Sonida Senior Living Inc. Q1 2023 Earnings Call

Okay.

Good day and welcome to the Sun Neatest 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 expressly 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 S. E. C 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 Sumita's senior living Dotcom flashed Investor Relations 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 Sunita senior living.

C E O branded rebar.

Thank you Alicia good morning, and welcome to our 2023 first quarter earnings call I'm joined today by Kevin <unk>, 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, its Anita senior living Dot com in the Investor Relations section, if you would like to follow along.

I continue to believe success first indeed in 2023 will be defined across three fundamental efforts.

<unk> margin expansion to generate positive cash flow from operations, a strengthened balance sheet with the more attractive debt profile and finally portfolio expansion through strategic management arrangements and accretive real estate acquisitions.

Over the last six months, we have focused on the first two efforts and I am 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 in programming and the investments made to our community physical plants in 2022.

During our previous earnings call in March we set forth an expectation for stable occupancy early in the year and expanded expanded margin improvement in 2023.

Our operating team delivered an eighth consecutive quarter of occupancy growth coupled with a revpar increase of six 4% over Q4 2022, the strongest increase in our company's recent history.

Our own 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 seven five.

A 5% increase in adjusted NOI, which excludes grant revenue for comparable quarters.

Even more impactful and encouraging where the March monthly results referenced on page six 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 Q.

102022.

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 <unk> 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.

<unk> with the U S News and World Report annual survey.

It is a testament to our team members, who create safe carrying spaces and cultivate joy for our residents everyday we are grateful for their hard work and dedication and pleased to see that retention of our senior leadership throughout our communities remained strong in Q1.

Portfolio experienced widespread operating improvement in Q1 led by concentrated recovery in the Midwest through strong rate expansion and stability on the staffing, Brian resulting in 600 basis points of margin expansion over the fourth quarter.

Texas, and Wisconsin, two of our traditionally strongest states continued to deliver revenue and margin growth with a combined NOI margin exceeding 31% in those two 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 eight open positions across more than 330, local and regional 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 cities. They will continue to deliver operational continuity and stable labor costs in our communities and.

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 three material lending partners with the goal of providing the short term liquidity needed to bridge to positive cash flow generation and <unk>.

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 our 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 physicians to Nida 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.

The owners operators and lenders across senior living are actively identifying strategic alternatives for their existing assets and our goal is to presents an EDA 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 part in partnership with our shareholders and investors success.

Success in each of these three 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 the best in class leadership team at the local and regional levels with the shared dedication to creating a safe and carrying environment, where residents find their joy and new experiences hobbies and friendships.

Now I'll turn the call over to Kevin for a discussion of the financial results.

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 six to eight months.

Starting with topline on slides five and six it bears repeating that the company realized an eighth straight quarter of both occupancy and revenue growth the slight increase in occupancy is particularly noteworthy for two reasons.

The first is that the historical trend of Q1 seasonality softening.

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 stabilized and improving occupancy across the portfolio firmly in place our regional leaders continue to focus their resources 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.

It will be a meaningful driver of our 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.

Great margin improvement should continue across the remaining stabilized portfolio based on a combination of macro industry recovery trends and specifics Anita initiatives discussed on previous calls.

Moving to slide eight.

In our last earnings call on March 30th we referenced the company's most significant active initiatives to address rate recovery and growth through the acceleration of resident rate increases on in place leases greater than 12 months.

Our beliefs that our residents would support responsible increases commensurate with the value currently provided from our community teams manifest in a significant way this quarter.

We are extremely pleased to report that we've.

Successfully executed on this initiative beginning March one while still slightly growing occupancy over the same period.

The company realized an overall rate increase of nine 1% on a population of approximately 1500 leases as seen on slide eight directly contributing to adjusted Revpar increases of five 6% and two 6% over Q1 2022 in 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 reservoir.

Please note that in addition to our historical presentation of Revpar and Revpar. 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.

2023 and 2022.

Yeah.

Amongst our amongst other revenue initiatives more fully described on page eight we continue to push on our 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 two 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 everyday by our community teams.

Finally, as a result of recently implemented technologies around our revamped level of care program we.

We have grown this revenue stream by 4% each of the last two 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 nine where we will address some of the encouraging trends on the operating expense side of the business.

Like our peers, we could continue to be laser focused on reducing contract labor to pre pandemic levels. We've now seen two consecutive quarters, where contract labor has decreased 530006 hundred 70000 in Q4 2022 in Q1 2023, respectively.

This represents a monthly run rate improvement from its high point of 630000 at Q3 2022 to just 230000 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 six 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.

On the same slide our food costs continued to trend down as each month, we are realizing increased compliance and optimization associated with our within our global purchasing organization against the economic backdrop of overall inflationary easing.

Finally, the company is 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 six 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 transition in the last two 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 in 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 four communities mortgage with protective.

Life as more fully described in the 10-Q to be filed later today.

Yeah.

Finally, I'd like to spend a bit of time on our 11th and final slides 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 shortened the bridge to run rate run rate cash generation.

Yeah.

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 2020 twos run rate, which averaged 15% for 'twenty or 'twenty, one and the first half of 2022.

We've also been able to successfully leverage our recently implemented ERP system to make more informed.

<unk> 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 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 you go into <unk>.

CERN accelerate the trajectory on cash flow generation and allow for the Swift pivot to strategic growth back to you Brandon.

I'll conclude today's presentation by once again, recognizing and thanking our leadership teams throughout the Nida.

I have the utmost confidence in this group of leaders to continue delivering high quality service and care to our residents while running a sound business.

It's my privilege and honor to share the success, they're achieving as we rebuild sunita is 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.

Thank you we will now be conducting a question and answer session.

If you would like to ask a question.

Press Star one on your telephone keypad.

Andy Your line is in the question queue.

You May press star two if he would like.

A question from the queue for participants using speaker equipment.

To be necessary to pick up your handset before pressing the psyche.

One moment, please while we poll.

Quick questions.

Thank you. Our first question is from Steve Valiquette with Barclays. Please proceed with your question.

Yeah, Thanks, Steve Valiquette from Barclays.

Hey, guys just a couple of years here Hey, good afternoon, a couple of bigger picture financial questions today, maybe separate from the quarterly results.

Taken out maybe a step back in 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 a pre pandemic.

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 you want to get to a steady state or just you know 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 a from the existing facility footprint.

Let's say, if that's $25 million because it happens in many facilities that you had back then versus 50 million of operating cash flow back then and there.

Context of 640 million of debt outstanding just trying to frame the.

The cash flow to debt outstanding ratio that we might see.

You know 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.

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 you know hopefully in the near future I don't think we're quite there yet, but I can tell you what what is really important about getting there and that is.

We're 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 six I think is important.

Because from their continued improvement that you referenced.

We don't see the high Eighty's is necessarily the cap to it and.

And we also want to continue to improve ourselves on the the operating.

Expense levels, so margin recovery and getting much closer in and around that 30% Mark that I think these communities collectively have been able to achieve historically.

<unk> 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 in our kind of thoughts around where the call. It stabilized fully baked cash flow of the portfolio is as.

As you probably recall, we had 45 communities that released in the past and so the kind of escalating lease costs were also factored into the the portfolio's ability to generate cash flow and we don't we don't have that anymore. So being fully owned and managed we think is beneficial.

I would be happy to kind of try and share some additional color on where we think that ultimate cash generation go 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 develop.

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.

Okay, that's definitely helpful.

And somewhat tied into that then I mean, obviously in this call you guys alluded to the potential restructuring of some of the data are here our loan modification discussions.

Understand you're probably handcuffed I'm being able to go into any sort of specifics around that but I guess I'm just curious.

High level just conceptually.

I mean could this involve any sort of you know just reduction the total amount of principal outstanding or is it more just about either change in the AR.

The interest burden associated with the existing debt and pushing out maturities, but just wondering is there any relief valve on just the amount of principal outstanding as part of the discussions.

Discuss that at all without giving away any specific numbers obviously.

Yes.

Fortunately in this is this is Kevin Steve we can't give any any ranges of what that might look like.

But I think what we can what we can share is that based on our scripts and in 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 ultimately <unk>.

Not be bound by our 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 through management acquisition and in real estate acquisition 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.

Okay Alright.

Alright, I appreciate that and then maybe just a final question.

Tied into all of this is.

You know roughly 18 months ago 24 months I forgot the exact timing, but you had you know another source of financing that involved a lot of different variables.

Stuff that can be potentially dilutive in the you know the equity piece as well, but all the different moving parts within that but yeah, I don't want to call out that investor and Actavis per se, but I'm just curious how much.

Investors has any role in the.

Ongoing discussions you are having around you know 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.

Yeah, 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 in.

They provide insights based on their areas of expertise and so.

We've had a really productive discussion.

Set of discussions and contributions from our various board members they've been very supportive of us and so that's that's the kind of stage on which we talk about the <unk>.

Discussions and where we're going as a business.

Got it okay.

Okay, Alright, notwithstanding all of that you know it's good to see some of the progress, though in the quarter kind of consistent with the industry trends as well so congrats on that and I look forward to its future developments on the kind of the balance sheet picture. So thanks again.

Yes. Thank you Steve I think we were very encouraged by what we what we saw towards the end of the first quarter and wanted to just continue to.

To push everything forward.

Accelerated fashion and then provide further details on the discussions that we're having on the balance sheet. So thank you and appreciate your time.

Thank you.

No further questions at this time.

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.

You for your participation.

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