It isn’t often that a company gets to report good news on two different fronts on the same day, especially in this environment. Capital Senior Living announced that June occupancy reached an average of 79.1%, up 380 basis points from its pandemic low of 75.3% this past February. We have been hearing a lot of that lately, and it is great news.
Perhaps that is what Conversant Capital LLC had its eye on these past few months as it was mulling over a major investment in Capital Senior Living. It is obviously looking at the future and counting on these occupancy increases to continue. Maybe not at the same pace, but continue nonetheless. What we do not know is what the cost, through discounting, has been to achieve these census gains.
We all know that Capital Senior Living was facing a bit of a liquidity crisis as it was trying to push census up. It had looming debt maturities and not enough cash for growth and the capex that was needed. Sufficient working capital was beginning to be an issue. Selling new common shares was not an option because of the dilution and most likely a lack of investor interest. So, what’s a Kimberly to do?
Cap Senior CEO Kimberly Lody did the only thing she could do to stave off a potential bankruptcy filing, and that was obtain fresh capital. The questions are, will it be enough, is it too expensive, and what will the impact be on current common stockholders?
Conversant Capital is purchasing $82.5 million in new convertible preferred stock that will accrue dividends at a rate between 11% and 15%, to be paid in cash or more preferred shares. The conversion price is $40 per share, or about 7% below the price before the announcement. Hmmm. We suppose they knew the potential dilution would cause the shares to drop, which they did, by 15%. It will also immediately lend Cap Senior $17.3 million at a 15% rate, with the funds to be used for working capital between signing and closing of the convertible preferred shares.
There will also be a $70 million common stock rights offering to existing shareholders to allow them to purchase the shares at $32 per share, compared with $36.28 per share at the end of the announcement day (down 15.6% on the day). Conversant has agreed to backstop $42.5 million of the rights offering by purchasing a like amount of additional preferred stock. The end result is that Cap Senior will receive at least $125 million of proceeds, and up to $152.5 million if the rights offering is fully subscribed.
All of this should be looked at in light of Cap Senior’s current market capitalization of about $80 million. The result is that the company will receive new capital that is more than double the value of its current equity. But did they have much of a choice? Most likely, no. Is the new investment going to be dilutive? Yes, in a big way.
If you are a big believer in the future of the company, remaining a shareholder and buying more shares at the discounted price of $32 may seem like a reasonable option. And if the company is able to get up to 90% plus occupancy in the next few years, and profitably so, it may be. We have not run the pro formas on how that would look, but we may have to do that exercise (for another day). The problem is that if it doesn’t work, Conversant Capital is first in line (after the remaining debt holders) and will get any proceeds from a sale of the company or liquidation of the owned assets, with little likelihood that there would be anything left for common shareholders. Remember, that as of today, the market value of the assets is about equal to the debt outstanding, maybe less. So, the value would have to rise a lot just to cover Conversant’s position, and then the common holders might see a piece of the pie, if all works out.
With the dividend rates of 11% to 15%, however, this is definitely expensive capital. But it is very risky capital and they are making a major bet on the solvency of the company, so it has to be worth their while. The preferred dividends can be paid in cash or additional preferred, but since Conversant will essentially control the board, they will do what is in their economic interest. If paid in cash, that would be about $10 million a year, and that could be tough for Cap Senior’s cash flow.
Will this be enough to save the day? This is hard to answer, except Conversant obviously believes it is, or maybe will be in a position to provide additional capital in year two or three if they see the momentum eventually getting them to their valuation. The problem is that a good portion of the net proceeds may be going to pay down some debt, maybe up to $70 million. So, expensive capital would be paying off cheaper capital, but capital with a maturity.
While the company certainly needs cash to operate, to be successful they need a lot of cash to maintain and improve their buildings, as well as grow with new acquisitions or developments. They now own only 60 communities, and to support their overhead they need to be larger. This capital infusion may not be enough for that.
The good news is that apparently Conversant does know the sector quite well and is not coming in blind, and the other good news is that these funds will postpone a BK filing. If Cap Senior can do a repeat of that 380-basis point census increase for July through October, and then repeat again the following four months, it may just work out. But they have to be profitable increases in census to provide lasting value. As they say, no margin, no mission.
