Capital Senior Living Shakes Up C-Suite, Operations After Poor Q4 Earnings

In the wake of poor quarterly earnings, Capital Senior Living (NYSE: CSU) assumed full responsibility for its 2018 struggles, made some major changes to its executive team and has made improving its operations and balance sheet an immediate priority.

The Dallas-based senior housing operator did not sugar coat its Q4 2018 earnings during a conference call Thursday morning, and described steps it has already taken, including cutting 250 field positions. This was the first earnings call for Capital CEO Kimberly Lody, who succeeded Larry Cohen in the role last month.

Capital generated revenues of $115.1 million in the fourth quarter, a 1.6% decrease year-to-year from the same time frame a year prior. For 2018, the company posted revenues of $460 million, a 1.5% drop over 2017.

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Adjusted Cash From Facility Operations (“CFFO”) was $6.9 million in Q4 and $36.1 million the year, compared with $12.3 million in Q4 2017 and $45.9 million for full year 2017.

Capital Senior Living’s stock price fell 9.75% in trading after the earnings were announced. Lody and Capital CFO Carey Hendrickson acknowledged macroeconomic headwinds such as higher labor costs and low occupancy rates are impacting performance in the company’s 129-property portfolio, but they assumed responsibility for the poor earnings report.

“The environment is challenging,” Hendrickson said. “But we did not execute well and we have to execute better going forward.”

An executive shakeup

To that end, Capital announced its COO, Brett D. Lee, is out effective immediately. Lody will assume Lee’s responsibilities as a search for his replacement is underway.

The company also announced the hiring of Michael Fryar as chief revenue officer. He was most recently vice president for North American Marketing for GN Hearing, which is part of the medical device division of the GN Group. The hiring reunites Fryar and Lody, a former GN Hearing president.

Fryar will will be responsible for marketing, sales support, corporate partnerships and commercial excellence. He will also handle traditional and digital marketing strategies, improve CRM [customer relationship management] analytics, elevate training and sales support and enhance customer experiences at Capital’s communities. He will report directly to Lody.

“I have first-hand experience with Mike’s extensive track record identifying and executing revenue generating opportunities, which will be an important part of our strategy moving forward,” she said.

Lee’s departure and the addition of Fryar should signal to investors that the company is changing, and Lody appears to be “taking steps to focus on core issues,” analysts with St. Louis-based financial services firm Stifel (NYSE: SF) wrote in a note issued Thursday.

Immediate priority: stabilizing operations

The top priority moving forward is improving operations, which must be done with precision and urgency, Lody said. A four-pillar strategy was announced emphasizing stabilization, investment, nurturing and growing the company (SING).

A immediate focus will be on addressing the company’s balance sheet, and better sales and marketing efforts will be a key component to that turnaround.

Capital Senior Living eliminated its regional sales managers and redeployed those resources directly into its communities. The company also changed its reporting structure so that sales is no longer a separate vertical organization alongside of operations but instead is directly aligned with its communities, providing a direct line of communication to executive directors.

Lody called this move essential. Sales directors are the ones who establish a community’s customer service program, from initial contact with potential residents to moving in and experiencing a community’s facilities, programming, dining, transportation and care.

“Establishing strong community-based leadership teams is not only an element of the strategy to stabilize the business, but will also play a leading role in the execution of our future plans,” Lody said.

Capital is undertaking a detailed analysis of its CRM and third-party data, in order to ensure it identifies leads sooner and transitions those leads into community tours and, eventually, move-ins. Lody acknowledged that previous sales and marketing initiatives have not gained traction, and believes Fryar’s arrival will be the difference.

“There has not been the right level of commercial expertise and experience to successfully drive these developments and their execution,” she said.

Capital hopes its renewed sales and marketing efforts will result in a rebound in occupancy and revenues. Same-store revenues decreased 2.3% in the fourth quarter, compared to 2017, while same-store occupancy dropped 270 basis points to 84.5%. In response, the company implemented lower rates for new residents and in communities where pricing was above prevailing market rates, and saw some improvement.

Capital Senior Living’s occupancy woes were worse than expected, according to the Stifel analysis, and the senior living industry as a whole should take heed.

“As we’ve said in prior research, we expect occupancy for the industry to decline before it recovers due to the oversupply situation,” the analysis stated. “Operators across the board need to keep a keen eye on their in-place residents and focus heavily on selling to new entrants in order to stem losses and stabilize performance.”

Capital Senior Living hopes the new best practices it is implementing will turn the tide on occupancy, especially in markets like Dallas, Indianapolis and Cincinnati, where it has four or more communities.

Occupancy in Dallas — home to Capital’s highest concentration of communities with 17 — declined at the same basis point rate as its overall portfolio. Indianapolis showed a greater occupancy decline than the overall portfolio, while Cincinnati was flat.

No guidance

Capital’s operational strategy led the company to decline providing guidance for 2019, or the foreseeable future, as it cannot predict when the results of the turnaround will be realized in a market that remains challenging, Hendrickson said.

“Our intention is to focus our conversations on the long-term drivers of our business,” he said.

The lack of guidance might be a stark sign that Capital Senior Living has a long road ahead, but the company is not the only provider facing challenges at the moment.

Aggregate operating margins have declined in recent years as occupancy has hit historical low points. While some companies have seen occupancy start to creep up, there are no signs of immediate relief from operational headwinds caused by an influx of new supply, tight labor markets and other factors.


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