Business context and reporting period
Capital Senior Living Corporation (the registrant named in this 10-Q; identified in the request as Sonida Senior Living, Inc.) reported unaudited results for the quarter and six months ended June 30, 2021. At quarter-end, it operated 84 senior housing communities in 19 states: 60 owned, 9 undergoing legal ownership transition to Fannie Mae, and 15 managed for third parties.
The portfolio and business model changed substantially after the company exited all master leases by December 31, 2020 and transferred or began transferring properties. Accordingly, year-over-year revenue comparisons reflect a much smaller consolidated portfolio as well as operating conditions.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $57.5 million | $101.5 million | $119.2 million | $207.6 million |
| Net income (loss) | $49.1 million | ($12.8 million) | $87.9 million | ($59.9 million) |
| Operating cash flow | Not separately stated for the quarter | $7.0 million | ($0.7 million) | |
| Capital expenditures | Not separately stated for the quarter | $4.8 million | $8.1 million | |
| Cash and cash equivalents at period-end | — | $14.6 million | — |
Q2 total revenue fell 43% year over year; resident revenue fell 53%, to $46.6 million from $99.4 million. Six-month total revenue declined 43%, and resident revenue declined 55%. Management attributed much of the decline to dispositions and the transition of 39 leased communities to other operators, with lower occupancy and rental rates also contributing.
Q2 net income was driven principally by a $67.2 million non-cash gain on debt extinguishment when six properties transferred to Fannie Mae. For the first half, the comparable gain was $114.2 million; the period also included $8.7 million of Provider Relief Fund grant income. These items materially affect the reported profit and should not be viewed as recurring operating earnings. Total expenses were $66.1 million in Q2, exceeding revenue before other income and expense.
Average financial occupancy was 78.1% in Q2 2021 versus 77.6% in Q2 2020. Average monthly rental rates were down 640 basis points year over year, which management attributed to portfolio transitions, COVID-related move-outs, and promotional activity. The filing does not provide a clear consolidated operating margin excluding the unusual gains and grant income.
At June 30, 2021, total assets were $678.9 million, notes payable net of deferred financing costs were $799.4 million, and shareholders’ deficit was $190.7 million. Current assets of $33.3 million compared with current liabilities of $298.3 million. Cash, including restricted cash, was $19.5 million. Six-month net cash decreased $3.3 million. Cash interest paid in the first half was $15.2 million.
Material changes versus the prior comparable period
- Portfolio exits and transfers reduced the number of consolidated communities and drove much of the decline in revenue and operating expenses. The company had no master lease agreements in 2021, compared with $6.5 million of Q2 2020 facility lease expense.
- Despite lower reported revenue, occupancy increased slightly year over year; rental rates declined. Management said increased visits and resumed in-person tours in Q2 reflected less restrictive visitation rules and a recovering economy.
- Operating cash flow improved to $7.0 million from a $0.7 million use in the first half of 2020, but the 2021 result included substantial non-cash gains and working-capital movements.
- There were no long-lived asset impairment charges in the first half of 2021, compared with $36.0 million in the first half of 2020.
Outlook, liquidity, risks, and unusual items
- Going concern: Management concluded that substantial doubt existed about the company’s ability to continue as a going concern for the year following issuance of the interim financial statements. Cited factors included COVID-19 uncertainty, a working-capital deficiency, $121.3 million of debt maturities and debt service due within 12 months, and covenant defaults. Management could not conclude that its proposed remediation plans were probable of resolving the substantial doubt.
- Debt and covenants: The company was in default on $31.5 million of Fifth Third Bank debt secured by two properties; the lender issued a notice of default and the loan was callable, with 25% recourse to the parent if accelerated. A $40.5 million BBVA loan was also callable at quarter-end due to covenant noncompliance. Subsequent to quarter-end, BBVA extended the loan to December 2022, waived the identified noncompliance, and set scheduled principal payments.
- Proposed capital transaction: In July 2021, affiliates of Conversant agreed to invest $82.5 million in convertible preferred stock and backstop up to $42.5 million of an approximately $70 million common-stock rights offering, with a proposed $25 million accordion. Minimum initial gross proceeds were expected to be $125 million. Closing was subject to stockholder approval and other conditions. The rights offering and investment could dilute existing common shareholders and were not assured.
- Interim financing: A $17.3 million secured promissory note was entered into alongside the proposed transaction. Most of the principal bears 15% interest, with a premium potentially due; $15.0 million was expected to convert into preferred stock or be repaid upon closing.
- COVID-19: The pandemic continued to affect occupancy, resident demand, costs, and liquidity. COVID-related costs were $0.2 million in Q2 and $1.3 million in the first half of 2021, down from $2.9 million and $3.2 million, respectively, in 2020. Future impacts remained uncertain.
- Controls and contingencies: Management reported disclosure controls and procedures were ineffective, citing a previously reported material weakness, and expected remediation by the end of Q4 2021. Routine claims were described as not expected to materially affect the financial statements, subject to insurance coverage and other uncertainties.
Important facts for investors to verify
- Whether the Conversant investment and rights offering received stockholder approval and closed on the expected terms and timetable.
- Whether the company maintained sufficient liquidity to meet near-term maturities, including the stated $121.3 million due within 12 months, and whether further refinancing or extensions were secured.
- Whether Fifth Third Bank resolved or waived the covenant default and whether any lender accelerated debt or exercised remedies.
- How remaining Fannie Mae property transfers affected debt, liabilities, operations, and subsequent-period gains.
- Whether occupancy and rental rates improved after Q2, and how reported results compare after separating portfolio changes, debt-extinguishment gains, and government relief grants.
- Whether the material weakness was remediated and controls tested and found effective.