Good day, and welcome to Capital Senior Living's Fourth Quarter 2020 Earnings Release Conference Call. Today's conference call is being recorded..

All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and the company expressly disclaims any obligation to update these statements in the future.

Actual results and performance may differ materially from forward-looking statements..

Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well in the reports the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly reports on Form 10-Q.

Please see today's press release for the full safe harbor statement, which may be found at capitalsenior.com/investorrelations and was furnished in an 8-K filing this morning..

Also, please note that during this call, the company will present non-GAAP financial measures. For a reconciliation of each non-GAAP measure to the most comparable GAAP measure, please also see today's press release..

At this time, I would like to turn the call over to Capital Senior Living's President and CEO, Ms. Kimberly Lody. .

Thanks, Devin, and good afternoon, everyone. Thank you for joining our fourth quarter and full year 2020 earnings call..

Before I get into the accomplishments for the quarter as well as the strategy update, I want to thank our team of talented colleagues across the company for their relentless dedication during the last 12 months in managing the safety and well-being of our residents, themselves and one another.

I am grateful for your steadfast presence, caring operational skill as each of you make a remarkable difference in the lives of so many every single day. I truly can't thank you enough..

Turning to our strategy. We are now in the third year of our 3-year plan to improve the company's operating performance and financial foundation.

I'm pleased to say that the actions we've taken during the last 24 months have stabilized the company's operations, enabled our transition to a more focused and agile portfolio of 60 assets with a history of strong performance, reduced our liabilities and improved our cash flow.

The detailed work has centered on securing top talent throughout the organization, establishing a new, scalable and efficient operating strategy, exiting all triple net leases and over-levered and underperforming owned assets to reduce our liabilities and stabilize our balance sheet and beginning to streamline our G&A..

We've made significant progress on every front, all while operating during the difficult conditions of the COVID-19 pandemic.

These strategic actions, along with tremendous operating discipline allowed us to adjust our operating model as needed throughout 2020 and resulted in Capital Senior Living outperforming many of our senior living peers in terms of mitigating occupancy declines brought on by the pandemic..

Comparing publicly available data, the year-over-year decline in average occupancy in our 60 pro forma-owned communities was 430 basis points, while that of others in the industry declined on average by 658 basis points, making our performance approximately 35% better by comparison.

We also performed better with respect to maintaining net operating income in that our year-over-year NOI decline was just under 13%, while our peers declined on average more than 20%..

In late December of 2020, we began vaccination clinics at our communities. And as of today, 87% of our residents are fully vaccinated and the incidence of active COVID-19 cases across our portfolio is nearly 0. 100% of our communities have completed their second rounds of vaccination clinics and 85% have completed all 3 rounds.

We expect to complete all clinics across all of our communities in the next 2 weeks..

We continue to work hard to inform and educate our employees about the benefits of the vaccine as we believe we can continue to improve upon our current employee vaccination rate of 41%. Since beginning vaccination activities in late December of 2020, the operating environment has improved significantly.

Leading indicators of leads and tours began to rebound in December and move in and move out trends began to stabilize and improve in the first quarter of 2021..

Based on preliminary information that may be subject to change, monthly average occupancy in our current portfolio of 60 owned assets was 75.7% in January, 75.2% in February, and we expect March average occupancy to be consistent with February.

March move-ins are tracking to be at the highest monthly level in more than 2 years, indicating that demand for senior living housing and services is beginning to rebound. Today's spot occupancy for our 60 owned assets is 76.1%..

These 60 owned assets have performed well historically and are strategically positioned in attractive high-growth markets. 97% are in markets where the expected 5-year growth in the 75-plus age demographic is 10% or more.

99% of the communities are in markets where the average household income in the 75-plus age demographic can readily afford our average monthly rent of approximately $3,600. 85% of the owned communities have no current competing projects under construction within a 5-mile radius..

For the full year of 2020, average occupancy in this group of assets was 80.5%, and NOI margin was 28%. In recent years, before the COVID-19 pandemic, these same assets had occupancy in the mid- to high 80s and margins in the mid-30% range.

We expect these communities to begin returning to at least the same level of performance as the operating environment stabilizes..

In addition to the 60 owned assets, we currently also manage 7 Ventas communities, 4 Healthpeak assets, 4 Welltower assets, 2 Fannie Mae assets and 1 asset in Canton, Ohio that we previously owned.

We expect that the Healthpeak, Welltower and Fannie Mae assets will transition to other operators by the end of the second quarter, resulting in 8 managed communities in our portfolio..

In summary, despite the last 12 months difficult operating environment created by the COVID-19 pandemic, we have made great progress on our 3-year strategy called SING for stabilize, invest, nurture and grow. We have stabilized the portfolio in the business. We have invested in our communities, our processes and our resident programs.

We have nurtured our lead generation and sales processes, and now we are ready to grow. We feel good about our team of colleagues, our restructured portfolio, our improving balance sheet and the improving post-COVID operating environment..

I'll now turn the call over to Brandon to discuss our 2021 operating priorities. .

Thank you, Kim, and good afternoon.

As we close out our first quarter of 2021, marking approximately 1 year of operating through the challenges presented by COVID-19, I want to highlight and thank our local leadership and frontline care and service providers for their consistent, compassionate and steadfast efforts to keep our residents and fellow staff safe and healthy..

Earlier this month, we realized a prolonged period of 0 employee and resident COVID-19 cases, a milestone worth celebrating. Our CSL communities have remained COVID-free for nearly all of March with only 2 resident COVID-19 cases reported throughout the month, and nearly 90% of our residents are fully vaccinated.

We continue to adjust our operating model to accommodate increased in-person visits from family members, larger groups for communal dining and activities in a safe and enjoyable manner..

Moving forward, we are encouraged by the tailwinds, both internally and externally that drive near and long term recovery. The stability and competency of our leadership at the community level continue to be a point of differentiation for CSL.

Leadership retention and overall staff turnover improved significantly in 2020, ending the year with total annualized turnover 4 percentage points improved over previous year, and early trends in 2021 show further progress with a people-centered culture at the core of our SING strategy..

On the revenue front, sales and marketing capabilities developed and implemented in 2019 and 2020 remain the foundation for our growth expectations. The achievement of 96% of prior year revenue in our 60 owned communities demonstrates the stability of the portfolio.

Revenue declined $1.1 million or 2.3% from Q3 to Q4, excluding any COVID-19 relief funds and rates remained flat. Currently, 25% of our portfolio is operating at or above 90% occupancy. We continue to focus our recovery efforts in this segment of the portfolio with near-term occupancy upside as the COVID-19 operating environment begins to ease..

Strategic growth priorities moving forward include providing differentiated resident services and programs in conjunction with comprehensive sales outreach efforts to rebuild occupancy across each of our service levels.

We are also confident that our community's strong reputations for excellent service and care will continue to drive quality lead traffic.

The expansion of our inside sales team and robust sales training and development programs have also delivered improvement in tour to move-in conversion ratios in 2021, a key indicator of improved sales capabilities and lead quality. .

After investing in our website and social media platforms throughout 2020, our local teams continue to focus on expanding lead and tour volume in early 2021. Lead and tour volume in Q1 have reached their highest levels since Q1 of 2020 and move-in volume has followed suit.

Move-in volume for Q1 2021 will exceed the first quarters of both 2020 and 2019, a strong indicator that our efforts are producing positive results at the community operating level. The results related to move-outs in Q1 are also positive..

From a health and wellness perspective, the diligent monitoring of our residents' health and well-being and access to therapy services are key components of preventing move-outs.

The ongoing rollout of additional clinical and wellness programs in partnership with our third-party therapy and home health providers also plays a key role in the reduction of move-outs.

We expect our move-out volume for Q1 to remain consistent with 2020 and 2019 first quarter levels and has trended down more than 20% from January to March this year..

Expanding further on our efforts related to programming, we completed implementation of our newly introduced Magnolia Trails memory care programming in 6 of our communities beginning in December of 2020, with an expectation of further program expansion across the remainder of our memory care units throughout 2021.

We believe our portfolio is well positioned to provide memory care services based on the 16% projected increase in the number of individuals with Alzheimer's disease on average in our 4 largest states between 2020 and 2025..

On the expense front, ongoing cost management efforts and initiatives provide opportunity in 2021 for margin recovery in conjunction with revenue recovery.

We were pleased with cost management efforts throughout 2020 in spite of significant ongoing investment in compensation for our frontline care and service providers in recognition of their efforts throughout the pandemic and the increased cost of supplies related to COVID-19 prevention efforts..

Expenses inclusive of additional labor expense associated with COVID-19 staff pay declined on a year-over-year basis by nearly $1 million or 0.6%. These costs exclude any COVID-19 relief funds received as offset to increased operating costs.

Total operating expenses were flat sequentially from Q3 to Q4, and results through the first 2 months of Q1 '21 are trending favorably due to reductions in variable operating expenses..

Additionally, use of stat pay in the current operating environment is no longer a material component of our labor compensation model due to the nearly complete elimination of COVID-19 cases in our communities throughout March.

Our local operating teams continue to diligently adjust their operating model to address changes in occupancy while ensuring the safety and well-being of our residents and staff..

These real-time adjustments and the ability to share staff between communities are being further supported by the ongoing rollout of real-time scheduling technology across the portfolio in Q2 and Q3.

While the impacts of COVID-19 on near-term revenue growth expectations remain uncertain, early indicators suggest the operating and sales environment improving with the presence of the vaccine throughout senior living in the nation.

What is certain is the energy and excitement of each of our communities has reached the highest point since the challenges of COVID-19 arrived in March 2020..

Our goal is to continue expanding our outreach efforts and ensure our resident-based programming delivers an enjoyable and safe experience to attract future residents and grow occupancy in the second half of 2021.

The combination of positive leading indicators on the revenue front, the gradual return to a prepandemic operating environment and consumers with increased confidence and interest in Senior Living all fuel a cautious optimism that recovery is within reach in 2021 and 2022.

I am excited and thankful that CSL has the leadership teams in the field to lead us on the road to recovery..

Now I'll turn the call over to Tiffany to provide a detailed review of our financials. .

Thank you, Brandon. Good afternoon, everyone. Our fourth quarter 2020 results reflect the continued impacts of COVID-19 on our occupancy, revenues and expenses.

However, as I did throughout 2020, our operations team did an excellent job in managing the cost within their control to mitigate the impact of COVID-19 on our overall results and in limiting the declines in occupancy during the quarter..

We also benefited from the receipt of $8.1 million in CARES Act relief funding pursuant to the Provider Relief Funds Phase 2 general distribution in November 2020.

The fourth quarter also reflects continued positive impacts associated with options we completed over the course of 2020 to improve our balance sheet position as we successfully exited all triple debt leases and continues the transition of 18 underperforming communities to Fannie Mae..

Our reported revenues for the fourth quarter were $80.2 million compared to $108.7 million in the fourth quarter of 2019. $38.6 million of the decrease was related to the sales or conversions of 54 properties since the end of 2019, partially offset by an increase in management fees and community reimbursement revenue of $14.1 million.

Most of the revenue associated with these managed communities, $13.1 million, was related to the reimbursement of certain operating costs that we paid on their behalf. You'll see that there is a corresponding expense on our income statement for the same $13.1 million. Our management fee revenue in the fourth quarter was approximately $1 million.

The remainder of the decrease is due to lower occupancy levels and a decrease in rate..

Financial occupancy for the consolidated portfolio in the fourth quarter of 2020 was 74.2%, a decline of 190 basis points from the third quarter of 2020 and a decline of 720 basis points compared to the fourth quarter of 2019.

The decrease in total occupancy was primarily due to reduced move-in activity, which began in the second half of March 2020 and continue through the end of 2020 related primarily to the COVID-19 pandemic..

Turning to collections. Our overall collections as a percentage of revenue through the pandemic period have remained consistent with the prepandemic period. Most of our collections are via ACH, and ACH collections have continued to be in the high 80% range as a percent of total revenue collected.

We have seen an increase in credit card usage for rent payments. But that still remains a very small percentage of our overall collections. And our return amounts have been very consistent with the prepandemic period..

Operating expenses in the fourth quarter of 2020 were $42.8 million, a decrease of $37.5 million when compared to the fourth quarter of 2019. As I mentioned, when discussing our decline in revenue, we had 54 fewer communities for all or part of the fourth quarter of 2020 than we had in the fourth quarter of 2019.

These 54 communities account for the majority of the decrease in expenses on a combined basis..

Our fourth quarter 2020 operating expenses were positively impacted by the receipt of $8.1 million in relief funds from Phase 2 of the Provider Relief Funds that I discussed earlier, which were recognized as a reduction in year-to-date COVID expenses, including $4.8 million of costs that were incurred and recognized during the fourth quarter, which primarily include employee hazard pay, specialized sterilization services, personal protective equipment and disposable foodservice supplies..

As Kim mentioned, our continuing communities portfolio consists of the 60 owned communities that will comprise our go-forward portfolio once all transitions have been completed. Our continuing communities revenues decreased $4.7 million or 7.7% in the fourth quarter of 2020 compared to the fourth quarter of 2019.

Compared to the third quarter of this year, revenue decreased $1.2 million or 2.1%..

Continuing community occupancy was 76.5%, which is 700 basis points lower than the fourth quarter of 2019 and is 200 basis points lower than the third quarter of 2020. While we are certainly not pleased with any occupancy decline, our operations and sales teams have done an admirable job in an unprecedented challenging marketplace..

Our average monthly rent increased 0.8% to $3,573 in the fourth quarter of 2020 over the fourth quarter of 2019, as well as increasing slightly 0.4% as compared to the third quarter of 2020.

Continuing community expenses, which exclude COVID-related costs of $2.1 million and the application of COVID relief funding, decreased $3.3 million or 8% in the fourth quarter of 2020 as compared to the fourth quarter of last year due to our operations teams focused on and success in managing costs to offset the impact of incremental COVID-19 costs..

Our employee labor costs decreased $0.9 million or 3.5% while all of our other expense categories combined to decrease $2.4 million or 1.9%, with our 2 other major cost categories, food and utilities, down 6.3% and 4.1%, respectively..

Our continuing community net operating income was $11.1 million and our NOI margin, which we define as revenues less operating expenses, exclusive of COVID-19 relief funding and costs with premium labor included, was 23.6%..

Our general and administrative expenses for the fourth quarter of 2020 were $6.9 million compared to $5.8 million in the fourth quarter of 2019.

The increase of approximately $1.1 million is primarily due to consulting expenses in our Dallas Support Center, an increase in corporate insurance premiums resulting from a challenging market and increases in transaction and conversion costs..

During the fourth quarter, we completed the sale of a community located in Canton, Ohio, which resulted in net cash proceeds of $6.4 million. We recorded a $2 million noncash gain on this transaction.

In addition, we have been retained by the new owner to manage the community on its behalf, which is expected to contribute approximately $300,000 in annualized 2021 revenue..

Adjusted EBITDAR for the fourth quarter of 2020 was $20.5 million. Adjusted EBITDAR, excluding COVID-19 expenses and relief funding was $16.9 million. Adjusted CFFO was a negative $0.4 million in the fourth quarter of 2020. When COVID-relief funds and expenses are excluded, adjusted CFFO was a negative $3.7 million in the fourth quarter of 2020..

Turning now to liquidity. We noted in the release that we had $17.9 million of unrestricted cash at December 31, 2020. As we announced our third quarter earnings, we received approximately $8.1 million of relief funding pursuant to the Provider Relief Funds Phase 2 general distribution in November 2020.

We are pleased to announce that we have received an additional $8.7 million in funding in our Phase 3 of the same program during the first quarter. In addition, we received approximately $900,000 of relief funds to offset COVID-19 expenses from state programs in Wisconsin and Ohio in the fourth quarter..

We have also received approximately $1.1 million in distributions in the second and fourth quarters from the Ohio Bureau of Workers' Compensation to help companies doing business in whole Ohio during COVID. In addition, we deferred an additional $2.4 million in payroll taxes under the CARES Act in the fourth quarter.

We deferred a total of $7.4 million in payroll taxes under that program..

We continue to progress with the transfer of ownership of 18 underperforming properties to Fannie Mae. At December 31, we included $218.4 million in current nets payable and $8.7 million in accrued interest on our balance sheet.

Once legal ownership of the properties transfers to Fannie Mae, which is expected to occur throughout 2021, we expect to recognize a gain on the extinguishment of debt and related accrued interest..

In October, we extended and enhanced our forbearance agreement with one of our lenders that resulted in 3 additional amounts of principal interest relief on 10 communities and 3 additional months of interest-only, which amounts to approximately $2.8 million of additional relief.

We are also in active discussions with 2 of our lenders regarding the extension of refinancing of 2 of our bridge loans, totaling $72.5 million that are currently scheduled to mature in December of 2021..

Although the operating environment will remain challenging in the months ahead, we are pleased with the improvements to our financial foundation resulting from exiting all triple net leases, transitioning the ownership of 18 underperforming assets at Fannie Mae, and the significant improvements made to the company's operating platform during the first 2 years of executing our same strategy..

As we move into the third and final year of SING, we work to -- we continue to work diligently to create value while strengthening our company and providing consistent, high-quality services and programs to residents across our portfolio..

That concludes our prepared remarks. I will now ask our operator, Devin, to open the line for questions. .

[Operator Instructions] Our first question comes from the line of Steven Valiquette with Barclays. .

Great. So a couple of questions here. First, the data around the 60 continuing communities is certainly helpful, and we can also draw our conclusions on the trends from here. But I guess, just given that a lot of your financials were in, what I would call transition mode from December 31, 2020, to the forward run rates for continued operations.

I just got a few questions, cash flow and balance sheet, in particular, if you're able to address any of these..

I guess just first on total debt. Do you know where that will shake out as 2021 progresses or even where it stands right now on March 31 just relative to the $910 million total debt that was on the balance sheet on December 31? I guess I'll just start with that question first. .

Well, of the $900 plus million, a large chunk of that, $218.4 million is related to the Fannie Mae properties. So as those fall off in our formally -- the ownership is formally transferred to Fannie Mae, we will be derecognizing the liability and recognizing a gain. And so we anticipate that will happen throughout 2020.

We also have approximately $72.5 million that is maturing at the end of this year, and we are in current -- active discussions with our lenders to refinance or extend the maturities of those notes. .

Okay. That's perfect. Okay. And then for the 60 communities going forward. Obviously, you're not really giving any 2021 guidance today, which is not too surprising given what's going on still around the pandemic.

But is there any color just on what we should expect on the ratio of annualized operating cash flow relative to EBITDA, just that ratio for those 60 assets going forward as well as what the annualized CapEx will be for those 60 properties?.

I'll start with the CapEx and then Tiffany or Brandon can jump in on the cash flow. With respect to CapEx, if you recall in our third quarter investor deck, we anticipate spending about $1,200 per unit in CapEx in that 60 community portfolio. And we think that, that's the right amount of CapEx..

When you think about that portfolio, those communities are -- they are in secondary and tertiary markets. As I mentioned in the script, we focus very much on the middle market. So they are -- they're warm, they're comfortable, they're clean, they're up to date.

So we don't have a lot of projects that would require -- we don't have any projects that would require significant repositioning or significant construction or refreshment, reconstruction of the portfolio. So Steve, I think that a good assumption on that is the $1,200 per unit. .

Okay. All right. Then that ratio of cash flow to EBITDA. If you don't have that handy right now, that's fine. We can always track that down later if you don't have any references, that's fine. .

We'll get back to you on that one. .

Maybe in the meantime, another question I had was just on -- in relation to the management fees and how that might progress through 2021, especially in light of the 16 formerly leased communities that are now under those interim management agreements.

Is there just any range of what they expect for management fees for the full year?.

Well, I think -- well, do you want to go in, Brandon?.

Yes. I think $2 million to $2.5 million in management fee revenue is our target for a run rate basis on the go forward. .

And you should see the majority of the -- as I said, the majority of that managed portfolio outside of the 8 core managed transition by the end of Q2. So in the second half, for sure, we'd be at the 8 managed communities. .

Got it. Okay. And then final quick question here around financials. The comment you gave around the additional stimulus or relief payments coming in, certainly helpful.

I was just curious, as we kind of balance the 2 of those components together, if you have any color on what you're expecting in relation to just COVID-related expenses in 2021 in total versus the $9.5 million that you incurred in 2020?.

In 2020, our COVID expenses, a large component of that was the hero pay. And so that was approximately 40% of the total number. And so as the number of cases in our portfolio nears 0, the number of the annual stat pay has declined as well.

We anticipate that we will incur additional direct expenses, just the PPE and items of that nature, but it will be decreasing over time. .

Yes. I would just add, Steve, that we're very -- we've been very pleased with the impact of the nearly 0 COVID cases on the portfolio from an expense standpoint, and are confident that as that trend should continue and hopefully will continue, we'll see a meaningful impact on the expense profile on a year-over-year basis related to COVID expenses. .

[Operator Instructions] There seems to be no further questions at this time. So I'd like to turn the call back over to Ms. Lody for any closing comments. .

All right. Thanks, Devin. This concludes today's conference. Thank you, everyone, and have a great day. .

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day..