Perhaps in an effort not to rattle the market, Capital Senior Living filed its first quarter 2021 10-Q after the markets closed on Friday, May 14. Perhaps they thought no one would notice as many were out celebrating the removal of their masks. Not that it should have been a surprise, but in the filing the company reiterated its dreaded “Going Concern” statement, meaning there are enough uncertainties about current events and conditions that raise substantial doubt about the company’s ability to continue as a going concern within a year. No one should be surprised, other than those who have been pushing the price up in the past month. Helloooo.
Last week after reviewing the financial statements, we did notice quite a shortfall in working capital, which includes $3.7 million in deferred payroll tax expense which has to be paid back by the end of the year. The other half must be paid by the end of 2022. We also did the math that proved the value of the 60 owned assets are substantially below the amount of long-term debt outstanding (see story here). And, even with a huge bump up in census, at best it gets even with the debt. We have heard that while buyers have looked, their evaluation comes closer to ours and not the debt level.
That, however, is not the biggest problem facing the company. CSU has $72.5 million of debt maturing in 2021, plus another a $13.2 million of debt service payments due before the end of the year. They are negotiating to complete a refinance, but with the Going Concern problem, not only will terms be tighter, but the interest rate will be higher, if a lender steps up. We would not want to be on the credit committee.
In addition, the company is out of compliance with certain financial covenants of its loan agreements with Fifth Third Bank covering two properties as of March 31, 2021 and December 31, 2020, as well as financial covenants covering three properties with BBVA, USA as of December 31, 2020. As long as they continue to make the payments, we have to believe these issues will be worked out.
The problem is that the company is projecting continuing operating losses through May 2022, cash is in short supply and they have debt maturities and debt service payments coming due. They can always continue to sell off owned properties where the value exceeds the debt, but that is like chopping off the hand that feeds you. At some point, you run out of properties. Obviously, one can blame COVID for this nightmare scenario, but even with stable census there are problems with valuation. Investors should also look at the G&A expense and ask why it is so high.
Will a white knight come riding in and save the day? We suppose it is possible, but what would they get in return? And for those shareholders who are waiting it out for a rebound, the dilution would be untenable. Let’s just say, management is in a tough spot, as are its creditors.
