Q1 2021 Capital Senior Living Corp Earnings Call

Good day and welcome to the capital senior living first quarter 2021 of the 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 todays day and the company expressly disclaims any obligation to update these statements and the future.

The results and performance may differ materially from forward looking statements.

Certain of these factors that could cause actual results to differ are.

A detailed in the earnings release the company issued earlier today as long as the reports the company files with the as you see from time to time, including the risk factors contained and the annual report on form 10-K, and quarterly reports on form 10-Q.

Please see today's press release for the full Safe Harbor statement.

Which may be found at capital senior Dotcom slice of Investor Relations and.

And was furnished and the 8-K filing this morning.

Also please note that during this call the company will present non-GAAP financial measures for reconciliation of each non-GAAP measure from the most comparable GAAP measure. Please also see today's press release at this time I would now let's turn the call over to capital Senior Living's, President and CEO Ms Kimberly loading.

Thanks, Devin and good afternoon, everyone and welcome to our first quarter 2021 earnings call. Joining me today are of Brandon Ribar, our Chief operating officer, and Pitney, Tiffany that and our senior Vice President of accounting and finance.

The 12 months from March 'twenty, and 'twenty to March 'twenty, 'twenty, one where extraordinary and unprecedented at the company and our nation and fought the ongoing impacts of the COVID-19 pandemic.

And our experienced and decisive teams are rigorous clinical and operational protocols are comprehensive communication and most importantly, our collective relentless devotion to the safety and wellbeing of our resident is what supported and strengthened us three of those incredibly difficult times.

And we're on the ground frontline community teams and their regional leaders have much to be proud of and I could not be more humbled by and grateful for all of that they deal.

I'm pleased to say the grips of the pandemic have eased considerably during the last few months, most notably upon achieving vaccination of 93 per cent of the residents and our communities.

We began to see signs of recovery and our business at nearly the same time as we began implementing vaccination activities.

Lead volume started to improve in December of 'twenty, and 'twenty, but with most of the country battling the height of the pandemic third wave and January and February meaningful improvement and tour and moving volume across the portfolio began in March.

Move ins increased 33% from the fourth quarter to the first quarter and move ins in March and April were at the highest monthly levels in two years.

Today, all of our communities are accepting visitors and new residents and all have safely resumed resident group activities and the social events.

Active cases of COVID-19, among our residents and employees are virtually non existent.

Despite the last 12 months' difficult operating environment created by the COVID-19 pandemic, we have made great progress on our three year strategy to stabilize invest and nurture and grow capital senior living we have redefined the portfolio and stabilized its performance we have invested in our people.

Our communities our processes and our resident programs, we have nurtured our lead generation and sales activities and now consistent with our three year plan, we are beginning to grow.

Occupancy for the first quarter was 75.5 per cent with January at $75 seven per cent February at 75.2% and March at $75 five per cent. The low point for average weekly spot occupancy was in the second week of March at $74 seven per cent.

And occupancy has steadily rebounded since that time.

April average occupancy was 76, 9% a 170 basis point increase from February and of 220 basis point improvement from the low point today's spot occupancy is 77.7 per cent.

In addition to the great work of our sales and marketing teams to welcome more residents and their families who are wonderful communities. We are further complemented these efforts by adding differentiated program to support the unique needs of our residents.

One such program is called Magnolia trails, which was developed by and internal and external multi disciplinary team of dementia care experts.

We began implementation of the program in December of 'twenty, and 'twenty and by the end of May we expect it to be operational and 35 per cent of our communities that serve memory care residents and and all of our communities our memory care communities by the end of the year early results are promising in terms of positive occupancy and rate development.

And the programming positions our communities to provide a higher level of memory care services to address the 16% projected increase and the number of individuals' with Alzheimers disease on average and our four largest states between 2020 and 2020 five.

Another Great example is the advanced wellness programming, we are implementing across our portfolio in partnership with aegis therapies, which utilize the purposeful engaging and evidence based educational programs and wellness activities to demonstrably improve the physical cognitive and emotional well being of our residents. This program is also.

Oh and positive early results were implemented with 78 per cent of resident actively participating in the new wellness offerings versus an industry average resident participation rate of 30 per cent.

All of these post pandemic growth levers are designed to support each of our communities local brands through continuous improvement of our reputation scores. We know the first thing families looked for when searching for seniors housing and services, whether online or through referrals from others is the reputation of the local community occur.

According to data from reputation dot com and the average reputation score and the seniors housing industry is 494 before the COVID-19 pandemic. The again capital senior Living's collective reputation score with 519 above average, but not good enough in 2020, while fighting the COVID-19 pandemic.

Managing the daily operations of our business and completing our strategic initiatives to redefine our portfolio.

Our reputation score increased steadily throughout the year and today. It is 688 and 32 per cent increase our strong community reputation and facilitate our being included in the consideration set for more prospective residents and their families.

And we're in the third year of our three year transformational strategy with the pandemic nearly behind us.

And all of the foundational hard work to stabilize the business complete we continue to invest and our teams our programming and our communities to drive post pandemic growth, we have good momentum and on a sequential basis, we expect the occupancy growth and NOI improvement to continue in the months ahead.

Well, it's still early to predict the recovery trajectory, we're confident that the steady improvement and the operating environment lower construction starts and strong affordability factors in our markets and the accelerating demographic tailwind demand for our services will continue to improve which will support further occupancy and NOI of development.

I'll now turn the call over to Brandon to provide more detail on our operating performance and expectations.

Thank you Kevin and good afternoon.

The first quarter of 2021 provided many opportunities to recognize and celebrate the achievements of our communities well and aggregate producing the baseline for our post COVID-19 recovery from an operating metric perspective, most important for the safety of our communities more than 93% of our residents are now vaccinated and COVID-19 cases remain at <unk>.

Extremely low levels currently sitting at zero resident cases, and our owned portfolio of the communities. We continue to experience increased vaccination levels across our employee base and our employee of cases are also nearly zero.

We attribute these outcomes to our local leadership and frontline care and service providers and the and recognize their consistent compassionate and steadfast efforts to keep our residents and fellows staff safe and healthy.

Throughout my travels in recent months I have witnessed firsthand the renewed energy and many moments of joy and laughter that accompany the more open and active environment throughout all of our communities.

We continue to adjust our operating model to accommodate increased in person visits from family members and larger groups for communal dining and activities and of safe and enjoyable manner.

Turning to occupancy we are pleased with the stability of the first quarter results as Kim referenced the strong growth in Q1 move in volume was energizing and encouraging and the continuation of these results and April further display of the ability of our local leadership to grow their business as the operating environment eases.

Achieving these results while maintaining rate integrity continues as the primary focus for our operations and sales teams.

For Q1, our average rate was 3000 and $531 a sequential decline of one 5% from Q4 of 2020 the.

And the change and rate resulted from increased one time move in concessions offered and December January and February to ensure strong volume to begin the year during the highest levels of national COVID-19 cases than at any other point during the pandemic.

Our March rate at 3005 hundred $60 increased 2% month over month and March move ins increased by 64% from February.

Our in place rent increases take place as residents renew their leases and in Q1, our average in place rent increase was 2%. We expect to continue this level of increase throughout the year.

As Kim referenced with COVID-19, operating restrictions loosening and the daily impact of COVID-19 cases at or near zero renewed focus on resident and engagement and the implementation of advanced resident programs will continue at an increased pace.

The accelerated rollout of our Magnolia trails memory care of programming and the ongoing implementation of advanced wellness programming and partnership with aegis therapies will positively impact each of our communities in 2021.

And the care and services provided to our residents continue to deliver of safe healthy and enjoyable living environment further supporting recovery on the occupancy from March and April each saw the lowest move out level of since may of 'twenty, and 'twenty, a month and which nearly all states, we're requiring the public to shelter and place.

We are optimistic the continued improvement and the national landscape will further sustain the occupancy trends of the previous two months we.

We continue our focus and Q2 on execution of our strategic growth priorities. The expansion of our inside sales team and robust sales training and development programs have delivered improvement and tour to move and conversion ratios in 2021 of key indicator of improved sales capabilities and lead quality.

And our tour to move in percentage remains and the mid to high Thirty's, even as lead volume has increased significantly in 2020. One results from March April and early volume indicators and may reflect the progress on each of these efforts.

On the expense from Q1 results show continued success and holding labor cost stable, while investing further and revenue generating efforts, a sequential decline of 65% and premium stacked pay and of 1.2% decrease and direct labor led to a two 5% sequential decrease in cost of labor.

For the quarter Q1 also includes approximately $100000 and additional one time labor costs due to the Texas Winter storm in mid February.

Both labor and total expenses decreased on a year over year basis by approximately 1% and Q1, excluding management fee insurance and real estate taxes.

These costs include the impact of premium labor related to COVID-19, but do not include reimbursement received under the cares Act in Q1 2021.

Use of stack pay and the current operating environment is no longer of material component of our labor compensation model due to the nearly complete elimination of COVID-19 cases in our communities beginning in March and continuing thus far and Q2.

Our local operating teams continue to diligently adjust their operating model to address changes and occupancy while ensuring the safety and wellbeing of our residents and staff. We're closely monitoring the competitive wage environment and the evolving political landscape related to unemployment benefits as the impact on service industries of course across the nation unfolds.

In summary, our communities and maintained a consistent expense model throughout the pandemic to ensure the safety of our residents and consistent staffing availability and.

As occupancy increases variable expense increases will consist primarily of food and supply related items, while labor remains constant.

We remain optimistic the industry tailwind on the occupancy front will continue in the months to come occupancy improvement and Q2 will support the ongoing recovery from the impacts of COVID-19 and 2020. Our goal is to continue outperforming the industry recovery trajectory through consistent outreach efforts and ensure our resident base programming delivers and any.

Oh, and safe experience to attract and future residents and grow occupancy and the second half of 2020 one.

I am excited and thankful that CSL has the leadership teams and the field to successfully lead the recovery.

Now I'll turn the call over to Tiffany to provide a detailed review of our financials. Thank you Brandon good afternoon, everyone. Although our first quarter of 2021 results reflect the impact of the third wave of the COVID-19 pandemic on our occupancy and revenue is as we neared the end of the quarter, we began to see increases in traffic and move ins as our country near.

That's the end of the pandemic the operating environment has remained challenging but our operations team has continued and is doing excellent job and managing the costs within their control and mitigate the impact of COVID-19 on our overall results, while continuing to prioritize the health and safety of our residents and staff members and we also benefited from the receipt of $8 seven.

And cares Act relief funding pursuant to the provider relief funds phase III, each and all distribution and January 'twenty 'twenty. One the first quarter also reflects continued positive impacts associated with the actions. We completed over the course of the past two years to stabilize our business disposed of underperforming assets and improve our balance sheet.

Position on a reported revenues for the first quarter were $61 6 million compared to $106 1 million and the first quarter of 2020, $43 9 million of the decrease was related to the sales or conversions of 59 properties throughout 2020, partially offset by an increase and management fees and community and reimbursement revenue of <unk>.

$15 9 million most of the revenue associated with these managed communities $15 3 million and the first quarter of 2020, one was related to the reimbursement of certain operating costs that we paid on their behalf you'll see that there is a corresponding expense on our income statement for the same $15 3 million or management of fee revenue and the first quarter what's the.

Approximately $1 2 million and the remainder of the decrease in revenues is due to the lower occupancy levels and the slight decrease and rate that brand and reference.

Operating expenses and the first quarter of 2021, or $36 8 million and decrease of $38 6 million and when compared to the first quarter of 2020 as I mentioned when discussing our decline in revenue. We had 59 fewer communities for all of our part of the first quarter of 2021 than we had and the first quarter of 2020. These 15.

Nine communities accounted for the majority of the decrease in expenses on the combined basis, turning now to the results of the continuing communities portfolio, which consists of the 60 on communities that will comprise of our go forward portfolio. Once all of transitions have been completed are continuing communities revenue decreased $5 4 million or 10 seven per cent.

And the first quarter of 2021 compared to the first quarter of 2020 compared to the fourth quarter of last year revenue decreased $1 7 million or three 6%.

The third wave and of the pandemic, which impacted our industry earlier. This year contributed to the 190 basis point decline in occupancy compared to the fourth quarter of 2020. However, the success of our vaccination clinics and increases in move ins that Kim referenced have led to an inflection point for our company, although continuing community occupancy.

For the quarter was 75, 5% average occupancy increased to 76, 9% and April which indicates the actions we have taken to improve our key sales metrics, including our focus on the quality of the leads our reputation score and visibility of our communities have resulted in positive momentum as we begin to move into the post COVID-19.

On the operating environment.

<unk> operating and continuing community expenses, which exclude COVID-19 related costs of 650000 decreased slightly and the first quarter of 2020, one as compared to the fourth quarter of last year due to our operations teams focus on and success and managing costs to offset the lingering impacts of the pandemic.

And we successfully navigated and managing labor costs, and a tight labor market, our employee labor cost decreased $600000 sequentially, our 2.5 per cent.

The remainder of our other expense categories combined to increase $500000 during the quarter or three 8%, which primarily resulted from investments and marketing and advertising initiatives to increase occupancy and an increase and utilities expenses during the quarter compared to the first quarter of 2020, continuing up and continuing expenses day.

<unk> 200000 or 0.5 per cent.

Our continuing community net operating income was $9 1 million and our NOI margin, which we define as revenue is less operating expenses exclusive of exclusive of COVID-19 relief funding and costs with premium labor and included it was 21 per cent.

Our general and administrative expenses for the first quarter of 2021 were $7 2 million compared to $6 4 million and the first quarter of 2020 the.

The increase of approximately $800000 is primarily due to increases in employee incentive and the retention bonus programs and higher employee and benefits and health insurance claims, partially offset by decreases and transaction costs, which were related to the lease amendments and terminations that were executed last year.

During the first quarter of 2021, we recognized other income of $8 7 million, which includes the receipt of $8 $7 million and really funding from the phase III of the provider really fund the I discussed earlier.

Adjusted EBIT or in the first quarter of 2021 was $3 1 million adjusted EBIT. Excluding COVID-19 expenses was $3 8 million and justice. The F. F. O. It was $2 8 million and for the first quarter of 2020, one when COVID-19 relief funds and the expenses are excluded adjusted the F. F. O is the negative $5 3 million and the first quarter.

Turning now to liquidity, we noted on the release that we had $16 8 million of unrestricted cash at March 31, 2020, one as we announced on the during our yearend earnings call. We received of approximately $8 $7 million of relief funding pursuant to the provider relief funds phase III General distribution and January of this year.

And the grants and we received our intended it to fund COVID-19, and expenses and lost revenues for the first and second quarters of 2020. Although additional funding has not been yet announced we continue to diligently monitor developments regarding additional government grants to the senior living industry.

We will apply for additional funding as soon as it becomes available.

We continue to progress with the transfer of ownership of 18 underperforming properties of Fannie Mae during the first quarter, we successfully transferred the legal ownership of three communities of Fannie Mae and recognize the $47 million gain on the extend the Englishman of debt and related liabilities of those communities since the end of the quarter, we have completed the.

For ownership of three additional communities as the legal ownership of the remaining properties transfer of Fannie Mae, which is expected to occur throughout 2021, we expect to recognize the gains on the extinguishment of debt and related accrued interest on those properties at March 31st we included $176 1 million and current notes payable.

<unk> and $8 million and accrued interest on our balance sheet related to the remaining 15 properties also we are in the active discussions with two of our lenders regarding the extension of our refinancing of our two bridge loans totaling $72 5 million and Dara currently scheduled to mature in December of 2020 one.

We are in the third and final year of our transformational strategy as we look toward the remainder of 2020. One we are beginning to realize the results of the significant improvements we have made to our financial foundation and operating platform. During the last two years, our continued investments and sales and marketing as well as our new wellness programming and Magnolia Charles.

Have positioned us to move into the final phase of our transformational plan growth.

Although we are still early and the recovery. We are pleased with the improvements and occupancy that we have seen since the second half of March and are optimistic about our results and the months ahead and that concludes our prepared remarks I will now ask our operator to open the line for questions.

At this time, we'd be conducting a question and answer session. If you would like to ask the question. Please press star one on your telephone keypad of craft.

Provisions on indicate your line is and the question queue. You mean for search if you will let you move your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star of keys, one moving pieces, we poll for questions.

Our first question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.

Hi, Thanks, good afternoon everybody.

So the good afternoon.

And I just have a few questions on slide nine and the slide deck.

You know first I think on the prepared comments you talked about NOI.

Trending upward from here I wasn't sure if that was both NOI and dollars.

And the NOI margin.

We look at the call it roughly 20% of the first quarter of 'twenty one.

But do you expect the margin and the dollars to both improve sequentially from here and I'm I have a couple of follow up questions on the same topic, depending on the answer.

Yeah, and so I'll start and then Brandon can jump in and so one of the of key items here, Steve is really around the occupancy growth and.

And because it will provide incremental operating leverage to the business.

I think we've mentioned before as we went through the pandemic last year, we really maintained our labor model and our communities to ensure that we would have enough staffing and so as you think about occupancy improvement and we feel like we have the labor in place to absorb.

That occupancy improvement.

And about each point.

Of the occupancy is about $225000 per month and incremental revenue.

And given the operating leverage we believe that the flow through should be around 60%. So you know on an annualized basis. We would expect that you know every 100 basis points would be about $2 7 million and incremental revenue and about $1 6 million and incremental NOI.

The dollars.

Okay, Great that's helpful.

And I'm also on page nine and the upper right hand corner of the average rent.

You guys talked about some of the rent concessions and the first couple of months of the year of sounded like March was trending better where it was up a little bit year over year, and we think about.

Or even the revpar for the rest of the calendar 'twenty, one should we assume that.

And that could be growing year over year as we look at those numbers, specifically versus a year ago and the upper right part of the slide nine.

Yeah, Steve and I think it's going to it will be a bit market dependent but because we do have in place rate increases that are throughout the year on the anniversary date for the resident we will see the continued increase on that front and at approximately of 2% rate.

And then as the concessions and you'll have begun to decline and the and the need for them have as well of our expectation is that we'll be able to recover the rate.

As we look at it versus a 2020.

Okay great.

And then final question I might have missed some comments on this and once we go below NOI.

The G&A expense of around $7 2 million for the quarter I know you talked about some of some increased marketing expenses and <unk>.

Sales efforts et cetera, but how should we think about the the run rate of.

G&A expenses on a quarterly basis going forward does that $7 million or so the good run rate or could that trend, perhaps the lower or higher for for other reasons.

Yeah, our expectation Steve is that the G&A run rate will continue to improve throughout the year.

On Q1 had some we'll call it extraordinary expenses and it really related to the transition of the communities, which we had anticipated being transitioned by the end of last year and most of those transitions occurred.

The occurred here in the first quarter and so there is quite of bit of work and.

To get through the accounting of those transitions and and get those finished off so we would expect that the G&A will continue to sort of level down throughout.

Throughout the year and and be at the run rate that we had put in our Q4 of DAC.

Just a few weeks ago.

Got it okay.

Alright, that's it from me thanks.

Alright, thank you.

And as there are no further questions left in the queue I would like to turn the floor back over to MS will be for any closing comments.

That concludes our earnings call for today. Thank you, everyone and have a great day.

And with that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day everyone.

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