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CSU > SEC Filings for CSU > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for CAPITAL SENIOR LIVING CORP

Form 10-K for CAPITAL SENIOR LIVING CORP


3-Mar-2014

Annual Report


ITEM 7. 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, avail-


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ability 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 SEC.

Overview

The following discussion and analysis addresses (i) the Company's results of operations on a historical consolidated basis for the years ended December 31, 2013, 2012, and 2011, and (ii) liquidity and capital resources of the Company and should be read in conjunction with the Company's historical consolidated financial statements and the selected financial data contained elsewhere in this report.

The Company is one of the largest operators of senior living communities in the United States. The Company's operating strategy is to provide value to its senior living residents by providing quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company provides senior living services to the elderly, including independent living, assisted living, and home care services at reasonable prices. 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.

As of December 31, 2013, the Company operated 112 senior living communities in 26 states with an aggregate capacity of approximately 14,600 residents, including 62 senior living communities which the Company either owned or in which the Company had an ownership interest, and 50 senior living communities that the Company leased. As of December 31, 2013, the Company also operated one home care agency.

Significant Financial and Operational Highlights

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. When comparing fiscal 2013 to fiscal 2012, the Company generated total revenues of approximately $350.4 million compared to total revenues of approximately $310.5 million, respectively, representing an increase of approximately $39.8 million, or 12.8%, of which approximately 98.1% of these revenues consisted of senior living resident and healthcare services during fiscal 2013 compared to 98.2% during fiscal 2012.

The weighted average financial occupancy rate for our consolidated communities for the fiscal years ended December 31, 2013 and 2012 was 85.9% and 87.2%, respectively. Although we experienced a decrease in occupancies, we achieved an increase in average monthly rental rates of 0.7% when comparing fiscal 2013 to fiscal 2012. On a same-store basis, the weighted average financial occupancy rate for our consolidated communities for the fiscal year ended December 31, 2013 and 2012 was 85.6% and 87.4%, respectively; however, we achieved an increase in average monthly rental rates of 2.0% when comparing fiscal 2013 to fiscal 2012. The increase in average monthly rental rates was primarily the result of our recent community acquisitions and the capital improvements we have prudently invested in our communities for unit conversions which enable us to provide a broader range of senior living services at higher levels of care.

Effective December 24, 2013, the Company closed the acquisition of three senior living communities located in Plainfield, Fort Wayne, and Charlestown, Indiana, for $57.0 million (the "Indiana Transaction"). The communities consist of 48 independent living units and 304 assisted living units. The Company obtained financing from Fannie Mae for approximately $43.7 million of the acquisition price at fixed rates of 5.56% with 10-year terms with the balance of the acquisition price paid from the Company's existing cash resources.

Effective December 24, 2013, the Company closed the acquisition of one senior living community located in Spartanburg, South Carolina, for approximately $7.9 million (the "Dillon Pointe Transaction"). The community consists of 36 assisted living units. The Company obtained financing from Fannie Mae for approximately $5.6 million of the acquisition price at a fixed rate of 5.56% 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 October 31, 2013, the Company closed the acquisition of one senior living community located in Milford, Massachusetts, for approximately $15.8 million (the "Whitcomb House Transaction"). The community consists of 68 assisted living units. The Company obtained financing from Fannie Mae for approximately $11.9 million of the acquisition price at a fixed rate of 5.38% with a 10-year term with the balance of the acquisition price paid from the Company's existing cash resources.

Effective October 23, 2013, the Company closed the acquisition of one senior living community located in Fitchburg, Wisconsin, for approximately $16.0 million (the "Fitchburg Transaction"). The community consists of 82 assisted living units. The Company obtained financing from Fannie Mae for approximately $11.9 million of the acquisition price at a fixed rate of 5.50% with a 10-year term with the balance of the acquisition price paid from the Company's existing cash resources.

Effective September 30, 2013, the Company closed the acquisition of one senior living community located in Oakwood, Georgia, for approximately $11.8 million (the "Oakwood Transaction"). The community consists of 64 assisted living units. The Company obtained interim financing from Berkadia Commercial Mortgage LLC ("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 "Middletown Transaction"). 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.

Effective June 28, 2013, the Company closed the acquisition of one senior living community located in Greencastle, Indiana, for $6.3 million (the "Autumn Glen Transaction"). 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 "Vintage Transaction"). 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 "Elkhorn Transaction"). 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 an interim financing the Company obtained from Berkadia on October 23, 2012, in connection with the Company's previous acquisition of a senior living community. 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 December 31, 2013, the Company managed three 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. Fur-


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ther, the Company is not responsible for capital investments in managed 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.

SHP III Transactions

In May 2007, the Company and SHPIII formed SHPIII/CSL Miami, LLC ("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 currently consists of 100 independent living units and 49 assisted living units and opened in August 2008. The Company 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, LLC ("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 currently consists of 68 independent living units and 80 assisted living units and opened in April 2009. The Company 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, LLC ("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 currently consists of 90 independent living units and 56 assisted living units and opened in April 2009. The Company 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 the SHPIII/CSL Management Agreements with SHPIII/CSL. The SHPIII/CSL Management Agreements are for initial terms of 10-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 Leases

The Company currently leases 50 senior living communities from certain real estate investment trusts ("REITs"). The lease terms are generally for 10-15 years with renewal options for 5-20 years at the Company's option. Under these lease agreements, the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes.

As of December 31, 2013, the Company leased 11 senior living facilities (collectively the "Ventas Lease Agreements"), from Ventas Healthcare Properties, Inc. ("Ventas"). During the second quarter of fiscal 2012, the Company closed the Ventas Lease Transaction, see definition and further discussion in Note 17, "Leases", in the notes to the consolidated financial statements, which resulted in modification to the Ventas Lease Agreements. All of the leased communities in the Ventas lease portfolio were modified to be coterminous, currently expiring on September 30, 2020, with two five-year renewal extensions available at the Company's option. The initial lease rates under each of the Ventas Lease Agreements range from 6.75% to 8% and are subject to certain conditional escalation clauses which will be recognized when probable or incurred. The Company incurred $3.0 million in lease acquisition costs related to the Ventas Lease Agreements. These deferred lease acquisition costs are being amortized over the lease terms and are included in facility lease expense in the Company's Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company accounts for nine of the Ventas Lease Agreements as an operating lease and two as a capital lease and financing obligation.

As of December 31, 2013, the Company leased 15 senior living facilities (collectively the "HCP Lease Agreements"), from HCP, Inc. ("HCP"). During the fourth quarter of fiscal 2013, the Company executed a third amendment to the master lease agreement with HCP to facilitate a $3.3 million capital improvement project for nine properties within the HCP lease portfolio extending the initial lease term with respect to such properties


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until October 31, 2020. The remaining six communities in the HCP lease portfolio currently expire May 2016. The HCP Lease Agreements each have two 10-year renewal extensions available at the Company's option. The initial lease rates under the HCP Lease Agreements range from 7.25% to 8% and are subject to certain conditional escalation clauses, which will be recognized when probable or incurred. The Company incurred $1.5 million in lease acquisition costs related to the HCP Lease Agreements. These deferred lease acquisition costs are being amortized over the lease terms and are included in facility lease expense in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company accounts for each of the HCP Lease Agreements as an operating lease.

As of December 31, 2013, the Company leased 24 senior living facilities (collectively the "HCN Lease Agreements"), from HCN. The HCN Lease Agreements each have an initial term of 15 years, with one 15-year renewal extension available at the Company's option. The initial lease rates under the HCN Lease Agreements range from 7.25% to 8.5% and are subject to certain conditional escalation clauses, which will be recognized when probable or incurred. The initial terms on the HCN Lease Agreements expire on various dates through April 2026. The Company incurred $2.1 million in lease acquisition costs related to the HCN Lease Agreements. These deferred lease acquisition costs are being amortized over the initial 15-year lease terms and are included in facility lease expense in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company accounts for each of the HCN Lease Agreements as an operating lease.

The following table summarizes each of the Company's facility lease agreements as of December 31, 2013 (dollars in millions):

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

Subtotal                                                                                                                                          6.6                   37.4
Accumulated amortization through December 31, 2013                                                                                               (3.1 )                   -
Accumulated deferred gains / lease concessions recognized through December 31, 2013                                                                -                   (15.8 )

Net lease acquisition costs / deferred gains / lease concessions as of December 31, 2013                                                $         3.5       $           21.6


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(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 respective 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 transaction with HCP on May 31, 2006, and $2.0 million relate to the transaction with HCN 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. For additional information, refer to Note 17, "Leases", in the notes to the consolidated financial statements.

(5) On November 11, 2013, the Company executed a third amendment to the master lease agreement associated with nine of its leases with HCP to facilitate a $3.3 million capital improvement project and extend the respective lease terms through October 31, 2020.

Facility lease expense in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization of deferred gains and lease incentives. There are various financial covenants and other restrictions in the Company's lease agreements. The Company was in compliance with all of its lease covenants at December 31, 2013 and 2012.

Debt Transactions

On December 24, 2013, in conjunction with the Indiana Transaction, the Company obtained approximately $43.7 million of mortgage debt from Fannie Mae. The new mortgage loans have 10-year terms with 5.56% fixed interest rates and the principal amortized over 30-year terms.

On December 24, 2013, in conjunction with the Dillon Pointe Transaction, the Company obtained approximately $5.6 million of mortgage debt from Fannie Mae. The new mortgage loan has a 10-year term with a 5.56% fixed interest rate and the principal amortized over a 30-year term.

On December 23, 2013, the Company obtained approximately $9.5 million of short-term financing on an existing community from Berkadia. The new loan is interest only short-term financing at a variable interest rate of LIBOR plus 4.50% with a maturity date of January 10, 2016.

On October 31, 2013, in conjunction with the Whitcomb House Transaction, the Company obtained approximately $11.9 million of mortgage debt from Fannie Mae. The new mortgage loan has a 10-year term with a 5.38% fixed interest rate and the principal amortized over a 30-year term.

On October 23, 2013, in conjunction with the Fitchburg Transaction, the Company obtained approximately $11.9 million of mortgage debt from Fannie Mae. The new mortgage loan has a 10-year term with a 5.50% fixed interest rate and the principal amortized over a 30-year term.

On September 30, 2013, in conjunction with the Oakwood Transaction, the Company obtained interim financing from Berkadia for approximately $8.5 million. The interim financing is interest only at a variable interest rate of LIBOR plus 3.75% with a maturity date of October 10, 2015.

On September 5, 2013, in conjunction with the Middletown Transaction, the Company obtained approximately $7.6 million of mortgage debt from Fannie Mae. The new mortgage loan has a 10-year term with a 5.93% fixed interest rate and the principal amortized over a 30-year term.

On June 28, 2013, in conjunction with the Autumn Glen Transaction, the Company obtained interim financing from Berkadia for approximately $4.6 million. The interim financing is interest only at a variable interest rate of LIBOR plus 3.75% with a maturity date of July 10, 2015.


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On May 31, 2013, in conjunction with the Vintage Transaction, the Company obtained approximately $14.5 million of mortgage debt from Fannie Mae. The new mortgage loan has a 12-year term with a 5.30% fixed interest rate and the principal amortized over a 30-year term.

On May 31, 2013, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $5.4 million. The finance agreement has a fixed interest rate of 1.97% with principal being repaid over an 11-month term.

On March 7, 2013, in conjunction with the Elkhorn Transaction, the Company obtained approximately $4.0 million of mortgage debt from Fannie Mae. 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.

On March 7, 2013, the Company obtained approximately $12.4 million of mortgage debt from Fannie Mae to replace an interim financing obtained by the Company from Berkadia on October 23, 2012, in connection with the Company's previous acquisition of a senior living community. 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 and is cross-collateralized and cross-defaulted with the approximately $4 million mortgage loan that also closed on March 7, 2013.

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