Capital Senior Living Issues Going Concern Warning Due to Covid-19

The coronavirus pandemic continues to pressure operations across the senior living industry. For Capital Senior Living (NYSE: CSU), the crisis could threaten its ability to remain a going concern.

The Dallas-based operator’s Q1 2020 earnings raised questions about its financial position if its communities remain secured to non-essential personnel for an extended period of time. Executives stressed that they are addressing the precarious position of the company.

“We’ve already taken actions to improve our liquidity position and address uncertainty about our ability to continue as a going concern, and we’re evaluating additional actions,” CFO Carey Hendricksen said on the company’s quarterly earnings call.


Notably, Capital entered into short-term debt forbearance agreements with some of its lenders, implemented spending reductions, and is evaluating selling some communities in order to shore up its financial position.

But Capital’s leadership team remained steadfast that efforts into turning around its portfolio — an ongoing project well before Covid-19 struck — will prove beneficial in the near- and long-term, CEO Kim Lody said Thursday during the earnings call.

“Our team responded to a quickly evolving crisis in real time, in the face of changing government guidance and an evolving understanding of Covid-19. We believe we have operated carefully and responsibly across our portfolio of senior living communities. And we will continue to do so for the health and wellness of our residents and employees,” she said.


Revenues take a hit

While Covid-19 has stung the entire industry, Capital Senior Living came into the pandemic in turnaround mode following years of declining occupancy and a C-suite shakeup. While there have been some signs of progress, there have also been signs of how much the coronavirus has been a set back. Most recently, Capital Senior Living disclosed that it is in danger of being delisted on the New York Stock Exchange.

With this as the backdrop, Capital reported first quarter revenue of $106.1 million, a 7.1% drop year-over year. Total occupancy also took a significant hit, falling 310 basis points in the quarter to 80%.

Capital’s leadership team attributed the revenue decline to its turnaround strategy it began last year. The operator sold four communities since Q1 2019, accounting for $3.5 million of the decrease. Six other communities transitioned to management agreements effective March 1, accounting for another $1.1 million.

But there were signs of positive momentum. Monthly average rent was $3,674, which was an increase of 1.6% as compared to the first quarter of 2019 and the first year-over-year increase Capital has posted since the second quarter of 2019, CFO Carey Hendricksen said.

First quarter expenses totaled $75.4 million, no change from the previous year. This includes $1.9 million of operating expenses related to the dispositions and another $700,000 for the communities that were converted to management agreements. Additionally, Capital had $1.2 million in business interruption credits related to two communities previously impacted by Hurricane Harvey in the first quarter of 2019, but did not have any such credits this quarter.

Capital reported a $3.7 million total loss from operations for quarter, and a net loss of $48.4 million.

Rather than focus on the year-over-year changes, Lody, Hendricksen and COO Brandon Ribar framed the numbers from a sequential comparison to Q4 2019, using its 118 same-store communities — including four that were excluded last year and brought back online.

From that perspective, total revenue fell 0.6% sequentially, occupancy decreased 67 basis points, and operating expenses were 4.5% lower. Net operating income (NOI) for the same-store portfolio increased $2.7 million or 9.4% sequentially, and NOI margin improved 290 basis points from 27.9% in Q4 2019 to 30.8% in the first quarter.

“We still have more work to do, but we are pleased with this improved performance,” Lody said.

Covid-19 affects move-ins

As was the case across the industry, Capital’s referral pipeline and move-ins were significantly impacted by the pandemic in April. Move-ins for the month fell 55%, while move-outs tracked near pre-pandemic levels. The move-in numbers rebounded a bit in recent weeks: through May 18, new move-ins were 38% below pre-pandemic averages. Referrals and tours decreased by 40% last month, Ribar said.

The response to the pandemic is impacting operating expenses, particularly increased labor and supply costs related to obtaining enough personal protective equipment (PPE). Same-store operating expenses increased 2.4%, year-over-year. Labor costs, including benefits, increased 5.9%, food costs decreased 1%, and utilities decreased 5.5%.

Capital indicated that it has measures in place to reduce the pace of expenses moving forward while still ensuring proper care and safety for its residents. In early March, the company established seven regional hub supply hubs throughout the country to ensure communities have quick access to all PPE beyond their on-site stock, if needed. An online microsite was launched, housing materials created for managing all aspects of the business, including safety protocols, training videos, communication resources for family members, clinical and operational checklists, and an index of all previously generated content related to managing in the Covid environment. And Capital conducts daily surveys with all communities to gather information on the real time needs of its employees and residents.

To mitigate the impact of Covid-related expenditures, Capital reduced spending on non-essential supplies, travel costs and other discretionary items, and suspended all non-critical capital expenditure projects. This allowed it to offset most of the increased expenses, but that will be difficult to sustain if the outbreak is prolonged, Hendricksen said.

The only CARES Act relief program available to Capital is the payroll tax deferral program. This will allow the company to defer the employer portion of payroll taxes from April through December of 2020, which Hendricksen estimates will total approximately $7 million. One half of the deferred payroll taxes will be due by December 2021, with the other half due by December 2022.

Capital also entered into short term debt forbearance agreements with some of its lenders effective April 1, which will require repayment of forbearance over a 12-month period following the end of the forbearance period.

Capital Senior Living has also been contending with an activist investor in Cove Street Capital. The firm’s principal, Jeffrey Bronchick, voiced concerns on Thursday’s call related to certain disclosures related to the forbearance agreements, and pressed Lody on whether she and other board members are currently waiving their cash fees. Lody said they have been since last November, and will continue to do so throughout the duration of the pandemic.

Taken sequentially, Capital’s leadership team believes the first quarter performance will continue to produce incremental improvements throughout the year, and the actions it has already taken are expected to generate positive cash flow in the second quarter.

“While the current environment is challenging, we remain confident [that] the steps we’ve taken over the past 15 months, and specifically in the first quarter of this year, will improve our financial position and provide a path to growth and long-term value creation. We’re working diligently to build a company that will have a consistent high quality product across its portfolio. And we know the hard work that we’ve done and are continuing to do will serve us well with the current challenge and as we emerge from the crisis,” Hendricksen said.

Capital Senior Living stock ended trading Thursday down nearly 13%, to $0.55 per share.

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