Good day, and welcome to the Capital Senior Living 2019 Q4 and Year-End Earnings Announcement Conference Call. Today's conference is being recorded. .

All statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and the company expressly disclaims any obligation to update these statements in the future.

Actual results and performance may differ materially from forward-looking statements.

Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well as the reports that the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly reports on Form 10-Q.

Please see today's press release for the full safe harbor statement, which may be found at capitalsenior.com/investor-relations, and was furnished in an 8-K filing this morning. .

Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release. .

At this time, I would like to turn the call over to Capital Senior Living's President and CEO, Ms. Kimberly Lody. .

Thank you, and good morning to our shareholders, analysts, employees and other participants. Welcome to Capital Senior Living's Fourth Quarter 2019 Earnings Call. Joining me for today's call is Carey Hendrickson, our Chief Financial Officer; and Brandon Ribar, our Chief Operating Officer. .

2019 was a reset year for Capital Senior Living as we focused the organization and our activities on the steps necessary to strengthen the business and establish the foundation for long-term success, while also navigating industry headwinds of oversupply, changing demographics and a very tight labor market.

We've now completed the first of our 3-year strategy of Stabilize, Invest, Nurture and Grow, and we expect that the hard work and investments made in 2019 will begin to pay off in 2020 with improved employee retention, stable or improved occupancy and revenue, improved net operating income and improved cash flow.

Of course, there is uncertainty now as a result of COVID-19 and it is difficult to predict when the overall operating environment will return to a more normal state. Nevertheless, we've already delivered some of these improvements in Q1, which we will talk more about throughout this call. .

First, I'll address our Q4 operating performance, focusing on the full portfolio of 126 communities, which includes 4 communities excluded from the same-store numbers in 2019, but that will be coming back online in 2020. .

Revenue for the 126 communities stabilized in the fourth quarter at $108.7 million, consistent with the third quarter. Occupancy was down 40 basis points sequentially from the third quarter, due primarily to a decline of 26 occupied units in independent living.

Occupied units in assisted living and memory care remained consistent with the third quarter. As we've mentioned on our previous calls, we invested heavily in certain operational areas during the second half of 2019 to improve the quality of our product offering across the portfolio.

Some of these investments included wage increases in certain markets, so we could reduce more expensive contract labor to a minimal level by the end of 2019 and maintain that lower level going forward.

I'm pleased to say we accomplished this objective, reducing contract labor expenses by more than 50% from Q3 to Q4 and reaching normalized levels in both November and December. Investments were also made in certain aesthetic aspects of our communities through repairs, maintenance and service contracts.

While collectively, these investments, along with some incremental advertising and promotion costs, increased operating expenses sequentially in the 126 communities, they were necessary short-term investments to improve the company's competitive positioning for the long term. .

Regarding sales and marketing, our focus was first to get the right structure and people in place to ensure incentives were aligned and understood, that our product was competitive and rent ready and that our teams have the tools to support the process, all while maintaining rate and minimizing discounts and concessions.

We accomplished all of these things. For the time and circumstances under which we operated in 2019, I'm satisfied that the Q4 financial performance is confirmation that the latter months of 2019 represented the bottom of the trough and that the business has stabilized.

In addition, through the first 2 months of 2020, our net operating income continued to improve as compared to Q4 of 2019. The January NOI was approximately $250,000 better than our average monthly NOI in the fourth quarter and February was more than $1 million better than January. This indicates that our plan is working. .

Now let's turn to another one of our top priorities, which is improving the financial foundation of the company. Shortly after my arrival last year as CEO, we began discussions with our landlords to address the high cost of the triple net leases that have been in place for more than a decade.

As recently announced, we were able to successfully reach mutually beneficial agreements with all of our landlords to reduce our short- and long-term lease liabilities. Every one of these leases had been generating negative annual cash flow since at least 2017.

It was clear that the economics of these leases were significant and growing burden on the financial performance of the company and had to be addressed.

During the last several months, we have successfully concluded negotiations and announced lease terminations that immediately reduced our rent and CapEx obligations by approximately $1.8 million per month through the end of 2020. Annual cash flow will improve by approximately $22 million.

And when the transitions are complete, all related lease liabilities, which were approximately $253 million at December 31, 2019, will be eliminated. .

I want to highlight that the CFFO from the consolidated leased assets in the portfolio was approximately negative $4 million or negative $0.14 per share in the fourth quarter, while our owned portfolio of communities delivered CFFO of approximately $3 million or $0.09 per share in the same period.

Clearly, the termination of the leases is a significant accomplishment that will be meaningfully accretive to the long-term performance of the company. Lastly, I want to touch upon the current market conditions and specifically, COVID-19.

In short, these are challenging times not only for us and our industry, but for nearly every industry in every geography.

While the situation is fluid, and we are operating under the assumption that this infectious disease will be present in every market in the U.S., it is clear that the work we did during 2019 to strengthen the operational foundation of the company prepared our business for the current environment. .

first, improving the quality of our product and services by investing in our people and communities, clarifying and streamlining our operational processes and implementing new sales and marketing initiatives across the portfolio; second, establishing robust systems and analytics to provide real-time insights to the business and achieve sustainable forecast accuracy; third, enhancing and upgrading our operational leadership; fourth, implementing programs and tools to attract, retain and develop high-quality talent, while dramatically reducing the utilization of agency staffing; and fifth, utilizing our unique scale and best practices to drive sustainable, long-term operational efficiencies through operating standards and expense controls.

.

We have an excellent leadership team across the company. We have well-trained community teams, detailed operational protocols, a solid supply chain and defined communication tools, all designed to support our communities, residents and employees.

At the onset of the pandemic, we swiftly implemented comprehensive protocols and best practices based on federal, state and local guidance as well as our own expertise and proven disease prevention protocols.

All communities are operating with restricted access, robust sanitation protocols, social distancing and other measures designed to keep our residents and employees safe. I'm extremely proud of how our teams have embraced the call to action with care, confidence and leadership.

Brandon will provide additional detail on our COVID-19 actions in his prepared remarks. .

I'll close my initial comments by saying that we firmly believe our turnaround plan has taken hold. The business is stabilizing, and we are in a much better operating position today than we were a year ago. Our fourth quarter revenue was consistent with the third quarter and we view that as a positive development.

The recent improvements in NOI is another positive development. Additionally, as I mentioned previously, while the impact of COVID-19 is difficult to predict, we are encouraged to see the financial improvement during the first several weeks of 2020.

We still have a lot of work to do, and I'm confident that we will navigate through the current environment with excellence and continue our path of incremental improvement once the overall environment stabilizes. .

Now I'll turn the call over to Brandon to provide a detailed review of our operations. .

Thank you, Kim, and good morning. I continue to be inspired every day by the efforts of our frontline caregivers, local and regional leadership and our support team throughout the country. I want to recognize their efforts to keep our residents safe and their families and loved ones engaged and confident through these challenging circumstances.

I have confidence in our ability to continue delivering great service and a warm caring environment to our residents, even as we have made significant adjustments in our operating model in response to this pandemic. .

The tenure instability of our highly valued local leadership teams and the improving operating results in Q4 and Q1 reinforce our ability to generate stable operating performance in these uncertain and turbulent times.

Specifically, from October 2019 through February 2020, we experienced continued stability with retention of our executive directors in 94% of our communities. Total employee turnover decreased 6 percentage points in the second half of 2019, and that improvement continued in January and February of this year.

We believe this strong level of retention positions CSL to maintain stability in the coming months and continue our improvement as and when the market returns to a stable state. .

One key indicator of operating improvement for CSL is the number of communities delivering revenue and NOI improvement on a quarter-over-quarter basis. This measure provides insight around the time to stabilization and the impact of our SING strategy.

The number of communities with sequential revenue growth in Q4 was 27% higher than Q3, and the number of communities with sequential NOI growth in Q4 nearly doubled over Q3.

As we entered Q1 with performance improving at a growing number of our communities, our regional and central leadership teams were able to increase focus on a more limited number of communities with challenges in either key revenue or expense management processes.

Our focus in 2020 is the consistent application of those operational systems that will deliver improved results across all 125 of our ongoing communities. We currently operate 43 communities with occupancy at or above 90% and utilize best practices and learnings from this group to improve results across the portfolio. .

We've segmented our operating portfolio into 4 categories based on trended financial metrics and leadership stability. This approach allows for a more tailored support model and visibility around performance trajectory.

Our communities we recognized as stabilized represent strong, consistent performers in both occupancy and NOI with little to no turnover in key leadership positions. These communities average occupancy in the low to mid-90s and NOI percentage is north of 35%.

Our second category, momentum, includes communities with consistent improvement across the trailing 6 months in revenue and NOI. Management teams that have stabilized or key strategic changes taking hold are typical operating characteristics of these communities.

The remaining 2 categories include communities requiring greater strategic and tactical support from our central and regional leadership teams. Our third category, baseline communities, are those with moderate, near-term growth expectations and expected stabilization periods of 9 to 12 months.

The final category, challenged communities, are those with recent leadership turnover or operating metrics significantly below expectations. We currently operate 19 communities with occupancy less than 70%.

These operations represent significant upside opportunity for performance with the appropriate development of strong local leadership and application of increased sales and business development resources. .

Now I would like to spend a few minutes highlighting the results from Q4 and early Q1 in the context of the 5 key areas of stabilization Kim referenced earlier. In 2019, we invested nearly $25 million in capital and expense related to physical plant improvements across our communities.

Additionally, we invested $1.3 million in market wage adjustments to ensure our ability to hire and retain a stable workforce.

In partnership with Mike Fryar, our Chief Revenue Officer, we have implemented foundational sales metrics, including lead response time, lead to tour and tour to move-in conversion ratios that allow our local and regional leadership to drive revenue opportunities.

In addition, increased communication of the services provided to our existing residents will support in place rate improvement. .

The retention of our key leadership positions and investment in market wage adjustments continues to deliver improvement in our premium and contract labor spend. On our last earnings discussion, I referenced the opportunity to materially reduce contract labor utilization.

From Q3 to Q4, we reduced contract labor by nearly $1 million from $1.8 million in Q3 to $860,000 in the fourth quarter. Based on January and February results, we expect this downward trend to continue in Q1. .

Let me close my comments with a real-time update on our operations related to COVID-19. Throughout the year, we conduct training on infectious disease protocols, clinical practices and safeguards for our residents and staff in each of our communities to limit the risk of influenza and other contagions.

We've implemented all COVID-19 government-recommended and required changes to clinical and operating procedures to maximize resident and staff safety. All persons entering a CSL community are required to complete a screening process, consistent with recommendations and requirements from the CDC and state health departments.

To date, we have 3 of our 125 communities where a resident or residents have tested positive for COVID-19. We continue to diligently monitor all residents and staff through our screening protocols for signs or symptoms and respond immediately should they occur.

In each community, we have worked closely with local health departments and state regulatory agencies and received feedback that all appropriate protocols are in place.

We continue to monitor and support all of our communities on a real-time basis and implement all appropriate response protocols as necessary with changes in the local market or within our own communities. .

In closing, we are so fortunate to have an incredible group of caregivers, employees and leaders across our 125 communities. Their day-to-day focus and dedication to our residents is the foundation of Capital Senior Living. .

Now I'll turn the call over to Carey to provide a detailed review of our financial performance. .

Thank you, Brandon. In my remarks this morning, I'll discuss our non-GAAP measures, which exclude 2 communities that have been undergoing lease-up or -- after significant renovation and conversion, consistent with the prior quarters in 2019.

Starting in the first quarter of 2020, so that you will know all communities will be included in all of our metrics going forward. .

In 2019 and in the first quarter of 2020, we've taken significant steps to build a platform for growth and long-term value creation. For example, during 2019, we made important capital investments to refresh high-impact areas within certain communities.

We increased our spending on repairs and maintenance to make sure the critical systems at our communities are working well for our residents and that our communities present well at all times. We've made market wage adjustments in certain markets and improved our benefits programs to attract and retain talent.

We've disposed of 3 noncore communities with the fourth scheduled to close today, resulting in approximately $23 million in total net cash proceeds and eliminating $48.4 million of debt. .

And importantly, we have reached agreements with all 3 of our REIT partners for the early termination of all of our leases by December 31, 2020, at the latest through the release of our existing security deposits and letters of credits with these respective REITs, and we'll see meaningful reductions in our rent payments until that time.

When all of the lease terminations are complete, our cash flow will improve by approximately $22 million on an annual basis and the related lease liabilities on our balance sheet, which were approximately $253 million at December 31, 2019 will be eliminated. This is a major step forward in the transformation of Capital Senior Living. .

We were further encouraged by the stabilization of our revenues in the fourth quarter. Our total consolidated revenues in the fourth quarter were $108.7 million, consistent with the revenue contribution of the life portfolio of communities in the third quarter of 2019.

Our $108.7 million of total revenues in the fourth quarter of 2019 compared to $115.1 million on a reported basis in the fourth quarter of 2018, half of that $6.4 million decline from the fourth -- at '19 to '18 was related to the disposition of the 3 communities that we disposed of in 2019, with the other half related to occupancy declines that occurred during 2019.

Financial occupancy for all communities was 80.7% in the fourth quarter, a decline of 60 basis points from the third quarter of 2019, a significant portion of which was related to the full impact of occupancy declines that occurred during the fourth quarter -- excuse me, during the third quarter.

We had increases in net move-ins in 2 of the 3 months in the fourth quarter, October and December. .

Our operating expenses in the fourth quarter of 2019 were $78.7 million, an increase of $2.7 million or 3.5% from the fourth quarter of 2018.

As we did throughout 2019, we made investments in advertising and promotion and repairs and maintenance in the fourth quarter, and we had an increase in our employee vacation expense that was related to an update to our paid time off policy.

Our expenses were $1.8 million lower in the fourth quarter of 2019 due to the disposition of the 3 noncore communities. Also of note, we did not have any business interruption credits in the fourth quarter of 2019 related to our 2 communities impacted by Hurricane Harvey, but we had had $0.7 million of such credits in the fourth quarter of 2018. .

Our general and administrative expenses for the fourth quarter of 2019 were $5.8 million compared to $9.6 million in the fourth quarter of 2019.

Excluding transaction costs from both years, including approximately $4 million in separation and placement costs in the fourth quarter of 2018, primarily associated with the company's former CEO, our G&A expense increased approximately $800,000 in the fourth quarter of 2019 as compared to the fourth quarter of 2018.

G&A expense as a percentage of revenue under management was 5.5% in the fourth quarter of 2019.

As a result of the changes in revenue, operating expense and G&A that I've discussed, our adjusted EBITDAR was $25.7 million in the fourth quarter of 2019 compared to $35.2 million in the fourth quarter of 2018, and our adjusted CFFO was negative $1.4 million in the fourth quarter of 2019 compared to $6.9 million in the fourth quarter of 2018.

Also of note, CFFO for the fourth quarter of 2019 included a negative net impact of CFFO of approximately $500,000 related to the adoption of the new lease accounting standard, which was effective January 1, 2019. .

Looking at our same-community results, our same-community revenues decreased 3.6% as compared to the fourth quarter of 2018. Same-community occupancy was 81.4% in the fourth quarter of 2019, a decrease of 290 basis points from the fourth quarter of 2018. And our average monthly rent was down slightly 0.2%.

Same-community expenses in the fourth quarter of 2019 increased 5% as compared to the fourth quarter of 2018. Our employee labor cost increased 2.7%. Our food cost increased 1.9%, and our utilities increased 0.7%.

The previously mentioned investments that we made in repairs and maintenance and advertising and promotion and the increase in vacation expense related to the update to our PTO policy were the primary other contributors to our same-community expense increase.

Of note, our contract labor costs, which peaked in the second quarter of 2019 at almost $2 million for the second quarter decreased to $1.6 million in the third quarter and declined to only $750,000 in the fourth quarter on a same-community basis due to our disciplined management of this category. .

As I noted earlier, we closed on the sale of 2 noncore communities in Springfield, Missouri and Peoria, Illinois on October 1 at a price of $64.8 million, resulting in $14.8 million in net cash proceeds. The communities had combined CFFO of $2.5 million in the first 9 months of 2019.

We avoided significant near-term capital expenditures, and we eliminated $44.4 million of debt with the sale of these communities. And today, we expect to close on the sale of our community in Merrillville, Indiana, which will result in net cash proceeds of approximately $6.9 million.

That community had CFFO contribution of approximately $200,000 in 2019. We continue to be engaged in and look for opportunities to strengthen our financial foundation and optimize our portfolio, including considering the divestiture of a limited number of noncore assets. .

Looking briefly at the balance sheet. We ended the quarter with $24 million of available cash. Including restricted cash, our cash balance was $31.7 million at December 31, 2019. During the fourth quarter, we continued to invest in our product for future growth, spending $6 million on capital expenditures.

Our mortgage debt balance at December 31, 2019 was $926.5 million at a weighted average interest rate of 4.8%. During the fourth quarter of 2019, we obtained a bridge loan for $31.5 million on 2 communities with the maturity date of December 2021.

And we amended one of our existing bridge loans, reducing the amount of the loan and extending the maturity from July of 2020 to December of 2021. Payments on both of these bridge loans are interest only.

At December 31, 2019, the majority of our debt was at fixed interest rates, except for our 3 bridge loans that totaled approximately $83 million and $50 million of long-term variable rate debt under our master credit facility. .

As noted in remarks by Kim and Brandon, our financial performance in the first 2 months of 2020 were in line with our expectations. Our NOI increased in January versus December, and then February NOI improved over January.

Our occupied units in January and February were stable with where we ended December, and our move-ins in March prior to the COVID-19 outbreak in the United States were trending positively. Obviously, business conditions have changed due to COVID-19, so we're uncertain how the first quarter will end.

New residents have continued to move in through the end of the month but at a lower rate than in recent months. Move-outs have also slowed somewhat. .

In March, and as we move forward, we expect to experience increases in labor costs due to the need to supplement our staff with premium pay labor, and we'll have increased costs related to medical supplies.

To offset these COVID-related expenditures, we've reduced spending on our nonessential supplies, travel cost and all other discretionary items, and we've reduced our capital spending to only the most critical projects. We're monitoring the impacts on our revenues and expenses, and we'll update you as we are able. .

While the current environment is challenging, we're very pleased with the important steps we've taken over the last year to establish a strong foundation for the company's future growth.

We're working diligently to build a company that will have a consistent high-quality product across its portfolio, and we know the hard work we've been in over the last year will serve us well through this current challenge and as we emerge from the COVID-19 crisis. .

Now I'll turn it back over to Kim. .

Thank you, Carey. As the business begins to exit the trough, we are in a much better position operationally and financially today than we were 1 year ago. This is due to our relentless focus to improve our execution and stabilize our operational performance. .

As the business continues to show consistency and predictability, we will reinforce these actions while also investing in key areas for future growth. These investments do not involve large capital expenditures and are about taking specific actions in specific communities to effectuate predictable and timely improvement in performance.

Our focus continues to be on executing the key elements of our strategy of Stabilize, Invest, Nurture and Grow to drive long-term value for all of our stakeholders. .

I'll now open the line for questions. .

[Operator Instructions] And we will take our first question from Joanna Gajuk from Bank of America. .

So a couple of questions. So the comment about the move on -- the move-outs actually also somewhat trending lower in the second half of March.

So any color there? Is it because there are no voluntary move-outs and maybe residents prefer to stay in? Or maybe just the skilled nursing facilities are not able to take them if that's where normally they will go? So any color you might give, that will be helpful. .

Yes, happy to do that, Joanna. I'll start and Brandon can jump in. What we're seeing in terms of move-outs is they're trending lower because people are choosing to stay in place. And it's very much what you described.

They believe that our communities are a great option for them and a good place for them to continue to stay versus going to any other environment in the community. And the health care system is, as you know, somewhat overwhelmed by the COVID situation. So those folks are choosing to stay in our communities.

Brandon any additional color on that?.

I would just echo what Kim said is that people, at this point in time, are not seeking any level of disruption in their care and services that they're receiving and have a high level of confidence in the services and the protocols that we have in place to keep them safe. .

Right.

So just to get things into perspective, just, I guess, in normal situation outside of where we are now, when you think about the, kind of, their natural attrition in the business, so assuming their average length of stay is 2.5 years or so on average, right, so is it fair to say that natural attrition is kind of 10%? And then when you think about it, is there a way to think about the kind of the bucket -- the biggest buckets and what the percent of these move-outs are related to that versus other reasons?.

Let me just pull up some -- in terms of the latter part of your question, Joanna, when you look at overall move-outs by quarter, generally, about 40% of those are for deaths. Another 20% for medical reasons, so they may need to go to a different type of care setting.

And then the remainder are either relocating to be closer to family members or their health improved or things like that. But generally, those are the 4 main categories that would make a move-out by reason. .

Okay. That makes sense.

But is my math correct, roughly thinking about just -- on just, I guess, setting the move-ins outside -- aside and then thinking about just if there are no move-ins, how should we think about just the natural kind of attrition in the business given the length of stay on average is 2.5 years, maybe 3 years? So is it fair to say that 10% sort of natural attrition you have to overcome every quarter almost?.

10% seems a little bit high, Joanna, but -- and I would also say that we -- you're saying no move-ins. I don't think -- we don't anticipate that there will be no move-ins. .

No. We've actually -- we have continued to see people in the market, in every market where our communities are operating, continue to seek services. It's at a lower volume than -- certainly than we saw at the beginning of the quarter, but there -- it's a need-based business in a lot of cases and people do continue to seek out those services.

So we are continuing to have move-ins. We're being very selective about those move-ins and also very careful with them. There are strict protocols in place. And those new residents also must be willing and able to self-quarantine for 14 days upon moving into one of our communities. .

And Joanna, I'll also say just generally, that it's really early in this process to really think about trends and what may really occur with move-ins and move-outs. There's just too much unknown right now. We haven't had enough time to -- in this process to really gauge the impact on that. .

Right. And then the other piece, I guess, you talked about in the press release and in your prepared remarks around some of the costs you're trying to reduce because you expect some other things that are going to be increasing apart from labor and supply.

So any way to think about sort of what is the kind of going forward, let's say, G&A, excluding any of the discretionary spending items, what's the kind of run rate for G&A? And I guess, to that end, you're also talking about reducing CapEx.

So what's the outlook, I guess, for the year at this point?.

Yes, I'll start backwards and -- I'll start with the last question and go backwards. From a CapEx standpoint, going -- we spent about $20.3 million in 2019.

In 2020, I would say we probably -- we were looking to spend $15 million to $18 million, maybe $20 million of capital expenditures in 2020, but with the COVID-19 situation that's occurred, we are -- we have cut back. And I think what we actually spend on CapEx this next year is going to depend on the extent and the duration of the COVID-19 situation.

So I can't -- so I would say we were going to spend $15 million to $20 million, we'll just have to see as it relates to that. From a G&A standpoint and really on our expenses, we are monitoring that very closely, and we're going to work to mitigate the potential impact of the additional expenses. But again, it is too early.

We don't have enough time here yet to have really determined how much the increases are going to be at the community level. G&A, I think will largely be relatively the same because we're continuing to support our communities in the same manner.

So the run rate for G&A, I would expect to be pretty similar to what you saw in the fourth quarter, perhaps a bit lower because we are looking to reduce travel and some of those kinds of things to a bare minimum. And so we will probably see a little bit of a decrease, but it's hard to say just how much yet. .

No, I appreciate it. That's helpful. And then the second, so of these potential offsets you mentioned in the press release, but on the call, you -- I guess, it wasn't mentioned, in terms of the stimulus package. So kind of what is your understanding of your ability because your business or the core is all private pay.

So would you be able -- or the provider of health care services to access the $10 million direct funding that's been created under the stimulus package? Or are you more targeting these other pieces in terms of these loans or other venues? So any color in terms of how you understand your ability to access that funding will be great. .

Yes. So Joanna, we've analyzed the CARES Act, and our financial and legal teams continue to work on that, given that it was just released late last week. But we believe that there are several items that can be helpful to us. I mean, certainly, the deferral of the 6.2% social security tax will be an important one.

There are potential mortgage debt forbearance programs included in that package for a debt that's backed by Fannie or Freddie. And then as you mentioned, the possible access to capital to help with the incremental expenses and the operations in the environment, we don't have the specifics on all of those just yet.

We're working through those and exactly what can be applicable to our business and what we'll be able to utilize. We intend to utilize as many of the provisions of that act as possible, and we'll know more in the coming days. .

That's great. If I can just squeeze in the last follow-up. I think I've missed some of the commentary at the end from Carey in terms of the monthly progression for NOI. So if you could repeat that? And also, I guess, as it relates to that, I guess, it was a commentary about January and February.

So I guess, as it relates to that, how should we think about the rent? So there is obviously that cut from your landlord.

So if I think about kind of the, let's call it, after I guess takes effect quarterly with expenses, is it around $11 million would be a good number for the quality of expense going forward?.

So let me start with the NOI progression. Yes, in December, our average monthly NOI was somewhere around just north of $10 million, and that bumped up by about $0.5 million, I believe, in January, and then bumped up by about -- close to $1 million in February versus January. So we've kind of had that nice progression of NOI increases.

And that's in a difficult time of the year, too. It was really about some really disciplined management of our expenses that we've continued to do in the first quarter. So that's -- it was -- has been an improvement. As you think about the impacts of the lease transactions, I believe that was your next question.

We've noted in the release that we -- that -- in our release that we did a couple of weeks ago about the transactions, all combined, that we expect our cash flow to improve about $22 million on an annual basis as a result of those lease transactions. From a revenue -- from an expense standpoint, it is a nice chunk of expenses.

Our rent expense will be probably about, let's say, $12 million to $14 million -- actually even a little bit more than that, about $15 million less in rent expense going forward. And yes, so we'll have a nice increase in our CFFO as a result of this.

Kim noted that the CFFO increase a little bit -- the CFFO contribution of the leases in the fourth quarter was negative $4 million, I believe, right?.

Negative $4 million. .

Okay.

So just to rephrase, so you're saying that the annual lease expense will be $15 million less or the quarterly?.

Annual. .

Annual. Okay. Great. .

We will take our next question from Steven Valiquette from Barclays. .

So probably similar to Joanna, I mean, our conversations with investors right now are also dominated by questions around occupancy trends for yourselves and really for the industry going forward from here.

And just to kind of set the stage a little bit, in my mind, I feel like based on historical trends in the senior living industry, it'd be a major deal if occupancy were to change by, let's say, 500 basis points, either up or down. That type of movement is pretty rare.

But I've been pretty surprised by the number of discussions I've had with investors over the past few months where there seems to be some notion that occupancy could fall by as much as 2,000 to 2,500 basis points down into like the 60% range for some operators this year, maybe even for the industry.

And this potential level of occupancy falloff is actually pretty hard for me to wrap my head around. So I'm wondering if you can maybe just perhaps spend a minute or 2 and address whether these types of occupancy declines are within the realm of possibility for this year, either for yourselves or for the industry, based on what you're seeing.

And hopefully, an attempt to maybe at least calm down some of the extreme downside scenarios that are sort of floating around in the investment community right now. So we'll start with that. .

Yes. Steve, it's -- as you know, we're early in this situation with the pandemic. So it's pretty difficult to predict what the impact will be. What I can say is that through the first -- through the middle of March, we really weren't seeing much change at all in terms of lead volume, tour volume or move-ins.

In the last couple of weeks, as more of the stay-at-home or stay-in-place kind of regulations and guidelines have come out across the United States, we have seen those volumes decline. Leads as well as in-person tours and the move-ins have declined or they have slowed, I guess, is a better way of saying it.

What we've done is we have -- we're utilizing our electronic and virtual means to really continue to engage with those families and those prospective residents. And where there is an interest and a desire to continue through that process with us, we are certainly happy to do that.

So at this point in time, while we're seeing some slowing in that volume, I don't see any indication of the kinds of numbers that you just put forward. But again, we're early on, so it's difficult to predict what it might look like here in the coming weeks and months.

Brandon, any other color you want to add?.

I would just add that one outcome of what's going on right now in the overall market is a willingness to engage with our local leadership in discussion around our services on a more consistent basis.

Again, with people being in their homes and not necessarily out and about, we are getting increased dialogue with individuals asking about our services or having discussions around just senior living in general.

So when we talk to our local leadership and our local kind of business development folks, they are engaging in quite a few conversations over the phone and conducting virtual tours as well, which you might expect given the fact that people are spending a ton of time right now at home.

And so we will see how that impacts overall the opportunities for us as we learn more about time lines around COVID-19 across the country. .

Okay.

So let's just say theoretically, if we fast forward, let's just say, I don't know, 9 months from now, and some facilities might see occupancy dip down into 60% range, again, all theoretical, how much flexibility is there to lower cost and still be profitable or at least breakeven in these facilities if occupancy were to dip down to those types of levels and avoid having to lose money? And then is there a certain rule of thumb if occupancy hits a certain point, you just say, "Hey, let's just shut down this facility because we're just going to lose too much money?" Are there any rules of thumb around that within your operations?.

Well, I'll start and Carey and Brandon can jump in. One of the key elements of the cost equation in any community is the size of that community and the physical layout of that community and the ability to service residents with that particular community environment. So our portfolio is not homogenous.

So we have a number of different floor plans across the portfolio. I would say for our smaller communities, there is absolute flexibility, I think strong flexibility to withstand those kinds of occupancy challenges.

For a handful of communities that we have that are really quite large and have more of a diverse layout or footprint, it's more difficult because there's -- it's simply more difficult to have the staff in the right places when you may have lower occupancy and have them dispersed around the community.

What we would do in those cases is certainly bring those residents together so that we could be flexible on the cost side of things and continue to serve them as we go about regenerating that top line and improving the occupancy. .

Okay. Last question is, I guess, I'm just curious around your thoughts around pricing strategy and what may or may not work in this sort of environment.

I mean, does it make sense to offer extra incentives for potential move-ins? Or do you feel like in this environment, if there's just fear factors on moving into the separate facility in general, maybe it doesn't make sense to offer any incentives that people are going to move in or not going to move in? I mean, so what are your thoughts on holding the line on pricing in this environment versus offering extra incentives to attract move-ins?.

Yes.

Well, we worked very hard during 2019 to reduce the level of discounting and concessions that we were utilizing in the organization because they had gotten quite high in 2018, and were not really -- while they were delivering some occupancy, they were not delivering the quality of revenue or long-term sustainable types of occupancy for the organization.

So we worked hard to really bring that down. And in fact, we reduced the level of concessions by about 60% year-over-year from '18 through 2019. So in this environment, I don't think that reigniting the discounts and the concessions are the right strategy.

I think people are -- if they have a need, they are continuing to explore that need and come into senior living. If it's not such an immediate need, we might see them waiting a little bit longer.

But a discount or additional financial incentives for them probably are not going to encourage them to move in, in the current environment if they're not comfortable doing so. .

[Operator Instructions].

Okay. I think we have no additional questions on the line. So in closing, I'd like to thank our shareholders, vendors and residents for their support. I'd also like to thank our 6,600 dedicated employees for all that they do each day to enhance and enrich the lives of our residents. .

This concludes today's conference. Thanks, everyone, and have a great day..