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The Market Hammers Capital Senior Living

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By Steve Moran

On July 31, 2018, Capital Senior Living released their quarterly earnings report and, simply put it, was not good. On August 1, 2018 the first day of trading after the earnings release their stock price was down 19% going from $9.99 per share to $8.06. For disclosure purposes, I have or have control over a modestly significant number of share of Capital Senior Living stock.  

By the Numbers:

  • Revenue decreased by 1.8% from the same quarter last year

  • Occupancy at 85.5% is a decrease of six-tenths of 1 percent from the quarter prior, and a full 1% from the same quarter a year prior

  • Average monthly rent increases $35 per month per occupied unit from the same quarter a year ago

  • Income from operations for all communities was $3.6 million for the quarter compared to $4.7 million for the same quarter a year prior

  • The net loss for the company for the quarter was 9.1 million dollars

  • They did decrease operating expenses by $0.3 million from the same quarter a year ago

What to Do, What to Do

I hate writing these kinds of articles. I really like and respect Larry Cohen (CEO) and Brett Lee (COO), and when I sliced and diced the earnings call it sounded as if management is thinking like this:

  • They are not optimistic that given current market conditions it is going to get much better at least through the remainder of the year  

  • They are offering targeted specials in highly competitive markets

  • They continue to focus on cost reduction strategies

  • They are thinking that in 18-plus months demographics will help to solve a lot of their current short-term challenges

  • They made particular note that they are focused on reducing food costs

  • They are paying higher commissions to salespeople as an incentive to get more move-ins

Thinking Different

Based on the earnings call I confess I found myself really struggling with their approach, which is similar to what Brookdale has done, maybe is still doing, and that is to focus on discounting and cost reduction. Both of which end up being a race to the bottom. Capital gives concessions because others are discounting, then when Capital discounts, the competitors will discount even more. Where does it end?

The one thing they are doing that I really applaud is to aggressively engage with every resident who is moving out of one of their communities to see if they can keep the move-out from happening or learn from the experience so that it does not happen again. 

More than anything else, I wish they would do things radically different. It is possible for Capital to blow the socks off the marketplace in the next 12 months by working exclusively on culture.

The Capital Response

When I write articles like this that is specifically critical of one organization it is my practice to send a draft article for their review. My goal is to make sure I get the facts as close to right as possible and not unfairly characterize either what they said or more importantly what they are thinking.

Over the weekend I spent considerable time on the phone with Brett Lee, the fairly new COO of Capital talking about my perceptions and the future of Capital. Here are some takeaways from that conversation:

  • While they are focused on cost cutting it is about reducing the number of vendors to a reasonable number and working to leverage the size and scale of Capital’s portfolio to obtain better pricing. Going from 87 types of chicken breasts to 6 to enhance quality and consistency, moving from a dozen supply vendors to half a dozen vendors and driving better utilization of group purchasing contracts (numbers are examples and not exact for Capital). It is about using Staples as a national vendor for office supplies rather than dozens of local suppliers, that might include Walmart or Safeway.

  • The discounting is narrowly targeted and they are working on creating an operating and sales culture where discounting will be much less important.

  • They are continuing to work on creating an outstanding staff and resident culture. Including things like implementing Senior Housing Forum partners' video storytelling solution from OneDay, and hosting a national day of service for the Alzheimer’s Association earlier this year.

Finally

Three things:

  1. My dream for Capital Senior Living leadership is to stand up and say, “Our goal is to be the best in class senior living community in every local marketplace.” To tell me as a shareholder that is their goal; to tell every resident that is their goal; to tell every team member that is their goal.

    To then live it out day to day as they interact with their team and the public. To tell stories about when they succeed and even to talk about when they blow it, using those mistakes as teachable moments.

  1. At least, for the time being, I am hanging on to my stock.

  1. Most Importantly: I am thinking Capital Senior Living needs me on their board.

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