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Capital Senior Living (NYSE:CSU)

Q1 2013 Earnings Call

May 07, 2013 11:00 am ET

Executives

Lawrence A. Cohen - Chief Executive Officer and Vice Chairman

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

Analysts

Dana Vartabedian - Deutsche Bank AG, Research Division

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

Dana Hambly - Stephens Inc., Research Division

Peter Sicher - Sidoti & Company, LLC

Wilson S. Jaeggli - Southwell Management, L.P.

Operator

Good day, and welcome to the Capital Senior Living First Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded. The forward-looking statements in this release [ph] are subject to certain risks and uncertainties that could cause results to differ materially, including, but not without limitation to, the company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Lawrence A. Cohen

Thank you, and good morning, and welcome to Capital Senior Living's First Quarter 2013 Earnings Release Conference Call. I am very pleased to report continued strong results for the first quarter, which is typically a challenging period. Excellent expense management has yielded significant growth in net operating income, despite the effects of normal seasonality and an active and prolonged flu season.

First quarter same-community occupancies increased 70 basis points from the comparable quarter of the prior year and CFFO grew by approximately 45%. Recent trends indicate solid growth in occupancy in the second quarter. Our robust pipeline allows us to continue our disciplined and strategic acquisition program that increases our ownership of high-quality, senior living communities in geographically concentrated regions and generate meaningful increases in CFFO, earnings and real estate value. 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 meaningful gains in shareholder value 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.

In the first quarter, we completed the acquisition of a senior living community in Nebraska for a purchase price of approximately $6.7 million. This transaction is expected to add CFFO in earnings of $0.01 per share and increase revenue by $2.6 million. This community was financed with another community we acquired in October 2012 to repay its bridge loan with a combined loan proceeds of $16.4 million, a 10-year fixed-rate nonrecourse debt with an interest rate of 4.66%. The effective cash-on-cash return on equity on the Nebraska acquisition is greater 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 these additional communities in the second and third quarters of this year.

I would now like to review our operating activities. I am pleased to report that in addition to the success that we are experiencing with our acquisition program, we are also achieving strong operating results with gains in occupancy and net operating income. We benefit from our proprietary expense management systems, 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 than national averages. We believe we are different from other companies in our peer group with our sole focus on the substantially all private-pay senior living business, capitalizing on our competitive strengths in operating communities in geographically concentrated regions and profiting from our competitive advantages as a larger company with economies of scale and proprietary systems operating in a highly fragmented industry that continues to generate excellent results.

At communities under management, excluding 1 community that had a recent conversion, same-community revenue in the first quarter of 2013 increased 3.1% versus the first quarter 2012. Same-community expenses increased 0.9% and net operating income increased 6.4% with margins improving by 100 basis points from the first quarter of the prior year. Our same-community occupancies increased 70 basis points from the comparable quarter of the prior year and were down 80 basis points sequentially. Lower sequential occupancies resulted from the effects of normal seasonality and an active and prolonged flu season.

We quarantined dozens of communities during the flu season, which limited prospects from touring our communities in January and February. This protocol delayed first quarter move-ins to the latter part of the quarter. In addition, we had more move-outs than anticipated in the first quarter, primarily due to death and higher levels of care. Fortunately, first quarter 2013 same-store deposits were 3% higher than in the comparable period in 2012. I am pleased to report that occupancy growth has been positive since the middle of March with net gains in occupancy resulting from more move-ins and fewer move-outs for March and April. And the outlook for May is very strong.

We anticipate solid growth in occupancy in the second quarter, which is typically a strong period. For example, last year, in 2012, we gained 117 units of occupancy in the second quarter for a 1.1 percentage point gain in occupancy during the quarter. 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 first quarter of 2012. Sequentially, same-community average monthly rents were 60 basis points higher. Industry fundamentals continue to be strong with demand continuing to outpace supply.

NIC MAP reported for first quarter 2013, that trailing 12-month construction starts as a percent of supply decreased to 1.2% and unit absorption to supply increased to 2.1%. Recently, we were able to review with a NIC MAP staff construction starts in Dallas and Houston and compare them to our existing communities in Texas. I am pleased to report that none of the construction currently underway in these 2 cities is competitive with any of our Texas communities. This confirms that our value strategy with average monthly rents of $3,022 acts as an economic barrier-to-entry for new development, where replacement costs are averaging excess of $175,000 per unit. Rents would have to be about 50% higher than current levels to generate a reasonable return on the cost of development, indicating the opportunity to realize significant rent growth before we expect to see any new construction in most of our markets.

With strong industry fundamentals and improving economy in housing market and virtually no new supply in our markets, we believe that our occupancies can continue to grow to an optimal level of 92% to 93%, leaving tremendous opportunity for additionally organically driven CFFO growth and increases in our real estate values. The number of our consolidated communities increased from 87 in the first quarter 2012 to 99 in the first quarter 2013. Financial occupancy of the consolidated portfolio averaged 86.7% in the first quarter of 2013, 100 basis points higher than the first quarter of 2012. Average monthly rents in the first quarter of 2013 increased 2.7% over the first quarter 2012 to $3,022 per occupied unit.

I am optimistic that industry fundamentals will continue to improve throughout 2013. We are benefiting from a recovery in existing home sales, increasing home prices and very limited new supply. I am encouraged by the high levels of tours, deposits and move-ins we are experiencing with the passage of winter.

The first quarter is typically a challenging period for the industry. And with the prolonged flu season, occupancy didn't recover until late in the quarter. I want to recognize and thank our on-site regional and corporate team for their discipline and effective use of our proprietary expense management systems that resulted in our strong first quarter same-store net operating income gains of 6.4%. Our positive results demonstrate that our team with its disciplined focus and attention to detail is successfully executing our operating strategy. 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 senior living industry.

I now would like to discuss our growth initiatives. We are excited that our growth at seniors housing is a need-driven product with very limited new supply. Demographic demand growth is driven by an aging population. These favorable demand 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 addition, I am very pleased to announce that later this month, we will be introducing a new branding for Capital Senior Living that will serve as the cornerstone for all marketing and sales initiatives. Some of the things you will see on our website will include new corporate and property site design tailored with the new Capital Senior Living branding, expanded SCO development, increased search functionality for community locations, expanded content, new resource sections, as well as an adaptive response mobile-friendly version of the site. We are 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 approximately $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 and allow them to age in place, as well as generate excellent financial returns to our company and shareholders.

We are in the process of converting an additional 158 units to assisted living. When stabilized, these new conversions are expected to add approximately $2.9 million of incremental revenue and $1.7 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. We have completed $188 million of acquisitions since the first quarter of 2012, which are expected to generate in their first year of operations CFFO of $0.35 per share and an 18% initial cash-on-cash return on invested equity.

I am pleased to report that our 2013 budgeted occupancies, average monthly rents, revenues, operating expenses and EBITDAR are all better than our 2013 projections at the time of their acquisition. Our discipline in making acquisitions is evidenced by the fact that since August 2011, we have acquired over $270 million of properties after evaluating in excess of $1.3 billion of acquisition opportunities. Our primarily off market acquisition focus continues to yield a robust pipeline, which currently consists of dozens of high-quality senior living communities. We are currently conducting due diligence on numerous transactions consisting of high-quality senior living communities in regions with extensive operations.

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

We expect our disciplined and accretive acquisition strategy to result in approximately $150 million of acquisitions in 2013, which we believe we can fund with our cash balances, the cash flow generated by our operations and the proceeds of possible sales of certain noncore properties. Our EBITDAR margin reflects the benefit we derive from executing on our acquisition strategy. 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 and 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 future acquisitions. We are very well-positioned to add to our success and I am optimistic that our future will be -- continue, as I am 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 am excited about the company's prospects as we benefit from our substantially all private-pay strategy in an industry that is benefiting from need-driven demand, limited new supply and 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 first quarter of 2013. Ralph?

Ralph A. Beattie

Thanks, Larry, and 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 highlights of our financial results for the first quarter of 2013. A copy of our press release is available on our corporate website at www.capitalsenior.com. If you would like to receive future press releases by email, there is a place on our website for you to provide your email address.

For the first quarter of 2013, the company reported revenue of $86.2 million compared to revenue of $72.2 million for the first quarter of 2012, an increase of $14 million or 19.4%. We consolidated 99 communities on our income statement this quarter versus 87 in the first quarter of the prior year, reflecting the results of our disciplined and strategic acquisition program over the last 12 months.

Financial occupancy of the consolidated portfolio averaged 86.7% in the first quarter of 2013 compared to 85.7% in the first quarter of 2012. So financial occupancy increased 100 basis points from the comparable quarter of the prior year. On a same-community basis, occupancies were 70 basis points higher than the first quarter of 2012.

At communities under management, same-community revenue in the first quarter of 2013 increased 3.1% versus the first quarter of 2012. Same-community expenses increased only 0.9% and net operating income increased 6.4% from the first quarter of the prior year, demonstrating the effectiveness of our proprietary expense management system.

As a percentage of resident and health care revenue, operating expenses were 59.1% in the first quarter of 2013 compared to 59.8% in the first quarter of 2012, an improvement of 70 basis points in operating margin. General and administrative expenses, as a percentage of revenues under management, were 5.1% for the quarter, excluding transaction costs of approximately $0.4 million.

Expenses this quarter were impacted by an abnormally high level of medical claims. The company is self-insured for the cost of employee and dependent medical benefits and purchases stop-loss protection on an individual and aggregate basis. Without a doubt, the self-insurance program significantly reduces the company's health insurance costs. Occasionally, expenses are higher than average in a particular quarter as a few claims approach stop-loss insurance thresholds. Health care costs in the first quarter of 2013 exceeded the first quarter of 2012 by approximately $0.5 million.

Adjusted EBITDAR for the first quarter of 2013 was approximately $30.5 million, an increase of $4.8 million or 18.5% from the first quarter of 2012. Adjusted EBITDAR margin was 35.3% for the period.

Adjusted net income for the first quarter of 2013 was $1.8 million or $0.07 per share, excluding nonrecurring or non economic items reconciled on the final page of the press release. This equals adjusted net income of $0.07 per share in the first quarter of 2012.

Adjusted CFFO was $9.7 million or $0.35 per share in the first quarter of 2013. Adjusted CFFO exceeded the first quarter of 2012 by $3 million or $0.10 per share, an increase of approximately 45%.

In the fourth quarter of 2012, the company initiated a tax consulting engagement to assist in reviewing the classification of costs incurred for the purchase of fixed assets and capital improvements so its 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 will realize additional tax benefits from this cost segregation study of approximately $0.20 per share as the next $15 million of taxable income is offset by this additional depreciation. Approximately $0.02 per share of CFFO was realized in the first quarter of 2013 with $0.18 per share of benefit remaining.

While CFFO in the first quarter of 2013 was significantly higher than the first quarter of 2012, CFFO declined approximately $0.07 per share from the fourth quarter of 2012, excluding tax benefits in both quarters. We estimate that the CFFO difference was partially due to lower sequential occupancy; partially due to higher G&A expenses, primarily health insurance claims; and the majority was due to timing differences in the receipt of residents' payments. We received a large number of January rent checks prior to January 1, 2012, resulting in a large increase in deferred income and cash flow. With the 2 days prior to April 1, 2013, a weekend, the number of rent checks received early and the consequent deferred income dropped and reduced CFFO. This appears to be a timing difference that is likely to reverse itself in the fourth quarter of this year. It is interesting to note that only about 18% of the 2012 CFFO was generated in the first quarter of last year.

Capital expenditures for the quarter were approximately $2.1 million, representing $1.1 million of investment spending and $1 million of recurring CapEx. If annualized, the company will spend approximately $400 per unit on recurring CapEx in the first quarter of 2013. The company ended the quarter with $27.9 million of cash and cash equivalents, including restricted cash. As of March 31, 2013, the company financed its 49 owned communities with mortgages totaling $364 million at fixed interest rates averaging 5.2%. None of the company's mortgages mature before July of 2015.

We would now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Darren Lehrich with Deutsche Bank.

Dana Vartabedian - Deutsche Bank AG, Research Division

This is Dana Vartabedian in for Darren. Just wondering if you could talk about how the portfolio is sort of breaking down in terms of occupancy looking at percentage above 90%, percentage below 80% and so on.

Ralph A. Beattie

Sure, Dana. Right now, as far as if you use 80 -- well, 90% threshold, I'd say, right now, about 50% of all properties are above 90%. Another 30% are actually at 87%. We classify our properties in 3 colors -- designations: Green, yellow and red. Green are 90 and above, they average right now 96%, that's about 50% of our portfolio. Another 30% are our yellow zone properties, which as of last Friday, averaged 87%. And the balance are our red zone, which are below [ph] 85%. What's very encouraging, as of last Friday, is the red zone, which is our most challenged properties. Well, in April and May, have 80 basis points of gains in occupancy. So the reason that we're very pleased with what we're hearing for the second quarter is evident in the success we're recognizing in those red zone properties and clearly they're filtering through as we go upward into our yellow and green zones as well.

Dana Vartabedian - Deutsche Bank AG, Research Division

Okay, great. And then just on the conversions you spoke to. Can you talk about the timing of those conversions to your [indiscernible].

Ralph A. Beattie

Yes, we are actually in the process of looking at conversions at 5 of our communities. Most of these, actually, almost all of these are second and third generation conversions that we very successfully completed. We have 1 property where we are converting 8 units from IL at AL, that's underway right now. It should be done quickly. We are actually changing the designation of licensure in one of our buildings, adding 65 units of assisted living, that's just a licensure process. There's no CapEx or cost involved with that. We're increasing our float number -- units in one of our properties by 25, again, that's merely licensure to allow for more assisted-living residents. We've successfully done this in many of our buildings and it has, obviously, allowed us to both transfer residents within and attract residents from outside the community into the assisted living, the higher rents, higher margins. We are now seeking approval for a second conversion of a building that we converted last -- actually converted it 2 years ago. We converted 45 units in all independent living property in Florida, that conversion was very successful, leasing to 90% in its first year. We are now looking at doing a Phase 2 of taking another 45 units from independent to assisted living. And then we have our last property, where we're looking at converting 15 units in an existing property that has an IL and AL, again, this is a designation. So the good news about these conversions, they're highly profitable and the cost to complete these are very, very minimal. The only property that will incur significant cost for the conversion will be the one in Florida, if we receive the approvals. That's a property we leased. The landlord, a REIT, will actually pay for the cost and then we'll just increase our rent to pay for that conversion as additional rent in future years on that property.

Operator

We'll go next to Daniel Bernstein with Stifel.

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

I was just trying to understand how the occupancy trend worked out in the first quarter? Maybe if you have, maybe an occupancy at the beginning of the quarter and the ending occupancy and maybe what months the flu impacted you the worst?

Ralph A. Beattie

I can be -- actually give you that information, I have it by month. For the quarter, Dan, we've lost 59 units which [ph] is interesting is, if you do the math, the financial occupancy was down 80 basis points. But the real loss was much less. What's interesting is when we report occupancy, these are financial occupancies, these are number of days that rent is collected in a quarter. What's typical in our industry is that most of the move-ins occur at the last week of the month and most of the move-outs seem to work -- to move-out the first week of the month. So if you look at what actually occurred in our portfolio in January, we lost 49 units. In February, we lost 45 units. Again, what's interesting is year-over-year, the move-ins were pretty comparable. It was really the attrition levels were higher for death and higher levels of care, we gained 33 units in March. And in April, we have exceeded that number. So we've grown, right now, we don't have financial, but physical occupancy appears to have grown by about 40 units in April and the reports for May are even stronger. So what's interesting, last year, if you look at the second quarter, we had our best month was May of last year and it looks like we may accomplish that as well. But hopefully, that gives you some color as far as the effect of the quarantining of our buildings. We had about almost 3 dozen buildings during those 2 months that had flu. And our protocol was to limit the spread by tray-ing meals to apartments for residents and then also stopping tours into the building, while there was flu in the building. And obviously, we saw the impact, the good news is we saw a nice gain in March, a better gain in April and can expect that to continue, especially as we get into the much better season during the summer, summertime.

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

Was it broad-based or was it more of local geographies, say like Houston or Dallas? And you have a little more concentrated -- geographic concentrations?

Ralph A. Beattie

As I said, there were dozens of buildings. It definitely affected some properties in Texas. Don't forget, we also got -- were impacted with very bad snow in Kansas and some of the Midwest that also happened during the quarter. But there was nothing that really stuck out as far as geographically concentrated flu, if you will. The epidemic was around and it kind of spread through a variety of buildings, again, almost 30% of our portfolio had some flu. And then, fortunately, with the passage of winter and better weather and better health, the move-outs are down considerably and move-ins are better so we are seeing very positive trends now.

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

Okay. And then in terms of your expense controls, it seems like it was very good in the quarter. Was there something in the fourth quarter that affected your fourth quarter expenses that would have kind of rolled into the first quarter, that you corrected in the first quarter that kind of helped first out expenses? Or maybe if you can give an example of your cost controls, and how that worked in the first quarter? Because it was much better operating margin than was expected.

Lawrence A. Cohen

Dan, it's an interesting question, and something that Ralph and I talk about frequently when we meet with investors. During the recession, you may remember, you actually called me, Dan, asking to stress test the industry on the effect of loss of occupancy. And our experience has been that we have systems in place that, for example, on December 25, every executive director in every regional knows their billings for January. They then will go through their budgets for January and make sure that they can find expense management to control expenses, to compensate for loss of revenue when there's a downtick. The easiest and most effective would be on food purchasing. So we only purchase enough food for the actual meals we're serving based upon the occupancy. Secondly is staffing, particularly hourly staff as it relates to wait staff and housekeepers. And then by department, we look at areas where we can either reduce a cost or perhaps delay a cost. But it's really mostly through food and labor. The company, in my experience, and again I give all the credit to our operating team that does a fabulous job and the systems that we have in place, that is -- shows the resiliency of this business model, that even with loss of occupancy, we can expand cash flow and margin by very disciplined and effective systems and people using those systems to manage expenses.

Ralph A. Beattie

I'm sorry, Dan, I might just add to that. If you look at the first quarter of 2013, again, a quarter where sequential occupancy declined, our revenues were up 3.1% on a same-store basis, expenses increased for about 0.9%. Net operating income grew 6.4%. If you compare that to the fourth quarter of 2012, a quarter where occupancies were growing, revenues increased 4.2% over the comparable quarter of the prior year, expenses up 2.8 and NOI of 6.2. So we actually had a larger NOI increase in an environment where occupancies were declining than we did in a very strong fourth quarter of 2012. So, it really demonstrates how effective these expense management controls are.

Lawrence A. Cohen

And I invite everybody -- we filed an 8-K this morning with the press release and an updated corporate presentation [indiscernible] because we do talk about this frequently with investors. We actually now have a same-store comparable quarter slide showing for the last 5 quarters revenue growth, expense, broken [ph] and NOI growth. And again, consistent with the company's practices, they continue to demonstrate a very nice rate spread between rate growth and expense growth that provides that leverage for a very strong NOI growth on a same-store basis.

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

And you're not seeing any expense pressures at this point from labor or food, utilities?

Lawrence A. Cohen

Not at all. In fact, our food costs are running less than 1% growth a year. Again, we had fixed contracts on our food through our group purchasing program. That has continued to save costs. In 2012, we actually invited about 10 chefs from our communities into Dallas. We spent 3 days with US Foods looking at the procurement to make sure that we will also be able to take advantage of rebates by having the same -- a limited number of staples that are used at our communities to benefit from that. Again, our systems, our group purchasing programs have worked well. We have fixed electricity contracts in de-regulated states, in Texas. We regularly now have -- I think it [ph] was $0.05 a kilowatt hour for electricity. We've been expanding that to other states as well, and that lasts for the next 3 to 5 years. So there has been no wage pressure at all. So the good news is, and obviously, as you look at just what's happening in the general economy on CPI and other kind of pressures. There really aren't many cost pressures out there. And we're able to efficiently operate our businesses with very disciplined focus on expenses. The reason that Capital Senior Living succeeds as a value provider, and is so successful with high margins with average rents of $3,000 a month, is expense. And the most important metric that this team, of operating team that we have, focuses on every year, is expense management and expense controls. It's really the expense growth that will then decide the rate growth. For example, in 2013, we are achieving about 3% rate growth in our communities, and that's about 100 basis points higher than the kind of normalized 2% rent growth. The reason it was so low in the first quarter was really the fact that as occupancies do drop, we're able to proactively anticipate that drop and manage the expenses to the occupancies. The other area, I will tell you, since I'm here in Dallas today, it's very mild -- it's very cool out. I mean -- utilities have been down. I mean, fortunately, the first quarter didn't have some of the extremes with the exception of the Midwest that we had in the prior year. So that was a benefit. And I'm optimistic that the second quarter will have lower utilities because temperatures in Texas are lower than they were last spring.

Operator

[Operator Instructions] We'll take our next question from Dana Hambly with Stephens.

Dana Hambly - Stephens Inc., Research Division

On the acquisitions, Larry, it sounds like, I know it's light in the first quarter, but I guess that was within the expectations. And so the target is still $150 million. And actually you said, second and third quarters. So are you are expecting all of that to close in the second and third quarter?

Lawrence A. Cohen

No. Let me, first of all, comment that if you recall last year, our target was $150 million. We acquired $181 million. We had over $30 million of transactions that closed in December of 2012. That was really the desire of sellers to sell transactions, quick sales before year-end to take advantage of lower capital gains rates. So in a normal period, those $30 million of acquisitions would've given us about $40 million in the first quarter kind of accelerated into December. We did have a $6.7 million transaction. We have, it's interesting, we have more transactions under contract in due diligence than we've ever had as a company at the current time. These transactions are under due diligence. We have closings scheduled, subject to completion of due diligence for later this month, June and then through September. So we're looking at completing those acquisitions of properties that are currently under contract in the second and third quarter. We then -- we have in our pipeline, additional transactions where we are submitting letters of intent, and negotiating terms for transactions that will be closed later this year. So in total, we think that we'll still hit our target of $150 million. They will, again, start hopefully end of this month, and then proceed through the balance of the year.

Dana Hambly - Stephens Inc., Research Division

Okay. And I assume that the cap rates that you're seeing are pretty consistent with what you've in the past? And just a comment on the financing as well, if that's similar to what we've been seeing [ph].

Lawrence A. Cohen

Sure, I'd be happy to. Cap rates have been very consistent. The terms are very consistent. The quality has been outstanding. I'll tell you what's really encouraging, I receive -- we all receive fabulous reports from our regionals that conduct their due diligence. And the properties that we are buying are just terrific. They're well-maintained, they're pristine, they have great staff, they're well-occupied, good performance. Obviously, we have found a big benefit when we take them over, when we incorporate our expense management programs, our group purchasing, our risk management insurance programs. We've seen a nice uptick. Cap rates have been very, very constant, and I think they'll continue that way. Again, we're very disciplined. There are some sellers that had expectations for lower cap rates, but they're not selling. In fact, 2 or 3 properties we're buying this year are properties that we saw over a year ago where the seller wasn't ready to sell, and now they are. And again, we're seeing virtually no competition. I'm amazed at the ability to maintain the discipline on pricing and quality and geography. And be able to continue to succeed in buying properties that we make offers on with virtually no competition. Financing, obviously, the 10-year [ph] has come down some from the first quarter, I think last I saw it, it was 175-ish. Ralph can talk about that in the spread, but we expect interest rates to be -- continue to be low, and Fannie and Freddie continue to be very active in this sector.

Ralph A. Beattie

Right. And Dana, we will continue to use both Fannie Mae and Freddie Mac to finance our acquisitions. It's all 10-year fixed-rate nonrecourse debt. It is priced off the 10-year treasury, plus the spread. So we're still anticipating financing available to us at about 80% LTVs and probably all-in interest rates fixed in the mid-4s. So financing is still readily available. And aside from an occasional bridge loan, which we may do, all of our financing is going to be 10-year fixed-rate nonrecourse debt.

Lawrence A. Cohen

Actually, there's a new program out now by Fannie Mae that we're looking at that might actually offer us 12-year loans. That's what -- the loan-to-value in 10-year financing is typically about 70%. If we undertake a 12-year loan, then the proceeds would increase to about 80%. So we're looking at that. We think with these rates, we can continue to borrow in the 4 1/4% to 4 1/2 % range. On the -- same pricing, 12 years and 10 years, virtually the same pricing, and have fixed rate non-recourse long-term debt. We think that's very attractive. It's also assumable and so it'd be very attractive, particularly if rates do increase over time, becomes enhancement of value to potential buyer of properties. So we would look to utilize this new program that's being initiated by Fannie Mae for 12-year terms that actually would slightly increase proceeds, have very strong coverages, but more importantly, would give us that 12-year term of very attractive low-fixed rate financing on a nonrecourse basis.

Dana Hambly - Stephens Inc., Research Division

Okay. Yes, and just on that point when you talk about being able to finance the full $150 million with existing cash, cash flow, and perhaps, a sale, are you assuming a 70% or an 80% LTV?

Lawrence A. Cohen

We're assuming 70%. Yes, I mean, if you look at it, we believe that we will have cash flow each quarter somewhere in the $9 million to $10 million range. This tax segregation that Ralph spoke about earlier is expected to save about $15 million in taxes. So that's cash that won't be spent. And then these sales, if they are affected, could also generate tens of millions of dollars of cash. So we feel very comfortable that we'll have cash that will allow us to complete $150 million of acquisitions and still have cash left over for additional acquisitions that either -- whether they accelerate into the fourth quarter or carry over into next year. So we feel very comfortable that we can continue to finance our growth prudently on our balance sheet and still maintain reserves, maintain our buildings with CapEx [indiscernible], something else that we'll talk about next quarter. We have gone through our properties, and we continue to update and renovate. The pictures I've been getting back on some of the renovations that have been done are fabulous on our portfolio, so we're very excited about that as well. And that will continue throughout the year. So we're very pleased with the position that we -- our properties have in their markets, and we feel they can compete extremely well with very, very attractive and well-maintained buildings.

Dana Hambly - Stephens Inc., Research Division

Okay, that's great. And just last one for me. Ralph, in your prepared comments, you mentioned something that was interesting. You said CFFO for the first quarter last year was 18% of CFFO for the year. I just -- I don't know if you can elaborate on that. I know you guys don't give guidance. But I mean, are we sensing maybe a similar pattern this year?

Ralph A. Beattie

Well, I don't want to make that statement, that it's going to be a similar pattern. But I do want to point out that the $0.35, if that were to be somewhere in the 18% to 20% range, would still indicate that we'll be in line with most of the analysts' consensus estimates.

Operator

And we'll go next to Peter Sicher with Sidoti & Company.

Peter Sicher - Sidoti & Company, LLC

Could you guys comment, I don't think I caught this, on sort of the remaining tax benefit, how you expect that to play out over the rest of the year?

Ralph A. Beattie

I'd be happy to, Peter. When we did the cost segregation study, we had a pool of accelerated depreciation to apply to our taxable income. About $0.09 of that benefit was realized in the fourth quarter of 2012, and then the remainder will be realized to offset future taxable income. There's about $0.20 per share of benefit remaining, and the timing is simply going to be based upon when we realize taxable income. I know not many analysts actually project taxable income, they're more focused on GAAP, but we don't expect to be a taxpayer in 2013. We'll expect to offset all of our taxable income for federal income tax purposes. And depending on how the rest of the year plays out, what kind of gains we might have on these sales of non-core assets, we could realize that $0.18 per share of CFFO benefit over the remainder of 2013.

Peter Sicher - Sidoti & Company, LLC

Okay, great. And then my second question is based on the comment you guys made, with the NIC study findings, does that change your view in any way on the achievable rate growth for you guys going forward?

Ralph A. Beattie

Well, I think, Peter, consistent with what we believed, we track from our communities whether there is constructions beginning. We don't see that in our markets. What's interesting though is the construction is not all that bad. And to the extent that typically, the rents or the newer product fees are higher than ours, actually typically improves our occupancy and does provide some rate growth. This year, we are expecting, as I said, we're achieving about a 3% rate growth. In some markets, we'll do a little better than that. Obviously, as occupancy starts to trend upwards and stabilize, will give us more conviction for future growth. We are forecasting better rate growth next year at this time. So we're -- again, what's really important is we're very confident that we can maintain a 5% to 7% same-store net operating growth quarter-to-quarter, as we have been doing, by having our expense management programs in place and have the ability to raise rents at a level higher than the expense growth.

Operator

We'll go next to Donald Marchani [ph] with Westharp [ph] Capital.

Unknown Analyst

Can you talk about the implementation of the Vigilant software across your asset base? Just kind of what's in the context of opportunities to capture additional revenue? And how many locations are using the software currently? And kind of what are the initial results of the rollout compared to maybe what you were expecting?

Lawrence A. Cohen

Donald, right now it's interesting, 71 of our communities have assisted living in them. And all of those properties, I believe, including the last acquisition, I think, at this point, has Vigilant implemented in those properties. So we are now able to have a technology for the care plans and the buildings. And we are monitoring that. We're studying that. As we get some better data over some period of time, we'll give some better guidance on that. Today, it's still new. Most of the cost that we have been -- being able to document in Vigilant, the level of care charges to the residence, were not immediately passed through to the residents because they would be a little higher than they had anticipated. With new residents coming in expecting to be billed for this and with attrition, we are gradually implementing that, and we are now budgeting for that in 2013, and we plan to give further guidance during the year once we have a history that we feel is reliable enough to give guidance. But we are seeing some benefits. Ralph, do you want to add anything to that?

Ralph A. Beattie

No, I think that's probably as much as we can say right now. We're actually measuring the effect of the care plan technology and trying to determine exactly how much benefit we're going to receive over the course of 2013 and beyond. And when we have some better data, we'll share that. But right now, the program is new. It's in the transition phase, and there's probably not a lot more we can say until we have some better data to -- at our fingertips.

Operator

[Operator Instructions] And we'll go next to Daniel Bernstein with Stifel.

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

Just a quick follow-up question on the portfolio pipeline. Are you still looking mainly at assisted living or are you finding anything attractive in independent living?

Lawrence A. Cohen

We're seeing, Dan, we are seeing some in independent living. It's more assisted living than independent. What's happened is, if you look at the construction cycle, even NIC MAP this quarter, there has been very little independent living built really since the late 1990s. Most of the buildings we're looking at are newer than that. So most of what we're buying or seeing are either freestanding assisted living, assisted living's memory care or independent with assisted. There are some buildings that are independent living. Interestingly, what we're looking at, at some of these acquisitions is actually the ability to license some of the buildings from independent living to assisted living, so we can buy an independent living building. And obviously, with the conversions that we would able to affect really enhances some of the growth on that. But I'd say, today, looking at the portfolio, we're probably looking at about 80% -- 75% to 80% assisted living, and 20% to 25% would be independent living. So when say assisted living, that would also incorporate some memory care units.

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

Are you looking at any freestanding memory care? That seems to be the one place where in certain dock [ph], there seems to be some over-load [ph] on the system, demand as well. So is that product attractive or do you really want to be in combination buildings ILA [ph] ?

Lawrence A. Cohen

We will only look at combination buildings. We do not like the freestanding memory product. We have learned over the years that memory care is very needed, but it's expensive. And there is a limit to what people are either able or willing to afford to buy a favored memory care. I believe that part of the reason I think NIC MAP shows 1/3 of the AL development today is memory care, freestanding memory care. And the reason for that is convinced [ph] earlier about cost of construction. And if you do the math at $3,000 average monthly rate that we generate in our communities, if you take that out at 90% occupancy, at a 35% margin, you're probably going to generate about 6%, 6.5% return to $175,000 development cost per unit. If you're able to build freestanding memory care and generate $4,500 to $6,000 a month rent, your pro forma looks very nice, and you [indiscernible] to get financing. The challenge is filling it. What we have found is it's much easier for a family to move a family member into assisted living. They can still get some of the care levels they need if they have some memory issues. As the needs increase, as the billings increase, they can transition to memory care. And it's a much easier transition. We find that it's much more of a sticker shock phenomenon moving right from the home to memory care. So we have looked at memory care for years. We love it as a small adjunct to our communities. We also both [ph] feel that size is important. I track weekly the occupancies of our properties by level of care. Consistently, our memory care properties are way over 90%. Those properties that have 14 units stay full, 14 to kind of 20, 21, stay very -- are high 90%, if you will. But once we have properties that exceeds 30 units, it's hard to exceed 85%. It's a numbers game. So we prefer -- we're pretty risk-averse, we're pretty conservative. We much rather buy what we feel comfortable buying, which are properties that have small component of memory care as an adjunct to either assisted living or have the continuum with independent living, assisted living and memory care.

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

So if you have memory care in a property, you're basically, you need to draw from the community to fill, whereas if you're 10 units of memory care, you're drawing more from the facility and not really competing with freestanding. Is that the way to think about it?

Lawrence A. Cohen

That's exactly right, that's exactly right.

Ralph A. Beattie

Interesting, I'm looking at the numbers for April, and it's so consistent on memory care. I mean, if this -- our memory care properties are 90%, and it really is a function of size. I mean, I can go down this list and you can see how those smaller buildings, 93, 93, 100, I mean, they're 94, 100, 100. And then once you get 41 units, 78%. So it's 37 units, 80%, actually at 92%, that's pretty good. But it's -- definitely, it's a numbers game as we look at this. So we feel more comfortable of having that 14 to 21 unit size that can easily draw it from within, and be less dependent upon the market. And also, we'll be less susceptible to competition if there is freestanding memory care going in. I will say that even in the NIC data that we looked at, there is very, very little memory care going into our markets that we're seeing. So we don't expect to see much impact buyback. But again, we just do not subscribe to the freestanding model.

Operator

And we'll go next to Wilson Jaeggli with Southwell.

Wilson S. Jaeggli - Southwell Management, L.P.

Just a question, a follow-up here on Donald's question, about the implementation of your software for revenue capture. You said 71 communities so far out of 102 it's been implemented. But I believe you said that it's only been implemented for new occupants. So consequently, in each of those 71 units, it would be what, maybe only 20% of the residents are under this new recapture program? Is that a fair number or...

Lawrence A. Cohen

Yes, Wilson, I know all of the residents in these properties are under the Vigilant program. We use it for staffing, we use it for our managing the care plan that's being delivered. We have just -- we have tablets, we have iPads, Minis that are being used by our staff when they serve the resident. What we said is that we have been slow to implement the revenue capture because of the -- we recognize that when we were doing it by hand, we weren't capturing all of the potential revenue. So we want to ease that in with our existing residents. It's easier to implement immediately to new residents because coming in, they understand that. So it's going to be somewhat of a catch-up for the existing residents, but through attrition and through utilization, we will start to see -- we believe we'll start to see further increases in the revenue generation through the Vigilant program.

Wilson S. Jaeggli - Southwell Management, L.P.

Right. And so what you're saying for the effective implementation on current residents in these 71 communities, it's a small percentage. Is that right?

Lawrence A. Cohen

It's -- well, it's -- yes. It is being used from staffing, it's being used to monitor the actual numbers. maybe 50%. I wouldn't say it's small. It's probably is at least 50%. If you look at the attrition in assisted living, it typically averages about 45% to 50% a year. And we did implement this program over the last couple of years, probably seeing about 50% of the residents. They are starting to see the plans being implemented. And even those residents that aren't being billed, they do see the level of care charges, so they see it in their billings monthly, so they understand what's being provided. It's also helpful for the family to see what care their family members are receiving. But there's the financial implementation has not yet been fully implemented. Although it is for budget, for the first time, our communities actually budgeted the Vigilant revenue in 2013.

Operator

And it appears we have no further questions at this time.

Lawrence A. Cohen

Well, we want to thank everybody for participating on today's call. Feel free if you have any follow-up questions to give Ralph or myself a call. We'll be seeing many of you at conferences over the next few weeks. We'll be at various conferences around the country, and we hope to see you there. And if not, we look forward to talking in August when we report the second quarter earnings. Thank you, and have a good day.

Operator

That does conclude today's conference. We appreciate your participation. You may now disconnect.

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