A Portfolio Divided: Capital Senior Living Posts Uneven Q2 Performance

Executives at Capital Senior Living (NYSE: CSU) are pleased with about half of the company’s 128 communities, but the other half of the portfolio is a different story.

“Many of our communities are performing well in occupancy and in NOI,” Capital Senior Living President and CEO Kim Lody told Senior Housing News. “But one half still has a lot of work to do.”

Industry headwinds continued to batter the Dallas-based operator in the second quarter of 2019, leading to a declining occupancy rate and lower revenue in the midst of an ongoing turnaround that Lody launched after taking the CEO role last January.


Capital logged a total average occupancy rate of 82.4% for the quarter, a 280 basis point decline from what it saw this time last year. That’s due in part to the reopening of two communities impacted by Hurricane Harvey in the third quarter of 2018, executives said on an earnings call Tuesday.

Total labor costs, including direct employees and contractors, increased 3.1% in the second quarter of 2019. Meanwhile, operating expenses for the second quarter of 2019 were $74.4 million, an increase of $1.5 million from what Capital reported in the second quarter of last year.

All told, same-community revenue was $110.5 million in the second quarter of 2019, a decrease of 1.7% when weighed against the $113.2 million Capital saw in the same quarter last year. That metric doesn’t include two communities undergoing lease-up or significant renovation and conversion or the two communities impacted by Hurricane Harvey.


The company’s net loss for the second quarter of 2019, which includes all of its communities, was $12.5 million.

Occupancy will continue to weigh on the company’s bottom line for the foreseeable future as industry headwinds persist, according to Stifel Analyst Chad Vanacore.

“We believe the lower levels of occupancy coming into the year will continue to be a drag,” Vanacore wrote in a note to investors. “We think CSU is facing difficult headwinds as the senior housing industry continues to face challenges from new supply and wage pressures.”

Lody acknowledged that while levels of new supply are generally dwindling across the country, it may take a while for supply and demand to even out in some markets where Capital Senior Living has a presence.

“When you’re outside of some of the major metro areas, it does take a little bit longer for supply and demand to reach an equilibrium, and I think that’s what we are experiencing,” Lody told SHN.

Capital’s stock price fell 7.65% to land at $4.95 by the time the markets closed Thursday.

A portfolio divided

While Capital had a challenging quarter, the operational woes weren’t spread evenly. Supply-demand dynamics, competition and sales team performance all helped lead to variations in occupancy performance across the portfolio.

Of the company’s communities, 69 logged an occupancy of 85% or greater for the quarter, with 47 of those landing at above 90%. But the provider’s other 59 communities saw occupancy below 85%.

Weighing individual property types, memory care units fared the best with a 110 point sequential occupancy gain in the second quarter of 2019. Assisted living occupancy, meanwhile, fell 80 basis points, while independent living occupancy dropped 140 basis points on a sequential basis.

“We tend to be in smaller areas, not large metro areas,” Lody told SHN. “I think that the demand equation in some of those markets is favorable for organizations that offer memory care.”

Memory care as a sector has been hard hit in recent years, but may be at the start of a turnaround.

On a market basis, Capital’s 17 communities in the Dallas market shed 130 basis points of occupancy, sequentially, in the second quarter of 2019. But elsewhere in the Lone Star State — where Capital has its largest footprint — things weren’t as troubled, according Carey Hendrickson, executive vice president and CFO with Capital.

“Occupancy at our three communities in Houston, excluding the Hurricane-impacted communities, increased 150 basis points on a sequential basis,” Hendrickson said on Thursday’s earnings call. “And occupancy at our two communities in San Antonio was a very healthy 92.2%.”

Revenue for the company’s Southwest region, which includes Texas, grew 3.7% in the second quarter of 2019 when compared with the same period last year.

In Indiana and Ohio — two other states where the provider has a sizable presence — occupancy declined by 40 basis points sequentially, which is half of what the company’s overall portfolio lost in occupancy between the first and second quarters of this year.

On a sequential basis, the provider’s communities in Florida, North Carolina, South Carolina and Virginia saw the biggest occupancy challenges.

Bright spots included Capital’s four communities in Missouri, which increased by 150 basis points, sequentially. And one community in Spartanburg, South Carolina, increased its occupancy rate from 78.1% in the first quarter of this year to 93.6% in the second quarter.

Capital is continuing to consider the sale of a limited number of communities, Hendrickson said on Thursday’s call. In May, the company sold a community in Kokomo, Indiana, for $5 million.

“There are some that are underperformers, and then there are some that are really strong performers,” Hendrickson said. “We believe that, if we decide to sell them, that they would produce meaningful cash proceeds for us.”

Capital also seeks to refinance certain owned communities to help provide it with incremental cash, he added.

Positive signs and progress

Despite the ongoing operational woes, there were some positive signs the provider’s Stabilize, Invest, Nurture and Grow (SING) strategy is bearing fruit.

The company this year implemented new sales, social media and search engine optimization (SEO) strategies designed to boost move-ins and leads. It’s also seeking to forge closer ties with referral sources in many communities.

Capital has undergone some large changes this year in addition to strategic evolution. The operator named Lody as its president and CEO in January, announced COO Brett Lee was leaving his post after poor fourth-quarter earnings and hired Michael Fryar to work as its chief revenue officer.

“We’re pleased with the progress we’re making against our plan, and we are delighted with the new organization structure we have in place and the talent that we have in key operational positions,” Lody told SHN.

On a same-community basis, revenue per occupied room (RevPOR) increased 40 basis points in the second quarter of 2019, year over year. That growth is the result of Capital stabilizing its market rates, implementing in-place rent increases and tasking sales teams with growing total revenue, Lody said.

Capital’s average monthly rent for all of its communities was $3,629 in the second quarter of 2019, an increase of $11 from the second quarter of 2018. The provider was also able to substantially slash rent concessions, from $1.1 million across all of its senior housing communities in the second quarter of 2018 to $280,000 in the same period this year.

And there are other signs the company is making gains on its operational strategy.

“Our employee retention is trending in the right direction. A big part of our product is the people that we have … so, that’s a big indicator that the business is stabilizing,” Lody told SHN. “The increase in our average rate is also a good indicator that the business is stabilizing.”

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