Capital Senior Living Corporation — 2016 Form 10-K
Period and business: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. The filing is for Capital Senior Living Corporation, not Sonida Senior Living, Inc. The company operated 129 senior housing communities in 23 states, with capacity for approximately 16,500 residents, and one home-care agency. It owned 79 communities and leased 50. Approximately 94.5% of community revenue came from private-pay sources.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $447.4 million | $412.2 million |
| Income from operations | $14.4 million; 3.2% margin | $18.8 million; 4.6% margin |
| Net loss | $28.0 million; $(0.97) per share | $14.3 million; $(0.50) per share |
| Cash from operating activities | $52.3 million | $48.9 million |
| Cash and cash equivalents at year-end | $34.0 million | $56.1 million |
| Notes payable, before deferred loan costs | $910.2 million | $777.1 million |
- Revenue rose 8.6%, primarily reflecting acquisitions and a full year of contribution from prior-year acquisitions. Consolidated financial occupancy was 88.0%, unchanged year over year; average monthly rents increased 3.4%. Same-store occupancy was 87.8%, also unchanged, while same-store rents increased 2.0%.
- Expenses grew 10.1% to $433.1 million, faster than revenue. Operating expenses increased with acquired properties and higher wages and benefits; depreciation and amortization, general and administrative costs, and stock compensation also rose.
- Interest expense increased to $42.2 million from $35.7 million. The resulting net loss widened despite higher revenue and operating cash flow. The company reported $82.1 million of net non-cash charges contributing to the difference between net loss and operating cash flow.
- Investing activities used $201.0 million, including $138.8 million for acquisitions and $62.4 million of capital expenditures. Financing activities provided $126.7 million. Cash declined by $22.1 million during the year.
- Working capital was positive but narrow at $0.6 million. Restricted cash was $13.3 million and is not available as ordinary operating cash.
Material changes and significant transactions
- Portfolio size increased from 121 to 129 owned or leased communities. Fiscal 2016 acquisitions included communities in Wisconsin, Florida, Texas, Massachusetts and Ohio, for disclosed purchase prices totaling approximately $138.8 million.
- Debt increased by approximately $133.1 million year over year. At year-end, $898.5 million was fixed-rate debt and $11.7 million variable-rate debt; weighted average fixed-rate interest was 4.6%. Management estimated that a one-percentage-point rate increase would add about $0.1 million to annual interest expense on the then-outstanding variable-rate debt.
- Future contractual cash obligations were $1.73 billion, including $1.21 billion of long-term debt payments and interest and $526.5 million of operating and capital lease commitments. Minimum lease payments were $67.3 million for 2017.
- On January 31, 2017, the company acquired four Ventas-leased communities for $85.0 million, using $65.0 million of 36-month, interest-only bridge financing at an initial LIBOR plus 4.0%, with the remainder paid from cash. The transaction is expected to reduce future lease obligations by $44.9 million; these changes are not reflected in year-end obligation figures.
Outlook, risks and unusual items
- The filing gives no specific financial guidance. Management said available cash and expected operating cash flow, supplemental financing, refinancings and asset-sale proceeds were expected to meet short-term working-capital needs; long-term capital needs could depend on access to debt or equity markets and joint ventures. It cautioned that financing availability and terms are uncertain.
- Key risks include substantial debt and lease commitments, covenant and cross-default provisions, refinancing needs, interest-rate and CPI exposure, and dependence on private-pay residents. Management also cited labor costs and staffing, competition and potential market oversupply, resident turnover, acquisition and integration execution, regulation and licensing, liability claims and insurance availability.
- Fiscal 2016 included $11.6 million of stock-based compensation, including accelerated vesting and severance-related costs following the death of the Chief Operating Officer. The company recorded an $8.6 million increase to its deferred-tax-asset valuation allowance; cumulative losses were cited as limiting evidence for realization of tax benefits.
- Acquisition-related in-place lease intangibles had $6.3 million net book value at year-end and were expected to be fully amortized in 2017. The company said accumulated amortization of these intangibles was $80.2 million through year-end, contributing to its retained deficit.
- Management reported compliance with debt and lease covenants at December 31, 2016. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Confirm the issuer identity: this filing is Capital Senior Living Corporation (NYSE: CSU), despite the request metadata naming Sonida Senior Living, Inc.
- Review the debt maturity schedule, covenant headroom, cross-default exposure and refinancing requirements, alongside the $526.5 million year-end lease commitment disclosure.
- Assess whether occupancy and rent growth can offset rising labor, operating, interest and depreciation costs, particularly given the narrower operating margin and larger net loss.
- Evaluate the January 2017 Ventas acquisition’s bridge-loan terms, liquidity impact, purchase-price allocation and expected reduction in lease obligations.
- Review the deferred-tax-asset valuation allowance, future amortization of acquisition intangibles, and the company’s ability to convert operating cash flow into sustainable earnings.