New Senior Investment Group Inc.
Q3 2019 Earnings Call Transcript

Published: 1 Nov 2019

[Operator:]

Good day, and welcome to the New Senior Investment Group Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.At this time, I'd like to turn the conference over to Jane Ryu, Vice President. Please go ahead.

[Jane Ryu:]

Good morning, and welcome to New Senior's earnings call for the third quarter 2019. With me today are Susan Givens, our CEO; Bhairav Patel, Interim CFO and CAO; and Lori Marino, General Counsel. Before I turn the call over to Susan, I'd like to highlight that this morning's press releases, 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 other disclosures in our most recent annual and quarterly reports filed with the SEC, including a 10-Q that we will be filing in the upcoming days. 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'd like to turn the call over to our CEO, Susan Givens.

[Susan Givens:]

Great. Thanks, Jane. Good morning, and thank you for joining New Senior's earnings call for the third quarter of 2019. I'll spend a few minutes discussing the strategic transaction that we announced this morning as well as the results for the quarter, and then I'll turn the call over to Bhairav to review the portfolio performance and the financial results.At the beginning of the year, we set out on a new path as an internally managed company. Since that time, we have been focused on a clear set of initiatives aimed at repositioning the company for future success. I believe today's announced sale of our entire assisted living and memory care portfolio represents another major step forward in the continued transformation of New Senior and demonstrates our ongoing commitment to maximizing shareholder value.Today, we announced that we have entered into a definitive purchase and sale agreement to sell our entire portfolio of assisted living and memory care properties for $385 million. The portfolio includes 28 AL memory care properties across 14 states and is currently managed by 6 different operators. From a financial perspective, the transaction is expected to materially improve cash flow without a significant impact to AFFO.As we discussed over the last several quarters, a top priority for us has been to improve the overall quality and performance of our portfolio. Our IL assets, which currently represent approximately 83% of our total NOI, have generally been much more stable than our AL assets. And that trend has continued throughout 2019. For the third quarter of 2019, the IL portfolio was up 0.7% year-over-year, representing the sixth straight quarter of positive year-over-year growth. Meanwhile, our AL portfolio, which represents only 14% of our total NOI, was down a disappointing 10% year-over-year.In response to this trend, we worked very hard to address our underperforming assets, and we implemented a series of initiatives aimed at improving performance. Despite all the work, we continued to face challenges and persistent underperformance across the AL portfolio. As a result, we began exploring a range of further alternatives, including additional operator transitions, capital investments to turn around and reposition assets and more sizable asset sales. Ultimately, we concluded that a sale of the entire portfolio would enable us to simplify our business and achieve several of our strategic goals for the company, including enhancing the overall quality of our portfolio and strengthening our balance sheet.Importantly, the sale of the AL/memory care portfolio will enable us to dedicate more of our focus towards growing our core business, which is low-acuity, private-pay senior housing. Some of the benefits from this transaction include, first, better positioning the company for growth. Following the sale, our company will have a simple and straightforward portfolio of 102 independent living assets and one CCRC. The transaction will enable us to focus on our core independent living properties, which generally benefit from higher operating margins, longer length of stay, lower regulatory risk and less new supply than AL/memory care. Additionally, our IL portfolio serves the attractive private-pay middle-market demographic, and we are extremely well positioned to benefit from fast-growing demand in this segment. Going forward, we will continue to focus on attractive senior housing assets and partner with best-in-class operators to grow our business.Second, the transaction improves the company's capital structure and liquidity. We intend to use the net proceeds from the sale of the AL portfolio to reduce debt by approximately $350 million. Additionally, along with the sale, we expect to refinance our largest near-term debt maturity. And as a result, we will significantly improve our debt maturity profile as we won't have any material debt maturities until 2025. Lastly, a significant number of the AL properties were losing money on a fully levered basis. And by selling the AL portfolio, we expect to improve the cash flow profile of the company.And third, the transaction reduces overall portfolio volatility. Despite representing a relatively small percentage of our overall NOI, the AL portfolio has had a prolonged negative impact on our overall financial results, a trend that we would have expected to continue into 2020 and beyond. By selling the AL portfolio, we are left with an IL portfolio that has a strong track record of delivering stable results and has consistently outperformed our more challenged AL assets.Overall, I truly believe that this transaction is a win-win for all parties involved as it enables us to focus on our core IL properties and it puts our AL properties in the hands of an owner group that's better positioned to invest the necessary time and capital into repositioning the assets for growth. We expect the transaction to close in the first quarter of 2020, and we look forward to updating you further as we move towards closing.Now I'll quickly touch on Q3 performance. AFFO for the quarter was $0.17 per share, in line with our expectations and guidance for the year. Bhairav will discuss in more detail, but on the portfolio side, we had another good quarter with solid NOI performance. Importantly, our independent living assets have continued to generate positive same-store results. And as we've now experienced for a series of quarters, the positive performance across our IL portfolio was offset by continued weakness in our AL portfolio. Like others in the senior housing market, we continue to face a number of challenges that are impacting occupancy and expenses across both our AL and IL portfolios. But we're encouraged by the trends that we're seeing across our IL assets, and we remain optimistic that our IL portfolio will continue to outperform as we approach the end of the year.Along those lines, I'm pleased to report that we're narrowing our 2019 guidance range and increasing the midpoint, resulting in an updated range of $0.64 to $0.67 per share. So far this year, our results have been in line with our expectations, and we expect that trend to continue for the balance of the year. It's also worth noting that the sale of the AL portfolio that I just discussed won't have any impact on our 2019 guidance.Now turning to our strategic priorities. At the beginning of the year, we identified 4 key focus areas for 2019, and I'll briefly give you an update on our progress across each. First, optimizing our portfolio. As discussed, one of the top priorities for the company has been to address the underperformance of the AL portfolio. And we believe the transaction that was announced today represents a significant step in the right direction. Overall, our goal is to get our portfolio to a place where we can generate strong and consistent NOI growth. We believe we have a unique portfolio of assets that are well positioned to benefit as trends improve across the industry, and we now have the ability to focus our attention on driving performance across our core IL assets.Second, managing our operator concentration. Holiday Retirement is our largest operating partner and currently manages assets that account for over 80% of our NOI. And upon completion of the sale of the AL portfolio, Holiday will account for over 90% of our NOI. Obviously, Holiday is an important partner of ours, and we believe they have done a terrific job operating our assets. That said, we recognize the benefits of having a diversified portfolio of operators, and we have spent considerable time developing and growing relationships with existing and new operators. We're excited about these relationships, and we believe that partnering with some of the best operators in the industry will provide fresh perspectives 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. So far this year, we have implemented several initiatives aimed at improving our capital structure, including taking advantage of the interest rate environment by executing interest rate swaps and putting a corporate revolver in place. With the AL portfolio sale, we will take another step towards improving our balance sheet by reducing our leverage and extending our average debt maturity profile. As we discussed, addressing our balance sheet will be a multistep process that will take time, but I'm pleased with the progress we're making.Lastly, increasing the transparency of our financial results. We provided financial guidance for the first time in February. And as I just mentioned, following the third quarter, we're improving the midpoint of the range. Throughout the year, we've continued to refine our financial reporting, and as we move forward, we'll continue to work to enhance and improve the transparency of our financial results.In summary, we're approximately 10 months into the company's life as an internally managed company, and I'm extremely pleased with the progress that our team has made on each of our strategic priorities over a relatively short period of time. While our work isn't done, our momentum is strong, and we continue to position the company for future growth and the creation of long-term shareholder value.Now I'd like to turn the call over to Bhairav to review portfolio and financial results in more detail. Bhairav?

[Bhairav Patel:]

Thanks, Susan, and thanks, everyone, for joining us on the call this morning. I'll begin with a review of our portfolio performance for the third quarter followed by an update on the financial results and 2019 guidance. Our portfolio composition remained unchanged compared to the previous quarter with 131 private-pay senior housing properties across 37 states. Consistent with what we have seen over the past few quarters, our IL portfolio continued to post positive results, growing cash NOI by 0.7% year-over-year. However, our AL portfolio continued to face challenges, resulting in total same-store cash NOI being down 0.7% year-over-year.Let me further break down the managed portfolio results between our IL and AL properties to highlight the divergent trends between the portfolios. Let's begin with our IL properties that represent 83% of our total cash NOI. As I mentioned earlier, cash NOI for our IL portfolio increased by 0.7% year-over-year. Once again, we saw solid RevPOR growth of 1.9% year-over-year, which was more than offset by occupancy declines. RevPOR trends have been improving steadily for our IL portfolio driven by increasing convergence between rent increases on existing residents of 3% and re-leasing spreads, which continued to trend positively.Now let's look at the AL properties, which represent 14% of our total cash NOI. We experienced another challenging quarter with same-store cash NOI down 10% year-over-year. Occupancy declined by 60 basis points year-over-year, and rate growth was just about flat at 0.2%. We have not seen the same convergence with respect to re-leasing spreads as we have seen in our IL portfolio. In order to combat occupancy pressures, we have seen our operators dip slightly on rent, as evidenced by the declining RevPOR trend. That resulted in lower revenues, and although we did see labor cost ease a bit, expenses were still higher year-over-year, further compressing margins.Our same-store AL portfolio excludes 9 properties that were transitioned to new operators in the first quarter of 2019. We continued to see occupancy declines in these properties as a result of the transition. Additionally, turnover in critical leadership positions, which is typical with respect to such transitions, further increased costs and depressed margins, contributing to another challenging quarter for the transitioned assets.On a sequential basis, our same-store cash NOI was down 2.6%. The decrease is driven by a decrease in operating margins mainly due to the expected impact of seasonality on expenses. Our same-store operating expenses increased by approximately $1.3 million, of which higher utilities expense as a result of the higher temperatures of the summer months accounted for $1.1 million. Additionally, our same-store portfolio on a sequential basis also includes the recently transitioned AL properties, which experienced another challenging quarter as the new operators continued to stabilize operations. This further dragged down the overall results for the quarter on a sequential basis.As Susan mentioned earlier, subsequent to quarter end, we entered into an agreement to sell all of our assisted living properties. We expect this to help us focus and build on the positive trends that have emerged with respect to our IL portfolio. To further illustrate this point, excluding AL properties, our same-store cash NOI for the current quarter would have been up 0.7% year-over-year and would have been up on a year-over-year basis during each quarter of 2019.Lastly, just a few points on supply. Overall, new construction remains high relative to historical levels, but the trend continues to improve. Starts in the 99 primary and secondary markets covered by NIC continued to decline and are almost 40% below the highest level reached at the end of 2015. In our markets, we continue to see a similar trend, with new openings down 55% year-over-year and the full year new deliveries expected to be down significantly compared to 2018. We are also encouraged to finally see demand exceed supply for the first time in over 3 years as absorption continues to grow and supply continues to trend lower.Now I'll provide an overview of our financial results, balance sheet and outlook for the remainder of 2019. AFFO for the third quarter was $14 million or $0.17 per diluted share compared to $0.16 per diluted share in the prior quarter. The increase was primarily driven by interest savings, and our floating-rate debt benefited from LIBOR decline that occurred during the quarter. NOI for the second quarter was $40.4 million, down 2% sequentially mainly due to a seasonal increase in operating expenses combined with another challenging quarter for our transitioned assets. Interest expense for the quarter was $22.7 million or 3% lower compared to the prior quarter driven by a decrease in LIBOR compared to the previous quarter, as I just mentioned. Total G&A remained unchanged compared to the prior quarter at $5.4 million.Also included in our P&L this quarter is approximately $38 million of net proceeds we received with respect to the settlement of the derivative lawsuit filed on behalf of the company. We used the proceeds to pay down a portion of the outstanding balance on our revolving credit facility. Although included in net income, these proceeds have been excluded from our key non-GAAP measures.Our balance sheet remained relatively unchanged compared to the prior quarter, with gross assets of $2.6 billion and cash and cash equivalents of $35 million. As it relates to debt, we had $1.8 billion in face amount outstanding as of the end of the quarter with a weighted average coupon of 4.4% and a weighted average maturity of 4.7 years.Additionally, as a result of the transaction to sell our AL portfolio, we expect to pay down and refinance most of our debt scheduled to mature in or prior to 2022. Subsequent to the refinancing, we do not expect to have significant maturities until 2025, which is expected to substantially increase the weighted average maturity of our debt.Lastly, on guidance, we are tightening our AFFO guidance range to $0.64 to $0.67 per share from $0.62 to $0.67 per share, increasing the midpoint of the range by $0.01. Our underlying assumptions can be found in our earnings release that we issued this morning and include the following

[Operator:]

[Operator Instructions]. And our first question today will come from Michael Gorman of BTIG.

[Michael Gorman:]

So you talked a little bit about some of the strategic options you guys looked at before deciding on a portfolio sale. Can you just spend a minute and kind of talk on, once you decided that the sale was the correct way to go, kind of what the process looked like? Obviously, I assume you can't disclose who the buyer is at this point, but maybe a little bit of context around them, their size, kind of how they came to the table. If you could just give us some more color on that, that would be great.

[Susan Givens:]

Sure. Look, I think just kind of stepping back on the AL assets, first and foremost, we've always liked the AL sector. Some of these assets have been a part of our portfolio for over 7 years, so these are assets we like. And we think the space, while facing some challenges, is a good place to be invested over a longer period of time.Really, when we kind of sat down and thought about different things we were trying to achieve with our company, we felt like addressing the AL portfolio was kind of a top thing we needed to do. And so there are lots of options, and I laid out some of them, that we took a look at and considered. But we also considered all those options in concert with bigger strategic things we were trying to accomplish with the company, namely our balance sheet and really trying to begin to tackle that.And so we looked at a full range of alternatives, and we really felt like a full exit from this segment at this point in time made the most sense for us. I think that importantly, in a portfolio of 28 assets, there are some great assets and some more challenged assets. And I think where we sat or sit from a capital perspective, they would require some CapEx to be invested. And I think that other groups out there in the space right now that have a real focus on AL, a long history with AL and have time and capital to reposition those assets are better suited to own them at this certain point in time.So the group that we're selling to is a very sophisticated institutional buyer with a long and successful track record in the space. We have a lot of respect for them. And we think that, as I said in my comments, it's a real win-win for us. It allows us to narrow our focus, but it really gives them an opportunity to own the assets in the structure that makes sense. And we want the assets to succeed. Their partners, we feel very strong -- we have strong relationships with all of the operating partners. And we want only the best thing for these assets in order to give us a good alternative for everyone.

[Michael Gorman:]

Okay. Great. And then if -- just a bit on the debt paydown or the -- and the debt refinancing. Can you just talk about some of the initial terms that you're seeing or kind of what you think you're going to see when you go to refinance the 2022 debt? And maybe included in that, the -- any potential prepayment penalties?

[Susan Givens:]

Yes, sure. So we're pretty far along the path on refinancing. So what will happen here is that we have our largest kind of near-term, if you will, maturities in 2022. And in total, it's about $650 million of debt. So in conjunction with this deal, we'll pay off that debt. And right now, the debt crosses some of the AL assets and some IL assets. So we'll pay off the $650 million, and then we will refinance the IL assets with about $300 million of new debt.And so the terms we're seeing right now are actually pretty favorable compared to the existing debt that we have in place. I think that's a function of where we are kind of in the interest rate environment. Obviously, you've seen what's gone this week and beyond. So terms are pretty good. And it will push out, as I said, our overall maturity profile so that our next most significant maturity will be 2025. So we've already made a lot of progress on that refi. We wanted to do it kind of in concert with the sale, so we feel good about where we are on that.

[Michael Gorman:]

Great. And just is there going to be a penalty associated with the prepayment on that $650 million?

[Susan Givens:]

It's very minimal because we are refinancing some of the assets with the existing counterparts. So there are some minor penalties but nothing significant.

[Operator:]

Our next question today will come from Drew Babin of Baird.

[Andrew Babin:]

Just one related question to Mike's questions. All of the debt prepayment activity, is it all related to 2022 maturities? Or are some of those maturities sort of in the interim being taken care of as well in conjunction with this?

[Susan Givens:]

They're a little bit staggered, but most of them are either 2022 or before. We have actually three financings in total. Two of them are very, very small. And so the largest is -- if you look at our balance sheet and our maturity schedule, there's about $560 million piece of debt, and that's the debt that matures in 2022. And then there are smaller pieces that were maturing before. So the headline point is with this, we really have no significant maturities until 2025. So I think when you look at our capital structure, the 2022 is the one we've been focused on for lots of reasons. And so this pushes that out. And then there are a couple of smaller maturities.

[Andrew Babin:]

Okay. That's all for me on the balance sheet front, but kind of moving to the operating portfolio. Were the transition assets maybe getting weaker than you had initially expected during the quarter? I guess the decision to sell all AL/IL, obviously, that business has had some struggles this year. But I guess as far as the goals of the transitioned assets and the operators you are working with there, was anything going meaningfully negative compared to your expectations? Or is it just more of a kind of an industry issue?

[Susan Givens:]

Yes, sure. When you transition assets -- I mean I think, first, transitioning assets is always a hard decision. And we transitioned assets previously. We know that when you transition, you should expect to see some deterioration before you see some improvement. So we had modeled in an expectation that we would see some deterioration, and we saw that. I think we have seen, with some of the assets that we've transitioned, the performance has been even weaker than we had anticipated. And I think that -- actually, the last month or so, we've seen some signs of improvement, so that's good. But I really don't think that we made a decision to sell the entire AL portfolio simply because of that.The assets that we transitioned to new operators, we chose those operators because we either had existing relationships with them or we've seen that they've done great things with other assets. And so we had a lot of confidence and, frankly, still do have confidence in those operators. But this is a bigger strategic decision for us. And so we wouldn't have made a decision based off of 1 quarter's worth of performance. This was really about trying to accomplish other things for our assets. And we hope the assets continue to improve. It's just that I think, with all the options we had in front of us, it made the most sense for us to take advantage of what was a full portfolio sale.

[Andrew Babin:]

Okay. That's -- yes. I mean in the context of potentially transitioning IL assets in the future currently managed by Holiday, I guess I was trying to get a read on just the track record of transitioning properties and sort of how that could go. It sounds like you're still pretty happy with the transitions that have occurred and sort of their longer-term potential. But I guess what I'm getting at is, in the future, should you transition IL properties currently managed by Holiday? Are there reasons why it's significantly easier to transition IL properties versus AL and memory care? I imagine the lower acuity probably makes it a bit easier, a little bit less disruptive. Can you maybe give us a framework to work with, as that potentially happens in the future, on how much noise might there be in additional transitions that happen? And would it be less noise than the AL?

[Susan Givens:]

Yes. It's a great question, Drew. It's something obviously we spend a lot of time thinking about. So I think you answered it in part. I think that -- a couple of comments. One, our view is that when you're transitioning assets that are already pretty stable and are performing pretty well, that is kind of a different set of facts and leads to kind of less deterioration than when you have an asset that's challenged for lots of reasons. And so to summarize, transitioning assets that are already performing pretty well usually is a better sort of outcome than trying to transition an asset that faces a lot of challenges.Second, I do think that transitioning IL assets is often easier than transitioning AL assets. I don't think transitioning any assets is easy. But I think it's slightly simpler with the IL business because of the lack of health care, and it's just, candidly, a little bit less complex. But I do think transitioning is hard, and I think you have to be really thoughtful about the partners. I think that the industry as a whole is spending a lot of time thinking about structures and alignment. I know a lot of people are talking about that right now, and we're spending a lot of time thinking and talking about that.So there are ways in which you can try to mitigate some of the deterioration with transition if you have operating partners that you're truly aligned with. And so those are things that we're thinking about and considering. But I do think it's easier -- while nothing's easy, I think it's easier to transition IL assets. But I think most importantly, it's something we're being really thoughtful around and really trying to make sure that we're learning from the history. Good news is we have a decent history to look at and refer to, but it's something we're pretty focused on.

[Operator:]

Our next question today will come from Daniel Bernstein of Capital One.

[Daniel Bernstein:]

Congratulations on the transaction. I guess I just wanted to also -- just want to clarify on the cap rate that you quoted in there, the 5.9%, is that before or after maintenance CapEx?

[Susan Givens:]

That's before. That's just -- that's an NOI cap rate.

[Daniel Bernstein:]

Just an NOI cap rate, okay, just be clear on that. And then on the balance sheet, I know you're refinancing the debt. But was there any consideration to repay the preferred stock owned by Fortress? That's pretty expensive capital. Just trying to understand what was the consideration to refinance the debt versus maybe trying to pay off some of that preferred.

[Susan Givens:]

Sure. That's an option for us. So when we say repay $350 million of debt, that could include that preferred. You're exactly right, that's our highest-cost debt, if you will. And so that's something that we're considering. So we're just, at this point, looking at $350 million, and then which pieces we definitively conclude to repay, we'll kind of decide as we move forward.

[Daniel Bernstein:]

Okay. And then what was the CapEx -- maintenance CapEx difference between the IL and the AL? Just trying to understand the differences there and -- for our modeling purposes, once you get -- once you sell the AL portfolio, how we should then be thinking about the CapEx for the IL, maybe both on the maintenance and maybe EBITDA enhancing as well.

[Susan Givens:]

Sure. I mean on average, our maintenance CapEx is about 1,500 across all of our assets. I think that our AL is a bit higher, usually kind of closer to 1,700. And our IL is about 1,200. Of course, it varies by asset. But to give you some general parameters, if our total average is 1,500, IL 1,200 of that kind of 1,500.

[Daniel Bernstein:]

Okay. No, that's very helpful. And then one last question. Now that you're selling the portfolio, you're rightsizing some of the balance sheet, you clearly have operator concentration with Holiday. What's in the pipeline? But -- and obviously, you've been working very hard on this AL transaction to refinance debt. But could you tell us some about what you're working on in the pipeline, whether it's all -- whether it's triple-net or RIDEA operating structure? What are the kind of items that you're looking at in the pipeline we can think about maybe for the future?

[Susan Givens:]

Yes. Sure. I mean I think obviously, addressing some of the issues that we've had to address has been -- that's been our top priority. But we continuously look and consider kind of what's out there. And I think our strategy around selling the AL assets is driven in large part by our belief that there's a real opportunity with lower-acuity, private-pay assets at a very attractive price point. So we're spending a lot of time, as we think about different operators and relationships and how to grow the business, working with people that we think have some real interesting thoughts around that segment. We think that there are fewer people kind of focused on that segment. And we think that our portfolio, given the fact that we have such a strong kind of presence in that space, makes sense for us to be -- to refocus there.At the same time, I don't think that by selling the AL portfolio now, that precludes us from ever looking at AL assets. Like I said, we like the sector. We think it's interesting. We just think this transaction makes sense for us right now. But the majority of what we're kind of focusing on looking at is in line with our core kind of business at this moment. And I think a lot of the people and operators out there like the lower-acuity kind of IL market. And so there are a lot of people that are coming to us, which is great for us. And I think it's a pretty interesting segment right now.

[Daniel Bernstein:]

Okay. Do you have any LOIs or assets under contract or close to that? Or maybe that's -- we're just going to have to...

[Susan Givens:]

No, not right now. Yes, we're focusing on kind of what's at hand, but we're always looking...

[Daniel Bernstein:]

I understand.

[Susan Givens:]

And looking at step-up to inform the strategy for the business. And so that's kind of what's resulted here.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. And at this time, I'd like to turn the conference back over to Susan Givens for any closing remarks.

[Susan Givens:]

Well, great. Really appreciate everyone joining us this morning, and thank you guys for your time. And we look forward to updating you as we move forward. Thanks.

[Operator:]

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.