Sonida Senior Living, Inc. (SNDA) Q1 2023 Earnings Call Transcript


Good day, and welcome to the Sonida Senior Living Q1 2023 Earnings Conference Call. Today’s conference 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 expressively 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 as in the reports the company filed 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 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 reconciliation of each non-GAAP measure from the most comparable GAAP measure, please also see today’s press release.

At this time, I would like to turn the call over to Sonida Senior Living CEO, Brandon Ribar.

Brandon Ribar

Thank you, Alicia. Good morning, and welcome to our 2023 first quarter earnings call. I’m joined today by Kevin Detz, our Chief Financial Officer. Earlier today, we posted our Q1 investor presentation, which will be referenced throughout this call as we discuss our strategic priorities and operating results for the quarter. You can find our latest presentation at in the Investor Relations section if you would like to follow along.

I continue to believe success for Sonida in 2023 will be defined across 3 fundamental efforts: accelerated margin expansion to generate positive cash flow from operations; a strengthened balance sheet with a more attractive debt profile; and finally, portfolio expansion through strategic management arrangements and accretive real estate acquisitions. Over the last 6 months, we have focused on the first 2 efforts, and I’m excited to share our progress.

First, accelerated margin expansion occurred in Q1, driven by the strength of our operational leadership team, the passion around our resident experience and programming, and the investments made to our community physical plans in 2022. During our previous earnings call in March, we set forth an expectation for stable occupancy early in the year and expanded margin improvement in 2023. Our operating team delivered an 8th consecutive quarter of occupancy growth, coupled with a RevPOR increase of 6.4% over Q4 2022, the strongest increase in our company’s recent history.

Our owned portfolio averaged 84% occupancy in Q1, with an expectation for further growth in Q2 and throughout 2023. On a sequential quarterly basis, the Q1 revenue increase of 6%, coupled with the strong expense control contributed to a 26% increase in community NOI and a 7.5% increase in adjusted NOI, which excludes grant revenue for comparable quarters. Even more impactful and encouraging were the March monthly results referenced on Page 6 of the investor deck. We view March results as our new baseline with run rate revenue up more than 10% year-over-year and operating margin at 24.3% in March, up 440 basis points from Q4 and 530 basis points from Q1 2022. Kevin will provide further detail in his comments, and I cannot thank our leadership team enough for the effort required to achieve these results so quickly.

I firmly believe the resident experience and delivering highly valued service and care to each of our residents and their families by team members who are engaged and excited to be part of the Sonida family will remain the foundation for the continued strengthening of our operating results. We are honored to have 35 of our communities recognized as the Best in Senior Living in conjunction with the U.S. News & World Report annual survey. It is a testament to our team members who create safe, caring spaces and cultivate joy for our residents every day. We are grateful for their hard work and dedication and pleased to see that retention of our senior leadership throughout our communities remain strong in Q1.

The portfolio experience is what spread operating improvement in Q1, led by concentrated recovery in the Midwest through strong rate expansion and stability on the staffing front, resulting in 600 basis points of margin expansion over the fourth quarter. Texas and Wisconsin, 2 of our traditionally strongest states, continued to deliver revenue and margin growth with a combined NOI margin exceeding 31% in those 2 states. I remain highly confident in our senior operating leadership as they continue to deliver operational excellence.

Developing and retaining high-performing teams will always be at the top of our core priorities. Leadership retention remains the highlight with only 8 open positions across more than 330 local and regional leadership roles, with turnover at the community down nearly 10 percentage points in the first quarter. These key metrics reflect our commitment to maintaining an open, transparent and supportive organizational culture across Sonida that will continue to deliver operational continuity and stable labor costs in our communities. In Q1, the total cost of labor declined sequentially for the first time in recent years, led by an additional 50% reduction in contract labor on top of the 25% reduction already achieved in Q4 2022.

Our second area of focus is delivering a strengthened balance sheet with a more attractive debt profile. We look forward to providing an extensive update on our potential lender restructurings in the near term. We remain in discussion with each of our 3 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.

Our operations generated more than $3 million in cash for the first quarter of 2023, a year-over-year improvement of $4 million. 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. 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.

As referenced previously, we believe our growth opportunities in 2023 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. We continue to balance the intense focus on operating improvement of the core portfolio, strengthening of the balance sheet and participating in the market as an active acquirer in partnership with our shareholders and investors.

Success in each of these 3 primary efforts: margin expansion; strengthening of the balance sheet; and growing the portfolio, will deliver substantial value to our shareholders in 2023 and beyond. Each of these efforts are only possible with a best-in-class leadership team at the local and regional levels, with the shared dedication to creating a safe and caring environment where residents find their joy in new experiences, hobbies and friendships.

I’ll now turn the call over to Kevin for a discussion of the financial results.

Kevin Detz

Thanks, Brandon. I’m equally excited to share the results from this quarter, which are starting to reflect all the amazing contributions and tireless efforts from the team over the past 6 to 8 months.

Starting with top line on Slides 5 and 6, it bears repeating that the company realized an 8th straight quarter of both occupancy and revenue growth. The slight increase in occupancy is particularly noteworthy for 2 reasons: The first is that the historical trend of Q1 seasonality softening is returning to the industry, as seen in our recent peer filings; the second is that the company was able to achieve its occupancy goals despite a programmatic rollout of our resident rate increases, as discussed in more detail in a few slides.

With the foundation of stabilizing and improving occupancy across the portfolio firmly in place, our regional leaders continue to focus their resource and efforts towards a small subset of underperforming communities with customized performance plans. We believe extra focus to address underperformance on these communities, when successful, will be a meaningful driver of overall portfolio occupancy growth to push our run rate occupancy north of 85% in the second half of the year.

We are encouraged with both industry and company metrics that reflect accretive incremental margins when occupancy begins to approach and exceed this level. Rate margin improvement should continue across the remaining stabilized portfolio, based on a combination of macro industry recovery trends and specific Sonida initiatives discussed on previous calls.

Moving to Slide 8. In our last earnings call on March 30th, we referenced the company’s most significant active initiative to address rate recovery and growth through the acceleration of resident rate increases on in-place leases greater than 12 months. Our belief that our residents would support responsible increases commensurate with the value currently provided from our community teams manifested in a significant way this quarter. We are extremely pleased to report that we successfully executed on this initiative beginning March 1, while still slightly growing occupancy over the same period.

The company realized an overall rate increase of 9.1% on a population of approximately 1,500 leases, as seen on Slide 8, directly contributing to adjusted RevPOR increases of 5.6% and 2.6% over Q1 2022 and Q4 2022, respectively. More important, the new foundation of rates should provide a permanently elevated run rate on overall portfolio margin. With another tranche of resident leases available for similar rent acceleration coming due this summer, we believe we will be successful in further pushing up RevPOR. Please note that in addition to our historical presentation of RevPAR and RevPOR, we’ve also presented these non-GAAP measures on an adjusted basis to remove the impact of nonrecurring state grants received in both Q1 of 2022 and — 2023 and 2022.

Amongst other revenue initiatives more fully described on Page 8, we continue to push on a recently implemented resident rate review cadence, which has allowed us to increase our quarter-over-quarter re-leasing spread by 2% for each of the last 2 quarters. Similar to our lease renewal increases, we believe that the positive 7% re-leasing spread was only achievable because of the resident and family experience created every day by our community teams.

Finally, as a result of recently implemented technologies around our revamped level of care program, we have grown this revenue stream by 4% each of the last 2 quarters. We believe there is still opportunity to further push our level of care revenues across the portfolio as the program matures and evolves.

Moving ahead to Slide 9, where we’ll address some of the encouraging trends on the operating expense side of the business. Like our peers, we continue to be laser-focused on reducing contract labor to pre-pandemic levels. We’ve now seen 2 consecutive quarters where contract labor has decreased $530,000 and $670,000 in Q4 2022 and Q1 2023, respectively. This represents a monthly run rate improvement from its high point of $630,000 at Q3 2022 to just $230,000 at Q1 2023. We continue to focus on a handful of individual communities that comprise much of the contract labor consistent with our targeted deployment on the occupancy front.

Over the same 6-month period, we have been able to hold direct labor relatively flat despite the rapid decrease in contract labor over the same period. We believe our leadership depth and stability have allowed us to retain our community teams, which has contributed to the avoidance of premium labor and out-of-market pay ranges. Specifically, we have realized double-digit percentage decreases in both voluntary and overall turnover ratios during the most recent quarter. Most importantly, these results create a lower overall labor run rate moving forward into a period where the composition of rate and occupancy growth should support continued margin expansion.

Staying on the same slide, our food costs continue to trend down, as each month we are realizing increased compliance and optimization associated within our global purchasing organization against the economic backdrop of overall inflationary easing. Finally, the company is seeing an overall flattening of all other operating expenses relative to its revenue profile. We continue to push on the various operating initiatives rolled out over the past 6 months in an attempt to further improve our unit economics.

On to Slide 10. As Brandon referenced, we are encouraged by the latest discussions surrounding the company’s debt structure. Please note that Slide 10 contains only historical numbers to date and excludes any favorable impact related to potential loan modifications. In early January, we legally transitioned the last 2 communities in connection with the company’s 2020 asset transfer of 18 Fannie Mae communities. This transition resulted in a noncash GAAP gain on extinguishment of debt of $36.3 million. As stated on our last call, we are happy to report that all our debt is now either fixed or variable with a full hedge in place, greatly limiting the company’s exposure to further and/or prolonged elevated interest rates. Finally, the company was in compliance with all financial covenants required under our mortgages with the exception of 4 communities mortgage with Protective Life as more fully described in the 10-Q to be filed later today.

Finally, I’d like to spend a bit of time on our 11th and final slides on today’s investor presentation. As discussed on previous calls and in our 2022 10-K filed in March, the company developed various cash preservation initiatives to immediately assist in reducing the run rate cash burn and shorten the bridge to run rate cash generation. In addition to the strategic and operational initiatives already touched on this call, we are pleased that our G&A profile continues to trend towards 10% of total revenues, a significant improvement from 2022’s run rate, which averaged 15% for 2021 and the first half of 2022.

We’ve also been able to successfully leverage our recently implemented ERP system to make more informed, ROI-based decisions on how we deploy capital into our communities. This process improvement, along with a significant amount of capital reinvested into our communities in 2022, has played a key role in the improved operations of our portfolio.

We believe our results, through one quarter of the year, are consistent with the overall effectiveness of these initiatives and a direct reflection of the quality of our new leadership team across every function of the company. 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 growing concern, accelerate the trajectory on cash flow generation and allow for the swift pivot to strategic growth.

Back to you, Brandon.

Brandon Ribar

I’ll conclude today’s presentation by once again recognizing and thanking our leadership team throughout Sonida. I have the utmost confidence in this group of leaders to continue delivering high-quality servicing care to our residents while running a sound business. It’s my privilege and honor to share the success they are achieving as we rebuild Sonida as an industry-leading company. I look forward to further updates in the future related to our growth trajectory and ongoing commitment to creating a differentiated resident experience.

Alicia, please open the line for questions.

Question-and-Answer Session


[Operator Instructions] Our first question is from Steve Valiquette with Barclays.

Steve Valiquette

It’s Steve Valiquette from Barclays. Just a couple of bigger picture financial questions today, maybe separate from the quarterly results. So just taking maybe a step back and let’s say, a couple of years down the road, you get occupancy back to peak levels in the high 80% range that you achieved, pre-pandemic.

The company was generating roughly $50 million of annualized operating cash flow in the middle of last decade, when you were achieving that high 80% occupancy. But that was also when the company had twice as many facilities as you have now. So I’m just trying to think, big picture, once we get to steady state or just back to full recovery of occupancy, is there just a range of what operating cash flow generation might be, true operating cash flow generation, not just EBITDA from the existing facility footprint?

And let’s say if that $25 million — because half of the many facilities that you had back then versus $50 million of operating cash flow back then, in the context of $640 million of debt outstanding, just trying to frame the kind of the cash flow to debt outstanding ratio that we might see once you kind of get full recovery on the facilities? And then I have a follow-up, kind of just based on how you address the first one, I guess.

Brandon Ribar

Sure. I’ll go ahead and start, Steve, and then Kevin can jump in. So I think your question in terms of a range is something that we’d like to be able to provide, hopefully, in the near future. I don’t think we’re quite there yet, but I can tell you what is really important about getting there.

And that is really seeing the ongoing improvement on the rate front that we reported. And looking at kind of that March baseline that we’ve got in the deck on Page 6, I think, is important because from there, continued improvement that you referenced.

And I think we don’t see the high 80s as necessarily the cap to it. And we also want to continue to improve ourselves on the operating expense level. So margin recovery and getting much closer around that 30% mark that, I think, these communities collectively have been able to achieve historically, is obviously really important to that.

I think the other factor is just the ultimate outcome from the discussions that we’re having with each of our material lenders and how that will impact our belief and our kind of thoughts around where the, call it, stabilized, fully baked cash flow of the portfolio is. As you probably recall, we had 45 communities that were leased in the past. And so the kind of escalating lease costs were also factored into the portfolio’s ability to generate cash flow, and we don’t have that anymore.

So being fully owned and managed, we think is beneficial. And we’d be happy to kind of try and share some additional color on where we think that ultimate cash generation goal looks, especially as we’re able to provide additional detail around the discussions related to our overall loan portfolio, and then just how we see the ongoing improvement not only in rate, but occupancy developed along with our operating expense profile.

So I’d say that we really look forward to being able to provide more guidance around the range of what the portfolio can do for the long term. But we want to get some of those other variables finalized before going down that path.

Steve Valiquette

Okay. Yes, that’s definitely helpful. And somewhat kind of tied into that then, I mean, obviously, on this call, you guys alluded to the potential restructuring of some of the debt or loan modification discussions. I understand you’re probably handcuffed on being able to go into any sort of specifics around that.

But I guess I’m just curious, at a high level, just conceptually, could this involve any sort of just reduction of the total amount of the principal outstanding, or is it more just about either change in the interest burden associated with the existing debt and/or pushing out maturities? So just wondering, is there any relief valve on just the amount of principal outstanding as part of the discussions, if you’re able to discuss that at all without giving away any specific numbers, obviously.

Kevin Detz

Yes. Unfortunately — and this is Kevin, Steve, we can’t give any ranges of what that might look like. But I think what we can share is that, based on our scripts and the release today is that what we’re ultimately going for is something that is going to be meaningful enough to prove out the investment thesis and to ultimately not be bound by or confined by the cash flow or some of the margins historically.

But really set the stage for what we think is a lot of value to our shareholders relative to operational improvement and overall value through management acquisition and real estate acquisitions. So without those numbers in hand, we wouldn’t feel comfortable sharing specifics. But I can tell you that what we’re going for is something meaningful.

Steve Valiquette

Okay. I appreciate that. And then maybe just a final question tied into all this is, roughly 18 months ago, 24 months ago, forgot the exact timing, but you had another source of financing that involved a lot of different variables, stuff that could be potentially dilutive on the equity piece as well, with all the different moving parts within that.

But I don’t want to call that investor an activist per se, I’m just curious how much investment investors has any role in the ongoing discussions you’re having around loan and debt modifications? Or is that party just totally independent, not really involved? Are they active or passive as far as their involvement in kind of the investment profile of the company and the way it stands right now?

Brandon Ribar

Yes. What I’d say is that we have representatives on our Board of Directors from our — two of our largest shareholders. And so in our ongoing discussions, we always keep the Board up to speed with the things that we’re working on. And they provide insights based on their areas of expertise. And so we’ve had a really productive set of discussions and contributions from our various board members. They’ve been very supportive of us. And so that’s the kind of stage on which we talk about the discussions and where we’re going as a business.

Steve Valiquette

Got it. Okay. All right. Notwithstanding all that, it was good to see some of the progress done in the quarter, kind of consistent with the industry trends as well. So congrats on that, and I look forward to future developments on the — kind of the balance sheet picture, so thanks again.

Brandon Ribar

Yes. Thank you, Steve. I think we’re very encouraged by what we saw towards the end of the first quarter and want to just continue to push everything forward in an accelerated fashion, and then provide further details on the discussions that we’re having on the balance sheet. So thank you, and I appreciate your time.


Thank you. There are no further questions at this time.

Brandon Ribar

Thank you, all, for joining. This will conclude our call for this morning. Take care.


This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.