Better late than never. Sonida Senior Living (formerly Capital Senior Living) just released its fourth quarter and full year 2021 financial results, just when companies are starting to release first quarter 2022 results. The best news, however, is their progress in the first quarter of 2022, bucking the norm of a first quarter census drop, much like many companies are doing.
Getting back to the recent results, as a result of their major recapitalization late last year, raising $154.8 million, there is no longer a “going concern” issue for the company, which was a major problem. Check that one off the list. Next up is census, which like everyone else hit bottom last Spring, but has been consistently rising, from 77.4% in the 2020 fourth quarter to 81.3% in the 2021 fourth quarter, up 390 basis points. But sequential occupancy this year has grown from 82.0% in January to 82.2% in February and 82.6% in March. A 60-basis point increase for a quarter when it always declines is nothing to sneeze at.
Profitability, however, is still a disappointment. In the fourth quarter, we calculated the EBITDAR margin to be 2.3% on revenues of approximately $50.0 million. Granted, this is after $6.6 million of G&A expenses, or 13.6% of revenues. This is way too high, but partly the result of not downsizing overhead enough to match the downsizing in number of communities operated, but also because we assume there were a lot of extra costs associated with the recap last year, plus other expenses in a difficult operating environment. The bottom line was that the interest coverage ratio was 0.13x, which means cash reserves are paying for interest expense. That is not something that should continue for too much longer.
With occupancy increasing in the first quarter this year, the goal is to get to pre-pandemic census levels by the end of the year, which is not a huge leap of faith. And when you think that we are talking about three additional residents per community, it does seem highly achievable. The problem is that even with reaching 85% occupancy, or a 350-basis point increase, the incremental cash flow is not that great. Assuming their average revenue per occupied room of about $3,600 per month, that would result in an additional $8.0 million of revenue per year and about $5.0 of incremental cash flow assuming a 60% incremental margin (which is low, and could be closer to 80%). That would still not cover interest expense.
Annual G&A expense of $26.4 million is just not realistic for a company with 60 owned communities. Either the company needs to grow into its G&A or reduce it sharply to get back on the road to profitability. They did complete their first acquisition in five years, acquiring two communities in Indiana for $12.3 million with good pricing metrics for all cash. It was a tuck-in acquisition in a strategic market, but other they were both small or old because that is a cheap price.
The company is also using some of the recap funds to renovate or upgrade existing communities, which we are sure is necessary. So, census is moving in the right direction, the recap brought in sufficient cash for at least a few years, they are on the growth path again, they have a new CFO and have addressed all debt maturities through mid-2024. They just need to raise rates enough to both cover fast-growing labor costs and make a decent profit, all while pushing census growth.
