Capital Senior Living To Transfer 18 Properties in Balance Sheet Restructuring

Capital Senior Living (NYSE: CSU) took further actions to improve its financial position during the coronavirus pandemic in the second quarter of 2020. But the moves raise deeper questions about its status as an ongoing concern.

Notably, Capital announced in an SEC Form 8-K filing on Thursday that it is in negotiations with Fannie Mae to transfer the operations and ownership of 18 communities that are either underperforming from an operational standpoint, or are in underperforming loan pools, to the lender, which holds the non-recourse debt on the properties. This will reduce the operator’s debt by $216.3 million and will improve annual cash flow by approximately $10 million, CEO Kim Lody said during the company’s Q2 2020 earnings call

The transfer, along with rent forbearance agreements and lease terminations it agreed to earlier this year with health care real estate investment trusts Welltower (NYSE: WELL) and Ventas (NYSE: VTR), are expected to reduce total lease and debt liabilities by approximately $469 million, while improving annual cash flow by approximately $32 million.


“In the second quarter, we began to see the positive impact of these agreements as rent reductions increased AFFO (adjusted funds from operations) by $800,000 in the second quarter compared to Q1,” Lody said.

Transferring communities back to a lender avoids a lengthy and costly court battle, and allows the lender to quickly find a buyer and operator to ensure that resident care will remain unaffected, Carnegie Capital Managing Partner JD Stettin told Senior Housing News.

The news sent Capital Senior Living stock trading downward, ending the day down nearly 4% to $0.68 per share.


Revenues, operations stabilizing

Capital’s moves to improve its financial position netted some positive results in the second quarter.

The operator reported $101.5 million in revenue in the second quarter, compared to $113.1 million in the second quarter of 2019 — a 10.1% decrease. On a sequential basis, however, this marked only a 4.3% decrease over Q1 2020.

The sale of five communities during or after the quarter accounted for $5.8 million of the decrease, and the conversion of six formerly leased communities to management agreements, which took place on March 1, accounted for another $3.3 million. The revenue totals include $500,000 in Covid-19 relief related to Medicaid residents at one of its North Carolina communities.

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Capital’s second quarter operating expenses totaled $71.3 million — a $3.1 million decrease, year over year. This includes $3.9 million related to the dispositions and $2 million for the properties that were converted to management agreements.

Capital also reported $2.9 million in expenses related to Covid-19, which have lessened as the company amassed PPE stockpiles and reduced spending in non-essential categories in order to offset the increased spending on virus-related items and services. As a result, net operating margin remained stable at approximately 31% during the first half of 2020.

On a sequential basis from the first quarter of 2020, Capital’s overall expenses decreased by $1.7 million.

Occupancy fell in the second quarter to 77.6% — a 480 basis points drop over the previous year. In what is emerging as a trend as more earnings are reported, the bulk of that decline occurred during the pandemic’s early grip on the industry in April and May, and has started to trend upward in June and July.

June was especially strong on the occupancy front for Capital. Occupancy increased by 30 basis points from May 31 to June 30, and move-ins for the month returned to pre-pandemic levels, Lody said. Those gains were wiped out in July, as the United States saw surges in positive coronavirus cases across the country, notably in the South, West and Southeast, and prospects postponed move-ins.

Overall, July move-ins were 20% lower than June, but 60% higher than April-May averages, Lody said.

Staffing was another bright spot for Capital in the quarter. In particular, the company’s efforts to reduce turnover are showing positive results. Total company turnover improved by more than 10 percentage points, retention of key leadership roles remains strong, COO Brandon Ribar said.

“The strength, compassion and confidence of our local leadership teams and the frontline caregivers and employees across each of our communities continues to shine throughout this challenging operating environment,” Ribar said.

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