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Edited Transcript of CSU earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Capital Senior Living Corp Earnings Call

DALLAS Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Capital Senior Living Corp earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carey P. Hendrickson

Capital Senior Living Corporation - Executive VP & CFO

* Kimberly S. Lody

Capital Senior Living Corporation - CEO, President & Director

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Good day, and welcome to the Capital Senior Living Second Quarter 2019 Earnings Release Conference Call. Today's conference is being recorded. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and the company expressly disclaims any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well as in the reports the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly report on Form 10-Q.

Please see today's press release for the full safe harbor statement, which may be found at capitalsenior.com/investor-relations and was furnished in an 8-K filing this morning. Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release.

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.

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Kimberly S. Lody, Capital Senior Living Corporation - CEO, President & Director [2]

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Thank you. And good morning to our shareholders, analysts, employees and other participants. Welcome to Capital Senior Living's conference call to discuss our second quarter 2019 results. Earlier this year, we announced a new strategic framework of stabilize, invest, nurture and grow, or SING, to improve our operating performance and financial foundation.

I am encouraged by our steady progress, and while the impacts of activities we began just a few months ago are not yet evident in our second quarter financial results, there are several indicators that the initiatives are taking hold and our business is stabilizing. To that end, we are laser focused on the quality of our communities and the services we provide, the tenure and skill sets of our valuable talent and the input that produce quality revenue, all of which drive our operational performance and financial foundation. The initiatives we are executing, and which I will discuss further throughout the call, are designed to strengthen our business quickly and with positive effect.

Starting with some of the key results. Our average rate or revenue per occupied room has stabilized and is beginning to increase. For same communities, revenue per occupied room increased 40 basis points over the second quarter of 2018, increased 50 basis points from the first quarter of 2019 and increased 60 basis points for the first 6 months of 2019 over the same period last year.

This is the result of stabilizing our market rates across our communities, implementing in-place rent increases and focusing our sales team on growing total revenue. While the average rate development is not yet at the level we desire, we are encouraged that it is moving in the right direction as driving rate is a key part of our strategy.

We have significantly reduced discounting and concessions. I mentioned on last quarter's earnings call that we have implemented a sales toolbox that provides our communities with the flexibility to be competitive while maintaining overall pricing discipline. During the second quarter of 2019, concessions were just $280,000 across our portfolio of senior housing communities as compared to concessions of $1.1 million in last year's second quarter. This represents a year-over-year decrease of $820,000 or 75%.

We are seeing our commercial excellence activities begin to take hold. Our Chief Revenue Officer joined Capital Senior Living at the end of February, and after completing a thorough review of our go-to-market strategies, in late May, we began executing several initiatives to improve the volume of sales leads to our senior living communities. We commenced social media engagement at several of our communities and began optimizing our digital marketing spend with more focus on our local markets and local community keywords and descriptions.

As a result, our sales leads from page search increased 32% in June over June of last year and increased 46% sequentially over the prior month. Additionally, while the volume of sales leads we received from third-party industry aggregators declined 6% year-over-year during the second quarter, I'm pleased to report that lead generated from our own sales and marketing activities increased 7% during the same period.

Another bright spot is our mid-America division, consisting of 46 communities [moving] were 8.7% higher in the second quarter compared to the first quarter. While we are still in the early stages of our commercial excellence initiative, we believe the initial results are promising. We will continue to build upon and expand them as key elements of our emerging growth strategy.

We are shifting our sales culture to one in which we serve the right residents with the right services for the right value by elevating our focus on the acuity, clinical needs and financial circumstances of those we serve. At times, this means our teams may work with other providers who can better meet the complex needs of some existing and prospective residents. We believe this balanced approach is best for our business, our residents and their families and will create a stronger foundation for our future success.

Turning the attention now to our talent strategies. Employee turnover is trending down. Our total turnover at the end of the second quarter improved 210 basis points when compared to the quarter ending in March, and turnover in our community leadership teams improved 20 basis points over that same period. These statistics continue to improve in July, and although this trend encompasses a very short period of time, we are encouraged that our employee base is stabilizing. At the same time, our year-over-year total labor cost, including both direct employee cost and contract labor cost, increased just 3.1% in the second quarter, evidence that managing property level, labor utilization target and addressing caregiver wage pressures in select markets is delivering tangible impact.

To further enhance the quality of our product offering in all of our communities, during the second quarter, we implemented several innovations. One is the development of a comprehensive peer review tool and 6 national peer review teams. These teams consist of high performing department leaders from across our senior housing portfolio. Their role is to examine the many dimensions of performance for a specific community. Once the review is completed, the peer review team provides the communities' executive director and regional manager with meaningful, constructive feedback as well as recommendations and actions for improvement.

We tested this approach regionally and quickly rolled it out nationally during the second quarter. We are already seeing a marked improvement in the proportion of deficiency-free surveys and a tangible culture shift of being connected and part of a performance-focused organization that identifies and shares best practices.

These actions, along with our new organizational structure and operational leadership, led to a 3.7% year-over-year growth -- revenue growth in our Southwest division, comparing the second quarter of 2019 with the second quarter of 2018.

This division represents approximately 1/3 of our total communities and is heavily concentrated in Texas. Comparing the first 6 months of 2019 with the same period in the prior year, this division achieved 3% revenue growth. We are delighted with this development, and while we don't normally report results at the division level, we wanted to provide it this quarter as an additional indicator of our progress.

The improvements we are reporting this morning are due to the commitment and dedication of our valued employees and a disciplined approach to managing our business. As indicated in our earnings release, occupancy for same communities declined 80 basis points sequentially compared to the first quarter of 2019, ending the second quarter at 83.6%. Some of this decline has been the result of strong focus in our communities to optimize the care and services we provide. We are confident that having a market-based balance, acuity and financial mix at all of our communities will create a stronger foundation for future success.

Turning to financial indicators. The lease coverage ratios are improving for several of our leased communities. While our results continue to be negatively impacted by the high cost of these triple-net leases, I'm pleased that the coverage ratios are improving in nearly all of our Ventas portfolios, in more than half of our HCP portfolio and in about 50% of our Welltower portfolio. We continue to have productive, ongoing conversations with our REIT partners and in particular with HCP regarding the 9 communities with leases terminating in October of 2020.

We expect to transition all 9 of these HCP communities by the lease termination date. As mentioned on previous earnings calls, as part of our normal course of business, we continue to evaluate our portfolio of senior living communities and develop plans to divest those assets that no longer fit within our strategy. In the second quarter of 2019, we closed on the sale of 1 community in Kokomo, Indiana, and we are marketing a small number of select assets for sale. We will continue to engage in these activities in conjunction with our overall portfolio management strategy.

As I normally do before turning the call over to Carey, I want to briefly mention market conditions in the senior housing industry. NIC data continues to suggest that downward trend in senior housing construction starts, especially for assisted living. In the second quarter of 2019, these construction starts as reported by NIC amounted to 3% of total existing senior housing inventory, down from 4.3% during the same period in 2018. While this is encouraging, the industry supply continues to outpace demand, and we expect this headwind to remain through at least May 2020.

Our diligence and focus are on improving the things we can control while navigating the local market conditions relevant to our communities. As you know, certain market conditions have been quite challenging, including the Northeast Ohio, some parts of Texas and certain areas of Illinois and the Carolinas. While we still have a lot to do, we are encouraged by the strength of our leadership, the business process changes we have implemented and the emerging signs that our business is stabilizing.

I will now turn the call over to our Chief Financial Officer, Carey Hendrickson.

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Carey P. Hendrickson, Capital Senior Living Corporation - Executive VP & CFO [3]

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Thank you, Kim, and good morning, everyone. In my remarks, I'll discuss our non-GAAP measures, which 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 restored 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 including them would only make the statistical measures less meaningful.

As Kim noted, we're focused on improving the quality of our product, our talent and our revenue. This focus is already resulting in improvements in operational performance. And in time, we expect of financial results to follow suit. In our release this morning, we reported a total consolidated revenue of $113.1 million for the second quarter of 2019, a decrease of $1.5 million or 1.3% over the second quarter of 2018.

The decrease is related to the sale of Kokomo, Indiana that community on May 1 as well as lower financial occupancy year-over-year. Declines related to these items are partially offset by a nominal increase in average rent as well as incremental revenue in the second quarter of 2019 from the 2 communities impacted by Hurricane Harvey, which came back online in July of 2018.

Our operating expenses increased $1.5 million or 2% to $74.4 million in the second quarter of 2019 as compared to the second quarter of 2018. Operating expenses at our 2 hurricane-impacted communities were $900,000 greater than the prior year, including a lesser business interruption credit of approximately $400,000. Both communities, as I mentioned, began admitting residents in July 2018 and are making steady progress. The business interruption reimbursements for these 2 communities, which totaled $1.1 million in the second quarter of 2019, ended in July of 2019. That was after 12 months of being in operation.

General and administrative expenses for the second quarter of 2019 were $6.6 million compared to $5.7 million in the second quarter of 2019. The second quarter of 2019 included approximately $500,000 in separation and placement costs associated with our former CEO and COO. Excluding these and other transaction costs from both years, our G&A expense increased approximately $1.3 million in the second quarter of 2019 as compared to the second quarter of 2018, mostly related to higher health claim expense, investments in personnel initiatives and differences in bonus accruals between the 2 periods. G&A as a percentage of revenue under management was 5.1% in the second quarter of 2019, the same as in the first quarter of 2019.

Our adjusted EBITDAR was $34 million in the second quarter of 2019 compared to $38.4 million in the second quarter of last year. Our adjusted CFFO was $5.2 million in the second quarter of 2019 compared to $10.6 million in the second quarter of last year. Our CFFO for the second quarter of 2019 included a negative net impact to CFFO of approximately $500,000 related to the adoption of the new lease accounting standard, which was effective January 1, 2019. So on a basis comparable to the prior year, our CFFO was $5.7 million or, if one were to do the math, $0.19 per share.

The new lease accounting standard requires to reassess 2 leases that we previously accounted for as financing leases, which resulted in a change of their classification from financing leases to operating leases. And in association with that change, our quarterly interest expense was reduced by approximately $400,000, and our quarterly rent expense was increased by approximately $900,000, resulting in the negative net impact of CFFO of $500,000.

Looking at our same community results, same community revenues decreased 1.7% as compared to the second quarter of 2018. We had a modest increase in average monthly rent of 0.4% as compared with the second quarter of the prior year, and same community occupancy declined 190 basis points to 83.6%. The decline was 80 basis points on a sequential basis from the first quarter of 2019.

There were variations in occupancy performance across our portfolio in the second quarter of 2019 based on the supply demand dynamics in the markets, our competitive position in those markets and the execution of our local community teams. 69 of our 128 communities had occupancy of 85% or greater in the second quarter of 2019, with 47 of those above 90%. That leaves 59 communities with occupancy below 85%. And looking at the variation in performance across markets, our 4 communities in Omaha continue to be a bright spot, achieving a very healthy occupancy rate of 94.6% in the second quarter of 2019, which is an increase of 380 basis points over the second quarter of 2018. In Texas, our largest state, the Dallas market is underperforming our overall portfolio, but many of our communities in other areas of Texas, notably Houston and San Antonio, are performing well.

Our 17 communities in Dallas declined 130 basis points on a sequential basis from the first quarter of 2019 to the second quarter of 2019. However, our occupancy at our 3 communities in Houston, excluding the 2 hurricane-impacted communities, increased 150 basis points on a sequential basis. And then occupancy at our 2 communities in San Antonio was a very healthy 92.2%.

The sequential occupancy decline in both of our 2 other largest states, Indiana and Ohio, was 40 basis points, considerably less than our overall portfolio sequential decline of 80 basis points. Among other states with multiple communities, our most challenging states in the second quarter from a sequential occupancy perspective were Florida, North Carolina, South Carolina and Virginia. In another positive note, occupancy at our 4 communities in Missouri increased 150 basis points on a sequential basis. And one notable performance in a secondary market was our community in Spartanburg, South Carolina, which increased occupancy from 78.1% in the first quarter of 2019 to 93.6% in the second quarter of 2019.

We continue to maintain good expense controls. Our same community expenses in the second quarter of 2019 increased 1.9%. Our employee labor cost increased only 0.4% in the second quarter of 2019 versus the second quarter of 2018, due in large part to the rightsizing of our workforce across our field operations that we completed in February of this year.

However, we did see an increase in our contract labor cost as compared to the second quarter of 2018, increasing $1.2 million. Including contract labor, our labor expense increased 3.1% in the second quarter of 2019 over the second quarter of the prior year. We've made wage adjustments at a number of our communities that have the most significant wage pressure, which is helping us to better attract caregivers in these markets. And as a result, we saw contract labor come down as the second quarter progressed.

Our food cost increased only 0.7% in the second quarter, and our other large cost category, utilities, decreased 3.2% over the second quarter of last year. Our same community net operating income decreased 7.7% in the second quarter of 2019 as compared to the second quarter of 2018.

Looking briefly at the balance sheet, we ended the quarter with $34.8 million of cash and cash equivalents, including restricted cash. During the second quarter, we spent $4.5 million on capital expenditures. Our mortgage debt balance at June 30, 2019, was $971 million at a weighted average interest rate of approximately 4.9%. At June 30, the majority of our debt was at fixed interest rates, expect for 2 bridge loans that totaled approximately $76 million and $50 million of long-term variable rate debt under our master credit facility.

Of the 2 bridge loans, we have a $65 million bridge that matures in July 2020 and $11 million bridge loan that matures in October 2021. We're in active discussions with lenders regarding both bridge loans and are considering options related to extensions and/or permanent financing for certain assets that are part of the current bridge loans.

As I noted previously, we closed on the sale of our community in Kokomo, Indiana on May 1 at a price of $5 million, which generated about $1.4 million in net cash proceeds for us. We are engaged in various activities as part of our ongoing effort to strengthen our financial foundation and optimize our portfolio, including considering the divestiture of a limited number of assets and the refinancing of certain existing owned assets.

We expect our operating and financial results in the second half of 2019 to reflect the occupancy declines we've experienced in the first half of the year, resulting in lower operating and financial results from the second half of the year than in the first half. We're pleased with the performance of about half of our communities, but the other half still have a considerable amount of work to do.

Our focus for the second half of the year will remain on continuing to stabilize and invest in our operations as we create a platform for growth in the years ahead. We're operating with a tremendous sense of urgency and expect these actions to drive stronger results, but we can't predict the timing of that improved performance, particularly in an environment that remains challenging.

Now I'll turn it back over to Kim.

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Kimberly S. Lody, Capital Senior Living Corporation - CEO, President & Director [4]

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Thanks, Carey. I'll conclude our prepared remarks by saying that we remain focused on improving the operational and financial performance of Capital Senior Living, while delivering the highest quality accommodations and care to our residents.

Each day, we operate with urgency, diligence and precision in executing our strategy of stabilize, invest, nurture and grow to drive long-term value for our customers, our employees and our shareholders. While we are seeing many of our performance-focused initiatives began to take hold across our senior housing portfolio, it will take time for the benefits of these activities to be fully realized throughout the enterprise and produce the results we all desire. We look forward to keeping you apprised of our developments.

We will now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll now take a question from Chad Vanacore with Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [2]

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So I'm just thinking about your optimization initiatives, which of those are you pursuing first? Maybe it's lead generation? Are they cost savings? What's your primary focus right now?

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Kimberly S. Lody, Capital Senior Living Corporation - CEO, President & Director [3]

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Chad, thanks for the question. Well, our primary focus really is driving the top line and doing that with high-quality revenue. A lot of the cost-savings initiatives that are delivering this year really were put in place throughout last year in terms of the new purchasing platforms that we put in place. And then, of course, earlier this year, we did a rightsizing exercise of our workforce, and that has continued to help us really manage those labor costs. So we are laser focused on the top line and on developing occupancy and doing that through -- primarily through our own efforts as indicated by the commercial excellence activities, although, of course, we still work with some of our other industry aggregator partners as well for leads. We are primarily focused on doing that organically.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [4]

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All right. So thinking about your workforce, same-store labor was only up 40 basis points, but contract labor was much higher than that. So effectively, you're still at 3% labor inflation. How should we think about those changes? Contract labor, those expenses transitory or did they just get replaced with employees at similar rates of inflation?

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Carey P. Hendrickson, Capital Senior Living Corporation - Executive VP & CFO [5]

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Yes. Chad, we would actually like to have less contract labor and more direct labor expense and most of that will translate into direct labor. It will move from contract labor into direct labor, but that will be a much better solution for the company. And as I've said in my remarks, we've made progress on that in the second quarter as the second quarter progressed, and we believe we'll make -- continue to make more progress on that in the third quarter. So I think that percentage will be about the same.

We had a little bit less contract labor in the first quarter than we did in the second. And our labor cost overall, including contract labor, were up 3.7%. So it's in that 3% to 3.5%, 3.7% range probably regardless of whether it's in direct or contract labor.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [6]

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Okay. And then just thinking about the communities that you're marketing and the divestitures that you may have teed up, what's currently being marketed? And how much do you think that can grow by?

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Carey P. Hendrickson, Capital Senior Living Corporation - Executive VP & CFO [7]

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So it's a limited number of assets, Chad. And it's -- there are some that are underperformers and there are some that are really strong performers. So it's really a mix. It's -- we're really just looking at those portfolio -- those assets that we believe fit in our portfolio and those that don't and making determinations as it relates to that and marketing those. I mean we believe it will -- when we -- if we decide to sell them that they would produce meaningful cash proceeds for us. But we're being very disciplined in our approach to make sure we receive appropriate value for our assets, if we do decide to sell them.

And I also mentioned we're looking to refinance certain known communities and so both the sale assets and refinancing would provide us with incremental cash. And we feel like the things we're doing in the normal course of operations give us the room we need to focus on improving our operations and our financial performance.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [8]

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All right. And then just one more for me. Just thinking about occupancy, what was the trend of occupancy month-by-month in 2Q? And then what have you seen so far in July and August?

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Carey P. Hendrickson, Capital Senior Living Corporation - Executive VP & CFO [9]

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Yes. So in the second quarter, our occupancy was -- it trended down during the quarter, it was 83.8% in April, 83.8% in May and then 83.1% in June. So we do start the third quarter with lower occupancy than we started the second quarter. The second quarter ended with March at 84.2%. So you can see, it went 84.2%, 83.8%, 83.8% and down to 83.1%. As far as July and August goes, we're -- I would say we're seeing relatively similar trends in July, but we would expect as the summer goes along for that to pick up.

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Operator [10]

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We'll now take our next question from Joanna Gajuk with Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [11]

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So I guess, as it relates to you just talked about occupancy. In terms of pricing, I guess, we seen a little bit of improvement, but I guess, it's still kind of flattish year-over-year. So how should we think about the progress you're making there? And where these rates could kind of shake up for the next, call it, a year or so?

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Carey P. Hendrickson, Capital Senior Living Corporation - Executive VP & CFO [12]

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Yes. So Joanna, we're -- as far as rates go, we are making some progress. When you look at on a sequential basis, from the fourth quarter to the first quarter of -- so the fourth quarter of '18 to this first quarter of 2019, we actually saw a sequential decline of 80 basis points, but we were pleased that we had a sequential increase in the second quarter to 50 basis points from the first to the second quarter.

And so if you take that 50 basis points, you annualize it, that's about a 2% annualized rate. I think we could be -- we're not providing guidance, so I don't want to give too much specific information related to rates, but I would certainly expect it to be positive going forward.

We've gone through the market rate adjustments that we've gone -- needed to go through, and now we're in the mode of increasing rates, particularly in those markets where we have outstanding occupancy. And I noted in my remarks, we have 47 communities that have occupancy at 90% or greater, and obviously, we have more pricing pressure in those markets than in the lower performing markets.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [13]

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So in those markets with strong occupancy, what are the market -- I mean, this -- I guess, in-place rent increases that you're able to achieve?

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Kimberly S. Lody, Capital Senior Living Corporation - CEO, President & Director [14]

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Yes. Depending on the community and the rate structure there, those in-place increases can range between 3% and 5%.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [15]

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All right. So But you're saying, in those markets where you have lower occupancy, you kind have stopped those aggressive discounting or there's still some discounting and some offers, I guess, that are being done?

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Kimberly S. Lody, Capital Senior Living Corporation - CEO, President & Director [16]

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Well, our sales team has a toolbox that they can utilize to be competitive. But in terms of the aggressive discounting that we have seen in the past that is not happening. We are very much focused on improving the quality of our revenue and ensuring that we're selling the value of the services that we provide. So we went through a pretty extensive exercise to stabilize our market rates, to put that toolbox in place, to eliminate or significantly reduce concessions and discounting, and we feel good about where the rates are now and also our ability to continue to implement increase -- in-place rent increases as leases expire and renew.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [17]

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That's helpful. And if I may just a follow up on the comments around, I guess, the plans or those [plans that need to sell] some of the markets should be marketing, and I appreciate a comment that you want to be disciplined, so should I read into it as you're saying things are maybe taking a longer in terms of actually executing those sales transactions because of the lack of interest at the level you're interested in selling or is there lack of interest in general? So any color you can give us in terms of what exactly is going on with -- over the process of selling some of these assets?

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Carey P. Hendrickson, Capital Senior Living Corporation - Executive VP & CFO [18]

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Yes. Joanna, we're just -- we definitely have interest in the assets we're marketing, considerable level of interest. And we're really just considering options as we look at it. We do want to receive appropriate value for them, and there are different ways that you can do that, selling in those one, but we could also look at -- if -- we can also look at potentially refinancing those assets in a vehicle where we could actually get relatively the same amount of proceeds. And some of the assets we're looking at have improved a little bit as we've gone through this process. So it's really just overall evaluation as we go through the process. And it takes a little time, but it's not because there's not interest in the assets.

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Operator [19]

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(Operator Instructions) And it appears there are no further questions at this time, I'd like to turn the conference back over to Ms. Lody for any additional or closing remarks.

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Kimberly S. Lody, Capital Senior Living Corporation - CEO, President & Director [20]

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Okay. Great. As I mentioned earlier, we're laser focused on the quality of our communities and the services we provide. The tenure and the skill-sets of our valuable talent and the inputs that produce quality revenue, all of which drive our operational performance and financial foundation. We appreciate you joining today's call. And we look forward to keeping you informed of our developments. Thank you.

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Operator [21]

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And once again, that does concludes today's conference. We thank you all for your participation. You may now disconnect.