Business context and reporting period
This is Capital Senior Living Corporation’s Form 10-Q for the quarter ended June 30, 2011, filed August 9, 2011. The filing entity is Capital Senior Living, not Sonida Senior Living, Inc.; investors should verify the requested company identity. The company operated 77 senior living communities in 23 states, with capacity for approximately 11,000 residents, and one home care agency. Results are unaudited; amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $64.3 | $50.5 | $124.2 | $98.4 |
| Operating income | $4.5 | $4.7 | $9.6 | $8.8 |
| Operating margin | 6.9% | 9.3% | 7.6% | 8.9% |
| Net income | $0.9 | $1.5 | $2.2 | $2.2 |
| Net margin | 1.4% | 2.8% | 1.6% | 2.2% |
| Diluted earnings per share | $0.03 | $0.05 | $0.08 | $0.08 |
- For the six months, cash from operations was $11.7, investing activities provided $13.2, and financing activities used $4.2. Cash increased $20.7 to $51.9. Investing cash included $15.8 of Spring Meadows transaction proceeds; operating cash flow also benefited from a $5.8 increase in income taxes receivable/payable.
- At June 30, cash and cash equivalents were $51.9 and restricted cash was $8.9. Total assets were $401.3; total liabilities were approximately $233.6.
- Notes payable totaled $173.0 ($5.0 current); the company reported fixed-rate debt and covenant compliance. Interest expense for the first half was $5.5, down from $5.6.
- Future lease obligations were $543.8, with possible contingent rent increases. The company also reported $2.6 of standby letters of credit supporting leases.
Material changes versus the prior comparable period
- Revenue increased 27.4% in Q2 and 26.2% in the first half, principally because communities added through the Spring Meadows, Midwest, and HCN/Signature transactions were consolidated or leased. Rental rates at other consolidated communities rose 2.3% in Q2 and 2.8% in the first half.
- Expenses grew faster than revenue: total expenses rose 30.7% in Q2 and 27.8% in the first half. Facility lease expense increased $5.7 in Q2 and $10.7 in the first half, reflecting the expanded leased portfolio. This contributed to lower operating and net margins.
- Q2 net income fell to $0.9 from $1.5; first-half net income was nearly unchanged at $2.2. The prior-year periods included a $0.7 gain on a debt settlement, which did not recur in 2011.
- The April 2011 Spring Meadows sale-leaseback generated approximately $17.0 in proceeds net of closing costs and a $16.1 gain deferred and recognized as a reduction in facility lease expense over the 15-year initial lease term. The lease has an initial 7.25% rate.
Outlook, risks and unusual items
- Management expected available cash, operating cash flows, joint-venture cash flows and asset-sale proceeds to fund short-term working capital needs. Long-term capital needs, particularly acquisitions, could depend on access to joint ventures and debt or equity markets. No specific earnings or revenue guidance was provided.
- Management cited challenging housing, credit and financial markets, and continued focus on occupancy, rental rates, expense control, and net operating income per unit. Risks include acquisition availability and financing, licensing, insurance costs, economic conditions, and access to capital.
- For three joint-venture developments, the company guaranteed completion and operating costs through breakeven; the agreements generally have no stated maximum payment. One venture had exhausted its lease-up reserve. The company had recognized approximately $0.7 in deficit charges as of June 30.
- After quarter-end, the company acquired three Indiana communities for a combined $26.2 and an Ohio community for $27.3. The Ohio acquisition had $19.0 of interim variable-rate financing maturing December 31, 2011; management expected to replace it with long-term fixed-rate financing. These transactions are subsequent events, not included in June 30 balances.
- Management stated that ordinary-course claims were not expected to materially affect the financial statements, and that disclosure controls were effective. The filing reported no material change in risk factors from the 2010 Form 10-K.
Important facts for investors to verify
- Confirm the registrant’s identity: this filing is for Capital Senior Living Corporation, despite the Sonida Senior Living, Inc. request metadata.
- Assess whether revenue growth from acquired and leased communities can translate into improved margins given higher operating and lease costs.
- Review lease commitments, escalation provisions, collateral requirements, and the exposure from development guarantees.
- Verify funding and refinancing for the post-quarter acquisitions, particularly replacement financing for the Ohio interim loan.
- Evaluate the sustainability of operating cash flow, including the period’s significant tax-related working-capital contribution, and the realization of deferred tax assets.