Capital Senior Living Carries Intensity Of Turnaround Effort Into Covid-19 Response

Capital Senior Living (NYSE: CSU) watched hopefully as its turnaround strategy gained momentum in the fourth quarter of 2019 and first quarter of 2020.

Then the process ran into the obstacle that is the Covid-19 pandemic.

The Dallas-based operator’s leadership team believes, however, that the hard work put into the turnaround allowed the company to respond faster and more urgently to Covid-19.

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“We think all the hard work we’ve put in is going to serve us well, both in the current environment and then as we emerge from that environment going forward,” CFO Carey Hendrickson told Senior Housing News, following the company’s Q4 2019 earnings call.

Specifically, the turnaround strategy in 2019 positioned the portfolio for sustainable growth and produced better revenues in the fourth quarter of 2019, which continued into Q1 of 2020, until the novel coronavirus completely disrupted the industry. Moreover, a combination of lower move-out rates, eliminating non-essential expenses, holding the line on rent concessions and discounts and leveraging provisions in the recently passed CARES Act will somewhat offset growing labor and wage pressures, and allow Capital to continue its turnaround once the crisis subsides.

Capital is still confident that its SING strategy (Stabilize, Invest, Nurture, Grow) will pay off in 2020, but that ultimately will be determined by when the pandemic subsides and operations return to normal, Hendrickson told SHN.

And while the Covid-19 situation is still in its early days and quickly evolving, CEO Kim Lody does not currently foresee drastic occupancy declines to result.

Covid-19 response

Although the company was reporting its Q4 financials, much of the discussion on Tuesday’s earnings call revolved around Capital Senior Living’s Covid-19 response over the past weeks, and what executives believe the future might hold.

Capital, like the industry as a whole, has spent most of its energies in the second half of March responding to the pandemic, and leadership’s urgency during the turnaround carried over into the response, COO Brandon Ribar told SHN.

Ribar and Lody are leading thrice-weekly video conferences with community leadership teams, asking questions, receiving updates and mapping out key objectives in preventing and containing the virus, they told SHN.

To date, three Capital communities have had one resident test positive for Covid-19, and staff worked quickly to get those residents treatment and isolate them from neighbors. The company Capital operates 124 communities in 23 states, serving over 12,000 residents.

Now that the CDC, state and local guidance has become more clear and the recommended practices to slow the spread of the virus are being implemented, Capital is beginning to see some stabilization to the virus in some markets, but it remains prepared to act if another outbreak occurs in one of its communities.

“Our company is one that is always prepared for the kind of processes and protocols associated with preventing the spread of contagions, especially during flu season. It was really just being even more consistent and robust and then adding on top of what we already do those changes that came across from state, local and CDC guidelines in order to address things consistent with Covid-19,” Ribar said.

The pandemic has impacted community tours and move-ins, but Capital is seeing move-outs trend lower, as well. This should bode well for operations as the pandemic becomes more fluid, Lody told SHN.

“Our sales directors continue to reach out to prospects and their families. Many times, a [move-in] decision is event-driven or needs-based. Those things are still happening in this environment and families are looking for solutions,” she said.

Responding to a question from Barclays Managing Director Steven Valiquette during Tuesday morning’s earnings call that the investment community is considering a 2,500 basis point decline in occupancy as a potential scenario for the industry, Lody and Ribar noted that so far there has been no indication of such a worst-case scenario.

“For our smaller communities, there is absolute flexibility, I would say strong flexibility to withstand those kinds of occupancy challenges,” Lody said on the call. “For a handful of communities that we have that are really quite large and have more of a diverse layout or footprint, it’s more difficult to have the staff in the right places when you may have lower occupancy and residents are in apartments that are dispersed around the community. What we would do in those cases is certainly bring the residents together so that we could be flexible on the cost side of things and continue to serve them as we go about regenerating that top line and improving the occupancy.”

The solution would be to bring residents into closer proximity to maintain operational efficiency while regrowing the top line.

Capital is looking to leverage tools in the newly passed CARES Act to improve its financial footing. Notably, it is looking at the deferral of the 6.2% Social Security tax, as well as potential mortgage debt deferral programs related to Fannie Mae and Freddie Mac financing to help with income. Those options will become clearer in the coming days, Hendrickson told SHN.

Heavy lifting complete

Outside of its Covid-19 response, Capital reported stabilized fourth quarter revenue of $108.7 million and adjusted cash funds from operations (CFFO) of minus-$1.4 million, compared to minus-$1.2 million the prior quarter.

The operator sold two non-core independent living communities for approximately $64.8 million, generating $14.8 million in net cash proceeds and eliminating $44.4 million of mortgage debt.

The most important moves Capital made were its master lease terminations with the “Big 3” health care REITs: Welltower (NYSE: WELL), Ventas (NYSE: VTR) and Healthpeak Properties (NYSE: PEAK). When the transitions are complete, the agreements are expected to improve the Company’s cash flow by approximately $22.0 million and all related lease liabilities, which were approximately $253.0 million at December 31, 2019, will be eliminated.

“That helps the financial foundation of this organization tremendously, both in the short term and certainly for the long term health of the organization,” Lody told SHN.

Capital was also able to reduce its employee turnover rate and realize improvements in net operating income. January NOI was $250,000 higher than Q4 averages, while February NOI was $1 million higher than in January.

Those positive trends continued into mid-March, when the pandemic’s impact began to be felt across the country.

“When you take all of those things together, that is the source of the optimism around the turnaround,” Lody said.

In terms of how Capital Senior Living is approaching the next phase of the turnaround, the leadership team is considering the portfolio in four categories:

  • Stabilized communities represent strong, consistent performers in both occupancy and NOI with little to no turnover in key positions. These communities’ average occupancy is in the low- to mid-90% range, with NOI percentage north of 35%.
  • “Momentum” communities show consistent improvement across the trailing six months in revenue and NOI.
  • “Baseline” communities show moderate near-term growth expectations and expected stabilization periods of nine to 12 months.
  • “Challenged” communities are those with recent leadership turnover or operating metrics significantly below expectations.

Capital currently operates 19 communities with occupancy rates below 70%, which represent significant upside opportunity for performance with the appropriate development of strong local leadership and no significant capital overlays.

“As the business continues to show consistency and predictability, we will reinforce these actions while also investing in key areas for future growth. These investments do not involve large capital expenditures and are about taking specific actions in specific communities, so effectuate predictable and timely improvement in performance,” Lody said during Tuesday’s earnings call.

Capital Senior Housing stock ended the day trading down 1.8%, to $0.58 per share.

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