Capital Senior Living 'very optimistic' about 2016
Capital Senior Living ended 2015 facing pressure to sell to a third party, and it began 2016 announcing the continuation of its stock repurchase program. On an after-hours conference call Feb. 25 about the company's fourth-quarter and full-year 2015 earnings, however, company leaders said they are “very optimistic about our growth prospects.”
“With solid industry fundamentals, an improving economy and housing market, limited competitive new supply in our local markets and the gains we are recognizing from our unit conversions, community renovations and refurbishments, we believe that our occupancies can grow over the next few years to an optimal level of 92% to 93%, delivering significant organically driven cash flow from operations growth and increases in the long-term value we are creating in our owned real estate and for our shareholders,” CEO Lawrence Cohen said.
The company is converting independent living units into assisted living and memory care units at more than 60% of communities, he said, and the efforts are increasing occupancy, revenues and net operating income. “We are confident that they will lead to further improvements in our operating and financial results,” Cohen said.
One reason is that average monthly rents are higher for assisted living and memory care units than for independent living units. In the fourth quarter, for instance, average independent living rent was about $2,500, average assisted living rent was about $4,000 and average memory care rent was about $5,000, Cohen said. A 3% market rate increase went into effect Jan. 1 at all communities, he said, and in-house rents will be increased by 3% on residents' one-year anniversary dates.
Through the fourth quarter of 2015, Capital Senior Living had converted 400 units from independent living to a higher level of care, Chief Financial Officer Carey Hendrickson said, adding that 200 additional units are expected to be converted by the end of 2016.
Currently, independent living units represent about 45% of the company's portfolio, the CEO said, and assisted living units represent 55%. Hendrickson said that, with conversions and acquisitions — which mainly are in assisted living with memory care — the company's assisted living units will represent somewhere between 55% and 60% of the portfolio at the end of the year.
Capital Senior Living has the highest percentage of wholly owned communities among the nation's top senior living operators, at 60%, Cohen said. The company has expanded its portfolio by acquiring 57 properties in the past four years for a total of about $803 million, he said, and most of them have been fairly new or recently renovated properties. Six of those properties came in the fourth quarter of 2015 and in the first quarter of 2016, Cohen added, for a total of about $102.4 million. Acquisitions have been self-funded from internally generated cash.
Additionally, since the fourth quarter of 2014, Hendrickson said, the company has “disposed of” five communities that don't mesh with its strategy.
More acquisitions are planned for 2016. Cohen said that the company “always [has] hundreds of millions of dollars of acquisition opportunity in the pipeline,” and typically buys about 15% of the properties it looks at.
The company's size is a competitive advantage, Cohen said. “Unlike our largest competitors, we don't need to make large portfolio acquisitions to ‘move the needle,' ” he said. “Our ‘onesie-twosie' acquisition approach allows us to self-fund our accretive growth and be selective and cherry-pick.”
The company's annual general and administrative expenses represent 4.3% of revenues, he added, which is less than half the combined administrative costs borne by real estate investment trusts and their third-party managers.
Of 2015, Cohen said: “Our focused execution produced growth in all of our key metrics in the fourth quarter, including revenue; occupancy; average monthly rent; net operating income; adjusted earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs; and adjusted cash flow from operations as compared to the prior year.” The gains the company saw in occupancy outpaced the industry, Cohen added, with same-community occupancy increasing 150 basis points since the first quarter of 2015.
Success came in part due to occasional introductory specials at lower-occupied communities, increased rates at higher-occupancy communities, increasing level-of-care charges and “disciplined, proactive expense management” he said.
When asked about the company's stock buy-back program, Cohen reiterated that the company's stock “is not reflecting our growth and our value” and that the program is a “good investment and shows the confidence and commitment we have to shareholder value.” Other allocations of capital, however, “are actually more accretive and, more importantly, actually create cash that we can then reinvest elsewhere and continue to enhance our shareholder returns,” he added.