Sonida Senior Living, Inc.

Good day and welcome to the Sonita Senior Living Fourth Quarter and Full Year 2021 Earnings Conference Call. Today's conference is being recorded. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities law. These statements are made as of today's date and the company expressly disclaims any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today, as well as in the reports the company files with the SEC from time to time, including the risk factors contained in the annual report on Form 10-K and quarterly reports on Form 10-Q. Please see today's press release for the full Safe Harbor Statement, which may be found at www.sonitaseniorliving.com forward slash investor desk relations and was furnished in an 8K filing this morning. Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release. At this time, I would like to turn the call over to Sonita Senior Living President and CEO, Ms. Kimberly Lodi.

Thank you, Paul. Good afternoon, everyone, and welcome to our fourth quarter and full year 2021 earnings call. Joining me today is Brandon Rebar, our Chief Operating Officer. 2021 was transformational for Sonita Senior Living in many ways. Most importantly was our success early in the year in quickly and efficiently facilitating multiple COVID-19 vaccination clinics at all of our communities. which resulted in an almost immediate drop in resident cases to nearly zero, as well as a drop in severity of cases when they did occur. Our high standards of infection control in all areas of our communities continue to help protect our residents and team members from the personal health impacts of this terrible infectious disease and its variants. Despite the emergence of multiple new variants and a difficult operating environment throughout 2021, our pandemic recovery strategy to immediately and quickly drive occupancy improvements by utilizing short-term incentives to encourage move-ins was successful. We increased occupancy from the low point of 75.3% in February of 2021 to 81.6% in December. Clearly, the work we did prior to the pandemic to strengthen our sales, marketing, clinical, and operating processes quickly delivered significant occupancy growth. We were also able to maintain the integrity of our rates and grow revenue 5.3% in the fourth quarter of 2021 as compared to the same quarter in 2020. Our focus continues to be responsible increases in market rates and in-place rents while managing the current circumstances of elevated operating expenses. In November, we closed on a strategic investment from Conversant Capital and raised, along with a shareholder rights offering, $154.8 million for the company. The proceeds from these transactions significantly strengthened the company's liquidity and positioned us to further fund our growth strategy, to invest in our assets, to enhance our competitive position, and to address all of our 2022 and 2023 mortgage debt maturities with flexibility and strength. The company also rebranded itself as Sonita Senior Living. The new branding and especially our new tagline of Find Your Joy Here has strongly resonated with our residents, families, team members, vendors, and others. We are excited about how well our new branding describes our company, our communities, and the engaging, caring, and joyful environment we provide throughout. In December, we fully repaid $31.5 million in partial recourse mortgage debt maturing on December 31st. In early March of 2022, we repaid our $40.5 million full recourse bridge loan and secured an $80 million loan secured by 10 properties that also includes opportunities for an additional $50 million in financing. Along with effectively addressing all mortgage debt maturities through mid-2024, we reduced our debt by $38.5 million, reduced the blended interest rate on the 10 refinanced communities by 63 basis points, and reduced our corporate guarantee by approximately $20 million. Building on our positive business momentum, the recovering industry, and attractive macro demographics, we continue to thoughtfully build our community portfolio. In early December, we expanded our relationship with Ventas by adding three Arkansas-based Ventas-owned assets to our managed portfolio. And in February of 2022, we acquired two assets in Indiana for approximately $12.3 million, further increasing our offering in the important Indiana markets. The acquisition represents an early step in our efforts to identify investment opportunities in strategic markets to complement the ongoing organic growth of our core portfolio. The cumulative effect of these strategic actions, along with the business performance driven by our talented and dedicated teams, has been to improve our liquidity, reduce our debt, invest in our business, and eliminate the going concern issue that we have been managing since early 2020. Turning specifically to our fourth quarter results, occupancy increased 390 basis points to 81.6% as compared to fourth quarter 2020 occupancy of 77.4%. Sequentially, occupancy increased 30 basis points from Q3 21. We're pleased that our business continues to demonstrate good momentum into 2022 with January occupancy of 82%, February occupancy of 82.2%, and March occupancy of 82.6%, an increase of 730 basis points from the pandemic low average monthly occupancy of 75.3% in February of 2020. Today, 77% of our communities have occupancy of 80% or greater, and we are within approximately 140 basis points of our Q1 2020 pre-pandemic occupancy of 83.7%. Comparing Sunita's performance to industry data recently released by NCHMAT Vision, it is clear that our strategic and operational initiatives are working as the industry's Q1 2022 occupancy remains 670 basis points behind Q1 of 2020. Combining our occupancy growth with rate improvement, consolidated resident revenue for the fourth quarter increased 5.3% as compared to the fourth quarter of 2020, and increased 90 basis points sequentially from Q3 2021. Revenue per occupied unit increased 50 basis points sequentially from Q3 2021 and was 20 basis points higher than the REV4 in the fourth quarter of 2020. With respect to operating expenses, the labor market continued to be intensely competitive in the fourth quarter and into the early months of 2022. This required the use of expensive agency labor and overtime in some of our communities. The good news is that high utilization of agency labor was concentrated in just a few of our communities, and we're now seeing it subside across the board. Brandon will talk more about the labor trend shortly. Net operating margin for our 60-owned communities was 18.3% in the fourth quarter compared to 21% in the third quarter of 2021, mostly due to the impact of agency staffing and overtime that I just described. Of course, we are not happy at all with this operating margin and are focused on improving it as quickly as possible. In conclusion, we remain steadfast in executing on three major priorities. Number one, the health and wellness of our residents and team members. This priority is and always will be paramount to our success. Two, occupancy recovery to pre-pandemic levels and beyond. Our goal is to return to pre-pandemic occupancy on a run rate basis by the end of 2022. As I mentioned earlier, based on preliminary Q1 occupancy numbers, we are about 140 basis points away from that goal, and we're confident that we're on track to achieve it. And then three is NOI expansion. We expect the NOI to improve sequentially throughout the year due to our continued focus on increasing rates responsibly, deploying innovative staffing solutions, and diligently managing expenses. Lastly, we are thrilled that on May 1st, Kevin Dietz will join our organization as Chief Financial Officer. Kevin will bring deep accounting and finance leadership to our team, and we expect his technical expertise, along with his strong real estate and hospitality background, will enable him to add value to the company immediately. We continue to believe in the promising future of this industry, and more specifically, in the future growth prospects for Sunita Senior Living. I'll now turn the call over to Brandon for some more insight into our operations.

Thank you, Kim, and good afternoon. As you mentioned, the fourth quarter of 2021 brought to conclusion an operational and financial transformation nearly three years in the making. We are so proud of the achievements of each of our communities throughout the most challenging operating period in recent memories. The positive energy and tireless dedication to our residents and staff that each one of our leadership teams bring to bear on a daily basis drives the optimism across Sonita for continued improvement in operating results in 2022. While plenty of work remains to continue occupancy and margin recovery across all of our communities, many of our local teams have already exceeded their pre-pandemic operating metrics. On a portfolio level, increased pressure in the operating environment related to cost and availability of labor and general inflation prevented margin expansion in Q4. However, the continued occupancy and revenue growth position our communities well for a 2022 recovery. Further development of labor management and staffing capabilities throughout 2021 in combination with adjustments to our local wage scale have shown promising results in the early months of 2022 with positive net hires of 259 team members in Q4 2021 and Q1 2022 combined. Revenue growth, driven by continued occupancy improvement and ongoing revenue increase, coupled with gains on the labor front, remain the priority for delivering margin improvement in 2022. The early stages of significant capital investment across many of our key communities has already provided an occupancy boost in a traditionally challenging quarter for senior living. As Kim mentioned, occupancy gains in each of the first three months of 2022 coupled with achievement of continued rate improvement, support our NOI growth expectations. In our previous discussions, we referenced the opportunity to improve margin by maintaining existing labor levels while increasing occupancy. The labor market remained extremely challenging in late 2021 and the early months of 2022. Use of contract labor increased rapidly across the industry in November and December with the spike in COVID cases related to the Omicron variant. Compared with Q4 of 2020, total labor costs increased by approximately $2.6 million, primarily due to a $1.7 million increase in contract labor. We remain confident the requirement for contract labor was limited to markets most significantly impacted by COVID cases and market-wide labor pressures, which have begun to ease here at the end of Q1. As previously mentioned, the positive net higher figures over the last two quarters continue to drive down use of premium labor as March contract labor utilization declined from January and February. Throughout 2021, we introduced staffing and scheduling technology to support a more flexible and employee-friendly work environment. The stability of our labor model in 2022 moving forward has been influenced by a number of key factors. Our internal recruiting and retention strategies have successfully accelerated candidate flow and increased retention of existing employees in early 2022. Adoption of our staffing and scheduling technology continues to increase each month and has reduced the number of open shifts requiring higher cost overtime or agency labor. Finally, wage increases and wage scale adjustments coupled with an increase in qualified candidates returning to the workforce continues to reduce the number of open positions across our portfolio. Turning to revenue and specifically rate, we delivered sequential improvement from $3,578 to $3,594. Rent concessions for new residents decreased for the third quarter in a row, further strengthening opportunity for near-term rate improvement. For 2022, we believe that residents and families understand the increase in costs of providing great service will mean higher rate growth. Specific to Sunita, the investments we have made and will continue to make in resident programming and experience. community technology infrastructure, and wages for our community teams provide direct support for the rent increases at or above the 5% we referenced previously for 2022. Despite the increase in national COVID cases in Q4 due to the Omicron variant, our leading indicators related to occupancy remain strong. Lead and tour volume for Q4 increased 57% over the same period in 2020 and 15% versus 2019 pre-pandemic numbers thanks to the ongoing outreach and digital marketing efforts conducted by our local and regional leadership. Occupancy opportunity in 2022 remains focused on accelerated recovery of those communities with occupancy under 80%. Highlighting the ongoing recovery in key states and markets, two of our largest states by unit count, Indiana and Wisconsin, are currently operating at an average occupancy of 90%, with many of the communities exceeding pre-pandemic occupancy. Further detailing the positive impact of our Q4 2021 capital infusion, capital projects of approximately $10 million are underway or completed in 15 of our owned communities. And for the first time in five years, Sunita completed the acquisition of two communities in Q1 within our Indianapolis market, and also added three Ventas-owned communities to our management portfolio. While still early, we are pleased with the integration timeline and early operating trends in these five communities. Finally, non-labor related expenses consisting primarily of food, marketing, facility maintenance, and supply related items decreased 1% sequentially, with a 4% increase in food costs offset by a significant reduction in third-party referral fees of more than $300,000 in Q4. In early 2022, we completed implementation of an updated menu management and meal costing technology to further advance our resident experience platform and expense management processes. while pressure on net operating income continued in the fourth quarter due to the challenging labor environment and significant increase in COVID cases across the country. Continued improvement in rate, occupancy, and the success of many Sunita communities in returning to pre-pandemic margins all provide support for our optimism in 2022. Early results from Q1 this year show further improvement in occupancy, in-place rent increases occurring across the portfolio, and positive movement in key hiring and retention metrics. Our operations leadership team remains confident that more than three years of investment in developing and retaining strong local and regional leadership and advancing resident-focused programming will deliver consistent improvement in operating results moving forward. We will now move to the question and answer portion of the call. Operator, please open the line for questions at this time.