New Senior Investment Group Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good day, and welcome to the New Senior Fourth Quarter and Full Year 2020 Results Conference Call. All participants will be in a 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, ma’am.

[Jane Ryu:]

Good morning, and welcome to New Senior’s earnings call for the fourth quarter and full year 2020. 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 of GAAP and non-GAAP financial measures can be found on our website at newseniorinv.com.

[Susan Givens:]

Great, thanks, Jane. Good morning and thank you for joining News Senior’s earnings call for the fourth quarter and full year 2020. In addition to issuing our fourth quarter press release and supplement, we posted a presentation to our website this morning, which I’ll be referencing throughout my comments. I want to start by saying that we continue to be deeply appreciative to all of our operators, whose associates have worked tirelessly over the past year to ensure the health, safety, and wellbeing of our residents. Our operators have shown their resiliency and their flexibility, and they have continuously adapted to the changing circumstances. We have nothing but gratitude and appreciation for everything that they are doing. Stepping back to the start of 2020, we began last year, ready to hit the ground running. In February, we successfully closed on the sale of our Assisted Living and Memory Care portfolio, allowing us to divest an underperforming segment of our business and shift our focus and attention to our core business, a portfolio of stable, low-acuity, private pay senior housing assets. Just as our transaction closed, the first known cases of COVID-19 were emerging in the U.S., and with them, the beginning of arguably, one of the most challenging periods the senior housing industry has ever faced. Since then, the bulk of our time and energy has been focused on understanding the ongoing impact of a pandemic on our 103 communities and positioning ourselves as best we can for the future. Almost at year-end, the COVID pandemic continued to impact our operations and financial results. As the pandemic has progressed, we had gained better insight and perspective into how our operators can best manage the operations of our communities. We learned early on that our operators would need to continuously adapt to their operational strategies to deliver the best possible resident experience, one that strikes the important balance between health and safety, and engagement and socialization.

[Bhairav Patel:]

Thanks, Susan. And thanks to everyone for joining us on the call this morning. Our portfolio remained unchanged versus the previous quarter, and as of year-end was comprised of 103 private pay senior housing properties across 36 states. Overall, our operating and financial results for the fourth quarter were in line with our expectations and the guidance range we provided last quarter. Same-store cash NOI for our total portfolio of 103 assets for the fourth quarter of 2020 was down 9.6%, compared to the fourth quarter of 2019. As expected, the decline in NOI year-over-year was larger during the current quarter relative to the 7.6% year-over-year decline we reported last quarter, due to the cumulative impact of declining occupancy experienced since the outset of the pandemic. As the decline in occupancy persisted through our 2020, we began each subsequent quarter at a lower occupancy point, which had compounding impact on year-over-year comparisons as we progressed through the year. This is further evidenced by the fact that our NOI for the full year was down 5.1% year-over-year as the impact of occupancy declines on NOI was fell disproportionately in the second half, which was down 8.6% year-over-year compared to the first half, which was down just 1.6%. Let me provide some additional color on the operating performance of our managed portfolio during the fourth quarter of 2020. Average occupancy for our managed portfolio was down about 81.3%, down 560 basis points year-over-year and ending occupancy declined at 690 basis points year-over-year to 81.8%. RevPOR was relatively flat versus last year as rental rate increases were offset by the increased use of incentives to drive move-in volume. As a result, total cash revenue declined by 6.3% year-over-year in the fourth quarter. The decline in revenue was slightly offset by a corresponding decline in expenses, which were down 3.7% year-over-year in part driven by lower variable expenses due to reduced occupancy. On a sequential basis, NOI declined by 1.4% versus the third quarter of 2020, as ending occupancy declined by another 150 basis points, during the quarter. Despite a promising start to the quarter, we saw only 20 basis points of occupancy decline in October. Occupancy declines picked up in November and December as COVID cases surged during the holiday season to the highest levels of the pandemic. Case counts have declined sharply in recent weeks. And with improved distribution and availability of vaccines, our expectation is that the trend of persistent occupancy decline since the onset of the pandemic may finally reverse in months ahead. Now, I’ll discuss our financial results, balance sheet and guidance for the first quarter of 2021. AFFO for the fourth quarter was $14.5 million or $0.17 per diluted share, which was consistent with our expectations and near the top end of our guidance range. AFFO remained relatively flat versus the third quarter as decline in cash NOI was offset by a decline in cash G&A while interest expense remained unchanged as LIBOR remained at all-time lows and averaged 15 basis points for the four quarter. Additionally, as a result of certain actions we have taken over the past 12 months, we continue to maintain a strong balance sheet and liquidity position. We successfully refinanced approximately $400 million of debt in conjunction with the sale of assisted living portfolio just before the onset of the pandemic, which improved our cash flow profile and extended our debt maturities. The weighted average maturity on our total debt outstanding of $1.5 billion 5.3 years with no significant maturities until 2025. In addition, we opportunistically executed a five-year $270 million interest rate swap during the third quarter, which increased the fixed debt component of our capital structure to 72% with interest rates close to all-time lows. After incorporating the impact of the swap, the weighted average interest on our total debt outstanding is 3.5%. And now, guidance. Forecasting occupancy, which is the main driver of our financial results, continues to be challenging in the current environment, and differences in the time and shape of an eventual recovery in occupancy can result in a wide range of outcomes over the next 12 months. However, we are providing guidance for the first quarter, based on actual results to date and current trends we are seeing across the country with respect to case counts. We expect ending occupancy to decline by approximately 170 basis points during the first quarter, while occupancy through the end of February is expected to fall by 140 basis points, 80 basis points in Jan and 60 basis points in Feb. We do anticipate the trend to improve in March, based on recent developments and our forecasting of 30 basis-point decline. We expect our first quarter 2021 same store cash NOI to be down approximately 15% year-over-year and first quarter AFFO to be between $0.14 and $0.15 a share. Again, the year-over-year decline is a result of the cumulative impact I mentioned earlier as NOI for the first quarter of 2020 was not materially impacted by the pandemic, until late March. As we have done through the pandemic, we expect to keep you updated with respect to new information and trends that affect our portfolio and the potential impact of such trends in our business and financial results. With that I will turn the call over to the operator to open the line for questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. And the first question will come from Michael Gorman with BTIG. Please go ahead.

[Michael Gorman:]

Susan, I wonder if you could just talk a little bit about the new relationship with Atria and kind of how you sourced the relationship, how you decided on what properties are moving over? And maybe when you think about the management contract with Atria versus Holliday, any differences or similarities that you made sure to include in there?

[Susan Givens:]

Yes, sure. So, in terms of how do we sourced the relationship, we’ve known Atria for a long time, and actually, I’ve had discussions with them for a number of years about things we could potentially do together. We as a team have always been very impressed with their entire organization. They are very, very innovative and data-driven company. And we also know that they have successfully transitioned and managed independent living assets that are exactly like ours. So, as we have thought over the last couple years about our diversification and alignment, they’ve always been a group that has been kind of top of mind. So, we’ve been in conversations and discussions with them for a long time. And then obviously, the pandemic called all of us to think and to be really mindful about what the right timing and approach should be. But, it’s a relationship that came to be over a long period of time. So, we’re very excited about it and think that, they’ll do a great job, and they’re just, they are they’re best-in-class, as we said. So, I’m happy about that. In terms of the assets that we decided and how we thought about the portfolio, we were very careful and considerate in determining which assets to transition and we looked at their footprint and their presence, and also thought about what made sense for our other operators and how we could manage that as best as possible. So, the assets that we’re transitioning to them fit well with the geographic footprint that they already have. So, they will be able to really pull these assets into their organization we think very seamlessly and easy. In terms of the actual specifics of the deal, we don’t actually disclose specific management contract terms. But,, part of our desire to enter into this relationship was really to create real and better alignment with our operators. So, I think, a couple of things to say. It’s a long-term contract, and it’s set up to really incentivize performance and to make sure that we’re all operating on the same page.

[Michael Gorman:]

Okay, great. That’s helpful. And then, maybe on the ATM program, understanding it’s pretty typical program for a REIT to have and its toolkit. I’m just interested in strategically kind of why now is the right time to put that in place. I understand, not necessarily looking to use in the near-term, but just kind some thought process behind why now if you can?

[Susan Givens:]

Yes. Honestly, there’s no magic to now. It’s something that, as you know, as we pointed out, moved freestyle. I think we might be the only, I could be wrong, but I think, we are one of the only if not the only REITs in our sector that does not have one. And so, it’s something we planned on putting in place. And for us, we just felt like putting into place in conjunction with the K made the most sense. There is no magic to it. As I mentioned that, we don’t have any plans to use it in near-term. It’s just very much good housekeeping and a standard tool that most REITs have.

[Operator:]

The next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thanks for taking the questions. I just wanted to dig into sort of the guidance a little bit more. You’ve laid out the occupancy side of things. Just wondering if you can give us a little bit more color on the expectations and how you expect expenses to trend? And then, just related to that, as you look forward into ‘21, now that a lot of residents have been vaccinated, big picture sort of what’s the high level plan in terms of gaining kind of the occupancy back?

[Susan Givens:]

Sure. So, in terms of the guidance, as we pointed out, the expectation is that occupancy trends will improve slightly in March. And so, as we said, occupancy will -- our expectation is that we’ll see 30 basis points of decline in March. So, a bit of an improvement based on some of the trends and obviously as that accelerates. In terms of RevPOR, we are expecting -- it’s actually, pretty steady and pretty much in line with what we saw in kind of the fourth quarter. In fact, we it get up a little bit. Our expectation is that it’s up in the first quarter versus the fourth quarter. So, what we’ve seen is that we’re still, our operators are still able to get pretty good rate increases and kind of a historical rate increases with existing residents. And yes, there’s discounting and promotions that are being offered to new residents. But, the rate increases for existing residents are holding very well, which has been, very much a positive thing to come through all that. So, in terms of your specific on RevPOR, that’s what we’re sort of expecting. In terms of expenses, we do expect our operators, will continue to tightly manage expenses. They’ve done a great job in doing that, as we’ve talked about extensively. We think that’s a much easier in independent living model, just given the lack of health care. So, our expectation is the expensive will continue to be kind of tightly managed. It really is a function of occupancy, and the fact that at this point, we have seen occupancy declines every month since the start of the pandemic, and that has at this impacted the NOI as we look to Q1. So, that’s really what’s in those numbers.

[Vikram Malhotra:]

And then, just the operator transition, I agree, sort of good to get that going. Atria is obviously a good operator. Just wondering kind of bigger picture of goals in terms of how much diversity or new operators you plan to sort of induct into the fold. And in the interim as the transition occurs, is there likely to be any, any first time that the transition takes, in terms of the NOI growth sort of might be delayed, or just the transition might take a while, how should we think about that?

[Susan Givens:]

Sure. First, in terms of operator kind of concentration and diversification plan, we think this is a great kind of first step in addressing our concentration and alignment. We are continuing to evaluate and consider what makes the most sense for our portfolio. We’re, as I said, very happy with our existing operators, but we do recognize and understand that there’s a benefit to having, different perspectives, and more than one operator relationship. So, it’s something we’re continuing to evaluate and focus on. And I think you can expect to see that going forward. I think, the second piece of it around --sorry. Vikram, your second part of the question again?

[Vikram Malhotra:]

Yes, just the transition, like as the transition occurs, could there be sort of a delay or pause in sort of the trajectory that you witnessed so far and underlying occupancy? Just sometimes transitions conditions take a while before you see kind of improvement in underlying results.

[Susan Givens:]

Yes, sure. So, I think, our expectation is that the transition will go very smoothly. Again, part of our decision to work with Atria in particular is they’ve done this before. And so, they know how to do it. Obviously, independent living is generally a little bit more stable. And so, we think that that will of course help, as we transition. And on top of that, we just think that while COVID is obviously difficult for all the reasons we know, it’s also a good time to transition. And as long as we’re, being very mindful of the impact it has at the community level, I think that putting Atria into active now when we are hopefully starting to see some signs of recovery will actually result in a really good runway for growth as we move forward. So, I think that our expectation is, it will be smooth. And they are committed to working very, very carefully and closely and working in conjunction with Holiday to make sure a very smooth transition. So, we think it will go well.

[Operator:]

The next question will come from Daniel Bernstein with Capital One. Please go ahead.

[Daniel Bernstein:]

Good morning. I’m actually going to follow up on -- I’m going to follow up on that and just go. I didn’t hear anything in the steps in terms of investments. And I was just trying to understand maybe how that fits into the picture in terms of diversification, and when we may start seeing you become more aggressive on the investment side. And obviously we’re at the bottom of a cycle here and there is probably opportunities for growth and diversification of operator. So, just kind of wanted to get your thoughts of that, especially in light of the ATM.

[Susan Givens:]

Yes, sure. I mean, I think that obviously diversification through growth is important and is a way of achieving some of the diversification goals that we pointed out. So, that’s something we’re certainly looking at and considering. I do think that by partnering with additional partners that could lead to additional growth opportunities, which is part of the reason why we wanted to enter into this relationship. And so, that’s definitely there. In terms of, what we’re seeing and considering in terms of investments, I mean, I think that after a very quiet 2020, there has been more activity in the beginning parts of 2021. And I would expect that more things will start to come up as we move through the year. I think that as we all know, it’s been difficult for potential buyers to underwrite, in some cases, finance new investments. And so, as I think there’s a little bit more visibility and to a recovery, you’ll start to see a lot more activity, and people can feel a little bit more comfortable about kind of what they’re underwriting, what they’re looking at. So, we’re always sort of out there, thinking and looking at stuff. But I think that our focus has really been more internally focused and it’s been focused on trying to make sure that we can get through this pandemic as best we can and focus on our operators and building and bolstering those relationships. So, we’re always considering other ways to grow the business. But I do think that right now, you have to be pretty cautious and careful as you look to grow. But, I expect more stuff will come up for sure.

[Daniel Bernstein:]

Okay. And then, I just wanted to go -- it seems like the move-ins are picking up, but I just wanted to dig a little bit deeper into the move-outs, which seem to -- I mean, if you listen to your peers, it seems like move-outs maybe have picked up a little bit. But, I think, it doesn’t seem to be the case in your portfolio. And maybe some thoughts around that whether that’s regional or geographic or do you that maybe is more of an independent living versus, assisted living kind of trade-off?

[Susan Givens:]

Yes. Our move-outs trended higher in the third quarter, and then they came back down kind of more historical levels in the fourth quarter. And so, that’s been what we’ve seen. I think, there’s -- every month provides a little bit of a different story. I think that we have seen some move move-out coming from COVID, some additional kind of steps as I think that we have had people -- certain instances that have remained in our communities kind of longer than they normally would have. But, I think from our standpoint, we’ve actually seen move-outs normalized through the fourth quarter and into kind of the first quarter. But, it’s obviously something that we’re pretty focused on and our operators are pretty focused on. But, that’s what we’ve seen for now.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Ms. Susan Givens for any closing remarks. Please go ahead.

[Susan Givens:]

Thank you everyone. I appreciate you joining us. And we will be in touch and look forward to updating you, as we move forward.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.