Capital Senior Living Corporation — Q1 2016 Form 10-Q
Entity note: The supplied filing is for Capital Senior Living Corporation, the company later known as Sonida Senior Living, Inc. The reporting period is the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Financial amounts below are in U.S. dollars.
Business context
The company operated 126 senior living communities in 23 states, with capacity for approximately 15,800 residents: 76 owned and 50 leased. It also operated one home care agency. Services included independent living, assisted living, and home care.
Financial and operating performance
- Revenue: Resident revenue was $109.2 million, up $10.5 million, or 10.7%. Management attributed the increase mainly to acquisitions, along with improved same-store occupancy and rental rates.
- Occupancy and rates: Consolidated financial occupancy was 88.0%, versus 86.9%; same-store occupancy was 87.8%, versus 87.0%. Average monthly rental rates increased 4.8% consolidated and 2.6% same-store.
- Expenses and operating margin: Total expenses rose 10.6% to $105.0 million. Operating income was $4.2 million, compared with $3.7 million; operating margin was 3.8% in both periods. Higher operating costs, depreciation, general and administrative expense, and stock-based compensation largely reflected acquisitions and other cost increases.
- Profit: Net loss was $6.0 million, approximately unchanged from $6.0 million in Q1 2015. Net loss per basic and diluted share was $0.21 in both periods. Interest expense increased to $10.0 million from $8.4 million.
- Cash flow: Operating cash flow was $15.7 million, up from $12.8 million. Investing used $78.5 million, including $64.8 million for acquisitions and $13.8 million of capital expenditures. Financing provided $38.5 million. Cash and cash equivalents declined $24.3 million during the quarter to $31.8 million.
- Balance sheet and liquidity: At March 31, cash and cash equivalents were $31.8 million and restricted cash was $13.2 million. Total assets were $1.053 billion; shareholders’ equity was $129.8 million. Notes payable, excluding deferred loan costs, totaled $819.0 million, versus $777.1 million at year-end 2015. The filing also reports $554.6 million of future facility lease obligations.
- Debt and interest-rate exposure: Debt comprised $807.2 million of fixed-rate and $11.8 million of variable-rate obligations. The company reported that a one-percentage-point increase in rates would raise annual interest expense by approximately $0.1 million, based on quarter-end variable debt. It was in compliance with outstanding debt and lease covenants.
Material changes and notable items
- The company acquired two Pensacola, Florida communities for approximately $48.0 million and three Wisconsin communities for approximately $16.8 million. The acquisitions added 317 assisted-living units in total. Related new mortgage financing was $35.0 million at 4.38% and $11.3 million at 4.50%, each with a 10-year term and principal amortized over 30 years.
- Acquisitions and same-store performance increased revenue, while the 2015 sale of five communities reduced year-over-year revenue by approximately $1.4 million, according to management.
- During the quarter, the company repurchased 144,315 shares for approximately $2.5 million, at an average price of $17.29 per share.
- The company recorded a $1.9 million increase to its deferred-tax-asset valuation allowance. Its net loss also reflects significant depreciation and amortization; management stated that accumulated accelerated amortization of in-place leases contributed substantially to the retained deficit.
- Management adopted new business-combination measurement-period accounting and recorded a $1.3 million reclassification from other assets to property and equipment. The purchase accounting for the Q1 acquisitions remained preliminary.
Outlook, risks, and contingencies
- No quantified earnings, revenue, occupancy, or capital-spending guidance was provided. Management expected available cash and operating cash flow, supplemental financing, refinancings, and asset-sale proceeds to cover short-term working-capital needs. Longer-term capital requirements, particularly for acquisitions and other initiatives, could depend on access to joint ventures and debt or equity markets.
- Management cautioned that there is no assurance the company will sustain current cash flows or obtain capital needed for its short- and long-term requirements. It also cited acquisition availability and terms, financing access, economic conditions, licensing and closing conditions, insurance availability and lease-coverage performance among relevant risks.
- Standby letters of credit totaled approximately $13.2 million: $3.9 million for workers’ compensation administration, $6.6 million for Welltower leases, and $2.7 million for HCP leases.
- The company reported ordinary-course claims, most believed to be insured, and management did not expect adverse outcomes to materially affect the financial statements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether acquisition-driven growth translates into durable same-store occupancy, rental-rate gains, and improved profitability after operating and financing costs.
- Debt maturities, refinancing needs, covenant headroom, and the terms of the company’s substantial lease commitments; the filing does not provide a single consolidated near-term maturity schedule in the supplied text.
- Cash needs for acquisitions and capital expenditures, and the extent to which future investment depends on external financing given the quarter’s cash decline.
- The final purchase-price allocations and operating contribution of the Pensacola and Wisconsin acquisitions.
- Whether deferred tax assets will be realizable, given the valuation allowance and continued quarterly losses.
- Potential effects of lease accounting changes and variable-rate debt exposure; the company said it was evaluating the relevant accounting standards’ impacts.