Q3 2024 Sonida Senior Living Inc Earnings Call
Novi: Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sunita Senior Living Q3 2024 earnings call. Please be aware that all lines have been placed on mute to prevent any background noise.
Speaker Change: I would now like to turn the call over to Jason Finkelstein, Investor Relations. Please go ahead.
Jason Finkelstein: All statements made today, November 13th, 2024, which are not historical facts, may be deemed to be forward-looking statements within the meaning of federal securities laws. The company expressly disclaims any obligation to update these statements in the future. Actual results or performance may differ materially from forward-looking statements.
Jason Finkelstein: Certain factors that can cause actual results to differ are detailed in the earnings release that the company issued earlier today, as well as in the reports that the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly reports on Form 10-Q.
Jason Finkelstein: Please see today's press release for the full Safe Harbor Statement, which may be found in the APA filing from this morning at the Company's Investor Relations page found at www.zonitaseniorliving.com.
Jason Finkelstein: Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of these non-GAAP measures to the most comparable GAAP measure, please also see today's earnings release.
Speaker Change: At this time, I'd like to turn the call over to Sunita Senior Living President and CEO, Brandon Ribar, for opening remarks.
Brandon Ribar: Thank you, Jason. Hello and welcome to our 2024 third quarter earnings call. I'm joined today by Kevin Detz, our Chief Financial Officer.
Brandon Ribar: Earlier today, we released our Q3 earnings and investor presentation, which will be referenced throughout this call as we discuss our strategic priorities and operating results in addition to our view on the year ahead in 2025.
Brandon Ribar: You can find our latest presentation at finitaseniorliving.com in the Investor Relations section if you would like to follow along. In addition, we have included supplemental earnings information within our investor presentation consistent with the prior quarter release.
Brandon Ribar: Q3 remained quite busy for Sunita. I'm extremely grateful to our team who continue providing great care and services for our residents, resulting in ongoing growth in occupancy and margins.
Brandon Ribar: I'll touch on these points in detail in a moment, but first I'd like to discuss several key capital allocation events that occurred since the end of Q2.
Brandon Ribar: First, we completed acquisitions of 14 new communities with more than $160 million in total asset value. We expect to use CENITA's broad operating platform to drive significant value to these assets and have seen initial positive momentum as part of the CENITA operating system.
Brandon Ribar: Second, we put in place a new $150 million secured line of credit on advantageous terms.
Brandon Ribar: In addition, the company successfully accessed public capital in a broad overnight equity offering resulting in $130 million of new capital at a price of $27 per share.
Brandon Ribar: This is an important milestone for the company as the first registered overnight equity offering in more than a decade. Together with our new credit facility, Sunita has the tools in place to access capital and maintain balance sheet flexibility to take advantage of further acquisition opportunities.
Brandon Ribar: Finally, I'm pleased to share that we recently reached agreement with Fannie Mae to extend $220 million of outstanding mortgages covering 18 communities, which currently have a maturity date of 12-31-2026.
to a new revised maturity date of January 1st, 2029.
Brandon Ribar: This extension, which is subject to completion of definitive documentation with Fannie Mae, allows us to retain attractive fixed-rate debt and move all material debt maturities for the company into 2027 and beyond.
Brandon Ribar: These capital allocation successes, coupled with the continued improvement in our same-store portfolio, serve as critical indicators of the progress we are making.
Brandon Ribar: Across both operational and capital allocation endeavors, we are committed to delivering results to all of our stakeholders, including residents and their families, our employees, and our investors.
Brandon Ribar: On the growth front, we closed our sixth transaction of the year in early November, increasing the total number of communities added this year to 22, of which 19 are owned outright or through strategic joint ventures, and three of which are capital light management agreements.
Brandon Ribar: This growth amounts to nearly 2,000 units added, or a 30% increase to our operating portfolio in just the past six months.
Brandon Ribar: The transaction environment remains compelling, and our growing acquisitions team has line of sight on a robust 2025 pipeline of attractive growth opportunities.
Brandon Ribar: I am incredibly proud of our operations team for meeting the challenge of quickly incorporating these new communities into the Senita family.
Brandon Ribar: Given our confidence in the depth of the opportunity set and our ability to find outsized return opportunities, we've chosen to invest in both acquisition and integration resources to strengthen the foundation for long-term value creation.
Brandon Ribar: We are seeing continued positive momentum in the second half of the year and are optimistic about the tailwind supporting continued NOI growth. Achieving portfolio-wide occupancy of 90% is our next significant milestone.
Brandon Ribar: Based on our high-quality portfolio, industry-wide supply-demand dynamics, and most importantly, our skilled operating teams, we believe that normalized occupancy can exceed 90% over the next several years.
Brandon Ribar: We are poised to deliver further NOI growth and margin expansion as we push the ongoing improvement in our same-store portfolio and accelerated revenue and margin stabilization.
Brandon Ribar: in our recently acquired communities. We see an opportunity to further compound our growth by capitalizing on our robust pipeline of additional acquisition opportunities, leveraging our operating capabilities and capital availability.
Brandon Ribar: I'll spend a few minutes discussing the fundamentals of our business that support our ongoing confidence in the upside across our 93 communities.
Brandon Ribar: We continue to prioritize the strength of our local and regional leadership, as well as the development of activities and programming to deliver a differentiated resident experience.
Brandon Ribar: The second half of the year has shown favorable trends in retention at both the community leadership and staff level within our communities and we continue to develop tools to strengthen employee engagement in both our new and existing communities.
Brandon Ribar: On the resident programming front, the advancement of our joyful living programs in both independent and assisted living settings have contributed to stability in average resident length of stay and enhanced our overall reputation score as measured by third-party reviews.
Brandon Ribar: Lead volume in the third quarter increased 7.5% year-over-year and 10% sequentially from Q2 in our same-store owned portfolio.
Brandon Ribar: Leads generated through organic channels, including the Sunita website, and local referral sources, now represent 56% of total lead volume in 2024, versus 52% in 2023, and only 41% in 2022, prior to our substantial investment in our digital platforms.
Brandon Ribar: We are especially pleased that move-ins driven by digital marketing enhancements, including website architecture changes, updated paid search strategy, and greater scrutiny over third-party listings, have significantly outpaced the change in paid move-ins from third-party aggregators in 2024.
Brandon Ribar: We are excited to further leverage the sales and marketing approach that has delivered 14 consecutive quarters of same-store occupancy growth to drive significant near-term performance improvement and value creation in 2025, particularly in our newly acquired communities.
Brandon Ribar: Through a combination of occupancy growth, ongoing rate improvement, and effective expense management, our investments are targeted to stabilize at a double-digit cap rate, delivering significant earnings accretion.
Brandon Ribar: We've included a summary of our 2024 year-to-date investments in the Investor Deck, and each deal reflects a specific approach to finding growth opportunities in the current market. From distressed purchases through banking relationships to strategic joint ventures and recapitalizations,
Brandon Ribar: Our deep and wide network of relationships continues to deliver accretive investment opportunities.
Brandon Ribar: Our investment pipeline remains robust and fluid with clear line of sight to additional opportunities consistent with our targeted transaction profile and propelled by our multifaceted sourcing strategy.
Brandon Ribar: While we are starting to see increased competition and pricing for high-quality and fully stabilized assets, we continue to see a wider bid-ask spread for value-add situations and believe the industry still suffers from limited capital availability.
Brandon Ribar: Moreover, we are accessing off-market transactions by leveraging our industry relationships under the leadership of our CIO, Max Levy, who was appointed earlier this summer.
Brandon Ribar: We believe our corporate structure as a pure-play senior housing owner, operator, and investor uniquely positions Sunita to access differentiated acquisitions.
Brandon Ribar: The combination of availability on our existing credit facility and our ability to access the equity markets when pricing is supportive allows us to aggressively pursue and complete acquisitions of new communities with significant operational upside at an attractive price per unit.
Brandon Ribar: We see meaningful NOI upside in our same store portfolio and are focused on acquisitions that we believe will be accretive on a stabilized basis due to even more significant NOI upside from stabilization and or wide going in cap rates.
Brandon Ribar: From a capital structure perspective, we intend to manage the balance sheet to delever through both operational improvement and the funding of our acquisitions with lower leverage.
Speaker Change: In summary, Tanita's focus on results-driven operational strategies and capital allocation yielded another quarter of strong performance and meaningful portfolio expansion.
Speaker Change: Same Store Revenue, Community Net Operating Income, Resident Rates, and Occupancy demonstrated continuing gains year over year.
Speaker Change: The excitement across the entire Sunita team is evident as the company aggressively pursues further growth, fueled by operational excellence and a commitment to building strong teams and creating a differentiated resident experience and living environment.
Speaker Change: As the future unfolds, our goal is to continue delivering strong operating results and measured ongoing improvement in the newly acquired communities, further demonstrating the strength of our people and our platform. I'll now turn it over to Kevin for discussion of the financial results.
Kevin Detz: Thanks, Brandon. I will be walking through select pages of today's investor presentation, starting with slide five.
Kevin Detz: Hitting upon some of our financial highlights, we achieved a 14th consecutive quarter of occupancy growth for our same store portfolio. As a reminder,
Kevin Detz: The same store portfolio excludes the 19 communities acquired over the past six months.
Kevin Detz: On a year-over-year basis, same-store adjusted community net operating income, which excludes the non-recurring impact of $500,000 in state grants received in Q3 2023, increased 18.3%.
Kevin Detz: Beyond the increase in occupancy, the NOI growth was achieved through blended resident rate increases of 5.5%, as well as continued optimization over the portfolio's variable operating expense profile. I will touch upon both rate and operating expenses in more detail later in the presentation.
Kevin Detz: Earlier, Brandon referenced the company's execution on its strategic growth plan. Beyond our strong operating results, we are very pleased with two significant capital events that are foundational to our growth and the next phase of the company's development.
Kevin Detz: In July and August, the company closed a senior secured credit facility for $150 million and raised $130 million of gross proceeds in a public equity offering.
Kevin Detz: These transactions provided the company with capital for the acquisition closed in the fourth quarter and a discounted debt payoff that I will discuss in a bit, as well as providing additional dry powder for future bolt-on acquisitions.
Kevin Detz: We expect that these transactions will be accretive to the company's equity value as we stabilize the communities acquired.
Kevin Detz: Amid similar buying opportunities and improving industry outlook and continue improving same-store portfolio performance.
Kevin Detz: We believe further de-levering is achievable with a debt to EBITDA ratio goal of below 7x, consistent with public peers.
Kevin Detz: Rounding out the highlights from this past quarter, in August, the company entered into a loan modification agreement with one of its lenders on two cross communities in Texas.
Kevin Detz: The modification included revised maturities and, more importantly, the ability to make a discounted payoff of $18.5 million on the $28.7 million balance.
Kevin Detz: On November 1st, the company made the discounted payoff, which represented a $10 million or 36% discount on the loan principal balance.
Kevin Detz: The remaining two loans account for approximately 2.5% of the outstanding debt balance.
Kevin Detz: Moving ahead to slide 15. Resident rates, which exclude one-time community fees and other ancillary revenue streams, increased five and a half percent from the same quarter in 2023.
Kevin Detz: Beyond the reemergence of seasonality within the industry, the one-half percentage decline on rate from Q2 2024 is attributed to occupancy mix.
Kevin Detz: Specifically, our net increase in occupancy quarter over quarter had an 84% composition of lower-rated independent living occupancy increases, with the rest of the modest increases in occupancy driven by our higher-rated assisted living and memory care lines.
Kevin Detz: Finally, discounts and concessions, both on a percentage of revenue basis and absolute basis.
Kevin Detz: Continue along a two-year downward trend. The waning absence of discounts and concessions supports the overall stability of the company's rate profile and service offering, and is consistent with Brandon's comments on her direct efforts to internally source more quality leads and conversions over the same period.
Kevin Detz: Moving to operating expense trends on slide 16, the cost of incremental labor to incremental revenue continues to show stabilization.
Kevin Detz: For purposes of seasonal comparability, note that Q3 is burdened with one more workday and one more holiday as compared to Q2. On a year-over-year basis, Q3's total labor as a percentage of revenue improved by 230 basis points.
Kevin Detz: This is consistent with the 290 basis point increase from Q2 2023 to Q2 2024 using the same metric.
Kevin Detz: The number of same-store full-time employees in Q3 2024 was down slightly from the previous quarter.
Kevin Detz: We believe these trends are sustainable indicators to continue margin expansion as the portfolio's occupancy base grows.
Kevin Detz: On slide 17, non-labor operating expenses are also showing continued signs of stabilization.
Kevin Detz: On an absolute basis, these costs increased approximately $400,000 from prior quarter.
Kevin Detz: Increases in utility costs comprise nearly the entire amount of the sequential increase from Q2 2024.
Kevin Detz: For seasonal comparability, the sequential increase is relatively consistent with the same increase from Q2 2023 to Q3 2023.
Kevin Detz: As stated above, the company continues to drive lower cost of sales through its digital marketing and local sales programming.
Speaker Change: Concluding the remarks on Q3 financial highlights, we will turn our attention to the balance sheet.
Speaker Change: On the capital investment front, through the third quarter, we have invested more than $18 million year-to-date across both technology and community-based capital expenditures, including both targeted NOI-generating capital and recurring maintenance.
Speaker Change: We expect these targeted NOI projects, which feature additional or converted resident units, to positively impact performance in 2025.
Our debt is comprised of 68% fixed rate notes.
Speaker Change: As mentioned earlier, the company continues to focus on de-levering its balance sheet.
Speaker Change: As of the date of its release, the company has agreed in principle on terms with Fannie Mae that it would extend the maturities of 18 of its individually mortgaged communities with a total debt balance of $220 million by two years.
Speaker Change: This will result in a January 1st, 2029 maturity date for all 37 communities under Fannie Mae Financing.
Speaker Change: In exchange for the extended loan term, the company will make a series of principal paydowns totaling $10 million over the revised term of the loan, with the first payment expected this quarter.
Speaker Change: This transaction is subject to definitive documentation by both parties. As always, we appreciate the collaborative nature of our relationship with Fannie Mae over the last two years.
Speaker Change: As of today, the company is in compliance with all financial covenants required under its mortgages and revolving credit facility.
Speaker Change: Prior to turning the presentation back to Brandon, I wanted to spend some time on the path to value creation for the company's shareholders.
Speaker Change: Starting with our annualized Q3 NOI of $67 million, we selected illustrative data points for both occupancy and NOI margin percentage, which are supported by general industry history as well as our own recent trajectory.
Speaker Change: Additionally, layering in similar stabilization achievement on the 19 communities acquired this year, with joint ventures being calculated at our respective ownership share, would illustratively produce an incremental $22 million of NOI.
Speaker Change: Under this assumed methodology, the total combined NOI for our owned assets would be approximately $100 million. Note that this chart makes no assumption on future rate growth and is based on current in-place rate levels.
Speaker Change: To date, the company has already incurred the majority of G&A costs needed to support the additional 19 communities.
Speaker Change: In closing, we continue to be encouraged by the operating trajectory of the portfolio, including our ability to realize performance improvement on the recently acquired communities. Back to you, Brandon.
Brandon Ribar: Thanks, Kevin. 2024 continues to present opportunities for SUNITA to deliver on our differentiated approach to both internal and external growth.
Brandon Ribar: With two months remaining in the year, consistent year-over-year growth in our in-place portfolio remains a primary focus, with an expectation to achieve positive recurring cash flow by year-end, when including the benefit of our recent acquisitions.
Brandon Ribar: Coupled with the ongoing identification and completion of accretive investments within our existing pipeline, it's an exciting time in our business.
Brandon Ribar: We firmly believe Sunita is positioned to fulfill our commitment to residents, employees, and shareholders to continue building a best-in-class owner, operator, and investor in senior living. Thank you all for participating, and this concludes today's conference call.
Speaker Change: Ladies and gentlemen, thank you all for joining. You may now disconnect.