Sonida Senior Living, Inc. — Q1 2023 Form 10-Q
Business and period. Sonida owns, operates and manages senior housing communities. At March 31, 2023, it operated 72 communities in 18 states: 62 owned and 10 managed for third parties. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $62.1 million | $58.5 million; up 6.1% |
| Resident revenue | $56.6 million | $50.8 million; up 11.4% |
| Operating expenses | $65.7 million | $66.8 million |
| Operating loss before other income and expense | $3.6 million | Calculated from reported revenue less expenses |
| Net income (loss) | $24.1 million | $(16.7) million |
| Net income (loss) attributable to common stockholders | $19.8 million; $2.88 basic EPS | $(17.8) million; $(2.81) basic EPS |
| Cash from operating activities | $3.2 million | $(0.7) million |
| Cash used in investing activities | $5.1 million | $17.9 million |
| Cash used in financing activities | $3.8 million | $13.4 million |
| Cash and cash equivalents | $13.0 million | $16.9 million at Dec. 31, 2022 |
| Restricted cash | $12.2 million | $13.8 million at Dec. 31, 2022 |
| Notes payable, net | $635.9 million, including $81.2 million current | $671.0 million at Dec. 31, 2022 |
Q1 net income included a $36.3 million gain on debt extinguishment after Fannie Mae completed transfer of the last two of 18 properties. Excluding that gain, the quarter would have shown a pretax loss of approximately $12.1 million, before considering other items.
For the 62 communities owned in both periods, weighted average occupancy rose to 84.0% from 81.8%; management said average monthly rental rates were 9.6% higher year over year. Operating expenses increased 4.5%, principally from labor and employee-related costs and utilities. Interest expense rose to $8.9 million from $7.6 million, primarily due to higher rates on variable-rate debt.
Liquidity, debt and material developments
- Going concern: Management disclosed conditions that raise substantial doubt about Sonida’s ability to continue as a going concern for the 12 months following issuance of the financial statements. These include a working capital deficit, recurring and projected operating losses through June 30, 2024, debt-service obligations, and mortgage-agreement noncompliance. Management could not conclude that its plans would probably alleviate the substantial doubt.
- Near-term obligations and default: The filing cites $81.2 million of principal and $38.5 million of scheduled interest due in the next 12 months. Sonida did not make required principal and interest payments on $69.8 million of Protective Life non-recourse mortgages covering four communities and classified the amount as current debt. Discussions with the lender were ongoing. The company also said covenant noncompliance and further defaults were probable in some debt instruments, potentially allowing acceleration or foreclosure.
- Liquidity actions: Management described rate increases, purchasing and labor initiatives, working-capital measures, spending reductions, lender discussions and applications for further relief grants. It received approximately $2.0 million in state grants in Q1. It may request up to $25.0 million of additional Series A preferred investment, subject to conditions. Availability and sufficiency of these sources are not assured.
- Preferred stock: The 11% cumulative Series A dividend was not declared in Q1; $1.2 million was added to the liquidation preference. Conversant affiliates held approximately 56.5% of voting ownership when including common shares issuable upon conversion and warrants.
- Controls: Disclosure controls were deemed ineffective due to an unremediated material weakness in internal controls, associated with accounting staffing challenges. Management expected to implement remediation by year-end 2023; remediation is not complete until controls operate and are tested.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management’s liquidity plans depend on operating cash generation, possible grants, and debt modifications, extensions or refinancing on acceptable terms; asset sales and ownership transfers may also be considered. The filing warns that these actions may not be available or sufficient. Key risks include labor availability and wage pressure, inflation and interest rates, occupancy and pandemic effects, refinancing and covenant compliance, and the ability to obtain capital. The company had $2.6 million of renovation and technology commitments expected to be substantially spent in 2023; it also expected approximately $1.1 million of insurance reimbursement for winter-storm rebuild costs.
Important facts for investors to verify
- Progress and terms of negotiations with Protective Life, and whether any other debt defaults, covenant breaches, accelerations or foreclosures occur.
- Whether Sonida can meet near-term principal and interest obligations and secure refinancing or extensions; compare actual maturities with the stated $81.2 million principal due in the next 12 months.
- Cash generation excluding state relief grants and the nonrecurring $36.3 million debt-extinguishment gain, alongside occupancy, rental-rate growth and labor costs.
- Availability and conditions of potential preferred-stock investment, additional grants, insurance proceeds and asset-sale proceeds.
- Remediation of the material weakness and whether disclosure and financial-reporting controls become effective.