New Senior Investment Group Inc.
Q2 2019 Earnings Call Transcript

Published: 2 Aug 2019

[Operator:]

Good morning, and welcome to the New Senior's Second Quarter 2019 Earnings Call. My name is Sylvia and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note to the options available in your event console. [Operator Instructions] At this time, I will turn the show over to Miss Jane Ryu, Vice President.

[Jane Ryu:]

Good morning, and welcome to New Senior’s earnings call for the second quarter of 2019. With me today are Susan Givens, our CEO; David Smith, CFO; Lori Marino, General Counsel; and Bhairav Patel, EVP of Finance and Accounting.But before I turn the call over to Susan, I would like to highlight that this morning’s press release, our quarterly supplement, and the reconciliations of 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.During this call, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. No forward-looking statements can be guaranteed and actual results may differ materially from those projected. Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in the Risk Factors and in other disclosures in our most recent annual and quarterly reports filed with the SEC including the 10-Q that we will be filing later today. We undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future events or otherwise.And now, I would like to turn the call over to our CEO, Susan Givens.

[Susan Givens:]

Great. Thank you, Jane. Good morning, and thank you for joining New Senior’s earnings call for the second quarter of 2019. I'll spend a few minutes discussing the quarter and then I'll turn the call over to David to review the portfolio performance and the financial results. Overall, we had a very productive quarter as we continue to make progress across our key focus areas. Reflecting on our first six months as an internally managed company, I'm very happy with what we've accomplished over a relatively short period of time.Overall, we successfully completed the internalization and the transition of the new company, which was a significant endeavor. We've posted solid portfolio and financial results consistent with our guidance. We've implemented plans to address our underperforming asset. We've significantly increased the flexibility of our balance sheet and we've made a number of positive changes to our corporate governance, including the appointment of a new independent director with significant senior housing and lead experience. While we still have a lot of work ahead of us, we've made significant progress towards achieving our goals for the year and I'm very optimistic that the measures taken today will help position the company for future growth.With that in the backdrop, I'll quickly touch on Q2 performance. AFFO for the quarter was $0.16 per share in line with our expectations in guidance for the year. David will discuss in more detail but on the portfolio side we had another good quarter with solid NOI performance. Importantly, our independent living assets continue to generate positive same-store results. But as we've now experienced for a number of quarters, the positive performance across our independent living portfolio was offset by continued weakness in our assisted living and memory care portfolio which I'll discuss in more detail in a minute.While we're disappointed with the results of our AL portfolio, we're encouraged by the trends we're seeing across our IL asset and we remain optimistic that our IL portfolio will continue to perform during the second half of the year. Along those lines, I'm pleased to report that we're increasing the mid-point of our 2019 guidance range resulting in an updated range of $0.62 to $0.67 per share.Now turning to our strategic priorities, at the beginning of the year, we identified four key focus areas for 2019. I'll briefly give an update of our progress across each. First, optimizing our portfolio. Our top priority is to improve the overall quality and performance of our portfolio through a combination of intensive asset management, operator transition, asset disposition and CapEx enhancements. Our IL assets, which represent approximately 83% of our total NOI have generally been much more stable than our AL asset and that trend continued throughout the first half of 2019. For the second quarter of 2019 the IL portfolio was up 1.3% year-over-year representing the fifth straight, quarter of positive year-over-year growth.Meanwhile, our AL portfolio, which represents only 13% of our total NOI was down a disappointing 11.7% year-over-year. Overall, our AL asset, continue to face ongoing and persistent pressure from new supply and labor shortages. While the occupancy declines have moderated our AL operators are struggling to increase rates and manage labor expenses and the face of new supply and a tight labor market. In response, we've been working very hard to address our underperforming asset and we've implemented a series of initiatives aimed at improving performance. So far this year we'd completed the transition of nine underperforming AL properties to new operators. We sold two underperforming assets that were generating negative cash flow and we've implemented plans to sell additional underperforming asset. Collectively, we've put initiatives in place to proactively address 50% of our AL assets and put this portfolio on a path to benefit from new positive changes.However, despite all the work, we continue to face challenges and persistent underperformance across the AL portfolio. As a result, we're exploring a range of further alternative, which could include additional operator transition, capital investments to turn around and reposition asset, and more sizeable asset sales. Overall, our goal is to get our portfolio to a place where we can generate strong and consistent NOI growth. Our IL assets which make up the vast majority of our portfolio have held up incredibly well despite weakness in the sector. Over the past several years, our IL assets have consistently outperformed our AL asset and we've observed the same trend play out across the industry.We believe we have a unique portfolio of assets and we want to position ourselves to benefit as trends improve across the industry. Second, managing our operator concentration. We recognize the benefits of having a diversified portfolio of operators and we continue to evaluate all of our operator relationship as we seek to improve performance and position the company for growth. So far this year we've engaged two new operating partners with significant experience in the senior housing industry.As we move forward, we're actively engaged in discussions with additional new operators about potential opportunities across our entire portfolio. We're excited about these new relationship and we believe that partnering with some of the best operators in the industry, will provide fresh perspective and creative ideas that will help put the company on a path to benefit from future growth. Third, strengthening our balance sheet. We're committed to strengthening our balance sheet with the goal of reducing leverage over time and increasing flexibility. During the second quarter, we strategically took advantage of the unique interest rate environment and executed a $350 million interest rate swap, converting floating rate debt to fixed rate debt, and increasing our fixed rate exposure from 24% to 43%. The swap allows us to maintain the flexibility of floating rate debt while simultaneously reducing interest rate volatility.Going forward. We're continuing to explore opportunities to address our balance sheet, including refinancing options to further lower our debt cost and strengthen our liquidity profile. And lastly, increasing the transparency of our financial result. We provided guidance for the first time in February and as I mentioned earlier, falling the second quarter, we're improving the midpoint of the range. Additionally, we continue to refine our financial reporting and I believe we're providing very insightful information on the performance of our IL for portfolio as compared to our AL portfolio. As we move forward, we'll continue to work to enhance and improve our financial reporting with the goal of continuing to increase financial transparency.In conclusion, it was an active and productive quarter and we continue to make significant progress as we move through the balance of the year. Our entire team has worked very hard and we've made significant changes with the objective of repositioning the company for future growth. There's still a lot of work to be done but we're on a good path and we're excited and optimistic about what's ahead.Now, I'd like to turn the call over to David who reviewed portfolio and financial results in more detail. Dave.

[David Smith:]

Thanks, Susan and thanks everyone for joining us on the call this morning. First I'll discuss our senior housing portfolio performance for the second quarter and we'll end with a review of our financial results in 2019 guidance. At the end of the second quarter, New Senior's portfolio was comprised of 131 private pay senior housing properties diversified across 37 states. Portfolio trends this quarter remain consistent with prior quarters with our IL portfolio delivering 1.3% same-store NOI growth year-over-year, which is more than offset by continued weakness in our AL portfolio resulting in same-store being down 0.5%. Sequentially, we realize solid NOI growth for the portfolio. Same-store NOI was up 3.2% with growth in all key metrics including 10 basis points of occupancy growth, 0.5% growth in RevPOR and a 90 basis point increase in margin.Now I'll break down a portfolio by acuity and start with our IL portfolio performance which represented 83% of our NOI in the second quarter. Same-store cash NOI for our IL portfolio increased 1.3% year-over-year. These results were driven by solid RevPOR growth of 1.6% offset by an occupancy decrease of 40 basis points. While this occupancy decline was wider than last quarter's year-over-year results, our operators have continued to push rate as a portfolio has experienced three straight quarters of accelerating RevPOR growth.Despite the marketing pressure margins held up and remain flat year-over-year as how they continues to do a great job on managing expenses at our properties notably on labor. Throughout the second quarter, the IL portfolio realized positive net movements during every month resulting in occupancy increasing 10 basis points sequentially and also an added positive in July. A good trend as we continued through the peak summer lacing season. Furthermore, IL releasing spreads for new residents were positive and increasing for the third straight quarter. Also, an encouraging trend. Rate increases on existing residents were also once again stable at approximately 3%.Now, let's move on to our AL portfolio, which accounted for only 13% of our NOI. Results this quarter remain challenged with same-store NOI down 11.7%, similar to the results reported in the first quarter, the portfolio managed to grow RevPOR 0.9% but realized an occupancy decline of 20 basis points to 81.4% which was a low for the portfolio and similar to the all-time occupancy lows the AL industry realized during the second quarter.Margins also declined significantly in south 300 basis points, which was again driven by labor cost pressures where we sell labor up over 5%. We continue to realize significant differences on expense trends between our IL portfolio and our AL portfolio, which can be attributed to the new supply and labor pressures in the industry and their resulting impact on margins in NOI. One of the reasons we like IL is because there is no healthcare provider in our properties which has resulted in lower labor cost pressures than we have seen in our AL properties.To put it into context, labor expenses in our IL portfolio were up just over 2% year-over-year while labor expenses on our AL portfolio exceeded 5%. As with last quarter, our portfolio was negatively impacted by a few assets that materially affected performance, which we were marketing during the quarter to continue our efforts to improve the overall quality and performance of our portfolio. Excluding these six assets from the same-store portfolio would have resulted in a positive 0.6% growth for the portfolio and approving them 110 basis points. As mentioned previously, we completed the transition of nine underperforming AL properties in the first quarter of this year. Results are in the second quarter representing the first full quarter under our new operators we're down significantly.While it was typical to see these types of declines right after transitions are completed and while we had anticipated these results, it's something we're closely monitoring. All of the transition properties experienced turnover in critical leadership positions and significant disruption. But at this point it made great progress in stabilizing the leadership teams and have established improved processes and programs which are crucial steps toward improving the performance that we expect to see in this portfolio.Lastly, I'll touch on new supply. Overall, levels of new supply remain high, but the trend continues to improve and the 99 primary and secondary markets covered by Nick curling 12 months starts declined again this quarter and are down over 30% since the highs reached in the fourth quarter of 2015. In our markets new openings continue to decrease with property openings in the second quarter down nearly 60% year-over-year, and we currently expect full-year new deliveries to be down compared to 2018.Now, we'll move onto our financial results balance sheet and outlook for 2019. Beginning with earnings, AFFO for the second quarter was $13.6 million or $0.16 per share consistent with last quarter and in line with our expectations and guidance for the year. And a lack of the second quarter increased 2% versus the first quarter to $41.1 million, driven by independent living portfolio performance as I just discussed. Interest expense decreased 1% sequentially to $23.5 million primarily due to a slightly lower LIBOR in the quarter and a full quarter to benefit from a $50 million refinancing completed at the end of the first quarter. G&A was $5.4 million for the second quarter versus $5.0 million in the first quarter.Turning to the balance sheet. As Susan mentioned, during the quarter, we completed the execution of a $350 million interest rate swap resulting in the improvement of our fixed rate debt exposure from 24% to 43% and lowering our floating rate debt exposure from $1.4 billion to $1.1 billion. The swap allows us to lower risk from interest rate volatility and provide further stability to earnings while also maintain the flexibility of the mortgage debt on our properties. As it relates to debt maturities, we remain incredibly well positioned with no maturities until the fourth quarter of 2021 with that maturity representing only 4% of our total debt.And lastly, 2019 guidance. We're improving the midpoint of our AFFO guidance range by $0.05 resulting in an updated range from $0.61 to $0.67 per share to $0.62 to $0.67 per share. Our assumptions underlying this guidance can be found in our earnings release that we issued this morning.With that, I'll conclude my remarks and ask the operator to please open the line for questions.

[Operator:]

Your first question comes from Michael Gorman from BTIG.

[Michael Gorman:]

Good morning. Susan, if you could maybe talk a little bit about the alternatives that you laid out for the AL portfolio and just how you're thinking about them internally. Specifically, kind of what do you have to see from these properties to pursue an operator transition or more CapEx investment versus just going with a disposition?

[Susan Givens:]

Yes, sure. It's a great question. To frame it a little bit, we have evaluated our AL assets. Our initial step was to look at the asset where we thought that the real estate was good, we liked the market, and we thought that perhaps a new operator could drive better performance, or we thought that it just didn't make sense to kind of stay within our portfolio either because we didn't think there was a lot of growth to come or we didn't think the market really was there for us. So we did a whole sort of detail bifurcation portfolio initially to go after the AL asset and that was said in our decisions that we made already. So transitioning nine assets, selling some assets, and I think got really the results of what kind of landed on that were result of the factors I just talked about.I think that what we've seen though is despite a lot of those kind of actions, we're still seeing our AL assets and a subset of our AL assets underperformed. So we addressed a bunch of them, but then we have other ones that kind of pop up and have persistent problems. And so, we're not done with our work as I would sort of characterize it. So we had hoped that we would address some of the real laggards and then we'd have our portfolio in a good place on AL side. But unfortunately, we're still seeing some weakness. And so we're now tackling those other assets and trying to determine whether we should transition even more assets, whether we should really put some additional CapEx and turn them around ourselves or if we just think it makes sense to sell them to get out of those markets and out of those assets.So, I think that all the things I described are kind of on the table right now and we're working through that sort of as we speak with the overarching goal to be like, let's get our portfolio to a place where the real positive growers. So the ILF is which are up 1.3% that becomes our headline versus having those assets be dragged down by a handful of other under-performers. So, there's a lot there, but hopefully, that answers your question a little bit.

[Michael Gorman:]

Yes, definitely. Thank you. And then I guess kind of sticking with that on the same-store side, obviously the sector likes to focus on year-over-year and you've got the full year guidance of flat to down three but pretty strong sequential number in the second quarter. Is that a trajectory that we can expect through the back half or is that 3% sequential going to moderate a little bit into the second half of the year?

[Susan Givens:]

The sequential stuff is as you know, there's seasonality and there are other factors that kind of go to sequentially. The third quarter tends to be sort of the peak leasing season. And so that is a strong leasing season, the third quarter also sometimes you see higher expenses because summer months and all the utilities and that kind of factors into it. I think as we sit here, we think that there are some reasons to have sort of a positive view of the balance of the year. I think we are seeing some positive trends on the moving side and purely on our IL portfolio. So I think we feel good about that. But is it going to be 3% kind of sequential growth in Q3, I think that that's hard to say, but I think if you just look at kind of nominal dollar growth sort of third quarter, fourth quarter versus this quarter, we feel good about that.

[Michael Gorman:]

Great, thanks. And then maybe the last one for me, some good color on the settlement in the press release. Can you just talk about the expected timing of the proceeds? Since it's a settlement, should we expect this to be a third quarter event or is there still the possibility that there's going to be an appeals process here?

[Susan Givens:]

Look, I'm obviously not a lawyer, but I think the view is that it's a pretty high probability that we're kind of done and that that's behind us. And in that case, I think the proceeds are expected to come in and at the very end of the third quarter and that might trickle to the very beginning of the fourth quarter. But I think, as far as I understand it, there's a low probability that it does not come in. I think a lot of the work has been done and it's pretty kind of final at this stage.

[Operator:]

Your next question comes from Drew Babin from Baird.

[Drew Babin:]

Good morning. Quick question on the asset sales. Are you able to give us kind of the cash NOI contribution from those assets that were sold in the quarter as well as the assets that you're currently marketing? Or alternatively you kind of a way to triangulate that number? I think you've mentioned in the past that maybe looking at a per bed basis is the better way to kind of evaluate the sales given at the NOI contribution is you're not great from those assets, but I guess how much NOI does go away with is this position?

[Susan Givens:]

I'll let David kind of comment on the pre unit stuff, but I think the way to think about it is not significant NOI contributors and in fact I'm kind of free cash flow negative. So from a cash flow profile for the company is very much a positive. It will help our cash flow profile. And then NOI, very, very, very small and not something that will at all kind of impact our financial. So, I view it as, you know, these assets were small in size and a distraction from kind of an asset management perspective, but then also negative contributors to cash. So a good, good result for us. And you won't be an impact to kind of our financial, other than positive ones. And David, I'll let you comment on the pricing.

[David Smith:]

Just on the pricing itself. Like if you look at just those two assets, again, it's in the 50k to 75k a unit range. So, obviously not indicative of the overall quality of our portfolio. So, really getting rid of some real under-performers in our portfolio.

[Susan Givens:]

And I think, Drew you asked about some other stuff we're selling. Those assets, I think are higher per unit valuation, just given the nature of the assets. I think if a little too early to say exactly where we kind of land on some of the other stuff, but I don't think you can draw conclusion from the two assets we just sold to what it might like if you do in what it might like if you do in a couple other assets sales. I think [indiscernible] they're pretty bespoke. But I think it's good news for us. We have a pretty low basis in most of these asset and we're being sort of thoughtful about what makes sense and what can really kind of put the portfolio in a better place.

[Drew Babin:]

So from a cash NOI perspective, the additional assets, sales will likely look like what was sold in the second quarter or we get into a period where maybe the NOI contribution is a little bit higher on what you're selling, kind of as you go?

[Operator:]

Ladies and gentlemen, this does conclude the New Senior second quarter, 2019 earnings conference call. Thank you for your participation. You may now disconnect.