Good day, and welcome to the Sonida 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 filed 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.sonidaseniorliving.com/invest-relations and was furnished in the 8-K filing this morning. Also, please note that during the call, the company will present non-GAAP financial measures. For reconciliations 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 Sonida Senior Living CEO, Brandon Ribar.

Thank you, Christine. And welcome to our 2023 Second Quarter Earnings Call. I'm joined today by Kevin Detz, 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 sonidaseniorliving.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 Sonida 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…

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 6 and 7 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 Ally Bank for their partnership and 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, on 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, Sonida will receive interest rate relief for the 12-month period starting from the forbearance effective date of June 1st, 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…

Thanks, Kevin. I'll conclude today's presentation by once again recognizing and thanking our leadership team throughout Sonida. 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 Sonida 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.

[Operator Instructions] Our first question comes from the line of Steven Valiquette with Barclays.

First, I definitely appreciate all the additional financial disclosure this quarter in the supplemental is definitely helpful for some further analysis. And I think somewhat tied into that with the weighted average occupancy for the owned communities basically flat sequentially. Just curious on any additional color you may have on 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 occupancy on Page 23 by these different community types, so we don't have any of the comparison data just to look at some of the trends, but curious to get your thoughts of separating it out between AL versus IL.

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-over-quarter 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 eight that I referenced before, seeing those increase by more than 4 percentage points in the first half of the year, I think gives us good confidence that 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 Q3 and beyond. And so I think 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.

And then just shifting gears here a little bit. So on Pages 6 and 7, 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 lenders, which is better than the outcome of potential either payment defaults or just ongoing covenant breaches? Just trying to figure out kind of 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, just want to get your sense for that as well.

So the terms of the modification and the forbearance are in the July 5th 8-K, but the highlights of ultimately what we had to give up in your words were two $5 million paydown. So we made 1 when we did the transaction, so 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 guarantee that effectively burns off related to those payments and then another $10 million corporate guarantee with the ability to burn that off as well through performance. So in terms of what was given up, I'd say those are the two most significant ones. And then it was a collaborative discussion, 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 50% of the excess cash flow back into those spanning assets for future equity value. So we feel like those were gives on our part, but overall, help us delever and ultimately improve our assets and Fannie's collateral.

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 would have been very difficult to get these deals done to the level of positive outcome that we did. And so the entities that -- partners that we're working with believe that there's a lot of long term benefit with the Sonida 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.

And since you mentioned Conversant for a moment here. In the press release, you show the $13.5 million equity commitment from them, looks like about $6 million of that's already been drawn already, I guess, first couple of days of third quarter. As far as the remainder, is that just at the discretion of Conversant, they can do that any time or 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, assets on hand requirements you have as part of the new terms and everything to. But just curious to get your thoughts around that.

So two responses there, Steve. So the $6 million that we pulled out was planned and anticipated and helped to effectively fund the $5 million principal payment that we made when we entered into 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.

So the commitment is purely at our discretion. Conversant does not have an option as to whether or not to fund that.

And then last question here, just looks like some pretty good progress on the labor front just based on some of the disclosures on Slide 11. And 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? I mean, obviously, it's not as important as the other ones [Indiscernible] going on. I'm just curious kind of what falls to that other labor category you have on Slide 11.

It's over time, it's basically premium wages, labor bonuses, not the bonus and not the incentive plan, but line level bonuses. And so that's the part of the business that once we address direct labor and contract level, which we have that's the other part that we continue to focus on.

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.

Thank you, Christine. This concludes today's conference. Thank you all for participating.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.