A “pivotal” second quarter and debt restructuring to shore up its balance sheet has set up Sonida Senior Living (NYSE: SNDA) for future rate growth, occupancy gains and investments, according to CEO Brandon Ribar.
Last month, Sonida announced a debt restructuring and an equity infusion agreement covering 49 assets financed by Fannie Mae and Ally Bank in a move aimed at aiding short-term cash flow. On Monday, Sonida announced operating margins were up 370 basis points compared to last year and up 240 basis points since the first quarter.
“The reason we’ve been able to deliver for the first time since I have been in this role — and really since pre-pandemic time –, [is] a significant improvement in our operating margin on a quarter-over-quarter, year-over-year basis,” Ribar told Senior Housing News. “I think it’s the output of all the work that’s been done over the year.”
That strength in margin growth is attributed to the company’s continued success on leadership retention, occupancy growth and increasing rates at a higher level than “ever attempted in recent history,” Ribar added.
The company’s share value fell 1.44% on Monday, closing at $9.56 per share.
Sonida’s recovery ‘launching point’
After a going concern warning was issued in March related to myriad factors, management said it secured $40 million of additional free cash flow over the next three years with the debt restructuring with Fannie Mae.
The debt restructuring allowed for overall cash generation for the first time in “recent history,” Ribar noted, highlighting just how the flexibility granted as part of the restructuring has positioned Sonida for future opportunities.
“To have those outcomes be very positive for the long-term runway of the company is why I really believe that was a pivotal and very positive quarter for us as a launching point going forward into the second-half of 2023 and beyond,” Ribar told Senior Housing News.
The forbearance agreement also included terms that “creates the long-term extension and ongoing interest rate relief,” Ribar added. During the forbearance period, Sonida will issue reduced debt service payments to include the loan modification, having already made a $5 million payment to apply to pre-existing loan balances previously.
Modifications made in the forbearance agreement take effect at the end of the third quarter.
“For us to continue down the path to have that modification completed, we need to just keep doing what we’re doing today which is servicing our debt and continuing to operate on a normal course basis,” Ribar said.
Pushing average occupancy beyond 85%
Sonida reported overall revenue of $68.85 million in the second quarter, up 5.4% compared to last year during the same period. But the company also recorded a net loss of $12.2 million in the second quarter.
Adjusted earnings before interest, taxes, depreciation (EBITDA) was $7.5 million in the second quarter, an increase of 78% compared to the second quarter of last year.
Sonida Senior Living’s portfolio includes 62 owned senior housing communities and 10 others the operator manages for third parties.
Weighted average occupancy for Sonida’s consolidated portfolio dipped 0.1% in the second quarter compared to the first quarter of this year, from 84% to 83.9%. Sequentially, occupancy remains higher than the second quarter of last year when 82.7% occupancy was reported.
“We’d love to continue to push occupancy past the 85% mark between now and the end of the year,” Ribar said. “It’s always the goal to get as many of our communities at or above that 90% mark which really represents a good level of stability.”
Revenue per available room (RevPAR) increased 9.9% from the last year to $3,300 and revenue per occupied room (Revpor) increased 8.3% from last year at this time.
Adjusted community net operating income margin increased from 20.9% in the first quarter of this year to 23.3% in the second quarter. Community NOI hit $13.6 million in the second quarter, up $200,000 from the first quarter of this year and up $3 million since the second quarter of last year.
While eight communities are still occupied below 75%, Ribar said he expects those lagging communities to reach north of 80% census after “strong progress” in the first-half of the year.
“I think stacking additional margin and occupancy improvement, as well as rate, onto the back-half of the year’s performance is going to tell a story that there’s a very clear, not just two-quarter trajectory of improvement, but longer-term, sustainable improvement that people can get comfortable with,” Ribar said.
Ribar also sees strength in growing resident rates, like many operators as they try to right-size their rates within their respective markets.
Resident rental rates increased 7.6% up from the second quarter of last year, with rental rates up 3.3% in the second quarter from the first quarter of this year due to the planned renewal of 38% of leases on March 1. This represents seven months of rate growth for Sonida.
Another metric watched closely by management is expense pressure. Operating expenses increased slightly in the second quarter to $43.4 million, up from $43.2 million in the first quarter, and up year-over-year from $41.4 million in 2Q22.
Sonida has also had success on labor in recent months, with three consecutive quarters of revenue growth outpacing total costs of labor. To-date, June 2023 labor costs as a percentage of revenue is down 1.4%, from 47.5% in June of last year compared to 46.1% reported two months ago. Contract labor is now limited to a “handful” of communities and decreased more than $6 million compared to last year.
In its latest review by management, five leadership positions in the company remain open across 330 local and regional leadership positions, Ribar highlighted, and turnover remains down by 10% compared to last year.
Growth and outlook
With the high cost of capital and construction costs, providers have had to get creative in recent times to conceive new growth projects. Sonida is no different, and Ribar said he would consider inking new management agreements to bring growth to the company’s portfolio. He added that they would have to be “very strategic and thoughtful” around how Sonida can expand overall real estate ownership.
“It provides us with a really strong opportunity to bring capital to the table and get a deal done,” Ribar said of the current environment. “We see working with banks, lenders and owners who may need additional capital that they want to invest.”
In each case, Ribar said Sonida would “prefer” to have a future stab at purchasing affiliated communities with real estate ownership opportunities set to be “very strong” over the next 12 to 18 months if providers have access to capital, he added.
With success in labor and improving financial metrics, Ribar said he was “optimistic” for what’s ahead.
“All these components combined with what we’ve been able to do on the capital structure provides us with some optimism that this recovery and improved performance trajectory should continue,” Ribar said.