Capital Senior Living CEO: Low Point of Turnaround is Behind Us

With industry fundamentals improving and successful operational initiatives starting to scale across the portfolio, leadership at Capital Senior Living (NYSE: CSU) believe the company is now poised to generate long-term success which could start to become evident as soon as the fourth quarter of 2019.

Notably, the operator has seen strong results from a sales-related pilot program that now is being rolled out more widely.

The Dallas-based operator’s Q3 2019 numbers, however, reflect a company that remains in the midst of a restructuring.

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“It’s not so much boldness about the fourth quarter, than the path we’re making moving forward,” Capital Senior Living CFO Carey Hendrickson told Senior Housing News.

Capital posted $111.1 million in total revenue in the third quarter, a 3.9% drop from the same time frame last year. Same community revenue saw a similar decline, down 3.8% year-over-year to $108.6 million. This total excludes two communities undergoing lease-up or improvements, and two properties impacted by Hurricane Harvey.

Total occupancy fell to 81.3% in Q3, a 280 basis point decline year-over year and 120 basis points sequentially. Occupancy for same communities was 82.3%, a 130 basis point drop over the second quarter of 2019 and a 340 basis point drop over Q3 2018.

There were some positives Capital sought to accentuate. Total move-ins increased 7% sequentially over Q2, and move-ins outpaced move-outs for the first time since mid-2018.

The operator completed the $64.8 million sale of two non-core independent living communities on Oct. 1, generating $14.8 million in net cash proceeds and eliminating $44.4 million in mortgage debt. Capital also agreed to an early termination of its master lease on nine communities owned by Irvine, California-based health care real estate investment trust Healthpeak Properties (NYSE: PEAK), formerly known as HCP.

These results were in line with expectations, Capital CEO Kim Lody said during an earnings call on Thursday, Nov. 7. The provider spent 2019 implementing a four-point operational overhaul aimed at stabilizing operations and improving its balance sheet called SING (Stabilize, Invest, Nurture and Grow). The strategy was launched shortly after Lody succeeded Larry Cohen as CEO in January.

Capital is willing to absorb the short-term losses in order to realize sustained growth in 2020 and beyond, Lody told Senior Housing News.

“We feel really good with where we are in our turnaround plan. The third quarter reflects where we’ve been and we have confidence in the plan,” she said.

Fewer move-outs

While Capital was happy with its move-in numbers in the quarter, it was equally happy with a commensurate downward trend in move-outs which may have had a bigger impact on reversing the move-in/move-out ratio.

The total number of move-outs declined 9% between the second and third quarters, 12% year to date, and 13% year-over-year. If this trend continues, it will support gains in occupancy and particularly rates. Lody noted that rents for in-place residents increase on a rolling 3% basis annually.

On the public earnings call and in a subsequent conversation with SHN, Lody and Capital CFO Carey Hendrickson cited several factors in the improvement in move-out numbers. The company has proactively invested in hiring and retaining talent across its portfolio, made improvements to the plants and physical structures of its communities and revamped programming where needed.

This has allowed sales teams at the community level to ensure it has competitive product in Capital’s markets, while holding the line on discounts and concessions.

Capital’s rates are typically in a middle-market range, but the company had very high concession numbers in previous years. As part of its SING strategy, sales teams at the local level are focused on selling the value of a community to referrals and in-place residents. The teams are equipped with what Lody calls “toolboxes” with fixed dollar amounts to use at their discretion. Sales teams are also in more frequent communication with operations and programming teams to look at the broader revenue picture, instead of focusing solely on move-ins.

In Q3, Capital launched a 12-week pilot program in 12 communities aimed at improving response time to new leads, and convert those into move-ins. The results were promising: total leads increased 12%, Capital saw a tenfold increase in response times to new leads, and move-ins improved 21%. The company is now actively expanding this program across its portfolio, Lody told SHN.

Cutting temporary labor expenses

Capital’s operating expenses increased 5.5% year-over-year to $80.4 million, but the company is seeing improvement in one of its biggest pain points: temporary labor. Agency staffing costs decreased $330,000 sequentially in Q3, and around $5 million so far in 2019.

Capital has overhauled its recruitment and retention efforts in 2019. The company revamped its health and wellness benefits, implemented new personal time off and flexible scheduling policies, and has been proactive on wage hikes in markets where the labor pool is especially tight, Hendrickson told SHN.

Agency staffing expenses increased throughout 2018 and the first half of 2019, but the reversal has been more noticeable as Capital’s workforce is being right-sized and the experience level grows.

“The company has come a long way [recruiting and retaining talent] in 2019. Where you see stable performance is where you see stable teams,” Lody said.

Capital’s leadership expect the forward momentum to continue into the fourth quarter before bearing fruit in 2020.

“While the results we’ve reported today reflect decisions we made to improve our long-term success, we firmly believe Q3 was the low point of our turnaround and we are now exiting that trough,” Lody said.

Capital has not been exempt from industry pressures stemming from oversupply and a tight labor market, nor is it the only operator restructuring its operations and portfolio for long-term growth.

Five Star Senior Living (Nasdaq: FVE) on Wednesday reported a $7.1 million loss in the third quarter, but that was an improvement over the $21.6 million loss of a year prior. Five Star CEO Katie Potter called this another step forward in the company’s reinvention. Brookdale Senior Living (NYSE: BKD), the largest senior housing operator in the U.S., saw its best same-store occupancy growth in five years in Q3 with a 70 basis point increase in Q3, although it too was grappling with high labor costs.

Capital Senior Living stock ended the day up marginally in trading, to $3.99 per share.

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