Capital Senior Living Reviewing Operations, Lease Structures After Tough Quarter

Capital Senior Living (NYSE: CSU) posted “disappointing” second quarter 2018 financial results on Tuesday—blaming ultra-competitive pricing and wage pressures for the company’s lower occupancy and worse-than-anticipated earnings.

The provider is also currently “conducting a comprehensive review of operations to determine additional steps that can be taken to improve performance going forward,” according to a press release.

Occupancy troubles aren’t new for Capital; the provider’s share price dropped more than 18% after it reported an occupancy decline for the first quarter of 2018.

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This time around, the Dallas-based senior housing operator saw occupancy decline in the second quarter due to high attrition rates, and in turn chose to offer discounted rents to new residents in select markets, CEO Larry Cohen explained during a call with analysts and investors on Tuesday.

Capital anticipates that the senior housing operating environment will remain challenging through the rest of the year, and that the lower average monthly rents that resulted from the Q2 pricing decisions will affect the rest of 2018.

Still, the provider believes that the plans it has in place will enable it to deliver better results starting in 2019.

“We are controlling what we can control,” Cohen said.

Capital Senior Living is not the only senior housing provider struggling to hit financial targets and maintain census in the current market conditions. On Friday, Welltower, Inc. (NYSE: WELL) indicated that the senior housing industry is “bouncing along the bottom” of the real estate cycle. Its tenant, Brandywine Living, has also recently experienced occupancy erosion.

State of operations

Capital Senior Living’s second-quarter 2018 revenue of $114.63 million missed analysts’ expectations by $3.57 million, though its second-quarter 2018 earnings per share loss of 17 cents beat analysts’ expectations by 2 cents.

The provider’s occupancy for consolidated and same communities was 85.5% in the second quarter of 2018, falling 60 basis points from the first quarter of 2018 and 100 basis points from a year earlier.

Capital managed to stabilize its occupancy at the end of the second quarter, Cohen noted, but its occupancy recovery plans caused the company’s average monthly rates to miss expectations.

“It was a very difficult winter where everyone lost occupancy, [and] as a result it just became much more price competitive,” he said. The markets where Capital Senior Living felt the most pressure included North Texas; South Carolina; North Carolina; Cleveland; and Indianapolis.

The company also payed higher than usual payment fees to third-party referral services during the quarter, COO Brett Lee said during the call.

Righting the ship

All the while, the provider is making moves intended to boost its financial performance.

Going forward, Capital plans to more closely manage its major expense categories, including food and supplies, as well as implement an operational and financial platform that will be in use companywide by the end of the year.

The company is presently in a “constructive dialogue” with its real estate investment trust (REIT) landlords, as well.

“I think there’s a movement among the REITs … converting triple-net into RIDEA structures,” Cohen said. “We feel that the leases place a burden on the company … to the extent that we can restructure them and equitize them in some fashion—that’s a focus I have.”

This month, Welltower’s 27-property Brandywine Living portfolio transitioned from triple-net leases to RIDEA.

Written by Mary Kate Nelson

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