Capital Senior Living Corporation — Q2 2018 Form 10-Q
Business context and reporting period. The filing is for the quarter ended June 30, 2018, with comparisons to Q2 and the six months ended June 30, 2017. The registrant named in the filing is Capital Senior Living Corporation. It operated 129 senior housing communities in 23 states, with capacity of approximately 16,500 residents; 83 communities were owned and 46 leased. The financial statements are unaudited.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Resident revenue | $114.6m | $116.7m | $229.3m | $232.7m |
| Operating income (loss) | $3.6m | $4.7m | $9.0m | ($4.9m) |
| Net loss | ($9.1m) | ($7.8m) | ($16.2m) | ($29.7m) |
| Basic and diluted loss per share | ($0.30) | ($0.27) | ($0.55) | ($1.01) |
| Operating cash flow | Not stated quarterly | $15.1m | $35.0m |
- Q2 operating margin was 3.2% versus 4.0%; net loss margin was 7.9% versus 6.7%. For the first half, operating margin was 3.9% versus negative 2.1%, and net loss margin was 7.1% versus 12.7%.
- First-half investing cash outflow was $10.8m, primarily capital expenditures; financing cash outflow was $11.0m. Cash and cash equivalents declined $6.7m. Capital expenditures were $10.8m.
- At June 30, cash and cash equivalents were $10.9m, plus $13.5m of restricted cash. Current assets were $55.9m and current liabilities $82.9m, a working-capital deficit of approximately $26.9m.
- Notes payable were $957.9m excluding deferred loan costs ($949.3m net on the balance sheet); $881.5m was fixed-rate and $76.4m variable-rate. Capital lease and financing obligations totaled about $50.4m. Future facility lease obligations were $407.5m.
Material changes versus prior comparable period
- Q2 revenue declined $2.1m (1.8%); first-half revenue declined $3.4m (1.5%). Two Texas communities remained vacant during repairs after Hurricane Harvey, reducing revenue by approximately $2.3m in Q2 and $4.7m in the first half. Other communities partly offset the decline through higher rents: average monthly rental rates rose 1.1% in Q2 and 1.4% in the first half.
- Excluding the Harvey-affected properties, average financial occupancy fell to 85.2% from 86.3% in Q2.
- Q2 net loss widened by $1.2m year over year, reflecting lower revenue, higher interest and stock compensation, among other items. First-half net loss improved by $13.5m, largely because the prior-year period included a $12.9m facility lease termination loss related to a 2017 property acquisition.
- First-half operating cash flow fell to $15.1m from $35.0m. Interest expense was $25.1m for the first half, up from $24.4m; management attributed the increase primarily to additional mortgage debt.
Outlook, commentary, risks, and unusual items
- Management expected available cash, operating cash flows, supplemental financing, refinancing proceeds, and asset-sale proceeds to be sufficient for short-term working capital needs. Long-term capital needs may depend on joint ventures and access to debt or equity markets; management cautioned that funding availability and terms are uncertain. No numerical earnings or revenue guidance was provided.
- The two Harvey-affected communities reopened and began accepting residents in July 2018. The company had incurred approximately $5.7m in cleanup and repair costs through June 30 and expected additional costs, which it believed would be reimbursed by insurance. First-half insurance payments totaled approximately $4.1m, including $3.1m for business interruption.
- In July 2018, the IRS notified the company of proposed Affordable Care Act employer payments of approximately $2.0m for 2015. The company preliminarily estimated its liability at $0.2m and had accrued that amount; it could appeal the assessments.
- A 1 percentage-point increase in interest rates was estimated to increase annual interest expense by approximately $0.8m, based on variable-rate debt at June 30. The company also faces contingent rent escalations on some leases.
- The company reported compliance with its debt and lease covenants. It extended a Canton, Ohio mortgage to October 2021 at an initial variable rate of LIBOR plus 5.0%. Adoption of the new lease accounting standard in 2019 was expected to materially increase reported balance-sheet right-of-use assets and lease liabilities.
- Management stated that ordinary-course claims were not expected to materially affect the financial statements if resolved adversely. It reported no material changes to the risk factors in its 2017 Form 10-K.
Important facts for investors to verify
- Occupancy, rate trends, and the pace of resident re-entry at the two reopened Harvey-affected communities; confirm insurance recovery and remaining repair costs.
- Liquidity and refinancing capacity given the working-capital deficit, low unrestricted cash relative to debt, and dependence on future financing or asset sales.
- Debt maturities, variable-rate exposure, covenant requirements, and the effect of lease obligations and upcoming lease-accounting changes.
- Final resolution and payment, if any, of the IRS’s approximately $2.0m proposed assessment versus the company’s preliminary $0.2m estimate.
- Operating cash flow trend and the sustainability of cost reductions, especially as occupancy, wages, bad debts, and insurance costs change.