Q2 2020 Capital Senior Living Corp Earnings Call

Hello, and welcome to the capital Senior living second quarter 2020 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 law.

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.

<unk> 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 filed within the FCC from time to time, including the risk factors contained in the annual report on form 10-K, I'm quarterly reports on file.

Form 10-Q, please see today's press release for the full safe Harbor statements, which may be found at capital senior Dotcom forward Slash Investor Hyphen relations.

And was furnished in an 8-K filing this morning.

Also please note that during the call the company will present non-GAAP financial measures.

For me, we Conciliations Beach non-GAAP measures 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 President and Chief Executive Officer, Ms. Kimberly loyalty. Please go ahead.

Good morning, everyone. Thank you for joining us for capital senior living second quarter, 2020, Investor and analyst call. Joining me. This morning is Carey Hendrickson, our Chief Financial Officer, and Brandon Rebar, our Chief operating officer.

First and foremost and want to highlight and recognize our 6000 plus employees.

It's continued to diligently in her Rosalie care for residents physical cognitive and emotional well being in the face it because it 19 pandemic, they're positive and profound impact each day on the lives of America's most vulnerable population is truly inspiring.

As I mentioned on our first quarter call. We acted early in swiftly and the procurement of P.P. infection control systems pets kids and other supplies to fortify our reserves and ensure our prepared that are fighting Cobiz 19.

We also expanded our existing comprehensive disease prevention protocols across our portfolio and implemented robust communication platforms to provide comprehensive operational clinical support to our communities day and night.

Want to thank our capital senior living team our residents their families our vendors and industry partners for their relentless commitment to safety and well being of everyone in our communities.

These efforts have helped us to mitigate the clinical operational and financial impacts of the pandemic and today, our resident infection rate across the portfolio is well below 1% as of this morning 48 of our 10000 residents have an active covert diagnosis random will provide additional insights to our cobot name.

Teen response.

Turning to our operating results. According to data published by neck occupancy for seniors housing fell 280 basis points in the second quarter with the largest drop occurring in April and then lesser Deteriorations in May and June our 118 same store portfolio experienced a similar but better occupancy.

He pattern declining 230 basis points in the second quarter with most of that decline occurring in the first several weeks at the quarter.

I'm pleased to report that in June move ins returned to pre Tobin levels and exceeded move outs for the month June occupancy increased 30 basis points from May 31st June Thirtyth. However in July as a resurgence of coded cases developed through many states move ins in move outs developed more similarly to May and art.

You lie sequential occupancy declined 30 basis points from June July move ins were 20% lower than June, but 60% higher than the April may average.

Leading sales indicators in the second quarter were also lower as consumers postponed decisions about senior housing.

Compared to Q1 leads were 24% lower tours were 43% lower and move is were 22% lower.

Routes were 4.7% better which helped to mitigate occupancy impact.

These statistics were at their lowest in April and improved incrementally throughout the quarter.

Looking forward into Q3 July leading indicators continue to trend favorably, especially tour volume and while we are encouraged by that neither leads nor tours have yet achieved pre cobot levels.

Strong service execution by our community and support center teams allowed us to mitigate some of the cobot impact our business most notably for our 118 same store portfolio. Our Q2 operating expenses declined sequentially by $1.7 million from 70.3 million in Q1 to 68.6.

And in Q2, as our teams exerted tremendous discipline to reduce spending in non essential categories in order to offset increased spending on kobin related items in services.

As a result net operating margin remained stable at approximately 31% in both Q2 and Q1.

Our community in Central support systems have delivered respectable responsible and commendable performance in the face of their relentless focus on protecting our residents and employees from covert 19.

Turning to the balance sheet for a moment earlier this year as part of our strategic plan, we announced agreements with our three Riet partners that would subject to certain conditions effectively eliminate our multiyear lease liabilities at the end of 2020 in the second quarter, we began to see the positive impact of these agreements as 25%.

<unk> increased to see if that though by $800000 in the second quarter compared to Q1.

Note that for the quarter. Our 79 owned communities delivered 20 cents of CFS FFO per share compared to negative two cents subsea AFFO per share from the lease portfolio.

We remain committed to the agreements with Welltower, Ben to Us and help peak and appreciate our continued collaborative relationships with all three.

As the next step in restructuring our balance sheet, we announced today that we've made the decision to turn back 18 communities with unsustainable nonrecourse mortgage debt to me any Fannie Mae.

These communities have been heavily impacted by the current cobot environment with their high debt load and generally difficult operating conditions. It did not make sense for us to continue to incur significant losses on these communities after debt service.

While a difficult decision.

After months of discussions with Fannie Mae we were unable to reach an agreement to materially modify the debt turning back these communities to meaningfully improve our operating performance and liquidity is in the best interest of the company and its shareholders. The transfer will reduce the company's debt by $216.3 million Ann Inc.

Crazy annual cash flow by approximately $10 million, we're working with Fannie Mae to finalize the details and timings of these transitions and we'll provide more information to investors as it becomes available.

This step when completed along with the progress made earlier this year to address the company's triple net leases will significantly improve the company's balance sheet by reducing total lease in debt liabilities by approximately $469 million, while improving our annual cash flow by approximately $32 million.

In summary, we're pleased with our strong service execution and stable and apply for the quarter today, our value proposition is more compelling than ever before as elderly citizens and their families seek senior care solutions.

By strengthening our operating platforms during the past 18 months and investing in our leadership teams technology community aesthetics, and programmatic enhancements to our resident experience. We've established a solid foundation from which to responsibly evolve our operating model, while innovating and managing our business.

We are excited about the future of our go forward portfolio above all we remain steadfastly committed to making decisions that best position us to deliver value to our shareholders residence employees vendors and all constituents over the long term.

I'll now turn the call over to Brandon to provide a brief update on our operations.

Thank you Kim and good morning.

More than five months into the co. Good 19 pandemic capital senior living preparation response and ongoing efforts to ensure the safety of our residents and employees continues as a top priority of our operating team.

In Q1, CSL prepared for a prolonged change in our operating environment by solidifying our staffing support developing nationwide supply hub, improving technology capabilities and redesigning the dining and activities experience.

Well some weeks feel like running a marathon and the current environment or clinical and operating results reflect the dedication and commitment to excellence in each one of our communities tire listen intensity here in.

The revised and improve clinical an infection control protocols and consistent communication efforts with employees residents in their loved ones continue to make the different.

Learning adjusting and incorporating best practices as of the National response to covert 19 has evolved continues to drive our daily operating activity.

Leadership stability has been constantly tested in the first half of 2020.

The intensity of the senior living operating environment, and the regulatory and customer communication needs have never been more demanding for our entire leadership team, but especially our executive directors and wellness directors are leaders work daily to calm concerned and frustrated family members on able for many months to visit inside our communities they share their stories and.

Experiences with national and state legislators and regulators to ensure the true impact of this virus has hurt their dedication leadership and daily inspiration of front line care Givers is reflected in our employee turnover numbers for the first half of 2020 or total company turnover continues to show year over year improvement, but more there.

More than 10 percentage points and the retention of our key leadership roles remains strong.

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.

I will briefly touch on the topic of testing, which continues as a focus of national conversation. We continue to follow all CDC protocols and local and state health Department guidance related to testing and the facilitated or administered more than 10000 tests across our communities.

However, until testing results are accurate and available on a real time basis wide scale point in time testing does not prevent exposure.

However, our experience has shown that diligence and diligent infection control practices, including use of pp comprehensive screening of all visitors and stuff and extensive disinfecting protocols greatly limits, both exposure and transmission for our residents and stuff.

As Kim mentioned, we currently have 48 residents with active cobot 19 cases in our population of nearly 10000.

Shifting to our operating results, we continue to measure the number of communities showing sequential quarterly improvement throughout this prolonged period of economic uncertainty.

In Q1, we communicated significant progress sequentially in spite of increased costs associated with covert 19 preparations and significant slowdown and move in volume for the second half of March.

Remarkably community community level operating results in Q2 remained stable with same community net operating income declining just $800000 or 2.5% sequentially.

As impressive 50% of our 118 communities, we're able to achieve sequential and a wide growth with no material government funding and including all covert 19 related expenses.

More than $1.6 million in additional pay to support our CSL frontline employees was offset by a $2.6 million reduction in discretionary spending associated with marketing and third party services.

We're also pleased to highlight the ongoing reduction in third party contract labor by another $100000 sequentially and down $1.4 million year over year for Q2.

Our sequential revenue decline was driven by the 230 basis point reduction in occupancy that Kim referenced.

Our rates held steady in Q2 with the sequential rate change of positive, 0.2% when excluding cobot relief dollars.

For Q3 discounting of rates for new residents moving into a CSL community remains strategic disciplined and focused in markets, where significant impacts to the senior living industry as a whole have created intense pricing competition as communities rebuild occupancy.

As Kim mentioned, our revenue key performance indicators improved throughout the second quarter with June move ins, reaching pre coded levels and exceeding the prior year by more than 15%.

The strength of these results gives us confidence that has cobot 19 restrictions ease the investment in our safety protocols and procedures and improving sales capabilities and drive occupancy growth.

Early Q3 indicators show ongoing increases in Leeds and tour volume. However, acceleration of Cobot 19 cases statewide have required delayed move in activity in our southern portfolio, including Texas, Florida and Arizona.

While the impacts of Kobin 19 on Q3 performance and beyond still remain uncertain. We continue to implement strong operating practices and protocols to responsibly manage business performance through these unprecedented times.

We remain confident in our leadership teams across our individual communities and our regional team to navigate the always changing landscape and continue providing a safe and enjoyable environment for current and future residence.

Now I'll turn the call over to carry to provide a detailed review of our financials.

Thank you Brenda and good morning, everyone.

Second quarter 2020 results reflect the impacts of cobot 19 under occupancy revenue and expenses hardware sales and operations team did an excellent job and marketing our communities to new residents and up and what was a very challenging environment.

And in managing the cost within their control to mitigate the impact of coping 19 are on our overall results. The second quarter also reflects positive impacts associated with the actions that we took in the first and second quarters related to our lease portfolio as a result, even with the declines in our adjusted EBITDAR in the second quarter of 2020 as compared to the first quarter 2020 arch.

Adjusted CFO increased quarter over quarter.

Looking at some of the detailed in our second quarter results. Our total consolidated revenues and the second quarter were $101.5 million as you saw in the release and that compares to $113 million and the second quarter of 2019.

Good chunk of that difference $5.8 million was related to dispositions on conversions of assets since the first quarter of 2019 with the rest due to lower occupancy levels, primarily related the impacts of Carbonite team was slightly offset by a 3.3% increase that we had in our rate.

The second quarter also includes $2 million of revenue related to our management of six healthy communities, which were converted to management agreements in March of this year. Most of that revenue is related to the reimbursement of certain operating costs. We paid on behalf of those managed communities and you'll see on the income statement that theres a corresponding expense there for the same amount.

Our financial occupancy for all communities was 77.6% in the second quarter, which was a decline of 240 basis points from the first quarter and a decline of 480 basis points from the second quarter of 2019.

We experienced the most significant loss of occupancy from a physical net move out standpoint in April with net move outs for our 118 consolidated communities of 186 residents in April.

May as Ken noted improved considerably and we had net move outs of 69 residents in May and June improved even more with our sales and operations team actually delivering growth in physical net move ins of 33 resonance for the month of June which was an incredible feet I think in this very challenging cobot environment.

With the resurgence in cobot cases across the nation in July and several of our most significant states considered to be in hot spots.

The July move ins and move outs played out much more like me with the decrease in physical net move outs of approximately 75 resonance here is our here's our all financial occupancy played out through the second quarter, starting point was financial occupancy of 79.8% for them at the March.

Occupancy dropped 110 basis points to 78.7% for the month of April.

And then it dropped another 130 basis points to 77.4% in May and then 70 basis points to 76.7% in June.

Our July financial occupancy showed a lesser decline moving down 30 basis points to 76.4%.

As for collections, our overall collections as a percent of revenue through the pandemic period of remain consistent with the pre pandemic period.

Most of our collections RV a C H and associates collections have continued to be in the high 80 percents as a percent of our total revenue collected.

We've seen a slight increase in our credit card usage for rent payments, but thats still remains a very small percentage of our overall collections and I'll return amounts have been very consistent with the pre pandemic period returns bumped up slightly in March and then came right back down to normal levels in April and all the way through July.

Our operating expenses in the second quarter of 2020 were $71.3 million, which was a decrease of $3.1 million when compared to second quarter of last year.

The second quarter last year included $3.9 million up operating expenses related to five communities. We disposed up since then and also the six formerly leased communities that were now managing as of March one of this year.

We also had some business interruption credits and the second quarter of last year that we don't have this year that was $1.2 million.

That was related to hurricane Harvey and the.

Sure. It's returns we continued to get related to those.

Then community results noted in our earnings release, and which I'm about to reference exclude $500000 of covert 19 revenue relief that we received in the second quarter front, North Carolina State Medicaid program and they also exclude $2.9 million of Cobot 19 expense primarily for hazard pay for employees at Kobin positive communities that.

Was about $1.5 million and then the remaining $1.4 million was for increased cost for P. P. Special sterilization services, and then cleaning and disposable foodservice supplies primarily.

Our same community revenues on this basis decreased $5.1 million or 4.4% in the second quarter as compared to the second quarter of last year.

Compared to the first quarter of this year, our revenue decreased $2.7 million or 2.7%.

Our same community occupancy was 77.6%, which is 480 basis points lower than the second quarter of 2019, and its 230 basis points lower than the first quarter. So a sequential decline in occupancy of 230 basis points on the same community basis, not all of our peers have reported yet but based on what we've seen.

So far we believe our sequential decline in occupancy will definitely be in the top tier performance.

Average monthly rent increased 0.6% to $3729 and the second quarter of 2020 over the second quarter 20, not team and then it increased slightly 0.2% as compared to first quarter of 2020.

Our same community expenses decreased 0.3% in the second quarter 2020, as compared to the second quarter last year due to our operations teams focus on and success in managing cost offset the impact of incremental coping 19 cost our employee labor cost increased $2.1 billion.

All of our other expense categories combined decreased $2.4 million.

Contract Labor, which has been a focus for us over the last year declined $1.4 million and most other categories, including food advertising and promotion repairs and maintenance and supplies all decreased as compared to the second quarter of 2019.

Our same community net operating income, which again excludes covered 19 revenue relief and cover 19 cost was $30.4 million, which is $800000 less than the first quarter of 2020.

And our into why margin was unchanged from the first quarter of 2020 at 31%. Despite the revenue decline.

Our gionee expenses for the second quarter, 2020 were $6.5 million, which compares to $6.6 million in the second quarter 2019, if you exclude the transaction costs from both years, our Gina expense decreased about $800000 in the second quarter as compared to the second quarter of last year, primarily due to lower healthcare claims expense.

We that were associated with our self insured health plans.

Our adjusted EBITDAR, the second quarter of 2020 was $23.9 million, which was $2.4 million lower than the first quarter of 2020 adjusted EBITDAR. If you exclude the impacts of covert 19, the revenue relief and the.

Overnight in cost that was $26.3 million, which was a decrease of only $300000 from our EBITDAR for the first quarter of this year.

Our adjusted CFO was $546000 in the second quarter, 2020, which was an increase of $800000 as compared to the first quarter 2020.

That increase is due to the reductions in our lease expense in the second quarter related the agreements that we reach with our landlords in the first and second quarters of 2020, and when you exclude the impacts of Koeppen 19, our adjusted CFO was $2.9 million and the second quarter of 2020.

We noted in the release that we had $25.5 million of available cash at June 30, and including restricted cash on cash balance was $28.8 million, we spent $2.7 million on capital expenditures in the second quarter and so far this year, we've spent $8.1 million on capital expenditures.

I mentioned that we receive covered relief in the second quarter under in North Carolina State Medicaid program in the second quarter again, we received $500000 an additional revenue for that program. It allowed for the billing of additional hours and at higher rates due to cope with for our residents in the state North Carolina, and then that also provided us another $100000 to offset certain covenant.

Teen expenses, that's the only relief that we've received to date, we do expect to receive relief funds from state Medicaid programs from the states of Nebraska, and Wisconsin, but we don't know the timing or the amount of that relief yet and we've also apply to really from a cares that provide a really fun for eligible Medicaid providers and we.

Aspect to receive some funds for that program, but we don't yet again, no the amount where the timing of that relief.

We were able to defer $5.7 million of debt service payments under for Barents agreements from certain of our lenders in the second quarter with one of those forbearance agreement sent extended through the month of July we also deferred taxes of $2.7 million under the cares Act in the second quarter.

Kim discussed our decision to turn back 18 communities to Fannie Mae and as she said that decision was difficult, but it was an important next step in our plan to restructure our balance sheet. Following the agreements that we reached with a re partners in the first quarter, we are fully committed to reducing our debt and getting our balance sheet in a state that will support our content.

You'd operational turnaround.

As we look forward the operating environment will remain challenging in the months ahead, but we're confident steps we've taken and we'll continue to take to improve our balance sheet and the improvements that we've made to our operating platform over the past 18 months provide us with the path to growth and long term value creation, we're working diligently to build a company that will have a consistent.

Hi quality product across its portfolio and we know the hard work that we've done and are continuing to do will serve us well through the this current challenge and as we emerge from the Cobot 19 crisis.

With that France, I will turn the call back to you for Q1 day.

It so if there are any questions.

Please let us. Thank you. Thank you if you would like to register question. Please press. The one followed by the four on your telephone you'll hear a three Tom prompted to acknowledge your request.

If your question has been answered and you would like to withdraw your registration. Please press the ones like to three.

And once again to register for questions. Please press the one followed by the floor.

On your telephone now and one woman piece for our first question.

And our first question is from the line or the Steven Valiquette with Barclays. Please go ahead.

Thanks, Good morning, everybody. That's one of the follow up quickly on the.

The facilities that were turned back to Fannie Mae.

Let's turn the at the 10-K that disclose as I think you have 78 total facilities on by the company.

Our encumbered by mortgage debt I know you have 35 different mortgage loans with Fannie Mae now does that mean 35 different properties, but I guess the questions are how'd you arrive at 18 as the.

The proper number properties to.

For the trigger on this and I guess a question it's good to be additional properties.

Yes, the near term that also get asked sort of the same I'm just curious to get more color around that whole process. Thanks.

Yeah, Steve This is carry and I'll start with that and Kim can add in you know we had 23 Fannie Mae communities that were a under forbearance and that was the beginning point of looking at those those are the ones all of our other for all of our other loans with Fannie Mae are performing well and are you know have good debt service coverage ratios.

And so there is we just had those 23 that were eligible really for forbearance and looking at that there were five of those that have done.

Pretty well through the cobot environment, and we made the decision that we could keep those we brought those current at the end of July and made the August payment just like we would normally make as it relates to those five the other 18 work.

Underperforming or there were the or they were an underperforming loan pools and we had to look at the pool as a whole with Fannie Mae so.

It was really based on looking at their they're leverage position their contribution to.

To.

Cash flow from a levered cash flow standpoint, and really determining that those were the 18 that we need to turn back the rest of that for paint Fannie portfolio is performing.

Okay, and then just shifting gears a little bit like on the call little bit late but I think I heard your comments that you had a.

Positive.

Move in that move ends in June.

But then it sounds like it reversed a little bit in July was just curious to hear more about that reversal if that was tied to it.

Maybe certain states, where cobot cases are starting to spike up again.

And was that also as far as some of this shift that's going on how much of this might be related to.

Voluntary actions.

The facilities on either not accepting new move ins versus maybe other state government mandates that is forcing some of this just want to give more color around that as well. Thanks.

Sure.

We can certainly provide that so you know we were really pleased with the performance in June and being able to achieve the positive net move ins and much of that has to do with our incredible safety protocols and the teams that we have there in the community is really managing that in.

And our sales team in managing those.

You know those prospects and helping them to be comfortable coming into our communities due to the safety protocols that we had in place in the the actions that we've taken in July yeah from an operating perspective, those things didn't change right. We still have those same protocols in place, but unfortunately as we saw the number.

Her of coded cases surge in various parts of the country and particular in the south and southeast.

We saw you know that the move in began to pull back as people postponed their decisions here really heading to senior housing giving that resurgence.

Okay got it okay that was that for me I appreciate the color. Thanks.

Alright, great.

As a reminder, if he would like to register for question. Please press the one followed by the four.

Our next question from the line of Morgan Mccarthy with Barclays. Please go ahead.

Hi, Thanks for taking the question I guess my first question as I.

I guess I'm wondering how you're thinking about the trade off between occupancy rate for the remainder of here I know you previously discussed the preference towards maintaining great and I guess Im just wondering if any at the current.

Sure it's related to cool they'd have changed your view is heading into the second half a year.

Hi, more again, we are we're really looking at that balance between rate and occupancy pretty strategically and I'm very focus in terms of.

It's a specific communities and specific market conditions in which that community operate.

So if there are situations, where we can help people feel more comfortable moving in by providing some.

You know some reduction or concession with respect to rate then we may do that in particular places I will say you know our business is very much in needs based business. There is a fair amount of pent up demand out there as seniors have been.

You know staying at home and feeling the impact of the isolation of Cove it.

So where we need to where we will I just right in order to help those move ins happen, but for the most part our focus is on maintaining that that balance and we feel like if we can keep rate stable while.

Maintaining a either reduction it's small reduction decline in occupancy.

Even stabilize here by the end of the year.

That's really our focus the balance of those two things together.

Okay. Thanks, and just one more question.

Can you provide any more color.

The difference and.

Between some of your more needs be.

Facilities, such as the assisted living versus independent living in a quarter and then even in July around either moving or leave.

For.

Yes.

We can.

I mean, just gets to that bought so for independent living the changes in occupancy for oxy relatively moderate.

Most of the changes that have occurred in occupancy has been more in the assisted living and memory care settings.

Yeah, and Morgan to provide a little color on that the this scary.

Occupancy for our independent living a quarter over quarter declined 170 basis points, but the occupancy for April and Alzheimer's.

Declined this is sequential decline around 260 to 270 basis points. So there was obviously a lot less decline and I'll turn it wasn't now.

Okay, great. Thanks.

Your final question.

I guess just want to see if you've heard any update for senior housing industry federal lease.

Broader basis.

Pressing went to trade associations. Thanks.

Well, we're very grateful to the trade associations and all of our peers any industry. Because of course is is a huge focus for the entire industry.

And in something that is critical you know we've been as an industry on the frontline fighting. This pandemic in there really has been very limited a relief available to providers outside of that things are starting to trickle in from the various states.

We remain optimistic that there will be something in the upcoming bill.

That will provide relief to our industry I think the industry is doing everything it can to encourage that and communicate and share data and make sure that the situation is well known.

So we look forward to seeing how all of that develops here over the next several weeks.

Great. Thank you.

Thank you Morgan.

I would sound like to turn the call back to Kim motive for her closing remarks. Please go ahead.

Thanks, Fran thank you to our shareholders vendors residents and employees here trusting capital Senior living. This concludes today's conference. Thanks, everyone have a great day.

Thank you. This does conclude the conference call for today, we thank you all for your participation I kindly ask that you. Please disconnect your lines have a great taping one.

Thank you.

Thank you.

Sure.

Let's.

Okay.

So.

Yeah.

[laughter] Reed Smith.

[music].