Q2 2019 Earnings Call

Good day and welcome to the capital Senior living second 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 FCC from time to time, including the risk factors contained in the annual report on Form 10-K , and quarterly reports on Form 10-Q .

Please see todays press release for the full safe Harbor statement, which may be found at capital senior <unk> Dot com.

Forward Slash Investor Dash relations and was furnished an 8-K filing this month 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 Livings, President and CEO Ms. Kimberly loading. Please go ahead.

Thank you and good morning to our shareholders analysts employees and other participants welcome to capital Senior living conference call to discuss our second quarter 2019 results.

Earlier this year, we announced a new strategic framework of stabilize invest nurture and grow or thing to improve our operating performance and financial Foundation.

I am encouraged by our steady progress and while the impact of activities. We began just a few months ago are not yet evident in our second quarter financial results. There are several indicators that the initiatives are taking hold and our business is stabilizing.

To that end, we are laser focused on the quality of our communities and the services, we provide the tenure and skill set of our valuable talent.

And the input that produce quality revenue all of which drive our operational performance and financial Foundation.

The initiatives, we are executing in which I will discuss further throughout the call are designed to strengthen our business quickly and with positive effect.

Starting with some of the key results.

Our average rate or revenue per occupied room has stabilized and is beginning to increase.

For same communities revenue per occupied room increased 40 basis points over the second quarter of 2018 increased 50 basis points from the first quarter of 2019 and increased 60 basis points for the first six months of 2019 over the same period last year. This is the result of stabilizing our market rates across our communities implementing in place rent increases and focusing our sales team on growing total revenue.

While the average rate development is not yet at the level. We desire. We are encouraged that it is moving in the right direction as driving rate is a key part of our strategy.

We have significantly reduced discounting and concessions I mentioned on last quarter's earnings call that we have implemented a sales tool box that provide their communities with the flexibility to be competitive while maintaining overall pricing discipline.

During the second quarter of 2019 concessions were just $280000 across our portfolio of senior housing communities.

As compared to concessions of $1.1 million in last years second quarter.

This represents a year over year decrease of $820000 or 75%.

We are seeing are commercial excellence activities begin to take hold our chief revenue officer joined capital senior living at the end of February and after completing a thorough review of our go to market strategies. In late May we began executing several initiatives to improve the volume of sales leads to our senior living communities.

We commenced social media engagement at several of our communities and begin optimizing our digital marketing spend with more focus on our local markets and local community keywords and descriptions.

As a result, our sales leads from paid search increased 32% in June over June of last year and increased 46% sequentially over the prior month.

Additionally, while the volume of sales leads we received from third party industry Aggregators declined 6% year over year during the second quarter.

I'm pleased to report that leads generated from our own sales and marketing activities increased 7% during the same period.

Another bright spot is our mid America division, consisting of 46 communities, losing 8.7% higher in the second quarter compared to the first quarter.

While we are still in the early stages of our commercial excellence initiatives. We believe the initial results are promising we will continue to build upon and expand them as key elements of our emerging growth strategy.

We are shifting our sales culture to one in which we serve the REIT residents with the right services for the right value by elevating our focus on the acuity clinical needs and financial circumstances of those we serve.

At times. This means our teams may work with other providers, who can better meet the complex needs of some existing and prospective residents.

Leave this balanced approach is best for our business, our residents and their families and will create a stronger foundation for our future success.

Turning the attention now to our talent strategies employee turnover is trending down.

Our total turnover at the end of the second quarter improved 210 basis points when compared to the quarter ending in March.

And turnover in our community leadership teams improved 20 basis points over that same period.

These statistics continue to improve in July and although this trend encompasses a very short period of time, we are encouraged that our employee base is stabilizing.

At the same time, our year over year total labor costs, including both direct employee costs and contract labor cost increased just 3.1% in the second quarter evidence that managing property level labor utilization targets and addressing caregiver wage pressures in select markets is delivering tangible impact.

To further enhance the quality of our product offering in all of our communities during the second quarter, we implemented several innovations.

One is the development of a comprehensive peer review tool and six National peer review team.

These teams consist of high performing department leaders from a cost our senior housing portfolio.

Their role is to examine the many dimensions of performance for specific community.

Once the review is completed the peer review team provides the communities executive director and regional manager with meaningful constructive feedback as well as recommendations and actions for improvement.

We tested this approach regionally and quickly rolled it out nationally during the second quarter. We are already seeing a marked improvement in the proportion of deficiency free surveys and a tangible culture ships of being connected and part of a performance focused organization that identifies and shares best practices.

These actions along with our new organizational structure and operational leadership led to a 3.7% year over year growth revenue growth in our southwest Division comparing the second quarter of 2019 with the second quarter of 2018. This division represents approximately one third of our total communities and is heavily concentrated in Texas.

Comparing the first six months of 2019 with the same period in the prior year. This division achieved 3% revenue growth.

We are delighted with this development and while we don't normally report results at the division level. We wanted to provide at this quarter as an additional indicator of our progress.

The improvements we are reporting this morning are due to the commitment and dedication of our valued employees and a disciplined approach to managing our business.

As indicated in our earnings release.

Occupancy for same communities declined 80 basis points sequentially compared to the first quarter of 2019, ending the second quarter at 83.6%.

Some of this decline has been the result of strong focus in our communities to optimize the care and services. We provide we are confident that having a market based balanced acuity in financial mix at all of our communities will create a stronger foundation for future success.

Turning to financial indicators the lease coverage ratios are improving for several of our leased communities.

While our results continue to be negatively impacted by the high cost of these triple net leases I'm pleased that the coverage ratios are improving in nearly all of our ventas portfolio in more than half of our HCP portfolio and in about 50% of our Welltower portfolio. We continue to have productive ongoing conversations with our re partners and in particular with with HCP regarding the nine communities with leases terminating in October of 2020.

We expect to transition all nine of these HCP communities by the lease termination date.

As mentioned on previous earnings calls as part of our normal course of business. We continue to evaluate our portfolio of senior living communities and developed plans to divest those assets that no longer fit within our strategy in the second quarter of 2019, we closed on the sale of one community in Kokomo, Indiana, and we are marketing a small number of select assets for sale. We will continue to engage in these activities in conjunction with our overall portfolio management strategy.

As I normally do before turning the call over to Kerry I want to briefly mentioned market conditions in the senior housing industry.

Nic data continues to suggest a downward trend in senior housing construction starts, especially for assisted living.

In the second quarter of 2019. These construction starts as reported by Nic amounted to 3% of total existing senior housing inventory down from 4.3% during the same period in 2018.

While this is encouraging the industry supply continues to outpace demand and we expect this headwind to remain through at least mid 2020.

Our diligence and focus on improving the things we can control while navigating the local market conditions relevant to our communities.

As you know certain market conditions have been quite challenging, including the northeast, Ohio, Some parts of Texas and certain areas of Illinois and the Carolinas.

While we still have a lot to do we are encouraged by the strength of our leadership the business process changes, we have implemented and the emerging signs that our business is stabilizing.

I will now turn the call over to our Chief Financial Officer Carey Hendrickson.

Thank you Kim and good morning, everyone.

In my remarks, I'll discuss our non-GAAP measures, which 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 restored their economic loss. However, the statistical measures that we include in the release exclude the results of these two Houston community since are in lease up and include that would make the statistical measures less meaningful.

As Kim noted, we're focused on improving the quality of our product our talent and our revenue. This focus is already resulting in improvements in operational performance and in time, we expect our financial results to follow suit.

In our release. This morning, we reported total consolidated revenue of $113.1 million for the second quarter of 2000, my team a decrease of $1.5 million or 1.3% over the second quarter of 2018.

The decrease is related to the sale of Kokomo, Indiana that community on May one as well as lower financial occupancy year over year.

[noise] declines related to these items were partially offset by a nominal increase in average rent as well as incremental revenue in the second quarter of 2019 from the two communities impacted by Hurricane Harbor, which came back online in July of 2018.

Our operating expenses increased $1.5 million or 2% to $74.4 million in the second quarter of 2019 as compared to the second quarter of 2018.

Operating expenses at our two hurricane impacted communities were $900000 greater than the prior year, including a lesser business interruption credit of approximately $400000.

Both communities as I mentioned begin admitting residents and July 2018, and are making steady progress.

The business interruption reimbursements for these two communities, which totaled $1.1 million in the second quarter of 2019 ended in July of 2019 that was after 12 months of.

Being in operation.

General and administrative expenses for the second quarter of 2019 were $6.6 million compared to $5.7 million in the second quarter of 2019. The second quarter of 2019 included approximately $500000 in separation employment placement cost associated with our former CEO and COO.

Excluding these and other transaction costs from both years, our Gina expense increased approximately $1.3 million in the second quarter of 2019 as compared to the second quarter of 2008 team mostly related to higher health claims expense investments in personnel initiatives, a differences and bonus accruals between the two periods.

DNA is it as a as a percentage of revenue under management was 5.1% in the second quarter of 2019, the same as in the first quarter of 2013.

Our adjusted EBITDAR was $34 million in the second quarter of 2019 compared to $38.4 million in the second quarter of last year.

Our adjusted CFO was $5.2 million in the second quarter of 2019 compared to $10.6 million in the second quarter of last year.

Our CFO for the second quarter of 2019 included a negative net impact the CFO of approximately $500000 related to the adoption of the new lease accounting standard which was effective January one of 2019, so on a basis comparable to the prior year. Our CFO was $5.7 million worth one were to do the math 19 cents per share.

The new lease accounting standard required us to reassess two leases that we previously accounted for as financing leases, which resulted in a change their classification from financing leases to operating leases.

And in association with that change our quarterly interest expense was reduced by approximately $400000.

At our quarterly rent expense was increased by approximately $900000, resulting in the negative net impact the CFO of $500000.

Looking at our same community results same community revenues decreased 1.7% as compared to the second quarter of 2018.

We had a modest increase in average monthly rent of 0.4% as compared with the second quarter. The prior year and same community occupancy declined 190 basis points to 83.6%.

The decline was 80 basis points on a sequential basis from the first quarter of 2019.

There were variations in occupancy performance across our portfolio in the second quarter of 2019 based on the supply demand dynamics in the markets our competitive position in those markets and the execution of our local community teams.

69 of our 128 communities had occupancy of 85% or greater in the second quarter 2019, with 47 of those above 90%.

That leaves 59 communities with occupancy below 85%.

And looking at the variation in performance across markets.

Our four communities and Omaha continues to be a bright spot achieving a very healthy occupancy rate of 94.6% in the second quarter of 2019.

Which is an increase of 380 basis points over the second quarter of 2018.

In Texas.

Our largest state the Dallas market is underperforming the overall portfolio, but many of our communities and other areas of Texas, notably Houston, and San Antonio are performing well.

Our 17 communities in Dallas declined 130 basis points on a sequential basis from the first quarter of 2019 to the second quarter of 2019, However, our occupancy at our three communities in Houston, excluding the two hurricane impacted communities increased 150 basis points on a sequential basis.

And then occupancy at our two communities in San Antonio was a very healthy 92.2%.

The sequential occupancy decline in both of our two other largest states, Indiana, and Ohio was 40 basis points considerably less than our overall portfolio sequential decline of 80 basis points.

Among our states with multiple communities, our most challenging states in the second quarter from a sequential occupancy perspective, We're Florida, North Carolina, South Carolina and Virginia.

In another positive note occupancy at our four communities in Missouri increased 150 basis points on sequential basis.

And one notable performance in a secondary market was our community in Spartanburg, South Carolina, which increased occupancy from 78.1% in the first quarter of 2019% to 93.6% in the second quarter of 2019.

We continue to maintain good expense controls our same community expenses in the second quarter of 2019 increased 1.9%.

Our employee labor cost increased only 0.4% in the second quarter of 2019.

Versus the second quarter of 2018.

Due in large part to the Rightsizing of our workforce across our field operations that we completed in February of this year.

However, we did see an increase in our contract labor costs as compared to the second quarter of 2018, increasing $1.2 million.

Including contract Labor, our labor expense increased 3.1% in the second quarter of 2019 over the second quarter of the prior year.

We've made wage adjustments at a number of our communities that have the most significant wage pressure, which is helping us to better attract caregivers in these markets and as a result, we saw contract labor come down as the second quarter progressed.

Our food cost increased only 0.7% in the second quarter on our other large cost category utilities decreased 3.2% over the second quarter of last year.

Our same community net operating income decreased 7.7% in the second quarter of 2019 as compared to the second quarter of 2018.

Looking briefly at the balance sheet, we ended the quarter with $34.8 million of cash and cash equivalents, including restricted cash.

During the second quarter, we spent $4.5 million on capital expenditures.

Our mortgage debt balance at June 32019.

[noise] was $971 million at a weighted average interest rate of approximately 4.9%.

At June 30, the majority of our debt was at fixed interest rates, except for two bridge loans that totaled approximately $76 million and $50 million of long term variable rate debt under our master credit facility.

Of the two bridge loans, we have a $65 million bridge that matures in July 2020, and $11 million bridge loan that matures in October 2021.

We're in active discussions with lenders regarding both bridge loans and are considering options related to extensions and or permanent financing for certain assets that are part of the current bridge loans.

As I noted previously we closed on the sale of our community in Kokomo, Indiana on May one at a price of $5 million, which generated about $1.4 million in net cash proceeds for us.

We are engaged in various activities as part of our ongoing effort to strengthen our financial foundation and optimizing our portfolio, including considering the divestiture of a limited number of assets and the refinancing of certain existing owned assets.

We expect our operating and financial results in the second half of 2019 to reflect the occupancy declines that we've experienced in the first half of the year, resulting in lower operating and financial results in the second half of the year than in the first half. We're pleased with the performance of about half of our communities, but the other half still have a considerable amount of work to do.

Our focus for the second half of the year, we'll remain on continuing to stabilize and invest in our operations as we create a platform for growth in the years ahead.

We're operating with a tremendous sense of urgency and expect these actions to drive stronger results, but we can't predict the timing of that improved performance, particularly in an environment that remains challenging.

Now I'll turn it back over to Kim.

Thanks Kerry.

I'll conclude our prepared remarks by saying that we remain focused on improving the operational and financial performance of capital senior living while delivering the highest quality accommodations and care to our residents.

Each day, we operate with urgency diligence.

Decision in executing our strategy of stabilize invest nurture and grow to drive long term value for our customers our employees and our shareholders.

While we are seeing many of our performance focused initiatives begin to take hold across our senior housing portfolio. It will take time for the benefits of these activities to be fully realized throughout the enterprise and produce the results we all desire.

We look forward to keeping you apprised of our developments.

We will now open the line for questions.

Thank you and if I might ask a question. Please take now by pressing star one on your telephone keypad.

If you're using a speaker phone. Please make sure your mute function is turned off to buy or sell to reach our equipment.

Once again that is star one if you would like to ask a question.

And well pause for just a moment to allow everyone an opportunity and ethanol.

Well now take a question from Chad Vanacore with Stifel.

Oh thanks.

So I'm just thinking about your optimization initiatives.

Which of those are you pursuing first are the lead generation or the cost savings you know, what's your primary focus right now.

Thanks, Ed.

Thanks for the question.

While our primary focus really is driving the top line and doing that with high quality revenue a lot of the cost savings initiatives and better delivering this year that really were put in place throughout last year in terms of the new purchasing platforms that we put in place and then of course earlier. This year, we did a rightsizing exercise of our workforce.

And that has continued to help us really manage those labor cost. So we are laser focused on the top line and on developing occupancy and doing that through primarily through our you know our own efforts as indicated by the commercial excellence activities. Although of course, we still work with some of our.

Other industry aggregator partners as well for for leads we are primarily focused on on doing that organically.

All right. It's just thinking about your workforce same store labor was only up 40 basis points contract labor was much higher than that so effectively you're still at.

3% labor inflation.

How should we think about those changes in contract labor those expenses transitory or do they just get replaced with with employees at similar rates of inflation.

Yes, Chad, we would actually like to have less contract labor and more direct labor expense and most of that will translate into into direct labor from will move from contract labor direct labor, but that will be a much better solution for the company and as I've said in my remarks, we've made progress on that in the second quarter as the second quarter progressed, and we believe will make continue to make more progress on that in the third quarter. So I think the percentage will be about the same.

We had a little bit less contract labor in the first quarter than we did in the second and our labor cost overall, including contract labor were up 3.7%. So it's in that three to you know.

Three and a half 3.7% range, probably regardless of whether it's a direct or contract labor.

Okay.

And then just thinking about the communities that you're marketing it divestitures that you may have teed up what's currently being marketed and then.

How much do you think that that could grow by.

So it's a limited number of assets Chad and.

You know it's it's there are some that are Underperformers and then there are some that are really strong performers. So it's really a mix. It's we're really just looking at those portfolio those assets that we believe fit in our portfolio and those that don't and making determinations as it relates to that and marketing those I mean, we believe it will when we if we decide to sell them that they would produce meaningful cash proceeds for us, but we're being very disciplined in our approach to make sure we receive appropriate value for assets. If we do decide to sell them and I also mentioned, we're looking to refinance certain known communities and both so but the sale of assets and refinancing would provide us with incremental cash.

And we feel like the things we're doing in the normal course of operations give us.

The room, we need to focus on improving our operations and our financial performance.

All right and then just one more from me just thinking about occupancy.

What was the trend of occupancy month by month in Twoq and then what are you seeing so far in July and August .

Yes, so in the second quarter, our occupancy was.

It trended down during the quarter it was 83.8% in April .

83.8% in May and then 83.1% in June .

So we do start to third quarter with lower occupants in than we started the second quarter. The second quarter ended with March at 84.2%. So you can see when 84 to 83 83, and then down to 83.1.

As far as July and August goes we're.

I would say, we're seeing relatively similar.

Trends in July , but we would expect as the summer goes along for that too to pickup.

All right Thats it for me thanks.

Well now take our next question from it.

Joanna Gajuk with bank of America.

Good morning, Thanks for taking the question so.

I guess, so as it relates to.

You just talked about occupancy in terms of pricing I guess, yeah, you know we.

You know a little bit of improvement about I guess still kind of flattish year over year. So how should we think about that.

You know the progress, you're making there and and and where these rates could kind of shake out for the next call like you know a year or so.

[noise], Yeah. So Joanna you know were.

As far as rates go we are making some progress when you look at on a sequential basis from the fourth quarter to the first quarter of the fourth quarter of 18 to the first quarter of 2019, we actually saw a sequential decline of 80 basis points, but we were pleased that we had a sequential increase in the second quarter to 50 basis of 50 basis points from the first to the second quarter and so if you take that 50 basis points you annualize that that's at about a 2% annualized rate I think we could be.

You know, we're not providing guidance so I don't want to give too much.

Specific information related to rates, but I would certainly expect it to be positive going forward, we've gone through the the market rate adjustments that we needed to go through and now we're in the mode of increasing rates, particularly in those markets, where we have outstanding docket occupancy and I noted in my remarks, we have 47 communities that have occupancy at 90% or greater and obviously, we have more pricing pressure in those markets than in the lower performing markets.

So in those markets with strong occupancy and what what are the market eight northeast.

Because in place.

Our rent increases that youre able to to achieve.

Yeah, depending on their community and the rate structure. There those are in place increases can range between three and 5%.

All right. So when you say in those markets, where you have a.

Lower occupancy a you can't stop it goes very aggressive discounting or there's still some discount and some offers tickets that are being done.

Well our sales team has the tool box that they can utilize to be competitive but in terms of you know the aggressive discounting that we have seen in the past that is not happening we're very much focused on improving the quality of our revenue and ensuring that we're selling the value of the services that we provide so you know we went through a pretty extensive exercise to stabilize our market rates to put that tool box in place.

To eliminate or significantly reduce concessions and discounting and we feel good about where the rates are now and also our ability to continue to.

Implement increase there in place rent increases as you know leases expire in Reno.

That's helpful. Thank you and if I may just a follow up on the comments around Oh My God. The planned oral dose classic is to sell some of the markets been marketing.

And I appreciate a comment that you want to be disciplined so should I read into it as you say you know things are maybe taking a longer in terms of actually executing that though so those so shows oh transactions because of that lack of interest the level you're interested in selling or is there lack of interest in general. So any color you can give us in terms of you know.

What exactly is going on with the with what the process of selling some of these assets.

Yeah trying to we're just.

We definitely have interest in the assets were marketing a considerable level of interest.

And we're really just considering options as we look at it we do want to receive appropriate value for them and there's there are different ways that you can do that selling in those one but we can also look at it. If we can also look at potentially refinancing those assets and in a vehicle, where we could actually get you know relatively the same amount of proceeds of and.

Some of the assets, we're looking at have improved a little bit as we've as we've gone through this process. So it's really just the overall evaluation as we go through the process and it takes a little time, but.

It's not because there's not interest in the assets.

All right. Thank you I appreciate the color. Thanks.

Thanks Joanna.

I'd say, it's on a reminder, that is star one if you would like to ask a question.

Well pause for just a moment.

Okay.

And it appears there are no further questions at this time I'd like to turn the conference back over to Ms. floaty for any additional or closing remarks.

Okay, great as I mentioned earlier, we're laser focused on the quality of our compute or communities and the services we provide.

The tenure and the skill sets of our valuable talent and the input that produce quality revenue all of which drive our operational performance and financial Foundation. We appreciate you joining today's call and we look forward to keeping you informed of our developments. Thank you.

And once again that does conclude today's conference and we thank you all for your participation you may now disconnect.