Good day, and welcome to the Capital Senior Living Fourth Quarter and Full Year 2018 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 the company's actual results and financial conditions to differ materially, including, but not limited to, the company's ability to generate sufficient cash flow to satisfy its debt and lease obligations and to fund the company's capital improvement projects to expand, redevelop, and/or reposition its senior living communities; the company's ability to obtain additional capital on terms acceptable to it; the company's ability to extend or refinance its existing debt as such debt matures; the company's compliance with its debt and lease agreements; the company's ability to complete acquisitions and dispositions upon favorable terms to all; the risk of oversupply and increased competition in the markets, which the company operates; the risk of increased competition for skilled workers due to wage pressure and changes in regulatory requirements; the departure of the company's key officers and personnel; the cost and difficulty of complying with applicable licensure, legislative oversight or regulatory changes; the risks associated with the decline in economic conditions generally; the adequacy and continued availability of the company's insurance policies and the company's ability to recover any losses it sustained under such policies; changes in accounting principles and interpretations; and the other risks and factors identified from time to time in the company's reports filed with the Securities and Exchange Commission. At this time, I would like to turn the call over to Capital Senior Living's President and CEO, Ms. Kimberly Lody. Please go ahead.

Thank you, and good morning, everyone. Welcome to Capital Senior Living's conference call to discuss our fourth quarter and year-end 2018 results. As many of you know, I joined the company about 8 weeks ago, on January 7, and in our communications about my appointment as CEO, we have really emphasized our top priorities as improving the company's operating performance and strengthening its financial foundation. Back in January, many of you had questions about specific initiatives to accomplish these objectives and we indicated that those details will be shared on today's call. Therefore, while we will certainly report on the company's fourth quarter and full year performance, most of my comments today will be focused on our go-forward plans to drive more consistent and predictable operating performance. I'd like to reflect for a moment on the industry as a backdrop of the operating environment. On previous earnings calls, management has described the challenging macroeconomic headwind prevalent in today's senior living industry. Throughout 2018, supply continued to outpace demand and this put pressure on occupancy and rates. At the same time, low unemployment drove higher labor costs. Because we expect these conditions to continue during the next 12 to 18 months, our #1 priority continues to be strengthening our operating performance and doing so with precision and urgency. Our plan and subsequent actions can be summarized under 4 key strategies, they are: stabilize, invest, nurture and grow, or SING, S-I-N-G, for short. So let's take these one at a time. First is stabilize. This is the main focus of our transformational efforts at this time. As you read in this morning's press release and Carey will describe in more detail, we are deeply disappointed in the company's 2018 operating performance, particularly with respect to the primary driver of our revenue, which…

Thank you. Kim. And the results I'll discuss and as we note in the press release, our non-GAAP measures exclude 2 communities that are undergoing lease-up after significant renovation and conversion. The non-GAAP measures continue to include the 2 Houston communities impacted by Hurricane Harvey since our business interruption insurance restores their economic loss. However, the statistical measures that we include in the release exclude the results of these 2 Houston communities since they are in lease up and to include them would make the statistical measures less meaningful. As Kim noted, we're very disappointed in our fourth quarter and full year 2018 operating results, particularly as it relates to the key drivers of our top line occupancy and rate. The company reported total consolidated revenue of $115.1 million for the fourth quarter of 2018, a decrease of $1.9 million or 1.6% over the fourth quarter of 2017. The decreases is related to lower financial occupancy, partially offset by a nominal increase in average rent. Operating expenses increased $4.7 million or 6.6% in the fourth quarter of 2018 to $76.1 million. Casualty expenses, which are not included in our non-GAAP results, were $1 million higher than the prior year. Another $1 million of increase is related to having a lesser business interruption credit associated with our 2 hurricane-impacted communities now that those communities are back in service. Both communities began admitting residents since July 2018 and are making steady progress. General and administrative expenses for the fourth quarter of 2018 were $9.6 million compared to $5.9 million in the fourth quarter of 2017. Fourth quarter of 2018 includes approximately $4 million in incremental cost associated with the retirement of our previous CEO and the transition to and placement of our new CEO. Excluding these and other transaction costs from both…

Thanks, Carey. In closing, I wanted to reiterate our sense of urgency, diligence and precision in executing our strategy of stabilize, invest, nurture and grow, to significantly improve the company's operating performance. While many performance-focused initiatives have been implemented, it will take time for these efforts to take hold across the portfolio to become anchored in the enterprise and to produce results. We look forward to keeping you appraised of our development. Thank you.

And Jeff, we'll now open the call for questions.

[Operator Instructions] We'll take our first question from Chad Vanacore from Stifel.

So just looking at performance this quarter, occupancy was a drop that's more severe than we thought. Are there any particular areas of concern where there is loss of Sales Directors or EDs or this more new competition and then whether issues spread out across the company or concentrated in a few communities?

Yes, Chad, I will take the first stab at this. And I'd say that we certainly -- the challenge -- the environment is challenging, but we did not execute well, and we have to execute better going forward. There was some variation in our results. As I noted in my comments, Dallas was down 270 basis points, but the rest of Texas was up 70 basis points. Indianapolis is another market that we've had a lot of competition in and it was down greater than that 270 basis points. So it was really a lot of decline in Dallas and in Indianapolis markets. And there is -- but there is variation across our portfolio. Kim, anything you want to add?

I'll just add Chad that in my assessment, we were very slow to respond with clear direction to changing market conditions and this resulted in poor and inconsistent execution. And our lens forward is on this exact issue. The systems and processes that we've already put in place and it will continue to implement, really are about improving that transparency into the business and improving our skills with respect to execution and discipline, along with holding ourself accountable for the results. So it is a top priority for us.

So when you look at -- you said, slow to respond, poor and inconsistent execution, what did you learn from that? What's the low-hanging fruit that's going to change in the next 12 months per se?

Yes. I think there are a couple of things. One is, as I mentioned in my remarks, we really have not had the depth of competency in terms of sales and marketing expertise to really drive that execution. And so with the addition of the Chief Revenue Officer, Mike Fryar, as I mentioned, we'll have much greater focus on that across the organization. Within each of the communities, each one operates in a unique market environment and the situation or the scenario in each community is different, we do have communities, they are doing quite well, and for them, it's continuing to do exactly what they're doing today. In other places, it is about making sure that we've got strong, solid leadership in place at those communities and that, that leadership team is working together to really generate those leads, nurture those leads and that engagement with families and prospective residents and existing residents, through that conversation, so that the choice that they make is to come with Capital Senior Living.

All right. You mentioned in your prepared remarks on thinking about outlook about maybe pricing rate being constrained. Should we think about that as holding with line on rate? Or should we think about that as more concessions coming through 2019?

Chad, I wouldn't say more concessions. It's just what we did in November of 2018 was we did a complete kind of look at all of our market pricing and adjusted our market pricing to where we -- in certain markets where we felt like we were above the prevailing market rates. As you know, we did discount quite a bit during the year, at different points during the year. So with the new -- with the lower rates in certain markets, we're going to have -- it will be difficult for us to grow rate at tremendous amount in 2019. Certainly, our existing residents when they come up for renewal, we have rate increases for them, that will go into place just as normal and that's probably around the 3% kind of level for those existing residents as they renew, but that will dampen our ability to grow our rate, the fact, we put these market pricing adjustments in place.

All right. And then just one more question from me. You mentioned limited number of dispositions in 2019. I think you kind of highlighted 2 companies or 2 communities that you unencumbered. So how many should we expect to be disposed up in 2019? Give us an idea of expected proceeds or changes in EBITDAR?

Yes. Chad, I don't know exactly how many. We're marketing some, and it's just going to depend on how that process goes. It's a handful of assets that we're marketing and the CFFO and EBITDAR impacts can depend on which of those communities we do end up divesting up. But I do not currently expect it to be a significant impact on those measures, more to come back as we move forward.

We can now take our next question from Joanna Gajuk from Bank of America.

So this is Bradley on for Joanna actually. I was just wondering if you can provide a little bit more color on cost-cutting initiatives. So I know you had reorganized the sales force and reduced field labor by 250 positions, but is there any way you can quantify that impact?

Bradley, the reduction in force, how we've characterized, it's going to help minimize the increase in our labor cost in 2018. So some of the savings will be redeployed to the market wage adjustments that we need to make in certain communities for caregivers and other community -- key community personnel, but we also expect savings as I noted overtime in contract labor to offset a portion of the wage adjustments. But it's a meaningful number that from the reduction in force, but not one that we're wanting to quantify at this point. But there are other initiatives and there are -- Bradley, there are other initiatives in place as well. We -- in 2019, we expect to continue to benefit from the food procurement initiative we put in place. We have one more full quarter of those savings because we've started that in April of 2018. So -- and those have been, as I noted, brought our food cost down 5% in 2018. And so we'll have another savings similar to that in the first quarter. And then we put other initiatives in place to continue to have some savings in food. Obviously, it won't be as great as this first year of implementation of the initiative. But we do expect additional savings in 2019 related to those refinements and then also we're continuing to nationalize or regionalize our vendor contracts across multiple services. And most notably, and I don't have a quantification of this yet, but we hope to be in a position to phase in changes related to telecom, television and internet during 2019. We expect those savings to be meaningful, but we don't have the final details worked out yet. So as I said, I can't quantify that at this point.

All right. That make sense. I guess, so then you had previously mentioned about $750,000 in annualized cost saves. Is that kind of what this is including or is that no longer implied?

I'm not sure to what you're referencing, Bradley, but that was -- for the full -- probably for the first full year of implementation, it's about for that food initiative, it's about $250,000 to $300,000 per quarter. So we -- it was about $750,000 in 2018 and there will be another $250,000 to $300,000 in the first quarter.

Okay. Got it. That make sense. So I guess, just trying to get where you were starting to see a CFFO grow again, would you -- you'd mentioned 2020 as sort of a target where you're starting to grow the -- have similar financial health there. Is that the way to look at it?

It's going to depend on the timing and the traction of some of the initiatives that we're putting in place. We're certainly working with a sense of urgency, and I think we have to emphasize that. But as we enter 2020 is when we currently expect to be in a position to begin drawing our financial results as I noted in my remarks.

And I will just jump in here and say, while we're confident in the initiatives that we have put in place and the initiatives that we will put in place, it is still early days and enterprise-wide change does take time to take hold and gain traction. So it's a little premature for us to predict the exact timing and the exact impact of those activities.

[Operator Instructions] We can take our next question from Dana Hambly from Stephens.

This is Jacob on for Dana. Welcome, Kim. I guess, the first question here is, on the new Chief Revenue Officer, can you just elaborate on some of the areas the position focused on initially and maybe following up on that, your prior CLO made some changes to sales efforts and looks like you're now revamping them again. Can you just talk about how perhaps the new strategy will differ?

Yes. Happy to do that. I think when you think about the umbrella of activities that Mike will lead as our Chief Revenue Officer, I would categorize those as commercial excellence. So that includes everything from our go-to-market strategy to the detailed executional plans about developing those leads and then taking them through the resident experience to improve the business. I really can't emphasize enough the resident experience piece of that. We have thousands of touch points every single day with residents and their families. And as I mentioned earlier, each one of our communities operates in a unique market and has a unique community mix and sort of feel to it. So making sure that we are capturing those local differences and leveraging those in the communities is really important. So Carey mentioned some of the activities that we're engaged in terms of reducing costs around technology and internet and television and things like that, that's one of the areas where we expect to make some -- have some significant opportunities. So not only will we save money with those initiatives, but we will also have a greater resident experience across the enterprise as a result of them. The reason that we took the sales management focus in a different direction is simply because what we were doing wasn't working. And it is critical to more closely align those sales resources with those individual communities and those individual market conditions to make sure that, that team is focused on executing in the best way possible given those conditions. I feel like decision-making really needs to be made as close as possible to the local community. And that Sales Director is a key element of that, but they are not the only element, they are part of the overall team to deliver.

Got it. And maybe just following up on that. I guess, the concern here is lot of changes in a short period of time. Can you just talk about or give any color around the turnover on some of the key positions in your facility levels? I guess, it does sound like you're sort of empowering the local leaders. So I'm guessing this is a positive for that, but just anything you can share there?

Yes, our employee turnover is generally in line with the industry, which is higher than we would like it to be. I think that that's pretty consistent across the industry. And so there's not a lot of color -- a lot of additional color to provide on that, other than that we are executing on a number of initiatives to really improve the hiring, the recruiting, hiring and retention of our employees really focused on that turnover. When I look at this plan and at the actions that we've taken in a really short period of time and I want to just emphasize for everyone, I was on the board and also part of a 3-person executive team that was working with management, which really allowed me to hit the ground running fast, when I joined the organization and that's the reason why we're able to make a lot of these changes very quickly. I don't view them as disruptive, meaning change, it is change, for sure, but we have a strong, solid field management team -- field leadership team, and I'm very confident in their ability to execute on the new direction going forward.

Great. And then thinking about sort of the invest part of thing. On CapEx, I don't know if you want to share kind of how we should think about it in 2019? And following up on that, have you done a review of your facilities and should we expect a large CapEx program at some point sort of as part of the new path forward?

Jacob, this is Carey, thanks. Yes, we are currently planning to spend around approximately $25 million to $30 million in total CapEx in 2019. It's a little bit elevated from 2018. This allowed $15 million to $20 million for the necessary physical infrastructure needs of our communities, roofs, HVAC, elevators, nurse call systems, fire alarms, sprinkler systems, all those kinds of things that are necessary and then about $10 million to $15 million for room turns and upgrades and select improvements at certain communities to sustain and improve their competitive position and the experience of our residents. We did go through a process to identify our current and our future CapEx needs for the next 5 years. And we believe that the $30 million we're allocating to CapEx this year is sufficient to cover most pressing physical infrastructure needs and to make improvements at the communities like I noted. And so we feel like that's the right amount for this year. And then -- but we do have -- you always have other needs, and we'll be looking at that as we go forward.

[Operator Instructions] It appears there are no further questions at this time. So I'd like to hand the call back to our host for any additional or closing remarks.

I want to thank everyone for joining us for our conference call this morning. And we will look forward to keeping you updated on our progress going forward. Thank you.

Thank you.

This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.