More acquisitions, conversions on tap for Capital Senior Living

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Capital Senior Living in 2017 will be focused on acquiring new communities, increasing the number of properties it owns rather than leases, and converting some existing independent living units to assisted living and memory care units, CEO Larry Cohen told shareholders, analysts and others participating in a Tuesday earnings call.

“We completed more than $138 million of acquisitions in 2016, and they are expected to generate a 15.8% first-year return on equity,” he said. In November, company executives said, the company acquired a 122-unit independent living, assisted living and memory care community in Cincinnati for $29 million.

“We closed an additional $85 million in January 2017 and are conducting due diligence on additional acquisitions of high-quality senior housing communities in states with extensive existing operations,” he said, describing the company's acquisition pipeline as “robust.”

“We are probably looking at another $100 million of acquisitions for the year,” Cohen said.

The four properties acquired Jan. 31 previously had been leased from Ventas, executives said.

“Importantly,” Cohen said, “this transaction will result in incremental cash flow from operations of approximately $2 million and provides us the flexibility to reposition communities and pursue accretive capital expenditures while eliminating expensive leases with minimum 3% annual rent escalators, which ultimately means that we will generate more sustainable cash flow, maximize our real estate value and create a stronger margin profile.”

Capital Senior Living's conversation of 169 units and renovations at three of the communities acquired from Ventas are expected to be complete in the first half of this year, Cohen said. “When [they are] stabilized, we project that these conversions will contribute an additional $3 million in cash flow from operations,” he said.

Since 2010, Cohen said, Capital Senior Living's real estate ownership has increased from 32.5% of its total portfolio to 64.3%, and the company continues to have discussions with landlords as it looks to buy more properties.

Unit conversions

Also during 2017, the CEO said, Capital also plans to return to use an additional 776 units that are being converted or repositioned.

The response to similar efforts in the past has been “outstanding,” Cohen said. Previous unit conversation have improved occupancy, he said, noting that Capital Senior Living converted 400 units from independent living to assisted living or memory care through the second quarter of 2015.

“Since conversion, these communities have achieved revenue growth of 21.2% and net operating income growth of 18.6%, and the lease-up of our recently opened conversions has been excellent,” Cohen said. “An additional 209 units have been completed since the second quarter of 2015, and these communities are currently 90% occupied.”

Other efforts

In addition to enhancing cash flow through renovations and refurbishments, Cohen said, the company, where possible, also is trying to improve occupancy, increase rent and level-of-care charges, and manage expenses. The company no longer is offering the short-term incentives that it used to increase occupancy in 2016.

Rent growth in seniors housing is at a seven-year high, Cohen said, and construction starts have slowed to their weakest pace since 2012.

“Capital Senior Living is well-positioned at the intersection of these industry trends,” he said, also noting that 99% of the company's portfolio is situated in metropolitan statistical areas with limited new construction.

“Furthermore,” he said, “we operate in markets with high barriers to entry. When comparing our average rates in many of our local markets versus the cost per unit of new builds, it's clear that any new entrant in our core markets will be challenged to generate a sufficient return on investment to justify creating any new supply.”

Capital Senior Living is not facing the same wage and expense pressures that Brookdale Senior Living, home healthcare providers and other healthcare companies are facing, Cohen said. “Our private-pay strategy insulates us from government reimbursement risk,” he said.

“We are not a healthcare company, so we don't have the same kind of wage pressure,” Senior Vice President and Chief Financial Officer Carey Hendrickson added in his remarks. “Really, a lot of the wage pressure is on health-related jobs.”

Hendrickson added that the markets in which the company operates are not experiencing pressure to increase the minimum wage, although, he added: “We really don't have very many minimum wage employees. We feel like we compensate them fairly.”

The CFO projects a 2.5% increase in wage expenses in 2017, compared with the actual 1.9% increase it saw in 2016, but Hendrickson noted that his projection for 2016 also had been around 2.5%.

For more news of this earnings call, see:

Senior living's 'Holy Grail' is bigger role in post-acute care continuum, Capital CEO says

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