Just like for almost everyone else, Sonida Senior Living had some good news to report for the second quarter as well as some areas that did not improve as much as maybe expected. But progress is being made to achieve stabilized occupancy, cash flow and operating margins.
Even though weighted average occupancy increased by 120 basis points from the year-ago quarter to 83.9%, it declined by 10 basis points from the first quarter this year. For the sector, the second quarter has rarely been a good one for census, but other companies have been reporting increases for both the first and second quarters. The 8% rate increases have caused some move outs for financial reasons, but the increases are necessary. To put things in perspective, occupancy at the end of 2019 was 84.0%, 79.7% at the end of June 2021 and 85.4% at the end of June 2023. But they need to get that to the high 80s (at least) before new development takes a bite out of it in a few years.
Management has been working hard on cost management, and it shows. General & Administrative expense declined by 30.3% year over year, getting down to 11.5% of resident revenue, from 18.1% a year ago, which was unsustainable. Labor cost as a percent of revenues declined by 140 basis points. Contract labor year to date dropped by $3.1 million, or 72%, from the first six months of 2022. All of this helped adjusted EBITDA (excluding grants) to increase by 23% sequentially to $7.1 million.
We previously covered the debt restructuring with Fannie Mae which was crucial to Sonida’s future, as well as the equity “line of credit” with its major shareholder, Conversant Capital. But as Sonida leadership mentioned in the earnings call, the ability to continue to show operational, cash flow and margin improvements will make it easier for the lenders to help kick the can down the road. Even though the equity LoC gives the company some breathing room, cash is now at its lowest level in quite a while at just $7.2 million ($16.9 million at December 31, 2022), which is why they have to keep pushing rates, census and cash flow.
There has been no movement on the debt with Protective Life, which will be crucial in the coming quarters. But if Ally sees the continued operational progress, they may not press the situation. It is a double-edged sword, however. If the bank thinks that Sonida is on better financial footing, then it may start to force the issue. Sonida can’t refinance that debt as of now, especially where interest rates are, and we are sure they are making that point.
All in all, Sonida will live to see another day, another quarter, and another year. But solving the debt problem will be the key to its long-term survival, and management knows it. Presumably, the lenders know it as well, and prefer to have a borrower upward bound. The third quarter, which historically has been the strongest for census growth for the industry, will give us some guidance.
