Capital Senior Living Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company operated 128 senior housing communities in 23 states, with capacity for approximately 16,400 residents. The filing is in the name of Capital Senior Living Corporation.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $111.1 million | $115.7 million | $338.4 million | $344.9 million |
| Operating income (loss) | $(8.1) million | $1.7 million | $(5.9) million | $10.7 million |
| Operating margin | (7.3)% | 1.5% | (1.8)% | 3.1% |
| Net loss | $(20.7) million | $(11.1) million | $(46.2) million | $(27.3) million |
| Net loss per share | $(0.68) | $(0.37) | $(1.53) | $(0.92) |
| Operating cash flow | Not provided for the quarter | $(0.8) million | $26.9 million |
- Q3 operating expenses rose 4.6% to $119.2 million, exceeding revenue. For the first nine months, expenses increased 3.0% to $344.3 million.
- At September 30, cash and cash equivalents were $7.7 million; restricted cash was $13.1 million. Cash and restricted cash together declined $23.5 million during the first nine months.
- Notes payable, excluding deferred loan costs, totaled $971.6 million: $126.2 million current and $836.6 million long-term on the balance sheet. The company reported $845.3 million of fixed-rate and $126.3 million of variable-rate debt.
- Operating lease liabilities were $261.8 million, including $46.8 million current. Total assets were $1.294 billion and shareholders’ equity was $3.2 million.
Changes versus the prior comparable period
- Revenue declined 3.9% in Q3 and 1.9% over nine months. Management attributed the decreases mainly to lower occupancy and, in part, the May sale of the Kokomo community.
- Average financial occupancy, excluding the two Hurricane Harvey-affected communities and Kokomo, was 81.3% in Q3 versus 84.1%; for nine months it was 82.3% versus 85.1%. Average monthly rental rates rose 0.36% over the nine-month comparison.
- Management cited higher labor and contract staffing costs, casualty and insurance costs, and corporate personnel transition costs. Lower stock-based compensation partially offset expense growth.
- Operating cash flow swung from $26.9 million provided in the first nine months of 2018 to $0.8 million used in 2019. Capital expenditures were $14.3 million, versus $18.0 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected cash, operating cash flows, refinancing proceeds and asset-sale proceeds to fund short-term working capital needs, but said long-term capital needs depend on access to debt or equity markets and additional asset sales. It cautioned that sufficient future cash generation or financing is not assured.
- Two communities were sold on October 1, 2019 for $64.8 million, yielding approximately $14.8 million net proceeds. At September 30, their $44.4 million mortgage debt was classified as current.
- An October 22 amendment with HCP provides for transition of four leased properties to new operators around January 2020 and sale of five more expected in or around Q2 2020. The company will pay $1.0 million for the four transitions; it may receive a share of proceeds above a specified price for one property.
- The company adopted ASC 842 lease accounting in January 2019, recognizing $255.4 million of lease right-of-use assets and $289.5 million of lease liabilities initially. Adoption included impairment adjustments and a $12.6 million increase to retained earnings; management said adoption did not materially affect cash flows or covenant compliance.
- A $2.3 million write-down was recorded on the Kokomo property before its sale. Deferred tax asset valuation allowances increased by $10.7 million in the first nine months. Hurricane Harvey insurance recoveries continued to affect reported operating expenses.
- Management reported compliance with debt and lease covenants at quarter-end. A 1 percentage-point increase in rates was estimated to raise annual interest expense by approximately $1.3 million. Principal risks include refinancing and liquidity needs, occupancy and labor pressures, lease coverage requirements, and competition. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Near-term debt maturities and refinancing plans, particularly the $126.2 million current notes payable balance and the Compass Bank loan maturity extended to July 2020.
- Whether operating performance and occupancy stabilize enough to improve cash generation and meet substantial debt and lease obligations.
- Completion and realized proceeds of the October community sale and the planned HCP property transitions and sales.
- Cash availability and the extent to which restricted cash, asset sales, or new financing are needed to fund operations and capital requirements.
- Effects of ongoing labor, insurance, and occupancy pressures, as well as the collectability of insurance recoveries and realization of deferred tax assets.