Capital Senior Living Corporation (identified in the filing; company metadata: Sonida Senior Living, Inc.) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing presents unaudited results and compares them with the corresponding 2011 periods. At quarter-end, the company operated 91 senior living communities in 23 states, with capacity for approximately 12,600 residents, and one home care agency.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $77.0 million | $64.3 million | $149.2 million | $124.2 million |
| Operating income | $3.5 million | $4.5 million | $7.5 million | $9.6 million |
| Operating margin | 4.5% | 6.9% | 5.0% | 7.6% |
| Net income (loss) | ($0.7) million | $0.9 million | ($0.5) million | $2.2 million |
| Diluted EPS | ($0.02) | $0.03 | ($0.02) | $0.08 |
| Operating cash flow | Not separately provided for the quarter | $19.3 million | $11.7 million |
- Revenue rose 19.7% in Q2 and 20.2% for the six months, primarily reflecting acquisitions and growth in resident and healthcare revenue. Same-store communities reported 1.4% higher occupancy and rental rates in Q2; for the six months, occupancy rose 1.0% and average monthly rental rates rose 0.6%.
- Profitability weakened despite revenue growth. Six-month expenses increased 23.8%, faster than revenue; depreciation and amortization increased $8.6 million and interest expense rose $2.4 million year over year. The company attributed much of these increases to acquired communities and related financing.
- At June 30, cash and cash equivalents were $36.8 million, restricted cash $9.2 million, and current assets $67.9 million versus current liabilities of $41.2 million. Notes payable totaled $292.4 million, including $9.2 million current; capital lease and financing obligations totaled $43.4 million. Shareholders’ equity was $170.3 million.
- Six-month investing cash outflow was $81.4 million, including $75.6 million of acquisition payments and $5.6 million of capital expenditures. Financing provided $76.6 million, including $81.9 million of note proceeds. Cash increased $14.6 million to $36.8 million.
Material changes and notable transactions
- During the first half, the company acquired communities in Granbury, Texas; four Texas communities in the Esperanza transaction; Jeffersonville, Indiana; and Irving, Texas. Aggregate acquisition cash payments were $75.6 million. A fifth Esperanza property in Corpus Christi was expected to close in Q3 2012.
- In June, the company modified its Ventas lease arrangements after anticipating it might not meet lease-coverage requirements. It exchanged two owned communities for one unencumbered community, leased back the two exchanged properties, obtained the return of approximately $3.4 million of cash collateral, and extended the portfolio leases to September 2020, with two five-year renewal options. Ventas assumed approximately $18.3 million of mortgage debt without further company obligation.
- The Ventas transaction was accounted for as a financing arrangement because of continuing involvement; the company recorded approximately $13.2 million in property and equipment and $11.8 million in other assets. These amounts and the purchase accounting were preliminary.
- New and supplemental financing included $20.2 million of Freddie Mac supplemental loans at a fixed 4.39%, plus acquisition-related Fannie Mae mortgages at fixed rates of 4.38%–4.76%. Notes payable increased from $233.1 million at year-end 2011 to $292.4 million at June 30, 2012.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance is provided. Management expected available cash, operating cash flows, potential supplemental financing and asset-sale proceeds to meet short-term working-capital needs; long-term capital requirements may depend on access to joint ventures and debt or equity markets. The filing cautions that access to capital and future cash generation are not assured.
- Management described challenging housing, credit and financial-market conditions. Its stated operating focus included occupancy, rental rates, expense control, net operating income per unit, higher-care conversions and selective acquisitions.
- Development guarantees cover certain joint ventures’ completion costs and operating deficits until breakeven, with no stated maximum potential payment under the general terms. One joint venture’s lease-up reserve was exhausted; the company had recorded approximately $1.2 million of deficit charges under these guarantees. Two other development guarantees had been satisfied and terminated.
- The company reported compliance with debt and lease covenants at June 30. It reported $583.5 million of future lease obligations, with some rent escalations tied to consumer prices or operating measures. Its $292.4 million of notes payable consisted solely of fixed-rate debt; interest-rate changes could affect fair values, while inflation or operating performance could affect future rent.
- Management believed normal-course claims, most believed insured subject to policy terms, would not materially affect the financial statements if resolved adversely. No material change to previously disclosed risk factors was reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and operating cash flow growth reflects acquisitions versus sustainable same-store performance, and how acquired communities perform after integration.
- Whether expense, depreciation and interest growth—and the resulting decline in operating margins—moderate in subsequent periods.
- The final accounting and valuation for the Ventas transaction, lease coverage performance, and obligations under the modified leases.
- Availability and terms of future financing, covenant headroom, debt maturities, and the company’s ability to fund acquisitions while preserving liquidity.
- Potential cash exposure under the remaining joint-venture development guarantees and progress toward breakeven at Miami.
- Realizability of the reported net deferred tax assets, which management considered reasonably assured but dependent on future results.