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SONIDA SENIOR LIVING, INC.

(SNDA)
  Report
Delayed Nyse  -  04:00:02 2023-02-03 pm EST
13.81 USD   +1.25%
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SONIDA SENIOR LIVING, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/14/2022 | 05:40pm EST

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the risks, uncertainties and other factors described under "Cautionary Note Regarding Forward-Looking Statements" above in this Quarterly Report on Form 10-Q and "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on April 15, 2022. Actual results may differ materially from those projected in such statements as a result of such risks, uncertainties and other factors.

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes to our critical accounting policies since December 31, 2021.

Overview

The following discussion and analysis addresses (i) the Company's results of operations for the three and nine months ended September 30, 2022 and 2021, and (ii) liquidity and capital resources of the Company.

The Company is one of the leading owner-operators of senior housing communities in the United States. The Company's operating strategy is to provide value to its senior living residents by offering quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company provides senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of the Company's communities offer a continuum of care to meet each resident's needs as they change over time. This continuum of care, which integrates independent living, assisted living, and memory care which may be bridged by home care through independent home care agencies, sustains our residents' autonomy and independence based on their physical and mental abilities.

As of September 30, 2022, the Company operated 76 senior housing communities in 18 states with an aggregate capacity of approximately 8,000 residents, including 62 owned senior housing communities and 14 communities that we manage on behalf of third parties.

COVID-19 Pandemic

The COVID-19 pandemic significantly disrupted the nation's economy, the senior living industry and the Company's business beginning in March 2020. The COVID-19 pandemic caused a decline in the occupancy levels at the Company's communities, which negatively impacted the Company's revenues and operating results, that depend significantly on such occupancy levels. In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company had previously restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As of March 31, 2022, all of the Company's senior living communities were open for new resident move-ins, and the Company has continued to make progress to rebuild occupancy lost during the COVID-19 pandemic. Although vaccines are now widely available, we cannot predict the duration of the pandemic or its ongoing impact on our business. If the COVID-19 pandemic worsens, including the transmission of highly contagious variants of the COVID-19 virus, the Company may have to impose or revert to restricted or limited access to its communities.

The COVID-19 pandemic has required the Company to incur significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, testing of the Company's residents and employees, labor and specialized disinfecting and cleaning services, which has increased the costs of caring for the residents and resulted in reduced occupancy at such communities. During the three month periods ended September 30, 2022 and 2021, the Company incurred $0.1 million and $0.4 million, respectively, in direct costs related to the COVID-19 pandemic. During the nine months ended September 30, 2022 and 2021, the Company incurred $0.4 million and $1.7 million, respectively, in direct costs related to the COVID-19 pandemic.

In April 2022 and January 2021, the Company accepted $9.1 million and $8.7 million of cash, respectively, through grants from the Public Health and Social Services Emergency Fund's (the "Provider Relief Fund") Phases 4 and 3 General Distribution,

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respectively, which was expanded by the CARES Act to provide grants or other funding mechanism to eligible healthcare providers for healthcare-related or lost revenues attributable to COVID-19. Both the Phase 4 and Phase 3 Provider Relief Funds were recorded as other income in the periods ended June 30, 2022 and 2021, respectively. No grants were received during the three months ended September 30, 2022 and September 30, 2021. The CARES Act Provider Relief Funds are grants that do not have to be repaid provided we satisfy the terms and conditions of the CARES Act.

The Company elected to utilize the CARES Act payroll tax deferral program to delay payment of a portion of its payroll taxes incurred from April 2020 through December 2020. The Company repaid one-half of the deferral amount in December 2021 and the other half will become due on December 31, 2022. At September 30, 2022 and December 31, 2021, the Company had $3.7 million in deferred payroll taxes, which was included in accrued expenses.

CARES Act Provider Relief Funds are subject to the terms and conditions of the program, including stringent restrictions that funds may only be used to reimburse COVID-19 related expenses or lost revenue that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. While we intend to pursue additional funding that may become available, there can be no assurances that we will qualify for, or receive, any additional relief funds in the future.

Significant Financial and Operational Highlights

Operations

Weighted average occupancy for the three months ended September 30, 2022 and 2021 for the 60 communities owned by the Company during both periods was 83.7% and 81.0%, respectively, reflecting continued occupancy recovery. The average monthly rental rate for these communities for the three months ended September 30, 2022 was higher by 290 basis points when compared to the three months ended September 30, 2021.

Weighted average occupancy for the nine months ended September 30, 2022 and 2021 for the 60 communities owned by the Company during both periods was 83.1% and 78.2%, respectively, reflecting continued occupancy recovery. The average monthly rental rate for these communities for the nine months ended September 30, 2022 was higher by 340 basis points when compared to the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2022, the Company continued to be impacted by the senior living industry's workforce challenges related to limited staff availability, which required the use of overtime, shift bonuses and contract labor to properly support our senior living communities and residents.

2022 Mortgage Refinance

In March 2022, the Company completed the refinancing of certain existing mortgage debt ("Refinance Facility") for ten of its communities. The Refinance Facility includes an initial term loan of $80 million. In addition, $10 million is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $40 million may be available to fund future growth initiatives. In addition, the Company provided a limited payment guaranty ("Limited Payment Guaranty") of 33%, that reduces to 25% and then to 10%, of the then outstanding balance of the Refinance Facility if the Company achieves certain financial covenants maintained over the life of the loan. As defined and required in the Limited Payment Guaranty, the Company is required to maintain certain covenants including maintaining Tangible Net Worth of $150 million and Liquid Assets of at least $13 million, which is inclusive of a $1.5 million debt service reserve provided by the Company at the closing of the Refinance Facility. The debt services reserve may be released upon terms described in the Loan Agreement and is included in restricted cash.

The Refinance Facility also requires the financial performance of the ten communities to meet certain financial covenants, including a minimum debt service coverage ratio and a minimum debt yield (as defined in the Loan Agreement) with a first measurement date as of June 30, 2022 and quarterly measurement dates thereafter. As of September 30, 2022, the Company was in compliance with such financial covenants. We can provide no assurance that financial covenants will be met in the future.

The Refinance Facility carries an initial interest rate of one-month SOFR plus 3.50%, subject to a SOFR floor of 0.25% and a lower margin spread of 3.25% or 3.00% if the Company achieves and maintains certain financial covenants. The Refinancing Facility requires that the Company purchase and maintain an interest rate cap facility during the term of the Refinancing Facility. The Company is in process of obtaining the interest rate cap facility in compliance with the lender's requirement.

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Results of Operations

Three months ended September 30, 2022 as compared to three months ended September 30, 2021



Revenues

Resident revenue for the three months ended September 30, 2022 was $52.5 million as compared to $49.0 million for the three months ended September 30, 2021, an increase of $3.5 million, or 7.2%. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in early 2022.

Management fee revenue for the three months ended September 30, 2022 decreased by $0.4 million as compared to the three months ended September 30, 2021, primarily as a result of managing fewer communities in 2022.

Managed community reimbursement revenue for the three months ended September 30, 2022 was $7.7 million as compared to $7.9 million for the three months ended September 30, 2021, representing a decrease of $0.2 million. The decrease was primarily a result of transitioning five Fannie Mae communities to other operators during the three-month period ended September 30, 2021.

Expenses

Operating expenses for the three months ended September 30, 2022 were $43.1 million as compared to $40.7 million for the three months ended September 30, 2021, an increase of $2.4 million or 5.9%. The increase is primarily due to a $2.6 million increase in labor and employee-related expenses, a $0.4 million increase in utility costs, and a $0.3 million increase in food expenses, partially offset by the $1.0 million energy provider settlement from winter storm Uri expensed in Q3 2021.

General and administrative expenses for the three months ended September 30, 2022 were $5.9 million as compared to $7.5 million for the three months ended September 30, 2021, representing a decrease of $1.6 million. This decrease is primarily due to a $1.2 million decrease in stock-based compensation expense from prior year due to forfeiture credits in connection with executive personnel changes in September 2022, and a $0.4 million net decrease in recurring corporate expenses.

Managed community reimbursement expense for the three months ended September 30, 2022 was $7.7 million as compared to $7.9 million for the three months ended September 30, 2021, representing a decrease of $0.2 million. The decrease was primarily a result of transitioning of five Fannie Mae communities to other operators during the three-month period ended September 30, 2021.

Interest expense for the three months ended September 30, 2022 was $8.2 million as compared to $9.7 million for the three months ended September 30, 2021, representing a decrease of $1.5 million due to lower overall borrowings in 2022, partially offset by increased interest rates associated with the Company's variable rate mortgages.

Gain on extinguishment of debt was $54.1 million for the three months ended September 30, 2021. The 2021 gain related to the derecognition of notes payable and liabilities as a result of the transition of legal ownership of five communities to Fannie Mae, the holder of the related non-recourse debt.

Results of Operations

Nine months ended September 30, 2022 as compared to nine months ended September 30, 2021



Revenues

Resident revenue for the nine months ended September 30, 2022 was $155.3 million as compared to $140.8 million for the nine months ended September 30, 2021, an increase of $14.5 million, or 10.3%. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in early 2022.

Management fee revenue for the nine months ended September 30, 2022 decreased by $1.2 million as compared to the nine months ended September 30, 2021, primarily as a result of managing fewer communities in 2022.

Managed community reimbursement revenue for the nine months ended September 30, 2022 was $21.8 million as compared to $33.3 million for the nine months ended September 30, 2021, a decrease of $11.5 million. The decrease was primarily a result of transitioning of 14 Fannie Mae communities to other operators during the nine-month period ended September 30, 2021.

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Expenses

Operating expenses for the nine months ended September 30, 2022 were $126.6 million as compared to $115.0 million for the nine months ended September 30, 2021, an increase of $11.6 million or 10.1%. The increase is primarily due to a $9.2 million increase in labor and employee-related expenses including premium labor, a $1.0 million increase in food costs, and a $1.4 million increase in other operating expenses.

General and administrative expenses for the nine months ended September 30, 2022 were $23.6 million as compared to $24.2 million for the nine months ended September 30, 2021, a decrease of $0.6 million. This decrease is primarily due to a $2.2 million decrease in bonuses and a $1.9 million decrease in payroll and employee-related expenses, partially offset by a $2.2 million increase in stock-based compensation expense and a $1.3 million increase in other expenses.

Managed community reimbursement expense for the nine months ended September 30, 2022 was $21.8 million as compared to $33.3 million for the nine months ended September 30, 2021, a decrease of $11.5 million. The decrease was primarily a result of transitioning 14 Fannie Mae communities to other operators during the nine-month period ended September 30, 2021.

Interest expense for the nine months ended September 30, 2022 was $23.7 million as compared to $28.6 million for the nine months ended September 30, 2021, a decrease of $4.9 million, primarily due to lower overall borrowings in 2022, partially offset by increased interest rates associated with the Company's variable rate mortgages.

Loss on extinguishment of debt for the nine months ended September 30, 2022 was $0.6 million as compared to a gain on extinguishment of debt of $168.3 million for the nine months ended September 30, 2021, a decrease of $168.9 million. The 2022 loss relates to the refinancing of debt in Q1 2022. The 2021 gain related to the derecognition of notes payable and liabilities as a result of transition of legal ownership of fourteen communities to Fannie Mae, the holder of the related non-recourse debt.

Other income for the nine months ended September 30, 2022 and for the nine months ended September 30, 2021 was $8.7 million. Both current year and prior year periods include cash received for CARES Act funding for healthcare-related expenses or lost revenues attributable to COVID-19.

Cash Flow Analysis

Nine months ended September 30, 2022 as compared to nine months ended September 30, 2021



Operating activities

Net cash provided by operating activities for the nine months ended September 30, 2022 was $2.9 million as compared to net cash used in operating activities of $7.2 million for the nine months ended September 30, 2021, an increase of $10.1 million primarily due to the timing of settlements of our receivables, current assets, and payables, as well as improved operations.

Investing activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $30.7 million as compared to $7.1 million for the nine months ended September 30, 2021 primarily due to increase in ongoing capital improvements and renovation projects at existing communities totaling $18.3 million, and the acquisition of two new communities in Q1 2022 for $12.3 million.

Financing activities

Net cash used in financing activities for the nine months ended September 30, 2022 was $24.3 million and primarily results from repayments of notes payable and deferred financing costs paid, net of proceeds from notes payable, of $20.7 million, related to our 2022 debt refinancing and $3.0 million of dividends paid to Series A Preferred Stockholders. The net cash provided by financing activities for the nine months ended September 30, 2021 was $6.6 million and primarily results from proceeds from notes payable, net of repayments.

Liquidity and Capital Resources

Short-term liquidity

Our primary source of short-term liquidity is our cash and cash equivalents and results from operations. As of September 30, 2022, we had $27.0 million of cash and cash equivalents excluding our restricted cash balance of $13.8 million. Due to the continued effects of the COVID-19 pandemic, our operations have not yet returned to 2019, pre-pandemic levels. We currently anticipate cash flow from operations will continue to be impacted for at least the near-term. Our known liquidity requirements

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primarily consist of funds necessary to pay for operating expenses related to our communities and other expenditures, including general and administrative expenses, interest and scheduled principal payments on our debt and dividends on our convertible preferred stock.

The Refinancing Facility we entered into in March 2022 contains financial covenants that were effective beginning June 30, 2022 and quarterly thereafter. As of September 30, 2022, the Company was in compliance with such covenants. There is no assurance that the Company will be able to meet any financial covenant requirements in the future. One of these financial covenants is that we are required to maintain cash and cash equivalents of no less than $13 million, inclusive of a $1.5 million lender service reserve, which is included in "restricted cash". In connection with the Refinancing Facility, the Company is in the process of obtaining an interest rate cap to hedge against further exposure in a rising interest rate environment.

Additional short-term sources of liquidity include grants under the CARES Act. As described above, these grants are available to reimburse the Company for COVID-19 related expenses. In April 2022, we received a grant of $9.1 million, where we determined we met the CARES Act requirements which allowed the Company to retain the funds and not repay the grant. There is no assurance that we will meet such requirements or qualify for, or receive, any additional CARES Act funds in the future, and we do not consider this to be a significant source of liquidity in the future. In addition, the Company has historically received and is eligible for funding in connection with various state programs.

Long-term liquidity

The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio, including debt financing or refinancings, purchases and sales of assets, and other transactions. If capital were obtained through the issuance of Company equity, the issuance of Company securities would dilute the ownership of our existing stockholders and any newly issued securities may have rights, preferences, and/or privileges senior to those of our common stock. There can be no assurance that the Company will continue to generate cash flows at or above current levels, or that the Company will be able to obtain the capital necessary to meet the Company's short and long-term capital requirements.

In connection with the refinancing transaction in March 2022, the Company was able to refinance certain debt due during 2022, 2023 and early 2024 with longer-term financing that matures in 2026. In addition, $10.0 million is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $40 million may be available to fund future growth initiatives. There is no assurance that we will be able to meet these financial covenant requirements.

As discussed in "Note 5. Notes Payable" of the condensed consolidated financial statements, the Company has scheduled maturities of debt coming due in the next five years and thereafter. The Company currently expects to be able to meet those maturities from cash on hand, future operations and future refinancings. The Refinance Facility matures in four years with an optional one-year extension if certain financial performance metrics and other customary conditions are maintained. There is no assurance that we will be able to meet such conditions or source refinancings at the time any of our debt matures or whether the terms of such refinancings will be comparable or satisfactory compared to our current loans.

The Company has unencumbered properties with a net book value of $23.6 million as of September 30, 2022, which could provide a source of liquidity from new debt. In the near term, the Company intends to finance the two Indiana communities purchased in Q1 2022.

© Edgar Online, source Glimpses

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