We are truly glad to see that Sonida Senior Living (formerly Capital Senior Living) is seeing improvements in census, contract labor use, rates and revenues. We are sure outgoing CEO Kim Lody wanted to leave with some upbeat news. Census (84% at quarter end) is now just 50 basis points below the pre-pandemic level. But as we have repeatedly said, pre-pandemic was not so good for the industry. We really have to look at three to four years before the pandemic as a goal. Several quarters ago we found a “typo” in the quarterly earnings release, which made the financial performance look better. After our reporting, they then issued a corrected release. In this second quarter 2022 earnings statement, we believe there is another typo, but a true typo and not consequential or misleading.
Call us nerdy, but we believe on the first page when discussing quarterly highlights, they compared “2Q 2022 vs 1Q 2021,” when it should have been 1Q 2022 they were comparing against. The numbers were correct, just a mistake in the labeling, so harmless. But we wonder who at the company is proofreading these things. And then, are there other mistakes we are not catching.
The good news is that contract labor expense was down 41% in the second quarter, and they expect it and other “premium” labor costs to be down to zero by year end. If only the rest of the industry was that optimistic. Sequentially, same-community (the 60 properties they own) census increased by 90 basis points, and the year-over-year increase was 510 basis points. This is all great news.
But (and there is always a but), operating margins are still too low, especially for occupancy that ended June at 84%. The stated net operating income margin increased to 20.6%, but this includes roughly $9 million of CARES Act funds, which they fortunately do not have to pay back. But it also artificially inflates the actual results that investors should be looking at. Without that grant, the real margin drops to single digits. With occupancy getting close to “stabilized,” and expenses still running high, the only way to boost that margin will be through rate increases, which they expect will be in the 4-5% range in 2023. But will it be enough? In an industry that is still suffering from low occupancy, getting above 90% will not be easy.
The company’s G&A expense still runs too high (and now includes stock-based compensation), so we have to assume they could grow the company significantly without adding too much to overhead. Growth by acquisition may be the only way to get there. With debt of nearly $670 million, or $11.1 million per community, that will be a hard nut to crack without much improved cash flow and favorable prices in the acquisition market. The share price was mostly flat after the earnings release, and the market cap is only a little more than $120 million. With new management at the helm after September 2, we will see what happens.
