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CSU > SEC Filings for CSU > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for CAPITAL SENIOR LIVING CORP

Form 10-Q for CAPITAL SENIOR LIVING CORP


5-Nov-2013

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, 2013 and 2012, 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, 2012.

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. Subsequent to September 30, 2013, the Company discontinued providing skilled nursing services to its residents.

As of September 30, 2013, the Company operated 106 senior living communities in 24 states with an aggregate capacity of approximately 14,100 residents, including 53 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, 2013, the Company also operated one home care agency.

Significant Financial and Operational Highlights

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. Improved operating results, recent acquisitions, and prudent expense management initiatives have fueled the Company's growing profitability. When comparing the first nine months of fiscal 2013 to the first nine months of fiscal 2012, the Company generated total revenues of approximately $261.4 million compared to total revenues of approximately $227.3 million, respectively, representing an increase of approximately $34.2 million, or 15.0%, of which approximately 98.1% were derived from resident and healthcare services during the first nine months of fiscal 2013 compared to 98.2% during the first nine months of fiscal 2012.

Effective September 30, 2013, the Company closed the acquisition of one senior living community located in Oakwood, Georgia, for approximately $11.8 million. The community consists of 64 assisted living units. The Company obtained interim financing from Berkadia for approximately $8.5 million of the acquisition price at a variable interest rate of LIBOR plus 3.75% with a maturity date of October 10, 2015, with the balance of the acquisition price paid from the Company's existing cash resources.

Effective September 5, 2013, the Company closed the acquisition of one senior living community located in Middletown, Ohio, for $9.9 million. The community consists of 61 assisted living units. The Company obtained financing from Fannie Mae for approximately $7.6 million of the acquisition price at a fixed interest rate of 5.93% with a 10-year term with the balance of the acquisition price paid from the Company's existing cash resources.


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Effective June 28, 2013, the Company closed the acquisition of one senior living community located in Greencastle, Indiana, for $6.3 million. The community consists of 52 assisted living units. The Company obtained interim financing from Berkadia for approximately $4.6 million of the acquisition price at a variable interest rate of LIBOR plus 3.75% with a maturity date of July 10, 2015, with the balance of the acquisition price paid from the Company's existing cash resources.

Effective May 31, 2013, the Company closed the acquisition of one senior living community located in St. Joseph, Missouri, for $19.1 million. The community consists of 80 assisted living units and 22 independent living units. The Company obtained financing from Fannie Mae for approximately $14.5 million of the acquisition price at a fixed interest rate of 5.30% with a 12-year term, with the balance of the acquisition price paid from the Company's existing cash resources.

Effective March 7, 2013, the Company closed the acquisition of one senior living community located in Elkhorn, Nebraska, for $6.7 million. The community consists of 64 assisted living units. The Company obtained financing from Fannie Mae for $4.0 million of the acquisition price at a fixed interest rate of 4.66% with a 10-year term, with the balance of the acquisition price paid from the Company's existing cash resources.

On March 7, 2013, the Company obtained approximately $12.4 million of mortgage debt from Fannie Mae to replace the interim financing obtained from Berkadia on October 23, 2012. The new mortgage loan has a 10-year term, with a 4.66% fixed interest rate and the principal amortized over a 30-year term.

Joint Venture Transactions and Management Contracts

As of September 30, 2013, 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.

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 97 independent living units and 49 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.

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 61 independent living units and 80 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.

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 90 independent living units and 56 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.

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


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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.

Facility Lease Transactions

The Company currently leases 50 senior living communities from certain real estate investment trusts ("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                                                                        (4)
           September 30, 2005               6     $        84.6     (Two five-year renewals)                  8 %    $         1.4      $             4.6
Ventas                                                                        (4)
           October 18, 2005                 1              19.5     (Two five-year renewals)                  8 %              0.2                     -
Ventas                                                                        (4)
           June 8, 2006                     1              19.1     (Two five-year renewals)                  8 %              0.4                     -
Ventas                                                                        (4)
           January 31, 2008                 1               5.0     (Two five-year renewals)               7.75 %              0.2                     -
Ventas                                                                        (4)
           June 27, 2012                    2              43.3     (Two five-year renewals)               6.75 %              0.8                     -
HCP                                                                           (5)
           May 1, 2006                      3              54.0     (Two ten-year renewals)                   8 %              0.2                   12.8
HCP                                                                         10 years
           May 31, 2006                     6              43.0     (Two ten-year renewals)                   8 %              0.2                    0.6
HCP                                                                           (5)
           December 1, 2006                 4              51.0     (Two ten-year renewals)                   8 %              0.7                     -
HCP                                                                           (5)
           December 14, 2006                1              18.0     (Two ten-year renewals)                7.75 %              0.3                     -
HCP                                                                           (5)
           April 11, 2007                   1               8.0     (Two ten-year renewals)                7.25 %              0.1                     -
HCN                                                                         15 years
           April 16, 2010                   5              48.5      (One 15-year renewal)                 8.25 %              0.6                    0.8
HCN                                                                         15 years
           May 1, 2010                      3              36.0      (One 15-year renewal)                 8.25 %              0.2                    0.4
HCN                                                                         15 years
           September 10, 2010              12             104.6      (One 15-year renewal)                 8.50 %              0.4                    2.0
HCN                                                                         15 years
           April 8, 2011                    4             141.0      (One 15-year renewal)                 7.25 %              0.9                   16.2

Subtotal                                                                                                                       6.6                   37.4
Accumulated amortization through September 30, 2013                                                                           (3.1 )                   -
Accumulated deferred gains / lease concessions recognized through September 30, 2013                                            -                   (15.2 )

Net lease acquisition costs / deferred gains / lease concessions as of September 30, 2013                            $         3.5      $            22.2

(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 as a reduction in facility lease expense over the respective initial lease terms. Lease concessions of $0.6 million relate to the transaction with HCP Inc. ("HCP") on May 31, 2006, and of $2.0 million relate to the transaction with Signature Assisted Living of Texas, LLC ("Signature") on September 10, 2010.

(4) Effective June 27, 2012, the Company closed the lease transaction with Ventas Healthcare Properties, Inc. ("Ventas"). 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.

Facility lease expense in the Company's Consolidated Statements of Operations and Comprehensive Loss includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization of deferred gains and lease incentives.


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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 data in thousands of dollars and
expressed as a percentage of total revenues.



                                              Three Months Ended September 30,                       Nine Months Ended September 30,
                                              2013                       2012                        2013                        2012
                                         $             %            $             %             $             %             $             %
Revenues:
Resident and healthcare revenue       $ 86,333         98.1      $ 76,577         98.2      $ 256,409         98.1      $ 223,161         98.2
Affiliated management service
revenue                                    205          0.2           176          0.2            586          0.2            492          0.2
Community reimbursement revenue          1,445          1.7         1,259          1.6          4,432          1.7          3,605          1.6

Total revenues                          87,983        100.0        78,012        100.0        261,427        100.0        227,258        100.0
Expenses:
Operating expenses (exclusive of
depreciation and amortization shown
below)                                  52,936         60.2        46,791         60.0        154,186         59.0        134,186         59.0
General and administrative expenses      5,026          5.7         3,288          4.2         15,029          5.7         10,923          4.8
Facility lease expense                  14,274         16.2        13,819         17.7         42,813         16.4         41,179         18.1
Stock-based compensation                   869          1.0           602          0.8          3,158          1.2          1,843          0.8
Depreciation and amortization           10,533         12.0         9,214         11.8         33,183         12.7         24,970         11.0
Community reimbursement expense          1,445          1.6         1,259          1.6          4,432          1.7          3,605          1.6

Total expenses                          85,083         96.7        74,973         96.1        252,801         96.7        216,706         95.4

Income from operations                   2,900          3.3         3,039          3.9          8,626          3.3         10,552          4.6
Other income (expense):
Interest income                             17          0.0           369          0.5            138          0.2            436          0.2
Interest expense                        (5,943 )       (6.8 )      (4,847 )       (6.2 )      (17,321 )       (6.6 )      (12,699 )       (5.6 )
Gain (Loss) on disposition of
assets, net                                 13          0.0           (14 )        0.0             12          0.0            (19 )        0.0
Equity in earnings (losses) of
unconsolidated joint ventures, net          43         (0.1 )         (26 )       (0.1 )           76          0.1           (241 )       (0.1 )
Other income                                10          0.0            -           0.0             28          0.0             -           0.0

Loss before (provision) benefit for
income taxes                            (2,960 )       (3.4 )      (1,479 )       (1.9 )       (8,441 )       (3.2 )       (1,971 )       (0.9 )
(Provision) Benefit for income
taxes                                   (7,003 )       (7.9 )         542          0.7         (5,668 )       (2.2 )          493          0.2

Net loss                              $ (9,963 )      (11.3 )    $   (937 )       (1.2 )    $ (14,109 )       (5.4 )    $  (1,478 )       (0.7 )

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenues.

Total revenues were $88.0 million for the three months ended September 30, 2013, compared to $78.0 million for the three months ended September 30, 2012, representing an increase of $10.0 million, or 12.8%. This increase in revenues is primarily the result of an increase in resident and healthcare revenue of $9.8 million and an increase in community reimbursement revenue of $0.2 million.

The increase in resident and healthcare revenue primarily results from an increase of $9.7 million from the senior living communities acquired by the Company during fiscal 2013 and subsequent to the third quarter of fiscal 2012 and an increase in average monthly rental rates of 1.8% 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 under long-term management agreements.

Expenses.

Total expenses were $85.1 million in the third quarter of fiscal 2013 compared to $75.0 million in the third quarter of fiscal 2012, representing an increase of $10.1 million, or 13.5%. This increase in expenses is primarily the result of a $6.1 million increase in operating expenses, a $1.7 million increase in general and administrative expenses, a $0.5 million increase in facility lease expense, a $0.3 million increase in stock-based compensation expense, a $1.3 million increase in depreciation and amortization expense, and a $0.2 million increase in community reimbursement expense.

The increase in operating expenses primarily results from the senior living communities acquired by the Company during fiscal 2013 and subsequent to the third quarter of fiscal 2012.

General and administrative expenses increased $1.7 million primarily from an increase of $0.5 million in wages and benefits for existing and additional full-time employees hired subsequent to the third quarter of fiscal 2012 and a net increase of $1.2 million in employee insurance benefits and claims paid, which resulted in higher health insurance costs to the Company.


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The $0.5 million increase in facility lease expense primarily results from contingent annual rental rate escalations for certain existing leases. As of September 30, 2013, the Company had net deferred gains on sale/leaseback transactions of approximately $20.6 million that are being recognized into income as a reduction to facility lease expense over their respective initial lease terms.

Depreciation and amortization expense increased $1.3 million primarily from an increase of $4.8 million from the senior living communities acquired by the Company during fiscal 2013 and subsequent to the third quarter of fiscal 2012 offset by a decrease in in-place lease amortization of approximately $3.5 million for senior living communities acquired by the Company during fiscal 2011 and 2012 which were fully amortized prior to the third quarter of fiscal 2013.

Community reimbursement expense represents payroll and administrative costs paid by the Company for the benefit of non-consolidated communities and joint ventures that the Company operates under long-term management agreements.

Other income and expense.

Interest income generally reflects interest earned on the investment of cash balances and interest earned on escrowed funds. Interest income decreased primarily due to lower average cash balances in the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012.

Interest expense increased $1.1 million in the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012 primarily due to the additional mortgage debt associated with the senior living communities acquired by the Company during fiscal 2013 and subsequent to the third quarter of fiscal 2012.

Equity in earnings (losses) of unconsolidated joint ventures, net, represents the Company's share of the net earnings (losses) on its investments in SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, and SHPIII/CSL Levis Commons.

(Provision) Benefit for income taxes.

Provision for income taxes for the third quarter of fiscal 2013 was approximately $7.0 million, or 236.6% of loss before income taxes, compared to a benefit for income taxes of approximately $0.5 million, or 36.6% of loss before income taxes, for the third quarter of fiscal 2012. The effective tax rates for the third quarters of fiscal 2013 and 2012 differ from the statutory tax rates due to state income taxes, permanent tax differences, and the deferred tax asset valuation allowance. The Company is impacted by the TMT, which effectively imposes tax on modified gross revenues for communities within the State of Texas. The Company consolidated 36 Texas communities in the third quarter of fiscal 2013 and 35 Texas communities in the third quarter of fiscal 2012 and the TMT increased the overall provision for income taxes. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary. Based upon this analysis, a valuation allowance of $7.5 million was recorded at September 30, 2013, to reduce the Company's net deferred tax assets to the amount that is more likely than not to be realized. Prior to September 30, 2013, a valuation allowance had not been provided.

Net loss and comprehensive loss.

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $(10.5 million) for the three months ended September 30, 2013, compared to net loss and comprehensive loss of $(0.9 million) for the three months ended September 30, 2012.


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Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenues.

Total revenues were $261.4 million for the nine months ended September 30, 2013, compared to $227.3 million for the nine months ended September 30, 2012, representing an increase of approximately $34.2 million, or 15.0%. This increase . . .

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