Capital Senior Living’s turnaound plan is showing initial signs of success, rooted in a foundation of improved local operations and strategic dispositions, President and CEO Kim Lody said during the Dallas-based operator’s Q1 2019 earnings call Thursday morning.
“We are now organized for success,” Lody said.
Capital posted $114.2 million in total revenue in the first quarter, a 0.4% decrease from Q1 2018. Same-store revenues, excluding two communities undergoing lease-up or significant renovation and conversion and two other properties impacted by Hurricane Harvey, was $111.9 million, a 1.2% decline year-over-year.
Total occupancy was 83.1%, a 10-basis point drop over Q4 2018 and a 270 basis point decrease over the previous year, which was attributed mainly to the two Harvey-affected communities coming back online.
Despite the drop in occupancy, CFO Carey Hendrickson was encouraged by the early signs of stabilization.
“We’re pleased that same community occupancy and total occupancy only dropped 10 basis points,” he said, adding net operating income (NOI) margin grew by 10 basis points.
Capital posted $75.4 million in operating expenses in Q1, a 5.2% increase over the previous year. Income from operations was $2 million in the first quarter, versus $5.2 million last year.
Lody and Hendrickson expressed encouragement by the initial results of the company’s Stabilize, Invest, Nurture and Grow (SING) strategy aimed at stabilizing operations and improving its balance sheet.
The pair spent much of the first quarter visiting communities throughout Capital’s 129-property portfolio, talking with sales, marketing and operational teams about expectations and the fundamental roles those teams will play in the SING strategy.
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Capital 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.
This realigned field operating structure will allow more frequent interactions between communities and Capital’s C-suite, while playing to its strengths operating mid-size, value oriented communities in secondary and tertiary markets.
Lody is betting the owner-operator model will provide the highest long-term opportunity for strong performance and value creation.
“We believe this is our sweet spot where we can best utilize our scale and centralization to provide affordability and consistency to middle-market residents and their families, while at the same time maintaining local flexibility to optimize resident-centric engagement, personalization, comfort and care,” she said.
Capital’s new partnership with Yardi to provide real-time community performance data is beginning to bear fruit, and will allow communities to adjust their sales and operating performances as needed.
“We feel good about the data capture and the analytics to evaluate, and the speed at which we’ve been able to explore [the data],” Lody said.
Capital will remain without a chief operating officer for the foreseeable future. Lody, who assumed former COO Brett D. Lee’s responsibilities last February, said the search for Lee’s replacement was “deliberately slowed” so that she can personally work directly with operations teams.
“This will minimize distractions and maintain focus on improving occupancy and NOI, while providing excellent services to our residents,” she said.
“This gives us some optimism that the turnaround may take hold sooner than we expected with growth resuming in 2020,” Stephens Analyst Dana Hambly wrote in a note to investors.
The master credit facility Capital secured last December has put the company in a good cash position, Hendrickson said. The facility provides the company with nearly $50 million in long-term variable rate debt for capital expenditures.
Capital reported $3.4 million in capital expenditures in Q1, and has identified a number of properties for disposition which will add more cash to its position — some of the proceeds will be used to fund future capital expenditures.
For the year, the company plans to spend between $20 million and $30 million in capital expenditures, depending on dispositions, earmarking $12 million for plant upgrades at several communities and another $10 million to $15 million in unit renovations, Hendrickson said.
One community in Kokomo, Indiana, was sold to Kandu Capital for an undisclosed sum. Bloom Senior Living will be the new operator of the property.
Capital is exploring selling other properties in its portfolio, Hendrickson said. Some are low-performing assets like the Kokomo property which have good value but are not generating much revenue. Others are good properties with strong values which can generate high net cash proceeds via a transfer of ownership.
These properties are in the due diligence phase and Capital hopes to provide updates on their sales by the end of the second quarter, if not sooner, Hendrickson said.
Capital has a $60 million set to mature next year, which it is looking to extend for another two years. It has a separate $11 million bridge loan due later in 2020, which it looks to either extend or place permanent debt on the property tied to the loan.
Capital Senior Living closed trading Thursday down 2.31%, to $4.23 per share.