Sonida Senior Living (SNDA) is in the 49th spot on Barchart.com’s Top 100 Stocks to Buy. The operator of 71 senior living communities has struggled recently, issuing a going concern in its March 2023 10-K.
“The Company has implemented plans, which include strategic and cash-preservation initiatives, designed to provide the Company with adequate liquidity to meet its obligations for at least the 12-month period following the date its fiscal year 2022 financial statements are issued,” it stated at the time of the going concern announcement.
A year later, its shares have gained nearly 203%, and its weighted alpha of 193.10 puts it into the top 100.
In July 2019, it traded above $80 after accounting for a 1:15 reverse split in December 2020. While it won’t be challenging this mark soon, the changes made to its business could get it there in 18-24 months.
Here’s why.
Its Operational Metrics Are Much Better
The company’s occupancy rate in Q3 2023 increased by 150 basis points to 84.9%. When it reported Q4 2022 results last March, it was 83.3%, up from 79.0% in 2021.
At a time when seniors are struggling with their housing costs, it’s not a slam dunk for operators like Sonida to fill their independent living, assisted living, and memory care communities.
So, every basis point higher in its occupancy rate is a win for the company. It’s trending in the right direction. Perhaps more important are the RevPAR (revenue per available unit) and RevPOR (revenue per occupied unit) increases it generated in the third quarter, up 13.7% and 11.7%, respectively, to $3,446 and $4,061.
Further, it generated sequential growth in the third quarter, with its RevPAR and RevPOR up 4.4% and 3.3% from Q2 2023.
As I said, it’s headed in the right direction.
Although it lost $18.4 million on a GAAP basis in the third quarter, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $9.3 million, 94% higher than a year earlier.
“We continue to see growth in both year-over-year occupancy and revenue that is surpassing industry trends. This strong financial performance combined with our improved debt structure has Sonida firmly positioned for strategic expansion
within the marketplace,” said Brandon Ribar, President and CEO.
What About That Improved Debt Structure?
At the end of 2022, Sonida had $16.9 million in cash on its balance sheet, a total debt of $671.0 million, and a net debt of $654.1 million. Its net debt was $625.9 million three quarters later, a slight improvement.
However, more importantly, last July, it managed to get all its mortgage agreements with Fannie Mae extended to December 2026 or beyond. Further, Fannie Mae deferred the principal payments on its 37 loans for three years or waived until maturity, putting $33 million in cash back into the business and generating higher cash flow. In addition, its near-term interest rates were cut, saving it $6.1 million in interest costs.
In addition to the $40 million in savings achieved through reworking its Fannie Mae loans, it secured a $13.5 million equity commitment over the next 18 months from Conversant Capital, which owns 62% of its stock, making it the company’s largest shareholder. Conversant is a hedge fund investing in credit and equity investments within the real estate, digital infrastructure, and hospitality industries.
On Feb. 6, Sonida announced it had received an additional equity investment of $47.75 million. Conversant participated in this private placement, issuing shares at $9.50 each. Those investors have a 242% return in less than two months.
“Since Conversant made its original investment in Sonida in November 2021, we’ve been
working diligently with the management team along three key initiatives – improving operations, strengthening the balance sheet and growing the business,” stated Michael Simanovsky, Founder and Managing Partner of Conversant Capital.
“Today’s transaction allows us to shift the Company’s focus towards the third initiative: accelerating the growth of the business.”
Sonida used $40.2 million of the equity investment to reduce its total debt by 9%, lowering its annual costs of servicing its debt by $3.2 million. Of its $581 million in total debt outstanding, only $32 million matures before December 2026.
It can now go on the offensive, growing revenues and margins.
Where to Next?
Sonida's history dates back to 1990 when Jeff Beck and James Stroud started buying up senior living communities. Capital Senior Living went public at $13.50 a share in November 1997. In November 2021, it rebranded as Sonida Senior Living after getting a $155 million capital injection from Conversant Capital.
The most essential thing Sonida needs to do is keep its occupancy rate growing each quarter. With labor costs stabilized at 46% of revenue and a 10.4% increase in resident rent rates over the past year, it will reach a GAAP profit in 2024.
It’s important to note that Sonida has not made a GAAP profit since 2011. The next leg higher won’t be nearly as easy as its gains since February. Patience is required.
That said, aggressive investors would be wise to put Sonida on their watchlist regardless of tomorrow's earnings. It’s an interesting speculative bet.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
