Capital Senior Living Corporation (CSU) Q3 2021 Results Conference Call November 11, 2021 2:30 PM ET
Kimberly Lody - President and Chief Executive Officer
Brandon Ribar - Chief Operating Officer
Tiffany Dutton - Senior Vice President, Accounting and Finance
Conference Call Participants
Steven Valiquette - Barclays
Good day, and welcome to the Capital Senior Living Q3 2021 Earnings Release Conference Call. Today's conference is being recorded.
All statements today, which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and the company expressly disclaims any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well as in the reports the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly reports on Form 10-Q. Please see today's press release for the full safe harbor statement, which may be found at capitalsenior.com/investor-relations and was furnished in an 8-K filing this morning.
Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release.
At this time, I would like to turn the call over to Capital Senior Living's President and CEO, Ms. Kimberly Lody.
Thank you, Kyle. Good afternoon, and welcome to our third quarter 2021 earnings call. Joining me today are Brandon Ribar, the company's Chief Operating Officer; and Tiffany Dutton, our Senior Vice President of Accounting and Finance.
The third quarter of 2021 was a pivotal time for Capital Senior Living. We announced a strategic investment from Conversant Capital to raise, along with the proposed rights offering, $154.8 million for the company, of which $113.5 million was guaranteed as common equity. With the proceeds from these transactions, which closed on November 3, we have significantly strengthened the company's liquidity and are now in a position to further fund our strong pandemic-related recovery to invest in our assets and enhance our competitive position and to address our near-term debt maturities with flexibility and strength.
In August, on the heels of our July 22 investment announcement, we extended our $40.5 million full recourse bridge loan from maturing in December of 2021 to now maturing in December of 2022. We also issued a full repayment notice on $31.5 million in partial recourse mortgage debt maturing on December 31. Discussions continue with lenders regarding the refinancing of our 2022 and 2023 debt maturities. The full details of the amended investment transactions, our pro forma capital structure and expected uses of the funds can be found on Pages 12 to 14 of the investor presentation released this morning as well as in our recent SEC filings.
I want to thank our employees, vendors and shareholders for their support, engagement and patience during this process. And I want to especially thank our residents and their families for continuing to trust us with the care and well-being of their most precious family members.
We also recently announced that effective Monday, November 15, the Company will rebrand itself as Sonida Senior Living and will trade under the ticker symbol SNDA. The names the needs derived from the word Sonata, which means a long piece of music comprised of several parts, and Vida, which means life. It perfectly and appropriately describes our communities, which are filled with the music of life. While our corporate name is changing, our community names will remain unchanged, allowing us to continue to build upon the positive reputation that our communities have earned in their local markets.
Today, our company-wide reputation score is 721, up 143 points from 578 at the end of 2020 and is significantly higher than the industry average of 488. When our communities reference their relationship with our overall organization, we believe Sonida Senior Living and our tagline, Find Your Joy Here, now better represents the important role our communities play in the lives and well-being of our residents.
Lastly, we announced that we are expanding our relationship with Ventas by adding three additional Ventas-owned assets to our managed portfolio effective December 1.
Turning to our third quarter results. Occupancy increased 290 basis points sequentially to 81% in Q3 from 78.1% in Q2. This compares to the net senior housing industry occupancy, which showed third quarter sequential occupancy growth of 120 basis points on a stabilized basis. We're pleased that our occupancy growth has outpaced the industry throughout this pandemic recovery period.
Our sales and marketing teams have demonstrated their strong abilities to generate leads, conduct insightful community tours and bring new residents into our communities. Lead stores and move-ins are at their highest levels since 2018. October occupancy was 81.2%, an increase of 590 basis points from the pandemic low average monthly occupancy of 75.3% in February. Our October month and spot occupancy was 82.3% and a good indicator of continued momentum. Today, more than 60% of our communities have occupancy of 80% or greater.
Combining our occupancy growth with rate improvement, consolidated resident revenue for the third quarter increased sequentially $2.3 million or 5% from the second quarter of this year. For our 60 owned communities, the sequential quarterly growth in resident revenue from second to third quarter 2021 was 5.6% and resident revenue growth over the same quarter prior year was 2%. Our average rate increased $60 or 1.7% sequentially and is on par with the average rate in the third quarter of the prior year.
With respect to operating expenses, the current labor market is intensely competitive and has required the use of extensive contract labor and overtime in some of our communities. In addition to intensifying our recruitment, onboarding and retention activities, our talented local teams have also adjusted our staffing model to provide more flexibility for employees while maintaining our number one priority of caring for our residents with high levels of resident and family satisfaction. These mitigation efforts are working as we have seen the number of employee terminations steadily decrease each month since July. We expect these labor challenges to be temporary and transitional as the U.S. adjust to the pandemic recovery and people return to employment.
Net operating margin for our 60 owned communities was 21% in the third quarter compared to 21.5% in the second quarter of this year. We're not satisfied with this level of operating margin and expect to see margin expansion when the labor and inflationary pressures in the economy subside. We commend our talented local teams for working hard to maintain operating margins while managing through the challenges of the current operating environment. Our teams delivered $331,000 of incremental NOI in Q3 compared to Q2.
Our pandemic recovery strategy was to immediately and quickly drive occupancy improvement by utilizing short-term incentives to encourage move-ins in the early part of the recovery. Those incentives, which were used in the second quarter of this year, have burned off, and our Q3 focus has been to improve rate while managing the temporary circumstances of elevated operating expenses.
As we enter the final weeks of 2021, I reflect on the 3-year plan we put in place in February of 2019. The journey to this point has been both challenging and rewarding, and I'm pleased to say our team has completed nearly everything that we set out to do. We exited expensive leases and divested underperforming assets to reduce negative cash flow and improve liquidity. We stabilized our operations, enhanced the care engagement and experiences we provide to our residents, and we improved our ability to execute with excellence in spite of the challenges of a global pandemic and its lingering impact.
Importantly, we have demonstrated that we can grow organically, and we are now capitalized to invest in our assets and stabilize the balance sheet for the foreseeable future. We look forward to being on the other side of this transitionary period of pandemic recovery when the labor issues and inflationary pressures subside.
We believe in the promising future of this industry and more specifically, in the future growth prospects for Sonida Senior Living. With the encouraging occupancy and rate improvement that we've delivered in recent months, along with our newly enhanced capital structure and liquidity position, we're extremely excited about the long-term growth and profitability prospects for our company. To that end, we intend to return to providing financial guidance for 2022.
I'll now turn the call over to Brandon for more insight into our operations.
Thank you, Kim, and good afternoon. It is truly a unique and exciting time in the Company's history as we strive to continuously improve our resident experience and build a best-in-class team at each of our communities. Recent pressure in the operating environment related to cost and availability of labor and general inflation are not surprising for those that follow senior living in the macro environment. However, we remain confident our local leadership teams will drive strong performance using creative, collaborative and resident-focused decision-making.
The recent capital investment provides the resources for our operations leadership to achieve continued growth while providing a living environment for residents to find their joy through many different programs and services. Highlighting our key performance indicators, revenue growth driven by continued occupancy improvement and near-term rate growth remains promising, especially with the immediate availability of capital. Delays in unit availability and distraction stemming from cash conservation in Q3 will no longer influence efforts to grow the top line, and opportunistic capital expenditures are now underway.
Our current owned portfolio presents a number of opportunities for return-generating capital expenditures that include improving community common areas, expanding our Magnolia Trails branded memory care offering and smaller scale investments to expand our available units in highly occupied communities. These investments are expected to generate occupancy and rate growth by the middle of 2022.
Occupancy grew at a strong pace in Q3, improving nearly 290 basis points, continuing our track record of outperforming the industry benchmarks, our inside sales capabilities and continued implementation of resident-focused evidence-based clinical programming and the ongoing dedication of our local sales resources to develop a strong pipeline of referral partners have all contributed to these results.
Turning to rate. Sequential improvement of 1.7% from $3,518 to $3,578 reflects our focus on reducing the use of concessions and continuing to achieve in-place rate increases, consistent with previous expectations. Concessions decreased by more than 50% on a sequential basis further strengthening opportunity for near-term rate improvement.
For 2022, we believe that residents and families understand the increase in costs of providing great service will mean higher rate growth. Specific to Capital Senior, the investments we have made and will continue to make in resident programming and experience, community technology infrastructure and wages for our community teams provide direct support for rent increases at or above 5%.
Despite the increase in national COVID cases in Q3 due to the Delta variant, our leading indicators related to occupancy remains strong. Lead and tour volume for Q3 increased 19% and 16% sequentially from Q2, thanks to the ongoing outreach and digital marketing efforts conducted by our local and regional leadership.
Occupancy opportunity in the fourth quarter is focused on further recovery of those communities with occupancy under 80%. These communities will further benefit in the coming months from strategic capital investment in the $300,000 to $700,000 range focused on aesthetic upgrades in both common areas and resident units.
The availability of capital to invest in specific communities with near-term occupancy upside is paramount to our growth strategy over the next 12 to 18 months. Common are refurbishments of approximately $7 million in 12 communities are slated to begin in Q4, in line with the completion of our capital raise.
In our previous discussions, we referenced the opportunity to improve margin by maintaining existing labor levels while increasing occupancy. The labor market remains extremely challenging, and our local teams continue to adjust to wage and labor pressures to ensure the retention of our key frontline care and service providers. Compared with Q3 of 2020, total labor costs increased by approximately $1.1 million and increased sequentially by $1.3 million primarily due to $1 million of increase in contract labor.
Contract labor expense represented 8.2% of total labor costs in Q3 2021. We are encouraged that contract labor utilization is both concentrated in a small subset of our communities and declining in the early part of Q4 due to detailed mitigation plans and focused recruiting efforts from our regional support teams.
Heightened turnover in late Q2 and early Q3 in our frontline employee base has shown improvement in recent months, and the benefit of staff stability through employee retention and recognition efforts remains an intense focus. Throughout 2021, we introduced staffing and scheduling technology to support a more flexible and employee-friendly work environment.
Our local teams have addressed pockets of intense labor pressure and competition by adjusting traditional staffing models to both ensure ongoing resident satisfaction and compete for employees with more flexible scheduling needs and expectations. Variable expenses consisting primarily of food, marketing, facility maintenance and supply-related items increased 2% sequentially, primarily driven by inflationary food expense of 7.7%. The investment in more or advanced procurement resources and culinary programs with the increased capital availability is a primary operating priority in the 2022 plan.
Collection levels remained strong with bad debt expense remaining below 0.5% and year-over-year improvement of more than 43%. The increased expense profile related to the operating environment in Q3 led to moderate sequential NOI improvement of 1.6%. While pleased with quarter-over-quarter NOI growth significant opportunity remains to recover margin with strengthening rates and further efforts to mitigate inflationary expenses.
On the whole, Q3 continued to deliver required growth in all key revenue indicators to support the ongoing recovery and foundational investment in both people and systems to address pressure on the expense front, and that will drive Q4 and 2022 results. Our operations leadership team remains confident that more than two years of investment in developing and retaining strong local and regional leadership and advancing resident-focused programming will deliver consistent improvement in operating results moving forward.
Now, I'll turn the call over to Tiffany to provide a detailed review of our financials.
Thank you, Brandon. Good afternoon, everyone. During the third quarter, we continued to see increases in traffic and move-ins. Average occupancy for the quarter was 81%, an increase of 290 basis points as compared to the previous quarter.
The operating environment has remained challenging, but our operations team has continued to do an excellent job in managing the cost within their control and to mitigate the impact of COVID-19 on our overall results while continuing to prioritize the health and safety of our residents and staff members.
The options we completed over the course of the past two years have stabilized our business and positioned us for future growth. As I review our consolidated financials comparing the third quarter of 2021 to the same quarter of 2020, it is important to note that our portfolio consisted of 53 fewer communities for all or part of the third quarter of 2021 compared to the number of communities in the third quarter of 2020.
Our imported revenues for the third quarter were $57.9 million compared to $96.1 million in the third quarter of 2020. $38 .2 million of the decrease was related to the sales or conversions of 59 properties throughout 2020. Management fees and community reimbursement revenue decreased $1.2 million due to the management of the 18 Fannie Mae communities being transitioned to other operators in late 2020, early 2021.
Most of the revenue associated with these managed communities, $7.9 million in the third quarter of 2021, was related to the reimbursement of certain operating costs that we paid on their behalf, the offset of which is also included as an expense on our income statement. Our management fee revenue in the third quarter was approximately $1 million. The decrease in revenue was partially offset by increases in occupancy and average monthly rate quarter-over-quarter.
Resident revenues for the third quarter increased $2.3 million from the previous quarter, which is primarily due to a 290 basis point increase in average occupancy and a 1.7% increase in rates.
Consolidating operating expenses in the third quarter of 2021 were $40.7 million, a decrease of $24.5 million when compared to the third quarter of 2020. The 53 community dispositions account for the majority of the decrease in expenses on a combined basis. Consolidated operating expenses increased $3.1 million or 8.3% during the third quarter compared to the second quarter of 2021.
We continue to operate in an intensely competitive labor market. Our employee labor costs increased $1.3 million sequentially or 5.6% due to increases in contract labor and workers' compensation.
The remainder of our other expense categories combined to increase $1.8 million during the quarter, which primarily resulted from investments in marketing and advertising initiatives to increase occupancy and an increase in food and other variable expenses during the quarter due to our continued occupancy growth.
Our continuing community net operating income was $10.3 million, and our continuing community net operating margin was 21%.
Our general and administrative expenses for the third quarter of 2021 were $6.9 million compared to $8.1 million in the third quarter of 2020. The decrease of approximately $1.2 million is primarily due to decreases in employee benefits and health insurance claims, placements and separation expenses and fees, partially offset by increases in labor-related expenses, insurance and other expenses.
Adjusted EBITDAR in the third quarter of 2021 was $3.2 million, an increase of $1.1 million compared to the previous quarter. Adjusted CFFO was a negative $6.3 million for the third quarter of 2021. When COVID-19 relief funds and expenses are excluded, adjusted CFFO was a negative $5.9 million in the third quarter.
Turning now to liquidity. We had $10.7 million of unrestricted cash at September 30, 2021, a $3.9 million decrease from the $14.6 million unrestricted cash balance that we reported at June 30, 2021. The reason for the decrease in cash is twofold. Although our financial position continues to improve, we have operated in a working capital deficit since 2017, which was magnified by the COVID-19 pandemic.
To fund the recovery of occupancy loss during the pandemic, we have made capital investments in our properties to address wear and tear caused by the pandemic to make our apartments rent-ready and to upgrade certain amenities in order to entice future residents to our properties. We have also made both capital and operating investments related to the implementation of our Magnolia Trails program at certain communities. Our year-to-date capital expenditures through the end of the third quarter totaled $7.1 million.
As Kim mentioned, we have successfully completed our shareholder rights offering and private placement investments totaling $154.8 million. After paying customary transaction and closing costs as well as fully repaying the $16 million promissory note to Conversant Capital, we see $128.5 million in net proceeds. The proceeds from the transaction will be used to fund our working capital needs as we continue to recover from the COVID-19 pandemic and fund accretive growth projects.
This week, we notified Fifth Third Bank of our intention to pay off the outstanding bridge loan totaling $31.5 million that is currently scheduled to mature in December 2021, and which will fully extinguish the outstanding loan in the Company's 25% corporate guarantee. We are in continuing discussions with current and prospective lenders regarding the refinancing of the $39.9 million A bridge loan maturing in December 2022 and other ones totaling $47.5 million that are currently scheduled to mature in 2022 and 2023.
We continue to progress with the transfer of ownership of 18 underperforming properties to Fannie Mae. During the third quarter, we successfully transferred the legal ownership of an additional four communities to Fannie Mae and recognized a $54.1 million gain on the extinguishment of debt and related liabilities of those communities. Since the end of the quarter, we have completed the transfer of ownership of one additional community, bringing our total dispositions to 14 of the 18 transitioning communities.
As legal ownership of the remaining properties transfers to Fannie Mae, which is expected to occur throughout the remainder of 2021 and into the first quarter of 2022, we expect to recognize gains on the extinguishment of debt and related accrued interest on those properties. At September 30, we included $62 million in current net payable and $4.6 million in accrued interest on our balance sheet related to the remaining four properties.
As we look towards the future, we are beginning to realize the results of the significant improvements that we have made to our financial foundation and operating platform during the last two years. With the proceeds from our recent transaction as well as our continued investments in sales and marketing, our new wellness programming and Magnolia Trials, we are poised to move into the final phase of our transformational plan growth. We are pleased with the continued improvements in occupancy that we have seen since early this spring and are optimistic about our results in the months ahead.
That concludes our prepared remarks. I will now ask our operator, Kyle, to open the line for questions.
At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Steven Valiquette with Barclays. Please proceed with your question.
Great. So a couple of questions here. First, you touched on the resident pricing a little bit in the prepared comments. And I guess regarding the in-place rate updates or '22 at or above 5%, would you expect that to lead to margin expansion next year to recoup some of the lost margin from last year and this year just tied to COVID and some of the initial labor pressure? Or would that rate just more likely match the cost trends such that you're just hoping to sort of keep margins flattish in '22 versus '21? I guess just to start there.
Steve, it's Brandon. Our hope would be that it would expand the margin. I think it's still a question of the timing just around the loosening in the labor market and then just a bit of the uncertainty on the inflationary pressures just in the macro environment. So our goal is to, as we referenced, expand the margin from where we are at the end of Q3 through the combination of mitigating the expense pressures but also realizing the benefits of those rate increases that we referenced in 2022.
The only thing I would add to that, Steve, is that we're optimistic about that margin expansion because we have seen since July the number of turnovers in our employee base, really come down every month since July as well as the utilization of contract labor is also beginning to subside. So, we feel good that the trend is heading in the right direction, like Brandon said. It's really a matter of timing for it to sort of take its way out through the economy.
Okay. All right. That's helpful. And then the -- by the way, that 5% rate -- or 5% or slightly higher, do you think that's in line with the market trends for some of your local markets? Or do you think you're above market, below market? How would you characterize your trend there versus the overall market?
I think it remains to be seen what happens in 2022 versus what people may suggest might happen. So I think it's -- we -- our various markets will be higher than that, and that's why we referenced at or above because there will be opportunities to be a bit higher, but I would suggest it is not ahead of where the market expectations are in the majority of our markets. I think it's in line or in line with.
Okay. Got it. Okay. And then this one might be a little bit tougher to answer, but there's obviously a lot of moving parts within RevPOR besides just the in-place rate updates. As we think about just RevPOR trends for '22 and how much that might grow, is there any preliminary range on where you think that would shake out just if we try to tie together all the moving parts? Or is it too early to make a call on that?
I think it's a little early, Steve. We mentioned in our prepared remarks that we intend to return to providing guidance, which I think is pretty exciting since 2019. We have not provided guidance since began the turnaround back in 2019, and certainly expectations around RevPOR will be part of that.
And I would just add also that we did see very strong growth in our memory care segment and continue to be really optimistic as we roll out our Magnolia Trails programming, and that is at a higher rate as well. So that may influence just the overall thinking as we go forward as well.
Got it. Okay. And then final question for me, and this is kind of more on the accounting side. But for the three eclipsed Senior Living properties that -- where you're taking over the operations management for those communities for Ventas, will you consolidate the full operational results of those properties on your P&L? Or is that just more of a straight management fee structure for CSU? Just so we know kind of how that will flow from an economic...
It's management -- I'm sorry. It's a management fee structure is just the same as the other managed communities that we currently operate. So they will not be consolidated.
Okay. Got it. We should assume just standard management fees or nothing exotic about that structure that's worth calling out one way or the other?
Not this time.
We have reached the end of the question-and-answer session, and I will now turn the call over to Ms. Kimberly Lody for closing remarks.
All right. Great. Well, that concludes our prepared remarks. And I just want to wish everyone a good rest of the day, and have a great week. Thank you, everyone, for joining the conference call.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.