After Capital Senior Living filed an 8-K recently talking about “going concern” issues, we have to admit we were a little nervous about the delayed first quarter earnings release. Let’s just say, it could have been worse. They included the “going concern” clause, which basically says the current conditions raise “substantial doubt about the company’s ability to continue as a going concern for the 12-month period following the issuance of its financial statements” for the first quarter of 2020.
Well, after reading the financial statements, it seems like there is definitely room to “continue” for the next 12 months, given some of the steps it has taken. They will have no lease payments by the beginning of 2021, they are deferring their payroll tax payments until the end of the year, they have entered into short-term forbearance agreements with certain lenders, they will be selling some properties that will raise net cash, and they have reduced spending, including their G&A expense.
In this year’s first quarter, the company was mildly cash flow positive after lease and interest expense, which should mean they can continue to operate, especially with $17.7 million of cash on the balance sheet as of March 31. The problem is that the COVID-19 expenses really did not start to kick in in a big way until April, and we are now in the middle of May. Occupancy is dropping, like it is at most of its peer group, and April move-ins were 45% below what is normal. The good news is that move-outs are at normal levels, something that many senior living providers are also reporting.
Same-community occupancy dropped by 280 basis points from the year-ago quarter, down to 79.9%, while average monthly rents increased by 0.9% year over year. But occupancy has continued to decline because of the slowdown in visits and move-ins, so we expect that 79.9% to be at least 100 to 200 basis points lower for the second quarter. The question is, what is the breaking point on census that could cause a default?
With $914 million of debt, which comes to about $91,000 per unit of owned communities, there should be some value when it comes to selling the assets. But at the end of the quarter they closed on one sale for $7.0 million, or a paltry $32,860 per unit in net cash proceeds. This 213-unit assisted living and memory care community, however, only contributed $200,000 in cash flow in 2019, which is quite low for the size. We hope this was an outlier with regard to performance.
While management had to issue the going concern comment, it would appear they have enough things they can do to keep on going. The caveat, of course, is that census does not deteriorate too much more, even though everyone expects it to continue to decline throughout the second quarter. Costs will probably rise as well, and COVID-related costs were just $300,000 in the first quarter, and that will rise with a full three months-worth of costs in the second quarter and perhaps beyond.
The company will live to see another day, but with a market cap of just $18.3 million, one has to wonder what they can possibly do to increase shareholder value, other than selling the company. That is still possible, but it would take a brave buyer in today’s environment, and one with vision.
Oh, and Kimberly Lody had a great response when she was being chastised by an investor on the earnings call for not canceling directors’ cash compensation in this time of financial crisis. She informed him that those fees were cut off last November. Gotcha.
