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Capital Senior Living (NYSE:CSU)

Q1 2014 Earnings Call

May 06, 2014 5:00 pm ET

Executives

Lawrence A. Cohen - Vice Chairman and Chief Executive Officer

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

Analysts

Darren P. Lehrich - Deutsche Bank AG, Research Division

Joanna Gajuk - BofA Merrill Lynch, Research Division

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

Dana Hambly - Stephens Inc., Research Division

Todd Cohen

Operator

Good day, and welcome to the Capital Senior Living First Quarter 2014 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; re-financing; community sales; 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 very much. Good afternoon, and welcome to Capital Senior Living's first quarter 2014 earnings release conference call.

I am pleased to report positive results for the first quarter as we continue to recover from high levels of attrition in 2013 with growth in revenue, EBITDAR and occupancy. These improvements were achieved despite harsh winter weather. However, winter-related expenses negatively impacted first quarter financial results.

In the first quarter, we completed the acquisition of a senior living community for approximately $14.6 million. This community enhances our geographic concentration around Ohio and was financed with approximately $11 million of non-recourse, 12-year mortgage debt with a fixed interest rate of 5.43%. This acquisition is expected to add adjusted CFFO of $0.02 per share and increase annual revenue by $4.5 million.

We expect to acquire approximately $84 million of high-quality senior living communities in regions with extensive operations in the second quarter, subject to customary closing conditions. In addition, we are conducting due diligence on approximately $34 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 third quarter of 2014.

Our pipeline remains robust, and we are negotiating additional transactions consisting of high-quality senior living communities in 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 other companies in our peer group with our sole focus on the 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 have implemented many initiatives that are yielding positive results. During the first quarter, we experienced a 30% increase in visits to our website and increases in our community leads from the launch of our integrated marketing program, a new, responsive website, an eMarketing campaign and expansion of our search engine optimization strategies. We are also benefiting from the utilization of software programs at our assisted living communities that optimize care plans and level-of-care charges as well as enhanced training and adherence to quality assurance. We are also encouraged by the positive results from our call centers that were initiated at many of our communities earlier this year.

We have also enhanced our private-pay revenues by closing the only skilled nursing beds we had operated in 2 continuing care retirement communities. I'm excited about the very attractive design plans that had been developed to reposition these 2 communities, which will include the addition of 21 memory care units, the conversion of 40 independent living units to assisted living and adding more interesting and appealing spaces, such as additional dining venues, Internet café, media room, theater and conversation clusters, at each of the communities.

While these 2 communities are being repositioned, they will be excluded from same community results. At communities under management, same community revenue in the first quarter of 2014 increased 0.8% versus the first quarter of 2013. As we experienced in December 2013, first quarter same community expenses were impacted by higher costs from the unusually harsh winter, including heating costs and snow removal, along with multiyear real estate tax adjustments from successful tax appeals and referral fees from higher move-ins.

54 of our 113 communities had winter-related -- weather-related insurance claims during the quarter. Excluding these unusual items, same community expenses increased 1% and net operating income increased 0.7% from the first quarter of the prior year.

First quarter 2014 same community average monthly rents were $3,115 per occupied unit or 1.2% higher than the first quarter of 2013.

First quarter same community financial occupancy improved sequentially 20 basis points from the fourth quarter of 2013. We had 110 more same community net move-ins in the first quarter of 2014 compared to the first quarter of 2013 as this year's flu was mild for seniors. First quarter occupancy trends are typically the weakest of the year. Our improvement in the first quarter occupancy is encouraging, particularly in light of the harsh winter weather and increases in April traffic and deposits, indicating promising improvements in second quarter occupancies.

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 required licensure approvals for most of these conversions during the second and third quarter of this year. Once these converted units are stabilized, we expect overall occupancy to increase by approximately 300 basis points to 90%. And when stabilized, these converted units are expected to add approximately $0.20 in annual CFFO and enhance the value of our owned real estate.

We have a successful track record in converting vacant and independent living units 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 units have been very well received, as demonstrated by our successful 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 continued to be solid with demand outpacing supply. Midmath [ph] reported favorable supply-demand trends for independent and assisted living communities with a slowdown in construction starts during the first quarter of 2014. And unit absorption-to-supply remained positive in the first quarter 2014.

As we have discussed previously, new construction remains muted in most of our markets, confirming that our value strategy with average monthly rents of $3,145 acts as an economic barrier to entry for new developments 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 would expect to see new construction in most of our markets.

With strong industry fundamentals, an improving economy and 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 additional organically driven CFFO growth and increases in our real estate values. Every 1% improvement in occupancy is expected to generate $3.8 million of revenue, $2.7 million of EBITDAR, and $0.06 per share of CFFO.

We are also looking to improve the quality of our portfolio and increase our liquidity by selling certain non-core communities. 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 operating strategy is to provide value to residents by providing quality senior living services 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 our very important objective of enhancing shareholder value through organic growth, proactive expense management and utilization of technology as well as allocating capital to accretive acquisitions of high-quality senior living communities in our geographically concentrated regions, unit conversions and community refurbishment projects. As we maximize our competitive strengths, we are lowering the cost of our capital.

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 3 years, we have acquired 36 communities for a combined purchase price of approximately $430 million. These strategic acquisitions have generated greater than a 16% cash on cash return.

Our success in acquiring quality communities in off-market, non-brokerage transactions validates our competitive advantage as a highly respected and credible owner-operator with the financial ability to complete transactions. 90% of the communities we have acquired or expect to acquire this year are off-market transactions. Many local and regional operators tell us that they prefer to transact with Capital Senior Living as opposed to REITs or private equity investors as they feel comfortable in trusting their residents and staff to the Capital Senior Living family. 50% of the communities that we purchased last year, and many that we expect to acquire in 2014, are with sellers that we have completed previous transactions.

As our cash flow continues to grow and our liquidity improves from refinancings and planned asset sales, our robust pipeline provides us with ample quality acquisition opportunities in a favorable financing market. We are excited about continuing our successful acquisition programs this year and in future years. We are well positioned to add to our accomplishments, and I am optimistic about our future as I am confident in our team's ability to continue to successfully execute a well-conceived strategic plan.

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.

Last week, we announced that our CFO, Ralph Beattie, will be retiring from the company. Ralph will continue to serve as a consultant until next February. I want to thank Ralph for his friendship, his 15 years of service and many contributions to the company. I wish him all the best on his retirement. We are excited to have a highly qualified successor in Carey Hendrickson join our company as Senior Vice President and Chief Financial Officer. Carey has 22 years of public company finance and administration experience in a multisite, geographically concentrated media company and will be a valuable member of our management team as we focus on operations and growth in geographically concentrated regions.

I look forward to many of you meeting Carey over the next several months as he will be joining me at our many upcoming investor conferences.

I would now like to introduce Ralph on his 50th earnings conference call to review the company's financial results for the first quarter of 2014.

Ralph A. Beattie

Thanks, Larry. Good afternoon. I hope everyone has had a chance to see the press release, which was distributed early today. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the first quarter of 2014.

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

The company reported revenue of $91.9 million for the first quarter of 2014 compared to revenue of $86.2 million for the first quarter of 2013, an increase of $5.6 million or 6.5%. We consolidated 110 communities on our income statement this quarter versus 99 in the first quarter of the prior year due to the acquisition of 11 wholly owned communities.

Financial occupancy of the consolidated portfolio averaged 87.1% in the first quarter of 2014.

Excluding the 2 CCRCs that are being repositioned, average monthly rent for the consolidated communities was $3,126 per occupied unit in the first quarter of 2014, an increase of $64 per occupied unit, 2.1% higher than the first quarter of 2013.

As a percentage of resident and health care revenue, operating expenses were 61.8% in the first quarter of 2014. Margins were negatively impacted by higher utility and snow removal costs from an unusually harsh winter, and real estate taxes were higher in the first quarter of 2014 because the first quarter of 2013 had multiyear favorable tax adjustments from successful property tax appeals. Furthermore, higher move-ins during the quarter resulted in higher referral fees to third parties. The unusual weather-related costs, along with higher real estate taxes and higher referral fees, totaled approximately $1.6 million and increased operating expenses by 1.8% of revenue.

Excluding transaction costs, general and administrative expenses as a percentage of revenues under management were 4.9% in the first quarter of 2014. Transaction costs were approximately $0.5 million in the quarter.

Adjusted EBITDAR for the first quarter of 2014 was approximately $31 million, an increase of $0.5 million, or 1.7%, from the first quarter of 2013.

Excluding the two CCRCs being repositioned, EBITDAR margin for the first quarter of 2014 was 34.7%. EBITDAR margin would have been approximately 36.5% for the quarter, excluding the unusual costs referred to earlier.

Adjusted net income for the first quarter of 2014 was $0.2 million, $0.01 per share, excluding the nonrecurring and noneconomic items reconciled in the press release.

Adjusted CFFO was $7.9 million, or $0.28 per share, in the first quarter of 2014. Adjusted CFFO would have been approximately $0.07 per share higher, or $0.35 per share, if not for the unusual weather-related costs, real estate taxes and referral fees mentioned earlier.

Capital expenditures for the quarter were approximately $3.1 million, representing $2.2 million of investment spending and $0.9 million of recurring CapEx. If annualized, the company spent approximately $325 per unit on recurring CapEx in the first quarter of 2014.

The company ended the quarter with $23 million of cash and cash equivalents, including restricted cash. As of March 31, 2014, the company financed its 60 owned communities with mortgages totaling $485 million with a blended average interest rate of 5.25%. None of the company's mortgages mature before July of 2015.

The company's mortgage debt includes a loan portfolio of 15 communities totaling approximately $112.7 million as of March 31. Originally structured as a 10-year, fixed-rate mortgages with a maturity date of July 2015, this loan portfolio has a blended fixed rate of 5.96%. The company is pursuing a refinance of its loan portfolio to take advantage of lower interest rates and the appreciation in value of these owned communities. Based on current rates, the company expects to lower the interest rate on this portfolio approximately 150 basis points. This anticipated refinancing is expected to close at the end of the second quarter of 2014, generating approximately $30 million in additional proceeds and actually lowering the company's overall borrowing costs. Additional cash is expected to be generated upon the planned sale of certain non-core owned communities in the third quarter of this year.

Cash on hand, cash flow from operations, net proceeds from its anticipated refinancing and community sales are expected to be sufficient for working capital, prudent reserves and equity needed to fund the company's acquisition program.

We'd now like to open the call to questions.

Question-and-Answer Session

Operator

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

Darren P. Lehrich - Deutsche Bank AG, Research Division

I wanted to ask a couple of things. I guess just going back to last quarter, you talked in the conference call about some very strong momentum, particularly in January, with regard to move-ins. I wonder if you can just characterize a little bit more about how the quarter progressed relative to move-ins and whether you saw any weather disruptions. I know you're calling out more from the expense side, but relative to just activity in the communities.

Ralph A. Beattie

It's interesting. Despite the weather, we had 2 weeks where deposit taking was low. We had the second week of January of particularly low deposit taking, which we think was weather related. The rest of the quarter actually -- and then we had -- we saw 2 weeks, that week and then the week of January 24, that had move-ins that were probably half of our normal pace, but we kind of boarded those with very strong move-ins the first week and last week of January. We saw momentum pick up during the quarter as well as this quarter. It’s interesting. If you look at this quarter compared to last year, we -- as I said, we ended up net about 110 move-ins higher than last year. We had better deposit taking, better move-ins and much lower attrition. So despite the weather, I think that the pace during the quarter was pretty encouraging. And as I said, we could identify a few weeks that clearly, because of weather, we saw some impact on weekly move-ins, but we seemed to kind of recapture that in the succeeding weeks.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Got it. And did you say that continued through April? Is that what I heard?

Ralph A. Beattie

April. Actually, the month of April had move-ins a little higher than our average in the first quarter. Deposit taking is up also in April. So, as I said, we're hopeful that we'll have an improvement in the second quarter as well.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Okay. And then I guess I just wanted to hear from you whether there's any change in your thinking about the time line for the repositioned communities in terms of when they might reach stabilization and how that's progressing.

Ralph A. Beattie

Sure. We're making good progress on the conversions. As I mentioned, there are 15 buildings that are in the process. We've actually have gotten license on a couple. I would expect that our target dates for the balance of the properties are either the second or third quarter. The CCRCs will be fourth quarter. Repositioning, as you can tell, those are really retrofitting and much more significant work that's going at those properties, but we have schematics and are now bidding out the costs for those conversions. So we think that we will continue to see improvement in the revenue from the conversions starting in the second half of the year and progressing and improving through the first 3 quarters of 2015.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Okay. And then just last thing for me. You're calling out higher referral fees, and I just want to make sure I understand. I mean, obviously, higher move-ins is a good thing, and that's what we're hoping for. But was there something about the structure of your referral fees in terms of what you've needed to pay out this quarter that is different? And if not, why should we be thinking about the higher referral fees differently if it's generating demand?

Ralph A. Beattie

It's a good question, Darren. Referral fees were up 19% this quarter. It was unusually high. Those fees are paid up front. The resident income is earned over 2 to 3 years. So we felt that this was much higher than we've ever seen in other quarters. We thought it was a little bit of an aberration, so we called it out. It wasn’t a significant part of the overall increase in costs compared to the weather-related and realty taxes. But it was an aberration. And as I said in the quarter, the fees were up about 19%, which we felt was high.

Operator

And we'll go next to Joanna Gajuk with Bank of America.

Joanna Gajuk - BofA Merrill Lynch, Research Division

So on that last point, can you quantify a little bit more the breakdown between the 3 elements, the weather, real estate taxes and the referral fees? Does it mean that this $1.6 million is pretty much all weather and real estate taxes?

Ralph A. Beattie

Joanna, the largest of the 3 items that we cited was the utilities. Heating costs were up significantly. Many of our communities are located in cold climates. And as we said, we also had the heavy snow removal, which we classify as part of those winter costs.

Real estate taxes were actually not unusually high, only relative to the first quarter of the prior year, which was unusually low based on some multiyear tax credits that we've received based upon property tax assessments that took us a long time to bring back in the line. And then smallest to the 3 were the referral fees, that Larry just discussed.

Lawrence A. Cohen

I'll break it down. The referral fees were about $150,000, Joanna. The balance of about -- talking about roughly $1.3 million, half of that was utilities and snow removal and the other half was real estate taxes.

I'm sorry, it was 2/3, 1/3. 2/3, so about $800,000 was snow removal and utilities and about $450,000 in real estate taxes.

Joanna Gajuk - BofA Merrill Lynch, Research Division

Great. And then, coming back to what was discussed last quarter and how you talk about the outlook for the year in terms of occupancy increases and rate increases, cost increases, so any changes to those items, so do you still think that occupancy will be up 100 to 150 basis points for the year and rate will be up 3% for the year?

Lawrence A. Cohen

Occupancy, we think is actually tracking ahead of our plans. When we budget internally because the first quarter usually is the most challenging, we expect flat occupancy in the first quarter. So our assumptions are we see progression in the second, third and fourth quarter. So picking up 20 basis points is a little better than we had projected internally. On rate growth, we're still budgeting 3%. This quarter, the rate growth was a little lower. We did have some promotions in December that resulted in the temporary reductions in rents in the first quarter that will come back in the second quarter, the balance of the year. So we're -- and I think our consolidated revenue was up a little over 2%, but we're still budgeting 3% rate growth for the year.

Joanna Gajuk - BofA Merrill Lynch, Research Division

And then on the NOI growth, 6% to 8%, I guess, still?

Ralph A. Beattie

Yes, based upon those factors for occupancy and rate and expense growth, that would translate to about a 6% to 8% NOI growth rate.

Joanna Gajuk - BofA Merrill Lynch, Research Division

Great. And then, it seems like the deal that you just did in the first quarter, a little high quality asset there. So the -- and I guess the commentary in the press release on the call suggests that the deals that you're working on are also high-quality, but are they similar? I mean, the average rent for this asset was pretty high, so are you looking at assets comparable to that or more looking like those that you did in 2013?

Ralph A. Beattie

The $84 million of transactions we're closing this quarter have average rents probably in the $3,600 to $3,800 a month range. The transactions that we mentioned, the $34 million, will have rents probably in the mid $3,000 range there. Again, if you're looking at the acquisitions on property type, we're looking at independent and assisted living mix on the $84 million. And then on the other properties, it's probably about 2/3 assisted living, 1/3 independent living. But the high -- the quality is very consistent with what we've acquired. I mean, we're very excited about the quality of the properties that we continue to have the ability to buy, and I think 2014, so far, we are -- I guess, we've talked about $133 million of acquisitions through the third quarter, and there's more that we're working on. Obviously, this is just the first week of May, so we're on a pretty good track. And I would say that the quality in the average rents of what we are buying this year is higher than what we've done previously.

Operator

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

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

I wanted to make sure I understood that, that extra $800,000 utilities and snow removal, is that the actual dollar amount that you've spent in the quarter? Or how much you -- how much above your normal accruals or expectations you would have for winter costs?

Lawrence A. Cohen

The actual cost of utilities was $4.6 million, snow removal was about $200 -- I'm sorry $1,070,000. So yes, that's -- the number we gave is what was higher than what was expected.

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

Okay, $800,000 variance over normal?

Lawrence A. Cohen

Yes, over normal. Last year, there were 5 -- yes, it's really looking at the variance off budget and off of last year.

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

Okay, okay. I also wanted to ask about the performance of the non-core assets you want to sell. So if you look at the overall impact on the 1Q earnings, was that a significant impact on the operating margin was -- if we took out the non-core assets that you're going to sell, would earning -- how much earnings would have been higher? I mean, I'm just trying to understand how much the -- are those assets making money? Are they losing money?

Lawrence A. Cohen

They're making money, but they're our lowest margin. The margins of those properties run -- we're talking about properties are probably in low double-digit margins, kind of 15%, 20% margins. They have the lowest average monthly rents in our portfolio. Some of the incentives we spoke about in the fourth quarter coming through this quarter was on those buildings because we wanted to see some better improvement in occupancy in the market. We have been getting very strong interests from buyers, so we're very encouraged by that. But I can't give you the dollar amount, Dan, but if -- they are kind of the assets that are full at the bottom of our average monthly rates as well as NOI per unit and margin. So these are non-core, but they're also some -- and they're all making money by the way. But again, they are probably performing at less than half of our core properties.

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

Okay, and are they all owned or was there mix of owned and leased in there?

Lawrence A. Cohen

They're only owned -- they're all owned properties.

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

Okay. And then also, just looking at the consolidated -- trying to understand sequentially, it looks like to me that if you took the consolidated assets, which you had one extra asset from last quarter, it's looks like occupancy was up 50 bps. Is that really the right way to think about it? That occupancy was up about 50 bps Q-over-Q and not 20? Just -- well, just give me the overall performance?

Lawrence A. Cohen

Yes. What we did, Dan, we tried this year in response to some of the requests we received from investors and analysts to be -- have a way -- have a better stable same community count of units. We have a number of buildings that have shared suites and the way they are built with the way we would calculate those as units. So if they were 2 residents in the unit, they were to count as 2 units, even though there's just one doorknob. What we've done this year to have consistency, and that's why we adjusted the numbers, we now -- the number of units is actually what is the doorknobs and the way that we report the occupancy is what all our financial or lenders do is, for example, if you have a shared suite with one doorknob and there are 2 bedrooms, they'd 0.5 occupied for each bedroom. So it had some -- if you look at the numbers, its slightly lower as far as the unit count and occupancy, so when we ran the comparison -- rather than looking at last quarter's report, year-over-year and sequential, is using apples-to-apples, using the same unit count, same occupied unit, and we expect this will be a fairly consistent count throughout the year.

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

Okay, okay. So 20 bps is a better indication of the idea.

Lawrence A. Cohen

That's a true number.

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

Okay, still up, but -- okay, it's just your understanding. And then one last question, when you listening to the REIT earnings calls? Most of the REITs are really talking about further competition from assets, maybe even some more cap rate compressions, seniors housing. While you do most of your acquisitions off market, what are you seeing in terms of any pricing pressure on those off market transactions? Just trying to understand whether your investment spreads are compressing or not.

Lawrence A. Cohen

Not really. If you look at the returns that we're achieving, it's been very consistent. 90% of our transactions are off market. We do bid on marketed deals and we're seeing kind of some of the marketed numbers and some of the offers we're starting to get on some of our sales, which is a marketed transaction. So we've been very disciplined in our approach. I'd say that the relative pricing to us has really remained relatively constant. The other phenomenon that you kind of heard on the refi, but I think was subtle, we're seeing a more competitive financing market, where our spreads are narrowing and interest rates are coming down considerably. So we're looking to borrow money now for acquisitions at levels we haven't seen in -- really going back for over a year. So it's interesting to see that, as Ralph mentioned in the refinancing, we're expecting 150 basis points reduction off 596, that suggests like a 4.5% rate. So we're starting to see rates coming back in that range which we hadn't seen in some time. So we actually think that it will accelerate the cash flow growth on these acquisitions and improve the returns on our equity because of the lower financing. But we've been able to maintain a lot of discipline and as I said, in these off market transactions, the sellers are coming to us, and really only want to deal with us. So we've been fortunate, we've been very selective, we are only buying typically 15%, 20% of what's in the market. And we feel very, very fortunate that this year looks like an excellent year. We have a really great pipeline for the second half of the year, also off market, which we think will continue to have similar pricing to what we've seen in the past. Again, every deal is going to be a little different, but in a relative basis, it's very different than what we're hearing from the REITs or hearing about in some of the marketed transactions.

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

Okay, that's very good. I have one last question, I'm sorry, I just thought of this. Are you doing anything to offset future referral costs? I mean, what do you do -- I kind of thought that you were doing some of that with your website and other sales and marketing issues, but just trying to think about how you could mitigate referral costs in the future or...

Lawrence A. Cohen

Well, I think, we're investing in a website. Our costs on our website this year are up, because we have expanded the -- and we're seeing, as I mentioned, this quarter alone, the first quarter, the website digits were up 30%, Dan, which is very encouraging. We have developed new strategies this quarter on better search engine optimization, better stickiness, repeat e-mails, so we're continuing to invest and enhance the use of the website and the Internet, so that hopefully, we can start to reduce some of those referral costs. This quarter was really an anomaly, I've never seen it this high. The good news is we have a lot of move-ins, but it was a place for mom and others that really -- those fees came up quite a bit and we are combating that by expanding the utilization and the different initiatives we're using in techniques to get better visits and leads from our website and other local initiatives.

Operator

And we'll go next to Dana Hambly with Stephens.

Dana Hambly - Stephens Inc., Research Division

Just a question again on the loan portfolio that you're going to refinance, it's a 10-year fixed rate, are you going to refinance that into a new 10-year fixed rate?

Lawrence A. Cohen

Yes, yes.

Dana Hambly - Stephens Inc., Research Division

All right, so that'll push is the maturity out for another 10 years from now. And so -- and this is probably a naive question, but you're getting 150 basis point savings off of that portfolio, so you -- I think you mentioned, Larry, more in that kind of 4.4% range -- 4.5% range and -- or you just finance a building at that 5.4%? I'm just trying to understand the discrepancy.

Lawrence A. Cohen

Well, that was a single asset $11 million loan versus a portfolio. This portfolio is very aggressively being bid on by various lenders. The Fannie, Freddie life companies want to do business with us, so there is an expansion. The other thing about this portfolio, it's predominantly independent living. There is definitely a lower-cost borrowing on IL versus AL. The spread is, what, 30, 40 basis points. So that had a big factor, because this is a predominantly independent living portfolio. And it's just the fact that it's a large portfolio where we have been fortunate to have a very active process with lenders very desirous to financing this portfolio.

Dana Hambly - Stephens Inc., Research Division

Yes. No it's a no-brainer of a deal, are there any more that you can do?

Lawrence A. Cohen

Well, I would tell you the acquisition's financing is coming in very similar, so we'll keep our fingers crossed. It's nice to see the market kind of where it is today. And again, I caution that it's based on current interest rates, the 10-year today is like 260, so it's come down 40 bps, but the spread is narrow. But the spread, we're confident about it, again, rates could vary over the next couple of months. But that's why the other reason we wanted to accelerate this refi is to take advantage of current rates as opposed to waiting to next year.

Dana Hambly - Stephens Inc., Research Division

Okay, that's helpful. And can you just talk about your cash needs this year? Are you still able to finance deals at about 75% or 25% equity.

Lawrence A. Cohen

Yes.

Dana Hambly - Stephens Inc., Research Division

Okay. And then, what will you need this year for retrofitting and repositioning assets?

Lawrence A. Cohen

Our CapEx budget this year, I think, is about $14 million, and that combines both the -- which is about the retrofitting. Obviously, we're still getting bids on the Town Centre in Canton Regency retrofit, which is more significant. We are looking at retrofitting other buildings, but a lot of those buildings are leased, so we expect -- just like we're seeing in Veranda Club and Boca Raton that a lot of those buildings which are at least owned by REITs. The REITs, we expect will finance the retrofit and those build it into our rent, so it doesn't require a lot cash. The acquisitions are relatively new or have mostly been refurbished, so there were acquisitions, which represent today about 30% of our portfolio, really don't require much as far as the CapEx is concerned. So -- and 50 -- with the 50 properties we lease, a lot of those buildings that we would look to retrofit are leased assets. So we don't think it's going to require an unusual amount of cash, as I said, in Canton, we know we're still waiting for bids maybe higher than the most, because we're doing a more aggressive plan there. But we are interesting -- and the retrofitting is an interesting word, because in addition to our normal refurbishments, which are carpets and furnishings, we are looking at changing some of these buildings as far as lighting, landscaping, units, countertops, bathrooms, really modernizing the buildings, so they become more competitive in the market. And with that, we hope we get a very good return on those investments, because we think we'll gain both occupancy and rate.

Dana Hambly - Stephens Inc., Research Division

Okay, it leads to my next question. The conversions from IL to AL, do you feel -- you guys have a pretty high IL concentration. If you own a lot of buildings, are you at a competitive disadvantage? If you can't have your residence age in place, is that more attractive you think to potential move-ins to need the IL and the AL in the same building?

Lawrence A. Cohen

The IL market is -- we were seeing the IL market, there's really less on the front end. It's just higher attrition, so they're moving out sooner, because they're coming in frailer. Don't forget: inner IL properties, we have therapy, rehab -- we're actually talking now on a corporate wide program with a large healthcare company to expand some of the therapy and rehab in our buildings. We have home health, we have wellness, we have visiting physicians. So there's a lot of services in those building that can supplement the resident. And what's compelling to those residents is the average rate is about $1,200 a month lower than assisted living in more residential larger units. So there's still a fit for that. What we're finding is it's not so much on the front end, it's a moving out sooner. So it's the retention where those residents can transfer in place as opposed to moving someplace else that captures and meets that need, and that's where we see we have the ability to probably pick up 300 basis points of occupancy at a much higher rent.

Dana Hambly - Stephens Inc., Research Division

And when do you anticipate that all of those units will be converted and then stabilization for those units?

Lawrence A. Cohen

With the -- the only retrofit that we're talking about on this whole program are the 2 CCRCs which we hope to have done by the fourth quarter, Veranda Club in Florida, which is a REIT-owned asset, which is to going to a second phase, that would probably be completed in the first part of -- we're looking for construction to start this August, probably it's finished by year end. The other should start to take residence in the second and third quarters. So we expect to see -- and what's nice about those conversions, Dana, there's very minimal costs. The buildings don’t need any retrofit, there's no refurbishment, there's no CapEx. It's really just making sure that we have an architect, that we're compliant with building code, do the licensure application. We have to get the -- our Executive Director's licensed as administrators. So the cost there is really not significant at all. And we have -- most of these have applications filed or completed and we're working with fire inspectors, those type of issues on the local building code issues. But our target dates for those are predominantly Q3 and Q2, so we think that those will start to see some occupancy and revenue gains in the second half of the year. We expect -- because the unit size is on these conversions range from an average of 14 units to about 30, so we would hope that those will be filled within 6 to 9 months. So they should be pretty well occupied and hopefully, the benefit financially should be seen in -- throughout 2015.

Dana Hambly - Stephens Inc., Research Division

Okay, on that last point, Larry, I think you mentioned that, that should be an incremental $0.20 or so in CFFO when stabilized?

Lawrence A. Cohen

That's correct.

Operator

[Operator Instructions] And we'll go next to Todd Cohen with MTC Advisers.

Todd Cohen

On the conversion question, we've been talking about, there is 360 that you've referenced, is the Veranda and the retrofitted CCRC, is any of that included in the 360?

Lawrence A. Cohen

They are.

Todd Cohen

They are?

Lawrence A. Cohen

[indiscernible] 360, yes.

Todd Cohen

Okay. And then, how much of that 360 are the retrofits at the CCRCs?

Lawrence A. Cohen

As I mentioned earlier, as we're looking at the CCRCs, each one is looking to have approximately 40 independent, 21 memory care units, that's 120. Veranda, about a 45 units, and then the other properties, as I said, we're looking at ranges of 14 to 30. We're actually licensing over 800 units. So when -- we're trying to be very conservative in our guidance year in our outlook, because we're looking at many of these independent living buildings at licensing the entire building, but expect that in the first year, only about 30 units will be utilized. So when you do the full count, it's about 360 of what we expect to be utilized in the first year. But the actual number of licensed assisted living units will increase by at least 800 units.

Todd Cohen

Okay. And when you said the 360 within the first year, you're talking about everything we've just spoken about Veranda, retrofits and the others?

Lawrence A. Cohen

That's correct.

Todd Cohen

Okay. Also, obviously, the 360 conversions are hindering your occupancy opportunity right now.

Lawrence A. Cohen

It does have an impact. I mean, Veranda Club, we stopped admitting residents. We -- actually, because we're getting ready for construction this August. And we've done -- the first conversion is 95% occupied. So to convert 45 units, we actually are now keeping units vacant for that. So we don't take those out of our numbers they're in our numbers. But we do have -- in some of these buildings we're starting to prepare for conversions and keeping units off market so that we can prepare them.

Todd Cohen

Okay. And then I just want to make sure that I understood the metrics you referenced on the assets you're thinking of selling. You were referring to EBITDAR margins in the 15-plus percent range?

Lawrence A. Cohen

Those are facility level NOI, that's before EBITDAR -- that's before the G&A. So the EBITDAR margins, you can spread across those buildings, it's not going to be that significant but it would be a little lower than EBITDAR margin. I'm looking at the facility level net operating income number.

Todd Cohen

Okay. And is there a way to get a sense for the size of the assets in terms of dollars or range that you might be able to dispose of?

Lawrence A. Cohen

When we have contracts, we will announce what the sale prices are, and we're expecting these to be sold in third quarter, and we'll update everybody at the time that we have contacts in place. It's a process right now, they're being competitively bid. We have the offers coming in, but we're not giving indications of expected proceeds or value at this time.

Operator

It appears there are no further questions at this time, I'd like to turn the conference back over to the speakers, for any additional or closing remarks.

Lawrence A. Cohen

Well, again, we want to thank everybody. I look forward to seeing many of you at conferences in the next several months. And Ralph will be around this week and would be available for phone calls and e-mails. And so -- and we'll-- again, so keep his phone number for a while, so he'll be available for those of you who want to give him a call, but we do wish Ralph the best on his retirement. Thank you very much for 15 strong years.

Ralph A. Beattie

Thanks, everybody. Have a great afternoon.

Operator

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

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Source: Capital Senior Living's (CSU) CEO Lawrence Cohen on Q1 2014 Results - Earnings Call Transcript
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