New Senior Investment Group Inc.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Good morning, and welcome to the New Senior Investment Group Q1 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Jane Ryu. Please go ahead.

[Jane Ryu:]

Thank you. Good morning and welcome to New Senior’s earnings call for the first quarter 2021. With me today are Susan Givens, our CEO; Bhairav Patel, EVP of Finance and Accounting; and Lori Marino, EVP and General Counsel. Before I turn the call over to Susan, I’d like to highlight that this morning’s press release, Company update, our quarterly supplement, and the reconciliations for GAAP and non-GAAP financial measures can be found on our website at newseniorinv.com. Before we begin, please note that our discussion will exclusively focus on non-GAAP measures unless otherwise indicated.

[Susan Givens:]

Great, thanks, Jane. Good morning and thank you for joining News Senior’s earnings call for the first quarter 2021. In addition to issuing our first quarter press release and supplement, we posted a presentation to our website this morning, which I’ll be referencing throughout my comments. I will spend a few minutes going over some of the recent trends we're seeing before I turn the call over to Bhairav to go through the financial results and guidance in more detail. It has now been over a year since the COVID-19 pandemic began to impact our communities and our company. The Senior Housing industry has been on the frontlines of this crisis since day one, and our operating partners have worked tirelessly over the past 14 months to minimize the impact of the virus on the population of seniors within our communities. It's been a challenging year, but I am pleased to report that we are starting to observe positive trends that could be signaling the start of a recovery. And in April, we had our first month of occupancy growth since the start of the pandemic. Vaccine distribution across our portfolio is now largely complete and today 100% of our communities have had access to the vaccine. As the vaccine progressed, the rate of new cases within our communities has declined significantly, following a large increase in the number of new cases beginning last November weekly case counts have dropped dramatically over the past several months. And the rate of new cases again in April after a significant decline in March. With strong resident vaccination rates of over 80% within our portfolio, our operators report only four new residents cases in April, and are reporting only one active resident cases this time. Importantly, the total number of new cases was down 95% in April from the peak levels in December.

[Bhairav Patel:]

Thanks, Susan. And thanks everyone for joining us on the call this morning. During the first quarter of 2021, our portfolio was comprised of 103 private pay senior housing properties across 36 states. Our operating and financial results for the first quarter of 2021 were in line with our expectations and the guidance range we shared with you a couple of months ago. Same-store cash NOI for our total portfolio for 103 assets for the first quarter of 2021 was down 16% compared to the first quarter of 2020. The decline in NOI year-over-year was consistent with our expectations and was largely driven by an occupancy starting point that was 690 basis points below that at the beginning of last year. In addition, case counts remained elevated at the beginning of the year resulting in an additional 160 basis points of occupancy loss during the first quarter of 2021. However, as Susan mentioned, occupancy trends have improved dramatically over the last couple of months as the vaccine has become more widely available as national case counts have begun to come down significantly.

[Operator:]

Thank you. At this time, we will pause momentarily to assemble our roster. The first question comes from Vikram Malhotra from Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Morning and thanks for taking the question. Maybe just on the first guidance on same-store NOI, maybe can you just clarify, obviously the comps are getting easier. And I believe in the second quarter of last year the occupancy was a little over 84%. So there's obviously less of an occupancy decline year-over-year, but just what's driving the 15% year-over-year decline?

[Susan Givens:]

Yes, certainly Vikram. So the second quarter last year was really the first quarter where we began to feel the impacts from the pandemic. And so if you think about kind of where occupancy started at the beginning of the second quarter and throughout the second quarter of last year it was still significantly higher than where occupancy is today. So I think that obviously it's very positive that we're beginning to see occupancy growth, so you have to look at kind of the average occupancy in kind of a second quarter versus the average occupancy of the second quarter of last year. And since the second quarter last year is really when things began, there was a pretty significant kind of drop-off. And so we're still expecting that average occupancy in the second quarter of this year will be lower than average occupancy in the second quarter of last year. So still our occupancy levels are lower than we're starting to see growth. So that's part of it. And then we certainly -- we talked about our operators are as you're shifting to kind of focus on occupancy growth, they are spending more on expenses that make sense to be spending money on. So things like marketing and commissions, as you're growing occupancy, you want to -- sort of push some of those expenses. And so when you take those two things together, you end up kind of with -- still growing occupancy relative to where we are today, average occupancy is still expected to be lower in the second quarter of this year the next year and then we are planning on smartly spending on the expense side to try to drive that occupancy growth. And I think talked about, we really think that hopefully, if occupancy continues to grow this is kind of the second quarter sort of the trough for us, and then we start to see the same-store NOI numbers really improved in the second half of the year. That's kind of our open obviously, that's all predicated on occupancy recovery that's sort of how it penciled out in terms of kind of a projection.

[Vikram Malhotra:]

Just on the CapEx side obviously there was a general deferment last year, but I imagine as occupancy comes back, there's a need to ramp up CapEx as well, can you just maybe walk us through the trajectory as we look throughout to ‘21, and maybe even just ‘22?

[Susan Givens:]

Yes, sure. So as you pointed out and one of the things we did do last year is we pulled back on non-required CapEx. And so obviously there's a need to kind of spend CapEx on a continuous basis. And we and our operators focused on doing that last year, but for what we kind of consider more discretionary CapEx items, those are the things we pull back on as we were kind of navigating through everything. Mid-year 2021, we are going back to kind of the more normalized level and so we do have additional CapEx kind of running through our numbers as compared to last year, but not necessarily significantly higher than kind of what it would look like on a more normalized basis. And so, I think when you look at the CapEx numbers for the first quarter of this year, you do see that, they're slightly higher than kind of what we saw on a quarterly basis last year. And that's in part to do that, what you just said to get back to a more normal operating environment.

[Vikram Malhotra:]

The market, there's obviously a lot of capital on the side lines, and particularly for senior housing, we've seen some big trades over the last call it six months and at prices that we may not have believed maybe six months ago, given kind of how strong the market is, can you maybe just update us more -- from a more strategic perspective, thinking about the portfolio in terms of JVs, acquisitions, dispositions is monetizing some of is more broadly, your view on -- any sort of strategic actions the company may take to kind of realize incremental value?

[Susan Givens:]

Yes, sure. So I think if we talk to you and others about -- our company, we need to be focused on our priorities. And I list them as kind of our leverage our operator and diversification in alignment. And then overall, kind of capital and scale, so those are the three things that I generally identify. And as we sit here today, we are like I said, very focused on the recovery and very focused on kind of continuing to get through the pandemic. But those other three priorities are things that as you would expect, we're very focused on and I do think that there are more things out there now, that could help us address those three items. And say a year ago, and so as you might expect, and those are things that we're looking at, and we're focused on. So I think that as I see it anything that can help us address those items and get the company into a better place. Those are things that we will think about and consider obviously not commenting or making any sort of statement or anything specifically, but I think you're right, there's more activity out there, there's more stuff generally that could help us advance our strategic priorities. And so those are things that we're thinking about, but I think first and foremost, we want to make sure that the portfolio performs and that we can get the assets in a good position to kind of benefit from our recovery. But obviously other strategic things are things we're always thinking about. And, I do think there could be more activity this year we'll see. But I agree I think there's more out there certainly versus where we were last year.

[Vikram Malhotra:]

Great. Thanks so much.

[Susan Givens:]

Thanks, Vikram.

[Operator:]

Thank you. The next question comes from Dan Bernstein from Capital One. Please go ahead.

[Daniel Bernstein:]

Hi, good morning.

[Susan Givens:]

Hi, Dan.

[Daniel Bernstein:]

Glad to hear the -- hey, glad, glad to hear the optimism on occupancy. I wanted to go over the operating margins for 1Q they were down about what 300 bps typical seasonality looks like 100 bps to 120 bps going back in looking at your numbers. So I just wanted to better -- try to better understand, how the impacts from COVID-19 expenses in the quarter as well as the weather related expenses? And how I should think about that relative to normal seasonality and maybe how margins might look going forward especially with the occupancy ramp? And I have a follow up question after that.

[Susan Givens:]

Yes, sure. So yes, as you pointed out, our margins were down a little bit in the first quarter kind of versus where they were in the fourth quarter. And as you rightly pointed out, I think it's a couple of things going on. So first, there were a bunch of winter storms at the very beginning of this year for kind of the first quarter, particularly the Texas storms and some other things that impacted our operating expenses. And so those I think account for roughly kind of a 1% of further margin decline. And that stuff that includes higher utilities, higher insurance costs, all those things that we were sort of unexpectedly hit with, if you will. So that's part of it. Then I -- the other part of it is, is definitely occupancy, related. And I think, as I mentioned before, we're sort of in this inflection point where before you start to hopefully be occupancy growth, you ended up with expenses that need to kind of be reintroduced into the system, things like marketing. And then of course, as you're growing occupancy, you're paying referral fees, you're paying commissions. And so that's the reason why we're seeing a slight kind of margin compression, we certainly expect and hope that as we start to get that occupancy growth margins, just bounce right back to where they are on a historical basis. But I think as you're building occupancy and you're combining that with kind of your lowest average occupancy level, it's sort of natural to assume that there's a slight amount of margin compression, but we certainly think that's very kind of near-term. And again, as we talked about extensively in the past, that's why we really liked the IL model. We think that margin can move and can kind of adjust and come back right when you start to see that occupancy growth. So that's kind of what's going on there.

[Daniel Bernstein:]

I guess the related question here would be, are your operators discussing inflationary pressures at this point? I mean, if you look at a lot of the S&P 500 -- I saw an article S&P -- 80% of the S&P 500 companies discuss inflation on their earnings calls, whether it's utilities, toiletries, anything so commodity so, how was that playing into your thoughts on margins that, what is Atria and Holiday than saying about cost pressures that are -- they're starting to filter in or might filter in into the system. I know, obviously, gain all that occupancy back it could overwhelm that, but that's probably one of the questions I have is what kind of inflationary pressures are being felt outside this point?

[Susan Givens:]

Yes, well, I think it's sort of a little bit too soon to sort of be able to correlate expenses to sort of what's happening from an inflation standpoint, but what I will say is that, as we've modeled and projected things, we are expecting expenses to go up, we're expecting wages to go up, we're expecting the cost of supplies and other things to increase. So we've modeled that because we just think that that's appropriate. At the same time, what I think is very encouraging, is we've seen very steady and stable and strong rate growth from our employees residents. And so, I think that we do have an environment where we can continue to get good increases on your in-place residence, that certainly kind of accounts for what you're seeing on the expense side, that's kind of the whole point is, the reason why you need to ask him and kind of push for rate increases, is to cover some of these increased expenses. And so we feel, think that as we kind of modeled it out our margin are still good and can be good. And once we start to really see the occupancy growth. So we factor that in as we thought about our kind of our trajectory and I don't think there's anything at this point that would indicate that margins are going to come down over a long period of time, which is really in my view kind of a near-term thing if we're building occupancy.

[Daniel Bernstein:]

Okay. I guess really, that's all I have. I'll hop off and maybe come back if I have another question. Thanks.

[Susan Givens:]

Thank you.

[Operator:]

Thank you. The next question comes from Michael Gorman from BTIG Please go ahead, Michael.

[Michael Gorman:]

Thanks. Good morning.

[Susan Givens:]

Hi, Michael. How are you?

[Michael Gorman:]

I'm good. How are you?

[Susan Givens:]

Good.

[Michael Gorman:]

So Susan, if we could go back to maybe kind of those three core, I guess, pillars that you talked about outside of the recovery from COVID? Can you maybe provide a little bit more context how you're thinking about them within the recovery from COVID? Right, obviously, as you laid-out in the presentation, a lot of potential upside here on the NOI side a lot of potential earnings growth, if you're able to kind of push that occupancy back up. So how do you think about, obviously have the ATM in place now? How do you think about debt reduction? How do you think about strategic growth? And how do you think I guess that baseline? How do you think about the equity value with this potential recovery in the offing -- does one have to come first before you, you execute on the others or how are you strategizing about that?

[Susan Givens:]

Yes, I mean, sure. So I think that, when we think about the strategic priorities everything we kind of evaluate in our opinion has to be advancing them. And it doesn't mean that we can address them in their entirety all at once. But it has to not be in conflict with advancing those kind of stated goals. And so I'll take my pieces. The operator kind of diversification and alignment that's something you've seen us already take steps to address. And so while we feel have a fairly concentrated relationship, we're taking action and we've gone to try to address that. And we think that by addressing that now sort of in the midst of pandemic which is never ideal timing for anything, it really puts us in a place where we can get the transitions completed and get everything kind of strong footing to benefit from the recovery. So strategically that factored into our decision to deal with Atria at this point, it was, let's get the assets, you kind of set up so that when we do start with your recovery, they're prepared and we really kind of ready to go. And so we've advanced that I think there's still no thoughts we have on that and kind of things, we're still contemplating, but I think we've come a long way in advancing that whole leverage and kind of balance sheet I will call it the leverage is kind of our biggest challenge as I see it, and I've been -- I think hopefully pretty open with people about that. What you have seen us do is do everything kind of within our power to put our balance sheet in a better place. So by selling assets last year and refinancing all of our debt pushing our debt maturities being really strategic and smart about flops and interest rates and everything we can kind of do on the margin to give us a lot of flexibility with the balance sheet. That's what we've done. And then I think bringing overall leverage down is going to be something that's going to take more time to do. And all the things that you might expect us to be thinking about in terms of how to do that or things we're thinking about. But I think first and foremost is I thought about the balance sheet, you have to give yourself flexibility on the balance sheet to then be able to, kind of reduce debt over time. So that's something that as we're thinking about different options and alternatives for the company. Of course, that's at the front of our minds. And then, lastly just kind of the scale and cost of capital, that kind of comes when you've addressed the first few things I believe. And so those are -- we think if we can make lots of progress on the first few things that will hopefully you can kind of follow and beyond that, I think just being able to post strong results and actually show good solid kind of performance on the core portfolio that will also allow the sort of cost of capital, so to come along. So that's how I think about it in terms of your kind of fundamental question of what are we sort of thinking about to address those things and what's there -- we're looking about lots of things, and I don't necessarily think sort of one has to come before the other in terms of cost of capital and , I think we need to think about a kind of holistically and see if there are things that can help us to tackle the balance sheet challenges are to really kind of accelerate the kind of diversification, so we're looking at all those things and I'm probably being intentionally sort of vague, but it's -- those are the things we're trying to address. And I think you see us do anything. It's really -- because we think it will advance those priorities.

[Michael Gorman:]

Okay, great. That's, that's helpful. And then maybe just on the move-ins side, obviously, March and April were strong even comp against 2019. What kind of color are you getting from your operators on these move-ins? Is this pent-up demand that they're hearing from people that were waiting to move-ins until they saw more progress on vaccines or saw more amenity availability or is this just a return to traditional even if it's slightly above average, just to return to traditional demand levels, trying to gauge how much of a potential pent-up demand we could see as we try to move back towards that those occupancy levels pre-pandemic?

[Susan Givens:]

Yes, I mean, I think that there's a lot of discussion around pent-up demand. And I think it's a little bit tricky to kind of pinpoint like what's pent-up demand versus as you say kind of just normal operations. What I will say -- what we're seeing and hearing from people certainly, kind of the more the vaccine has been distributed the more broadly comfortable seniors are, but importantly, also the more comfortable their family members are. So family members are a big, the decisive factor here in senior housing. And so as we're seeing more people kind of vaccinated broadly the seniors that's leading to somebody's increased kind of move-ins, then we're also hearing a lot from our operators that the big questions and the focal point for potential move-ins is what is it like living here now? What are the services that are offered? And I do the activities that I like to do. And so I think it's a really important thing for seniors and there's a real focus on actually having access to the services that are kind of critical to doing independent living. And so I'd say if anything kind of those two things, overall kind of comfort level with sort of more vaccine distribution, not just the seniors have also listening for the family members, and then children -- to what is the experience like in the communities and not the really critical items that people are focused on and I think as we heard and it's been kind of widely discussed, socialization and what that's done to everyone but to really to kind of seniors throughout this pandemic is a real focus. And I think there's a real awareness among family members and seniors that they need to have more social engagement, they need to be more active. And so I think if people are thinking about moving in and that's a really critical kind of question for people is kind of what is the environment within the community look like?

[Michael Gorman:]

Great, thank you.

[Susan Givens:]

Thanks.

[Operator:]

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Susan Givens for closing remarks.

[Susan Givens:]

Great. Well, thank you everyone for joining us and we look forward to keep you updated as we move forward.

[Operator:]

Thank you. The conference call is now concluded. Thank you for attending today's presentation. You may now disconnect.