Business context and reporting period
This is Capital Senior Living Corporation’s Form 10-K for the fiscal year ended December 31, 2013; it is not a standalone Q4 filing. The company, now associated with the Sonida Senior Living name, operated 112 senior living communities in 26 states, with capacity for approximately 14,600 residents, and one home-care agency. Its services include independent living, assisted living and limited skilled nursing. Approximately 96% of community revenue came from private-pay sources.
Financial and operating results
- Revenue: $350.4 million, up 12.8% from $310.5 million in 2012. Resident and health-care revenue was $343.5 million. Growth primarily reflected acquisitions; 2013 acquisitions contributed $8.0 million of revenue after their respective closing dates.
- Profitability: Operating income was $11.3 million, down from $13.7 million; operating margin declined to 3.2% from 4.4%. Net loss was $16.5 million, or $0.58 per diluted share, compared with a $3.1 million loss, or $0.11 per share, in 2012. Interest expense increased to $23.8 million from $18.0 million.
- Q4 results: Revenue was $88.9 million, operating income $2.6 million and net loss $2.4 million ($0.08 per share). Q4 2012 revenue was $83.3 million, operating income $3.1 million and net loss $1.6 million.
- Occupancy and rates: Average financial occupancy across consolidated communities was 85.9%, versus 87.2% in 2012. Same-store occupancy was 85.6%, versus 87.4%; same-store average monthly rental rates rose 2.0%. The consolidated-community average monthly rental rate rose 0.7%.
- Cash flow: Operating cash flow was $42.6 million, down from $46.4 million. Investing used $162.3 million, including $150.4 million for acquisitions and $13.6 million in capital expenditures; financing provided $114.5 million. Cash declined $5.1 million to $13.6 million.
- Liquidity: Cash and cash equivalents were $13.6 million, alongside $11.4 million of restricted cash. Working capital was negative $5.9 million.
- Debt and leases: Notes payable totaled $479.3 million, up from $362.6 million; $456.8 million was fixed-rate and $22.5 million variable-rate. Future facility lease obligations were reported at approximately $540.7 million; the contractual-obligations table lists $544.5 million for operating and capital leases. Minimum 2014 lease obligations were approximately $61.2 million.
- Margins and taxes: Total expenses rose 14.2%, faster than revenue growth. The company recorded an $8.8 million valuation allowance against deferred tax assets and a $5.8 million income-tax provision despite a pretax loss of $10.7 million.
Material changes versus the prior comparable period
- Revenue growth was driven largely by acquisitions, while occupancy fell and operating income declined. Operating expenses, general and administrative costs, depreciation and amortization, and interest expense increased.
- The company acquired multiple communities during 2013 for aggregate consideration reflected in $150.4 million of acquisition cash outflows. Acquisitions increased owned or leased communities from 98 to 109; total operated communities, including three joint-venture communities, rose from 101 to 112.
- Long-term debt increased substantially, while cash and shareholders’ equity declined. The company’s 2013 net loss widened, in part because of the deferred-tax valuation allowance.
- The company discontinued skilled nursing services at two communities and began repositioning the space for assisted living.
Outlook, commentary, risks and unusual items
- Management’s stated strategy is to improve occupancy, rents and margins, lease up non-stabilized communities, convert or expand existing properties, and pursue acquisitions. The filing provides no quantified financial guidance.
- Management expected available cash, operating cash flows and other identified sources to cover short-term working-capital needs, but said long-term capital needs could depend on access to joint ventures and debt or equity markets. It gave no assurance that financing would be available on acceptable terms.
- Key risks include significant debt and lease commitments, covenant or cross-default consequences, refinancing needs, interest-rate exposure, private-pay dependence, falling occupancy, labor and insurance costs, competition, and evolving licensing and other regulation. Residents generally may terminate agreements on 30 days’ notice.
- Most debt was fixed-rate, but variable-rate borrowings and lease escalators create exposure to interest rates and inflation. The company reported compliance with debt and lease covenants at year-end.
- Legal claims were described as arising in the ordinary course and not expected by management to materially affect the financial statements if resolved adversely. The auditor issued an unqualified opinion on the financial statements; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether occupancy stabilizes or improves, and whether rental-rate increases can offset operating-cost inflation.
- Acquired-community performance, including integration, lease-up, and the effect of purchase-accounting amortization on reported earnings.
- Debt maturities and refinancing exposure, especially the substantial 2015 maturities, as well as available liquidity and covenant headroom.
- The complete lease-obligation schedule and reconciliation of the approximately $540.7 million facility-lease figure with the $544.5 million contractual-obligations figure.
- Whether deferred tax assets can be realized and whether further valuation allowances or tax charges arise.
- The source filing identifies the registrant as Capital Senior Living Corporation; investors should verify the relationship between that 2013 issuer and the current Sonida Senior Living entity.