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CSU > SEC Filings for CSU > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CAPITAL SENIOR LIVING CORP

Form 10-Q for CAPITAL SENIOR LIVING CORP


7-Aug-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 and six month periods ended June 30, 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.

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 June 30, 2014, the Company operated 113 senior living communities in 26 states with an aggregate capacity of approximately 14,700 residents, including 63 senior living communities that the Company owned and 50 senior living communities that the Company leased. As of June 30, 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. When comparing the second quarter of fiscal 2014 to the second quarter of fiscal 2013, the Company generated total revenues of approximately $93.4 million compared to total revenues of approximately $87.2 million, respectively, representing an increase of approximately $6.2 million, or 7.1%, of which approximately 98.1% of these revenues consisted of senior living resident and healthcare services provided during the second quarter of fiscal 2014 compared to 97.8% during the second quarter of fiscal 2013. The increase in revenues primarily results from the senior living communities acquired by the Company during fiscal 2014 and 2013.

The weighted average financial occupancy rate for our consolidated communities for the second quarters of fiscal 2014 and 2013 was 86.6% and 86.0%, respectively. Additionally, we also experienced an increase in average monthly rental rates for our consolidated communities of 0.3% when comparing the second quarter of fiscal 2014 to the second quarter of fiscal 2013. On a same-store basis, the weighted average financial occupancy rate for our consolidated communities for the second quarters of fiscal 2014 and 2013 was 86.4% and 86.0%, respectively. We experienced a decrease in average monthly rental rates for our consolidated same-store communities of 0.9% when comparing the second quarter of fiscal 2014 to the second quarter of fiscal 2013.

Effective June 30, 2014, the Company closed the SHPIII/CSL Transaction acquiring 100% of the members' equity interests in SHPIII/CSL Miami, SHPIII/CSL Richmond Heights, and SHPIII/CSL Levis Commons for approximately $83.6 million. The Company obtained financing from Fannie Mae for the acquisition of SHPIII/CSL Miami for $16.4 million of the acquisition price at a fixed rate of 4.30% with a 10-year term. The Company obtained financing from Fannie Mae for the acquisition of SHPIII/CSL Richmond


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Heights for $23.7 million of the acquisition price at a fixed rate of 4.48% with a 10-year term. The Company obtained interim interest only financing from Wells Fargo for the acquisition of SHPIII/CSL Levis Commons for $21.6 million of the acquisition price at a variable rate of LIBOR plus 2.75% with a 24-month term. The balance of the acquisition price was paid from the Company's existing cash resources. As a result of this transaction, the Company received cash proceeds, including incentive distributions, of approximately $2.5 million and recognized a joint venture equity investment valuation gain of approximately $1.5 million.

On June 27, 2014, the Company refinanced mortgage loans totaling approximately $111.9 million from Freddie Mac associated with 15 of its senior living communities. The Company obtained approximately $135.5 million of mortgage debt for 12 of the senior living communities from Fannie Mae. These new mortgage loans have 10-year terms with fixed interest rates of 4.24% and the principal amortized over 30-years. The Company obtained interim, interest only, financing of $9.3 million from Berkadia for two of the senior living communities with a variable interest rate of LIBOR plus 4.50% and a 12-month term. The Company also obtained interim, interest only, financing of $11.8 million from Berkadia for one of the senior living communities with a variable interest rate of LIBOR plus 4.50% and a 24-month term. The Company incurred approximately $1.7 million in deferred financing costs related to these loans, which are being amortized over the respective loan terms. As a result of the refinance, the Company received approximately $36.5 million in cash proceeds. As a result of the early repayment of the existing mortgage debt with Freddie Mac, the Company accelerated the amortization of approximately $0.5 million in unamortized deferred financing costs and incurred a prepayment premium of approximately $6.5 million.

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.

Joint Venture Transactions and Management Contracts

The Company managed three communities owned by joint ventures in which the Company had a minority interest. For communities owned by joint ventures, the Company typically received a management fee of 5% of gross revenues.

The Company's joint venture management fees were based on a percentage of gross revenues. As a result, the cash flow and profitability of such contracts to the Company were more dependent on the revenues generated by such communities and less dependent on net cash flow than for owned or leased communities.

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 earned development and management fees and could receive incentive distributions. The senior housing community opened in August 2008 and currently consists of 97 independent living units and 49 assisted living units. The Company had contributed $0.8 million to SHPIII/CSL Miami for its 10% interest and accounted 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 earned development and management fees and could receive incentive distributions. The senior housing community opened in April 2009 and currently consists of 61 independent living units and 80 assisted living units. The Company had contributed $0.8 million to SHPIII/CSL Richmond Heights for its 10% interest and accounted 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 earned development and management fees and could receive incentive distributions. The senior housing community opened in April 2009 and currently consists of 90 independent living units and 56 assisted living units. The Company had contributed $0.8 million to SHPIII/CSL Levis Commons for its 10% interest and accounted for its investment in SHPIII/CSL Levis Commons under the equity method of accounting.

The Company was 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 were owned 90% by SHPIII, a fund managed by Prudential Investment, and 10% by the Company, which collectively owned and operated SHPIII/CSL. The SHPIII/CSL Management Agreements were for initial terms of ten years from the date the certificate of occupancy was issued and extended until various dates through January 2019. The SHPIII/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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As discussed above, on June 30, 2014, the Company closed the SHPIII/CSL Transaction, acquiring 100% of the member interests of SHPIII/CSL Miami, SHPIII/CSL Levis Commons, and SHPIII/CSL Richmond Heights. For additional information refer to Note 4, "Acquisitions", within the notes to unaudited consolidated financial statements.


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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 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 %              0.3                   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                   16.3

Subtotal                                                                                                                   6.7                   37.5
Accumulated amortization through June 30, 2014                                                                            (3.1 )                   -
Accumulated deferred gains / lease concessions recognized through June 30, 2014                                             -                   (16.9 )

Net lease acquisition costs / deferred gains / lease concessions as of June 30, 2014                             $         3.6      $            20.6

(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 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 executed a lease amendment 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 slightly 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 June 30, 2014 and December 31, 2013.


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Recently Issued Accounting Guidance

In April 2014 the 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 2014-08 is applied prospectively and is effective for fiscal years beginning on or after December 15, 2014; however, early adoption is permitted.

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.

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 June 30,                             Six Months Ended June 30,
                                              2014                       2013                        2014                        2013
                                         $             %            $             %             $             %             $             %
Revenues:
Resident and healthcare revenue       $ 91,600         98.1      $ 85,301         97.8      $ 181,774         98.1      $ 170,076         98.1
Affiliated management service
revenue                                    207          0.2           196          0.2            415          0.2            381          0.2
Community reimbursement revenue          1,618          1.7         1,722          2.0          3,093          1.7          2,987          1.7

Total revenue                           93,425        100.0        87,219        100.0        185,282        100.0        173,444        100.0
Expenses:
Operating expenses (exclusive of
depreciation and amortization shown
below)                                  55,585         59.5        51,130         58.6        111,276         60.1        101,250         58.4
General and administrative expenses      4,651          5.0         5,081          5.8          9,622          5.2         10,003          5.8
Facility lease expense                  14,889         15.9        14,269         16.4         29,683         16.0         28,539         16.4
Stock-based compensation                 2,717          2.9         1,293          1.5          4,077          2.2          2,289          1.3
Depreciation and amortization           10,816         11.6        10,761         12.3         21,767         11.7         22,650         13.1
Community reimbursement expense          1,618          1.7         1,722          2.0          3,093          1.7          2,987          1.7

Total expenses                          90,276         96.6        84,256         96.6        179,518         96.9        167,718         96.7

Income from operations                   3,149          3.4         2,963          3.4          5,764          3.1          5,726          3.3
Other income (expense):
Interest income                             16          0.0            17          0.0             28          0.0            121          0.1
Interest expense                        (7,393 )       (7.9 )      (5,694 )       (6.5 )      (14,530 )       (7.8 )      (11,378 )       (6.6 )
Write-off of deferred loan costs
and prepayment premium                  (6,979 )       (7.5 )          -            -          (6,979 )       (3.8 )           -            -
Joint venture equity investment
valuation gain                           1,519          1.6            -            -           1,519          0.8             -            -
Loss on disposition of assets, net         (14 )        0.0            (2 )        0.0            (10 )        0.0             (1 )        0.0
Equity in earnings of
unconsolidated joint ventures, net          64          0.1            30          0.0            105          0.1             33          0.0
Other income                                 9          0.0             6          0.0             17          0.0             18          0.0

Income before (provision) benefit
for income taxes                        (9,629 )      (10.3 )      (2,680 )       (3.1 )      (14,086 )       (7.6 )       (5,481 )       (3.2 )
(Provision) Benefit for income
taxes                                     (190 )       (0.2 )         610          0.7           (380 )       (0.2 )        1,335          0.8

Net loss                              $ (9,819 )      (10.5 )    $ (2,070 )       (2.4 )    $ (14,466 )       (7.8 )    $  (4,146 )       (2.4 )

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Revenues.

Total revenues were $93.4 million for the three months ended June 30, 2014, compared to $87.2 million for the three months ended June 30, 2013, representing an increase of $6.2 million, or 7.1%. This increase in revenue is primarily the result of an increase in resident and healthcare revenue of $6.3 million slightly offset by a decrease in community reimbursement revenue of $0.1 million.

The increase in resident and healthcare revenue primarily results from an increase of $8.3 million from the senior living communities acquired by the Company during fiscal 2014 and subsequent to the first quarter of fiscal 2013 and an increase in occupancy of 0.4% at the Company's other consolidated same-store communities partially offset by a decrease of $2.3 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 the facilities being converted to offer assisted living care and services and a decrease in average monthly rental rates of 0.9% at the Company's other consolidated same-store communities.


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Community reimbursement revenue is comprised of reimbursable expenses from unconsolidated joint ventures that the Company operated under management agreements. On June 30, 2014, the Company acquired 100% of the member interests in these joint ventures. For additional information refer to Note 4, "Acquisitions", within the notes to unaudited consolidated financial statements.

Expenses.

Total expenses were $90.3 million in the second quarter of fiscal 2014 compared to $84.3 million in the second quarter of fiscal 2013, representing an increase of $6.0 million, or 7.1%. This increase is primarily the result of a $4.5 million increase in operating expenses, a $0.6 million increase in facility lease expense, a $1.4 million increase in stock-based compensation expense, and a $0.1 million increase in depreciation and amortization expense, slightly offset by a decrease in general and administrative expenses of $0.4 million and a decrease in community reimbursement expense of $0.1 million.

The increase in operating expenses primarily results from an increase of $5.6 million from the senior living communities acquired by the Company during fiscal 2014 and subsequent to the first quarter of fiscal 2013 and an increase in general overall operating costs at the Company's other consolidated same-store communities of $1.4 million partially 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 the facilities being converted to offer assisted living care and services. The increase in operating costs of $1.4 million at the Company's other consolidated same-store communities primarily results from an increase in employee wages and benefits of $1.1 million, an increase in utilities of $0.1 million, an increase in food costs of $0.1 million, and an increase in promotion and referral fees of $0.4 million slightly offset by a decrease in property taxes of $0.3 million and a decrease in provision for bad debts of $0.1 million.

The increase in facility lease expense primarily results from contingent annual rental rate escalations for certain existing leases.

The increase in stock-based compensation expense results from the accelerated vesting of certain restricted stock awards associated with the retirement of the Company's Chief Financial Officer during the second quarter of fiscal 2014 and the Company granting 55,882 shares of restricted stock awards to certain employees, officers, and directors.

The increase in depreciation and amortization expense primarily results from an increase of $4.2 million from the senior living communities acquired by the Company during fiscal 2014 and subsequent to the first quarter of fiscal 2013 and an increase of $0.1 million as a result of an increase in depreciable assets at the Company's other consolidated same-store communities partially offset by a decrease in in-place lease amortization of approximately $4.2 million for senior living communities acquired by the Company during fiscal 2013 and 2012 which were fully amortized during fiscal 2013 or the first quarter of fiscal 2014.

The decrease in general and administrative expenses primarily results from a decrease of $0.7 million in employee insurance benefits and claims paid, which resulted in lower health insurance costs to the Company, partially offset by an increase of $0.3 million in wages and benefits for existing and additional full-time employees hired subsequent to the first quarter of fiscal 2013.

Community reimbursement expense represents payroll and administrative . . .

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