Capital Senior Living: Where the action is

John Ogg | May 24, 2007 5:35am EDT | Comment

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Until recently, Capital Senior Living Corp. (NYSE: CSU) might have been considered a dull and steady company in a dull and steady field: senior living communities and assisted living. To borrow a well-worn phrase from a 1971 book title, that was then, this is now.

The first children of the first great Baby Boom are just now starting to turn 60, and can hardly call themselves Baby-anything. At the same time, their parents are living longer, now into their late 70s and up into their 80s or beyond. This puts Capital Senior Living in what is a secular growth spot.

Capital Senior Living has a business that aims to allow people to “age in place,” so to speak, and it is a small enough company that many investors are not familiar with the name. It operates retirement-age residential communities, and also offers assisted living and home care services. It operates 64 senior living communities in 23 states with a combined capacity of 9,500 residents. Capital Senior owns or has ownership interest in 37 of these senior living communities, while 24 are leased communities. The company manages three communities for third parties.

Nearly three-fourths of the residents of the communities operated by the Capital Senior Living live independently, while 24% require assistance to daily living and 2% require skilled nursing. The company is not immune to hurricane or earthquake damage with its Gulf Coast and California properties, but it is spread out enough across nearly half of the states in the United States to absorb much of any such disruptions.

Capital Senior Living is not alone in the field of senior care and “health assistance for the aging,” but it is still considered largely overlooked or undiscovered. With a market cap of under $300 million the company is just now becoming profitable after more than three years of fiscal net losses. The stock has been publicly traded for almost 10 years, trading as high as $15.00 before 2000, only to drop to as low as $2.00 by 2002 after a botched takeover related to an IRS issue the previous year. Shares hit $10.00 again in late 2005 and have generally moved in a range of $9.00 to $12.00 since then. There are only two known analysts who cover the company, and both expect it to remain profitable for the foreseeable future.

The last few weeks have been full of good news for longer-term investors. The company swung to a profit of $920,000, or $0.03 a share, in the first-quarter of 2007, helped by an $800,000 gain from the sale of 16 senior living communities. This compared with a loss of $1 million, or $0.04 a share, a year earlier. Revenues grew 26% to $46.2 million in the three months ended March 31. On May 3 the company refinanced $30 million of mortgage debt on four communities, which it said would result in annual savings of $0.7 million per year.

The total occupancy rate was marginally lower on March 31 with 90.6% physical occupancy (down from 91.5% the year before), but Capital Senior added 10 stabilized living communities during the quarter. The company is now charging 5.5% higher rent than last year--and anyone who has a family member in any assisted living communities knows that these rates almost never drop.

Capital Senior’s stock-price chart recently has become more indicative of a sideways or consolidating pattern, which gives investors the chance to pick an entrance rather than “chase a chart.” Capital Senior’s 52-week high of $12.22 was established April 27. The recent price at just under $11.00 does offer a fair entry point; any further pullbacks of even as much as 10% would represent opportune entry points to a growth and turnaround story that is far from being completed.

To be sure, Capital Senior competes in a large field with many larger competitors. Among them: Sunrise Senior Living Inc. (NYSE: SRZ); Manor Care Inc. (NYSE: HCR), and Brookdale Senior Living Inc. (NYSE: BKD). It also competes against several healthcare and retirement REITS, including Senior Housing Properties Trust (NYSE: SNH).

The good news for investors, of course, is that demand for these facilities is large, and getting larger—as anyone who has tried getting a parent or relative into a senior living facility can attest. And because Capital Senior is more focused on the development side and more geared into the “introductory phase” of senior care, the company is poised to capture more of a bite as it continues to add communities over the next five to 10 years, as the Baby Boomers start retiring in meaningful numbers.