Capital Senior Living released its first quarter earnings this week, and the results were sort of a mixed bag. Of course, the occupancy results were great news, with April average census rising 140 basis points from the Q1 average to 76.95%. And spot occupancy increased from 75.3% at the end of February to 78.5% by the end of April, for a 320-basis point increase. We’re not sure if we’ve seen a steeper increase. About 93% of residents are now vaccinated, COVID cases fell to zero across the 60 owned communities, and 100% of communities are open to new residents, so the runway to recovery is smoother.
Looking forward, CSU will also not be encumbered by the 39 legacy triple-net leases which it couldn’t afford, plus the 18 over-levered communities that it transitioned ownership back to Fannie Mae. Although significantly smaller, the company is theoretically nimbler.
However, despite the positive occupancy news, the financial health of the company is another matter. After a quarter when G&A expense soared (as a result of higher costs associated with new move-ins and continued transitioning of properties), the company’s NOI fell to $2.443 million in the first quarter. That did not cover the $9.374 million of Q1 interest expense, which is a precarious position to be in.
Breaking down the financial results even further, the value of CSU’s debt currently surpasses the value of its properties. After the turning over the Fannie Mae assets, CSU is left with about $680 million of debt, which equates to $120,700 per unit, or $162,600 per occupied unit as of the end of April. Based on the company’s first quarter results, with community-level NOI after a 5% management fee totaling $6.84 million, or $27.36 million annualized, the current value of its communities is just $391 million assuming a 7% cap rate. Even with a 6% cap rate, the value only rises to $456 million, leaving a $224 million gap from the total amount of debt. We believe the higher cap rate is more realistic given that 11 of the properties have fewer than 50 units. And, we do not know how much deferred capex there is.
A quick census recovery could resolve this issue, but CSU will not have much margin for error (especially since they are not alone in trying to fill units). If the company took occupancy to 88%, that equals around 563 newly filled units. At $3,531 per unit of average rent (average in the first quarter), incremental revenues for the full year would then top $23.85 million. On the earnings call, CSU management confirmed the margin on filling new units is 60%, which we think is quite conservative (although we aren’t seeing the numbers from the field like they are).
This would equal $14.3 million in incremental NOI, bringing annualized NOI to $41.66 million. Going back to the cap rate valuation, we would then value the company’s communities at $595.1 million based on a 7% cap rate and $694.3 million on a 6% cap rate. Compared to debt of $680 million, CSU would pretty much have to hit that 88% census target without rampant discounting and G&A expenses. In the first quarter of 2020, occupancy was 83.7% across the 60 owned communities. Consequently, 88% could be a push, especially when everyone else is battling for customers.
CSU’s rental rates tend to be on the low end, so there is potentially some room for growth there. And its NOI per unit of $7,400 (based on $41.66 million of EBITDA) is on the low end compared to the $11,550 per unit for seniors housing (independent living and assisted living) communities that sold in 2020 according to our latest Senior Care Acquisition Report. The near-term problem will be refinancing the debt that is due at the end of the year, and the low level of cash on the balance sheet relative to accrued expenses and payables. There could be a cash squeeze before the debt is even refinanced. That said, the occupancy rebound was impressive, but we don’t know what was given away to get there.
