Sonida Senior Living, Inc. (SNDA) Earnings Call Transcript & Summary

Okay. Great. Good morning. Welcome to the continuation of day 3 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, Managing Director and Healthcare Services analyst here at Barclays. And our next session will be with Capital Senior Living. Stock has performed pretty well over the past couple of months on the back of the positive COVID vaccination programs across the U.S., but that will be just one of the -- just one of several topics we'll discuss in this particular session. So with us from the company, we have Kim Lody, the company's Chief Executive Officer; Brandon Ribar, Chief Financial Officer right there -- Operating Officer, I got that one wrong. Chief Operating Officer, I apologize. And also Chad Vanacore, just joined for Investor Relations as well. This will be a hybrid set a formal presentation followed by a fireside chat. So with that, let me turn it over to Kim to start the presentation. Kim?

Great. Thanks, Steve. Thanks for inviting us to the conference. We're happy to be here. We have a few slides we'd like to share to highlight the transformational actions we've taken over the last 2 years to strengthen the company and position it for growth. So we'll talk about that, cover a little bit on the portfolio. Our performance during COVID-19 environment and our view of the post pandemic growth levers. So let me just share my screen here. There we go. And just to note, we have not yet released our Q4 or full year 2020 numbers. So those will be coming in the next couple of weeks, so our comments today are focused on the operational metrics and the presentation materials that we released with yesterday's 8-K. Here we go. So just to focus here on the transformative actions that we've taken. Back in 2019, we began a very specific set of strategic actions to transform the company in a meaningful way. First, we focused on talent, not only at the senior level, including myself and Brandon, who are new among other folks, but also, and more importantly, at the regional and the community level. We focused very heavily on building a strong team of talented and experienced leaders across the business. And I'm very happy to report that, that effort really enabled our strong performance during the pandemic and has resulted in year-over-year reductions in employee turnover across the portfolio. We established a detailed 3-year operating strategy, focused on upgrading nearly every aspect of the business to improve performance. We gave that strategy, an acronym called SING, for Stabilize, Invest, Nurture and Grow. And we did that so that people across our organization in every physician and all types of responsibilities could understand and execute on what we wanted them to do. We exited all of our triple-net leases, which, at the time when we announced this -- these agreements back in the beginning of 2020, we expected that, that action would improve our annualized cash flow by about $22 million. With the COVID-19 related operating conditions, the actual improvement in the annual cash flow savings is about $47 million. We stabilized our balance sheet, reduced our liabilities by transitioning 18 communities back to the lender. Again, improving our annualized cash flow by about $11 million. We have sold a few assets over the last few years. We've sold 5 that were either underperforming in noncore markets or we're at peak performance and really needed extensive CapEx to continue at that high level of performance. And then lastly, we have reduced our overhead and really streamlined our operations. We're expecting about a 19% G&A savings between last year and this year. And most of the work on that rationalization of overhead and the operational work was done in the latter part of '20 and then going on here also in 2021. So together, these actions really strengthen the company's foundation, both financially and operationally. And allowed us to transition to a more focused platform of communities that are historically our highest-performing communities and that are really well positioned for growth. So our go-forward portfolio consists of 60 owned and 8 managed communities, spanning 18 states, where we focus primarily on the underserved middle market. All of our communities are located in markets where the average income of the 75-plus population can very readily afford our average monthly rent of $3,600. And 97% of our communities are in markets with expected population growth in that 75-plus demographic of 10% or more. So we feel like we are very well positioned to capitalize on the demographic trends. A couple of other notable items. The portfolio is highly concentrated in four states: Texas, Ohio, Wisconsin and Indiana. These are states where we have operated for many, many years. We have very deep market understanding of these states of the regulatory environment, et cetera. Again, like I said a moment ago, this portfolio of owned communities has historically performed very well with average occupancy for the group consistently above 85% good rate growth, strong private payments and with margins in excess of 30%. So we expect this portfolio will return to those same levels of performance as the pandemic recovery evolves. January and February movement in this portfolio were up nearly 13% over November and December. So we're very encouraged by that. And move-outs comparing that same period, were down about 4%. So again, the trends are moving in the right direction. Our unit mix of 50% assisted living, 38% independent living and 12% memory care is a mix that we see is very attractive. Really enables us to provide multiple living environments and levels of care to serve seniors whose needs range from very little assistance with activities of daily living to those who may have a higher level of need for assistance with those activities of daily living. Our average resident age is about 84 years, and it's interesting that there's really very little difference in age between IL AL and memory care in our portfolio. The difference is very much more about the number of chronic conditions that those residents may have the significance of the conditions. And like I mentioned earlier, the support that they need for those activities of daily living. Another reason why we think this mix is important is the demographic data that predicts that by the year 2029, the number of people over the age of 75 that will have three or more chronic conditions is expected to grow substantially by more than 70% from 5.7 million today to nearly 10 million in just a few years. So we're very pleased with the actions that we've taken, the results of those actions and the strength and positioning of this portfolio, the 60 owned and 8 managed communities. And now I'll turn it over to Brandon, and he's going to talk a little bit about our performance during the COVID pandemic. Brandon?

Thank you, Kim. We are pleased that in a very challenging year as we look at our performance 2020 versus 2019, we were able to maintain our occupancy with a 430 basis point year-over-year decline, which in comparison with our peers on the publicly traded or publicly available information, does compare favorably by about 230 basis points or about 35% better in terms of the overall year-over-year occupancy change in a very challenging operating environment. We believe that we achieved these results through a combination of just a couple of things: One being the strength of our local leadership. As Kim mentioned, the reduction in turnover in those leadership roles in our communities led to stability throughout the very volatile times of 2020 as well as the strength in our regional and executive leadership teams, almost entirely of whom have spent time and more acute settings throughout their career, which, I believe, enabled us to adjust very quickly, and again, a very rapidly changing operating environment. Understanding the changes in the regulatory environment as well across senior living that we needed to adjust to. And ultimately, remaining stable in terms of our overall operating protocols and then operating metrics. In addition, the investments the company made on the commercial excellence side. So our social media and digital platforms enabled us to very quickly adjust and capture opportunities and leads that were coming through virtual mediums as opposed to in-person tours, far more prominently throughout 2020. So our reputation throughout social media platforms has continued to improve over the last 2 years. And customers' understanding and experience of how Capital Senior Living performs reflects very well on those platforms and has helped us to stabilize occupancy and ensure that we we're able to capture as much lead volume as possible through the challenging times. And then finally, just the ability to continue with our sales leadership in our communities, focused on the opportunities to reach out to potential customers with more immediate needs throughout the pandemic allowed us to produce stable results throughout 2020, that were, again, about 230 basis points favorable to those publicly available peers. So where are we today in terms of the COVID-19 pandemic and its impact on our communities? So we have seen throughout the nation, a decline here at the beginning of the year. And as you look at the trend of cases in our communities, there is clearly a relationship with the overall national trend. However, we are at this current point in the most favorable position we've been in since really a year ago today. We currently have 0 active new cases for residents in our communities, which is a testament to our local leadership and their diligence around our safety protocols as well as the prevalence of the vaccine that we have so quickly adopted thankfully across senior living, but specifically at Capital Senior Living to protect our residents and our staff as well. So we are very pleased with where our portfolio is in terms of exposure to COVID-19. We continue with the diligence around all of those protocols in place. And we look forward to these trends really continuing to bolster the industry and Capital Senior Living's opportunity to recover occupancy and normalized operating metrics in 2021. And then finally, just to add on to what Kim referenced in terms of our leading indicators, we did have, throughout the year, increasing and improving trends in the marketplace, as states we're opening up with challenges in the operating environment returning, as we know, in Q4 for senior living. However, as Kim mentioned, very positive trends in January and February in terms of our overall percentage of leads, tours and move-ins, with leads and tours clearly returning to pre-pandemic levels for the first time, again, in nearly a year. So we are optimistic, and our goal is to see move-ins exceeding move-outs in March, which will continue to bolster and stabilize the occupancy, which we expect and which our goal is to see growth in the second half of 2021. So very optimistic about the overall market as well as our local operating capabilities to really continue to see improvement as 2021 plays out. So thank you, Kim, and I'll turn it back over to you.

Great. Thanks, Brandon. So we're feeling very encouraged by these recent material developments and improvements in the operating environment, and we see a number of strong growth levers for Capital Senior Living. I won't go through all of these in the interest of time, but I do want to focus on a couple of them. Most importantly, being the rapid pace of the vaccine clinics in our portfolio, which, as Brandon mentioned, has resulted in 0 new cases being recorded in our communities in the last couple of weeks. So keeping our residents employees safe is clearly our top priority, and we are just delighted with this development. We do believe that there is pent-up demand and especially for assisted living and memory care services, which are very need driven. And with our leads, tours and move-ins nearing pre-pandemic levels, we really believe that the recovery is beginning to take hold. Premium labor costs that were incurred during the pandemic are trending downward, and we expect that to continue. There are fewer newer housing starts in senior housing now than pre-pandemic, and that supply is being absorbed. In fact, in our portfolio, the 68 communities, the units under construction within a 5-mile radius of our communities is just 3% of the existing supply, which is significantly below the pre-pandemic level. And then lastly, the work we've done over the last 2 years has reduced our liabilities, improved our cash flow, and strengthened the company. And with the rapidly improving operating environment, we are cautiously optimistic about 2021 occupancy, recovery and growth. And then lastly, I'll just comment that while we are not currently providing guidance to the market, we do expect to return to doing so as the operating environment improves and stabilizes. And with that, Steve, I will turn it back over to you.

All right. Great. Okay. Yes, we have some time here for some questions. So the slide deck definitely showed some promising science regarding leads and also the facilities that are allowing move-ins. So they're combining that with the positive impact from COVID vaccinations overall. Just curious if you have any preliminary thoughts you can share about the potential quarterly progression of occupancy in 2021? And now looking for any specific number, maybe just the quarterly cadence, could 1Q be the trough the way it feels right now? Just curious to get some thoughts around the troughs and peaks throughout the year?

Yes. Well, generally, the second quarter is a pretty good quarter for occupancy improvement compared to Q1. And as we sit here today, that would be our expectation as well. And then Q3, generally, improves over the second quarter. And we would expect that to be the case this year as well. So we expect that those historical seasonal trends in occupancy should develop in a similar rate this year.

Okay. Great. And then as a follow-up, when we think about the senior housing industry overall in this post-COVID world, I'm just curious if there's anything incremental that you or the industry can do to really get the message out that the communities remain safe for residents. Or is it just simply a matter of just continuing to demonstrate that you have no new cases popping up within the the overall facilities and just let that kind of speak for itself. But just curious if there's anything else incremental you can do, if you're in the marketing or advertising standpoint around that?

Yes, Brandon, do you want to talk about that?

I think using the platforms that we've spent so much time investing in and developing social media in order to share visuals and stories around the events and the activities that are occurring in our communities, with the CDC guidance around the ability for individuals to interact that are fully vaccinated, being able to not just say that we're COVID free, but really share those social activities. The things that people have missed for so long now, more than a year, that really do display why senior living is a place that's not only safe, but it's also really healthy and enjoyable and allow us for those social activities and physical activities in group settings that have been missing from many people lives who remained isolated. Over the last year. So we have so many different mediums to share that. And just really, again, highlighting those stories is our way to differentiate from where we were over the last year plus.

Okay. Great. Now over the last quarter or two, you guys negotiated some rent reductions, also some early lease terminations. Those were all net positive for annual cash flow, also reduced a lot of your liabilities. Just curious if you think that the company is essentially done with that type of activity for now, and then therefore, the existing footprint as far as number of residence, facilities, et cetera, will be pretty much intact going forward? Or can we see additional similar type activity going forward?

No, Steve, I think we're done with that activity. It's been a lot of hard work over the last couple of years, and we feel really good about this portfolio of the 60 owned and 8 managed communities. And we don't expect to stay at that level in terms of the portfolio size. We're ready for growth. We think that there are a number of opportunities out there in the marketplace for that growth, not just the organic growth of occupancy in the existing portfolio, but even with some of the other dislocation in the marketplace. I think we have performed extremely well over the last year from an operational perspective. That's a testament to Brandon and his team. And I think we can leverage that operational expertise on behalf of other owners and operators with some additional management opportunities or management agreements. So we're looking for growth, not only in the current portfolio, but we're looking to expand that footprint as it makes sense here over the coming couple of years.

All right. Great. And as you mentioned, you have not provided the fourth quarter '20 results yet. But just given all the property portfolio activity over the last 6 months or so and just some of the moving parts, is there any range you can provide or maybe slightly tighter range around just where the company stands on the overall leverage ratio at the end of 2020? Just as a multiple of trailing EBITDA or just some approximation?

I think we'll hold that for the earnings discussion, if that's all right with you Steve? We've got a little bit more work to do on some of those things. So we'll put that into comments at that time.

Yes, that's understandable. And then the answer to this question might fall in the same bucket, but maybe just high level, as far as any updates you might be able to provide on the level of COVID related operating expenses across the property portfolio, exiting 2020 and into '21. And then is there any approximation for how much of that is fixed versus variable in terms of your ability to bring some of those costs down further?

Yes. Brandon, do you want to talk about that?

I would just say that as many of the industry have reported, the significant impact of COVID on the expense line items have been around premium labor for our own employees, not on the contract side, but premium labor to our own employees, which in line with the fact that we don't have any current cases. We are optimistic will continue to be at a much, much lower level. And we do see as variable and based on the impacts of the pandemic. And then on the supply front, with the continued use of masking in the near future, there will be some expense on that front, but we don't expect that to be significant over where a normalized run rate would be for us. So we're optimistic. In addition, that some of the costs we were able to adjust with the different operating environment around transportation and the ability to use virtual technology for medical visits and other, allows us to also find ways moving forward to keep costs at pre-pandemic levels. So that's our goal and that we will continue to work towards.

Okay. Great. And then just tying some of that together, as we think about the NOI margins and your current property portfolio, I think it was somewhere in the high 30% range pre-COVID to right now somewhere high 20s. So it's come down by 1,000 basis points or so, but not dramatically different than what the whole industry saw. Where do you think these margins can get back to during the recovery? Is there any good rule of thumb that maybe on the way back up that for every 100 basis points in occupancy improvement, that might translate into roughly 100 basis points margin improvement. Just curious to get more thoughts around all those.

Yes. Steve, I think that's a good way to think about it. With our Q3 release and the information in that investor presentation, we put the expectation around sort of post-pandemic margin for this portfolio at around 27%. And as you mentioned, historically, that same portfolio has performed well into the 30s. So Brandon and I see no reason why we cannot get back to that same level of performance here over the coming time period as the recovery takes place. So I think that, that's a great way to think about it. And again, with the expenses related to COVID really declining and our view that most of that is not permanent and would not continue forward in the operating model, again, we would expect to get back to that same level of performance.

Okay. All right. I think we have maybe one minute left here. So final question. As we think about your prior SING 3-year plan that you mentioned previously with the acronym around Stabilize, Invest, Nurture and Grow. Just any update on the progression of this? And also, is this acronym still relevant? Should we come up with a new acronym for 2021? Is that going to be Chad's job? No, I'm just kidding. Just having -- we're kind of leave -- final question here just to kind of touch on the SING evolution?

Yes. So we put that in place in the beginning of 2019. And that acronym and that strategy was a 3-year strategy and is very focused on the operational performance in the communities. We're now into the third year. So we're in the last year of that strategy, I think it is still extremely relevant. We have accomplished nearly all that we've set out to do in most of those categories, that very final category, the G in SING is Grow. So that's where our effort is going to be here during the third year of that strategic plan and through 2021.

All right, great. But with that, we're out of time. So I certainly want to thank everyone from Capital Senior Living for your time today, and everyone enjoy the rest of the conference.

All right. Thanks.

Thank you.

Take care.