As many of you know, for several years we have been pressing Brookdale Senior Living to reduce its size further than what it has already accomplished. In the meantime, Capital Senior Living is getting smaller by the day, and while we understand why, we certainly hope Brookdale does not go down this somewhat extreme path in size (very doubtful). Cap Senior is now forecasting to be one-half the size it was two years ago, with 60 owned communities and eight managed. The leases will be gone.
During the course of the third quarter, like other operators, Capital Senior Living has been improving its capital structure, shedding unprofitable leases, handing properties over to lenders (Fannie Mae) and generally trying to get ready for the future, whatever that may be. We now know what that will look like, as a much smaller company.
The 68 total communities with 5,634 units will be in 16 states, with the majority in just four of them, including Texas (17), Ohio (12), Indiana (10) and Wisconsin (8). Six states will have just one community, and unless those are over achievers, we wonder why they would keep them. Seven states will have two each. Assisted living will comprise 50% of the units, with independent living 38% and memory care 12%. That is a very workable mix.
So, the “new” portfolio had an occupancy rate of 79.3% in the third quarter, with average rent of about $3,582 per unit. Now, this is where it gets a little fuzzy. CSU displayed a third quarter 27% NOI margin for the post-transition communities (owned buildings only), but it may be based on pre-COVID performance (you will see why this matters). The NOI also excludes bad debt and management fees. The company’s debt, post transition, will be about $688.7 million.
Using their numbers, the post-transition company would have revenues of about $191 million (giving full credit to the eight managed communities), and using the questionable 27% operating margin, we derive $51.655 million of EBITDA. Using a cap rate of 7.5%, we derive a value of $688.7 million, exactly the same as the debt. You might think that cap rate is too high (we don’t in this environment), but when you deduct a 5% management fee and the other excluded expenses, the NOI would drop to $42.1 million.
At a 6.5% cap rate (you wanted it lower, right?), the value drops a bit to $647.8 million, or less than the debt. And this is using an operating margin that is higher than what we believe the actual is during the pandemic. In Capital Senior’s third quarter, the EBITDAR margin was just over 15%, but included communities that will not be there in six months. Keep in mind that the company’s current stock market capitalization is just $17 million.
Consequently, given the significant change in the company from the third quarter to early next year, the historical results are not that meaningful, other than from an industry perspective. With that in mind, same-community occupancy in the third quarter was 78.0%, a drop of 460 basis points compared with a year ago. On a sequential basis, it dropped 190 basis points.
The bottom line is that with future revenues less than $200 million and just 60 owned communities, not to mention a market cap that is lower than what many individual communities sell for, Capital Senior Living really should not be publicly traded. We believe management knows this, and may even want to do something about it. But the problem is, how do you accomplish this change when your share price is about 60 cents and the market value of your communities, after deducting the debt, may be less than the $17 million market cap? Who would pay $2.50 per share to take it private, and why? Or even $1.50 per share?
Operations have to improve significantly, and we just don’t see that happening in the near or medium term given the pandemic and other industry headwinds. As a smaller company, however, they have a better chance to be able to focus on their remaining communities. We know buyers have been sniffing around, but the majority of current shareholders came into the stock at much, much higher values. At what point will they decide to realize their loss? Not in the past two years.
