Capital Senior Living’s (NYSE: CSU) plan to raise up to $152.5 million through a private placement of convertible preferred stock to affiliates of the private investment firm Conversant Capital comes at an inflection point in the company’s existence.
The Dallas-based operator acknowledged in its Q1 2021 earnings call in May that its ability to continue as a going concern was in danger, due to ongoing pressures stemming from Covid-19, along with its liquidity position.
The Conversant deal is expected to provide Capital with the necessary cash infusion to stabilize its balance sheet, address near-term debt maturities and enable investment into its portfolio to grow earnings, President and CEO Kim Lody said Thursday during the company’s second-quarter 2021 earnings call.
The deal, which is being opposed by shareholder Ortelius Advisors, arrives as Capital completes a three-year operational turnaround, pares its portfolio of owned communities, and reports positive momentum with leads, occupancy and net operating income (NOI).
Lody believes the present is a “pivotal time” for the operator, which has been operating under a cash-constrained environment for the past 15 months.
“This provides the catalyst to create an exciting long-term business plan for growth and success,” she said.
Revenue recovers slightly
Capital reported second-quarter revenue of $46.6 million, a 53.1% decrease year over year. It did, however, mark a 3.1% improvement over the first quarter of 2021.
The company’s leadership attributed the performance to its turnaround agenda. Notably, Capital disposed of a sizable portion of its portfolio in 2020 including:
- The sale of two owned properties, one of which transitioned to a management agreement with the successor owner
- The transition of 39 leased communities to different operators
- Transferring legal ownership of 18 communities to Fannie Mae (Capital completed the transfer of the final six communities in that transaction in the second quarter)
Together, these accounted for a decrease in revenue of approximately $39.2 million.
Capital’s portfolio now consists of 60 wholly owned communities.
Net operating income — excluding management fees, and including real estate taxes and insurance — improved to 21.5% in the second quarter, compared to 20.1% in the first quarter.
“This represents our first sequential quarterly revenue growth and margin improvement since the onset of Covid – an encouraging sign that recovery has begun to take hold,” Lody said.
Rates and margins improved in the later part of the quarter. June rates averaged $3,523, slightly down from Q1 2021 averages, as a result of Capital’s strategic decision to grow occupancy through concessions, COO Brandon Ribar said during the earnings call.
But he noted that the use and size of concessions continued to decrease into July, based on move-in data.
Total occupancy improved a half percentage point, year over year, ending the second quarter at 78.1%. This also marked a 2.6% sequential improvement. Spot occupancy was 81.8%, as of July 31.
Capital is experiencing occupancy gains across care levels. Independent living improved 170 basis points. Assisted living reported a 290 basis point gain, and memory care achieved a 400 basis point improvement over the previous quarter.
July marked the fifth-consecutive month of occupancy growth.
Conversant agreement moves forward
Earlier this week, Ortelius Advisors sent a letter to Capital’s board of directors opposing the rights offering, arguing that it significantly undervalues the company while turning control over to Conversant. The letter accused the board of shirking its fiduciary duty.
Ortelius Managing Partner Peter DeSorcy believes other shareholders agree and are willing to band together to provide the short-term cash infusion needed to unlock growth.
Based in New York City, Ortelius is one of the company’s largest shareholders, with holdings equal to 11.7% of outstanding common stock, according to financial filings.
Capital responded with a letter on Wednesday defending the Conversant deal, arguing that the board engaged in a thorough process to explore strategic alternatives and seek financing sources to address liquidity needs. Following the completion of the review, the board unanimously approved the proposed transaction.
The company is facing looming near-term debt maturities, which threaten its status as a going concern. It has $72 million of maturing mortgage debt with recourse provisions due in December 2021, and another $37 million of non-recourse mortgage debt maturing in April and May of 2022, Lody said.
The Conversant announcement has already proved beneficial. On Wednesday, Capital finalized a 12-month extension on the mortgage debt via a $40.5 million, full recourse bridge loan. The terms are essentially the same as the existing debt, and carry an option to extend the bridge loan an additional six months by meeting certain financial criteria.
With the extension in place, there remains $31.5 million of partial recourse mortgage debt.
This gives Capital some flexibility in its plan to grow revenue, and to deploy the capital from the Conversant transaction responsibly and productively to maximize value for shareholders.
“When completed, this raise will allow Capital Senior Living to quickly pivot from playing defense to playing offense,” Lody said.
Capital Senior Living stock, which has fallen 40% in value since the Conversant deal was announced, ended trading Thursday down slightly, closing at $24.96 per share.
The post Capital Senior Living CEO: ‘Constrained’ Cash Environment Led to Conversant Deal appeared first on Senior Housing News.
Source: For the full article please visit Senior Housing News