Sonida Senior Living, Inc. (SNDA) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Capital Senior Living Fourth Quarter and Full Year 2011 Earnings Release Conference Call. Just a reminder, 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, for opening remarks and introduction, I'll turn the conference over to Mr. Larry Cohen, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to Capital Senior Living's Fourth Quarter 2011 and Full Year 2011 Earnings Release Conference Call. I am very pleased to report continued occupancy growth and strong results from the implementation of our strategic plan that is focused on operations, marketing and accretive growth to enhance shareholder value. Successful execution of this plan yielded strong results for 2011. Year-over-year revenue increased 24%, while EBITDAR grew by nearly 35%. Average monthly rent ended the year 5.5% higher than the year before, and EBITDAR margin improved 2.6 percentage points to 35% for 2011. CFFO in the fourth quarter of 2011 of $0.31 per share, including the tax savings resulting from bonus depreciation, which Ralph will discuss further in his comments, was 50% higher than the fourth quarter of 2010. We differentiate Capital Senior Living as the value leader in providing quality seniors housing and care at reasonable prices. We are well positioned, as the substantially all private pay business in an industry that benefits from need-driven demand and limited new supply. These fundamentals are further enhanced by our robust acquisition program that increases our ownership of high-quality senior living communities in geographically concentrated regions, generating meaningful increases in CFFO, earnings and net asset value. In the fourth quarter, the company completed the acquisition of 3 high-quality senior living communities for a combined purchase price of approximately $30 million. These communities enhance the company's geographic concentration to more than 1,200 residents in North and South Carolina. These acquisitions are expected to add CFFO of approximately $1.4 million or $0.05 per share, increase earnings by $0.03 per share and increase annual revenue by more than $8 million. These 3 communities have a resident capacity of approximately 300, with a mix of independent living, assisted living and memory care. Occupancy at these communities average 93%, and average monthly rents are approximately $2,800. These 3 communities were financed with approximately $22 million of 10-year, fixed rate, nonrecourse debt with a blended average interest rate of 4.92%. Subsequent to the end of the fourth quarter, the company completed the acquisition of a senior living community in Texas for a purchase price of approximately $7 million. This acquisition increased the company's geographic concentration to a resident capacity of approximately 3,050 in Texas. This acquisition is expected to add CFFO of approximately $400,000 or $0.02 per share, increase earnings by $0.01 per share and increase annual revenue by more than $2.5 million. Occupancy at this community averages 96%, although our underwriting was at a lower level, and average monthly rents are approximately $2,700. This community was financed with approximately $5.3 million of 10-year, fixed rate, nonrecourse debt with an interest rate of 4.3%. We have completed due diligence on 5 additional high-quality senior living communities in Texas and Indiana. Subject to customary closing conditions, we expect to acquire these 5 additional communities later this month for a combined purchase price of approximately $49 million. These communities are projected to increase annual CFFO by approximately $0.09 per share. We are conducting due diligence on a number of additional transactions consisting of high-quality senior living communities in regions where we have extensive operations. Subject to completion of due diligence and customary closing conditions, we expect to acquire these communities in the second quarter of 2012. I now would like to review operating activities for the fourth quarter and full year 2011. I am pleased to report that in addition to the success we are experiencing with our acquisition program, we are also achieving strong operating results from gains in occupancy and net operating income. Our results differentiate Capital Senior Living as the value leader in providing quality seniors housing, care and services that are personalized and tailored to meet the individual needs of each community resident at reasonable prices. The company's range of products and services is continually expanding to meet the evolving needs of our residents. We believe we are different from other companies in our peer group, with our sole focus on a substantially all private pay senior living business able to capitalize on our competitive strengths in operating communities in geographically concentrated regions. We're benefiting from larger company economies of scale and proprietary systems in a fragmented industry that are yielding solid operating results. The number of consolidated communities increased from 70 in the fourth quarter 2010 to 81 in the fourth quarter 2011. Consolidated average occupancy, including 112 units recently converted to higher levels of care that are in lease-up, was 85.6% in the fourth quarter of 2011, a 90-basis-point improvement from the third quarter of 2011 and 50 basis points higher than the fourth quarter of 2010. Average monthly rent improved 5.5% to $2,908 per occupied unit in the fourth quarter of 2011. This is the second consecutive year that we have experienced fourth quarter occupancy gains. It seems that we are benefiting from the convergence of pent-up demand from our senior prospects with improving economic data and the attractiveness of our senior living communities, the quality, services and care provided by our talented and passionate on-site team and the value we offer seniors. Once again, we saw a spike in activity this past December and January, as adult children visiting their parents for the holidays realize they can no longer live safely at home. This was particularly evident at many of our independent living communities, which represents about 58% of our resident capacity, as seniors and their adult children were attracted to the compelling value that we offer. The average monthly rate for our independent living unit is $2,380, offering larger apartments with full kitchens, and the monthly rate includes 2 or 3 meals daily in our attractive dining rooms, a wide array of social and recreational activities, transportation and weekly housekeeping. Our strategy is to rent space in our independent living communities to third-party independent providers of home health, therapy, rehab, as well as having offices available for physicians to serve and care for independent living residents. We believe these independent agencies have better resources to serve our residents, provide valuable referrals to our communities, assist in attracting and retaining residents and allow us to focus on the higher margin, substantially all private pay senior living business. Our operating philosophy, implemented with our competitive advantages, have resulted in improving occupancies beginning in the third quarter 2010, with a falloff last year at the end of Q1 into the first half of Q2 2011, as a result of treacherous winter weather affecting our Texas and northern communities last February and March. After the thaw, occupancies began to improve, resulting in fourth quarter 2011 same-store occupancies increasing 110 basis points from our second quarter 2011 average. I am pleased to report that this trend is continuing in the first quarter of 2012, and I am optimistic that with the mild winter we are experiencing in our regions and with the strong response we are receiving from senior prospects and their families, these positive trends will continue, resulting in very favorable year-over-year comparisons. In fact, I am pleased to report that we had a third highest number of move-ins last week at our same-store communities that we've experienced over the past 52 weeks. And our same-store occupancy as of last Friday was 140 basis points higher than the same week last year. Same-store fourth quarter 2011 independent living average occupancy increased 70 basis points from third quarter 2011 to 84.7%, its highest level in more than 3 years. And same-store fourth quarter 2011 assisted living occupancies improved 60 basis points from third quarter 2011 to 87.8%. Same-store occupancies at our 2 rental CCRCs dropped in the fourth quarter 1.4% sequentially but have recovered and improved in the current quarter. Fourth quarter same-store community occupancies for all levels of care averaged 85.4%, their highest level since 2008. This was a 50-basis-point improvement from the fourth quarter of 2010 and 50 basis points higher than the third quarter of 2011. At communities under management, excluding one community that had a recent conversion, same-community revenue in the fourth quarter of 2011 increased 2.9% versus the fourth quarter of 2010. Same community expenses increased only 2.2%, and net income increased 3.8% from the fourth quarter of the prior year. Sequentially, same-store net income improved 4.9% in the fourth quarter 2011. Same-store average monthly rents were 2.3% higher than the fourth quarter of 2010 and 30 basis points lower than third quarter 2011, reflecting the mix in occupancy gains and independent living exceeding those in higher levels of care. These results compare favorably to recently released NIC MAP fourth quarter 2011 top 100 MSA occupancy growth of 10 basis points from the third quarter of 2011, with independent living occupancy growth of 20 basis points higher quarter-over-quarter and average daily rate increases of 1.9%. Our attrition rate in the fourth quarter decreased to 40.2% from third quarter rates of 41.7%, with independent living attrition rates falling to 33.6%, the lowest level we've seen since Q1 2010. Our positive fourth quarter results demonstrates that our team, with a disciplined focus and attention to detail, is successfully executing our operating strategy and systems, and confirms that Capital Senior Living is different from other senior living providers. We are the value leader in providing high-quality senior housing and care at reasonable prices in geographically concentrated regions with an exclusive focus on senior living. And substantially all of our revenues are derived from private pay sources. As you've heard me say many times before, our most valuable resource is our human resource. Successful senior living operations require well-located communities with the right on-site team supported by strong regional and corporate resources. We are fortunate to recruit and retain many of the best operations and sales and marketing professionals in the senior living industry at the community level, as well as the regional and corporate level. They are attracted to Capital Senior Living's culture and operating style. They are hearing from their peers about our successes. They are honing their skills at Capital Senior university with state-of-the-art training, and they are impressed with our company-wide respect for residents and their family. I want to thank all of our dedicated on-site regional and corporate team, as well as the members of our highly skilled Board of Directors, for their commitment, passion, focus and accomplishments in serving our residents so well and contributing to our positive results. I also want to congratulate our team on achieving a greater than 95% score on our 2011 resident satisfaction survey. As previously reported, and as evident in our fourth quarter results, the impact of the recent rate cuts in Medicare-skilled nursing reimbursement are insignificant to Capital Senior Living, as only 1.6% of our beds are in skilled nursing, many of which are private pay, and these are located within 2 larger rental CCRCs. We don't expect that any further -- future acquisitions to have any skilled nursing beds and this percentage will be further diminished as we execute our growth strategy of owning more senior living communities. Overall, we are benefiting from our substantially all private pay business, with more than 95% of our total revenue derived from private pay sources. I now would like to discuss our growth initiatives. We are excited about our growth opportunities, as seniors housing is a needs-driven product with new supply at very low levels, and demographic demand is driving -- is being driven by an aging population. In fact, according to third -- fourth quarter NIC MAP data, construction in the top 100 MSAs as percentage of inventory is down again in the fourth quarter to just nearly 1.5%. Also encouraging is NIC MAP's reporting that unit absorption in the top 100 MSAs has outpaced new supply for the past 7 quarters. These favorable demographic and supply-demand trends should allow for continued occupancy and rate growth. We are seeing the improvement in our operations from our implementation last year of Internet marketing and social media initiatives, as well as software programs for care plans and level of care charges. We are also benefiting from investing in cash flow, enhancing renovations, refurbishments and conversions of units to higher levels of care. These initiatives, combined with the operating leverage in our prudently financed business, are expected to increase our revenues, margins and cash flow. Each 1% improvement in occupancy is expected to generate $3 million of revenue, $2 million of EBITDAR and $0.05 per share of CFFO. We completed conversions of 165 consolidated units to higher levels of care in 2011, and we are in the process of converting an additional 73 units from independent living to assisted living. When stabilized, these conversions are expected to add more than $6 million of incremental revenue and approximately $3.6 million of EBITDAR. Additional conversion opportunities are currently under review. As we execute our strategic business plan, we are enhancing our geographic concentration with expanded care to residents, maximizing our competitive strengths and lowering our cost of capital. Our strategy is focused on generating attractive returns, enhancing free cash flow and maximizing shareholder value. I am extremely pleased and encouraged by our successful acquisition program. I thought it would be helpful to expand on the scope of our acquisition activities in 2011. These statistics evident the strength of our pipeline, the success of our off-market acquisition strategy and our disciplined underwriting and highly selective due diligence standards. In 2011, we signed 48 confidentiality agreements, of which 65% were transactions that were marketed by brokers, and 35% were off market. We submitted offers on 56 properties with a combined offer price of nearly $700 million. Our acceptance rate on marketed transactions was 44%, and on off-market transactions, our acceptance rate was 80%. In due diligence, we terminated transactions with a total of 10 communities based on our findings. Since July of 2011, we have completed acquisitions of 8 exceptional, institutional-quality communities and plan on closing an additional 5 high-caliber communities later this month, subject to customary closing conditions. These 13 communities have a combined purchase price of approximately $140 million and are expected to increase annual CFFO by approximately $0.23 per share. The $90 million of acquisitions completed since July are expected to generate greater than a 15% initial return on invested capital. As you can see, our focus on off-market, strategically located acquisitions in the current favorable interest rate environment is yielding outstanding returns. We are conducting due diligence on a number of additional transactions consisting of institutional, high-quality senior living communities in regions where we have extensive operations. Subject to completion of due diligence and customary closing conditions, we expect these acquisitions to be completed in the second quarter of 2012. When completed, these acquisitions are expected to be accretive to CFFO as well as earnings and lead to further improvement in our EBITDAR margin and operating metrics. The 260 basis point increase in EBITDAR margin recognized in 2011 compared to 2010 reflects the benefit we derive from executing on a strategy of acquiring communities in geographically concentrated regions. We are able to leverage our nimble operating platform with our community-based empowerment, existing regional operating and marketing centers, and benefit from economies of scale, our group purchasing programs, our proprietary proactive expense management and other systems and focused marketing programs to integrate acquisitions in a highly accretive manner. Our success in acquiring high-quality senior living communities on attractive terms validates our competitive advantage as an owner-operator with a geographic focus able to successfully assimilate acquisitions with minimal incremental costs. And our liquidity is solid, allowing us to have the capacity to comfortably fund our working capital, maintain our communities, maintain prudent reserves and have the equity to fund more than $150 million of acquisitions in 2012. I am optimistic about our outlook, as we benefit from favorable industry fundamentals and our team's ability and discipline to successfully execute on a well-conceived strategic plan. We expect to continue significant growth in cash flow from operations, earnings and net asset value that will lead to a meaningful increase in shareholder value. Our fundamentals are solid, and I am excited about the company's prospects, as we benefit from need-driven demand growth with limited new supply. 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 2011.

Thanks, Larry, and good morning. I hope everyone has had a chance to see the press release, which was distributed last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the fourth quarter and full year 2011. A copy of our press release is available on our corporate website at www.capitalsenior.com. If you would like to receive future press releases by e-mail, there is a place on our website for you to provide your e-mail address. Beginning with fourth quarter highlights, the company reported revenue of $71.2 million for the fourth quarter of 2011 compared to revenue of $59.9 million for the fourth quarter of 2010, an increase of 18.8%. Resident and healthcare revenue increased from the fourth quarter of the prior year by $13.1 million or 23.2%. We consolidated 81 communities on our income statement this quarter versus 70 in the fourth quarter of the prior year. The year-over-year growth of 11 consolidated communities reflects the 4 Spring Meadows properties, which we began leasing in the second quarter, and the 7 communities that were acquired in the third and fourth quarters of 2011. Financial occupancy of the consolidated portfolio averaged 85.6% in the fourth quarter of 2011 compared to 84.7% in the third quarter of 2011, a sequential improvement of 90 basis points. Average monthly rent was $2,908 per occupied unit in the fourth quarter of 2011, an increase of $152 per occupied unit, 5.5% higher than the fourth quarter of 2010. On a same community basis, average rents were 2.3% higher than the fourth quarter of 2010. As a percentage of resident and healthcare revenue, operating expenses were 59.5% in the fourth quarter of 2011 compared to 59.7% in the fourth quarter of 2010, an improvement of 20 basis points. Same community expenses increased 2.2% versus the fourth quarter of the prior year, and net income increased 3.8%. Excluding transaction costs associated with the acquisition process, general and administrative expenses as a percentage of revenues under management were 4.3% in the fourth quarter of 2011. Transaction costs were approximately $0.5 million in the quarter. Adjusted EBITDAR for the fourth quarter of 2011 was approximately $25.4 million, and adjusted EBITDAR margin was 35.7% for the period. EBITDAR increased $4.5 million, and margin improved 80 basis points from the fourth quarter of 2010. Approximately 1/3 of our depreciation and amortization expense for the quarter relates to resident lease amortization from communities we acquired in 2011. This expense is not only noncash, it's also noneconomic in nature, and we add it back on our reconciliation schedule so that investors can see the true economic benefit of the acquisitions. Adjusted net income for the fourth quarter of 2011 was $2 million or $0.08 per share, excluding the nonrecurring and noneconomic items reconciled in our release. Adjusted CFFO was $8.4 million or $0.31 per share in the fourth quarter of 2011 compared to $5.6 million or $0.21 per share in the fourth quarter of 2010, an increase of approximately 50%. Approximately $0.07 of CFFO in the fourth quarter of 2011 was attributable to an economic stimulus measure entitled the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, which enable taxpayers to take 100% depreciation on capital investments and furniture fixtures and equipment with a depreciable life of 20 years or less. Excluding this bonus depreciation, CFFO in the fourth quarter of 2011 was $6.6 million or $0.24 per share. As Larry indicated earlier, we acquired 3 communities in the middle of October, so a partial quarter's contribution from these properties was reflected in Q4. We have acquired one community in the first quarter of 2012 and expect to close on 5 more later this month. We further expect our due diligence process to result in additional acquisitions in the second quarter and beyond, so quarterly comparisons should continue to be strong on both a year-over-year and sequential basis. Moving to full year results, the company reported revenue of $263.5 million, an increase of $51.6 million or 24.3% from the prior year. Adjusted EBITDAR was $92.3 million for 2011, an increase of $23.7 million or 34.6%. EBITDAR margin was 35% for the year, an improvement of 260 basis points. Adjusted net income was $6.9 million or $0.25 per share in 2011 versus $4.7 million or $0.17 per share in 2010. CFFO was $25.1 million or $0.93 per share in 2011, an increase of $8 million or $0.29 per share from 2010. Excluding the bonus depreciation, 2011 CFFO was $0.86 per share. Capital expenditures for the year were approximately $10.4 million, representing $5.7 million of investment spending and $4.7 million of recurring CapEx. The company spent approximately $500 per unit on recurring CapEx in 2011. The company ended the year with $31.4 million of cash and cash equivalents including restricted cash. We invested $24.3 million of cash as equity to acquire $83.4 million of properties in 2011. And we project an annual return on this investment in the mid-teens. As of December 31, 2011, the company financed its 32 owned communities, with mortgages totaling $229.3 million at fixed interest rates averaging 5.8%. We have since added one additional mortgage of $5.3 million at a fixed interest rate of 4.38%. None of the company's mortgages mature before July of 2015. We also closed today on a supplemental financing of $5.6 million at a fixed rate of 4.47%. An additional $20 million of supplemental financing is expected to close in the second quarter. Since the original mortgages replaced the Fannie Mae and Freddie Mac, the communities have increased in value and a portion of the principal has been amortized. We can then go back and take out additional proceeds one time for each mortgage. The supplemental debt is coterminous with the original loan and is priced off the treasury rate for the remaining term. The company has the ability to pursue additional supplemental financing in the future. Cash on hand, cash flow from operations and the supplemental financings to be completed in the second quarter are expected to be sufficient for working capital, prudent reserves and equity to fund the company's 2012 acquisition program. We'd now like to open the call to questions.

[Operator Instructions] We'll take our first question from Daniel Bernstein with Stifel, Nicolaus.

So on the acquisitions, would it be correct to characterize the strategy as essentially finding 90%-plus occupied assets so that you could get the Fannie Mae and Freddie Mac financing and leverage your cash rather than going after distressed assets? And just -- how do you feel about distressed assets at this point?

That's a great question, Dan. Just you're, obviously, articulating well our strategy. We feel that we are -- and we're seeing that we're really in a very fortunate situation where what's really critical about our strategy and the implementation of this strategy is our regional focus and the size of the transactions. The typical transaction is ranging as small as $7 million to $40 million per transaction. They're with multiple sellers, and what we're finding is in a fragmented industry with very limited access to capital, we're benefiting as one of the haves versus the have nots. The size is much too small to make any type of an impact on the larger public companies or the Healthcare REITs. And the local operators don't have capacity to close these type of deals. So if you look at the cash and cash returns, I'll point out something really interesting. It's the spread between the acquisition cap rate, if you will, and taking advantage of these Fannie Mae rates. The transaction we announced in Texas, a $7 million purchase, our equity is $1,650,000. Our first year cash flow is $418,000. That's a projected 25.3% return on our equity without taking into account any synergies from our systems, our insurance, our group purchasing. That's on sellers' numbers, and that's underwriting at an occupancy lower than its current 97%. So not all of those will be 25%, trust me. And again, the rates will change. But the $90 million that we've closed since July has in excess of 15%. We're also buying high institutional grade real estate. So we're creating significant shareholder value by amassing a fabulous portfolio of modern, new, state-of-the-art properties that are performing so well. In question to your -- answer to your question about turnaround properties, we're great operators, but we're not magicians. My experience in this industry has been a lot of distressed properties are distressed because of the local market. As I said in my comments, this is a local business. We're only as good as the market in which we serve and the demand-supply, as well as the number of qualified seniors and adult children living in a 7-mile radius. We are very disciplined, as you heard about how many deals we don't close, how many we pursue. We look at local trends on economic data, job growth, population growth, age cohort over the next 10 years, and we want to be very selective in buying properties in areas where there are growing populations and good economies. And too often, what we have found on turnarounds is that it's so hard to turn properties around because the market just isn't there. It becomes a distraction to our most valuable resource, which is our people. So we can assimilate these using the original infrastructure. The returns, I've never seen in my career. I mean, I've done, Dan, tens of billions of dollars of transactions in my career. I've never seen these type of returns on fabulous assets. And again, we believe we have a competitive advantage from the buy side and clearly, a competitive advantage on the operating side that we think is a strategy, if executed successfully, can drive significant shareholder value.

I think the volumes have been much greater than at least what I had been expecting. I mean you're doing about $150 million since July, $200 million annual run rate. Are all of these transactions being generated by you going out to the potential seller? Or are the sellers now realizing that you're a buyer with capital, and are they coming to you? I mean, how -- what is that mix there?

It's a great question and it's both. Joe Solari, who I know is on the call, joined us in September 2010. Those of you who don't know Joe, he spent 2 years at Ventas as the seniors housing acquisition officer, spent 12 years at Houlihan Lokey as investment banker in healthcare. Actually, we met Joe when he was marketing senior housing properties many years ago and dealt with Joe successfully at Ventas. And Joe has a fabulous personality and relationship. And we have relationships with owners, operators in this industry that have come to us. A lot of it is, again, it's the networking and the relationship building that takes months or years to develop the trust level. What's really interesting about this business is it's so important to these owners to have the confidence and trust that a buyer will operate the properties at a level that would really treat their residents and their staff well. And that's a very important issue, and clearly, we take great pride in the reputation that we enjoy and the successes that we see in our communities. And plus, we're buying properties in our markets. So it's a combination of reaching out and finding buyers. Many of these buyers have other assets that they'll come back to us. In fact, one of our lenders, we had dinner with last night, visited a number of our properties the last couple of days, and the reports we're getting back -- I mean, I can't stress how fabulous these buildings are. I mean, the Signature portfolio that we bought in September 2010, which we'd love to invite some of our investors to visit, are as nice as anything I've seen in this industry, and I'd say the quality of the acquisitions that we're making today are really just outstanding, I mean, truly institutional grade assets. And when you're taking advantage of these type of properties and these relationships and these financings, they've been great, and some of these owners have other properties that are coming back to us as a pipeline for future acquisitions. So many of these transactions are coming to us because people know us. They trust us. They know we're real. We have access to capital, and they like dealing with us. So a lot of them, they do come to us by phone calls to us and more. And they congratulate and thank Joe because a lot of this is really a result of his activity of just cultivating very strong relationships with owner and operators in a very fragmented industry.

And maybe along the lines of the distressed properties, you've done development in the past, especially on the JV with Prudential, and we're seeing some pickup in development financing from the REITs. Have you been approached to do any development? Are you thinking about doing any development?

We are not thinking of doing development at this time. We have been approached. Actually, it's interesting enough we've been approached by developers who would like us to be their operator so that the REITs would finance their development. But look, we've had great success. The 3 properties we built in Ohio with Prudential opened at the worst time you can imagine, in 2008, right in the heart of the deep recession. We gained 13 percentage points of occupancy last year in Ohio. There's -- I'll tell you something. It's very encouraging to see the resurgence in the automobile industry and the manufacturing industry as we see, and we have had a fabulous run for the last 3 or 4 months that are continuing in Dayton, in Richmond Heights in Cleveland and Toledo. So -- but I'd tell you the challenge in development today is these properties opened in '08. Two of them will stabilize. They're very near stabilizing. They should stabilize this year, probably hit 90%, 95% this summer. The other will probably be there some time next year. That's a 4-year program. When you can buy properties with some financing from Fannie and Freddie at these rates and get the cash and cash returns, the immediate accretion to our cash flow and our value, it doesn't seem like that's a good allocation of resources to be involved a, to take the risk or just the delayed benefit of really getting properties. On new developments, by the time you lease it up, build it and churn the residents, it takes 7 or 8 years to really create value, and we're getting immediate value creation through our acquisition program.

Okay. And one other quick question I have, just on the general results of the company. You talked about the CCRCs having some drop in occupancy and when you talk about independent living, assisted living, they really were up 60 or 70 bps, taking out the CCRCs. So can you talk about a little bit about the issues you had at the CCRCs and whether that's at the SNF portion where occupancy has been weak in the industry -- industry-wide because of hospital admissions? You've talked a little bit about the CCRCs in your same-store portfolio.

That's exactly -- independent and assisted are doing great. It's the skilled portion because of the fewer discharges from the hospitals. But I would tell you, they're -- they actually rebounded nicely in the first quarter. We spent a significant amount of money at Towne Centre in Merrillville, Indiana last year. We did a renovation on the building, the ILAL within the last year or 2. We're just now completing the skilled portion. There was about $900,000 of renovation, and we're getting fabulous results. So we're actually seeing a nice rebound. Our other CCRC is a rental in Canton, Ohio. That's actually been more stable. Obviously, it's almost at -- the skilled portion is high -- half of it's private pay. But clearly, it's not been the ILAL. It's been the skilled. And when we give our stats, we don't break out the ILAL segment of the CCRC. We look at it in totality. So our ILAL numbers don't reflect the better occupancies in those segments of the rental CCRCs. But it's clearly the skilled. And as I said, fortunately, it's a very small part of our business, but also we're -- we are seeing a marked improvement into 2012.

[Operator Instructions] We'll go next to Joe Munda with Sidoti.

Real quick. Can you guys give us a little bit of color on the multiple of sales? I know you mentioned 13 communities this year. What are you guys looking at as far as the multiple you're paying to acquire these properties?

If you look at the -- our slide presentation, which we refiled this morning in 8-K, it's on our website. We update it. And you look at Slide 18, it actually shows the economics of the $90.4 million of recently completed acquisitions. And I'll let Ralph discuss that and show, again, we can kind of give some metrics on the economics of our acquisitions. We -- by the way, we will not give cap rates. We just don't think that's prudent as we're in the market constantly as a buyer, because once you put a number out there, a seller has an expectation and not every property is the same. But we'd use it as a base of EBITDAR and cash flow. So Ralph can give you some color on that.

Right, Joe. Yes, we had this slide prior to yesterday at $83.4 million. We updated it for the community that just closed earlier this month. And what you can see based on the $90.4 million of acquisitions, we contributed $25.7 million of equity, financed about 70% of the transaction with debt well below 5% fixed interest rates. This should generate about $24 million of revenue in the first 12 months of operation, EBITDAR of $8.6 million and most importantly, cash flow from operations of $3.9 million. So if you look at $3.9 million of cash flow based on our $25.7 million of equity, that's about a 15% cash on cash return. And as Larry said earlier, which I think is really an important point, these figures are based upon sellers' numbers, and we actually reduce the occupancy if the occupancy is extraordinarily high, to more of a long-term sustainable average occupancy rate. We don't have our group purchasing program, our insurance programs, our systems, our regional structure, so that we really believe like these are first year numbers that will actually get better and better as we integrate these operations into the Capital structure. But that will give you a real good feel. We think that the additional acquisitions we're going to complete will be at this economic level or better.

Okay. And then as far as the occupancy rate goes with these 13 in the pipeline, does that push you, total occupancy for both assisted and independent over 86%, you think, in 2012?

Yes. I mean, I'll tell you right now what's in the pipeline, including the property we just closed in Texas and what we are closing this month, the average occupancy is 94%. As Ralph said, we underwrite it to a lower level, so that will drive us, again, over the current rates once these are consolidated and blended into our occupancies. And hopefully, we'll continue to see further improvement organically, so we'll continue to see increases in our owned occupancy. But clearly, it would be augmented by the contribution of the acquired properties.

Okay. And you guys had mentioned that new construction is at approximately 1.5%, and it looks like the absorption rate is 2.5%. Do you think that some of the operators that are approaching you or you're in talks with understand that metric and are a little bit more reluctant to sell at a number that you guys are looking for? Or are you seeing more flexibility and enough inventory to move onto the next project?

I think the catalyst for a lot of the sellers, some of them are personal, could be a sibling died and someone had to pay an estate tax, as where one case where the 2 brothers, the operator, was an elder brother who passed away. The developer brother didn't want to operate so he sold. But what's interesting about Fannie Mae and Freddie Mac, which really is unique, that financing is very -- is confined to stable properties, typically 90% or more, for the prior 12 months. But the operator has to be -- have a track record and a bench. A single operator, single developer, one or 2 properties, properties can be 100% occupied for years. They can't qualify for Fannie or Freddie financing. And the local bank is perhaps out of business but not making any more real estate loans. So they can't develop. So it's really the catalyst has been that we're the -- we provide them the ability to monetize their assets because they don't have access to debt financing. So by selling to us, they know that we're credible. We'll continue to operate the properties, take care of the residents. But more importantly, they're getting a nice cash payout as well that they cannot get because they don't qualify or can't seek -- I think the limits, typically, I think, you got to have 5 properties in the regulation, just so to qualify for Fannie or Freddie and most of these operators are smaller. And the other thing Fannie or Freddie will not do is provide cash out financing. They'll provide acquisition financing. They won't provide financing to somebody that's looking to cash out through a financing versus an acquisition financing. It's very different.

We'll take our next question from Brian Lancaster with Clayton Partners.

Is it correct now that basically 1/3 of your resident capacity is in Texas? And can you talk a little bit about your sort of specific outlook for Texas? What you're seeing with regard to new construction and kind of a little more granular on that market?

We are actually 25%. It's 3,000 not 12,000, so that'd be 25%, Brian. That's just in -- Texas has been great. I got to tell you, I mean, I know you're here. It's a fabulous economy. It's very diverse. There's no development that we're seeing in our Texas markets. And I'm trying to think if there's any, virtually, none. And what we're finding is that, again, it has demographic draw. You have population growth. You have a very favorable tax structure that allows people to move to Texas, a greater labor pool, centrally located. Our Texas properties, I mean, I want to give a shout out to our community in Plano. They had a fabulous year this year. ILAL, I think their same-store net income growth was like 25% this year on regaining occupancy with real good expense management. So the Signature portfolio that we acquired, the leasehold interest in 2010 are averaging about 92%. The Waterford that we built about 10 years ago are about 90%. Many of these have recovered. We have properties that in the last 12 months have recovered from 78% to 90% in Texas. So I mean, it's been a really very consistent, attractive market with very strong demographics, but what's interesting about construction is it's affordable. The rents are constrained in Texas. Our Texas rents are much lower than rents in New Jersey or California or Connecticut. The rent level though is so low that it doesn't justify construction because replacement cost is too high. That's the barrier to entry in Texas. So if our average independent living rents in Texas are, say, $2,000 a month, nobody can buy -- you can't build a building at $150-plus thousand per unit and get a return based on the economics of having that rent structure. So it's highly -- high margin, highly profitable, great labor force. Obviously, we're getting great results operationally, but there is the financial barriers to entry, which is the rent structure and the levels that really make it very difficult for new construction to begin in this sector.

Right. So can -- are you okay with continuing to drive your concentration to one state higher? Or how do you think about the diversification you want to have?

We like having a geographic concentration. We think, again, we don't want to be all in Texas. Again, we have big concentrations north, central, midwest. We have large operations in Ohio, Indiana, the Carolinas, that's where we've been buying properties. Nebraska has been a very good state for us. So we like to look at very stable economies, good growth areas, and we get a lot of leverage because we have the regional oversights. So when we bought the recent holdings in Signature, 12 buildings, we had budgeted incremental overhead of $300,000 that we never had to spend. We could just layer it into our existing infrastructure. So part of the reason that we're getting these phenomenal returns is the fact that we don't pay ourselves a management fee. That stays 5% versus another buyer having to hire a manager of revenues. But more importantly, we have the existing infrastructure, and what it also does, the other properties in our regions benefit because it's reducing our distribution costs. We have more food deliveries now coming to, for example, Texas. We have some shared marketing. So there are other features that we benefit from by having that scale within these regions, both from an overhead G&A perspective as well as an operating margin perspective that are driving the very, very strong returns. And again, we just are very attracted to the strength and stability of the market.

Great. One other question, are you seeing -- are you able to quantify what you're seeing as far as the impact from the new care plan, kind of soft where you guys have implemented? Or is that still to come?

Yes. It's implemented, but we -- it's going to take a while to kind of really go through the results and quantify it. We've rolled out at almost all of our communities. We're now rolling at our acquired communities, the vigilant software program, which has been very effective on the care plan. We're getting great reports from our on-site and regional on the effectiveness of the plans. But again, it's starting to be implemented. We're starting to look at building for care levels. And again, that will be implemented over a year or 2 as we look at the effectiveness of that, and then we'll be able to evaluate it after a year or so of operations.

We'll take our next question from Todd Cohen with MTC Advisors.

I may have missed it, but did you actually highlight the size of the pipeline going forward? I know...

I -- we did not. We have not given any description of the forward-looking pipeline. We just gave stats on 2011. But as...

Was that the third -- the previous caller, not Brian, but the gentleman before, was referencing 13 properties or what did I miss?

I think the 13 properties, Todd, are we've closed 8, and we're scheduled to close 5 more in March. So at the end of the first quarter, we will have since July closed on 13 properties.

Okay. Got you. Okay. And then is -- the acquisitions that are going to close, I guess, soon, the 5, any shot at the returns on those being close to kind of what you got on that other property in Texas?

Well, won't know until we've locked rates on the debt, which won't happen yet. But the returns we're looking at today on our underwriting, they're not 25%, but they're high teens, low 20s, so they are very attractive. But again, I caution that until we know the actual interest rate and the actual amount of proceeds from Fannie Mae, that may move. But based on our underwriting, based on their current financials and kind of where we think rates might be, we're very pleased with the prospect of the returns.

Okay, great. And then I missed your comments on the current business trends. Can you refresh me on that?

Yes. As I mentioned, we had a very solid December, January. We're starting to see the effects of some pent-up demand from seniors that may have delayed the decision 2, 3 years ago, that no longer can live home safely. I think one thing that's very interesting is the effect of the housing downturn is really, really moderating. I think it's a combination of it's no longer the concern that my neighbor got a higher price 6 months ago because, they made their sale, they've been 4 or 5 years ago. I think there may be better economic data coming out that maybe is easing the market. One of the benefits, if you go back to Brian's question, is in the markets which you operate. They've been more of a solid housing market, where housing is affordable and buyers can get mortgages and financing. But we saw a nice improvement in December, January. I did mention that as of last Friday, which was a fabulous week, on a same-store basis, same week in 2011 to the same week 2012, our actual occupancy was 140 basis points better year-over-year. So that's very encouraging, and hopefully with the end of winter -- and we had the benefit of a mild winter and no flu or outbreaks, hopefully, will continue into the spring. And typically, the third quarter is our strongest quarter. But one thing that I am optimistic about is if you look at last year's results, we lost occupancy really starting in the middle of February through really the second week of April, which would be the effect of the ice storms in Texas and the harsh weather in the northern states. And then we recovered nicely. That should -- the fact that we're having continued improvement, as I said earlier, the year-over-year comparisons for the next few quarters should be very impressive.

Okay. And then just lastly on kind of the sales and marketing side, would you say that you're pretty early on in your level of competency, kind of on the social media and Internet side? And that, that can be a bigger contributor going forward? Or are you pretty much at a level now where you were going to get?

Todd, I thought you were asking firstly about the early stages of my comments [ph] . The -- but yes, we...

Yes, we can hold out [indiscernible] or hold out their [indiscernible] .

We got nobody else to call. The social media actually is sowing results. We're doing blast e-mail. It's very fascinating, the -- we can do a whole segment on marketing. As you and others probably know, we invested resources last year. We have completely redone our website. We have just now redone all of our community websites. We're now enhancing that with videos and Flash and other things that would be interactive for that. We are using much more marketing medium, Facebook and other types of social medium. Many of our communities now are getting great success on the blast e-mails, something new that we're using as far as referrals. So yes, we are at the infancy. That's a good point. I mean, we're just now implementing it. We as an industry are all marveling at the success of A Place for Mom, that's a company that is a marketer that uses the Internet, Google Analytics, of really being a resource to all the larger operators for referrals. So there clearly is evidence that seniors and the adult children are on the Internet, are using the Internet for marketing, and we are now, again, clearly utilizing it, and we will clearly get better as we fine tune our resources and get better utilization of the Internet at each of our communities.

And there are no other questions in queue at this time. Mr. Cohen, I'd like to turn it back to you for closing remarks.

Well, again, as you can probably hear, we are very pleased with our results, very encouraged about our outlook. And again, I can't stress enough how lucky we are to have such fabulous people that work in our company, that serve our residents daily, and that's the difference that generates these results. So we thank everybody, and Ralph and I will be available for any calls if there are any further questions. And we wish you a good day. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.