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CSU > SEC Filings for CSU > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CAPITAL SENIOR LIVING CORP

Form 10-Q for CAPITAL SENIOR LIVING CORP


8-May-2014

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 months ended March 31, 2014 and 2013, 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, 2013.

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 to continue 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 March 31, 2014, the Company operated 113 senior living communities in 26 states with an aggregate capacity of approximately 14,700 residents, including 60 senior living communities that the Company owned, three senior living communities in which the Company had an ownership interest, and 50 senior living communities that the Company leased. As of March 31, 2014, 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 the first quarter of fiscal 2014 to the first quarter of fiscal 2013, the Company generated total revenues of approximately $91.9 million compared to total revenues of approximately $86.2 million, respectively, representing an increase of approximately $5.6 million, or 6.5%, of which approximately 98.2% of these revenues consisted of senior living resident and healthcare services during the first quarter of fiscal 2014 compared to 98.3% during the first quarter of fiscal 2013. The increase in revenues primarily results from the senior living communities acquired by the Company subsequent to the first quarter of fiscal 2013.

The weighted average financial occupancy rate for our consolidated communities for the first quarters of fiscal 2014 and 2013 was 86.5% and 86.8%, respectively. Although we experienced a decrease in occupancies, average monthly rental rates for our consolidated communities remained relatively unchanged when comparing the first quarter of fiscal 2014 to the first quarter of fiscal 2013. On a same-store basis, the weighted average financial occupancy rate for our consolidated communities for the first quarters of fiscal 2014 and 2013 was 86.1% and 86.8%, respectively. We experienced a decrease in average monthly rental rates for our consolidated same-store communities of 1.0% when comparing the first quarter of fiscal 2014 to the first quarter of fiscal 2013.

Effective March 26, 2014, the Company closed the Aspen Grove Transaction. The community consists of 78 assisted living units. The Company obtained financing from Fannie Mae for $11.0 million of the acquisition price at a fixed rate of 5.43% with a 12-year term with the balance of the acquisition price paid from the Company's existing cash resources.


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Joint Venture Transactions and Management Contracts

As of March 31, 2014, 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. Further, 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.

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 100 independent living units and 49 assisted living units with a capacity of 196 residents. 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 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 68 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 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 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 facility lease agreements as of March 31, 2014 (dollars in millions):

                                                                                                                                                          Lease
                                                                                                                                                       Acquisition
                                                                                                                                       Initial             and                Deferred
                                                                     Number of         Value of                                         Lease          Modification         Gains / Lease
Landlord                                        Date of Lease       Communities       Transaction                  Term                Rate (1)         Costs (2)          Concessions (3)
Ventas                                        September 30, 2005               6     $        84.6     (4) (Two five-year renewals)            8 %    $          1.4      $             4.6
Ventas                                         October 18, 2005                1              19.5     (4) (Two five-year renewals)            8 %               0.2                     -
Ventas                                                                                                          9.5 years
                                                 June 8, 2006                  1              19.1       (Two five-year renewals)              8 %               0.4                     -
Ventas                                         January 31, 2008                1               5.0     (4) (Two five-year renewals)         7.75 %               0.2                     -
Ventas                                          June 27, 2012                  2              43.3     (4) (Two five-year renewals)         6.75 %               0.8                     -
HCP                                              May 1, 2006                   3              54.0     (5) (Two ten-year renewals)             8 %               0.3                   12.8
HCP                                                                                                              10 years
                                                 May 31, 2006                  6              43.0       (Two ten-year renewals)               8 %               0.2                    0.6
HCP                                            December 1, 2006                4              51.0     (5) (Two ten-year renewals)             8 %               0.7                     -
HCP                                           December 14, 2006                1              18.0     (5) (Two ten-year renewals)          7.75 %               0.3                     -
HCP                                             April 11, 2007                 1               8.0     (5) (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                   16.3

Subtotal                                                                                                                                                         6.7                   37.5
Accumulated amortization through March 31,
2014                                                                                                                                                            (3.0 )                   -
Accumulated deferred gains / lease
concessions recognized through March 31,
2014                                                                                                                                                              -                   (16.4 )

Net lease acquisition costs / deferred
gains / lease concessions as of March 31,
2014                                                                                                                                                  $          3.7      $            21.1

(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 and modification costs are being amortized over the respective 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 term. Lease concessions of $0.6 million relate to the lease transaction with HCP, Inc. ("HCP") on May 31, 2006, and of $2.0 million relate to the lease transaction with HCN on September 10, 2010.

(4) Effective June 27, 2012, the Company closed the lease transaction with Ventas, 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 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 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 March 31, 2014 and December 31, 2013.


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Recently Issued Accounting Guidance

In April 2014 the Financial Accounting Standards Board ("FASB") issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new and expanded disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance provided in ASU 2014-18 is applied prospectively and is effective for fiscal years beginning on or after December 15, 2014.

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, 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 March 31,
                                                           2014                         2013
                                                     $              %             $              %
Revenues:
Resident and healthcare revenue                   $ 90,174          98.2       $ 84,775          98.3
Affiliated management service revenue                  208           0.2            185           0.2
Community reimbursement income                       1,475           1.6          1,265           1.5

Total revenues                                      91,857         100.0         86,225         100.0
Expenses:
Operating expenses (exclusive of facility
lease expense and depreciation and
amortization shown below)                           55,691          60.6         50,120          58.1
General and administrative expenses                  4,971           5.4          4,922           5.7
Facility lease expense                              14,794          16.1         14,270          16.5
Stock-based compensation expense                     1,360           1.5            996           1.2
Depreciation and amortization expense               10,951          11.9         11,889          13.8
Community reimbursement expense                      1,475           1.6          1,265           1.5

Total expenses                                      89,242          97.2         83,462          96.8

Income from operations                               2,615           2.8          2,763           3.2
Other income (expense):
Interest income                                         12           0.0            104           0.1
Interest expense                                    (7,137 )        (7.8 )       (5,684 )        (6.5 )
Gain on disposition of assets, net                       4           0.0              1           0.0
Equity in the earnings of unconsolidated joint
ventures, net                                           41           0.0              3           0.0
Other income                                             8           0.0             12           0.0

Loss before (provision) benefit for income
taxes                                               (4,457 )        (4.9 )       (2,801 )        (3.2 )
(Provision) Benefit for income taxes                  (190 )        (0.2 )          725           0.8

Net loss                                          $ (4,647 )        (5.1 )     $ (2,076 )        (2.4 )

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Revenues.

Total revenues were $91.9 million for the three months ended March 31, 2014, compared to $86.2 million for the three months ended March 31, 2013, representing an increase of $5.6 million, or 6.5%. This increase in revenue is primarily the result of an increase in resident and healthcare revenue of $5.4 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 $8.2 million from the senior living communities acquired by the Company subsequent to the first quarter of fiscal 2013 offset by a decrease of $2.8 million due to the Company no longer providing skilled nursing services at two of its senior living communities which are in the process of being repositioned with space being converted to offer assisted living care and services.

Community reimbursement revenue is comprised of reimbursable expenses from non-consolidated communities that the Company operates under long-term management agreements.

Expenses.

Total expenses were $89.2 million in the first quarter of fiscal 2014 compared to $83.5 million in the first quarter of fiscal 2013, representing an increase of $5.8 million, or 6.9%. This increase is primarily the result of a $5.6 million increase in operating expenses, a $0.5 million increase in facility lease expense, a $0.4 million increase in stock-based compensation expense, and a $0.2 million increase in community reimbursement expense offset by a $0.9 million decrease in depreciation and amortization expense.


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The increase in operating expenses primarily results from an increase of $5.4 million from the senior living communities acquired by the Company subsequent to the first quarter of fiscal 2013 and an increase in operating costs at the Company's other consolidated same-store communities of $2.7 million offset by a decrease of $2.5 million due to the Company no longer providing skilled nursing services at two of its senior living communities which are in the process of being repositioned with space being converted to offer assisted living care and services. The increase in operating costs at the Company's other consolidated same-store communities of $2.7 million primarily results from an increase in employee wages and benefits of $0.9 million, an increase in utilities of $0.5 million, an increase in property taxes of $0.4 million, an increase in referral fees of $0.2 million, an increase for snow removal of $0.2 million, an increase in insurance of $0.1 million, and an increase of $0.4 million in general overall operating costs.

The increase in facility lease expense primarily results from contingent annual rental rate escalations for certain existing leases. As of March 31, 2014, the Company had net deferred gains on sale/leaseback transactions of approximately $19.6 million that are being recognized into income as a reduction to facility lease expense over their respective initial lease terms.

Community reimbursement expense represents payroll and administrative costs paid by the Company for the benefit of non-consolidated communities and joint ventures.

The decrease in depreciation and amortization expense primarily results from a decrease in in-place lease amortization of $2.2 million from senior living communities acquired by the Company prior to the first quarter of fiscal 2014 offset by an increase in depreciation of $1.2 million from senior living communities acquired by the Company subsequent to the first quarter of fiscal 2013 and an increase in depreciation of $0.1 million at the Company's other consolidated same-store communities.

Other income and expense.

Interest income 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 fiscal 2014 compared to fiscal 2013.

Interest expense increased $1.5 million in the first quarter of fiscal 2014 when compared to the first quarter of fiscal 2013 primarily due to the additional mortgage debt associated with the senior living communities acquired by the Company during fiscal 2013 and 2014.

Equity in earnings of unconsolidated joint ventures, net, represents the Company's share of the net earnings 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 first quarter of fiscal 2014 was $0.2 million, or 4.3% of loss before taxes, compared to a benefit for income taxes of $0.7 million, or 26.8% of income before taxes, for the first quarter of fiscal 2013. The effective tax rates for the first quarters of fiscal 2014 and 2013 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in 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. During the first quarter of fiscal 2014 and the first quarter of fiscal 2013 the Company consolidated 36 Texas communities 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 on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this evaluation, an adjustment to the valuation allowance of $1.7 million was recorded during the first quarter of fiscal 2014 to reduce the Company's net deferred tax assets to the amount that is more likely than not to be realized. A valuation allowance was not provided during the first quarter of fiscal 2013.

Net loss and comprehensive loss.

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $(4.6 million) for the three months ended March 31, 2014, compared to net loss and comprehensive loss of $(2.1 million) for the three months ended March 31, 2013.


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Liquidity and Capital Resources

The impact of the current economic environment could result in decreases in the fair value of assets, slowing of transactions, and tightening liquidity and credit markets. These impacts could make securing debt for acquisitions or refinancings for the Company, its joint ventures, or buyers of the Company's properties more difficult or on terms not acceptable to the Company. Additionally, the Company may be more susceptible to being negatively impacted by operating or performance deficits based on the exposure associated with certain lease coverage requirements.

In addition to approximately $11.6 million of unrestricted cash balances on hand as of March 31, 2014, the Company's principal sources of liquidity are expected to be cash flows from operations and from SHPIII/CSL Miami, SHP III/CSL Richmond Heights, SHPIII/CSL Levis Commons, supplemental debt financings, additional . . .

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