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spk00: Good day and welcome to the Sunita Senior Living second quarter 2023 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 laws. 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.senitaseniorliving.com backslash investor dash relations and was furnished in the 8K filing this morning. Also, please note that during the call, the company will present non-GAAP financial measures. For reconciliation of each non-GAAP measure from most comparable GAAP measure, please also see today's press release. At this time, I would like to turn the call over to Senita Senior Living CEO, Brandon Rebar.
spk01: Thank you, Christine, and welcome to our 2023 second quarter earnings call. I'm joined today by Kevin Dietz, our Chief Financial Officer. Earlier today, we posted our Q2 investor presentation, which will be referenced throughout this call as we discuss our strategic priorities and operating results for the quarter. You can find our latest presentation at SenitaSeniorLiving.com in the investor relations section if you would like to follow along. This quarter, we are also introducing a supplemental earnings presentation, which gives analysts and investors more insight into our company. We look forward to enhancing these materials in the coming quarters and are committed to providing transparent and comprehensive views of our business consistent with best in class companies in our sector. Q2 was truly a pivotal quarter for the Sunita team and our shareholders. With our portfolio occupancy surpassing the industry average in early 2023 and labor and expense management efforts taking hold, we moved forward with the most aggressive rate push in the company's recent history, all while pursuing foundational changes in our capital structure to create stability and runway for growth. Our team delivered, and I'm proud to share the success and progress on multiple fronts this morning. Accelerated margin expansion in Q2 was driven through a combination of continued revenue improvement, effective labor management, and ongoing focus throughout our expense structure to limit inflationary cost increases. Q2 adjusted community net operating income, which excludes state grant funds, improved 31% year-over-year and 16% sequentially to $13.2 million, the highest level in three years. This quarterly margin expanded by 350 basis points year-over-year to nearly 24% in Q2. Finally, adjusted EBITDA increased 84% year-over-year to $7.5 million. The focused effort from our operational leadership team to grow rental rates and capture appropriate level of care revenue at the highest percentage in this portfolio's history while maintaining or improving occupancy was the primary driver of margin improvement in Q2. The stability of our leadership and their passion around our resident experience and programming, coupled with the investments made to our community physical plants in 2022, supported the 10% increase in RevPAR and more than 8% increase in RevPOR year over year. We expect further rate growth in Q3 specifically through level of care increases, additional reimbursed resident programming, and releasing spreads. Diving deeper into occupancy, our operating team delivered growth when looking at quarter end spot occupancy. However, the trajectory of improvement has remained below 2022's pace of recovery. July's 20 basis point improvement over June and strong net move-in results show opportunity for further expansion in Q3. We are pleased to see nearly 60% of our communities exceeding the 85% occupancy mark and only 8 communities at or below 75%. These 8 recovery communities have improved 410 basis points in the 1st, half of the year and we expect further improvement to support 3rd quarter occupancy growth portfolio wide. Kevin will provide further detail on the expense side of the business. However, I will highlight the extensive work our team has done to stabilize our workforce and focus on designing a more optimized labor model. Two of our signature labor management programs gained further traction in Q2 and will expand across key SUNITA markets in the coming months. The creation of dynamic staffing pools in dense markets and the implementation of flexible shifts across each of our clinical, food service, and community maintenance disciplines resulted in a stable cost of labor in both Q1 and Q2, and a 73% reduction in contract labor year over year. The significant operating improvements in 2023 would not have been realized without the talent and stability of our community leadership. In our most recent review, only five leadership positions remain open across 330 local and regional leadership roles. And similar to our trends in the first quarter, turnover at the community level is down nearly 10 percentage points against 2022. Our operations generated more than $5.5 million in cash the first half of 2023, compared to a cash burn of $2 million for the first half of 2022. The improvement in run rate cash flows from operations, coupled with our comprehensive restructuring of our mortgage loans, remains on pace to return the company to overall cash generation for the first time in the company's recent history. I am incredibly proud of the commitment, fortitude, and passion across all of our community leadership teams and our central support resources responsible for delivering these results. I'll spend a few minutes commenting on the completion and announcement of material agreements across both our debt and equity capital structure that represented the culmination of more than six months of discussion with our largest lending and equity relationships. These agreements represent foundational improvements to the financial stability of Sunita and provide fuel for new growth efforts. Our strong operational improvement A completely transparent approach to the nature of our financial position and additional equity capital were each fundamental to gaining the support of our lending partners. Kevin will provide a deeper dive into the Fannie Mae debt modification process and timeline as well as the overall economics of the transactions in his comments. We believe the combination of strong and stable leadership across our operating platform, the strengthening of our balance sheet, and significant margin expansion in Q2 positions Sunita for continued success and growth in 2023 and beyond. From a market perspective, we remain optimistic the industry will continue to benefit from suppressed inventory levels and accelerating demand trends in the coming years. However, near-term stress remains in both the lending and transaction market due to ongoing interest rate pressure and tightened liquidity. Our belief is the current dislocation offers significant investment opportunity through off-market transactions requiring sophisticated operating capabilities and a creative capital partner to provide future value for both Sunita and the seller. We are diligently working towards identifying a creative growth opportunities for Sunita made possible by the work completed in the first half of the year to solidify the balance sheet and operations of the business. As referenced previously, we believe our growth opportunities in 2023 will come from a combination of additional strategic management arrangements and the acquisition of real estate with an accretive investment profile. Many owners, operators and lenders across senior living are actively identifying strategic alternatives for their existing assets. Our goal is to present Sunita as a primary transaction partner. The summary of Q2's operating results is simple. Our strong and stable community leadership teams delivered near double digit rate and revenue growth year over year in a challenging environment. Our sequential margin improvement was even more encouraging with a greater than 100% revenue flow through to margin. Each of these efforts are only possible with the best in class leadership team at local and regional levels with the shared dedication to creating a safe and caring environment where residents find their joy in new experiences, hobbies and friendships. I'll now turn it over to Kevin for discussion of the financial results.
spk03: Thanks, Brandon. You touched on a lot of elements of really strong momentum, and I'll dive into these areas in a little more depth. Picking up with slide six and seven of the presentation, I am pleased to report that after positive and collaborative conversations with two of our largest lenders, we have executed on the first of a two-step process to significantly address the company's debt structure and run rate liquidity for more than 80% of our community mortgages. I cannot stress enough appreciation towards Fannie Mae and Allied Bank for their partnership in reaching terms that will benefit all stakeholders and address multiple facets of our debt. Under the first step, we entered into a forbearance with Fannie Mae with terms that will be included in the subsequent execution of a proposed loan modification agreement prior to the expiration of the forbearance on October 1st. Specific terms of the Fannie forbearance, including extending loan include extending loan maturities to December 2026 or beyond, which increases the average portfolio maturity by over one year. Addressing maturities was a significant priority for the company as mortgages for 13 Fannie Mae communities were previously scheduled to mature in 2024. Further, under the forbearance, all contractually required principal payments for all 37 Fannie Mae loans will be deferred for a minimum of three years or through maturity. resulting in $33 million of cash savings over the revised maturity dates. Finally, Sunita will receive interest rate relief for the 12-month period starting from the forbearance effective date of June 1, totaling $6 million. These amounts do not need to be repaid provided the company does not have any events of default under the Fannie loan agreements. The combination of the principal and interest relief results in a cost of debt of 3.4% and 5.5% and the first and second years following the forbearance, as well as a decrease in total debt service by $15.5 million and $8.9 million over these same two years. As part of the broader debt restructuring, there were two other significant components completed. Ally Bank granted a one-year waiver of its minimum liquidity test, which provides the company with financial flexibility as it sequentially improves its all-in cash profile. And on the equity front, Our largest individual shareholder, Conversant Capital, provided an equity commitment of $13.5 million to further bolster liquidity, withdrawals to be requested by the company as necessary. Beyond the short-term liquidity relief this recapitalization provides, it more importantly sets the company up for future long-term value creation and allows management to focus on its strategic growth initiatives and unstable but opportunistic markets. Moving to slide eight, where I will quickly hit on a few important performance trends. Brandon mentioned our recent success on the rate front, which we expect to build upon with another round of programmatic resident increases having taken place in July. These increases are part of the company's conversion from a resident anniversary convention to an annual convention in March of every year. Excluding the impact from non-recurring state grants, REVPOR increased 4% from Q1 and 9% as compared to the same quarter in 2022. These increases largely contribute to the dramatic jump up in NOI margin over the same periods, again, adjusting out the impact of one-time state grants. The other significant driver for the recent NOI transformation relates directly to the focused contributions from our community and regional leadership teams to the various cost initiatives we have rolled out over the past nine months. I will walk through our encouraging operating expense trends in a few slides, but wanted to reiterate the foundational impact of extremely strong community leadership development, retention, and stability across our owned and managed communities. Our team's execution, along with our steady rise in occupancy base as seen on slide 9, should continue to support margin expansion. Moving ahead to slide 10, I want to highlight some of the rate-related successes we're enjoying as a result of recent initiatives in this area. Our 8% increase in Q2 rent renewals along with sustained occupancy provides us with more feedback that our comprehensive rate strategy continues to be appropriate for our resident base. This is also supported by a releasing spread increase of 3% for the quarter, which already contemplates an elevated average rate in its base. For the roughly 9% of revenues that are Medicaid assisted, we are seeing a steady incline rate increase with even more government-backed subsidies becoming available or working their way through legislation. All discussion of our rate success must include the progress we have recently made across our level of care program. This includes the conversion of 93% of our residents to our new care levels, resulting in a year-over-year increase of 18% for this revenue stream. Revamped processes and recently implemented tools should help continue to assess our residents' needs and support the sustainability of this new baseline moving forward. Diving into more of the margin drivers, we will move ahead to slide 11 to discuss our recent labor trends. We are extremely pleased that in this tight labor market and hyperinflationary period, we've been able to control our labor costs. As a percentage of revenue, our labor over the last two quarters decreased 200 basis points from the immediately preceding quarters. We were able to achieve this improvement for two reasons. we dramatically pushed down our contract labor expense by more than $6 million on an annualized basis. At this point, contract labor is now limited to a handful of communities where market specific labor constraints persist. Secondly, and just as important, we have migrated away from contract labor. We have been able to hold direct labor relatively flat on an absolute basis. Again, This is another testament where our leadership depth and stability have allowed us to keep overall labor costs well under recent elevated inflationary and macroeconomic pacing. With weighted average occupancy at levels that historically support a creative incremental margin with top line growth, we believe we have positioned ourselves to continue to push up run rate margin. Looking at all other expenses on slide 12, we see a material decrease in these costs as a percentage of revenue. This decrease is largely a culmination of the operating initiatives we discussed in past calls taking root and approving unit economics. Specifically, we continue to see improved compliance and reduced spend in the first nine months since the rollout of our global purchasing organization. Through an expanded partnership with our real estate tax advisor, we have been able to hold assessed values down and even decrease our tax liability through the appeal and litigation process. This will effectively lower our run rate expense base as we move forward. On the insurance front, despite a challenging pricing environment, our overall increases have been relatively muted compared to market, thanks in part to switching brokers at the end of 2022. With revamped treasury and AR functions put in place in the second half of last year, we are seeing steady declines in our overall collectability exposure and related bad debt expense. Though there will ultimately be a floor on our unit economic cost, we believe we have made the right operational investments into these expense categories to reestablish a new margin baseline that will accrete with future top line growth as well as inorganic expansion of the company's own portfolio. Having already dedicated time describing the terms and benefits from our loan restructuring process, I will quickly hit our 13th and final slide from today. Amidst the backdrop of a locked-up credit market, we are very pleased with the long-term nature of our debt maturity runway, coupled with a sub-5% all-in interest rate. Our debt is comprised of 80% fixed-rate debt with remaining variable-rate debt fully hedged. Finally, as of today, the company was in compliance with all financial covenants required under our mortgages, with the exception of three communities mortgaged with protective life, as more fully described in the 10-Q to be filed later today. Back to you, Brandon.
spk01: Thanks, Kevin. I'll conclude today's presentation by once again recognizing and thanking our leadership team throughout Sunita. I have the utmost confidence in this group of leaders to continue delivering high-quality service and care to our residents while running a sound business. It's my privilege and honor to share the success they are achieving as we rebuild Sunita as an industry-leading company. Already well into the second half of the year, I remain optimistic that continued revenue and margin growth coupled with a strengthened capital structure will deliver significant value to all of our key stakeholders. Christine, please open the line for questions.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Steven Valliquette with Barclays. Please proceed with your question.
spk02: Great. Thanks. Hello, guys. Thanks for taking the questions here. Hey, Steve. How are you? Hey, pretty good. First, I definitely appreciate all the additional financial disclosure this quarter, and the supplemental is definitely helpful for some further analysis. And I think somewhat tied into that, you know, with the weighted average occupancy for the owned communities, you know, basically flat sequentially. Just curious on any additional color you may have in the underlying trends within AL versus IL, especially since there were a few other companies in the industry this quarter that saw some softness in the IL marketplace. I know you break down the I keep seeing on page 23 by these different community types, but we don't have any of the comparison data just to look at some of the trends. We're curious to get your thoughts separating it out between AL versus IL. Thanks.
spk01: Yeah, I would say that for us, while they weren't materially different in either direction, we actually saw a little bit stronger performance on the independent living side. AL had a really strong rate profile to it, and part of that Ultimately resulted in a few extra move outs, which I think was a driver of the occupancy change there. We were very excited to see the year over year and the quarter reporter growth on the memory care side. Which, as, you know, has the highest level of revenue associated with those rates those rooms. So we feel like going into Q3 based on what we saw in July. And the fact that those outlier communities on the kind of the bottom segment, those 8 that I referenced before seeing those increase by more than 4 percentage points in the 1st, half of the year. I think gives us good confidence that. you know those aren't stuck at that lower occupancy level and that they've got a lot of runway that should be the driver of improvement in in q3 and beyond and so i think you know we have confidence in both the al and il side but part of that really strong rate growth on al i think was a bit of why it was down slightly on the occupancy front okay great
spk02: Okay. And then just shifting gears here a little bit. So on pages six and seven, you highlight some of the key benefits of the debt restructurings with Fannie Mae and Ally Bank. I mean, usually there's some trade-offs in some of these things, but in this case, it looks like it's all primarily positive. So I guess I'm just curious, what's the trade-off here? Is it really just that revising these terms from the viewpoint of the the lenders, which is better than the outcome of potential either payment defaults or just ongoing covenant breaches. Just trying to figure out kind of, you know, what else they benefit that kind of pushing out and being a little more lax on some of these terms. Unless it's just as simple as that. I just want to get your sense for that as well.
spk03: Sure. I'll take that one, Steve. This is Kevin. So the terms of of the modification the forbearance are are in the july 5th 8k but um the highlights of of ultimately what we what we had to give up in in your words were two five million dollar pay downs so we made one um when we did the transaction so right at right at june 29th and then there's another one due 12 months from there and then on top of that there was a 10 million dollar guarantee that effectively burns off Uh, related to those payments and then another ten million dollar corporate guarantee with the ability to burn that off as well through performance. So, in terms of what was what was given up, I'd say those are the two most significant ones. And then, you know, was a collaborative discussion part of part of what we all agreed that was what was best was to reinvest excess cash flow into the communities. And so there's a concept of putting in fifty percent of the excess cash flow. back into those Fannie assets for future equity values. So we feel like those were gifts on our part, but overall helped us deliver and ultimately improve our assets and Fannie's collateral.
spk01: Yeah, and just to add a little bit more color, I think in the discussions that we've had, and I won't put words into their mouth, but this was made possible by the improving operational just output of the company and profile of the company. I think had there not been a level of confidence in our long-term viability, it would have been very difficult to get these deals done to the level of, you know, positive outcome that we did. And so, you know, the entities, the partners that we're working with believe that there's a lot of long-term benefit with, you know, the Sanita platform, and so that's where Conversant's comfort with putting additional equity available as well as with what Fannie Mae and Ally were willing to do to work with us was really based on their confidence in the ongoing operational improvement that they've seen recently and that is looking like it will occur on a go-forward basis.
spk02: Okay. All right. That's helpful. And since you mentioned Conversant for a moment here, Yeah, and the press release, you know, you show the $13.5 million equity commitment from them. Looks like about $6 million of that's already been, you know, drawn already, I guess, the first couple days of the third quarter. As far as the remainder, is that just at the discretion of Converse and they can do that anytime? Or I just want to get a sense for how the rest of that might play out. I know it kind of ties into some of those – liquidity requirements, you know, assets on hand, requirements you have as part of the new terms and everything too. But just curious to get your thoughts around that.
spk03: Yeah. So two responses there, Steve. So the $6 million that we pulled down was planned and anticipated and helped to effectively fund the $5 million principal payment that we made when we entered in the forbearance. And then on your other question, all draws are at the discretion of management as available or as required based on our forecasting that we have.
spk02: Okay, got it.
spk01: Yeah, so the commitment is purely at our discretion. Conversant does not have an option as to whether or not to fund that. Perfect, okay.
spk02: Okay, the last question here just looks like some pretty good progress on the labor front just based on some of the disclosures on slide 11. The only quick question, I should know this already, but the category you have there of other labor, can you just give us a quick description of what's in that? Obviously, it's not as important as the other ones for tracking what's going on. I'm just curious kind of what falls into that other labor category you have on slide 11.
spk03: It's overtime. It's basically premium wages, labor bonuses, not the bonuses, not the incentive plan, but line line level bonuses and so that's the part of the the business that once we've addressed direct labor and contract labor which we have that's the other part that you know we continue to focus on okay got it okay all right that's all helpful all right guys that's it for me thanks thanks steve thank you steve thank you we have reached the end of the question and answer session mr rebar i would now like to turn the floor back over to you for closing comments
spk01: Thank you, Christine. This concludes today's conference. Thank you all for participating.
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