Sonida Senior Living executives continue to feel uncertain about the future of the company, less than two months after reporting “substantial doubt about our ability to continue as a going concern,” according to a Thursday filing with the Securities and Exchange Commission. But in the filing and a call with analysts and investors, they detailed actions they have taken or plan to take to strengthen the company’s financial footing.
“We strongly believe that the successful execution of these ongoing initiatives should enable the company to remove any doubts on its ability to continue as a going concern, accelerate the trajectory on cashflow generation and allow for the swift pivot to strategic growth,” Chief Financial Officer Kevin Detz said Thursday on the earnings call.
President and CEO Brandon Ribar said that the company is focusing on three areas as it aims for success: “accelerated margin expansion to generate positive cash flow from operations, a strengthened balance sheet with a more attractive debt profile, and portfolio expansion through strategic management arrangements and accretive real estate acquisitions.”
Sonida saw positive signs in the first quarter, executives said, when the company:
- Saw margin expansion of 600 basis points over the fourth quarter of 2022.
- Achieved its eighth consecutive quarter of occupancy growth, coupled with an increase in revenue per occupied room of 6.4% over the fourth quarter of 2022, the strongest increase in the company’s “recent history.”
- Experienced an occupancy rate of 84% in its owned portfolio, with an expectation of further growth in the second quarter and throughout 2023.
- Realized a 6% increase in revenue compared with the fourth quarter of 2022.
- Had a 26% increase in community net operating income and a 7.5% increase in adjusted NOI.
- Saw community-level turnover decrease by almost 10 percentage points. Ribar said that of more than 330 local and regional leadership roles, only eight positions are open.
- Experienced the first decline in total labor costs compared with the previous quarter for the first time “in recent years,” led by an additional 50% reduction in contract labor on top of the 25% reduction already seen in the fourth quarter of 2022. The company is “laser-focused on reducing contract labor to pre-pandemic levels,” Detz said. “We’ve now seen two consecutive quarters where contract labor has decreased $530,000 and $670,000, in Q4 2022 and Q1 2023, respectively,” he said. Direct labor costs have remained “relatively flat” during that time, he added.
- Generated more than $3 million in cash from operations, a year-over-year improvement of $4 million.
- Grew the revenue stream related to its revamped level of care program by 4%, with “opportunity to further push our level of care revenues across the portfolio as the program matures and evolves.”
- Beginning March 1, implemented an acceleration of resident rate increases on in-place leases greater than 12 months, resulting in an overall rate increase of 9.1% on approximately 1,500 leases, “directly contributing to adjusted RevPOR increases of 5.6% and 2.6% over Q1 2022 and Q4 2022, respectively,” Detz said. Another tranche of leases will be available for rent acceleration this summer, potentially increasing RevPOR, he added.
- Realized $36.3 million for the gain on debt extinguishments when Fannie Mae transitioned to new owners the final two of 18 communities that were in receivership after Sonida elected not to pay $3.8 million on related loans.
Run rate revenue was up more than 10% year over year, and the operating margin was at 24.3% in March, up 440 basis points from the fourth quarter of 2022 and 530 basis points from the first quarter of 2022, Ribar said.
“We view March results as our new baseline,” the CEO said.
Moving forward, Detz said, the company is taking additional actions to strengthen its financial position, including watching costs for food and other expenses as well as having regional leaders follow customized performance plans for “a small subset of underperforming communities” in an effort to “push our run rate occupancy north of 85% in the second half of the year.”
The company also is continuing discussions with each of its three material lending partners “with a goal of providing the short-term liquidity needed to bridge to positive cash flow generation, and more importantly, capital structure stability that supports planned strategic growth,” Ribar said.
Growth opportunities in 2023, he said, “will come from a combination of additional strategic management arrangements and the acquisition of real estate with an accretive investment profile. Many owners, operators and lenders across senior living are actively identifying strategic alternatives for their existing assets, and our goal is to present Sonida as a primary transaction partner in the near term.”
In the meantime, according to the SEC filing, as of March 31, the company was in default on a mortgage for four communities on which it elected not to make principal or interest payments, with an aggregate outstanding principal amount of $69.8 million. The company said it is in discussions with the lender, Protective Life Insurance Co., to resolve the matter.
Sonida was in compliance with all other financial covenants required under its mortgages, Detz said.
“The improvement in run rate cash flows from operations, coupled with a comprehensive restructuring of our mortgage loans, would return the company to overall cash flow generation for the first time in the company’s recent history,” Ribar said. “The combination of strong and stable leadership across our operating platform, substantial progress in discussions with our lending partners, and significant margin expansion in Q1 positions Sonida for continued success and growth in 2023 and beyond.”
For more coverage of the earnings call, see the McKnight’s Business Daily.