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Capital Senior Living (NYSE:CSU)

Q4 2013 Earnings Call

February 27, 2014 5:00 pm 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

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

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

Peter Sicher - Sidoti & Company, LLC

Darren P. Lehrich - Deutsche Bank AG, Research Division

Dana Hambly - Stephens Inc., Research Division

Todd Cohen

Operator

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

Lawrence A. Cohen

Thank you. Good afternoon, and welcome to Capital Senior Living's Fourth Quarter and Full Year 2013 Earnings Release Conference Call.

I am pleased to report positive results for the fourth quarter as we continue to recover from high levels of attrition in 2013. We are focused on reducing attrition and increasing occupancy by converting approximately 360 vacant independent living units to assisted living and memory care. Once these converted units are stabilized, we expect overall occupancy to increase by approximately 300 basis points, approaching 90%.

Complementing our organic growth is a robust pipeline that 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 generates meaningful increases in adjusted 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 fourth quarter, we completed the acquisition of 6 senior living communities for a combined purchase price of approximately $96.7 million. 4 communities enhance our geographic concentration in Indiana and South Carolina; and 2 communities add the contiguous states of Wisconsin and Massachusetts to the company's footprint. These communities were financed with an aggregate of approximately $73.1 million of non-recourse 10-year mortgage debt with a blended fixed interest rate of 5.52%.

These acquisitions are expected to add adjusted CFFO of $0.13 per share, increase earnings by $0.05 per share, increase annual revenue by $22 million and generate an effective cash-on-cash return on equity of more than 15%. We are conducting due diligence on approximately $100 million of additional transactions of high-quality senior living communities in regions with extensive operations. Subject to completion of due diligence and customary closing conditions, these transactions are expected to close in the first half of 2014. Our pipeline remains robust, and we are negotiating additional transactions consisting of high-quality senior living communities to regions where we have extensive operations.

In addition to our successful acquisition program, we are focused on generating superior organic growth through gains in occupancy, proactive expense management, community refurbishment projects and unit conversions. We believe we are different from our other companies in our peer group with our sole focus on a substantially all private-pay senior living business. We are capitalizing on our competitive strengths in operating communities in geographically concentrated regions that allow us to profit from our competitive advantages as a larger company with economies of scale and proprietary systems in a highly fragmented industry.

We implemented many initiatives in 2013 that we expect will improve our organic growth. These include the launch of an integrated marketing program and a new responsive website and eMarketing campaign. We have seen significant increases in visits to our website and community leads and are implementing new tactics to add -- to expand our search engine optimization strategies to attract more new and repeat customers to our website. We expanded the utilization of software programs at our assisted living communities to optimize care plans and level of care charges and enhance our training and adherence to quality assurance. We also reorganized our operations department to enhance our regional and district management oversight and focus.

Last month, we initiated call centers at many of our communities that already are producing positive results. In 2013, we also increased our private-pay revenues to 96% of total revenues by closing the only skilled nursing beds we had operated and are repositioning our 2 continuing care retirement communities for other private-pay and resident uses. While these 2 communities are being repositioned, they will be excluded from same-community results. At communities under management, same-community revenue in the fourth quarter of 2013 increased 0.9 of a percentage point versus the fourth quarter of 2012. Same-community expenses increased 3.3% and net operating income declined 2.5% from the fourth quarter of the prior year. The increase in expenses was due to higher utility costs from unusually cold weather and multiyear real estate tax adjustments from successful tax appeals received in the fourth quarter of 2012.

Fourth quarter same-store financial occupancy was dampened by the cumulative effect of higher attrition in 2013 compared to exceptionally strong occupancy gains in 2012. We had 103 more move-outs in 2013 than in 2012. It's interesting to note that while sequential same-store financial occupancy improved 80 basis points in the fourth quarter 2012 compared to sequential gain of 10 basis points in the fourth quarter of 2013, we had 55 more move-ins, 67 more deposits and 145 more tours on a same-store basis in the fourth quarter 2013 compared to fourth quarter 2012.

These improvements during the fourth quarter of 2013 have led to improved financial occupancies at the end of the year and have continued into the first 2 months of 2014 despite the harsh winter weather. I expect that our first quarter 2014 occupancy will compare favorably to first quarter 2013 as the severe flu season caused a significant decline in last year's first quarter occupancy. Fortunately, the flu has been benign in 2014.

Fourth quarter 2013 same-community average monthly rents were 2.3% higher than the fourth quarter of 2012 with independent living rents improving 1.6% and assisted living rents improving 2.4% from the fourth quarter of 2012. We are focused on reducing attrition and improving occupancy by converting approximately 360 vacant independent living units to assisted living and memory care at 15 communities. We expect to receive most required licensure approvals for these conversions during the first half of this year.

Once these converted units are stabilized, we expect overall occupancy to increase by approximately 300 basis points approaching 90%. When stabilized, these converted units are expected to add approximately $0.20 in annual CFFO and enhance our real estate value. We have a successful track record in converting vacant units of independent living apartments to assisted living and memory care. Conversions of larger, residential, independent living units with full kitchens, walk-in closets and 1- or 2-bedroom apartments provide our communities with a competitive advantage over smaller, purpose-built assisted living units. Prior conversions of independent living apartments to assisted living and memory care have been very well received as demonstrated by our strong track record.

Over the past 2 years, we completed assisted living and memory care conversions at 10 of our communities, resulting in occupancy gains of 10 percentage points. Industry fundamentals continue to be solid with demand outpacing supply. NIC MAP reported favorable supply-demand trends for independent and assisted living communities with lower trailing 12-month construction starts as a percent of supply and improved unit absorption to supply for the fourth quarter 2013.

As we have discussed on previous calls, new construction has been needed in most of our markets, confirming our value strategy with average monthly rents of $3,037 acting as an economic barrier to entry for new development, with replacement costs averaging in 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 new construction in most of our markets.

With strong industry fundamentals and improving economy and housing market and virtually no new supply in our markets, we believe our occupancies can continue to grow to an optimal level of 92% to 93%, leaving tremendous opportunity for additional organically driven CFFO growth and increases in our real estate values. Every 1% improvement in occupancy is expected to generate $3.5 million of revenue, $2.5 million of EBITDAR and $0.06 per share of CFFO.

We are also looking to improve the quality of our portfolio by pruning certain communities that are not in core locations. We expect that selected asset sales in 2014 will improve our operating metrics and allow us to redeploy the proceeds to acquire better performing communities in our geographically concentrated regions. Our mission is to provide quality senior living services and care to our residents at reasonable prices.

We believe our competitive advantage that allows us to achieve solid operating results and disciplined growth is our people and our culture. We continue to execute on a strategic plan that is focused on the very important objective of enhancing shareholder value through organic growth, proactive expense management and utilization of technology, as well as the allocation of our capital for accretive acquisitions of high-quality senior living communities in our geographically concentrated regions, unit conversions and community refurbishment projects.

With our on-site regional and corporate teams focus and discipline, we maintain our communities and train our staff to enhance resident care and satisfaction.

I am pleased to report that our 2013 resident satisfaction results were greater than 95%. We continue to grow through a disciplined and strategic acquisition program that began in 2011 and which has been funded from internally generated cash flow. In the past 2.5 years, we have acquired 35 communities for a combined purchase price of more than $415 million. These strategic acquisitions have generated greater than a 16% cash-on-cash return on the equity we invested.

As our cash flow continues to grow and our robust pipeline continues to provide us with ample quality acquisition opportunities, we are excited about continuing our successful acquisition program in 2014 and in future years. Our success in acquiring quality communities in off-market transactions validates our competitive advantage as a highly respected and credible owner/operator with the financial ability to complete transactions.

Many local and regional operators continue to tell us they prefer to transact with Capital Senior Living as opposed to regional private equity investors as they feel comfortable in trusting their residents and staff to the Capital Senior Living family. This is evident by the fact that 50% of the communities we purchased in 2013, and many we expect to acquire in 2014 are with sellers that we have completed previous transactions.

Seniors housing is a need-driven product with limited new supply. Demographic demand growth is driven by an aging population. These favorable demographic and supply demand trends should allow for occupancy and rate growth. Our many initiatives focus on improving organic and external growth combined with the operating leverage in our prudently financed business are expected to increase revenues, margins and cash flow.

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. Successful execution of this plan has resulted in EBITDAR growth of 108% on an 86% increase of revenues and nearly a 500-basis-point expansion of our EBITDAR margin since 2010.

We are well positioned to add to our success and I am optimistic about our future 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 fourth quarter and full year 2013.

Ralph A. Beattie

Thanks, Larry, and good afternoon. I hope everyone has had a chance to see the press release, which was distributed earlier today. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the fourth quarter and full year 2013.

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

Beginning with fourth quarter highlights. The company reported revenue of $88.9 million for the fourth quarter of 2013, compared to revenue of $83.3 million for the fourth quarter of 2012, an increase of $5.6 million or 6.8%.

We consolidated 109 communities on our income statement this quarter versus 98 in the fourth quarter of the prior year due to the purchase of 11 wholly-owned communities in 2013.

Financial occupancy of the consolidated portfolio averaged 86.5% in the fourth quarter of 2013, 10 basis points higher than the third quarter of 2013. Excluding the 2 CCRCs that are being repositioned, average monthly rents for the consolidated communities was $3,037 per occupied unit in the fourth quarter of 2013, an increase of $90 per occupied unit, 3.1% higher than the fourth quarter of 2012.

As a percentage of resident and health care revenue, operating expenses were 62.1% in the fourth quarter of 2013. Margins were negatively impacted by higher utility costs from unusually cold weather and real estate taxes were higher in the fourth quarter of 2013 because the fourth quarter of 2012 had multiyear favorable tax adjustments from successful property tax appeals.

Excluding transaction costs, general and administrative expenses as a percentage of revenues under management were 5.2% in the fourth quarter of 2013. Transaction costs were approximately $0.7 million in the quarter.

I am pleased to report that the cost of our self-insured medical benefits came back into line in the fourth quarter of 2013. Adjusted EBITDAR for the fourth quarter of 2013 was approximately $29.7 million, an increase of $0.5 million or 1.8% from the fourth quarter of 2012. Excluding the 2 CCRCs being repositioned, EBITDAR margins for the fourth quarter of 2013 was 34.6%.

Adjusted net income for the fourth quarter of 2013 was $1.2 million or $0.04 per share, excluding a nonrecurring and noneconomic item reconciled in our release. Adjusted CFFO was $14.5 million or $0.52 per share in the fourth quarter of 2013.

Adjusted CFFO including a tax benefit from the cost segregation study of $0.12 per share in the fourth quarter of 2013. The fourth quarter of 2012 included a similar tax benefit of $0.09 per share. Excluding tax benefits in both quarters, CFFO matched the prior year at $0.40 per share.

Moving to the full year results. The company reported revenue of $350.4 million, an increase of $39.8 million or 12.8% from the prior year.

Adjusted EBITDAR was $119.6 million for 2013, an increase of $9.6 million or 8.7%. EBITDAR margin was 34.9% for the year excluding the 2 CCRCs. Adjusted net income was $4.9 million or $0.17 per share in 2013 and CFFO was $42.6 million or $1.53 per share.

Excluding tax benefits from the cost segregation study in both years, CFFO grew from $1.27 in 2012 to $1.39 in 2013.

Capital expenditures for the year were approximately $13.6 million, representing $9.5 million of investment spending and $4.1 million of recurring CapEx. The company spent approximately $400 per unit on recurring CapEx in 2013. The company ended the year with $25 million of cash and cash equivalents, including restricted cash.

We invested $38.1 million of cash as equity to acquire $150.4 million of properties in 2013. As of December 31, 2013, the company financed its 59 owned communities with mortgages totaling $476.2 million with a blended average interest rate of 5.25%.

None of the company's mortgages mature before July of 2015. Our coverages remain very strong. Our interest coverage is 2.6x, and our total fixed charge coverage is 1.5x.

We would now like to share with you our expectations for 2014. We anticipate continued improvement in the economy and the housing market with limited new supply in seniors housing. We expect to see occupancy growth in our existing portfolio of 100 to 150 basis points. Coupled with this occupancy growth, we expect to be able to raise average rents by approximately 3% and hold expense growth to approximately 2%. These factors should combine to provide same-store NOI growth of approximately 6% to 8%.

In addition, the acquisitions we completed in 2013 are expected to contribute CFFO of $0.20 per share in their first 12 months of ownership. Approximately $0.05 of the $0.20 was realized in 2013 with an incremental $0.15 per share expected in 2014. We'd now like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] First, we'll go to Daniel Bernstein from Stifel.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

So I guess just to start off on that last comment, 100 to 150 bps of occupancy, how much of that is coming from the repositioning of the CCRCs and the conversions from IL to AL memory care?

Lawrence A. Cohen

Dan, very little, actually. The repositioning of the 2 CCRCs is underway, but won't have a full year benefit in 2014 and the conversions will have to be completed and then stabilized. So I would say most of that is just normal organic growth based upon what we're seeing in our markets in which we operate.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And I don't want you -- you don't need, I mean I'm not going to ask you to comment on the Brookdale-Emeritus merger per se, but do you see the need for yourselves to get larger? And what are the pressures that are out there for consolidation in the seniors housing industry? Or are there pressures for others to consolidate and grow in the seniors housing? I'm just trying to understand the dynamic that's out there?

Lawrence A. Cohen

Dan, I think it's an excellent question. First of all, I congratulate Brookdale and Emeritus on I think a very excellent transaction that I think will help the industry and help their shareholders and most importantly be very positive to their residents. This is a highly fragmented industry. I believe that the merged company will only operate 10% of the supply of senior housing in this country. As we see, the consolidation opportunity for our company is to continue growth of smaller, regional and local operators. The pricing that we're able to accommodate, the simplicity of transitioning these properties and the speed in which we can benefit from the economics and the ability to take advantage of historically low interest rates drives significant growth in cash flow, real estate value and shareholder value. So we believe that as this industry matures, you heard my comments about a lot of the initiatives that we have undertaken that really, because of our size, now allow us to participate in training programs, webinars, quality assurance -- I think the whole industry is dealing with the fact that we serve an older, frailer resident. We have a different philosophy than Brookdale. We believe that our residents could utilize services in our properties so that's why we look at continuing to convert units to assisted living to provide higher levels of care to our residents where they can age in place. We also bring in third parties to provide home health, rehab, therapy, hospice, we have visiting physicians. We have virtually the same activity that Brookdale does. We just think it's a better allocation of our capital to focus on the private-pay senior housing business at the type of returns that we can generate through acquisitions and feel that it's still a local business and those providers who are the best in their markets not only provide excellent care and services to our residents but are leaders in providing leads to our communities, because they're out in the homes of seniors. So when an event occurs where somebody has to move, they recommended they move into our properties. So again I think it's a great transaction for the industry. I commend Andy and Granger on a very, very smart and hopefully successful transaction. I think we'll see more consolidation as the industry matures because I just think that it's so highly fragmented and to really play a role in the continuum of care that we're going to see amongst ACOs and hospitals and other care levels, larger operators -- and we are one of the larger operators today, particularly with our geographic concentrated regions, we believe we will benefit as well.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then one more question here. So if I can compare the -- I don't know if we have to take this off-line, but if we compare the same-store 89 properties in 3Q to the 89 properties in 4Q, how should I think about the change in occupancy rate and margin sequentially for those 89 same-store properties?

Lawrence A. Cohen

Yes, I mean -- I think Ralph can go through it. I mean the margin clearly was impacted. It's interesting, the change in utilities and real estate taxes was about $538,000. So if you look at the margin in the fourth quarter, our operating expenses would've been, I think, about 59.8% -- I have that number here. So that's the biggest impact on margin. On occupancy, we had a very good third quarter as far as gains in August and September. We had a great December. We had again high attrition in November. We ended December on financial occupancy gains, end the month, about 50 basis points higher than our average for the month. We've seen that manifest in January so I, think that the biggest change in the margin was really the effect of the higher variance we saw in utilities because of the cold weather and then the change of realty taxes year-over-year because of the lower taxes we had in 2012 and some reassessment that occurred in Texas in the fourth quarter in 2013. Ralph, you may want to expand on it.

Ralph A. Beattie

No, I think that's a very good explanation. If you take a look at our same-communities under management results, third quarter versus fourth quarter, it does show 1 percentage point of reduced margin, but that's due to the factors that Larry said. And we expect in the future to have revenue growth consistently exceeding expense growth. This is the first quarter that it has been the other way in many years and we don't expect that to continue. We consider this quarter an anomaly, and we expect in the future that our rate of growth in revenues will consistently exceed our rate of growth in expenses.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And just real quickly, could you go over the timeline for when you think the -- your conversions will I guess will be completed? And how long does it take to season? I'm just trying to understand, it sounds like, based on the previous occupancy comments that it's more a 2015 benefit to you than 2014?

Lawrence A. Cohen

We should start to see the benefit in 2014. As I mentioned, most of the licenses that will be required we expect to receive in the first half of this year. We already have received some. We have others where we have approvals and going through final inspections. We think we'll start to see the benefit in the second half of the year. What's interesting is that the average number of units per property is kind of like 14 to 30. So when you think about the fill rate, they really can fill within 6 months. There will be couple that will be a little more significant like in Florida, Veranda Club, where a couple of years ago, remember, I don't think, Dan, you've seen Veranda Club. That's a large independent living property that we licensed 45 units to assisted living 2 years ago. Those units are 95% occupied. That particular community occupancy improved from low 70s to 90%. So we're looking at second phase there that will start this summer. But most of, I think, the contribution will start to be generated in the second half of this year and should be fully appreciated in the first half of 2015.

Operator

The next will go to John Ransom with Raymond James.

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

Can you talk about how you're going to fund the equity piece of the transactions you have that you're looking at, the $100 million? I would assume you have to come up with something in the range of $30 million? And that's more than what your nonrestricted cash is?

Lawrence A. Cohen

It's about, probably close to $25 million, John. We're generating about, I guess, $10 million a quarter of free cash flow. We do have some asset sales that we talked about that we're also looking to complete that will generate we think numbers equivalent if not greater than that, so -- and we think that we have 1 transaction that will close in the near term. The balance will probably more towards the end of the -- second quarter, so we feel that the cash flow that we generated from the operations, our cash on balance sheet and some asset sales will help that. And then we also will get a recovery of some tax benefits on the carryback of tax segregation study, which I think is another about $5 million of cash that will come in later in the second half of the year. So we think that we'll have the cash that will be available for these acquisitions for the first half of the year.

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

Okay. And secondly, can you give us CapEx number for 2014, outside of M&A?

Ralph A. Beattie

I would say, John, this year was $13.6 million. That was up a little bit from 2012. Obviously, the portfolio is growing in size, so I would say that our recurring CapEx will probably be in the neighborhood of $4 million to $6 million, total CapEx will probably be closer to $15 million.

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

So the rest of that -- how much of that is in your 360 beds that you're converting? Does that...

Ralph A. Beattie

Very little.

Lawrence A. Cohen

John, it's interesting. I've got 360 beds we're converting. The only significant CapEx is a leased property where the landlord has a -- is paying for it. So we just build that into natural rent. The other cost is very little CapEx. It's typically the licensure process working with the architect, making sure we comply with building codes. There is not much in construction, so the CapEx on these conversions is really very, very minimal.

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

So what's the extra CapEx going toward then?

Ralph A. Beattie

It's going towards refurbishments and things that will improve future revenues and margins. So it's basically improving the portfolio.

Lawrence A. Cohen

Yes, if you go to our website, you'll start to see press releases that we've put out at the local level, the continual refurbishment of our properties. We just, I think, released one on Sedgwick Plaza in Wichita. We just finished one here in Plano. So throughout our portfolio, we're constantly looking at enhancing the common areas, dining room, chairs, carpeting, wallcoverings to freshen up the building. So that's something that goes on. We think we get an exceptional return on the investment when we look at the gains in occupancy and the potential for rent increases at those properties.

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

And as we model 2014, how should we think about CFFO growth? And I know you mention same-store EBITDAR in the, what, 6% to 8% range, but how should we think about the CFFO for the year, over 2013?

Ralph A. Beattie

Well, I think the way we would look at it, John, is we're looking at about $0.15 per share of 2013 acquisitions contributing incrementally in 2014. So if you took the 2013 number it should increase by about $0.15 just based upon acquisitions that have already been completed that haven't been -- had a full year of ownership. And then I would take the remainder of it and increase it by the 6 point -- 6% to 8% NOI growth. And then we're not getting any guidance on acquisitions other than the fact that we have about $100 million presently in due diligence.

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

Should we think about those as potentially kind of second half year events in terms of putting them in the model?

Ralph A. Beattie

I would put them in probably beginning third quarter.

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

Yes, right. Okay. And any comments about first quarter? Any seasonality or timing issues with your CFFO or EBITDAR that we should think about?

Ralph A. Beattie

Typically, the first quarter is not a strong quarter for CFFO. So you would normally not be able to take the first quarter, multiply by 4 and get a reasonable number for the year. So I think you might see a slight drop-off from the fourth quarter to first quarter and then momentum building throughout the year.

Lawrence A. Cohen

Although I would say that, I think, as I mentioned in my comments, the actual occupancy gains that we're seeing in the first quarter will compare everything very nicely compared to the losses that we had last year.

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

Okay. And finally, are you seeing any trend in acquisition prices? I know there's the blended rate of your debt is a little bit higher than what it had been, so are you able to offset some of that with a lower cap rate?

Lawrence A. Cohen

We are. And actually, the rates have come back down. 10-year treasuries today are about 2.65%. That -- what's interesting, Fannie and Freddie are narrowing their spreads. They're actually becoming more competitive on financing. We're also looking at 7-year financing, so the range of debt, based on where the treasury is today would be about 4.45% for 7-year, about 5.15% or so for 10-year, based on where the 10-year is training today. We been fairly consistent in our pricing and still think we can generate very significant mid- to high-teens cash-on-cash returns on these acquisitions and the pricing of the transactions that we have under agreement, and those that we are negotiating, I think are very consistent with the experience we had over the last couple of years.

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

Okay. And is your pipeline still being fed by developers that you got a historical relationship with? Or are you expanding that...?

Lawrence A. Cohen

They're new -- there's a lot of new development, new relationships, but they're all basically exclusive. We have -- the transactions I mentioned, one is actually -- came to us through a broker in a limited marketing. One is a repeat seller that we've dealt with previously. The other transactions are new relationships. Some of which we've cultivated over the last 2 years. So as I said, the pipeline that we have continues to grow. It's interesting, last year we had a very hectic December in 2012 because sellers wanted to take advantage of lower capital gains rates before tax law changes. January was kind of slow. We start this year really sprinting. So we're very busy. We have a number of letters of intent out with sellers that it's just us that they're talking to at this point, that we're in negotiations on. So we feel very good about the pipeline and the breadth of the sellers is expanding.

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

Do you see any assets coming out of Brookdale-Emeritus potentially?

Lawrence A. Cohen

We're not even considering that. That's always a possibility. That's not our focus. Those -- that does happen if it's going to be a widely-marketed transaction, we probably won't be very active in that process. So we like sticking to what we're doing. There's ample amount of opportunity of these smaller regional sellers that we deal with as opposed to a process run by a bank or something.

Operator

Moving on to Peter Sicher with Sidoti & Company.

Peter Sicher - Sidoti & Company, LLC

You've actually already addressed my question.

Operator

We'll now go to Darren Lehrich with Deutsche Bank.

Darren P. Lehrich - Deutsche Bank AG, Research Division

So a couple of questions. I guess just wanted to start on occupancy and you made progress sequentially as we can see here. I guess I'd be curious just to get your thoughts. As you think about 2013 and the attrition that occurred, early in the year it certainly was -- some of it was seasonal elements. From an operational standpoint, Larry, I just wanted to get your thoughts on what you guys may have been doing operationally that's helped improve and how you feel about some of those activities that have led to the improvement?

Lawrence A. Cohen

Sure. Well, first of all, let me kind of slice it a little bit, the available granular on attrition. For 2013, our independent living attrition was about 38.6% in '13 compared to 35.5% in '12. IL AL was actually slightly lower, 37.3% in '13 compared to 38.5% in '12. Our assisted living and memory care was 49.8% to 48.5%.

So overall, it's really in independent living that we found -- and as I mentioned, the total number of move-outs for the year was about 103. Most of it did occur in the first quarter and then we kind of stayed flat in sequential quarters, kind of never recovered. We started to see recoveries in August, September, had some more attrition in November, had a really good December. And right now, first quarter looks pretty good. For a quarter that typically is very seasonal, the winter has not impacted us nor has the flu, so we're starting to see some nice gains. We actually saw probably the best financial gain we've seen in years in the month of January, which is a result of a very strong December. So the area that we're focused on recognizing that -- I think what's happened, Darren, I went back and for 6 consecutive quarters, starting in the second quarter of 2012 through the fourth quarter of 2013, our independent living units, same-store, had occupancy gains every quarter and AL had gains in 5 out of 6. And then this past year, we lost occupancy, in IL lost 3 quarters, gained a little bit in the fourth quarter and AL was kind of flatter. A little -- most of that loss was the first quarter with the flu. So what we've realized and recognize is the age of our resident keeps creeping up, they're a little more frail and our independent living residents I think today, we've seen the average length of stay shrink to 31 months. So that has some impact. And the success that we have seen in these conversions. I mentioned, over the last 2 years 10 communities added more licensed units for assisted living and memory care, and those 10 communities saw an increase in their occupancy of 10 percentage points. Very significant. We had buildings went from 72% to 95%, 67% to 90% -- I mean 57% to 87%, 60% to 95%. So I mean some of these numbers are very, very significant. So we realized that by having the ability and focus of licensing more units to have the resident age in place should solve the problem but it's I think a function of the fact that our residents are aging. I think with the better economy, more consumer confidence better housing market, now we're not getting the same benefit we may have gotten on the value proposition of independent living, assisted living because of the care levels. That has something to do with it. But I do think it's really a function of the aging more residents that's increased the attrition and we think it will resolve itself as we license these units in our properties to assisted living and memory care.

Darren P. Lehrich - Deutsche Bank AG, Research Division

That's really helpful color. So one other thing that I just want to ask about, Ralph, around the cost segregation. Obviously, I think most of us had left that out of the CFFO estimate. At least, I know I did. So in thinking about that for 2014, any clues on how you think it might fall into place? And how it could be spread out? What's your expectation about recovering the residual of that?

Ralph A. Beattie

If you look at what we've realized so far, Darren, we realized about a $0.09 benefit in the fourth quarter of 2012, and then in 2013, we realized $0.14, $0.02 in the first quarter, $0.12 in the fourth. So we've realized about $0.23 per share of CFFO due to the cost segregation study. We will be doing recurring cost segregation studies as we bring acquisitions on, but I think we'll look at that as part of our normal tax planning strategy rather than try to break it out as a separate item. It was such a big impact over the last 5 quarters and we wanted to recognize it and give it a separate focus. But I think in the future you could just consider that part of our normal tax planning.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Okay. So there's no large outsized ones expected over the course of 2014?

Ralph A. Beattie

I don't think it will affect any quarter significantly, although we do expect to see some additional benefits flowing through our deferred tax assets as we complete additional studies from future acquisitions.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Great. Okay. And then just with regard to recurring CapEx, I know you said your number was $400 a unit in 2013. I guess, how does that change in 2014? And are you building any kind of inflationary elements into that estimate?

Ralph A. Beattie

The nice thing, Darren, is that the properties we're acquiring are all in excellent condition. We do get property condition reports and if there are issues that it to be addressed, the seller normally provides for those. So the assets we are acquiring, the increases in the portfolio require very little capital, if any. So that the $400 is probably a reasonable number. I would say it might be $450, but something in that range I think would be adequate.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Okay. That's helpful. And then I think one of the prior questioners may have been referring to the repositioning and the timeline of the repositioning and I think you answered part of the question by just talking about some of the conversions that you guys are doing. So just specifically on the repositioning, I would ask kind of where are we? And is it still a second half event? Any kind of broader update on when you'd expect that to really start to kick in and even come back into the same-store?

Lawrence A. Cohen

Darren, it's Larry. It would most likely be a second half event. What we plan to do at Towne Centre in Canton is convert some independent living apartments to memory care, some assisted living. We're also looking at different dining venues and different services for our residents. We've been working with a third-party helping us study the repositioning. There we think it impacted by weather because twice some trips were delayed or canceled because of snow in the Midwest. But as I said, that study should be -- was supposed to be completed end of January. It was delayed because of weather by a few weeks. We talked about it pretty frequently and I think we have very good ideas about what plan to do, and now we're starting to just prepare the drawings and the renderings and start going on this size. So as I said, I think, it will be something that will start in the second half of the year, that we'll start to see the benefit probably towards the latter part of the year.

Operator

Next we'll go to Dana Hambly with Stephens.

Dana Hambly - Stephens Inc., Research Division

So, Larry, just on the CCR repositioning, what are the costs associated with those empty units right now? Is there anything?

Lawrence A. Cohen

Right now, as far as maintaining those empty units or the cost of converting those emptiness?

Dana Hambly - Stephens Inc., Research Division

No, just maintaining them right now. I mean, is there anything...

Lawrence A. Cohen

No. I mean right now, they're just -- we pay real estate taxes. Obviously were going to challenge and try to appeal some of the taxes in light of the fewer number of units. It's just the fixed cost of the building, there's really nothing else. Utilities don't change. I mean, they'll probably go lower because the lights are not on. The heat's kept at a lower temperature. There's less food that we're serving and less meals. So from a comparative standpoint the expenses are lower, but there's really no unusual costs that we're incurring just by having those units closed at this point.

Dana Hambly - Stephens Inc., Research Division

Okay, all right. That's helpful.

Lawrence A. Cohen

If anything, it is obviously down.

Dana Hambly - Stephens Inc., Research Division

Yes, right. And so I'm just looking at your adjusted over EBITDAR margins over the past couple of years, I think in 2011, they were about 35%, picked up in 2012 a little bit, and obviously came back, here, in 2013. I mean is there anything different with the portfolio where we couldn't get back to kind of 35%-plus type margins just talking adjusted EBITDAR?

Lawrence A. Cohen

No, I think this year it was really the attrition -- if you think about it, I talk about 1 percentage point of occupancy is $2.5 million of EBITDAR. So that's probably where, if you think about it really, it's more than anything else just on the fact that the loss of residents during the course of 2013.

Dana Hambly - Stephens Inc., Research Division

Okay. And then on the -- and I'm trying to get a better sense on the conversions you're talking about one's fully converted. I think you said that time line was maybe early 2015 or first half of 2015. At that point, you think the consolidated occupancy would be at 90%? Am I misinterpreting that?

Lawrence A. Cohen

No, that is correct. Actually, if I can draw everyone's attention to our company's presentation. It's interesting, we have a slide -- it's actually Slide 15 in our company's presentation. It shows fourth quarter 2013, we have 11,114 units of which 5,888 are independent living, with an occupancy of 4,998 or 84.9%. By taking those 360 units away from independent living and add it into assisted living, you can see that the independent living occupancy, with no change from where it is at the end of the year, would be 90.4%. And the assisted living occupancy at 90% stabilization on those units would be 88.6% and the total company would be 89.5%. So it's really the function of shrinking the denominator for the IL. We are keeping the numerator static. And then the other component I mentioned is our average rents for assisted living is close to $3,700 a unit. If you think that we utilize 90% of those 360 -- about 320 units, that's $3,700 a month at a 60% margin, which is our experience, the -- because there's not much incremental cost on those converted units, but for the caregivers and some food, it would generate about $0.20 a year in annual cash flow from operations.

Dana Hambly - Stephens Inc., Research Division

Okay, all right. That's helpful. And then just last one for me. Ralph or Larry, I appreciate the color on the CFFO for 2014. As we think about the $0.15 coming on from acquired facilities, I mean, is there a chance -- I assume you're making improvements there as well, is there a chance that we could see that grow, maybe not 6% to 8%, but 4% to 5%?

Ralph A. Beattie

There may be some growth there, Dana, but we're looking at -- when we acquired those buildings, we estimated about $0.20 CFFO contribution in the first 12 months that we owned them and then when we took a look at what we actually realized in 2013, we got about a quarter of the full benefit with about $0.15 left. So there may be some growth in that, but not extraordinary growth.

Lawrence A. Cohen

But, Dana, let me clarify your question. I think when Ralph went through the analysis, Ralph, you took the $0.15 and put it into your 2013 base?

Ralph A. Beattie

Right.

Lawrence A. Cohen

And then increased the 6% to 8% same-store NOI growth?

Ralph A. Beattie

Right.

Lawrence A. Cohen

That would also apply to the acquired.

Ralph A. Beattie

Right. That's...

Dana Hambly - Stephens Inc., Research Division

Okay. So if I take the kind of $1.39 x the tax segregation benefit plus $0.15, you're saying grow that kind of 6% to 8%?

Ralph A. Beattie

That's what the numbers would indicate.

Operator

And we'll now go Todd Cohen with MTC Advisers.

Todd Cohen

Just a couple of quick questions. Larry or Ralph, you're offered kind of some big picture guidance for 2014. I'm just trying to remember, have you done that in the past?

Ralph A. Beattie

We've provided building blocks in the past, Todd. We've tried to be a little bit more specific than we have historically, but we've been very clear with our shareholders and analysts that we expect normally about a 3% change in average rents, about 100 basis points less rate of growth in expenses and revenues. And that provides something in the 4% to 6% range plus some occupancy growth would bring it to 6% to 8%. So the numbers really aren't new, I think we've just been a little bit more specific in this call than we typically are.

Todd Cohen

Okay, good. All right. And then the 360 units under conversion, how many buildings does that encompass?

Lawrence A. Cohen

Over 15, Todd. I means, the number is a number of what we think would be utilized. Because there are a number of independent living communities that we operate that are actually 120 unit buildings where we plan to license the entire building. But for purposes of utilization in the first year, we're only expecting about 30 of those units to be used for assisted living. Over time, that could change. We had -- it's interesting, Todd, we go through our portfolio and look at the success we have had with other conversions. I think some of you are familiar with the 3 buildings that we built in Ohio that opened in 2008 right in the heart of the recession. Rust Belt, auto industry. Not a very pretty picture. Those buildings were originally built as 101 units of independent, 45 of assisted, and with the flow lease up, we were about 58% occupied at the end of 2010. We started to license more independent to assisted, and every time we did it, it filled and we licensed more. Today, those 3 buildings are 90% occupied. The mix now went from 101 IL, 45 assisted to now 80 AL in 1 building and 65 independent. So I think what will happen is, it's interesting is the commentary that we're suggesting is the first wave of absorption of units. We in total will be licensing many hundreds of units more than the 360. So we think that it's maybe a $0.20 contribution in the first year, but expect that in future years there will be more growth from those as more units will be occupied by assisted living residents.

Todd Cohen

Got it. Okay. And then on the discussion regarding the CFFO for the first quarter you indicate that that's seasonally not as good of a quarter, typically, than the fourth I think you said?

Ralph A. Beattie

I probably should have said it a slightly different way, Todd. Typically, the fourth quarter is our strongest quarter for CFFO. So it's not necessarily that CFFO is going to decline, it's just that the fourth quarter is normally abnormally high.

Todd Cohen

Why...?

Ralph A. Beattie

We realized $0.40 in both the fourth quarter of 2012 and the fourth quarter of 2013. Those happen to be the highest quarters in each of those 2 years. But as Larry said, trends are very positive, and we're going to do everything we can to make sure we maintain that run rate.

Todd Cohen

So, Ralph, just curious, why is the fourth quarter typically the best from a cash flow point of view, because I know...?

Ralph A. Beattie

Todd, because there's a lot of balance sheet and cash flow changes that take place that are behind that calculation, so while the calculation may appear simple, it's not. There's a lot of changes in deferred tax assets and liabilities that factor in so that there's enough moving parts that the fourth quarter and year end and the audited results are more analysis and determination than the other quarters. So typically, there is a process we go through that tends to add a little bit to the CFFO in the fourth quarter.

Todd Cohen

And is it possible to pick that up in the first quarter with an occupancy improvement?

Ralph A. Beattie

Certainly, the first quarter occupancy improvement could make up for whatever difference might otherwise exist.

Todd Cohen

And then we should pull out the $0.12, right?

Ralph A. Beattie

Yes, I would start with a $1.39 rate for the full year, $0.40 for the fourth quarter.

Operator

We have a question from Daniel Bernstein with Stifel.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Sorry, I'll make this quick. Now that you've been buying more assisted living and doing a lot of conversions to assisted living, how have you changed your controls for quality of care and training? I'm just trying to understand as you go from IL to a more AL operator, how are you training -- changing your internal controls for those?

Lawrence A. Cohen

Great question. We now have a quality assurance committee that senior management meets quarterly. We have hired a clinical director who has 20 years of experience in nursing. She joined us this summer. She actually was working for Weber Insurance carriers, and she was responsible for all the quality assurance we did with our carrier. She does survey. We -- I think that -- it's interesting, I was in Florida. I had 3 vendors come up to me and said that they were so impressed with Capital Senior Living's quality assurance. We have Vigilant now with care plan technology that we've rolled out over the last couple of years. We've been very pleased with that, has helped us in assessing residents on move-in, every 60 to 90 days, working through the billing, the care levels and the staffing. We then have, actually, both in-house and consultants through our insurance carrier, regularly going into our buildings and doing surveys. We now have reporting going to our corporate -- we've expanded our corporate governance and nominating committee this past quarter to also include quality assurance. On that committee is the former Chairman and CEO of Gentiva and one of the leading geriatric physicians in the country that was the medical director of LIJ North Shore Hospital and before that Gentiva. So we think we have some very talented people and we have now developed 6 or 7 metrics that we score to with care plans and correctional plans for that. We have webinars. We have now hired a third-party that is actually going to continue -- we do have to train the trainers by region. We have a national program. We have third-parties with tailor-made webinars and training exclusively for Capital Senior Living. So we think that we are -- and we are starting to look at certifications. We think we're at the leading edge of this curve for the industry and for a company that 3, 4 years ago was predominantly independent living, as we have expanded the assisted living, we've brought in a lot of resources, both in-house and out, to really provide, I think, the highest -- one of the highest levels of care and quality assurance and training in the industry.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

No, it's good. I don't think I've ever asked you the question before, so it's -- you get nervous when you go from something that you didn't do couple of years ago to something now, and that's a good answer.

Lawrence A. Cohen

It's interesting, Dan. I have a comment for everybody. 2013 is probably really a transitional year for our company. I kind of ticked off things that we've done through the year, but when you really delve deeper into the breadth of what we're doing on our regional oversight, district managers, quality assurance, workers comp plans, same thing there as far as people going out and training, how to lift, how to do things to minimize comp -- workers' comp claims, you look at our insurance and risk management features. And our consultant there, I think, we're at the leading edge of the industry on the whole breadth of risk management and insurance. It's just not something we talk a lot about. But I said, I think that as a shareholder, I'm very pleased with the performance of the company and the focus of the team to really focus on quality care as being a very, very important factor in being able to serve our residents, and it's interesting. I was at Rose Arbor in Maple Grove, Minnesota last week. I had lunch with our sales director and our exec director and all they talked about was the health care provider, the steps programs, the balancing programs and all that they're doing that allows that building to be 98% occupied because of its reputation. It just got designated as the #1 assisted living community in its market. And a lot of it is because of all the care -- some of it's done by third parties, some of it's done by our own staff. But we have a very robust program and oversight and assurance and training across our entire company.

Well, I think that's the end of the questions. We thank everybody for participating today. Feel free to give Ralph or myself a call if you have any further questions, and we look forward to seeing you at various conferences in the future. Have a good evening. Thank you very much.

Operator

This does conclude today's conference. We do thank you all for joining us.

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