Business context and reporting period
Capital Senior Living Corporation (the registrant named in this filing; ticker CSU) filed this unaudited Form 10-Q for the quarter ended June 30, 2019. It operated 128 senior housing communities in 23 states, with capacity for approximately 16,400 residents: 82 owned and 46 leased. The filing compares the second quarter and first six months of 2019 with the corresponding 2018 periods.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Resident revenue | $113.1 million | $114.6 million | $227.3 million | $229.3 million |
| Income from operations | $0.2 million | $3.6 million | $2.2 million | $9.0 million |
| Net loss | $(12.5) million | $(9.1) million | $(25.5) million | $(16.2) million |
| Net loss per share | $(0.41) | $(0.30) | $(0.85) | $(0.55) |
| Operating cash flow | — | $0.8 million | $15.1 million |
- Q2 operating margin was approximately 0.2%, versus 3.2% a year earlier; net margin was approximately (11.1)%, versus (7.9)%. For the first half, operating margin was approximately 1.0% versus 3.9%, and net margin was (11.2)% versus (7.1)%. Margins are calculated from reported revenue and operating income or net loss.
- Q2 expenses rose 1.7% to $112.9 million despite lower revenue. For the first half, expenses rose 2.2% to $225.1 million. Wage and benefit costs, general and administrative expenses, and depreciation increased; lower stock compensation partly offset these increases.
- Six-month investing cash outflow was $2.9 million, including $7.8 million of capital expenditures and $4.9 million of asset-sale proceeds. Financing cash outflow was $7.4 million. Cash and cash equivalents declined $9.6 million to $21.7 million; including restricted cash, the ending balance was $34.8 million.
- At June 30, cash and cash equivalents were $21.7 million, current assets $63.0 million, and current liabilities $117.6 million. Notes payable were approximately $976.6 million excluding deferred loan costs; reported notes payable net of costs totaled approximately $967.8 million. Operating lease liabilities were $272.9 million, including $46.0 million current. Shareholders’ equity was $23.0 million.
- Interest expense was $12.6 million in Q2 and $25.2 million for the first half. The company reported $850.2 million of fixed-rate and $126.4 million of variable-rate debt. It estimated that a 1 percentage-point rate increase would add approximately $1.3 million to annual interest expense.
Material changes versus comparable periods
- Revenue declined 1.3% in Q2 and 0.9% for the first half. Management attributed the shortfall primarily to lower occupancy at communities excluding the two Hurricane Harvey-affected sites and the Kokomo disposition. Excluding those sites and the disposition, Q2 average financial occupancy was 83.2%, down from 85.2%; first-half occupancy was 83.7%, down from 85.5%. Average monthly rental rates increased 0.4% in Q2 and 0.5% for the first half.
- Higher revenue at the two Harvey-affected communities, which reopened in July 2018, was more than offset by lower revenue elsewhere and the Kokomo sale. The company sold the 138-unit Indiana community effective May 1, 2019, for $5.0 million; net proceeds after mortgage repayment and closing costs were approximately $1.4 million.
- Operating cash flow fell to $0.8 million from $15.1 million for the first half. The filing cites the larger net loss, a $7.1 million decline in accounts payable, and increases in receivables and prepaid expenses among the factors.
- Effective January 1, 2019, adoption of ASC 842 added $255.4 million of operating lease right-of-use assets and $289.5 million of lease liabilities to the balance sheet. The adoption included a $17.8 million impairment adjustment to retained deficit and a $10.0 million write-off of deferred sale-leaseback gains to retained earnings. The company said adoption did not materially affect earnings or cash flows and did not affect covenant compliance.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance is provided. Management expects available cash, operating cash flows, supplemental debt financing, refinancing and asset-sale proceeds to cover short-term working-capital needs; longer-term capital needs may depend on access to debt or equity markets. Management cautioned that sufficient future cash generation or access to needed capital is not assured.
- The company extended an interest-only, variable-rate Compass Bank mortgage on four communities, moving maturity from May 11, 2020 to July 11, 2020. Management reported compliance with outstanding debt and lease covenants at June 30, 2019. The short extension, substantial debt and lease obligations, and reliance on financing and asset sales are notable liquidity considerations.
- Hurricane Harvey-related communities had reopened and accepted residents from July 2018. Through June 30, 2019, the company had incurred approximately $6.8 million of repair and cleanup costs it believed probable of insurance recovery, and had received $14.7 million in insurance payments, including $9.7 million for business interruption. Further recovery remains subject to insurer payment and claim outcomes.
- The company recorded a $2.3 million first-quarter write-down on the Kokomo property before its second-quarter sale. Deferred tax asset valuation allowances increased by $5.7 million in the first half, reducing deferred tax assets by $51.9 million at June 30; realization depends on future taxable income and other assumptions.
- Management identified risks including the ability to meet debt and lease obligations, refinance or extend maturing debt, obtain capital, comply with covenants, manage occupancy and labor costs, and compete in its markets. It reported no material change in the risk factors from its 2018 Form 10-K. Ordinary-course claims were not expected by management to materially affect the financial statements if resolved adversely.
- Management concluded disclosure controls and procedures were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether occupancy stabilizes or improves, and whether rental-rate increases can offset staffing, wage, insurance and other operating-cost pressure.
- Cash generation, cash runway and the company’s ability to fund capital improvements and meet near-term debt maturities without relying on uncertain refinancing or asset-sale proceeds.
- Debt and lease covenant headroom, variable-rate exposure, and the implications of the large lease-payment commitments.
- The timing and collectability of remaining Hurricane Harvey insurance recoveries, and the assumptions supporting tax-asset realization.
- The filing’s reported stock-based compensation amounts: the statements show $0.7 million for the first half of 2019, while the note describes $1.6 million for Q2 and $0.7 million for the first half; confirm the period presentation and any related adjustments.