So we did have a higher attrition rate in January than our normal run rate.

But because those trends tend to normalized throughout the course of the year and we've minimize the impact of flu itself, we anticipate a much quicker bounce-back than we had last year and that's starting to prove itself in February already..

Okay. And then the flu season seems to be breaking out a bit.

Do you think it's a little bit early to call that? In other words, what could actually improve that experience from now till into the second quarter?.

Yes, so that's a great question. When you look at our internal data, we actually peaked in terms of number of infections in mid-January and have seen a rapid decline since then in each week.

And we think the fundamental protocols that we put in place in terms of appropriate hand hygiene, education of our staff, isolation protocols for symptomatic residents, shutting down public areas and common areas when we've got an outbreak in a community to mitigate the impacts of additional infections, those are protocols that we will have in place on a continuous basis even outside of flu season to protect us from other communicable diseases.

So although the flu season may continue on for a few more weeks, we feel like we've got fundamental processes in place that will protect us going forward..

I invite everybody with the 8-K filing tonight. We filed a special issue brief that is in conjunction with the American Senior Housing Association, that provides great, detailed information, tracking information, education protocol with actually lessons learned and shows the weekly impact of the flu.

The other thing I'll comment, while there was flu in almost 95% of our communities, it was limited to one resident, and that is the effectiveness of the protocol we have put in place. And the reason that we filed this brief is we feel so strongly that this will help the entire industry combat flu in future years.

It's something that happens every year. It should not be an excuse. It's part of our business, it's part of our DNA, it's what we do. And to provide the right quality to our families and residents, we have the responsibility of taking precaution and having the best measures possible to protect the wellness and health of our residents and employees..

All right. And then you laid out a pretty proactive plan on operating expense. And if I'm right, I think in the third quarter, you garnered something like $3 million or $4 million of savings from the moves you made then.

So given that you're rolling out a new purchasing platform in April and making other moves, how much incremental savings were in 4Q? And then what do we think the run rate savings by the end of 2018 get to?.

Right. So in the fourth quarter versus the third quarter, we were able to maintain the decrease that we had in the third quarter. So I think we expect to continue to maintain those throughout 2018. They will compare favorably for the first 8 months of the year versus 2017's numbers.

And then as we get to the last part of the year, then we'll have the lower comparables. And so there will be some variation there in expenses as we get there. But in the meantime, we will have these additional expense initiatives that we're going to put in place in the second quarter.

So we haven't quantified yet fully the impact of these additional expense initiatives that are going to help us in 2018. As I said in my remarks, we think those could be as much as $500,000 to $750,000 per quarter in the third and fourth quarters. That could be more or could be less but just kind of in that range.

So I hope that's helpful in answering your question..

I guess one more for me. On the $1.5 million credit that you received on the 2 properties that are closed. How long do you expect them to be offline? I think you had mentioned I thought second quarter but I might have missed that.

And then when do you actually expect these properties to stabilize?.

Right, so we expect to begin admitting residents in the second quarter of 2018. And I can actually let Brett speak to that in a bit more detail. And Brett, as to the timeline of how long you think that will take to fill up..

Yes, and so thank you for the question. We anticipate that we will begin admitting new residents, probably in the mid-to-late March time frame. We are already on the ground with a proactive public relations campaign and marketing effort and are already taking deposits for those communities.

There is a significant component of the residents that were already in those communities that have gone home with families that have expressed a desire to come back to the communities. And so we anticipate that the ramp-up will be somewhat accelerated, but we will open those communities in phases.

So we will have the benefit of the business interruption insurance to help to mitigate some of the ramp-up impact for the next 12 months, and our goal would be to -- be back to historical occupancy levels by the time that we transition off of that business interruption insurance..

Okay. And just one more piece of question on that..

Chad, to be clear about the 12 months on the BI, that begins once we have a CO for the communities. So it's actually longer than 12 months in total, but it begins when we have that CO for the community or certificate of occupancy..

Okay, got it.

And then just the 4 communities that are closed now, did you say you opened up three starting January 1?.

Yes, well they've been open. We just added them back to our non-GAAP results beginning January 1, 2018 because all the work on them was complete in the various levels of care. We had certain portion of their buildings open before. Now we're in the lease-up mode for all three of those. Actually, one of them is very well leased.

Veranda Club is about 90%, and so that's back in our numbers January 1, as our town in Canton. Those will lease up as the year goes along and begin to impact our CFFO, as I described..

Okay.

And then what's the incremental changes we should expect?.

In 2018, approximately $1.5 million of CFFO impact from those three communities. You mentioned a fourth community. There is one other community that continues to be out of our numbers, and that will be out of our numbers throughout 2018. We would hope to be able to add that back in the first part of 2019..

[Operator Instructions]. Next we'll take a question from Joanna Gajuk from Bank of America..

So first on the quarter. It was better than your guidance in terms of the CFFO.

So can you just talk about what was the surprise to the upside?.

Yes, so it was at the high end of our guidance. Our revenues were really pretty much in line with what we expected for the fourth quarter, but we had a range of what we expected from an expense impact, and it was at the higher end of that range. So that's what really got us to the higher end of the range with the better expenses, Joanna..

Anything in particular on the expenses?.

It's really labor cost. Labor was very impressive and what we're able to do on that end from that standpoint..

Joanna, it's Larry. And I'll let Brett speak more. We put in new systems and protocols in August on recovery and saving on expenses. It has been an effort that has really involved the entire enterprise, all the leaders at our 129 properties, our regional managers and our corporate staff. And they have templates every month of what they need to achieve.

And it's been really incredibly successful and effective. And that's really what saved expenses and rebased our expenses going forward and why we feel so confident that we can accomplish the outlook that we spoke about for 2018.

Brett, you want to give more color on that?.

Yes, and I would want to emphasize one comment that Larry said. This is a project that we've taken on to systematize, to make it a core component of how we operate our communities going forward. And we went about creating and implementing standard staffing grids to make sure that we are staffing to our appropriate occupancy levels.

We had a concerted effort around reducing contract labor, both in terms of oversight of general utilization so that regional approval is required for introduction of contract labor into a community, but also to try to shift that contract labor to more internal staff through the development of staffing pools in major markets, where we could have part-time employees that could flip between our communities and not rely so much on external labor.

Those things are all sustainable that, as Carey said, have rebased our expenses around our labor that we've carried into 2018..

That's great.

And on the full year outlook, can you just confirm the numbers? So the CFFO to grow 4% to 6.5% before deals, and the same-store NOI inside that is 2% to 4% increase, correct?.

That is right, yes..

Okay. So then how should I think about the delta? Because I guess last time when we talked about the outlook for the year, you were talking about 10% CFFO growth, which I guess, included the deals in the second half of the year.

So can you help us bridge between your commentary today versus 2 months ago in terms of the outlook for the year?.

Yes, you're right. That did include -- that comment previously did include the acquisitions, $50 million of acquisitions, which the guidance today does not. Also, Joanna, we did say we were in the middle of kind of looking -- trying to compose our 2018 budget at the time. So we wanted to give an idea of where we could come out with that.

And we'd probably at about 2 percentage points to our number to add those acquisitions, so it would be a little bit higher than that.

But as far as where we are today, I think probably as we talked about this first -- the attrition in the first quarter, and January particularly being a little bit more than what we anticipated coming into the year is part of that, and -- but we feel very good about -- we still expect 40 to 60 basis points of occupancy growth in 2018.

It just as -- it may happen a little bit differently. We may get some of that occupancy. We now expect to get a little bit more of that later in the first quarter and into the second quarter. So it kind of changes the timing of that a little bit, but we feel really good about that 40 to 60 basis points of occupancy growth..

Good because that was my second part of question. Because I thought that last time you talked about 60 to 90 basis points of occupancy increase, and now you say it's 40 to 60 maybe because the Q1 attrition so far you experienced was [indiscernible]. So then Q4, you made it sound like Q4 was sort of as expected.

Was it the occupancy as expected or just the mix of that in terms of revenue as expected?.

Yes, revenue was as expected. Occupancy really wasn't as expected. We've got 30 basis points of occupancy growth, and that was kind of the middle of our range of expectations for fourth quarter occupancy..

Okay. So then you're saying that occupancy, 40 to 60 basis points and pricing was pretty good this quarter.

So you still expect kind of 3% range increase for '18?.

Yes, we do..

Okay, great. And then if I may, just on this topic that you introduced in terms of doing more work with maybe acute care hospitals around ACOs. So can you just flesh it out? It sounds like there will be something -- that will be a first for the company in terms of doing something along these lines.

So can you just give us as much detail, I guess, as you can? But first of all, are these Medicare ACOs? Are these commercial ACOs? Was it driven by the acute care hospitals? Or was it driven by CSU? And how far along are you in those discussions?.

Yes, absolutely. I'll share with you what I can. And I think the great opportunity that we have as a company is to really truly define the role of senior living in the broader care continuum.

We are serving an increasingly fragile seniors population that is the same population that hospitals, acute care systems and accountable care organizations are trying to put a supportive environment around.

And we provide that medically supportive environment to coordinate care more effectively to manage chronic disease, effectively reduce hospital readmissions, and so there is a great interest from these acute care providers to help to work with us to define where we fit in that continuum.

So these ACOs that we're talking with are typically sponsored by a large acute care system. And at this point, we're not talking about any kind of risk-sharing agreements. What we are talking about is sharing quality data with them to enhance our own outcomes.

And then in exchange for that, we will essentially become a preferred referral source for their discharge planners, potentially even doing some work around respite care for folks who need to come out of the hospital for a period of time that are not safe to go home and are willing to pay a per diem rate.

And what our experience has been is when people come in for a respite stay, many of them end up staying with us long term.

So we anticipate that this can add a tremendous amount of value to the acute care systems because we can better coordinate care, we can reduce hospital readmissions, we can help them to manage down there post-acute spend overall for populations that they've assumed risk for. And it can also be a nice volume generator for us as well.

So we're excited about the potential..

And Joanna, just to clarify, it will be only private pay..

That's right. Good to know that, Larry..

It's only private pay..

Only private pay. Okay.

And you're saying so there would be more data? Or has it already started in a sense of exchanging the data or that's the goal for now and then at some point in the future, it will be more around risk-taking?.

Yes. So we haven't contemplated risk-taking yet, but we are working with them collaboratively to develop a quality dashboard that we would both feel comfortable with would be a good representation of the value add that we can provide to an acute care system.

We think that's going to be great for us as well and for our residents because it will challenge us to get even better at the care that we provide. So at this point, we're not contemplating taking risk. It will be more of a data sharing and a referral relationship.

And we, again, think that we can help them to achieve some of their outcome goals in terms of reducing readmissions and coordination of care..

So was it initiated on their part or was it CSU active at pursuing those kinds of relationships with hospitals?.

Yes, it was actually on our part pursuing these relationships both because we think we can truly add value to the overall senior experience as we look at that population, but also we believe that it will help us to get better in terms of the care that we provide by being proactive around measuring our quality and our outcomes.

And acute care systems are well ahead of us in terms of the disciplines of data mining. And so we think this will really accelerate our efforts..

And I'll comment that Brett's background really is helpful. As you may know, Brett ran four of the largest children's hospitals in the country. He was the CEO of Tenet's North Dallas operations. So he brings a lot of experience and relationships with these organizations. So it's something that he's done very well in his career.

And now we're formulating that to what we do on the private-pay senior living side..

Our next question will come from Brian Hollenden with Sidoti..

Can you provide some additional color on occupancy in December? How many communities were a 100% full and how many were below 80%?.

I'll grab that data for a second. We're pulling it together..

Brian, I think that one we'll have to get back to you on. I don't think that the materials we have, have the breakout. I have some quarterly numbers but not the December numbers. But I have to find that as well..

Okay. And my last question is just more longer term.

So given the guidance, just beyond 2018, is the right way to think about CFFO growth in mid to high single digits? Or are there opportunities to grow organically at a higher rate? And if so, is it how? By expense controls?.

Yes, I mean, I think, we'll see greater growth. Just speaking broadly, Brian, I think that we could see greater growth even in '19 than in '18 given that we'll have a full year of some of the expense initiatives that we'll implement in 2018 in 2019.

In addition, I think some of the things we'll be doing on the sales side and some of the talent that we're hiring on the sales side is really going to begin to impact the top line, and that's certainly the goal. And so I think we could see greater growth in '19.

I'm not committing to that, but I believe that we certainly have the potential for that in '19 as we continue to make improvements on that side as well..

[Operator Instructions]. Next we'll take a question from Dana Hambly from Stephens..

Carey, do you have a full year all-in CapEx number for 2018?.

In 2018, it was right at $40 million, $39.9 million prior to reimbursements from our REIT partners. With those reimbursements, it was $34 million..

No, for 2018?.

Oh, 2018. I'm sorry. That's for 2017..

Yes, what are you projecting?.

2018, I'm projecting about $20 million net of reimbursements and CapEx in 2018..

That's all-in. Okay.

And kind of a similar amount on maintenance CapEx on a quarterly basis?.

Yes. Yes, similar amount on forecast..

And you called out EBITDAR-enhancing capital expenditures in the press release.

Without giving away any trade secrets beyond conversion of units, what would some of those enhancing CapEx projects entail?.

Conversions are one of the things. Conversions certainly would be EBITDAR-enhancing kinds of capital. But we still believe there is some we can do on that front, Dana, and we'll be looking at that..

Ok.

And then Carey, the $500 million to $750,000 in potential cost savings per quarter, is that contemplated in the $1.62 to $1.66 or any portion of that or is it all incorporated?.

A portion of that is, yes..

But not everything?.

That's generally what I have in there, Dana, before it. Some were probably in the lower end of that range. But again, we just -- we don't want to oversell on that, because we are still at the front end. And once we get those fully implemented, we actually feel very good about the promise of these expense initiatives.

And it's part of the reason -- it's certainly part of the reason why we expect our expenses to be well under control and managed first in 2018 versus 2017 to have a minimal expense inquiries in '18 and certainly to be less than the revenue growth we anticipate, giving us that NOI growth on a same-store basis of 2% to 4%..

Okay, okay. So not baking everything in, but you've got reasonably good visibility on that number ramping up in the back half of the year..

Yes, we've got some early returns on it, and so we kind of have some idea of what those savings are going to be. But again, we're still in the front end of that. And so we want to wait to fully flesh that out before we get -- start providing guidance around those numbers..

Okay, all right. So last one for me, Larry. The GAO put out a report recently on assisted living. It read fairly innocuous as it relates to your business. But anytime these reports come out, I get a little bit nervous.

So do you have any comments on that?.

Dana, I saw the same report, had the same reaction and sent an e-mail to David Schless at ASHA. It is in innocuous. It is something that deals with their looking at certain states on Medicaid and getting more information. But one of them believes it's going to lead to any type of oversight regarding assisted living..

And that does conclude our question-and-answer session for today. And at this time, I'd like to turn the conference back over to Larry Cohen for any additional or closing remarks..

I want to thank everybody for your participation and support. As always, feel free to call any of us with any further questions. Carey and I will be at some investor conferences coming up, and we look forward to seeing many of you. Have a good evening, and thank you again..

That does conclude our conference for today. Thank you for your participation..