It’s been quite a week of earnings announcements from the publicly traded senior care companies, with Healthpeak Properties, Welltower, CareTrust REIT, Sabra Health Care REIT, Omega Healthcare Investors, Five Star Senior Living, Diversified Healthcare Trust and The Ensign Group all reporting. Capital Senior Living Corporation also came out with its second quarter results, and surprised some by revealing it was turning 18 properties in forbearance with Fannie Mae back to the agency lender. We have never heard of a company basically handing the keys over to Fannie Mae for that many communities. It is safe to say we are in unchartered territory that does not fail to surprise us, to say the least.
In the earnings conference call, management explained that the 18 properties were part of a 23-property group that was in forbearance with Fannie Mae. But the other five properties were eventually made whole and their August payments were made. CSU has 12 other properties with Fannie Mae mortgages that all currently have good debt service coverage ratios, so no worries there. But because of their underperformance and “unsustainable, non-recourse debt,” (per CEO Kim Lody), the 18 properties would have produced a loss after debt service, and both the ownership and operations are in the process of being handed back in an orderly fashion. The transfer will reduce the company’s debt by $216.3 million and improve annual cash flow by approximately $10 million, but it is unfortunate it had to come to this. Management did stress it was a difficult decision. It is no wonder Fannie has been tightening up its underwriting.
CSU took another step to increasing its cash flow by also entering into short-term forbearance agreements with other lenders, which provided $5.7 million of debt service payment deferrals in the second quarter of 2020. The company also worked with its REIT partners in the first quarter of 2020 to reduce its lease payments, resulting in a lesser net loss for Q2:2020, which fell from a $47.2 million loss in Q1 to a $12.8 million loss in Q2. And as of the end of the second quarter, the company had $28.8 million of cash and cash equivalents, including restricted cash.
The rest of the earnings report did not generate any real surprises. Consolidated occupancy declined 240 bps in the second quarter of 2020 as compared to the first quarter of 2020, and overall is down 480 basis points compared with the second quarter of 2019. It dropped to 77.4% by May 31, rose slightly in June to 77.7%, but then July had net move outs, bringing the average down again. Could be worse, but CSU started at a low level anyway. Some good news was that monthly average rent was $3,749, or 3.3% higher than the second quarter of 2019.
Revenues fell to $101.5 million in Q2:20 compared with $113.1 million in Q2:19 because of both the disposition of five communities and conversion of six leased communities to management agreements effective March 1, 2020. Also, there were some COVID-related decline. The company did receive $500,000 in Medicaid relief from the state of North Carolina, and expects a couple other payments from Nebraska and Wisconsin soon, though the amounts are unknown. Around $2.9 million of incremental COVID-19-related costs were incurred in the second quarter, which were partially offset by reductions in other expenses, including contract services, food costs and deferred maintenance.
CSU’s share price started the day at $0.72, then it fell to a low of $0.64 around midday before finishing down just a few cents at $0.68 at normal trading volume. There was some optimism in the call, but it looks like a long road to recovery. The market cap is just $21 million, and with improved leases and the removal of 18 owned properties that were losing money after debt service, the remaining owned communities have to be worth a lot more than $21 million net of debt. We would still like to hear about a plan to improve census. That would go a long way for CSU, and for everyone else.
