Capital Senior Living's (CSU) CEO Larry Cohen on Q2 2016 Results - Earnings Call Transcript

| About: Capital Senior (CSU)

Capital Senior Living Corporation (NYSE:CSU)

Q2 2016 Earnings Conference Call

August 2, 2016 5:00 pm ET

Executives

Larry Cohen - CEO

Carey Hendrickson - SVP and CFO

Analysts

Chad Vanacore - Stifel Nicolaus

Joanna Gajuk - Bank of America Merrill Lynch

Ryan Halsted - Wells Fargo Securities

Jacob Johnson - Stephens

Brian Hollenden - Sidoti & Company

Operator

Good day and welcome to the Capital Senior Living Second Quarter 2016 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.

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

Larry Cohen

Thank you. Good afternoon to all of our shareholders and other participants and welcome to Capital Senior Living's second quarter 2016 earnings call. I want to thank our strong team at Capital Senior Living communities across the country for providing our residents with exceptional service and care. I am extremely proud of their hard work and dedication. It is our talented employees that give us such great confidence in the future of our Company and the continued quality care we provide our residents, and the long term value we are creating for all of our stockholders and other stakeholders.

Our strong second quarter 2016 results demonstrate the advantages of our clear and differentiated strategy to drive superior shareholder value, as we successfully execute on our multiple avenues of growth. Our focused execution of our strategic plan produced solid growth in all of our key metrics in the second quarter as compared to the prior year, including revenue, occupancy, average monthly rent, NOI, adjusted EBITDAR and adjusted CFFO, despite the heavy rains and flooding in Texas and in the Midwest that impacted our traffic in May and early June. Rainfall in Texas during the quarter was 25 inches above average and we saw the effect on weekly move-ins and deposits in those weeks with heavy rainfall and flooding.

Our occupancy gains, despite the weather, continue to outpace the industry, with same community occupancy increasing 50 basis points since the second quarter of 2015 and increasing 10 basis points from the first quarter of 2016. Same community average monthly rate increased 60 basis points from the first quarter of 2016. We achieved a Company record number of move-ins in the last week of June and June's end of month financial occupancy was 100 basis points greater than our June average.

We also ended the second quarter with a Company record number of green zone communities with a 15% increase in the number of communities with occupancies 90% or greater as compared to June of 2015. We expect this momentum in our occupancy to continue to build in the second half of the year as the third and fourth quarters are seasonally are quarters of greatest occupancy growth.

Our strong second quarter results reflect the successful implementation of various initiatives that increase shareholder value, both in the near-term and in the long-term, including occasional introductory specials at lower occupied communities, increasing rates at higher occupied communities, increasing level of care charges and disciplined proactive expense management.

We are also benefiting from the cash flow and value enhancing renovations, refurbishments and conversion of units to higher levels of care that are in process at more than 60% of our communities. They are resulting in exceptional increases in occupancy and revenues. These renovations, refurbishments and conversions are scheduled through the first half of 2017 and should lead to further improvements in our operating and financial results. And the transformation of our sales and marketing strategies is also yielding positive results, especially in Internet lead generation and call center activity.

Second quarter NIC MAP data shows that 54% of seniors housing construction is concentrated in 10 MSAs. We only operate in one of these markets and it represents about 1% of our units. Nationally, construction starts as a percentage of inventory declined for the second consecutive quarter and our superior results demonstrate that competitive new supply remains limited in our local markets due to low investment returns.

With our average monthly rate of $3,473 and average construction costs of approximately $200,000 per unit, the return on investment on the newly built community at 90% occupancy would be approximately 5.6%. This low return on cost is an economic barrier that limits competitive new supply in most of our local markets. In fact, the only local market that we are aware of with meaningful competitive new supply is in the McKinney, Plano, Allen, Frisco submarket in North Dallas which represents less than 2% of our portfolio.

Once again, I can state with confidence that we are not concerned about supply derailing Capital Senior Living's bright growth trajectory. With strong industry fundamentals and improving economy in housing market, limited competitive new supply in the local market, and the gains we are recognizing from our unit conversions, community renovations and refurbishments, we believe that our occupancies can grow to an optimal level of 92% to 93% delivering significant organically driven CFFO growth and increases in the long-term value we are creating in our owned real estate and for our shareholders. Every 1% improvement in occupancy is expected to generate $5 million of revenue, $3 million of EBITDAR and $0.10 per share of incremental CFFO.

Another compelling strategy to drive superior shareholder value is our accretive acquisitions. As we previously announced, we expect to acquire three communities for $74 million subject to completion of due diligence and customary closing conditions. These closings were expected to occur at the end of the second quarter but have been delayed because of our desire to obtain Memory Care certification in one case and the need to replace staff following an incident at another community.

These issues have been resolved and we expect to purchase one of the communities for approximately $18 million in mid-August and the other two communities totaling approximately $56 million are expected to close late in the third quarter or early in the fourth quarter. Once complete, these will bring the Company's total acquisitions in 2016 to approximately $138.4 million, and we have a strong pipeline of near to medium targets.

Our disciplined and strategic acquisition program is self-funded from internally generated cash. In the last five years, we purchased 57 communities for a combined price of approximately $803 million and prudently financed them with long-term fixed rate non-recourse mortgages with an interest expense coverage ratio of 2.7x. These acquisitions have generated better than a 16% cash on cash return on equity and first year CFFO of $1.23 per share.

Our success in acquiring high performing communities in off-market non-broker transactions at attractive terms validates our differentiated competitive advantage as a highly regarded and credible owner-operator with the financial ability to complete transactions. As our cash flow grows and our liquidity improves, our robust pipeline allows us to continue our disciplined and strategic acquisition program that increases our ownership of high-quality senior living communities in geographically concentrated regions and generates additional significant increases in EBITDAR, CFFO, real estate value and shareholder value.

As some healthcare REITs are reducing their allocation of capital to senior living acquisitions, Capital Senior Living is well-positioned as our differentiated investment strategy allows us to fund our growth from internal sources without raising equity or accessing the capital markets. And for our shareholders, we offer a more cost efficient investment vehicle with our second quarter G&A of only 4.1% of revenues compared to a REIT that is paying a third-party operator a management fee of 5% of revenues in addition to the REIT's G&A averaging 3.8% of revenues.

We have been proactive in enhancing the quality of our portfolio, increasing our substantially all private-pay revenues and improving our balance sheet. We closed the only skilled nursing beds we had operated and we sold older non-strategic communities, eliminating operations in three states. These actions have allowed us to sharpen our strategic focus, recycle capital and strengthen our operations in our geographically concentrated regions resulting in improvements in all of our key operating metrics.

We also continue to recognize the significant value that has been created in our wholly-owned real estate through attractive non-recourse fixed-rate long-term refinancings and supplemental financings at historically low interest rates, which have extended our mortgage maturities and increased our cash balances. During the second quarter of 2016, we completed supplemental loans on eight communities resulting in $19.5 million in cash proceeds. Additional supplemental loans are expected to be completed in the third quarter of 2016.

We have a very clear and differentiated strategy and benefit from larger company competitive advantages in a highly fragmented industry. Approximately 70% of the senior living operators in the United States are mom-and-pops. Most senior living operators are not well capitalized as they serve as a fee manager for a third-party owner or as a tenant under a triple-net lease with minimal coverage and escalating lease payments. In contrast, Capital Senior Living wholly owns more than 60% of our communities, which is the highest percentage of wholly-owned properties among the nation's top senior living operators.

Our differentiated investment strategy of owning our communities creates significant real estate value and generates sustainable cash flow, which we are investing in people, training, technology, systems, renovations, refurbishments, conversions of units to higher levels of care and accretive acquisitions, while maintaining prudent reserves. And our dominant competitive position in a highly fragmented local market is a catalyst for further aggregation of smaller operators with limited resources.

Our commitment to our most valuable resource, our people, limits turnover and strengthens resident satisfaction and length of staying. As many of you know, we recognize employee achievements and years of service every quarter, and today I was proud to issue gift cards and service PINs to one corporate employee celebrating her 15th anniversary and three corporate employees celebrating their 20th anniversaries with Capital Senior Living.

Capital Senior Living is transformed and improving. Our track record is proven. We are attractively positioned to drive superior shareholder value as a larger company with scale, competitive advantages and a substantially all private-pay business model in a highly fragmented industry that benefits from long-term demographics, need-driven demand, limited competitive new supply in our local markets, a strong housing market, and a growing economy.

It is my pleasure now to introduce Carey Hendrickson, our Chief Financial Officer, to review our Company's financial results for the second quarter of 2016.

Carey Hendrickson

Thank you, Larry, and afternoon everyone. Hope you've had a chance to review today's press release. If not, it's available on our Web-site at www.capitalsenior.com. You can also sign up on our Web-site to receive future press releases by e-mail, if you'd like to do that, there.

The Company reported total consolidated revenue of $111 million for the second quarter of 2016. This was an increase of $9.4 million or 9.3% over the second quarter of 2015. The increase in revenue was largely due to acquisitions the Company made during or after the second quarter of 2015, net of a disposition that we made in the third quarter of 2015.

During or since the third quarter of 2015, we've acquired 12 communities. Excluding the revenue of the community that we sold in the third quarter of 2015, our revenues increased $10.1 million or 10.4% in the second quarter of 2016 as compared to the second quarter of the prior year.

Revenue for our consolidated communities, excluding the three communities that are undergoing repositioning, lease-up or significant renovation and conversion, increased 9.4% in the second quarter of 2016 as compared to the second quarter of 2015. It's important to note that this 9.4% increase was achieved with fewer units available for lease in the second quarter of 2016 than the second quarter of 2015, exclusive of acquisitions, due to conversion or renovation projects currently in progress at certain communities.

Net operating income for these communities increased 8% in the second quarter of 2016 as compared to the second quarter of 2015. These results clearly illustrate the effectiveness of our strategy to acquire high performing communities in strong markets, dispose of non-strategic underperforming communities and to convert units at our existing communities to higher levels of care, while continuing to proactively manage our expenses.

Our operating expenses increased $6.5 million in the second quarter of 2016 to $67.2 million, primarily due to the acquisitions. Our general and administrative expenses for the second quarter of 2016 were $5 million compared to $5.7 million in the second quarter of 2015. If you exclude transaction costs from both years, our G&A expense was $400,000 lower than the second quarter of 2015. And on that same basis, G&A expenses as a percentage of revenue under management were 4.1% in the second quarter of 2016, as compared to 4.8% in the second quarter of 2015.

As we noted in the press release, the Company's non-GAAP and statistical measures exclude three communities that are undergoing repositioning, lease-up of higher licensed units, or significant renovation and conversion. Our adjusted EBITDAR was $39 million in the second quarter of 2016, which was an increase of $3.3 million or 9.2% from the second quarter of 2015. This does not include EBITDAR of another $800,000 related to those three communities that we are currently taking out of our numbers. The Company's adjusted EBITDAR margin was 36.5% in the second quarter of 2016.

Our adjusted CFFO was $12.9 million in the second quarter of 2016, which is an increase of 10.0% from $11.7 million in the second quarter of 2015. On a per share basis, CFFO was $0.45, compared to $0.41 in the second quarter of last year. The contribution to CFFO from communities acquired during or since the second quarter of last year was $0.06, which is in line with our expectations and public announcements related to these communities.

As Larry noted, our consolidated and same-community second quarter results were impacted by the heavy rain and flooding that we experienced throughout Texas and the Midwest, particularly during May and early June. Until that point, our trends in the quarter were strong and returning to our projection of $0.46 to $0.47 that we thought we would be at going into the second quarter, even after updating our projections based on May results, but the extended rains and flooding continued to dampen our traffic in June and caused our second quarter results to be a little short of expectations. Our traffic picked up dramatically in the last half of June, as Larry noted, most likely due to pent-up demand, and we finished the quarter strong, which gives us excellent momentum for the second half of the year.

Same-community revenue increased $1.7 million or 1.8% over the second quarter of the prior year. As noted previously, due to conversion and refurbishment projects currently in progress at certain communities, there were fewer units available for lease in the second quarter of this year than the second quarter of last year, 38 units less on a same-store basis. With a like number of units available in both years, same-community revenue would have increased approximately 2.2% versus second quarter of the prior year. We've now cycled against the community to have the most units taken out of circulation due to renovation or refurbishment. That project is near completion, and once it's completed, then we'll begin adding units back as they lease up.

Our same-community expenses remained very well under control, increasing only 1.7% in the second quarter of 2016 versus the second quarter of last year. Looking at the three major cost components, labor cost including benefits increased only 2.1%, which continues to confirm that we have very little wage pressure across our portfolio. Our food cost increased 0.6% and our utilities cost increased 0.9%.

Our same-community net operating income increased 1.9% in the second quarter of 2016 as compared to the second quarter of 2015. Again, with a like number of units available in both years, same-community net operating income would've increased approximately 2.6% from the second quarter of last year.

Our same-community occupancy was 88.6% in the second quarter of 2016, an increase of 50 basis points versus the second quarter of last year. Our same-community average monthly rent was up 1.6% versus the second quarter of 2015 but it was up 60 basis points from the first quarter, which equates to an annualized rate increase of 2.4%.

Our average monthly rent for our consolidated communities increased 3.3% versus the second quarter of 2015 and was up 90 basis points from the first quarter, which equates to an annualized rate increase of 3.6%. The improvement in our consolidated metrics versus the second quarter of last year reflects our accretive acquisitions of high occupancy communities with higher rents despite the heavy rain and flooding during the second quarter of 2016.

We continue to make steady progress on the conversions of independent living units to higher levels of care. Based on the second quarter 2016 results, the annualized impact of the second phase of 400 units converted to a higher level of care that were completed by midyear 2015 is currently approximately $0.09 per share of CFFO, with the contribution expected to grow through the year.

The impact of this first phase of 400 conversions on occupancy, revenue and NOI is outstanding. On a combined basis, occupancy at these communities has grown from 82.3% prior to conversion to about 89% at June 30, 2016. Revenue at these communities has increased more than 25% when comparing second quarter 2016 revenue for these communities to the revenues prior to conversion. And on the same basis, net operating income has increased almost 28%.

We completed another 100 conversions by the end of 2015 and we're in the process of leasing those units, and also we're making steady progress on additional 200 conversions that we expect to complete by the end of 2016 with the majority of those expected to be completed in the second half of the year. And additional conversions at other properties are also under consideration.

Looking briefly at the balance sheet, we ended the quarter with $57.7 million of cash and cash equivalents, including restricted cash which was an increase of $12.7 million since March 31, 2016. During the second quarter, we received $19.5 million in net cash proceeds related to supplemental loans for eight communities. We spent $16 million on capital expenditures which includes $3.1 million for leasehold improvements for which we expect to receive reimbursement from our leasers. During the second quarter, we received reimbursements of $3 million for capital improvements and expect to continue to receive reimbursements as projects are completed.

Our mortgage debt balance at December 31, 2016 was $834.4 million at a weighted average interest rate of approximately 4.6%. At June 30, all of our debt was at fixed interest rates except for one bridge loan that totaled $11.8 million. The average duration of our debt is approximately eight years with 99% of our debt maturing in 2021 and after.

As noted in the release and as Larry mentioned, we expect to close on three acquisitions totaling approximately $74 million in the third and fourth quarters, subject to completion of due diligence and customary closing conditions, which will bring our total acquisitions for the year to $138.4 million. We expect one of the acquisitions with a purchase price of approximately $18 million to close by mid-August, with the remaining two acquisitions totaling $56 million to close one in the late in the third quarter and the other early in the fourth quarter.

Looking at our expectations for the third quarter, the third quarter will be impacted by incremental seasonal expenses, as is the case every third quarter. Our utilities are generally about $900,000 higher in the third quarter than the second quarter due to the hot summer months and we have one more day in the third quarter than the second quarter, which equates to approximately $500,000 in incremental expenses.

This $1.4 million of incremental seasonal expenses will reduce our third quarter CFFO by approximately $0.05 per share as compared to the second quarter. However, the third quarter is generally our strongest quarter of occupancy growth, so we expect increases related to core operations, conversions and the one mid-quarter acquisition to add about $0.02 to $0.03 per share to our third quarter CFFO.

Also, as we look forward to the fourth quarter, our utilities should decrease, there is no difference in the number of days and our occupancy is expected to continue to accelerate based on the positive trends we're seeing. So we expect very good growth in our fourth quarter CFFO versus the third quarter.

That concludes our formal remarks and we would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] At this time, we'll take our first question from Chad Vanacore with Stifel.

Chad Vanacore

In the comments, you mentioned record move-ins in June. Can you give us a little more color on that?

Larry Cohen

The last week of June, we had 224 move-ins to our properties. Our average for the year is 95 a week. So that is quite an improvement. And as I mentioned on the call, when you look at financial occupancies for the month of June, which were 88.5%, the financial occupancy of our properties on June 30 was actually 100 basis points higher, 89.5%. And we saw that in all three levels of care, independent living end of month occupancies improved 110 basis points, assisted living up 90 basis points, and memory care up 130 basis points. So we had extremely strong end of the month.

The rains I mentioned really impacted four weeks during the second quarter. There was heavy rain and flash flooding around May 8th, the 15th, 22 inches of rain on May 26 and 27, and then some more rains hitting in early June. So that kind of were the weeks where we saw less deposit taking and move-ins, but as I said, this was a Company record number of move-ins, the last week of June.

Chad Vanacore

All right. So did the $3 million or so lease incentives drive a portion of that or was this just natural or is there something going on geographically aside from the rain that we should be thinking about?

Larry Cohen

I think demand continues to be strong, I would say that's pent-up demand, for people moving in at the end of June. We continue to show growth in occupancies and rate, and expect that to continue. I think it has to be with the fact that we provide excellent care and service, have very strong reputations and great staff in our local communities with limited competition, and the most important driver is just growing demand.

Chad Vanacore

Okay. And so with that in mind, should we expect occupancy to build more in the third quarter with all these new move-ins and then moderate in the fourth quarter, or would it be more an upward trend throughout the balance of the year?

Larry Cohen

If you look historically, the best quarter is the third quarter. The best month of the year actually is typically September, which drives very strong results in fourth quarter. Going back a couple of years, if you look at same-store quarterly occupancy growth in the third quarter of 2014, it was 50 basis points, in 2015 it was 70 basis points. And then we saw a growth in the fourth quarter about half of what we achieved in the third quarter.

Chad Vanacore

Okay. And then just one other question, how should we expect the delay in closing of acquisitions to actually impact CFFO, and did that push back any subsequent acquisitions that you may have had planned?

Larry Cohen

It does not push back any other acquisitions. As I mentioned, in due diligence one property that was expected to close in the second quarter, we desired to increase the certification to take – for Memory Care residents. The survey has been complete. We're expecting to close that in a couple of weeks. The other property, an incident occurred. So that got delayed. But it does not affect the rest of the year as far as our pipeline.

Typically these properties were expected to generate, if you look at our customary returns of 15% cash on cash on equity, it'd be like nine-tenths a share for the full year. So you have one coming-in in middle of the third quarter. That's an $18 million transaction. The $56 million of transactions should occur at the end of this quarter and early fourth quarter. They will move back basically on average by almost a quarter on the contribution to cash flow.

Chad Vanacore

Okay. Thanks Larry.

Operator

We'll take a question from Joanna Gajuk with Bank of America.

Joanna Gajuk

So I just want to follow-up on this last comment about delay in deals. So was there any I guess meaningful impact to the actual Q2 CFFO [indiscernible] because I know you outlined the impact from the weather, you think that's what's driving some of the shortfall or was there anything quantifiable on the deal delay or it was just meant to be closed late in the quarter anyway so it wouldn't be much of an impact?

Carey Hendrickson

That's right, Joanna, they were intended to close late in the second quarter, so we had minimal impact on the second quarter itself. It was really about the heavy rains and flooding that happened in the second quarter that impacted our traffic and then therefore impacted our top line a bit.

Larry Cohen

But they do impact third quarter numbers based on our original expectations because they will be closed during the quarter or later in the quarter as opposed to the end of the second quarter.

Carey Hendrickson

Right.

Joanna Gajuk

Okay. So how would you describe, because it seems like even despite this weather, occupancy improved sequentially which Q2 doesn't necessarily seem as a very strong quarter historically, so is there anything in particular you would point to, any market or any business line that kind of was driving this improvement?

Larry Cohen

As you heard from my comments about the month of June, we saw gains in all levels of care. I'd say that growth was really pretty consistent throughout the country, without looking to geographies. Midwest was particularly strong, but I think the whole country. If you look at quarterly results based on level of care, for the quarter we saw an improvement in occupancy in independent living as well as our memory care and assisted living properties. The best actually improvement in occupancy was in our – sequentially it was in memory care, followed by independent living and then assisted living.

Joanna Gajuk

Okay, that's helpful. And then on a different topic, clearly the cost control is still very solid and labor costs specifically seems to be like they are under control, but is there any comment or any quantification around the overtime rule that I guess seems like it's still going to take effect later this year?

Carey Hendrickson

We have looked at that and really expect very minimal impact related to that. Most of our employees that are hourly make more than that minimum that's going to be required. So I think we're going to be in good shape as it relates to that, so [indiscernible] no impact.

Larry Cohen

Joanna, it's interesting, we looked at this issue two years ago and we look at our exempt and non-exempt status at all of our communities and corporate staff. So this new Department of Labor regulation is something that we were probably two years ahead of and we don't expect to see much of an impact from that.

Joanna Gajuk

Great, that's very helpful. I'll go back to the queue. Thank you.

Operator

We'll now move to Ryan Halsted with Wells Fargo.

Ryan Halsted

A question on average monthly rent growth. So it was a little lighter than I guess we were expecting. It seemed like it also kind of trailed the NIC data. So I was just wondering if you could comment on any trends you saw on the pricing during the quarter.

Larry Cohen

If you look at the quarterly performance, actually the pricing this quarter was a little better than last quarter. As Carey mentioned, the sequential gains annualized were right at or better than NIC data. Our consolidated portfolio was 90 basis points for the quarter compared to the first quarter. That's 3.6% for the year. Our same-store numbers were about 2.4 annualized for the year, little behind. That's more in the mix. Our greatest gains this year, year-over-year, have been in independent living. Our average independent living rates are about $2,600 a month versus our assisted living rates of $3,800 and memory care of $5,157.

So when you look at the fact that there was a larger percentage of new residents moving in independent living, since we don't breakout the changes in rates by level of care, it moderates our rate growth, but actually I thought that the second quarter results were actually stronger than first quarter, and again, we saw growth throughout all business lines.

Ryan Halsted

Okay. And so was there any – in the past you've commented on use of incentives, I mean did you see any change in the use of move-in incentives during second quarter and are you seeing or do you expect there to be some fairly competitive rates in the third quarter during the higher occupancy, higher move-in periods of the year?

Larry Cohen

If you look at our incentives, what we've done typically is we will have spot incentives for properties typically red zone which are properties below 85% occupancy, and sometimes yellow zone which are between 85% and 89%. We typically don't do it for green. If it comes out from some change we want to jumpstart, we might do that.

As I mentioned, what's interesting is we increased the number of green zone properties by 15% from June 2015 to June 2016 and we shrunk the number of yellow and red zone. So those properties do have incentives. They typically are for a limited duration. It's typically a reduction in the first three months' rent and they graduate based on level of care. So we saw that again in the quarter and that's something that we will use sporadically throughout the year to drive occupancy.

And I think that the rate growth we're showing on a consolidated basis or even same-store annualized at 2.6% or 3.6% are pretty much in the range of our targeted 3% for the year for rent growth. So, there is some specials, we really [indiscernible] specials than discounting [indiscernible] that we provide that will moderate that, that typically is not reflected in renewals because the in-house rents we grow at the state it increases, it's really incentives to get people move-in sooner into the property.

As a result, one thing we've seen which is a marked change in our business is that move-ins from deposits are averaging weeks versus months. So it really has accelerated the move-in and that's the reason for most of these incentives is to incentivize the residents to move-in earlier than they typically would.

Ryan Halsted

Okay. How do you feel about your core NOI growth target of 4% to 6% for the full year?

Carey Hendrickson

Because of the little downtick that we had in the second quarter related to our NOI growth, it's probably on the lower end of that, but we still expect to reach in that level for the year, Ryan.

Ryan Halsted

Okay. Last question for me is, how should we think about the equity that you're able to tap on some of your owned real estate that you are able to take these supplemental loans against? What's sort of the best use of that and how does that compare I guess with your more traditional sources of capital?

Larry Cohen

Ryan, it's something we've done over time, we've been doing it the last few years. It allows us to recognize the appreciation in our properties. And that money is then being recycled particularly in new acquisitions, which are highly accretive. Again, you look at the interest rates on the supplementals, they've been low 4% to high 4% range. We're also using it for some of the cost of the renovations and conversions.

One thing that Carey spoke about is our capital expenditures are greater this year than historically. That will continue into the first half of 2017 and that will come back down to more normalized levels which will free up cash. So it's really we are reinvesting those proceeds accretively typically in acquisitions or in our physical plan to either convert to higher levels of care or reposition or renovate properties which hopefully will generate higher revenue through increases in occupancy and rate.

Operator

We'll take a question from Dana Hambly with Stephens.

Jacob Johnson

This is Jacob Johnson on for Dana. First question, I think last year you guys raised rates in September by about 3%. Is that something you guys believe you'll be able to capture again this year?

Larry Cohen

We raised rates again t in January which are effective throughout the year on the renewal of leases on move-ins. So right now we are not forecasting an additional rate increase in this September. That rate increase actually got accelerated to January is the point. We did rate increase in September of 2015. The 2016 increase didn't go in effect a year later, it went into effect four months later and has been effective throughout the year for 2016. So we actually accelerated that increase starting in January rather than waiting till September.

Jacob Johnson

Got you. And then, Larry, you just mentioned CapEx being elevated through 2017. I think earlier you talked about some renovations. I thought maybe CapEx was going to slow down in the fourth quarter. Should we sort of think about it continuing at this second quarter pace sort of through the first quarter of 2017?

Carey Hendrickson

You're right, Jacob, it will decrease in the fourth quarter. We've got higher capital expenditures in the second quarter. The third quarter will be similar probably to the second quarter and in the fourth quarter it will begin to moderate, and then it will still be somewhat higher than normal, if you will, in the first half of 2017 and then really come down to more normal levels in the last half and then into 2018.

Jacob Johnson

Got it. Thank you.

Carey Hendrickson

One thing to note about these CapEx numbers that we talk about, Jacob, is that they are gross numbers, they are gross and they include the reimbursements we are making at our leased communities even though we're going to be reimbursed for those expenditures. So on a net basis, our full year CapEx will be somewhere around $40 million, even though it will look higher than that on a gross basis, it may look like $50 million to $55 million, but on a net basis it will be about $40 million.

Jacob Johnson

And that $3 million of the lease reimbursement, is that a good way to think about the next couple of quarters?

Carey Hendrickson

It should be higher than that in the third and fourth quarters, because as these projects become complete, and even along the way, we're reimbursed and we're coming into some more of those reimbursements now. So I would expect those reimbursements to increase in the second half of the year.

Jacob Johnson

Okay. And one last one for me, and I don't know if you guys have ever disclosed this, but Larry, you guys talk about these green, yellow and red properties, have you ever quantified what percentage of your properties fall in each of those buckets?

Larry Cohen

Yes, typically we see about 65% to 70% of the properties are green, and then the balance is split between yellow and red. I will tell you, I just looked at last week's numbers, our green zones which are the 85% to 89% occupancy, their leased to occupancy in totality was 90% last week. So that's very encouraging. That was last week's numbers.

The red zones are actually averaging right now in the low 80% range. So that's where we are looking at conversions, renovations, repositionings. We sold some of those buildings. But the nice number that I was very, very pleased to see this quarter was an improvement in the number of green zone properties by 15% over a year ago. That's pretty dramatic.

Jacob Johnson

Awesome. Thank you guys very much.

Operator

I think we have a question from Brian Hollenden with Sidoti.

Brian Hollenden

Just wanted to get a sense on the acquisition environment, are we expecting more acquisitions in total compared to last year and then how do we think about that for 2017, and then just your general thoughts on multiples, competition, if you could just talk about that, that'd be helpful.

Larry Cohen

I'd be happy to. Just to give you some framework, so far in the first six months of this year, we signed confidentiality agreements on 30 transactions. Their gross value is close to $1 billion. The properties, we've closed on five buildings for $65 million and the other three is $74 million, we spoke about earlier. That takes us to about $139 million. We have other offers outstanding. We're in negotiations in other transactions. We typically have not provided guidance on acquisitions, as you can tell. We remain very disciplined. The pipeline is extremely active and robust.

We've also been very disciplined on pricing. So you can see the consistency in the returns on the equity that we invest. We don't chase deals. So, we like to have that discipline and balance. We have other ways to allocate our capital profitably, which we're doing through the capital expenditure program and refurbishments and renovations, repositionings. And we have been extremely consistent now for five years of maintaining some range of the $150 million to $200 million of transactions a year, and I would expect that we probably will continue that pace as our cash flow increases.

As our CapEx starts to reduce, it may give us more dry powder to do more acquisitions in the future, but right now it's really balancing the money that we're spending on all these different initiatives, which we think all drive superior shareholder value and also maintaining prudent reserves for the operations.

Operator

At this time, we have no further questions in the queue. I'll turn it back over to management for any additional or closing remarks.

Larry Cohen

We thank everybody for your participation today. As always, feel free to give Carey or me a call if you have any follow-up questions. We look forward to seeing many of you over the next couple of months as we start to attend various conferences and some non-deal road-shows that Carey and I will be on, and if not, we wish you all a very, very good end to the summer. Thank you very much and have a good afternoon. Thank you.

Operator

Again, this does conclude today's conference call. Thank you all for your participation.

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