Capital Senior Living Corporation
Q1 2019 Earnings Call Transcript

Published: 12 May 2019

[Operator:]

Good day and welcome to the Capital Senior Living First Quarter 2019 Earnings Release Conference Call. Today's conference is being recorded. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date. And the company expressly disclaims any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well as in the reports the company files with the SEC from time to time, including the Risk Factors contained in the Annual Report on Form 10-K and Quarterly Report on Form 10-Q. Please see today's press release for the full safe harbor statement, which may be found at capitalsenior.com/investor-relations and was furnished in an 8-K filing this morning. Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release. At this time, I would like to turn the call over to Capital Senior Living's President and CEO, Ms. Kimberly Lody. Please go ahead.

[Kim Lody:]

Thank you and good morning, everyone. Welcome to Capital Senior Living's conference call to discuss our first quarter 2019 results. Along with today's press release and comments, we have also posted a new investor presentation to our website, where you can find additional information about the company and our strategy. I encourage you to access those materials. Last quarter, we talked about our renewed commitment and focus on two top priorities

[Carey Hendrickson:]

Thank you, Kim. In the results I'll discuss and as we note in the press release are non-GAAP measures, exclude two communities that are undergoing lease-up after significant renovation and conversion. The non-GAAP measures continue to include the two Houston communities impacted by Hurricane Harvey since our business interruption insurance restores our economic loss. However, the statistical measures that we include in the release exclude the results of these two communities, since they aren't leased up, and to include them would make the statistical measures less meaningful. There's still much we can do, when we need to improve on in our execution operations going forward, but we're encouraged by some of the early signs of stabilization that we saw in the first quarter and firmly believe the changes in organizational structure and personnel and operations, sales and marketing and the new processes implemented in the first quarter will lead to improve operating and financial performance in the months and years ahead. Given that the first quarter is typically the most challenging quarter of the year with the flu and other winter-related illnesses, we're pleased that both of our consolidated occupancy and our same-community occupancy declined only 10 basis points on a sequential basis from the fourth quarter of 2018 to the first quarter 2019. Also our consolidated NOI was consistent with the fourth quarter at $40.1 million versus $40.3 million in the fourth quarter of 2018 and our NOI margin showed a slight increase of 10 basis points from 35.0% in the fourth quarter of 2018 to 35.1% in the first quarter of 2019. Kim mentioned that she and I visited a number of facilities since the beginning of the year, we've observed firsthand the strength of our local community teams and the excellent resident center care and services they're providing to our residents. And this gives us tremendous confidence that our foundation is solid and that we have a strong base from which to launch the transformation of Capital Senior Living. In our release this morning, we reported total consolidated revenue of $114.2 million for the first quarter of 2019, a decrease of $0.5 million or 0.4% over the first quarter of 2018. The decrease is related to lower financial occupancy year-over-year, partially offset by a normal increase in average rent as well as incremental revenue in the first quarter of 2019 from the company's two communities impacted by Hurricane Harvey, which came back online in July of 2018. Operating expenses increased $3.7 million or 5.2% in the first quarter 2019 to $75.4 million. Operating expenses at our two hurricane impacted communities were $900,000 greater than the prior year, including a lesser business interruption credit of approximately $350,000. Both communities began admitting residents in July 2018 as I noted earlier and are making steady progress. Business interruption, reimbursements for these two communities are expected to continue through the second quarter of this year. Our general and administrative expenses for the first quarter of 2019 were $7.6 million compared to $6 million in the first quarter of 2018. The first quarter of 2019 included approximately $1.2 million in incremental costs associated with the separation and placement of certain marketing and executive roles. Excluding these and other transaction costs from both years, our G&A expense decreased approximately $100,000 in the first quarter as compared to the first quarter of 2018. Our G&A expense as a percentage of revenue under management was 5.1% in the first quarter 2019, which is the same as it was in the first quarter of 2018. Our adjusted EBITDAR was $34.3 million in the first quarter of 2019 compared to $37.9 million in the first quarter of 2018. Adjusted CFFO was $5.5 million in the first quarter of 2019 compared to $10.4 million in the first quarter of 2018. CFFO for the first quarter of 2019 included a negative net impact to CFFO of approximately $500,000 related to the adoption of the new lease accounting standards. So on a basis comparable to the prior year, CFFO was $6 million, or if one were to do the math, $0.20 per share. The new lease accounting standard required us to reassess two leases that were previously accounted for as financing leases, which resulted in a change of their classification from financing leases to operating leases. In association with this change in classification, our first quarter interest expense was reduced by approximately $400,000 and our first quarter rent expense was increased by approximately $900,000, which the result was the negative net impact of CFFO of $500,000. The cash payments related to these two leases didn't change. There was no true cash impact associated with the reassessment. And there was no impact on EBITDAR as the changes were interest expense and lease expense, both of which are excluded from EBITDAR. Speaking of the new lease accounting standard, it also required us to perform an impairment analysis of the right of use asset established by the standard, which resulted in a $17.8 million impairment charge associated with eight of our community leases, which was taken against our beginning retained earnings. So our balance sheet now has right of use asset of $246.4 million and a right of use liability of $279.9 million, $44.6 million, which is current. Looking at our same-community results. Same-community revenues decreased 1.2% as compared to the first quarter of 2018. We had a modest increase in average monthly rent of 0.8% as compared with the first quarter of the prior year, but same-community occupancy declined 170 basis points to 84.4%. The decline was only 10 basis points on a sequential basis from the fourth quarter of 2018. Again, we see that as an early sign of the stabilization of our occupancy. There were variations in occupancy performance across our portfolio in the first quarter of 2019 based on the supply demand metrics dynamics in the markets, competitive position in those markets and the execution of our local community teams. In the Dallas market, where we have our largest concentration of communities with 17 communities, our financial occupancy declined 20 basis points on a sequential basis from the fourth quarter of 2018 to the first quarter 2019, which is slightly greater than our overall portfolio sequential decline of 10 basis points. We have three other markets, where we have four or more communities in the market

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Chad Vanacore with Stifel.

[Chad Vanacore:]

All right, thanks. So, Carey, you just mentioned that your expected rate to be constrained for the year. Could you give us a comparison, what were the in-place rate increases this quarter compared to the mark-to-market rates?

[Carey Hendrickson:]

Yes, the in-place rent increases varied, obviously, by market. It depends on what was going on - in Omaha, for instance, you have a lot more pricing power when you have 95.7% occupancy than you do in other markets where it's less than that. But I would say in general, the in-place market rents increased at about a 3% level in the first quarter.

[Chad Vanacore:]

All right. And then, I would assume that mark-to-market is somewhere in the negative territory?

[Carey Hendrickson:]

I'm sorry, the mark-to-market?

[Chad Vanacore:]

Yeah.

[Carey Hendrickson:]

Yeah, so with - yeah, when you look at the overall rate, yeah, it did decline from the fourth quarter to the first quarter, because we did have the market rate adjustments that we made in the fourth quarter of 2018. That we do believe will impact us in a positive way on the occupancy line.

[Chad Vanacore:]

Okay. All right, it's fair to say you're trading off rate per occupancy just to stabilize things?

[Kim Lody:]

That's right.

[Carey Hendrickson:]

Yes.

[Chad Vanacore:]

Good. Okay. And then thinking about same-store operating expense, it was up 3.3% year-over-year, is that right?

[Carey Hendrickson:]

Yes, that's right.

[Chad Vanacore:]

Labor was only up to 2.4%. What's the main driver of that expense in equation there?

[Carey Hendrickson:]

Yes. Well, it's really related to the reduction in force that we had early in the year in February. So that lessened the amount of the increase, because we are obviously still having some market wage adjustment, some market wage pressure, and we did make adjustments in the first quarter. At some of our communities, we are going to be making a few more of those in the first part. Well, we did make a few of those in the first part of the second quarter. But that is going to kind of lessen the increase in our labor cost going forward. I did note in my comments that when including contract labor cost, our labor increased 3.7%. That's a little bit of a reflection of the fact that we do have - continuing to have some difficulty hiring for caregiver positions. And so, we're having to supplement that with contracts labor. But, overall, even still that 3.7% labor increase is I think pretty reasonable for the first quarter.

[Chad Vanacore:]

Okay, all right. And then, can you point to any early impact of you jiggering your sales force and incentives? Are there any noticeable change in net move-ins or any upside there?

[Kim Lody:]

No, Chad. I think it's really too early. We're four months into this new strategy and our Chief Revenue Officer has been here for a couple of months. What I can say in terms of early indicator is that we're pleased with the level of leads that we're seeing both year-over-year as well as sequentially from the fourth quarter. But it's really too early to tell how that sales process is translating into additional towards the move-ins.

[Chad Vanacore:]

All right, I'll stop there and hop back in the queue. Thanks.

[Carey Hendrickson:]

Chad, I will say, anecdotally from - hey, Chad, I would just say anecdotally from the conversions we've had with sales persons as we have been out in the visiting communities. They have noted to us, Kim and I in our conversations, how they are focused now more on revenue and move-outs as opposed to just move-ins, because they were previously compensated based on move-ins. And so they are very invested in overall top revenue line, which was really the goal. And we are seeing that level of focus at the community level.

[Chad Vanacore:]

So now your people are being compensated on that net move-ins, not just move-ins, is that right?

[Kim Lody:]

Yeah. Actually, Chad, their compensation is based on revenue and it is based on achieving target revenue. So one of the challenges that we had with people who are really just focused on move-ins and weren't necessarily, and I'm talking about the sales team, not necessarily focused on the resident experience or our controllable move-outs. And so now with this new incentive compensation plan, they're very focused on the whole picture and total revenue and everything that comes with that in each community. It's really a mindset change. And it's interesting, because when you speak with the sales directors, they articulated extremely well that they are absolutely focused on occupancy, rate, level of care fees, controlling move-outs, everything that we want them to be focused on.

[Chad Vanacore:]

Okay. Given that they have more control over the sales process, do they also have discretion over rate?

[Kim Lody:]

They have some discussion. We went through a process in Q4 of really, I'll say, resetting the market rates making sure that our rates were appropriate for the competition levels in each of the markets. And one of the reasons that we did that was there was quite a bit of discounting and concessions going on throughout 2018. And we felt that, that was not the right approach, not in the best interest of the company or our shareholders. So we have put in place rates that we feel are very competitive and then the sales directors have a toolbox, minimal toolbox that they are able to utilize at their discretion to help accelerate that move-in process or - so if it's - there is - we can reduce the community fee by a small amount or something to encourage the move-ins sooner. They have the ability to do that, but it is limited to a specific overall amount that they can utilize.

[Chad Vanacore:]

So more discount that will roll-off in the short period rather than ongoing?

[Kim Lody:]

That's right. That's right. Yeah.

[Chad Vanacore:]

Okay. All right. Thanks a lot.

[Kim Lody:]

Yeah.

[Carey Hendrickson:]

Yeah.

[Operator:]

[Operator Instructions] And we'll take our next question from Joanna Gajuk of Bank of America.

[Joanna Gajuk:]

Good morning. Thank you. So I guess on that discussion in terms of the pricing. So obviously, you took a lot of these actions in 2018, but it sounds like maybe you're limiting those in 2019 to some degree. So is it fair to say that pricing should look better against 2020?

[Carey Hendrickson:]

Well, I think, certainly, we expect to - the market rate adjustments were made in late 2018, the fourth quarter and really in December primarily. So we'll cycle through all of that in 2019. And then we would anticipate we'd have market rate increases in the first part of 2020. And so therefore, I would expect for that rate to pick up in 2020 just in a general statement, yes.

[Joanna Gajuk:]

All right. Because you also made a statement that you expect just a competition that you have currently in your markets to continue to pressure for the next year or so. So are you seeing new constructions drilling down in your markets? Or are you seeing some markets, where actually you're seeing acceleration or new development happening that might offset some maybe of the stabilization in this market - some of the new asset that opening on sale last year? And so any color on new construction in your markets?

[Kim Lody:]

Yeah. Joanna, I'd say, it's pretty mixed depending on the particular market. I think in some of our markets, we are seeing that new construction sort of ease, but there are other markets where the new construction continues or their constructions finished and they're in leased-up activities. I think one of the things that we have done pretty successfully here in the first quarter is really change the mindset within the organization and how we view that new construction. We can control that. We can control what we do. And we have a strong competitive advantage, again new construction and new operators. It might be nice shiny new buildings, but we've got 30 years of experience in this space. We know how to take care of seniors. We have a great reputation across their portfolio. We have talented employees. We have processes and scale and procedures that many of these new entrants into this place don't have, and we have the operating expertise that many of them also don't have. So while, I think, the industry conditions will continue to be challenging, our focus is really on our own value proposition and how that is meaningful in our marketplace.

[Joanna Gajuk:]

And I guess, somewhat related to that. So three months ago on the Q4 call, you talked about the CapEx outlook for the year $25 million to $30 million. So is it still hold, because, I guess, Q1 was only $3.5 million CapEx in Q1?

[Carey Hendrickson:]

Yeah. We typically start a little bit slower in CapEx in any given year. But we - I would say, Joanna, our plans are still to spend somewhere between $20 million and $30 million in total CapEx depending on the timing and the amount of cash we generate from our divestitures in 2019. So that would allow for $15 million to $20 million for necessary physical and structured capital needs for our communities, rooms, HVAC, elevators, those kinds of things. And then, $10 million to $15 million for room turns and upgrades as well as improvements at certain communities to sustain and improve their competitive position and experience of the residents. So that would be our goal and it's just really going to depend on the timing and the amount of cash generated from the divestitures.

[Joanna Gajuk:]

If I might squeeze last one. So the cash was actually very negative in Q1. So how should we think about the progression through the year? Was there any timing issues or any unusual, I guess, cash outflow in Q1?

[Carey Hendrickson:]

No, you're right, Joanna. It was negative in the first quarter and with our occupancy, where it is today, and our revenue that it will probably remain like that until we get that top-line going better. And - but we do believe we're in a strong cash position. The Master Credit Facility we put in place at the end of 2018 really gave us some good cash position as we began the year and then we are looking to sell this limited number of communities just as part of the normal ongoing optimization portfolio, but it also does add cash to our cash position in 2019. So with that, we feel like we have the room that we need to really concentrate on improving our operations and our performance.

[Joanna Gajuk:]

Thank you.

[Operator:]

We'll take our next question from Dana Hambly with Stephens.

[Dana Hambly:]

Hey, good morning. Kim, you used the term commercial excellence, and I think there is a lack of commercial excellence, when you joined CSU. I guess, I'm just having a tough time conceptualizing what that actually means. I wonder if maybe you could break that down for me a little bit more.

[Kim Lody:]

Yes, Dana, happy to do that. When we think about commercial excellence, probably the easiest way to think about it is all things that touch the resident and their family. So that sort of an end-to-end process from the beginning point of our marketing activities in lead generation, all the way through our sales process to our tour process, to the residents moving in, their on-boarding process within the communities, and then post move-in, the activities and engagement and the programming that we provide to them. So it's a very comprehensive way of looking at the full resident experience, and making sure that in every single one of those touch points, we are executing with - to the best of our ability and in a way that creates significant value for that resident and their family.

[Dana Hambly:]

Okay. That's helpful. And now as far as like capturing all the data and the analytics, you feel like you have the systems in place where you're getting that very much real time versus maybe where you were even in the fourth quarter?

[Kim Lody:]

Yeah, with the conversion to the Yardi system, and now having all of our communities on the Yardi system, which has a CRM element to it as well as several other elements, we do feel good about the capture of the data in the system and the analytics that we're able to evaluate based on that data, and actually, the speed at which we're able to do it. We have really spent quite a lot of time here in the first quarter instituting a very robust process for that. And I feel very good about not only the timeliness of the information that we're able to get, but also the accuracy of the information that we have.

[Dana Hambly:]

Okay. That's helpful. And, Carey, on the lease accounting change, the $500,000 hit to 1Q, is that one-time or is that going to carry through for the next few quarters?

[Carey Hendrickson:]

That will be the norm now, Dana, going forward. So it's just really a difference in how we're accounting for that lease, so it will be - so in the setting the new base, it will be that $500,000 each quarter in 2019, and then the comparison that'd okay in 2020 going forward.

[Dana Hambly:]

Next year, we'll lap that next year. Okay.

[Carey Hendrickson:]

Yeah.

[Dana Hambly:]

And then, on the - as far as the balance sheet, are the bridge loans, the $65 million, you said those are for next year. Is that the only real near-term priority for the balance sheet?

[Carey Hendrickson:]

Yeah, so we have that $65 million bridge loan. And I think Kim noted in her comments that we're currently looking to extend that for two years. And then, besides that, we have an $11 million bridge loan that's also due later in 2020. And that is when that we will also either look to extend or put permanent financing on that community. That right now that community would have essentially greater value than the bridge loan that's associated with it. And so, we could certainly refinance that and with permanent debt at that time.

[Dana Hambly:]

Okay. And then, Carey, on the divestitures, when do you think you'd be in a position to give some more detail on those for our modeling? And would they be like Kokomo, where they're losing money, so even though it would take of revenue, it might be cash flow accretive?

[Carey Hendrickson:]

Dana, there are - it's a mix. So I think some of the ones that we are - one of the - some of the ones we are looking to sell do have a significant CFFO contribution. They're very good properties that have strong values and will result in meaningful net cash proceeds for us. And I'm just not comfortable quite yet talking about those numbers, because we're still in the due diligence process of those. But I do hope that before we report next quarter, that we will even perhaps even inter-quarter be able to provide an update on that and where that all is. But they are in the due diligence phase and getting close to those transactions going hard, if you will, with the cash that was put up as many.

[Dana Hambly:]

Okay, that's fair. I appreciate the question.

[Carey Hendrickson:]

You bet. And then, Dana, I will say otherwise, there are also some that are like Kokomo, that do not have much cash contribution that we're looking to sell, but do have good value. And so, it's a mix of both that we're looking at. Some of it just don't fit the portfolio and then some that can generate some strong cash proceeds for us.

[Dana Hambly:]

Okay, understood. Thanks.

[Carey Hendrickson:]

Thank you.

[Operator:]

[Operator Instructions] It appears there are no further questions at this time. I would like to turn the conference back to our speakers for any additional or closing remarks.

[Kim Lody:]

Okay. Great, Amy. In closing, I want to again reiterate our sense of urgency, diligence and precision in executing our strategy as Stabilize, Invest, Nurture and Grow, drive long-term shareholder value. While we're seeing many of our performance-focused initiatives begin to take hold across the portfolio, it will take time for these activities to be fully anchored in the enterprise and produce the results we all desire. We appreciate your interest in Capital Senior Living and we look forward to keeping you apprised of our developments. Thank you, everyone.

[Carey Hendrickson:]

Thank you.

[Operator:]

This concludes today's conference. Thank you for your participation. You may now disconnect.