Capital Senior Living (CSU)

BUY
Target Price:
Time frame:
Introduction
Capital senior living Corporation provides senior living services to elderly with its 117 Senior
Living communities in 26 States, 67 owned and 50 leased, providing an aggregated capacity of
15,200 residents. CSUs services range from the following three models, Independent Living,
Assisted Living and Memory Care. The latter models include more services thus charge higher
rental rates and enjoy larger profit margin.
Investment thesis
1. aging population
2. vacancy improvement
3. target for PE

Business Framework:
Market position: CSU is one of the major players, yet not the leader in the senior living industry.
Its revenue is around one-tenth of the largest public competitor Brookdale. In Mid-west,
especially IN, TX and OH, CSU is a regional leader with concentrated facilities footprint.
Market growth: Since 2005 the senior housing market has been growing at higher than 3% rate,
and is expected to grow at 5% in future two years according to IBIS World.
Market share trend: Over the past five year, the sales of CSU has been growing at 13%
cumulatively. This rate is higher than market growth thus CSU has been expanding market share.
However, many of the growth are non-organic, CSU has been very active in acquisitions and
expand to new market.
Business Cycle risk: the growth rate of sales range from 25.8% to -0.7% during the past ten year
business cycle. The downturn provides an opportunity for acquisition and consolidation. Senior
living industry is a cyclical industry from the standard deviation point of view, but is somewhat
protected because the market growth prospect for future years are strong.
Strong Cash Flow: CSU generates stable positive cash flow during the past years. The stable
annual rent revenue and operating expenses allows for stablized cash flow generation.

Low ROCE: the return on capital employed has been fairly low, below 5% over the past years.
Senior living industry is capital intensive, with heavy real estate assets or lease obligations. The
trend of ROCE is getting lower due to recent acquisitions.
Market stablity: currently 19.5% of the age restricted seniors housing supply in the united states
are assisted living, 22.8% are independent living units, 52.4% are nursing care units and 5.1%
memory care units. With the 85 years old population at the fastest growing rate, the need for
assisted living will be the major trend in the market. CSU is renovating its vacant independent
living unites to satisfy the demand.
Conclusion: CSU is a good business with one major drawback in ROCE. The low ROCE is
common in this capital intensive industry, not specifically due to CSUs operation or strategy.
Cyclicity could be a relief given the fact that even during the financial crisis, the senior living
industry grew at 3%. With the positive revenue prospect in future, we believe CSU is
fundamentally a good business.

FY
2003

FY
2004

FY
2005

FY
2006

FY
2007

FY
2008

FY
2009

FY
2010

FY
2011

FY
2012

FY
2013

FY
2014

Capital Employed

413

409

409

365

365

360

349

350

438

611

728

791

Total Asset
Goodwill

421

431

434

394

390

388

381

383

462

637

746

898

Current Liabilities

34

54

27

28

31

35

32

32

40

62

59

101

Current Debt
Excess Cash and
Investment

32

52

24

24

29

33

30

30

38

55

55

34

20

22

26

23

26

29

31

22

19

14

39

EBIT

5.8

6.7

11.0

11.7

16.8

17.0

16.6

18.5

17.9

13.7

11.3

13.9

ROTCE

1.4%

1.6%

2.7%

3.2%

4.6%

4.7%

4.8%

5.3%

4.1%

2.2%

1.6%

1.8%

FCF

4.6

1.9

2.8

2.5

5.9

9.8

-0.8

6.4

26.2

9.7

6.6

NI

5.0

-6.8

-5.4

-2.6

4.4

3.7

2.8

4.3

3.0

-3.1

-16.5

-24.1

DA

7.8

12.0

13.0

12.5

11.6

12.8

13.3

14.0

20.0

35.9

44.4

49.5

NWC

12.6

10.9

13.4

14.0

18.8

21.4

19.6

30.3

36.4

30.7

35.4

-11.8

-1.7

2.6

0.5

4.8

2.6

-1.8

10.7

6.1

-5.7

4.7

CAPX

-1.6

-2.4

-3.2

-6.7

-8.6

-8.1

-8.0

-8.4

-10.5

-12.3

-13.6

-18.7