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Capital Senior Living Corporation

Capital Senior Living Corporation

14160 Dallas Parkway
Suite 300
Dallas, Texas 75254
U.S.A.
Telephone: (972) 770-5600
Fax: (972) 770-5666
Web site: http://www.capitalsenior.com

Public Company
Incorporated:
1996 as Capital Senior Living Corporation
Employees: 2,795
Sales: $93.26 million (2004)
Stock Exchanges: New York
Ticker Symbol: CSU
NAIC: 623110 Nursing Care Facilities; 623990 Other Residential Care Facilities

Capital Senior Living Corporation is a leading operator of residential communities for seniors, primarily aged 75 and over. It runs more than 40 communities (39 company owned and 15 managed for third parties) in 20 states with a capacity of about 7,000 residents, most of whom live independently. Meals, housekeeping, and transportation are available. The company also offers assisted living services, making it possible for residents to "age in place" as their needs change without having to move to different facilities.

Origins

Dallas-based Capital Senior Living Corporation has been involved (through its precursors) in the senior housing industry since 1990. Independent living and assisted living developments bridged a gap between traditional housing and nursing homes. Beyond mere residences, these communities provided meals and transportation. Capital originally focused on the younger, more active seniors of the independent living market. Annual revenues were about $20 million in the mid-1990s.

Jeffrey L. Beck and James A. Stroud were the group's cofounders and cochairmen. Beck also served as CEO while Stroud was chief operating officer. Each would head an industry trade group.

Another investor in one of the companies that would make up Capital Senior Living Corporation, Quality Home Care, Inc., was Lawrence A. Cohen, who would be vice-chairman, CFO, and later CEO of the corporation. Other entities that were part of the formation transactions that created Capital Senior Living Corporation were Capital Senior Living, Inc.; Capital Senior Management 1, Inc.; Capital Senior Management 2, Inc.; and Capital Senior Development, Inc., which were each owned by Beck and Stroud. Capital Senior Living Corporation was incorporated in October 1996 in preparation for its initial public offering.

1997 IPO

The company listed on the New York Stock Exchange on October 31, 1997, raising $130 million. The initial public offering (IPO) was carried out in spite of a 554-point dip in the market just days before. The company's track record, profitability, and niche were key selling points, Beck told the Dallas Business Journal.

At the time of the IPO, Capital had 5,000 residents in its communities, which were 95 percent full. Most paid an average of $1,500 a month for independent living quarters and about $600 more for assisted living. Capital did not provide specialized services such as dialysis, and more than 90 percent of residents paid out of private funds, freeing the company of the hassle of dealing with Medicare and Medicaid. Capital was said to be the second largest supplier of senior living services in the United States.

Proceeds from the IPO were earmarked to fund two years of expansion plans, including consolidating partnerships in which the company had an interest. In October 1998 Capital bought out four retirement communities it had been managing from NHP Retirement Housing Partners I. Capital paid $40.6 million for the properties in California, Florida, and Michigan, which together had a capacity of 706 residents.

The company was also buying communities in Nebraska and Missouri. At the time, Capital was expanding nine other facili-ties and building about 30 new ones. The company typically located them in large urban centers, and preferred large developments of more than 100 units. The company's target demographic, according to the Dallas Business Journal, was those age 75 and above with $25,000 in disposable income.

Late 1990s Shake-Up

The senior housing industry had a banner year in 1997 followed by a crash the next year. Still, Capital was able to provide shareholders a return of more than 33 percent in 1998, according to one source. With large numbers of the population entering retirement, many expected the industry to grow in the long term. As one of the best capitalized companies in the industry, Capital was able to finance its developments as capital became scarce. Smaller operators in the fragmented industry had difficulty finding bank financing and the state of the capital markets dissuaded them from going public for a few years, an industry insider told National Real Estate Investor. Capital took advantage of the industry shakeup to acquire companies and bring in management talent. Another factor in Capital's favor was the general decline of the nursing home industry.

While there would be justifiable concerns about overbuilding in certain segments of the senior housing market, Capital was focusing on affordable, independent living, which it felt to be an underserved niche. Capital had been expanding its offerings to provide more services to those who required more assistance. This allowed the company to promote an "age in place" philosophy wherein aging residents could remain in the same setting as their needs changed. Capital's focus remained on private pay residents; nursing services providers who relied on Medicare had been hammered by the 1997 Balanced Budget Act.

Lawrence A. Cohen became Capital's president and CEO in 1999 after serving as vice-chairman and chief financial officer for about three years. Prior to that, he had been CEO of PaineWebber Properties Incorporated.

2000 and Beyond

Capital acquired ILM I Senior Living Inc., a Virginia REIT, in August 2000. The deal included eight communities in Omaha, Nebraska; East Lansing, Michigan; Peoria, Illinois; Raleigh, North Carolina; Wichita Kansas; Hot Springs, Arkansas; Winston-Salem, North Carolina, and one in Santa Barbara, California, that was co-owned by ILM II Senior Living Inc. The acquisition added capacity for 1,300 residents and increased revenues by $22 million a year. Capital had been managing the properties since 1996. A planned merger with the ILM II fund was terminated over a tax issue.

Capital had total revenues of $59.7 million in 2000. The senior population in Texas was booming, putting it third behind Florida and California as a choice of retirement area.

Capital formed a joint venture with Blackstone Real Estate Advisors in late 2001 to increase its involvement in the housing market for seniors. Blackstone owned 90 percent of the venture and provided significant financial resources from its $1.5 billion Blackstone Real Estate Partners III fund. Capital's role was to manage the properties. The partnership intended to acquire $200 million of senior housing communities, Cohen told the Wall Street Transcript.

The purchase of a dozen communities under the Triad name was announced in 2003. They had a capacity of 1,670 residents and were owned by five partnerships, in which Capital had previously held a 1 percent interest. However, according to the Dallas Morning News, as the industry dealt with lingering over-capacity, Capital was looking for new growth by gaining more management contracts and keeping existing communities full.

Capital was also making some divestments as its share price slipped to a fraction of its 1998 peak. It sold a community in Sacramento, California, to an investment group, raising $11.7 million. The company sold a 90 percent holding in a Cottonwood, Arizona development to the Blackstone joint venture.

In 2004 Capital acquired CGI Management Inc. (CGIM) from The Covenant Group of Texas Inc. (TCG) for $2 million, plus up to another $1.6 million in performance-linked consideration. CGIM operated 16 senior communities, seven of them owned by TCG. The company expected management contracts to continue at 13 properties in four states (Arkansas, Mississippi, Oklahoma, and Texas), which had a capacity of 1,600 residents.

Stroud told the Dallas Business Journal the senior housing industry was seeing more emphasis on affordability in a lethargic economy. Operators were allowing residents to save money by unbundling such services as meals and transportation. By this time Capital had 2,500 employees and about 8,500 residents.

Company Perspectives:

Capital Senior Living Corporation is committed to providing quality housing and services based on the highest standards of excellence in the industry. Our goal is to enrich the daily lives of our senior residents by providing an environment that stimulates them physically, mentally, and emotionally. Therefore, each community offers a relaxed atmosphere of warmth and caring that promotes companionship among residents and staff. Each community's employees are personally committed to serving residents and treating them with dignity and respect.

Key Dates:

1990:
Company enters senior housing business.
1997:
Initial public offering raises $131 million.
2000:
ILM I Senior Living Inc. is acquired.
2001:
Blackstone housing joint venture is formed.
2003:
A dozen Triad communities are acquired.
2004:
CGI Management Inc. is acquired from The Covenant Group of Texas Inc.

Capital and other operators were also adding new amenities to attract residents in a competitive market. Some communities featured gyms, health centers, beauty salons, and libraries. At least one site even sported an aviary stocked with finches.

There were projections for the number of 65- to 74-year-olds to reach 37 million by 2030, more than twice as many as in 1990, when Capital started out in the senior housing market. The over-75 bracket was growing even faster, outpacing any other segment of the population.

Principal Subsidiaries

Capital Senior Living, Inc.; Capital Senior Development, Inc.; Capital Senior Management 1, Inc.; Capital Senior Management 2, Inc.; Capital Senior Living Properties, Inc.; Capital Senior Living Properties 2, Inc.; Capital Senior Living Properties 2,Atrium of Carmichael, Inc.; Capital Senior Living Properties 2,Crossword Oaks, Inc.; Capital Senior Living Properties 2Gramercy, Inc.; Capital Senior Living Properties 2,Heatherwood, Inc.; Capital Senior Living Properties 2NHPT, Inc.; Capital Senior Living Properties 2,Tesson Heights, Inc.; Capital Senior Living Properties 2Veranda Club, Inc.; Capital Senior Living Properties 3, Inc.; Capital Senior Living Properties 4, Inc.; Capital Senior Living Properties 5, Inc.; Capital Senior Living Properties 6, Inc.; Capital Senior Living A, Inc.; Capital Senior Living, ILM-A, Inc.; Capital Senior Living P-B, Inc.; Capital Senior Living ILM-B, Inc.; Capital Senior Living P-C, Inc.; Capital Senior Living ILM-C, Inc.; Capital Senior Living Acquisition, LLC; CGI Management, Inc.; HealthCare Properties, L.P. (57%); Quality Home Care, Inc.

Principal Operating Units

Owned: Canton Regency (4), Canton, Ohio; Crosswood Oaks, Sacramento, California; Gramercy Hill, Lincoln, Nebraska; Heatherwood, Detroit, Michigan; Independence Village, East Lansing, Michigan; Independence Village, Peoria, Illinois; Independence Village, Raleigh, North Carolina; Independence Village, Winston-Salem, North Carolina; Sedgwick Plaza, Wichita, Kansas; Tesson Heights, St. Louis, Missouri; Towne Centre (4), Merrillville, Indiana; Veranda Club, Boca Raton, Florida; Waterford at Columbia, South Carolina; Waterford at Deer Park, Texas; Waterford at Edison Lakes, South Bend, Indiana; Waterford at Fairfield, Ohio; Waterford at Fort Worth, Texas; Waterford at Highland Colony, Jackson, Mississippi; Waterford at Huebner, San Antonio, Texas; Waterford at Ironbridge; Springfield, Missouri; Waterford at Mansfield, Ohio; Waterford at Mesquite, Texas; Waterford at Pantego, Texas; Waterford at Plano, Texas; Waterford at Shreveport, Louisiana; Waterford at Thousand Oaks, San Antonio, Texas; Wellington at Arapaho, Richardson, Texas; Wellington at North Richland Hills, Texas; Wellington at Oklahoma City, Oklahoma; Affiliates: BRE/CSL; SHPII/CSL; Managed: Atrium of Carmichael, Sacramento, California; Covenant Place of Burleson, Texas; Covenant Place of Waxahachie, Texas; Covenant Place of Abilene, Texas; Crescent Point, Cedar Hill, Texas; Good Place, North Richland Hills, Texas; Harding Place, Searcy, Arkansas; Meadow Lakes, North Richland Hills, Texas; Mountain Creek, Grand Prairie, Texas; Meadow View, Arlington, Texas; Saint Ann, Oklahoma City, Oklahoma; Southern Plaza, Bethany, Oklahoma; Sunnybrook Estates, Madison, Mississippi; Tealridge Manor, Edmond, Oklahoma; The Arbrook, Arlington, Texas.

Principal Competitors

American Retirement Corporation; Brookdale Living Communities; Emeritus Corporation; Holiday Retirement Corporation; Sunrise Senior Living, Inc.

Further Reading

"CEO/Company Interview: Lawrence A. Cohen, Capital Senior Living Corp.," Wall Street Transcript, July 31, 2000.

"Company Interview: Lawrence A. Cohen, Capital Senior Living Corporation," Wall Street Transcript, May 13, 2002.

"Dallas-Based Developer Buys Four Retirement Communities," Dallas Morning News, October 6, 1998.

Holman, Kelly, "Blackstone in JV for Senior Housing," Daily Deal, January 2, 2002.

Johnson, Ben, "Assisted Living's Crossroads: Public vs. Private Rages On," National Real Estate Investor, April 30, 1999.

Lennhoff, David C. and Peter A. Wolman, "Valuation of Continuing Care Retirement Communities: Worth Another Look," Appraisal Journal, January 2000, pp. 57, 63.

McCarthy, Edward, "Avoiding the Pitfalls of Assisted Living Development," Urban Land, February 1997, pp. 45, 55.

Patrick, Stephanie, "Capital Merger Ups Resident Capacity," Dallas Business Journal, August 18, 2000, p. 8.

, "Capital to Manage Sites It Sells, CEO Says," Dallas Business Journal, December 15, 2000, p. 26.

, "Capital Senior Buying Two REITs," Dallas Business Journal, July 14, 2000, p. 1.

, "Merger Snag," Dallas Business Journal, July 28, 2000, p. 3.

, "Senior-Housing Market Heats Up in Metroplex," Dallas Business Journal, March 31, 2000, p. 37.

, "Two Minutes with James A. Stroud," Dallas Business Journal, November 12, 2004.

Strauss, Lawrence, "Capital Senior Living May Improve with Age," Barron's Online, December 16, 1998.

Tanner, Lisa, "Capital Senior Living Raises $131 Million for Expansion," Dallas Business Journal, November 14, 1997, pp. 1 +.

, "Capital Senior Living Rides Wave of an Aging Population," Dallas Business Journal, January 22, 1999.

Yu, Roger, "Senior Housing Industry Changing with Times," Dallas Morning News, October 26, 2003.

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