We have now become nervous with each earnings period because there just seem to be too many surprises. Unfortunately, these surprises have usually been negative. Three months after being positive about the direction of the company, Capital Senior Living spooked investors not only with their poor results in the second quarter, but their dismal prospects for the rest of the year.
When you underperform expectations, and cut full-year forecasts by 20%, you should expect the worst. And the worst was a 23% plunge in the share price on August 1, followed by a 5% decline the following morning. Volume was 6x the average, but not heavy in absolute terms. The news also took Brookdale Senior Living down 8%, which is ironic, because for the past two years Capital Senior Living lived in Brookdale’s dark shadow, falling every time Brookdale announced another poor quarter.
With Capital Senior Living’s market cap falling to just $233 million, everyone is comparing its owned real estate value to the stock value, and highlighting the market disconnect. The real estate is being calculated as being worth anything from $6.50 per share to $16.00 per share. The problem is, the discussion is largely irrelevant.
Stocks are valued on how investors believe the company will perform, and performance is based on future earnings and cash flow. If earnings stagnate or decline, the stock will decline. The value of what is on the balance sheet has little to do with what the company is worth, at least as a publicly traded company. The assets are a means to grow cash flow. But because the seniors housing industry, and its capital providers, have been putting such a focus on real estate value, everyone seems to think that the stock should be worth at least what the real estate is worth, and if not, then the higher real estate value should be monetized with a sale.
That sale could be in a sale/leaseback, sale/manageback, or a sale of the whole company. Financially, this would be the worst thing that could happen to the company, at least if it wants to remain as an operating company. As we have repeatedly said, most of the companies in trouble today are in trouble because of their capital structures, which were not designed to withstand turbulent times. So, in these unsettled times, now is not the time to leverage up anyone’s assets.
There will be calls to at long last sell the company to the highest bidder, and that will certainly bail out some investors. We still believe that is just a short-term solution to an industry-wide problem, and the only way to increase shareholder value in the long term is through increasing cash flow, something that management has been promising but not successfully delivering on.
If they don’t want the company sold, they need to come clean on where they really are, how long it will take to get from point A to point B, what it will cost and how they are going to do it. In other words, a believable action plan. Hollow words on focusing on revenue growth and cost management are just not believed by shareholders any more. It is time to under promise and overperform. At $20 a share, management had some leeway, but at $7.50 per share, credibility is a serious issue. And they need SWAT teams on the underperforming properties now. If they will take too long to turn around, maybe it’s time to divest them to the highest bidder, and then look for better opportunities out there. Otherwise, Dan Baty may start poking around at that $233 million market cap. Chump change for him.
