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CSU > SEC Filings for CSU > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CAPITAL SENIOR LIVING CORP

Form 10-Q for CAPITAL SENIOR LIVING CORP


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain information contained in this report constitutes "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as "may," "will," "would," "intend," "could," "believe," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company cautions readers that forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified. These factors include the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturn in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission ("SEC").

Overview

The following discussion and analysis addresses (i) the Company's results of operations for the three and nine month periods ended September 30, 2012 and 2011, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company's consolidated financial statements contained elsewhere in this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

The Company is one of the largest operators of senior living communities in the United States. The Company's operating strategy is to provide quality senior living services to its residents, while achieving and sustaining a strong, competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. The Company provides senior living services to the elderly, including independent living, assisted living, skilled nursing and home care services.

As of September 30, 2012, the Company operated 91 senior living communities in 23 states with an aggregate capacity of approximately 12,600 residents, including 38 senior living communities that the Company owned, 3 senior living communities in which the Company had an ownership interest, and 50 senior living communities that the Company leased. As of September 30, 2012, the Company also operated one home care agency.

Significant Financial and Operational Highlights

The Company's operating strategy is to provide quality senior living communities and services to its residents, while achieving and sustaining a strong, competitive position within its chosen markets, as well as to continue to enhance the performance of its operations. The Company provides senior living services to the elderly, including independent living, assisted living, skilled nursing and home care services. Many of the Company's communities offer a continuum of care to meet its residents' needs as they change over time. This continuum of care, which integrates independent living and assisted living and is bridged by home care through independent home care agencies or the Company's home care agency, sustains residents' autonomy and independence based on their physical and mental abilities.

The Company primarily derives its revenue by providing senior living and healthcare services to the elderly and operating senior living communities under joint venture arrangements. Operating results from recent acquisitions have added to the Company's growing profitability. When comparing the first nine months of fiscal 2012 to the first nine months of fiscal 2011, the Company has generated total revenues of approximately $227.3 million compared to total revenues of approximately $192.4 million, respectively, representing an increase of approximately $34.9 million, or 18.1%, of which approximately 98.2% were derived from resident and healthcare services during the first nine months of fiscal 2012 compared to 97.1% during the first nine months of fiscal 2011.

Effective June 27, 2012, the Company closed a lease modification transaction with Ventas which resulted in the Company exchanging two of its owned communities for one of the communities in the existing Ventas lease portfolio and simultaneously leasing back the two communities exchanged. This transaction was the result of negotiations for a permanent solution to the anticipation of the Company not meeting certain lease coverage ratio requirements for its lease portfolio of ten properties with Ventas. The East Lansing Community and Raleigh Community were exchanged for the Towne Centre Community. All three communities continue to be operated by the Company. In conjunction with this transaction, Ventas assumed approximately $18.3 million of existing mortgage debt with Berkadia and the Company received the Towne Centre Community unencumbered. All of the leased communities in the Ventas


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lease portfolio were modified to be coterminous with the East Lansing and Raleigh Community leases expiring on September 30, 2020, with two 5-year renewal extensions available at the Company's option, eliminate property-level lease covenants, and contain substantially similar terms and structures. Under the terms of the lease agreements with Ventas, the Company had previously deposited additional cash collateral of approximately $3.4 million which was returnable to the Company once certain performance targets were reached. However, due to the rebalanced lease portfolio meeting the lease coverage ratio requirements, the Company negotiated the return of these deposits as a condition to the lease modification. Additionally, due to the extension of the lease terms for the Ventas lease portfolio to fiscal 2020, the rights of Ventas to reset the underlying values of the leased communities were deferred for five years.

Effective April 30, 2012, the Company closed the acquisition of one senior living community located in Irving, Texas, for approximately $19.2 million. The community consists of 128 independent living units. The Company obtained financing through Fannie Mae for approximately $11.8 million of the acquisition price at a fixed rate of 4.48% with a 10-year term, with the balance of the acquisition price paid from the Company's existing cash resources.

Effective March 30, 2012, the Company closed the acquisition of one senior living community located in Jeffersonville, Indiana, for approximately $15.3 million. The community consists of 97 assisted living units. The Company obtained financing through Fannie Mae for approximately $11.5 million of the acquisition price at a fixed rate of 4.76% with a 10-year term, with the balance of the acquisition price paid from the Company's existing cash resources.

Effective March 30, 2012, the Company also closed the acquisition of four senior living communities located in Arlington, College Station, Conroe and Stephenville, Texas, for approximately $34.1 million. The four properties acquired are part of a five property portfolio with the fifth property located in Corpus Christi, Texas, which closed on October 17, 2012. The four communities acquired consist of 45 independent living units and 211 assisted living units. The Company obtained financing through Fannie Mae for approximately $26.1 million of the acquisition price at a fixed rate of 4.69% with a 10-year term, with the balance of the acquisition price paid from the Company's existing cash resources.

Effective March 1, 2012, the Company closed the acquisition of a senior living community located in Granbury, Texas, for approximately $7.0 million. The community consists of 82 assisted living units. The Company obtained financing through Fannie Mae for approximately $5.4 million of the acquisition price at a fixed rate of 4.38% with a 10-year term, with the balance of the acquisition price paid from the Company's existing cash resources.

The senior living industry continues to be impacted by challenging conditions in the housing, credit, and financial markets, generally resulting in lower than anticipated operating results. During the first nine months of fiscal 2012 and throughout fiscal 2011, in response to these conditions, the Company has continued to focus on maintaining an emphasis on occupancy increases, improvement in rental rates, expense management and growth in net operating income per unit, strategic acquisitions of senior living communities in regions where the Company has existing operations, and other opportunities to enhance cash flow and shareholder value.

Joint Venture Transactions and Management Contracts

As of September 30, 2012, the Company managed 3 communities owned by joint ventures in which the Company has a minority interest. For communities owned by joint ventures, the Company typically receives a management fee of 5% of gross revenues.

The Company's joint venture management fees are primarily based on a percentage of gross revenues. As a result, the cash flow and profitability of such contracts to the Company are more dependent on the revenues generated by such communities and less dependent on net cash flow than for owned or leased communities. The management contracts are generally terminable only for cause or upon the sale of a community, subject to the Company's right to offer to purchase such community.

SHPII/CSL Transactions

In November 2004, the Company formed SHPII/CSL with SHPII. SHPII/CSL was owned 95% by SHPII, a fund managed by Prudential, and 5% by the Company. Effective as of November 30, 2004, SHPII/CSL acquired the Spring Meadows Communities which currently comprise 628 units with a combined capacity of 758 residents. The Company contributed $1.3 million for its interests in SHPII/CSL and accounted for its investment in SHPII/CSL under the equity method of accounting.

The Company was party to a series of property management agreements (the "SHPII/CSL Management Agreements") with SHPII/CSL, which collectively owned and operated the Spring Meadows Communities. The SHPII/CSL Management Agreements extended until various dates through November 2014. The SHPII/CSL Management Agreements generally provided for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities.


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On April 8, 2011, SHPII/CSL closed the Spring Meadows Transaction. Upon closing the sale, the Company leased the four Spring Meadows Communities from HCN. The lease has an initial term of 15 years, with one 15-year renewal extension available at the Company's option. The initial lease rate is 7.25% and is subject to certain conditional lease escalation clauses. The Company incurred $0.9 million in lease acquisition costs which have been deferred and are being amortized over the initial 15-year lease term. The Company has accounted for this lease as an operating lease. As a result of this transaction, the Company received cash proceeds, including incentive distributions, from the sale by SHPII/CSL of approximately $17.0 million, net of closing costs, resulting in a gain to the Company of approximately $16.1 million which has been deferred and is being recognized in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income as a reduction in facility lease expense over the initial 15-year lease term.

SHPIII Transactions

In May 2007, the Company and SHPIII formed SHPIII/CSL Miami to develop a senior housing community in Miamisburg, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community opened in August 2008 and currently consists of 101 independent living units and 45 assisted living units with a capacity of 196 residents. The Company has contributed $0.8 million to SHPIII/CSL Miami for its 10% interest and accounts for its investment in SHPIII/CSL Miami under the equity method of accounting. As of September 30, 2012, the Company had not met the breakeven requirements of the development agreement guarantee for this joint venture development.

In November 2007, the Company and SHPIII formed SHPIII/CSL Richmond Heights to develop a senior housing community in Richmond Heights, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community opened in April 2009 and currently consists of 96 independent living units and 45 assisted living units with a capacity of 197 residents. The Company has contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest and accounts for its investment in SHPIII/CSL Richmond Heights under the equity method of accounting. The Company contributed land to SHP III/CSL Richmond Heights as a capital contribution during formation of the joint venture in November 2007 resulting in a $0.2 million gain to the Company. The gain had been deferred when the land was initially contributed to SHP III/CSL Richmond Heights due to the continuing involvement of the Company as a result of a development agreement guarantee. The Company met the breakeven requirements of the development agreement guarantee during the third quarter of fiscal 2011 resulting in full satisfaction and termination of the guarantee and recognition of the deferred gain as a component of gain on disposition of assets, net, within the Company's Consolidated Statements of Operations and Comprehensive
(Loss) Income.

In December 2007, the Company and SHPIII formed SHPIII/CSL Levis Commons to develop a senior housing community near Toledo, Ohio. Under the joint venture and related agreements, the Company earns development and management fees and may receive incentive distributions. The senior housing community opened in April 2009 and currently consists of 101 independent living units and 45 assisted living units with a capacity of 197 residents. The Company has contributed $0.8 million to SHPIII/CSL Levis Commons for its 10% interest and accounts for its investment in SHPIII/CSL Levis Commons under the equity method of accounting. During the third quarter of fiscal 2011, the Company met the breakeven requirements of the development agreement guarantee for this joint venture development resulting in full satisfaction and termination of the guarantee.

The Company is party to a series of property management agreements (the "SHPIII/CSL Management Agreements") with SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, and SHPIII/CSL Levis Commons (collectively "SHPIII/CSL"), which joint ventures are owned 90% by SHPIII, a fund managed by Prudential Investment Management, Inc. ("Prudential Investment"), and 10% by the Company, which collectively own and operate SHPIII/CSL. The SHPIII/CSL Management Agreements are for initial terms of ten years from the date the certificate of occupancy was issued and currently extend until various dates through January 2019. The SHPIII/CSL Management Agreements generally provide for management fees of 5% of gross revenue plus reimbursement for costs and expenses related to the communities.


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Facility Lease Transactions

The Company currently leases 50 senior living communities from certain REITs, 48 of which are accounted for as operating leases and two of which are accounted for as capital lease and financing obligations. The lease terms are generally for 10-15 years with renewal options for 5-20 years at the Company's option. Under these agreements the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes. The following table summarizes each of the Company's lease agreements (dollars in millions):

                                                                                                                         Lease              Deferred
                                  Number of         Value of                                       Initial            Acquisition        Gains /  Lease
Landlord     Date of Lease       Communities       Transaction                Term              Lease Rate (1)         Costs (2)         Concessions (3)
Ventas     September 30, 2005                                                 (4)
                                            6     $        84.6     (Two five-year renewals)                  8 %    $         1.4      $             4.6
Ventas      October 18, 2005                                                  (4)
                                            1              19.5     (Two five-year renewals)                  8 %              0.2                    -
Ventas        June 8, 2006                                                    (4)
                                            1              19.1     (Two five-year renewals)                  8 %              0.4                    -
Ventas      January 31, 2008                                                  (4)
                                            1               5.0     (Two five-year renewals)               7.75 %              0.2                    -
Ventas       June 27, 2012                                                    (4)
                                            2              43.3     (Two five-year renewals)               6.75 %              0.8                    -
HCP           May 1, 2006                                                     (5)
                                            3              54.0     (Two ten-year renewals)                   8 %              0.2                   12.8
HCP           May 31, 2006                                                  10 years
                                            6              43.0     (Two ten-year renewals)                   8 %              0.2                    0.6
HCP         December 1, 2006                                                  (5)
                                            4              51.0     (Two ten-year renewals)                   8 %              0.7                    -
HCP        December 14, 2006                                                  (5)
                                            1              18.0     (Two ten-year renewals)                7.75 %              0.3                    -
HCP          April 11, 2007                                                   (5)
                                            1               8.0     (Two ten-year renewals)                7.25 %              0.1                    -
HCN          April 16, 2010                                                 15 years
                                            5              48.5      (One 15-year renewal)                 8.25 %              0.6                    0.8
HCN           May 1, 2010                                                   15 years
                                            3              36.0      (One 15-year renewal)                 8.25 %              0.2                    0.4
HCN        September 10, 2010                                               15 years
                                           12             104.6      (One 15-year renewal)                 8.50 %              0.4                    2.0
HCN          April 8, 2011                                                  15 years
                                            4             141.0      (One 15-year renewal)                 7.25 %              0.9                   16.2

Subtotal                                                                                                                       6.6                   37.4
Accumulated amortization through September 30, 2012                                                                           (2.5 )                  -
Accumulated deferred gains / lease concessions recognized through September 30, 2012                                           -                    (12.8 )

Net lease acquisition costs / deferred gains / lease concessions as of September 30, 2012                            $         4.1      $            24.6

(1) Initial lease rates are measured against agreed upon fair market values and are subject to conditional lease escalation provisions as set forth in each lease agreement.

(2) Lease acquisition costs are being amortized over the respective initial lease terms.

(3) Deferred gains of $34.8 million and lease concessions of $2.6 million are being recognized in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income as a reduction in facility lease expense over the respective initial lease terms. Lease concessions of $0.6 million relate to the HCP transaction on May 31, 2006, and of $2.0 million relate to the HCN/Signature Transaction on September 10, 2010.

(4) Effective June 27, 2012, the Company closed the Ventas Lease Transaction. All of the leased communities in the Ventas lease portfolio were modified to be coterminous expiring on September 30, 2020, with two 5-year renewal extensions available at the Company's option.

(5) On March 4, 2010, the Company executed a second amendment to the master lease agreement associated with nine of its leases with HCP to effectively combine the lessees into one master lease and extend the lease terms for the HCP lease portfolio through October 31, 2018.

There are various financial covenants and other restrictions in the Company's lease agreements. Under the terms of certain lease agreements, the Company had previously deposited additional cash collateral of approximately $3.4 million with a certain landlord which was returnable to the Company once certain performance targets were reached. However, the Company negotiated a lease modification with this landlord during the second quarter of fiscal 2012 and all of the additional cash collateral initially deposited by the Company was returned to the Company. For additional information, refer to Note 4, "FACILITY LEASE TRANSACTIONS" within the Company's Notes To Unaudited Consolidated Financial Statements. The Company was in compliance with all lease covenants at September 30, 2012.

Website

The Company's Internet website www.capitalsenior.com contains an Investor Relations section, which provides links to the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and Section 16 filings and any amendments to those reports and filings. These reports and filings are available free of charge through the Company's internet website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.


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Results of Operations

The following table sets forth for the periods indicated selected Consolidated
Statements of Operations and Comprehensive (Loss) Income data in thousands of
dollars and expressed as a percentage of total revenues.



                                              Three Months Ended September 30,                       Nine Months Ended September 30,
                                              2012                       2011                        2012                        2011
                                         $             %            $             %             $             %             $             %
Revenues:
Resident and healthcare revenue       $ 76,577         98.2      $ 66,928         98.2      $ 223,161         98.2      $ 186,773         97.1
Affiliated management service
revenue                                    176          0.2           141          0.2            492          0.2            738          0.4
Community reimbursement revenue          1,259          1.6         1,122          1.6          3,605          1.6          4,839          2.5

Total revenue                           78,012        100.0        68,191        100.0        227,258        100.0        192,350        100.0
Expenses:
Operating expenses (exclusive of
depreciation and amortization shown
below)                                  46,791         60.0        40,975         60.1        134,186         59.0        112,714         58.6
General and administrative expenses      3,288          4.2         3,270          4.8         10,923          4.8          9,557          5.0
Facility lease expense                  13,819         17.7        13,723         20.1         41,179         18.1         38,767         20.2
Stock-based compensation                   602          0.8           430          0.6          1,843          0.8          1,020          0.5
Depreciation and amortization            9,214         11.8         4,775          7.0         24,970         11.0         11,916          6.2
Community reimbursement expense          1,259          1.6         1,122          1.6          3,605          1.6          4,839          2.5

Total expenses                          74,973         96.1        64,295         94.3        216,706         95.4        178,813         93.0

Income from operations                   3,039          3.9         3,896          5.7         10,552          4.6         13,537          7.0
Other income (expense):
Interest income                            369          0.5            18          0.0            436          0.2             82          0.1
Interest expense                        (4,847 )       (6.2 )      (2,978 )       (4.4 )      (12,699 )       (5.6 )       (8,429 )       (4.4 )
(Loss) Gain on disposition of
assets, net                                (14 )        0.0           187          0.3            (19 )        0.0            181          0.1
Equity in losses of unconsolidated
joint ventures, net                        (26 )       (0.1 )        (223 )       (0.3 )         (241 )       (0.1 )         (619 )       (0.3 )

Income before provision for income
taxes                                   (1,479 )       (1.9 )         900          1.3         (1,971 )       (0.9 )        4,752          2.5
Benefit (Provision) for income
taxes                                      542          0.7          (390 )       (0.6 )          493          0.2         (2,073 )       (1.1 )

Net (loss) income                     $   (937 )       (1.2 )    $    510          0.7      $  (1,478 )       (0.7 )    $   2,679          1.4

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Revenues.

Total revenues were $78.0 million for the three months ended September 30, 2012, compared to $68.2 million for the three months ended September 30, 2011, representing an increase of $9.8 million, or 14.4%. This increase in revenue is primarily the result of an increase in resident and healthcare revenue of $9.7 million and an increase in community reimbursement revenue of $0.1 million.

The increase in resident and healthcare revenue primarily results from an increase of $0.3 million from the Spring Meadows Transaction, an increase of $7.6 million from the GreenTree at Kokomo Transaction, Keystone Woods and Wynnfield Crossing Transaction, Summit Point Transaction, Pulliam Transaction, Granbury Transaction, Esperanza Transaction, Riverbend Transaction, and Remington Transaction, an increase of $0.2 million from the Ventas Lease Transaction, and an increase in occupancy of 1.1% and average monthly rental rates of 1.5% at the Company's other consolidated same-store communities.

Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated communities and joint ventures that the Company operates . . .

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