Selling Real Estate Floated as Possible Solution for Capital Senior Living

Capital Senior Living’s (NYSE: CSU) only salvation may be in its owned real estate, according to analysts from Stephens and Stifel.

On Tuesday, the Dallas-based senior housing provider reported “disappointing” financial results for the second quarter of 2018, as well as a drop in occupancy for consolidated and same communities to 85.5%.

Currently, Capital Senior Living leadership “is fighting an uphill battle to stabilize occupancy, contain costs and regain investor confidence,” according to a July 31 note from Stifel analysts.

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This year, Capital’s occupancy is not likely to increase beyond its 2017 rate of 87.2%, and it’s “quite likely,” that the provider’s year-over-year occupancy will be flat in 2019, according to an August 1 note from Stephens.

All the while, there is value in the provider’s owned real estate, both firms assert.

Monetizing its real estate may be something Capital has explored. During a call with investors and analysts on Tuesday, CEO Larry Cohen said he believes the provider’s leases place a burden on the company, and that Capital is in a “constructive dialogue” with its real estate investment trust (REIT) landlords to “restructure them and equitize them in some fashion.” The provider currently owns about 64% of the units it operates.

Stifel estimates Capital’s owned real estate is valued at $7 to $9 per share. Stephens, on the other hand, estimates that Capital’s real estate is valued between $6.41 and $16.75 per share, assuming cap rates of 6.5% to 7.5%.

As of market close on Wednesday, Capital’s share price had fallen 23.12% to $7.68.

It’s difficult to imagine the provider’s underlying operations improving anytime soon, according to Stephens.

“While we are hesitant to base our thesis on the takeout of a company, CSU owns a large amount of real estate,” the Stephens note says. “We expect shares to be pressured and at this point it is difficult to lay out a bull case on fundamental improvement in the underlying operations, at least in the near term.”

Capital’s second-quarter 2018 financials were “not all that surprising” given quarterly results from major senior housing landlords Welltower, Inc. (NYSE: WELL) and Ventas, Inc. (NYSE: VTR), Stephens notes, adding that it anticipates that the nation’s largest senior housing provider, Brookdale Senior Living (NYSE: BKD), is experiencing “a similar tough operating environment.” Brookdale has also faced pressure to unlock the value of its owned real estate over the past several years of operational challenges and share price erosion.

Still, both Stephens and Stifel are bullish on senior housing in general.

“While we believe the next 12 to 24 months will be challenging for seniors housing, the long term outlook for the seniors demographics growth, increased demand and absorption of the current supply overhang is positive,” the Stifel note reads. “That sort of long term value proposition could attract more activist investor interest.”

Capital Senior Living was not able to comment to Senior Housing News before press time.

Written by Mary Kate Nelson

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