Capital Senior Living(SNDA) - 2023 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Presents Sonida Senior Living's unaudited Q1 2023 condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets | Metric (in thousands) | March 31, 2023 (Unaudited) | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------------------- | :-------------------------- | :------------------ | :------------------------ | | Assets | | | | | Cash and cash equivalents | $12,972 | $16,913 | $(3,941) | | Restricted cash | $12,174 | $13,829 | $(1,655) | | Total current assets | $36,141 | $43,566 | $(7,425) | | Property and equipment, net | $610,945 | $615,754 | $(4,809) | | Total assets | $648,697 | $661,268 | $(12,571) | | Liabilities and Equity | | | | | Accounts payable | $9,246 | $7,272 | $1,974 | | Accrued expenses | $31,857 | $36,944 | $(5,087) | | Current portion of notes payable, net | $81,151 | $46,029 | $35,122 | | Total current liabilities | $127,011 | $94,317 | $32,694 | | Notes payable, net of current portion | $554,723 | $625,002 | $(70,279) | | Total liabilities | $681,829 | $719,432 | $(37,603) | | Redeemable preferred stock | $44,748 | $43,550 | $1,198 | | Total shareholders' deficit | $(77,880) | $(101,714) | $23,834 | | Total liabilities, redeemable preferred stock and shareholders' deficit | $648,697 | $661,268 | $(12,571) | Condensed Consolidated Statements of Operations | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :------------------------------------ | :---------------------------------- | :---------------------------------- | :------------------- | | Resident revenue | $56,606 | $50,834 | $5,772 (11.4%) | | Total revenues | $62,073 | $58,484 | $3,589 (6.1%) | | Operating expense | $43,808 | $41,929 | $1,879 (4.5%) | | General and administrative expense | $7,063 | $8,273 | $(1,210) (-14.6%) | | Total expenses | $65,714 | $66,802 | $(1,088) (-1.6%) | | Interest expense | $(8,867) | $(7,603) | $(1,264) (16.6%) | | Gain (loss) on extinguishment of debt, net | $36,339 | $(641) | $36,980 | | Net income (loss) | $24,145 | $(16,678) | $40,823 | | Net income (loss) attributable to common stockholders | $19,765 | $(17,811) | $37,576 | | Basic net income (loss) per common share | $2.88 | $(2.81) | $5.69 | | Diluted net income (loss) per common share | $2.76 | $(2.81) | $5.57 | Condensed Consolidated Statements of Shareholders' Equity (Deficit) | Metric (in thousands) | As of March 31, 2023 | As of December 31, 2022 | | :------------------------------------ | :------------------- | :-------------------- | | Common Stock (Shares) | 6,942 | 6,670 | | Common Stock (Amount) | $69 | $67 | | Additional Paid-In Capital | $294,964 | $295,277 | | Retained Deficit | $(372,913) | $(397,058) | | Total Shareholders' Deficit | $(77,880) | $(101,714) | Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :------------------------------------ | :---------------------------------- | :---------------------------------- | :------------------- | | Net cash provided by (used in) operating activities | $3,249 | $(690) | $3,939 | | Net cash used in investing activities | $(5,086) | $(17,924) | $12,838 | | Net cash used in financing activities | $(3,759) | $(13,434) | $9,675 | | Decrease in cash and cash equivalents and restricted cash | $(5,596) | $(32,048) | $26,452 | | Cash, cash equivalents, and restricted cash at end of period | $25,146 | $60,828 | $(35,682) | | Cash paid for interest | $7,639 | $7,076 | $563 | Notes to Condensed Consolidated Financial Statements Detailed explanations for financial statements, covering policies, going concern, and specific line items 1. Basis of Presentation - Sonida Senior Living, Inc. operates 72 senior housing communities in 18 states, with approximately 8,000 resident capacity as of March 31, 2023, including 62 owned and 10 managed communities[21] - The company completed the transfer of legal ownership for two properties to Fannie Mae in January 2023, which were no longer operated as of December 31, 2022[21] - The financial statements are unaudited and prepared in accordance with GAAP, with certain disclosures omitted per SEC rules for Form 10-Q[22] 2. Going Concern Uncertainty and Related Strategic Cash Preservation Initiatives - Substantial doubt exists about the Company's ability to continue as a going concern for the next 12 months due to COVID-19 impact, inflation, elevated interest rates, $81.2 million in principal payments and $38.5 million in interest payments due, recurring operating losses, working capital deficit, and non-compliance with certain mortgage agreements[28] - The Company has implemented strategic and cash preservation initiatives, including resident rate reviews, global purchasing, labor environment mitigants, cash optimization, discussions with lenders for debt modifications, proactive spending reductions, and pursuing state grants[30] - Management could not conclude that its plans would probably mitigate the going concern doubt, as the remediation plan depends on external factors and there's a probability of non-compliance with debt covenants, potentially triggering default and acceleration of debt[31] 3. Summary of Significant Accounting Policies | Restricted Cash Category (in thousands) | March 31, 2023 | December 31, 2022 | | :-------------------------------------- | :------------- | :---------------- | | Property tax and insurance reserves | $4,361 | $6,184 | | Lender reserve | $1,500 | $1,500 | | Capital expenditures reserves | $2,202 | $2,034 | | Deposits for outstanding letters of credit | $4,111 | $4,111 | | Total restricted cash | $12,174 | $13,829 | - Revenue recognition for resident services is generally recorded when services are rendered, with residency agreements typically short-term (one year or less) and terminable with 30 days' notice[40] - Medicaid program revenues accounted for approximately 9.3% and 9.6% of total revenue for the three months ended March 31, 2023 and 2022, respectively, with 24 communities participating in Medicaid in Q1 2023[42] - The Company adopted ASU 2016-13 (Credit Losses) on January 1, 2023, with an immaterial impact on financial statements[61] 4. Property and Equipment, net | Asset Category (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | Total property and equipment | $973,817 | $968,888 | | Less accumulated depreciation and amortization | $(362,872) | $(353,134) | | Total property and equipment, net | $610,945 | $615,754 | - No impairments on long-lived assets were recorded for the three months ended March 31, 2023, or March 31, 2022[64] 5. Accrued expenses | Accrued Expense Category (in thousands) | March 31, 2023 | December 31, 2022 | | :-------------------------------------- | :------------- | :---------------- | | Accrued payroll and employee benefits | $14,187 | $13,795 | | Accrued interest | $5,897 | $9,374 | | Accrued taxes | $5,876 | $6,939 | | Accrued professional fees | $3,571 | $3,179 | | Accrued other expenses | $2,326 | $3,657 | | Total accrued expenses | $31,857 | $36,944 | 6. Notes Payable | Notes Payable Category (in thousands) | March 31, 2023 | December 31, 2022 | | :------------------------------------ | :------------- | :---------------- | | Fixed rate mortgage notes payable | $500,721 | $503,312 | | Variable rate mortgage notes payable | $137,453 | $137,652 | | Notes payable - insurance | $800 | $1,724 | | Notes payable - other | $1,619 | $1,619 | | Total notes payable, excluding deferred loan costs | $640,593 | $676,298 | | Deferred loan costs, net | $(4,719) | $(5,267) | | Total notes payable, net | $635,874 | $671,031 | | Less current portion | $(81,151) | $(46,029) | | Total long-term notes payable, net | $554,723 | $625,002 | | Principal Payments Due (in thousands) | Amount | | :------------------------------------ | :----- | | 2023 | $80,081 | | 2024 | $150,220 | | 2025 | $76,031 | | 2026 | $136,116 | | 2027 | $3,980 | | Thereafter | $194,165 | | Total notes payable, excluding deferred loan costs | $640,593 | - The Company completed the transition of legal ownership of the remaining two Fannie Mae properties to new owners on January 11, 2023, resulting in a $36.3 million gain on debt extinguishment for Q1 2023[80] - The Company defaulted on $69.8 million of non-recourse mortgage loan agreements with Protective Life Insurance Company for four communities in Q1 2023, with discussions ongoing to resolve the matter[81] 7. Redeemable Preferred Stock - The Series A Preferred Stock has an 11% annual dividend, accrued quarterly and compounded, with $1.2 million added to the liquidation preference in Q1 2023 as no dividend was declared[84] - As of March 31, 2023, the Series A Preferred Stock is carried at its maximum redemption value of $44.7 million[13][55] 8. Revenue | Revenue Component (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :------------------------------- | :---------------------------------- | :---------------------------------- | :----------- | | Housing and support services | $53,791 | $49,438 | $4,353 | | Community fees | $479 | $453 | $26 | | Ancillary services | $273 | $254 | $19 | | Other operating revenue (Provider Relief Funds) | $2,063 | $689 | $1,374 | | Resident revenue | $56,606 | $50,834 | $5,772 | | Management fees | $505 | $628 | $(123) | | Managed community reimbursement revenue | $4,962 | $7,022 | $(2,060) | | Total revenues | $62,073 | $58,484 | $3,589 | - Other operating revenue, primarily Provider Relief Funds from state departments due to COVID-19 financial distress, increased significantly from $0.7 million in Q1 2022 to $2.0 million in Q1 2023[85] 9. Net Income (Loss) Per Share | EPS Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Net income (loss) attributable to common stockholders | $19,765 | $(17,811) | | Weighted average shares outstanding — basic | 6,855 | 6,341 | | Basic net income (loss) per share | $2.88 | $(2.81) | | Weighted average shares outstanding — diluted | 7,168 | 6,341 | | Diluted net income (loss) per share | $2.76 | $(2.81) | - Securities with an antidilutive effect, including warrants, Series A Preferred Stock (if converted), restricted stock awards, and stock options, totaled 2,335 thousand shares in Q1 2023 and 2,290 thousand shares in Q1 2022, and were excluded from diluted EPS calculation[89] 10. Stock-Based Compensation | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :---------------------------------- | :---------------------------------- | | Stock-based compensation expense | $902 | $1,828 | - The Company granted 274 thousand restricted stock awards with a total grant date fair value of $2.3 million during Q1 2023[90] 11. Commitments and Contingencies - As of March 31, 2023, the Company had contractual commitments of $2.6 million for future renovations and technology enhancements, expected to be substantially expended in 2023[91] - Management believes that claims incurred in the normal course of business, whether or not covered by insurance, should not have a material impact on the condensed consolidated financial statements[92] 12. Related Party Transactions - Affiliates of Conversant Capital LLC owned approximately 56.5% of the Company's outstanding common stock (inclusive of convertible Series A Preferred Stock and warrants) as of March 31, 2023[93] 13. Fair Value Measurements - The fair value of derivative assets (interest rate caps) was $2.1 million as of March 31, 2023, determined using Level 2 observable inputs[93] | Financial Instrument (in thousands) | Carrying Amount (March 31, 2023) | Fair Value (March 31, 2023) | Carrying Amount (December 31, 2022) | Fair Value (December 31, 2022) | | :---------------------------------- | :------------------------------- | :-------------------------- | :---------------------------------- | :----------------------------- | | Cash and cash equivalents | $12,972 | $12,972 | $16,913 | $16,913 | | Restricted cash | $12,174 | $12,174 | $13,829 | $13,829 | | Notes payable, excluding deferred loan costs | $640,593 | $568,769 | $676,298 | $638,485 | 14. Derivatives and Hedging - The Company uses interest rate caps to manage exposure to interest rate fluctuations on variable-rate debt, with an aggregate notional amount of $138.4 million as of March 31, 2023[97][101] | Derivative Type (in thousands) | Notional Amount (March 31, 2023) | Fair Value (March 31, 2023) | | :-------------- | :--------------------------------------------- | :---------------------------------------- | | Interest rate cap (LIBOR-based) | $50,260 | $460 | | Interest rate cap (SOFR-based) | $88,125 | $1,671 | | Total derivative assets | $138,385 | $2,131 | - A loss of $0.6 million on derivatives not designated as hedges was included in interest expense for the three months ended March 31, 2023[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of Q1 2023 financial condition and results, covering business, COVID-19, going concern, and liquidity Overview - Sonida Senior Living is a leading owner-operator of senior housing communities, providing independent living, assisted living, and memory care services primarily to the 75+ population[104] - As of March 31, 2023, the Company operated 72 senior housing communities (62 owned, 10 managed) across 18 states, with an aggregate capacity of approximately 8,000 residents[105] COVID-19 Pandemic - The COVID-19 pandemic negatively impacted occupancy levels, revenues, and operating results, requiring significant additional operating costs for infection control and resident care[106][107] | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :---------------------------------- | :---------------------------------- | | Direct COVID-19 costs | $33 | $200 | | Provider Relief Funds received | $2,000 | $700 | - All senior living communities were open for new resident move-ins as of March 31, 2023, but the continued impact of the pandemic remains uncertain[106][109] Going Concern Uncertainty and Related Strategic Cash-Preservation Initiatives - The Company faces substantial doubt about its ability to continue as a going concern for the next 12 months due to factors including COVID-19 impact, inflation, high interest rates, significant debt payments ($81.2M principal, $38.5M interest), recurring operating losses, working capital deficit, and mortgage agreement non-compliance[112] - Strategic initiatives include resident rate reviews, global purchasing, labor mitigants, cash optimization, debt modification discussions, spending reductions, and seeking state grants[114] - Management could not conclude that its plans would probably mitigate the going concern doubt, as the remediation plan is dependent on external factors and there's a risk of non-compliance with debt covenants, potentially leading to default and debt acceleration[115] Significant Financial and Operational Highlights Operations | Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :------------------------------------ | :---------------------------------- | :---------------------------------- | :----------- | | Resident revenue | $56.6 | $50.8 | $5.8 (11.4%) | | Weighted average occupancy (62 owned communities) | 84.0% | 81.8% | 2.2 percentage points | | Average monthly rental rate (62 owned communities) | Higher by 960 basis points | N/A | 9.6% increase | - The increase in resident revenue was primarily driven by increased occupancy, higher average rent rates, and the acquisition of two new communities in early 2022[117] - The Company continues to face workforce challenges in the senior living industry, leading to increased use of overtime, shift bonuses, and contract labor[119] 2022 Mortgage Refinance - In March 2022, the Company refinanced existing mortgage debt with Ally Bank for ten communities, securing an initial term loan of $80 million, which was amended in December 2022 to include two additional communities, increasing the principal to $88.1 million[120][121] - The Refinance Facility includes an additional $10 million available as delayed loans and up to an uncommitted $40 million for future growth, subject to financial covenant requirements[120][121] - As of March 31, 2023, the Company was in compliance with the financial covenants of the Refinance Facility, but future compliance is not assured[75] Other Significant Transactions - The foreclosure sales of the remaining two Fannie Mae properties were completed on January 11, 2023, relieving the Company of related debt and resulting in a $36.3 million gain on debt extinguishment for Q1 2023, completing the foreclosure process for all 18 Fannie Mae properties initiated in 2020[124] - In Q1 2023, the Company defaulted on $69.8 million of non-recourse mortgage loan agreements with Protective Life Insurance Company for four communities by electing not to make principal and interest payments[125] Application of Critical Accounting Policies and Estimates - There have been no significant changes to the Company's critical accounting policies since December 31, 2022[126] Recent Accounting Guidance Adopted - Refer to Note 3 – Summary of Significant Accounting Policies for details on recently adopted accounting pronouncements[127] Results of Operations (Three months ended March 31, 2023 as compared to three months ended March 31, 2022) Revenues | Revenue Type (in millions) | Q1 2023 | Q1 2022 | Change (YoY) | | :------------------------- | :------ | :------ | :----------- | | Resident revenue | $56.6 | $50.8 | +$5.8 (11.4%) | | Management fee revenue | $0.5 | $0.6 | -$0.1 | | Managed community reimbursement revenue | $5.0 | $7.0 | -$2.0 | - The increase in resident revenue was primarily driven by increased occupancy, higher average rent rates, and the acquisition of two new communities in early 2022[128] - Decreases in management fee and managed community reimbursement revenue were primarily due to managing fewer communities in 2023[129] Expenses | Expense Type (in millions) | Q1 2023 | Q1 2022 | Change (YoY) | | :------------------------- | :------ | :------ | :----------- | | Operating expense | $43.8 | $41.9 | +$1.9 (4.5%) | | General and administrative expense | $7.1 | $8.3 | -$1.2 (-14.6%) | | Managed community reimbursement expense | $5.0 | $7.0 | -$2.0 | | Interest expense | $8.9 | $7.6 | +$1.3 | | Gain (loss) on extinguishment of debt | $36.3 | $(0.6) | +$36.9 | - Operating expenses increased due to a $1.3 million rise in labor and employee-related expenses and a $0.6 million increase in utility costs[130] - General and administrative expenses decreased primarily due to a $0.9 million reduction in stock-based compensation expense from forfeiture credits related to executive personnel changes in 2022[131] - The $36.3 million gain on extinguishment of debt in Q1 2023 resulted from the derecognition of notes payable and liabilities following the transition of legal ownership of two communities to Fannie Mae[134] Liquidity and Capital Resources - As of March 31, 2023, the Company had $13.0 million in unrestricted cash, with primary liquidity sources including cash from operations, COVID-19 relief grants, debt refinancings/modifications, and asset sales[135] - The Company's strategic and cash-preservation initiatives aim to provide adequate liquidity for the next 12 months, but success is not assured due to external factors and potential non-compliance with debt covenants[136] | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------------------- | :---------------------------------- | :---------------------------------- | :----------- | | Net cash provided by (used in) operating activities | $3,249 | $(690) | +$3,939 | | Net cash used in investing activities | $(5,086) | $(17,924) | +$12,838 | | Net cash used in financing activities | $(3,759) | $(13,434) | +$9,675 | | Decrease in cash and cash equivalents | $(5,596) | $(32,048) | +$26,452 | Operating activities - Net cash provided by operating activities increased by $3.9 million, from a net cash use of $0.7 million in Q1 2022 to a net cash provision of $3.2 million in Q1 2023, driven by improved operations and higher Provider Relief Funds ($2.0 million in Q1 2023 vs. $0.7 million in Q1 2022)[140] Investing activities - Net cash used in investing activities decreased significantly from $17.9 million in Q1 2022 to $5.1 million in Q1 2023, primarily due to the acquisition of two new communities for $12.3 million in Q1 2022 that did not recur in Q1 2023[141] - Capital expenditures in Q1 2023 included approximately $2.0 million for rebuild activities from Winter Storm Elliott, with $1.1 million anticipated in insurance reimbursements[141] Financing activities - Net cash used in financing activities decreased from $13.4 million in Q1 2022 to $3.8 million in Q1 2023, primarily due to lower repayments of notes payable compared to the prior year's debt refinancing[142] Item 3. Quantitative and Qualitative Disclosures About Market Risk No applicable quantitative and qualitative disclosures about market risk for the Company in this report Item 4. Controls and Procedures Discusses effectiveness of disclosure controls and internal control over financial reporting, noting an unremediated material weakness Effectiveness of Controls and Procedures - The Company's CEO and CFO concluded that disclosure controls and procedures were ineffective as of March 31, 2023, due to a material weakness identified in the Annual Report on Form 10-K[145] Remediation Plan - The material weakness in internal control over financial reporting, stemming from challenges in hiring and maintaining accounting staffing levels, remained unremediated as of March 31, 2023[147] - A remediation plan has been initiated to develop and maintain appropriate management review and process level controls, with expected implementation by the end of Q4 2023[148] Part II. Other Information Item 1. Legal Proceedings Management believes normal course claims are insurance-covered and will not materially impact financial statements - Management believes that claims incurred in the normal course of business are covered by insurance and are not expected to have a material effect on the condensed consolidated financial statements[151] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the 2022 Annual Report on Form 10-K - No material changes to the risk factors previously disclosed in the 2022 Annual Report on Form 10-K[152] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common stock repurchases in Q1 2023 under the existing $10.0 million share repurchase program | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | | :-------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------- | :----------------------------------------------------------------------------- | | January 1 – January 31, 2023 | — | — | — | 6,570,222 | | February 1 – February 28, 2023 | — | — | — | 6,570,222 | | March 1 – March 31, 2023 | — | — | — | 6,570,222 | - The Company's board of directors approved a share repurchase program in 2009 (continued in 2016) authorizing up to $10.0 million of common stock purchases, with no stated expiration date[153] Item 3. Defaults Upon Senior Securities Company defaulted on $69.8 million of non-recourse mortgage loans with Protective Life in Q1 2023 - As of March 31, 2023, the Company was in default on $69.8 million of non-recourse mortgage loan agreements with Protective Life for four communities due to missed debt service payments[154] - An additional $48.7 million was outstanding under other loan agreements with Protective Life on six communities, for which the Company was not in default as of March 31, 2023[154] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Company Item 5. Other Information No other information to report in this section Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including corporate governance documents and officer certifications - The exhibits include various corporate governance documents such as the Amended and Restated Certificate of Incorporation and its amendments, Second Amended and Restated Bylaws and its amendment, and the Certificate of Designation for Series A Convertible Preferred Stock[158] - Certifications from the Principal Executive Officer and Principal Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002, are filed herewith[158]