Sonida Senior Living, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company owns, operates and manages senior housing. At quarter-end, it operated 76 communities in 18 states: 62 owned and 14 managed for third parties.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $60.8 million | $57.9 million | $178.9 million | $177.1 million |
| Operating expenses | $66.4 million | $65.6 million | $200.8 million | $200.3 million |
| Net income (loss) | $(13.7) million | $36.5 million | $(37.8) million | $124.4 million |
| Net income (loss) attributable to common stockholders | $(14.9) million | $36.5 million | $(41.2) million | $124.4 million |
| Operating cash flow | — | $2.9 million | $(7.2) million |
- Q3 resident revenue increased 7.2% to $52.5 million; nine-month resident revenue rose 10.3% to $155.3 million. Revenue gains reflected improved occupancy, higher rents and the February acquisition of two Indiana communities. Occupancy for the 60-community comparable owned portfolio was 83.7% in Q3 and 83.1% year to date, versus 81.0% and 78.2%, respectively, in 2021.
- Cash and cash equivalents were $27.0 million at September 30, excluding $13.8 million of restricted cash. Total assets were $675.3 million; total liabilities were $717.8 million. Shareholders’ deficit was $84.8 million, and redeemable preferred stock was $42.4 million.
- Notes payable totaled $671.4 million before deferred financing costs ($665.9 million net); $46.1 million net was classified current. Scheduled principal payments include $35.8 million in the remainder of 2022 and $15.1 million in 2023. The filing reports a $47.7 million excess of current liabilities over current assets, based on the balance-sheet totals.
- Nine-month investing cash outflow was $30.7 million, including $18.3 million of capital expenditures and $12.3 million for the two-community acquisition. Financing cash outflow was $24.3 million; cash, cash equivalents and restricted cash fell by $52.1 million to $40.8 million.
Changes versus the prior comparable periods
- Despite higher resident revenue, operating costs increased, particularly labor and employee-related costs: $2.6 million higher in Q3 and $9.2 million higher year to date. Management cited overtime, shift bonuses and contract labor amid workforce shortages.
- Interest expense declined to $8.2 million in Q3 and $23.7 million year to date, mainly due to lower borrowings, partly offset by higher rates on variable-rate debt.
- Prior-year earnings included large gains on extinguishment of debt when properties transitioned to Fannie Mae: $54.1 million in Q3 and $168.3 million year to date. The 2022 nine-month period instead included a $0.6 million refinancing loss. These items materially affect year-over-year net income comparisons.
- Year-to-date 2022 other income included approximately $8.7 million of CARES Act Provider Relief Fund support; the company received $9.1 million in April 2022. No such grants were received in either third quarter.
Outlook, risks and unusual matters
- Management said operations had not returned to pre-pandemic levels and expected near-term operating cash flow to remain affected. No formal financial guidance was provided. Management expects to meet debt maturities with cash, future operations and refinancings, but cautioned that future cash generation and refinancing access are not assured.
- The March 2022 refinancing provided an $80 million term loan, with a further $10 million available subject to covenant requirements and up to $40 million in additional uncommitted financing. The facility has covenant requirements, including minimum liquid assets of $13 million; the company reported compliance at September 30, 2022, but gave no assurance of future compliance.
- Two properties remain subject to unresolved Fannie Mae loan defaults and an expected ownership transition. The related $31.8 million debt was classified current, with $3.7 million of accrued interest. The company reported compliance with other outstanding indebtedness.
- Variable-rate debt exposes the company to rising interest rates. The filing describes a $50.3 million interest-rate cap through March 2024, while also stating that the company was in the process of obtaining a cap required by the refinancing facility; the status and relationship of these arrangements merit clarification.
- Series A preferred stock carries an 11% cumulative, quarterly-compounding dividend. The Board did not declare the Q3 dividend, adding approximately $1.1 million to the preferred liquidation preference. Approximately $3.0 million of preferred dividends were paid during the first nine months.
- Disclosure controls were deemed ineffective because a previously reported material weakness had not been remediated, with accounting staffing challenges cited. Management expected to implement remediation processes by the end of Q4 2022; effectiveness would still require testing over time.
- Other cited risks include COVID-19 effects, labor and wage pressures, inflation, debt refinancing and covenant compliance, and the ability to obtain capital. The company had $7.0 million of contractual commitments for renovations and technology enhancements, expected to be substantially spent in 2023. Management said ordinary-course claims were not expected to have a material financial effect.
Investor verification priorities
- Track occupancy, rental-rate growth and labor costs to assess whether operating improvement is translating into sustainable cash flow.
- Review the near-term debt schedule, Fannie Mae default/transition developments, refinancing access and ongoing covenant compliance.
- Clarify the status and coverage of the refinancing facility’s required interest-rate cap, given the filing’s separate descriptions of the cap arrangements.
- Monitor cash levels, restricted-cash availability, capital spending, and the company’s ability to fund obligations and preferred dividends.
- Confirm whether the material weakness remediation was implemented and whether controls were subsequently tested and found effective.
- Distinguish recurring operating performance from prior-year debt-extinguishment gains and Provider Relief Fund support when evaluating comparisons.