Sonida Senior Living, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. Sonida operated 72 senior housing communities in 18 states: 62 owned and 10 managed for third parties.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $238.4 million | $234.7 million |
| Resident revenue | $208.7 million | $190.2 million |
| Operating expenses | $171.6 million | $157.3 million |
| Operating loss before interest and other items | $30.9 million | $40.2 million |
| Interest expense | $33.0 million | $37.2 million |
| Net income (loss) | $(54.4) million | $125.6 million |
| Cash used in operating activities | $2.6 million | $28.8 million |
| Cash and cash equivalents at year-end | $16.9 million | $78.7 million |
| Total debt, before deferred loan costs | $676.3 million | $687.3 million |
Resident revenue rose 9.7%, driven by improved occupancy, higher rents and the acquisition of two Indiana communities. For 60 communities owned in both periods, weighted average occupancy increased to 83.3% from 79.0%; average monthly rental rates were 2.7% higher. Total revenue growth was modest because managed-community reimbursement revenue declined 33.1%, largely following the transition of Fannie Mae properties to other operators. Reimbursement revenue and its corresponding expense are pass-through amounts.
The 2022 net loss compares with 2021 net income that included a $199.9 million gain on debt extinguishment following the transfer of 16 properties to Fannie Mae. Thus, the year-over-year earnings swing is not a like-for-like operating comparison. 2022 also included $10.0 million of other income, including $9.1 million in federal Provider Relief Fund grants. The company recorded $1.6 million of property impairment in 2022, versus $6.5 million in 2021.
Cash used in investing was $36.9 million, including $24.6 million of capital expenditures and $12.3 million to acquire the Indiana communities. Cash used in financing was $22.7 million. At year-end, restricted cash was an additional $13.8 million, but includes reserves and deposits and is not equivalent to unrestricted liquidity. Current assets were $43.6 million against current liabilities of $94.3 million.
Labor and employee-related costs were a major pressure: same-store labor expense increased approximately $9.5 million, or 10.2%, in 2022. Same-store non-labor expense increased approximately $4.0 million, or 6.8%. Interest expense fell year over year due to lower overall borrowings, partly offset by higher rates on variable-rate debt.
Material changes, outlook and risks
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern for the 12 months after the financial statements were issued. Factors include recurring and projected losses, a working-capital deficit, debt service requirements and covenant concerns. Management’s plans include rate reviews, purchasing and cost initiatives, tighter spending and working-capital controls, lender negotiations, and potential refinancing or asset transactions. Management could not conclude that these plans would probably alleviate the substantial doubt.
- Debt and defaults: The company reported $676.3 million of debt before deferred loan costs, with $137.7 million in variable-rate debt. Scheduled debt maturities included $152.2 million in 2024 and $164.0 million in 2026. In the first quarter of 2023, Sonida did not make February and March payments on four Protective Life loans totaling $70.0 million at year-end and was in default; negotiations were ongoing, with no assured resolution. Separately, Fannie Mae transferred the final two properties back on January 11, 2023; Sonida expected to derecognize related debt and accrued interest and recognize an approximately $36 million gain in first-quarter 2023.
- 2023 expectations: No quantified revenue, earnings or occupancy guidance is provided. Management expected continued labor-cost and inflationary pressures, including higher staffing costs as occupancy grows. It described operational measures aimed at margin recovery and liquidity improvement, but gave no assurance they would succeed.
- Financing and preferred stock: The Ally refinancing reached $88.1 million in principal, with $10 million of delayed borrowing available only if specified covenants are met; an additional $40 million was uncommitted and at the lender’s discretion. Series A preferred stock carries cumulative dividends at 11% annually; $2.3 million of undeclared dividends was added to its liquidation preference in 2022. Conversant investors held a majority of voting power at year-end.
- Controls: Management found disclosure controls and internal control over financial reporting ineffective due to a material weakness in close-process controls over timely and appropriately reviewed reconciliations and journal entries. Staffing challenges impeded remediation; management expected remediation by the end of 2023.
- Other risks and contingencies: COVID-19-related occupancy and operating effects, labor availability and wages, inflation, interest rates, refinancing and covenant compliance, regulatory and care-related liabilities, and geographic concentration remain material risks. The company reported $5.4 million of renovation and technology commitments expected to be substantially spent in 2023. It received approximately $2.0 million in state grants in January and February 2023.
Key facts for investors to verify
- Current status and terms of negotiations with Protective Life, including any cure, restructuring, foreclosure or cross-default consequences.
- Available unrestricted liquidity, cash needs and debt maturities, and whether management’s plans can fund operations and debt service through the going-concern assessment period.
- Compliance with lender covenants, including Ally’s liquidity and tangible-net-worth requirements and the status of delayed borrowing availability.
- Actual occupancy, resident rate increases and labor-cost trends in 2023, compared with management’s recovery initiatives.
- Completion and testing of the internal-control remediation plan, and any subsequent financial reporting changes.
- Recognition and accounting for the approximately $36 million Fannie Mae debt-extinguishment gain and the resulting effect on 2023 reported earnings.
- Accrued preferred dividends, redemption terms and potential dilution from preferred conversion, warrants and other share issuances.