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Capital Senior Living (NYSE:CSU)

Q4 2012 Earnings Call

March 07, 2013 11:00 am ET

Executives

Lawrence A. Cohen - Vice Chairman and Chief Executive Officer

Ralph A. Beattie - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Dana Vartabedian - Deutsche Bank AG, Research Division

John W. Ransom - Raymond James & Associates, Inc., Research Division

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Joseph P. Munda - Sidoti & Company, LLC

Dana Hambly - Stephens Inc., Research Division

Will Hamilton

Operator

Good day, everyone, and welcome to the Capital Senior Living Fourth Quarter and Full Year 2012 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 limited to the company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at 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, Chief Executive Officer. Please go ahead, sir.

Lawrence A. Cohen

Thank you very much. Good morning, and welcome to Capital Senior Living's fourth quarter and full year 2012 earnings release conference call. I am very pleased to report continued occupancy growth and strong operating and financial results from the successful implementation of our strategic plan that is focused on operations, marketing and accretive growth to enhance shareholder value. CFFO of $1.37 per share was 46% higher and our EBITDAR margin improved 40 basis points from the prior year. We differentiate Capital Senior Living as the value leader in providing quality seniors housing and care at reasonable prices. We are well positioned to make further gains as a substantially private pay business in an industry that benefits from need-driven demand, limited new supply and an improving economy and housing market. These strong fundamentals are further enhanced by our disciplined and strategic acquisition program that increases our ownership of high-quality senior living communities in geographically concentrated regions, generating meaningful increases in CFFO, earnings and real estate value.

In the fourth quarter, we completed the acquisition of 10 senior living communities for a purchase price of approximately $105.7 million. These communities are located in Texas, Indiana, Ohio and Missouri, enhancing the company's geographic concentration in each of these states. These transactions are expected to add CFFO of $0.20 per share, increase earnings by $0.12 per share and increase annual revenue by $29.6 million. Occupancy at these communities average above 95%, with average monthly rents of $3,200. The 10 communities were financed with approximately $74.7 million of 10-year fixed-rate non-recourse debt at a blended interest rate of approximately 4.44%. We are in the process of completing the acquisition of another senior living community in Nebraska for a purchase price of approximately $6.7 million. This transaction is expected to add CFFO and increase revenue by $2.6 million. This committee will be financed with another community we acquired in October 2012 to repay its bridge loan with combined loan proceeds of $16.4 million of 10-year fixed-rate non-recourse debt with an interest rate of 4.66%. The effective cash on cash return on equity on the Nebraska acquisition is more than 18%.

We are conducting due diligence on additional transactions consisting of high-quality senior living communities in regions where we have extensive existing operations. Subject to completion of due diligence and customary closing conditions, we expect to acquire additional communities in the second quarter of 2013.

I would now like to review our operating activities. I am pleased to report that in addition to the success we are experiencing with our acquisition program, we are also achieving strong operating results, with gains in occupancy and net operating income. We are benefiting from our community-based empowerment philosophy, our operating strategy to provide value to our senior living residents and our geographically concentrated operating platform, with most of our regions enjoying better economies and lower levels of unemployment than national averages. We believe we are different from other companies in our peer group, with our sole focus on a substantially all private-pay senior living business, capitalizing on our competitive strengths in operating communities in geographically-concentrated regions and profiting form our targeted advantages as a larger company with economies of scale and proprietary systems operating in a highly fragmented industry that continue to generate excellent results.

At communities under management, excluding one committee that had a recent conversion, same-community revenue in the fourth quarter of 2012 increased 4.2% versus the fourth quarter of 2011. Same-community expenses increased 2.8% and net income increased 6.2% from the fourth quarter of the prior year. For the second consecutive quarter, our same-community occupancies increased 180 basis points from the comparable quarter of the prior year and 80 basis points sequentially. Same-community occupancy over the past year reflected occupancy gains in independent living, exceeding those in higher levels of care, resulting in average monthly rents 2.1% higher than the fourth quarter of 2011.

Sequentially, same-community independent living occupancies improved 120 basis points and assisted living occupancy gained 30 basis points from the third quarter of 2012.

Our fourth quarter operating data results are compared favorably to NIC MAP top 100 MSA data, which report industry same-community fourth quarter 2012 occupancy growth of 20 basis points sequentially and 80 basis points annually. NIC MAP reported trailing 12-month construction starts as the percentage of supply decreased to 1.4% and unit absorption to supply increased to 1.9%. These metrics are very favorable, with absorption exceeding inventory growth for the past 11 consecutive quarters.

I'm also pleased to point out that since the first quarter of 2010, Capital Senior Living same-community occupancies have increased 550 basis points and average monthly rents have improved 9%. This compares extremely favorably to NIC MAP, which reported that seniors housing average occupancy has recovered 210 basis points from its cyclical low in the first quarter of 2010.

It is important to note that Capital Senior Living's fourth quarter same-community occupancy had only recovered to 86.6%. With strong industry fundamentals, an improving economy and housing market and virtually no new supply, we believe that our occupancies can continue to grow another 550 basis points. In other words, we have only recovered halfway to what I believe should be optimal occupancy, leaving a lot of runway for additional organically driven CFFO growth, as well as increases in our owned real estate values.

The number of our consolidated communities increased from 81 in the fourth quarter of 2011 to 98 in the fourth quarter of 2012. Financial occupancy of the consolidated portfolio averaged 87.2% in the fourth quarter 2012, 110 basis points higher than the third quarter of 2012 and 160 basis points higher than the fourth quarter of 2011. Average monthly rents in the fourth quarter of 2012 increased 3.2% over the fourth quarter 2011 to $3,002 per occupied unit.

I am optimistic that industry fundamentals will continue to improve throughout 2013. We were fortunate that our communities were not negatively impacted from the recent flu epidemic, although our protocol to quarantine residents at certain communities limited prospects from touring these committees while the flu was evident.

The first quarter is typically a flat quarter for us. And with the flu season, occupancies fell in January, recovered to a gain in February and our positive momentum has returned in March. In fact, last week was by far the best week with the highest number of move-ins yet this year.

Our positive results demonstrate that our team, with its disciplined focus and attention to detail, is successfully executing our operating strategy and confirms that Capital Senior Living is different from other senior living providers. Successful senior living operations require well-located communities with the right on-site team, supported by strong regional and corporate resources. We are fortunate to continue to recruit and retain many of the best operations and sales and marketing professionals in the industry. Once again, I want to thank our dedicated on-site regional and corporate team, as well as the members of our Board of Directors for their commitment, passion, focus and accomplishments in serving the residents so well and contributing to our positive results. I would now like to comment on our growth initiatives.

We are excited about our growth as seniors housing is a need-driven product with very limited new supply. Demographic demand growth is driven by an aging population. These favorable demographic and supply-demand trends should allow for continued occupancy and rate growth. We have improved our operations by implementing software programs for care plans and level of care charges in our assisted living residences. In addition, we are implementing a new branding strategy across all marketing tactics, both online and offline, as well as enhancing our e-marketing and social media initiatives.

We're also benefiting from our investment in cash flow enhancing renovations, refurbishments and conversions of units to higher levels of care. These initiatives, combined with the operating leverage in our prudently financed business, are expected to increase our revenues, margins and cash flow.

Each 3% increase in average monthly rent generates approximately $10 million of incremental revenue. Every 1% improvement in occupancy is expected to generate $3.3 million of revenue, $2.3 million of EBITDAR and $0.05 per share of CFFO. We have had much success in converting units to higher levels of care to meet the needs of our residents so they can age in place, as well as generate excellent financial results to our company. We are in the process of converting an additional 143 units in 2013 to assisted living. When stabilized, these new conversions are expected to add approximately $2.7 million of incremental revenue and $1.6 million of EBITDAR. Additional conversion opportunities are currently under review.

As we execute our strategic business plan, we are enhancing our geographic concentration with expanded care to residents, maximizing our competitive strengths and lowering our cost of capital. Our strategy is focused on generating attractive returns, enhancing free cash flow and maximizing shareholder value.

In 2012, we completed $181.3 million of acquisitions, which are expected to generate in the first year of operations, CFFO of $0.34 per share and an 18% initial cash on cash return on invested equity.

Comparing our 2013 budgets that were recently completed to the pro forma projections we completed acquisition validates our conservative underwriting when acquiring communities.

I am pleased to report that our 2013 budgeted occupancies, average monthly rents, revenues, operating expenses and EBITDAR are all better than those projected at the time of acquisition for 2013. Our discipline in making acquisitions is evidenced also by the fact that since August of 2011, we have acquired $265 million of high-quality communities after evaluating an excess of $1.3 billion in acquisition opportunities.

Our primarily offmarket-focused acquisition strategy continues to yield an extremely robust pipeline. Currently, we are analyzing dozens of high-quality senior living communities located in geographically concentrated regions where we have existing operations. Our disciplined and accretive acquisition strategy is expected to result in an additional $150 million of acquisitions throughout 2013, which we can fund with our cash balances, the cash flow generated by our operations and the proceeds of possible sales of certain non-core properties.

We are in the process of completing the acquisition of a senior living in Nebraska and are conducting due diligence on additional transactions, consisting of high-quality senior living communities in regions with extensive existing operations.

Subject to completion of due diligence and other customary closing conditions, we expect to acquire additional communities during the second quarter of 2013. When completed, these acquisitions are expected to be accretive to CFFO, as well as earnings and lead to further improvement in our EBITDAR margin and operating metrics.

The improvement that we see in our EBITDAR margin reflects the benefit we derive from executing on our strategy of acquiring communities in geographically concentrated regions. We are able to leverage our geographically concentrated operating platform and benefit from economies of scale, our group purchasing program, our proprietary proactive expense management systems, our risk management insurance programs, as well as our focused marketing plans to integrate acquisitions in a highly accretive manner. Our success in acquiring high-quality senior living communities on attractive terms validates Capital Senior Living's competitive advantage as an owner operator with a geographic focus able to successfully assimilate acquisitions with minimal incremental costs. And our liquidity and balance sheet are solid, allowing us to have the capacity to comfortably fund our working capital, maintain our communities, retain prudent reserves and have the equity to fund additional acquisitions.

We are very well positioned to add to our success and I am optimistic about our future as I'm confident in our team's ability to continue our successful execution of a well-conceived strategic plan. We expect continued significant growth in CFFO, earnings and owned real estate that will lead to a meaningful increase in shareholder value.

Our fundamentals are strong and I'm excited about the company's prospects as we benefit from a substantially all private-pay strategy in an industry that's benefiting from need-driven demand, limited new supply and in an improving economy and housing market. I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the company's financial results for the fourth quarter and full year of 2012. Ralph?

Ralph A. Beattie

Thanks, Larry. Good morning. I hope everyone has had a chance to see the press release, which was distributed last night. In the next few minutes, I'm going to review and expand upon the highlights of our financial results for the fourth quarter and full year 2012.

A copy of our press release is available on our corporate website at www.capitalsenior.com. And if you would like to receive future press releases by e-mail, there is a place on our website for you to provide your e-mail address.

Beginning with the fourth quarter highlights, the company reported revenue of $83.3 million for the fourth quarter of 2012, compared to revenue of $71.2 million for the fourth quarter of 2011, an increase of $12.1 million or 17%.

We consolidated 98 communities in our income statement this quarter, versus 81 in the fourth quarter of the prior year due to the purchase of 17 wholly owned communities in 2012.

Financial occupancy of the consolidated portfolio averaged 87.2% in the fourth quarter of 2012, 110 basis points higher than the third quarter of 2012 and 160 basis points higher than the fourth quarter of 2011.

Average monthly rent for the consolidated communities was $3,002 per occupied unit in the fourth quarter of 2012, an increase of $94 per occupied unit, 3.2% higher than the fourth quarter of 2011.

On a same-community basis, average rents were 2.1% higher than the fourth quarter of 2011, reflecting the fact that independent living occupancies increased at a faster rate than occupancies at higher levels of care.

On a same-community basis, revenues increased 4.2%, same-community expenses increased 2.8% and net income increased 6.2% versus the fourth quarter of the prior year.

As a percentage of resident and health care revenue, operating expenses were 59.6% in the fourth quarter of 2012.

Excluding transaction costs, general and administrative expenses as a percentage of revenues under management were 4.9% in the fourth quarter of 2012. Transaction costs were approximately $0.7 million in the quarter.

In addition, general and administrative expenses in the fourth quarter of 2012 reflect approximately $0.6 million of accrued bonus expense due to the achievement of certain performance-based incentive goals.

Adjusted EBITDAR for the fourth quarter of 2012 was approximately $29.2 million. If the additional performance bonuses had been accrued evenly throughout the year, adjusted EBITDAR margin would have been 35.6% for the period.

Adjusted net income for the fourth quarter of 2012 was $1.9 million or $0.07 per share, excluding the non-recurring and noneconomic items reconciled in our press release.

Adjusted CFFO was $13.5 million or $0.49 per share in the fourth quarter of 2012 and adjusted CFFO exceeded the fourth quarter of 2011 by $4.9 million or $0.17 per share.

In the most recent quarter, the company initiated a tax consulting engagement to assist in review and the classification of cost incurred for the purchase and improvement to its owned and leased portfolio. The purpose of this study was to determine which costs may qualify for shorter depreciable lives for federal and state income tax purposes.

The preliminary findings of this cost segregation study indicated that the company could increase its depreciation expense for tax purposes by approximately $6.1 million in the fourth quarter of 2012, saving approximately $2.4 million of taxes and increasing CFFO by approximately $0.09 per share.

The company expects to realize additional tax benefit from this cost segregation study of approximately $0.05 per share in each quarter of 2013. Without this tax benefit, CFFO in the fourth quarter of 2012 would have been approximately $11 million or $0.40 per share.

Adjusted CFFO in the fourth quarter of 2011 benefited from approximately $4 million of bonus depreciation, pursuant to the tax relief, unemployment insurance and job creation act that was passed late last year. Tax savings of $1.8 million resulting from this bonus depreciation, added approximately $0.07 per share to CFFO in the fourth quarter of 2011.

Excluding tax benefits in both quarters, CFFO increased from $0.25 per share in the fourth quarter of 2011 to $0.40 per share in the fourth quarter of 2012, an increase of approximately 60%.

Moving to the full year results, the company reported revenue of $310.5 million, an increase of $47 million or 17.8% from the prior year.

Adjusted EBITDAR was $110 million for 2012, an increase of $17.7 million or 19.1%. EBITDAR margin was 35.4% for the year, an improvement of 40 basis points.

Adjusted net income was $7.7 million or $0.28 per share in 2012 versus $6.9 million or $0.25 per share in 2011. CFFO was $37.3 million or $1.37 per share in 2012, an increase of $11.7 million or $0.42 per share from 2011.

Capital expenditures for the year were approximately $12.3 million, representing $7.5 million of investment spending and $4.8 million of recurring CapEx. The company spent approximately $500 per unit of recurring CapEx in 2012. The company ended the year with $28.9 million of cash and cash equivalents including restricted cash. We invested $51.8 million of cash as equity to acquire $181.3 million of properties in 2012. And we projected annual cash on cash return on this investment of approximately 18%.

As of December 31, 2012, the company financed its 48 owned communities, with mortgages totaling $360.9 million, with a blended average interest rate of 5.25%. Except for one bridge loan that will be replaced with permanent financing in the first quarter of 2013, none of the company's mortgages mature before July of 2015. We'd now like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Darren Lehrich with Deutsche Bank.

Dana Vartabedian - Deutsche Bank AG, Research Division

This is Dana Vartabedian, in for Darren. I guess first, just wanted to get a sense for the number of units that were expanded last year.

Lawrence A. Cohen

Yes. We actually did not expand units last year. However, we did have conversion of units to higher levels of care. Last year, we actually converted 165 units to higher levels of care. Those units would actually result when stabilizing about $6 million of revenue, and that's $3.6 million of EBITDAR. A lot of that has now come to fruition. And as I mentioned, we now have, for this year, projected additional conversion of units in 2 or 3 cases actually second or third generation of the versions at properties that had tremendous success with the conversions. So we're expecting to complete those this year and have similar success on filling those converted units over the next year or so.

Dana Vartabedian - Deutsche Bank AG, Research Division

Okay, great. And then I guess given a lot of the storm activity and weather events of last year, just want to get a sense for how you're preparing, I guess, as an organization for that to ensure no disruptions in your communities going forward?

Lawrence A. Cohen

Well, fortunately, we avoided all the storm damage last year. We had 2 properties that lost power during hurricane Sandy, one in Trumbull, Connecticut, one in Summit, New Jersey. Summit lost power for 8 days. I'm glad you brought it up because our Executive Director and his team did a fabulous job serving our residents. We had a generator. We got a second generator. I got a report back when the power back on, how we had the best food being delivered to our residents in their apartments and we really had the entire team working around the clock, checking maps -- the temperature at 3:00 in the morning for our residents. So fortunately, we had no insurance claims. We had no property damage. We had some disruption and we have very good systems. Ralph can talk a little bit more about this, with our risk management team and our insurance consultants throughout the United States that actually have its consultants to go on site, and work with our staff on basic proactive risk management programs, as well as workers' compensation plans. So I think that the protocol that we have used in the past has proven to be very successful. We're very fortunate that the geographies in which we operate avoided any of the storm damage last year. But we feel very comfortable that we have a well positioned if there are any additional disruptions because of nature or other types of disasters.

Operator

And we'll take our next question from John Ransom with Raymond James.

John W. Ransom - Raymond James & Associates, Inc., Research Division

A bunch of SEC grads down here in Florida, so we just need -- we just want to check the math for 2013. Your $0.40, Ralph, how much of that had some, what I'd call it, maybe some one-time or working capital benefits and what would be -- is there a different baseline number you would use for 4Q because of that or are we overthinking that?

Ralph A. Beattie

I think that the $0.40 is certainly a high watermark for us. There was really nothing unusual that occurred in the quarter. There is one phenomenon that we're seeing that does add some CCFO to the mix and I hope this isn't too complicated, but basically, when we...

Ralph A. Beattie

Use small words.

John W. Ransom - Raymond James & Associates, Inc., Research Division

It's just a complicated accounting issue, but when we collect community fees, when our new residents move in, we amortize those community fees over a 12-month period. So when we're at a steady state of having residents move in, we normally collect cash community fees and have an income benefit from the community fees that's roughly equal. Soon after acquisitions, we don't have any community fees on hand. So when we have a new resident move in, we only take 1/12 of that community fee in the first month. So it's actually adding CFFO, but not income, so there is a bit of a disparity when we're as acquisitive as we are now. So we did see some of that benefit in the fourth quarter. I think the $0.40 is probably a little higher than I might project going forward, but nothing really unusual happened. It's just the nature of our business. But because of the number of acquisition we completed, we did get some benefit through deferred income to the tune of $0.03 or $0.04 that may not recur if we don't do the same velocity of acquisitions in the future quarters.

John W. Ransom - Raymond James & Associates, Inc., Research Division

All right. So let's just say, for argument's sake, $0.35 is the base and then I think we calculated something like $0.25 of CFFO from acquisitions that you didn't own for the full year last year, so in other words, they contributed $0.12 last year and more like $0.37 this year and then whatever our assumptions are for organic plus acquisition. Is that a decent way to think about '13?

Ralph A. Beattie

That's a decent way to think about it. I would also add that in each quarter of 2013, we expect to realize about $0.05 per share as residual benefit from the cost segregation study. So you may exclude that, but it will be reported as part of our CFFO.

John W. Ransom - Raymond James & Associates, Inc., Research Division

No. The number you use, though, you didn't back out the $0.03 or $0.04 from bonus accruals as well.

Ralph A. Beattie

No, we did not.

John W. Ransom - Raymond James & Associates, Inc., Research Division

So it's that kind of a push then, right?

Ralph A. Beattie

It's close to a push.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. I know you don't want people jacking your numbers up to '13 where you can't get to them, but anyway, we're just trying to think about the right framework. And secondly, could you just maybe frame for us if you think about your pipeline, what do the buckets looks like in terms of stuff that you're working on, on an exclusive basis, stuff that -- where you bought properties from people before, things where you might be in an auction and then maybe there's a category of other, maybe banks talking to banks about the stress fields or REITs, joining up with REITs, can we just think -- and how does that change and how are the prices moving on those different types of assets?

Ralph A. Beattie

John, as far as the pipeline we're looking at today, we have a couple of transactions, properties that are actually being shown to us from sellers that we transacted previously. There is one portfolio that's actually -- is marketed by a specialized broker in seniors housing. The others are offmarket transactions. So I'd say that probably around 80% of the current portfolios or transactions that we're working on are offmarket principal to principal, where it's either us or a very small select group of potential buyers. We have -- we're in due diligence on transaction right now with a seller that we spoke to over a year ago. The seller decides not to sell, approached us earlier this year, showed it to us and one other potential buyer that they had spoken to a year ago and within 2 days, we had a signed letter of intent and now we're in due diligence . So our strategy continues to focus primarily on offmarket transactions. As you can see from the report on the Nebraska transaction, the economics, the cap rates, the cash and cash returns to our company are very similar to what we experienced all throughout 2012 and 2011. And we continue to focus on transactions that are typically 1 or 2 as maybe as many -- last year we had a couple of portfolios that was as many as 6. But the bulk of the transactions are going to be 1 or 2 properties, not the stressed, these are good quality assets in good markets within our geographies. It's a mixture of assisted living, independent living and memory care. Most of the buildings have -- actually, almost everyone of the buildings we're looking has multiple levels of care, so residents can age in place. And I'd say the quality assets are typically B+ or As. So it's improving the asset quality and we feel that we can, continue to be extremely disciplined in our approach, in our underwriting, in our due diligence to be able to generate meaningful increases in our owned real estate values, as well as cash flow from operations, and continue to just improve the quality of our portfolio.

John W. Ransom - Raymond James & Associates, Inc., Research Division

And I may have missed this, but can you remind us, the deals you closed last year, how many of those were offmarket deals?

Lawrence A. Cohen

I'd say, last year, I think all but 2 were offmarket transactions last year. We bought one property, which was marketed. It actually came to us from a REIT that asked us to be their tenants. When we look at the economics, we decided not to lease the building, suggested they find another operator. They felt it was too small for them, so they asked if we'd like to buy it. We did. We paid $19.2 million. It's the property that I spoke about in the second quarter where we compared our performance first, 90 days of ownership versus 90 days before. We actually improved the operating margin in the first 90 days by 900 basis points by implementing our expense management system. So it was extremely successful. That was one of the transactions. But as I think through, we had a couple of transactions, which were repeat with the same seller. We bought one property in March from a gentleman. We bought 6 more in October. We're expecting more this year. We're already talking about that later in the year, when we've planned to buy these. His buildings are all full, very high-quality in 2 of our states, Indiana and Ohio. So as I go back and think through, it becomes a blur after a while, but if I go back and think through it, I say with exception of the one transaction I spoke about and maybe one other, they're really almost all offmarket transaction.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And just remind me, Ralph, your corporate -- I'm sorry, your property tax. I know you don't put that at the facility level, and break that out between owned versus leased.

Ralph A. Beattie

The total amount of property tax?

John W. Ransom - Raymond James & Associates, Inc., Research Division

Yes. And just the split between your owned and leased property tax.

Ralph A. Beattie

John, let me give you a call back with that. If anyone else is interested, I will be glad to share that information to them as well, but I don't actually have the property taxes broken out in the statements I have in this room.

John W. Ransom - Raymond James & Associates, Inc., Research Division

You know the total property tax?

Ralph A. Beattie

Not of the top of my head, but I can get you that number in a matter of minutes.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And just to be clear, when you guys are looking at facilities and applying cap rates, you subtract the property tax, do you not?

Lawrence A. Cohen

Yes. When we look at cap rate, it's fully all operating expenses, including property tax. When we underwrite, we do imply -- impute a management fee of 5%, as well as CapEx for every property of typically about $500 per unit. That results in the cash flow that we used to the cap rate. So we do the same conventional underwriting as any other institutional buyer would of the real estate or senior housing assets.

Operator

We'll take our next question from Daniel Bernstein with Stifel, Nicolaus.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

It's hard to figure out anything wrong with the quarter. So I'll just ask you, where do you think you can improve upon in your operations if there's some places not from obvious from the numbers that you report on areas that you can improve upon and that you're working on?

Lawrence A. Cohen

There are 2 areas that I'm excited about, Dan. I kind of alluded into them in my remarks. We've spoken, and if look at our corporate presentations, for the last 1.5 years. We've been talking about the care plan technology that we implemented in 2011, 2012 for assisted living. These are assessments that are conducted when a resident moves into a community. They're reassessed every 90 days. And what's nice about the technology, not only does it allow us with a handheld device, have realtime documentation of the levels of care and being able to both show the family and the residents the services they are being provided and the time element to it. We can actually bill for it. We also can better manage our staffing because it allows us through the technology to manage the hours that our staff are working to make sure that we are operating as efficiently as possible. There was some sticker shock when we started to see the results of the revenue that could be captured through this technology that we felt we could immediately pass on to existing residents. Now that this has been in effect for 18 months and we have been working with residents and showing them the care levels. We inform new residents and prospects about expectations. We have gotten more granular where we used to have 3 levels of care. We now are assessing 6 levels of care. I'm optimistic that we will start to see some meaningful increases in revenue generation from this. We haven't given guidance because we want to test it this year. It is in the corporate budgets for our individual properties. We did see some very promising numbers in January, but it maybe early yet to really see trends. I expect that by the time we report first quarter results in May, we'll have good 4 months of experience that we can speak more to. But I think it's both our ability to better serve our residents, which is most important, but also capture more revenue to the company. And the second area is the whole Internet e-marketing and brand. We are about to roll out a new campaign with new logo, new colors, new brands and a new website, as well as at corporately and the property level. We realized that there are companies like A Place for Mom and other vendors in the industry that are very affective in referring seniors and their families to our communities and we pay a pretty significant commission for that. We brought in some excellent personnel with extensive experience in hospitality and the airline industry that we think really will add a lot of value as we think about brands, as well as the ability to enhance the marketing of our communities using the Internet. We expect to be live with most of these initiatives in April. It's very exciting as we look at the templates that have already been developed. And so we think that those are changes that we will make that will have some significance to our occupancies and profitability. But the basic business in blocking and tackling, our proprietary systems, our expense management systems have been proven and tested and we'll continue with those. So I think that the core methodologies of how we operate the business will continue. We continue to be very disciplined, where management meets every month and reviews every property, with regionals, we go through every line, we go through expense variances, trends, have really good discussions about markets and industry. So that won't change, but I am excited about some of the initiatives where technology can now enhance our ability to better manage our communities, better serve our residents and enhance the profitability to our shareholders.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Should I think about any additional G&A cost in the first quarter that will come back to you as the studies programs are implemented. Just trying to think about whether how we can tweak our model for that at all.

Ralph A. Beattie

Dan, I would say that there's no real additional G&A expense you want to take into account other than the fact that the G&A base is growing somewhat a the number of communities increases and we add regional operations and marketing support, property accounting, payroll. So there's some growth aspect of that, but probably less than 1% of additional revenues in terms of the G&A increment.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then the other item that I was -- I've been thinking about a little bit more is the implementation of the Affordable Care Act in 2014 and how that is going to start affecting companies in terms of their health insurance costs, and have you guys given some thought to that and whether there may be some incremental operating cost or G&A cost that analysts and investors should be thinking about for 2014?

Lawrence A. Cohen

We're feeling extensive -- it's very relevant. You know what, the basis for 2014 is based on 2013 performance. So we have spent a lot of time looking at this. We've done some very interesting analytical studies that Ralph have talked about, which I think is very encouraging to show how minimal we expect the impact to be. Ralph why don't talk about the staffing.

Ralph A. Beattie

Dan, we took a look at our December payroll to see how many employees we have and how many might qualify under the affordable care act for future benefits. We had about 5,000 employees on the payroll in December. Of those, about 2,800 were full-time employees, meaning that they are scheduled to work over 35 hours a week. About 2,200 were part-time employees. And of the 2,200, about 80% of them actually worked less than 30 hours. We've always classified full-time in this company as scheduled to work more than 35 hours a week. The affordable care act actually draws that distinction at 30 hours per week. So about 40% of our total employee base would not qualify, as my understanding, under the affordable care act due to not working enough hours to meet that qualification.

Lawrence A. Cohen

Yes, most of our part-time employees are students and they are working fewer than 30 hours. The other component that's very interesting is we have a very generous plan that's been available to our employees for years. We do self-insure. What we are implementing as we go into 2014 will be to have 3 or 4 different plans that will be compliant, but we'll give some of our employees the ability, who don't participate today to participate at perhaps a lower level. So when we go through the analysis, and obviously it's not yet complete, we do not expect to see a material change in our expenses from the affordable care act. We do think it could create a catalyst later this year, however, for acquisitions. Because we think in the fragmented industry that we serve, many of the smaller operators that might fall within the confines of having more than 50 full-time employees that they would be marked -- negatively impacted by the Affordable Care Act and that might precipitate some thoughts to sell properties as opposed to bear those burdens.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

That's interesting. We're actually backloading some of the acquisitions and maybe in anticipation of that. I guess the other question I had, I just want to be clear on the IL and AL occupancy. When you say, I heard, 125 bps of sequential IL occupancy, you're talking about IL units only, and not just counting some of the AL units or additions that might be an IL-AL combination facility. You're just thinking strictly about the IL unit themselves, right?

Ralph A. Beattie

Let me give you -- I'll be very specific. In the fourth quarter, we had 5,374 available independent living units. Their occupancies, quarter-over-quarter, were up 120 basis, which is the same-store, year-over-year, of 310 basis points. Assisted living, 3,343 same-store available units. Their occupancies were up 30 basis points sequentially, 40 basis points year-over-year. The reason that our blended numbers don't reflect the same, 80 basis points and 180 year-over-year on same-store is we do have 2 rental CCRCs where we actually had a loss sequentially of 60 basis points of occupancy and 300 basis points year-over-year loss of occupancy. So when we report same-community, we don't exclude the CCRCs. It's all level of cares, but the actual IL continues to outperform the AL. I will tell you that since we've been tracking this information, fourth quarter IL growth, both sequentially and annually, is the highest it's been on record and the AL continues to do very well. But the difference in trying to do the math and that's a good question, is the fact we do have a loss in occupancy that we show blended in the full, because again, for all properties, 9,334 units of same-store units available. Our occupancies grew up 80 basis points sequentially, 180 basis points annually.

Operator

We'll take our next question from Joe Munda with Sidoti.

Joseph P. Munda - Sidoti & Company, LLC

Real quick. Larry, 2 questions. Of the 143 conversions that you guys are planning in 2013, can you give us a little bit more of a time frame when you think those will be completed? Is that more of a year-long target or -- just a little bit more color would be helpful.

Lawrence A. Cohen

We actually -- only one of these conversions will actually be a construction conversion. We spoke in the past and in fact, we take out our same-store one community in Boca Raton, Florida, the Veranda Club, which is 189 unit, all independent living building that we operated which in April of 2011, we opened a 45-unit conversion to assisted living and those units filled to 90% in less than a year. It's been so successful, we are now looking at a second conversion at that property for another 45 units. That is a leased property, so we're working with the landlord on approvals. That's probably -- if it will be something, that will be later this year. The economic impact will probably reflect itself probably in 2014. The other units are all properties that we have already have conversions, and that is licensure or higher levels of care. There's very minimal cost to us to do those. Those are all -- many of those have already been improved. So I think those impacts we'll see this year as opposed to the Veranda Club, which is 45 of those units that I said probably will not be completed and open until 2014.

Joseph P. Munda - Sidoti & Company, LLC

Also with the addition of these properties through acquisition, Ralph, any comment on CapEx? I know you had mentioned maintenance CapEx of $4.8 million, can you give us some sense of where that's heading going into 2013, as well as 2014 if possible?

Ralph A. Beattie

Joe, I would say that the properties we're acquiring our well-maintained properties. So there's no deferred CapEx for the acquisitions. I think the best way to model it would be to take a look at our owned and leased units and model about $500 per unit per year. So it will grow as we're adding to the portfolio, but I think the $500 per unit number will remain pretty stable.

Joseph P. Munda - Sidoti & Company, LLC

Okay, and then 2 quick ones for Larry. As far as -- you had mentioned that seller from a year ago came back to you guys, and said, "listen, I'm interested in selling again," I'm just curious, how many acquisitions that either you have passed on or the seller has passed on are coming back to you guys to maybe take another look at a deal. I'm just curious, are you seeing increasing numbers of people that or sellers that have, for some reason, haven't come to terms with you guys coming back to the table and negotiating?

Lawrence A. Cohen

We have seen that. It's more reflective of sellers that we have transacted with that have had great success, and this is very interesting in this business, it's in a very emotional transaction. We're dealing with local operators that these are their babies. The staff and the residents, they know personally. They're at the committee monthly. They know the family members. I mean, we have some beautiful correspondence that some of the sellers wrote to their residents and family members of why they sold to Capital Senior Living that -- I mean, we couldn't hire a PR firm quite frankly. For example, we bought a portfolio of properties from a gentleman in October of 2011. He still speaks, at least quarterly, to our regionals about those communities. He still speaks to the on-site staff. He has more buildings that we actually have one that we are interested in acquiring. The other 3, we didn't buy because they just didn't fit as to what the kind of profile and our underwriting standards and that won't change. There's another gentleman, as I said, we've bought 1 building, which was very successful, bought 6 more. He keeps updating me about his progress on some other buildings that we expect to acquire, so it's much more the success that we have had in completing transactions, but more importantly, it's the quality of the care and the services that our on-site staff are able to continue with their employees as being part of the Capital Senior Living family that really has been the catalyst, if you will, for their desire to do more business with us.

Joseph P. Munda - Sidoti & Company, LLC

And then, my final question. Larry, I'm just wondering how much more runway do you guys have on rent increases based on the fact that I'm guessing the number of residents who live on fixed income and obviously, there is a little bit of a disparity there. So I'm just wondering, how much more runway do you guys have in implementing rent increases?

Lawrence A. Cohen

Joe, a great question. And an industry question is affordability. What's really interesting is we constantly talk about how we differentiate Capital Senior Living from our peers. We reported that our same-store -- our average monthly rents, consolidated rents in this quarter are $3,000 a month. That is significantly low -- below our peers, which could range from $4,500 to $6,000 or $7,000. Now while we do have a large admits of independent living to assisted, our average independent living rents are $2,400 a month, assisted living is $3,600. I think part of the reason that we have seen such recovery in occupancy in independent living is because it's a price point that's so compelling and our philosophy not to be in the Ancillary business, but to better serve our residents to have the best providers in those market leased space from us in the buildings to be available to provide home health, therapy, rehab supportive services to a resident, and they can do a fine better jobs that a captive senior housing company could do. So we feel that it's the right thing to do for residents. It eliminates the reimbursement issues, keeps us in the private-pay business and better serves our residents. What's interesting is if you go back from Q1 2010 to Q4 2012 on a same-store basis, our reported -- our same-store revenues increased 9%. That's more than 3% a year coming out of the worst recession our seniors probably ever experienced. Some probably did -- were born during the depression, but this is really in their adult lives. So hopefully, what I'm encouraged about is 2 phenomenons. As we gain occupancy and they are reported, we feel, no one at Capital Senior is taking a victory lap. We've had great success, but we're only half-way through our recovery. We have a huge runway left to recapture another 500-plus basis points of occupancy to get back to higher than 90% on our portfolio. I think once we get to those levels and we're doing it selectively at properties that are in the high over 90%, mid-90% level, start pushing rents more aggressively, I think that supply-demand dynamics will give us some pricing power. And I think Capital Senior will have the ability to continue to rise -- to have greater price increases because the base we're coming off is lower. And I'm also very encouraged that if you look at Kaye Scholer, last month, the housing prices nationwide were up 6.8%. And every month, I share with our marketing and operations team, the Kaye Scholer numbers, I keep questioning as the home values are increasing at very high rates, should that allow us to start thinking about raising rent. So I think that there's still a lot runway. The industry, historically, was a 4% to 5% per year increase in rents. We had consistently, in the last 2 years, been averaging 3% growth. We expect to do that again this year, but I'm optimistic that with an improving economy, at some point, interest rates will start coming back, that's another benefit of our residents who live on fixed income and clearly with better conviction of the stability of this industry, I do think we'll be able to see some price increases. And again, I believe that Capital Senior Living, on a relative basis, will outperform our peers because of the fact that it's much easier to raise a $2,400 a month of rent at 3% than a $7,500 a month of rent at 3%.

Joseph P. Munda - Sidoti & Company, LLC

Well Larry, I guess, your point there -- I mean, it wouldn't make sense if you raise the rent increases to match home sales, but you said, what, 6% up, so it would be, I guess, beneficial to you guys to keep below that rate, correct?

Lawrence A. Cohen

We're below it. But I think the fact that home prices are growing more rapidly gives the consumer more confidence and the ability to afford some more rent increases if they're moving into a community.

Joseph P. Munda - Sidoti & Company, LLC

Yes, I mean, but strategically for you guys, it would always be beneficial to be below that number, correct?

Lawrence A. Cohen

And we plan to be below that.

Operator

We'll take our next one from Dana Hambly with Stephens.

Dana Hambly - Stephens Inc., Research Division

On the -- just as we think about organic growth for the year, 3% rate, 1% occupancy, a little bit of margin kind of at mid-single digits, is that the right way to think about it?

Ralph A. Beattie

Dana, we're looking at -- we believe at least 1% of occupancy. If we increased the rates by 3% and kept expense growth to 2% or less, you'd probably seeing a 7% or so NOI growth. So between 3% revenue growth and 2% expense growth, that would generate about 7% of NOI and then of course, the occupancy is very profitable for us. We generally model additional occupancy once we're at our current levels, having generally a 60% to 70% incremental margin and there's additional residents moving in. So those 2 factors, combined, would give us very solid high single-digit NOI growth in 2013.

Dana Hambly - Stephens Inc., Research Division

Okay, great. And as we think about the 2014 numbers, I just want to be clear. Should -- the $0.20 you're getting from the accelerated depreciation, we should really be taking that out of our baseline number when we think about 2014?

Ralph A. Beattie

Yes. That cost segregation study will be fully realized within 2013. So we did -- you'll learn some things that should benefit us going forward from this study and we can always do a future study based upon acquisitions that take place from this point forward, but I would say that the safe thing to do would be to take out the $0.05 per quarter in 2013 in your 2014 model.

Lawrence A. Cohen

Dana, let me ask Ralph a question. I'll show how I think about this. Ralph, on a cash basis, how much cash is the company going to be able to save through the cost segregation study that would otherwise be paid in taxes?

Ralph A. Beattie

We're looking at saving about $16 million of cash.

Lawrence A. Cohen

So if we reinvest that $16 million in acquisitions and we're able to generate a 15% or 18% return, the incremental cash flow, Dana, on that savings could be over $2.8 million a year of additional cash flow. So while the CFFO benefit of the cost segregation won't carry forward, it does give us a source of capital for equity in investing in more acquisitions that should have a sustainable returns over the long term.

Dana Hambly - Stephens Inc., Research Division

Okay, that makes sense. That's helpful. And Larry can you go again through the occupancy from January to February to where we are now?

Lawrence A. Cohen

Well, I'm not going to be very specific, but I will tell you that January, we did lose occupancy. We had a gain in February, which was good to see. I'm pleased to report that we had the best week of the year, last week, which was the end of February, with over 100 move-ins on a same-store basis. The momentum and the positive momentum that we had in the fourth quarter seems to be back in March, so we are excited about as we get into some mild weather into the spring. We've got some momentum going forward. So in a weak model, internally, Dana, we typically look at the first quarter as being a flat quarter because we know there's some seasonality with weather and it could be through. Fortunately we had a very mild winter in our regions. Texas has been particularly mild. We've had -- I will tell you that our residents and staff at Wichita would disagree with that because you had some bad snow the last few weeks in Kansas, but most of our properties, actually, I was very encouraged in January, expenses were down quite a bit. And I think a lot of it had to do with the fact that it was much milder as regard to utilities and snow removal. So I think the trends are very positive. We had a monthly meeting last week to go through the portfolio, talk about February, outlook for March, it's very positive. We saw it last week in the results, so I think we'll continue to see very good gains in occupancy and typically, the spring and summer are the best seasons for our company.

Dana Hambly - Stephens Inc., Research Division

Okay, that makes sense. And then last one for me, Larry. I think on the Nebraska acquisition, you'd expect an 18% cash on cash return?

Lawrence A. Cohen

That's correct. The actual equity investment is about 28% of purchase price and the first year cash flow cash flow is about $340,000, so if you do the math, it ends up at about 18.5% on the equity.

Dana Hambly - Stephens Inc., Research Division

Okay, I guess I had a different equity investment.

Lawrence A. Cohen

Dana, the reason for that is, I tried -- it's a good question. We bought a portfolio of properties in October. One of which, in Ohio, had a 33-unit expansion completed in August. When we closed the transaction, that expansion was full, but Fannie Mae wouldn't provide financing until it was more seasoned with a track record. Arcadia, a lender, gave us a bridge loan so the loan that we're taking out to close the Nebraska acquisition is also financing the refi of that bridge loan. When you look at the proceeds for both properties, the actual net equity is 28%. So it's the way the lender allocated the proceeds between the 2 properties that you see in the press release. But the actual effective return or the actual equity that's invested was 18.5%. I'm glad you asked that because it's not clear from the release we issued this morning.

Dana Hambly - Stephens Inc., Research Division

Okay, that makes a lot more sense. And then the financing, no real changes there?

Lawrence A. Cohen

No. Fixed-rate, 10-year, non-recourse, spread over the 10-year. The financing we're closing now is about 4.66%. But very much in line with what we saw throughout last year. Both Fannie Mae and Freddie Mac are still very active and we enjoy very good relationships with both.

Operator

We'll go next to Will Hamilton with Granite Point Capital.

Will Hamilton

Larry, you made a brief comment about the potential community sales or asset divestitures, I know you maybe sensitive about talking specifics, but I was just wondering if could just maybe elaborate maybe the timeline, is it something this year or what kind of proceeds might be?

Lawrence A. Cohen

Yes, Will. We're not going to talk about the communities because we are sensitive. We keep this because we're -- but we are in the process right now of looking at selling some non-core assets. We expect those sales, if they do -- are completed, would be completed this year. And we think that the magnitude of the proceeds could be in the tens of millions of dollars. Now again, I won't be anymore specific because they may not happen. Clearly, we don't inform our residents and staff about transactions that may take place, but we are actively pursuing this and we're optimistic that the level of interest we've seen in some of these properties suggest that we can generate some meaningful proceeds that we could use for future acquisitions that would again allow us to continue to focus on the core business we're in and the geographies and generate much higher returns to our company and our shareholders than all the properties we'll be selling.

Will Hamilton

Right. I appreciate that and one of the other reasons I just kind of asked, as a shareholder, it seems like based on the cash flow you should generate now, the potential for cash flow receipts from sales the financing that's available that -- there doesn't seem to be a need for any equity capital unless something big were to come along for what your pipeline of acquisitions is this year?

Lawrence A. Cohen

We agree 100%. Our goal -- our business plan is to use -- internally generate cash and not raise equity. We think we can fund with a disciplined growth plans through acquisitions, have the resources to fund it. If these transactions are successful, we'll probably have cash to take this into next year as well. And what's really interesting about the acquisitions and the organic growth that we're delivering is the acceleration in the generation of cash flow. So our plan is to continue to be very disciplined and like you said, there could be something that comes down the pipe that changes that. But right now our plan is to continue to use internally generated cash, including some selective asset sales as opposed to raising equity.

Will Hamilton

Great. And last question, just on the technology side, seems like you're seeing some benefits from that -- one of your competitors who recently added the same or similar module from RealPage. I was wondering if you're planning on adding any more this year or next year, or any plans on that?

Lawrence A. Cohen

Well, we've actually rolled it out now for all of the assisted living. We will now be rolling it out for the newly acquired properties. So that's underway as we speak. It's typical implemented within 90 days of acquisitions on new buildings. So right now, it's been fully implemented at all of our assisted living communities. The difference is -- RealPage has some very interesting statistics in their materials about the potential for income growth per unit by implementing the plan. We'll see if that's correct, but we do think that there will be a financial benefit to the company that we realized in 2013.

Will Hamilton

But in terms of maybe additional modules that you could add, is there anything in that regard?

Lawrence A. Cohen

I think -- well, right now, I think we've increased level of care. I think right now, for 2013, where we feel that the modules we have and the system we have will work well.

Operator

And with no further questions. I'd like to turn the program back over to Mr. Larry Cohen for additional or closing comments.

Lawrence A. Cohen

Well, again, I thank everybody for your participation today. Obviously, we're extremely pleased with the success that we had. I, again, want to really point out the excellent work that our operations and marketing team have done on-site, regionally and corporately, it makes Ralph's and my job much easier and we're very excited about the ability to continue this growth and the success in many quarters to come. So we wish you all very well. If there's any further questions you have, feel free to give Ralph or me a call. Thank you very much, and have a good day.

Operator

That does conclude today's call. Thank you for your participation.

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