Q2 2021 Capital Senior Living Corp Earnings Call
Good day and welcome to the capital Senior living second quarter 2021 earnings call 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 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.
Certain of these factors that could cause actual results to differ are detailed in the earnings release and 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 <unk> annual report on Form 10-K and quarterly <unk>.
Reports on Form 10-Q please.
Please see today's press release for the full Safe Harbor statement.
Found at the capital senior Dot Com Investor Relations.
It was furnished in an 8-K filing this morning.
Also please note that during this call the company will present non-GAAP financial measure.
For a reconciliation 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 Loady.
Thank you Doug good afternoon, and welcome to our second quarter 2021 earnings call. Joining me today are Brandon Ribar, our chief operating officer, and Tiffany <unk>, our senior Vice President of accounting and finance.
As we continue to navigate the COVID-19, pandemic and emergence of the Delta variant the talented and dedicated teams at capital senior living demonstrate not only their resilience, but their grit and determination every single day to win the recovery despite doing so in an ever changing and challenging operating environment.
I'm pleased to report that with our July average monthly occupancy of 80.4%. We've now delivered five consecutive months of occupancy growth accumulative increase of 510 basis points from the pandemic low average monthly occupancy of 75, 3% in February.
July month end spot occupancy was 81, 8% and a good indicator of continued upward momentum.
Comparing sequential average quarterly occupancy by segment from Q1, 2021 to Q2 of 2021 which is the first full quarter of results since completing three sets of vaccination clinics in all of our communities occupancy in our independent living units grew 170 basis points.
Occupancy in our assisted living units grew 290 basis points and then our memory care units occupancy increased 400 basis points.
We believe this strong performance is attributed to the excellent care and strong value proposition provided to our residents every day by our community teams along with the differentiated resident experiences. We've recently implemented across the portfolio. We are pleased with this progress and believe we continue to outpace our industry peers.
And occupancy growth.
In our portfolio of 60 owned communities revenue for the second quarter increased sequentially $1.3 million or two 8% from the first quarter of this year.
Net operating income for the 60 owned communities, which excludes management fees and includes real estate taxes and insurance improved to 21.5% in the second quarter of 2021 compared to 21% in the first quarter.
This represents our first sequential quarterly revenue growth and margin improvement since the onset of Covid and encouraging sign that recovery has begun to take hold.
Turning to G&A the year to date increase of $3.1 million was driven primarily by higher employee benefits and health insurance claims as these same expenses were extraordinarily low in 2020 due to the Covid 19 pandemic, excluding the health insurance related costs in both periods G&A.
Expenses have declined approximately $1.7 million year to date through June 30th compared to the same period last year.
As we complete the remaining non continuing community transitions in the second half of 'twenty 'twenty. One we expect G&A expenses, excluding employee health insurance claims and transaction related expenses to continue to decline.
Well the hard work, we did in 2019 in 2020 is now evident in the statistics of our strong pace of recovery from the pandemic. This is a pivotal time for capital senior living the company has been operating in a very capital constrained environment for many years and while we took decisive actions throughout 'twenty 'twenty to address the company.
Liquidity by shedding under performing communities. The COVID-19 pandemic has put additional ongoing stress on our cash resources.
Additionally, we have been facing $72 million of maturing mortgage debt with recourse provisions in December of 2021 and another 37 million of nonrecourse mortgage debt maturing in April and May of next year.
These pressures on our liquidity have been evident for the past 15 months and since our release of our March 'twenty 'twenty financial results. When we expressed doubt about the company's ability to continue as a going concern and we outlined the significant steps we were taking and continue to take to mitigate this risk.
We are now turning the corner on the pandemic with occupancy increasing while new supply is at decades, low and demographic growth is poised to accelerate for the duration of the decade how.
However, the near term operating environment remains very costly uncertain and challenging due to the proliferation of the Delta variant limited staff availability and many markets general inflationary pressures and the need to invest in our communities to support the trajectory of recovery in further growth.
To seize this inflection point and responsibly fund not only the near term capital requirements to support the recovery from the pandemic, but also a long term growth plan, we require additional capital.
On July 22nd we announced the capital Senior Living's Board of directors conducted a thorough process to explore strategic alternatives for the company and unanimously approved a strategic investment from conversant capital and experienced institutional investor with a successful track record of partnering with real estate platforms and their management.
Teams.
This strategic investment along with a proposed rights offering will raise up to $152.5 million, consisting of $82.5 million in convertible preferred equity and a common rights offering of approximately $70 million, which is partially backstopped by conversant.
In addition conversion will provide us a $25 million accordion for future investment.
This transaction is subject to shareholder approval and pending approval is expected to close during the fourth quarter of this year.
When completed this capital raise will allow capital senior living to quickly pivot from playing defense to playing offense in three important ways.
First by enabling significant investment into our assets to grow earnings we have a pipeline of select investment projects in our portfolio that we expect to strengthen our competitive position in key markets and provide returns in excess of the cost of this new capital.
Second by fortifying our balance sheet. So we have sufficient working capital to fund the near term pandemic related recovery and so we can address near term debt maturities from a position of strength.
And third by providing capital for accretive acquisitions in an environment, where many operators are capital constrained.
The strategic investment has already been helpful to us as of yesterday, we finalized the extension as a $45 million full recourse bridge loan that was scheduled to mature in just four months on December 31st.
The bridge loan is extended for 12 months with the option to extend an additional six months by meeting certain financial criteria. The terms of the loan are essentially the same as they were previously but the lender required a loan pay down of approximately $5.3 million, which will be paid in installments over the course of the extension with.
This 12 month extension in place there remains $31.5 million of partial recourse mortgage debt maturing in December of 'twenty, 'twenty, one and approximately $37 million of nonrecourse mortgage debt maturing between now and May of 2022.
We believe we can deploy the capital from the strategic investment transaction responsibly and productively to maximize value for our shareholders. The amount of capital raised fundamentally strengthened the company by comprehensively addressing both capital needs of the assets and the balance sheet for the foreseeable future. This provides the catalyst to come.
Create an exciting long term business plan for growth and success, there's never been a better time to be part of capital senior living demographic trends are favorable new supply is at decade lows, our three year transformation to improve operating performance and strengthen our financial Foundation is nearly complete and we are ready for the.
The next chapter, which is focused on exemplary care engaging resident experiences and measured responsible and sustainable growth I'll now turn the call over to Brandon to provide more detail on our Q2 operating performance and second half expectations.
Thank you Kim and good afternoon.
As you mentioned, we could not be more proud of the ongoing and significant effort and dedication of our local leaders to guide their communities through the ever evolving operating environment across senior living.
Throughout Q2, and the early stages of Q3, our local operating teams worked tirelessly to quickly adjust to the more open operating environment with increased tours and family visits within the community.
Most important for the safety of our communities more than 90% of our residents are fully vaccinated and Covid cases remain at low levels in spite of the national rise associated with the Delta Varian.
We remain focused on education efforts across our employee base to increase the percentage of fully vaccinated employees. While also closely monitoring the landscape related to state local and industry vaccine mandates.
The decision to move forward with vaccination as a condition of employment has not yet been finalized. This option is under careful consideration while also weighing the challenging labor environment in certain secondary and tertiary markets.
Despite the increase in National Covid cases are leading indicators related to occupancy remains strong lead in tour volume in July reached the highest level in nearly two years and move in volume remained strong.
Move outs in July were at the lowest level since may of 2020.
Lead and tour volume remains strong in the early part of August Thanks to the ongoing outreach and digital marketing efforts conducted by our local and regional leadership, while the occupancy gains over the previous five months are promising many of our communities have significant opportunity to continue supporting further growth in our portfolio.
The availability of capital to invest in specific communities with near term occupancy upside is paramount to our growth strategy over the next 12 to 18 months capital investment focused in common area refurbishments upgrading amenities within our resident units and conversion of existing units in wings to meet the demands of the growing memory care segment.
In certain markets presents significant near term growth opportunity column.
Common area Refurbishments of approximately $7 million in 12 communities are slated to begin in Q4 following the completion of our capital raise we.
We've also targeted five communities in Ohio, and Wisconsin for conversion of independent living and assisted living units two memory care wings with completion dates inside of 12 months. These.
These conversions will improve our unit mix and fold. The recently developed Magnolia trails memory care programming into more than 65 units across these communities collectively these investments are expected to generate returns exceeding 20% on average.
Turning to rate and margin rates began to improve in the latter part of Q2 with June rates, averaging $3523 just slightly behind our Q1 average of $3531 as a direct result of our strategic decision to grow occupancy Q2 declined slightly sequentially due to the impact of elevated one.
Time concessions in the first four months of the year.
Based on moving data from June and July the use and size of concessions continues to decrease we expect rate growth in the second half of 2021 to further improve the margin expansion Kim referenced in her comments.
Our in place rent increases take place as residents renew their leases and in Q2, our average in place rent increase was 2%. We expect to continue this level of increase throughout the year.
In our previous discussions we referenced the opportunity to improve margin by maintaining existing labor levels, while increasing our occupancy.
Adjusted for calendar days, our total labor expense, excluding benefits and workers' compensation remained flat at $229000 per day versus Q1.
The labor market remains extremely challenging and our local teams continue to adjust to wage and labor pressure to ensure the retention of our key frontline care and service providers. We are encouraged by our 98, 5% retention of executive directors in Q2 as stability in our key leadership roles is a leading indicator of staff stability.
And strong operating performance.
Variable expenses, consisting primarily of food advertising and marketing and supply related items increased three 7% sequentially, primarily driven by inflationary food expense of four 3%.
Bad debt expense remained strong at 0.3% of revenue and improved from an already low rate of 0.8% in Q1. These key expense metrics combined with our two 8% sequential revenue growth delivered the NOI growth and margin expansion referenced in Kim's comments.
Our operating team continues to monitor and adjust to the impact of the Delta variant and increased nationwide Covid cases, while remaining focused on the safety and care of our residents and retention of our frontline staff.
Now I'll turn the call over to Tiffany to provide a detailed review of our financials.
Thank you Brandon.
Afternoon, everyone. During the second quarter, we continue to see increases in traffic and move on and average occupancy for the quarter was 78, 1% an increase of 260 basis points as compared to the previous quarter.
Operating environment has remained challenging but our operations team has continued to do an excellent job in managing the costs within their control and to mitigate the impact of COVID-19 on their overall results, while continuing to prioritize the health and safety of our residents and staff members. The actions we completed over the course of the past two years has stabilized.
Our business and positioned us for future growth.
As I review, our consolidated financials, comparing the second quarter of 2021 to the same quarter of 2020. It is important to note that our portfolio consisted of 59 fewer communities for all or part of the second quarter of 2021 compared to the number of communities in the second quarter of 2020, our reported revenues for the second quarter or <unk>.
$7.5 million compared to $101.5 million in the second quarter of 2020, $39.2 million of the decrease was related to the cells are conversions at 59 properties throughout 2020, partially offset by an increase in management fees and community reimbursement revenue of $8.9 million.
Most of the revenue associated with these managed community, it's a $10.1 million in the second quarter of 2021 was related to the reimbursement of certain operating costs that we paid on their behalf. The offset of which is also included as an expense on our income statement.
Fee revenue in the second quarter with approximately $800000. The remainder of the decrease in revenues is due to a decrease in average monthly rate quarter over quarter.
Resident revenues for the second quarter increased $1.4 million from the previous quarter, which was primarily due to a 260 basis point increase in average occupancy.
Operating expenses in the second quarter of 2021 were $37.6 million, a decrease of $33.7 million when compared to the second quarter of 2020 that 59 community dispositions accounted for the majority of the decrease in expenses on a combined basis.
Operating expenses increased $810000 or two 2% during the second quarter compared to the first quarter of 2021, we continue to operate in a tight labor market, our employee labor cost increased $500000 sequentially or two 3% due to increases in benefits and workers' compensation expenses.
The remainder of our other expense categories combined to increase $300000 during the quarter, which primarily resulted from investments in marketing and advertising initiatives to increase occupancy and an increase in food and other variable expenses during the quarter due to our continued occupancy growth. Our net operating income was $10 million and our operating margin.
Which we defined as revenues less operating expenses.
Most of the COVID-19 relief funding and costs with premium later are included with 28, 7%.
Our general and administrative expenses for the second quarter of 2021 were $8.8 million compared to $6.4 million in the second quarter of 2020.
The increase of approximately $2.4 million is primarily due to increases in employee benefits and health insurance claims increases in travel and workers' compensation related expenses, partially offset by decreases in transaction costs, which are related to the lease amendments and terminations that were executed last year.
Adjusted EBITDAR in the second quarter of 2021 was $2.01 million adjusted EBITDAR, Excluding Covid 19 expenses was $2.3 million for the quarter.
Adjusted <unk> was a negative $7.3 million for the second quarter of 2021, when Covid 19 relief funds and expenses are excluded adjusted <unk> was a negative $7.1 million in the second quarter, turning now to liquidity, we had $14.6 million of unrestricted cash at June 30 of 2021 at $2.
$2 million decrease from the $16.8 million unrestricted cash balance we reported at March 31.2021.
The reason for the decrease in cash is twofold.
Though our financial position continues to improve we have operated in a working capital deficit since 2017, which wasn't phosphoreted by the COVID-19, pandemic and raise substantial doubt about the company's ability to continue as a going concern to fund their recovery of occupancy loss during the pandemic, we've made capital investments in our properties.
To address the wear and tear caused by the pandemic to make our apartment rent ready and to upgrade certain amenities in order to entice future revenue browser to our properties. We have also made both capital and operating investments related to the implementation of our Magnolia Charles' program at certain communities our year to date capital expenditures through the end of second quarter.
Total of $4.7 million.
Today, we announced that we have extended the maturity date of the $45 million bridge loan with BBVA from December 2021 to December 2022 in conjunction with the extension we are required to pay $900000 to establish a debt service reserve and then make a principal pay down of $150000 per month.
For the term of the extension and $1 million on or before December one 2021 subsequent quarter principal pay downs of $500000. Beginning in March 2022 will be required of certain financial metrics are not achieved the ascension waves. The failure of the debt service coverage ratio covenant that occurred as of December 31, 2020.
We continue to be in active discussions with one of our other lenders regarding the near term attorney at the other bridge loans totaling $31.5 million that is currently scheduled to mature in December 2021.
In addition, we have begun discussions with current and prospective lenders regarding loans totaling $47.5 million that are currently scheduled to mature in 2022 and 2023 as.
As we look towards the future we recognize that we require capital to continue to fund a recovery as well as position the company for future growth as Ken mentioned, we recently announced a strategic investment from Conversant capital along with our proposed rights offering that will together raise up to $152.5 million for more information.
On the proposed transaction. Please see the form 8-K that was filed with the SEC on July 20th stuck out.
And a preliminary proxy will be filed with the OCC in the coming days.
We continue to progress with the transfer of ownership of 18 underperforming properties to Fannie Mae during the second quarter, we successfully transitioned the legal ownership of an additional six properties to Fannie Mae and recognized a $67 million gain on the extinguishment of debt and related liabilities that those communities since the end of the quarter.
We have completed the transfer of ownership of four additional communities, bringing our total dispositions to 13 of the 18 transitioning community.
The legal ownership of the remaining properties transferred to Fannie Mae, which is expected to occur throughout the remainder of 2021, we expect to recognize gains on the extinguishment of debt and related accrued interest on those properties.
Yes, we included $112.7 million in continents payable and $6.5 million and accrued interest on our balance sheet related to the remaining nine properties as.
As we look towards the future 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 with the capital from the strategic investment from converse in capital as well as our continued investments in sales and marketing our new wellness programming and Magnolia trial, we are poised to move into the final phase of.
Our transformational plan growth.
We are pleased with the continued improvements in occupancy that we have seen since early this spring and are optimistic about our results in the months ahead.
That concludes our prepared remarks, I will now ask our operator to open the line for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment, it may be necessary to pick up your handset.
Before pressing historically.
Our first question comes from the line of Steven Valiquette.
Valiquette with Barclays. Please proceed with your question.
Alright, Thanks, good afternoon everybody.
So just a couple of questions here just on the quarter itself just around the operating expenses and the margins for the 61 communities.
On page nine in the slide presentation. You include their real estate taxes and insurance expense in the operating expenses.
It's into 'twenty, 1.5% NOI margin, which is up 140 bps sequentially, but then on page 10 in the press release, you exclude the real estate taxes and insurance and you show the NOI margin at 28, 7%, which is up 860 bps.
I guess I was just trying to just better understand the thought pattern on excluding or including those expenses in one comparison, but then excluding them in another just so we can understand kind of the thought pattern on the best way to think about that thanks.
Yeah. Thanks, Steve So on the on the the page nine of the Investor presentation. The comparison of the 21, 5% versus the 21%. The reason that we include real estate taxes and insurance in that NOI calculation.
Asian is because as we look at our portfolio of assets you know our expectation is that those assets should be able to cover those operating expenses with their you know with our operating results. When you look at the supplemental information.
From the press release and in the supplemental schedule that you referenced you know that's that's just a pure calculation excluding those two line items.
That's kind of our historical.
Our operating margin that the company has represented them, but we think that the more relevant representation of how the business is doing needs to include those two components are expenses that include real estate taxes and.
And insurance.
Okay.
Okay, Great that's helpful. So.
So when those are included then to the extent that you had let's call. It just use round numbers roughly $36 million in quarterly operating expenses in both <unk> and <unk> this year.
And then tying that in with your comments just regarding labor expense and also the tight labor market. How should we think about just the raw dollar amount of quarterly operating expenses going forward from here relative to that $36 million of trend line that we saw in each of the first two quarters. Thanks.
Yeah, Steve I think that we're looking at that as we've said previously and in my comments as I'm in this very well.
I'd say dynamic operating environment, and we're continuing to focus heavily on keeping our labor expense flat, while we are increasing the occupancy and just kind of referencing back to some of my comments, we did see our labor expense when you exclude the benefit and workers' compensation expenses remained flat quarter over quarter while.
We experienced that referenced occupancy increase so I think we see opportunity within that $36 million that you referenced to bring it down as the overall environment continues to evolve I think there's just a bit of uncertainty right now around what the Delta variant is kind of what impact that may.
I have here and there.
The near future and then just how the labor market evolves as you know the.
The government supplements begin to to go away here towards the end of the year. So we are looking at opportunities to bring that number down so that we get the benefit of the increasing revenue and occupancy that we're delivering.
But you know theres a lot of a lot of variability right now and just what's going on in the labor market.
Okay great.
Okay and then.
A few questions around some of the recent in investor activity, but I think I'll just follow up with those offline just to keep things more simplistic for today. So thanks.
Okay, great. Thanks, Steve.
That concludes our question and answer session I'd like to hand, it back to you Miss loading for closing remarks.
Alright. Thanks, Doug. This concludes today's conference. Thank you, everyone and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.