Historic competition for new residents, increasing wage pressure and higher-than-expected resident attrition negatively affected Capital Senior Living’s performance in the second quarter, but plans are in place to increase revenues and reduce expenses, company executives said Tuesday evening in a second-quarter earnings call.
“While we are disappointed with our second-quarter results, we continue to strengthen our platform and processes to enhance our execution and increase opportunities to drive growth in the current challenging competitive environment,” CEO Larry Cohen said.
Same-community financial occupancy was 85.5% in the second quarter, a decrease of 60 basis points from the first quarter of 2018 and a decrease of 100 basis points from the second quarter of 2017, Chief Operating Officer Brett Lee said.
The most challenging markets for the company have been North Texas, Indianapolis, Cleveland, North Carolina and South Carolina, he said. In such markets, Dallas-based Capital implemented one-month move-in concessions or discounts to counter “increasingly competitive pricing incentives offered by our competitors,” he said.
Lee said that a survey voluntarily completed by residents who submitted move-out notices in the quarter helped the company reduce resident turnover from a high of 466 in April to 399 in June, and the top reasons for move-out remain death or the need for a higher level of care.
Financial occupancy declined to 85.6% in April and to 85.1% in May but then increased to 85.7% in June, he said.
Although concessions and discounts helped stabilize occupancy at the end of the quarter, Cohen said, “the special discounts were above our normal levels, causing the average monthly rates to fall below expectations. As such, we expect that the lower average monthly rent that resulted from the challenged first half of 2018 will impact the remainder of the year. We also expect that the operating environment will remain challenging.”
In addition to rent concessions, the company paid additional sales commissions to employees and placement fees to third-party aggregators to increase move-ins, Lee said.
Additional rate concessions may be necessary in the third and fourth quarters, he said, adding, however, that they should be “less pervasive” than they were in the second quarter. Capital expects the use of discounting to return to its baseline level in August.
Centralized operating model
Despite the challenges in the quarter, Lee said that the company’s centralized operating model appears to be capitalizing on economies of scale to reduce costs as planned.
In June, a new national menu system helped lower food costs by 11.4%, supply costs were down 11.3% thanks to a new centralized procurement platform rolled out in May and June, and consolidating local service contracts into regional and national agreements led to a 3.4% reduction in service contract-related costs compared with the prior year, he said.
“We anticipate that this savings momentum will continue to improve for the remainder of the year as we continue to optimize our platforms to further enhance savings,” Lee said.
Where possible, the company will try to raise revenues by increasing level-of-care charges and increasing the rate at communities where occupancy is higher than 90%, he said.
“While we know we have challenges ahead of us, we believe that we are laying the right foundation to drive long-term, sustained success for our company going forward,” Lee said.
Cohen said that company will be rolling out additional initiatives in the third quarter and continues to look for other ways to improve performance. An electronic information platform designed to provide more timely operational and financial information should be in place by the end of the year, he said.
Owning real estate
Cohen said Capital believes that the fact that it owns most of its real estate is a benefit.
“We believe that the intrinsic value our real estate will ultimately provide a multiplier effect when the recovery in the market and the impact from our operational initiatives take hold,” he said.
The company is having “constructive” talks with its real estate investment trust landlords, Cohen said. Capital has 25 leases with HCP, 19 of which mature in 2025 or 2026, and 24 leases with Welltower that mature in 2025 or 2026; the company bought back seven communities that were with Ventas, he noted.
“We feel that the leases place a burden on the company,” Cohen said. “They obviously have escalators for another nine years, and to the extent that we can restructure them and equitize them in some fashion, it would remove what would be equivalent to hundreds of millions of dollars of debt and then give us more strategic flexibility moving forward without the burden of those leases.”