By Steve Moran
Through May 1, 2018, I was fairly happy with my investment in Capital Senior Living (CSU). Then came their earnings report . . . the shares went from $11.79 on May 1, to a low of $9.15 on May 2, 2018, closing at $9.35, and I just about choked.
Just so you don’t have to look, today as I am writing this story (May 8, 2018) the shares are back up to $10.89.
Their Earnings . . .
Here is where it gets kind of weird. If you look at their earnings report there are some real positives:
In the first quarter, they achieved the highest number of Q1 move-ins in the history of the company.
They had the lowest amount of Q1 occupancy loss in the past 3 years.
March was the 7th consecutive month that they achieved year-over-year growth in same-store net operating income.
Not exactly spectacular, but overall better than expected and better than other public senior living organizations.
Why It Tanked
There are three reasons it tanked:
While the same-store NOI was up, the top line missed investors expectations by 1.2%.
Most importantly one analyst (Stifel Nicolaus) cut their target price from $13.00 to $10.50. It is important to note that this analyst’s opinion was contrary to the more optimistic outlook from all other analysts that cover Capital Senior Living.
Still Freaking Out
The reason I purchased those Capital Senior Living shares several months ago was that I had a number of interactions with Capital’s new COO Brett Lee, including him helping with an issue a fellow church member was having at a Capital community.
I did not listen to the earnings call but read the transcript and it was honestly not as balanced as I would have hoped. There was a lot of talk about cutting expenses, and a little talk about culture.
Historically, cutting expenses is a horrible long-term strategy. It can be a very effective tool to give the bottom line a short-term boost, but often it ends up hurting services and staff morale. I wanted to better understand how Capital Senior Living was balancing the need for efficiency with preserving the long-term culture of the company.
Because I have shares and because Capital Senior Living is part of the Culture 2100 CEO roundtable on how to create the perfect 21st century senior living employee culture, I found myself feeling a bit reluctant to write about the stock drop, but at the end of the day decided that those relationships were a terrible reason to not tackle an important topic.
I sent Brett an email telling him I was working on a story, and asking if we could chat. I know these are sort of dicey requests for public companies but figured it was worth asking. We had a nice visit and here are the highlights, of that conversation . . . and why I am still feeling like it is a good investment to the point of maybe purchasing some additional shares.
The goal of the cost-cutting is to better right size staffing and expenses with the needs of residents and team members. It is focused on two areas: 1) building economies of scale as a larger company, and 2) shifting more of the drudgery from the local property to the central office, which will allow executive directors to spend more time doing what they do best (caring for residents).
- They are working hard to create a balance between taking advantage of their size and continuing to allow local autonomy for executive directors.
A big part of the cost-cutting effort was to gain control over contract labor, which had experienced significant creep in the 2nd and 3rd quarters of 2017. The focus has been on shifting those hours to internal staff (who are more vested in the communities) at a lower overall cost.
I pushed pretty hard on the culture thing because when I look at those senior living organizations that have the 90%+ occupancies it is always because they have the best cultures, not because they have the best buildings and the best locations.
They are working on a number of initiatives to keep the Capital Senior Living Communities from being commoditized. This includes taking a hard look at their leaders' natural strengths, figuring out how to grow their capabilities, and developing a formal leadership development platform. They have also invested significantly in enhancing the quality of resident care that is provided in their communities and launched new cultural enrichment programs, such as an intergenerational music program for residents in partnership with an organization called Music Together.
Capital Senior Living has also demonstrated a strong commitment to resident satisfaction and has recently rolled out a new national customer service platform to ensure a warm and welcoming environment for their residents. They were recently named as one of the top performers in the country by JD Power in terms of resident satisfaction, and their average resident satisfaction score is 95% on their internal surveys.
This people-focused culture starts at the top. When Capital Senior Living’s CEO, Larry Cohen, was honored last week at the Alzheimer’s Association annual Brain Ball gala, he dedicated his award to the caregivers at Capital Senior Living that make a difference every day. You can see the video here:
Consumers are too often shopping on price and they want to move away from that model, becoming the organization that provides a different value proposition through better care, an engaging home environment for seniors, and keeping residents healthier longer.
At the end of the day, they are outperforming the industry and look to continue to build on this momentum, and with all of the new leadership it will take some time to get there, but they are already on their way.