New Senior Investment Group Inc.
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good morning, my name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Senior First Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Ms. Ivy Hernandez, you may begin your conference.

[Ivy Hernandez:]

Good morning, and welcome to New Senior's earnings call for the first quarter of 2017. Joining us today are Susan Givens, our CEO; Bhairav Patel, our CFO; and David Smith, Managing Director. Before I turn the call over to Susan, I would like to remind you that certain statements made today may be forward-looking statements. These statements describe the company's current expectations, and actual results may differ materially from these expectations. In addition, the speakers will present non-GAAP information. I encourage you to review the cautionary statements regarding forward-looking statements, the reconciliations of non-GAAP measures, and the risk factors contained in our annual and quarterly reports filed with the SEC. With that, I'd like to turn the call over to Susan.

[Susan Givens:]

Thanks, Ivy and good morning everyone and thank you for joining us today for New Senior's first quarter 2017 earnings call. Following my remarks, David will review portfolio performance, and Bhairav will review our financial results. Before we discuss our results for the quarter, I want to take a minute to quickly comment on the macro environment and the trends we are seeing in the industry. Today, we have one of the largest portfolios of senior housing properties in the U.S. And our target demographic is the fastest-growing segment of the U.S. population. The senior housing industry is large, $300 billion, and part of the larger $3 trillion U.S. healthcare industry. Private capital continues to be very interested in the space and foreign capital has become increasingly active. Despite the tremendous long-term prospects for the business, the senior housing industry is facing near-term challenges as new supply and increased competition continues to impact performance. This quarter, we continued to see weakness across our assisted living and memory care properties, while our independent living properties were generally more stable. In response, we've been very proactive about transitioning AL/memory care assets to new operators and pursuing selective asset sales with the goal of improving the overall quality of our portfolio. We continue to see solid demand for high-quality senior housing assets and we intend to continue to explore asset sales and evaluate new operator relationships. We're operating in a competitive market and supply and other factors are exerting pressure on growth. Nevertheless, we're excited to be invested in the healthcare industry and we remain confident in the medium and long-term fundamentals of our industry. Now turning to highlights for the quarter. Total NOI for the quarter was approximately $55 million. Normalized FFO for the quarter was approximately $24 million and AFFO was approximately $22 million. On a per share basis, that's normalized FFO of $0.30 per basic share, and AFFO of $0.27 per basic share. Across our total portfolio, same-store cash NOI decreased 1.5% year-over-year. This decline was driven by the results of our managed portfolio, which were offset by the growth in our triple net lease portfolio. For our managed portfolio, same-store cash NOI was down 6.1% year-over-year, primarily on account of continued weakness across our AL portfolio. Our triple net portfolio posted a 4.3% increase in same-store cash NOI year-over-year and EBITDARM coverage was flat quarter-over-quarter. In addition, we completed the sale of two assisted living/memory care assets in January of this year for $15.5 million and we used the net proceeds to pay down debt. We're actively marketing a couple of additional portfolios now and we have some assets under contract, which we expect to close this quarter or early in Q3. Lastly, we transitioned three underperforming assets to a new operator on May 1st, and we expect to transition one of our most challenging assets to a new operator on June 1st. We're enthusiastic about building relationships with new operators as a part of our ongoing effort to strengthen our portfolio and improve performance. And with that, let me turn it over to David to talk about the portfolio in more detail.

[David Smith:]

Thanks, Susan and good morning everyone. At the end of the first quarter, our portfolio totaled 150 private pay senior housing properties, consisting of 92 managed properties and 58 triple net properties. Same-store cash NOI for our total portfolio decreased 1.5% compared to the first quarter of 2016. First, I'll discuss our managed portfolio. This includes 53 independent living and 39 assisted living properties, and accounts for roughly half of our total portfolio NOI. Same-store managed cash NOI for the first quarter decreased 6.1% year-over-year to $27.5 million. Similar to past quarters, our IL portfolio, which is roughly two thirds of our same-store pool, continued to outperform our AL portfolio. Occupancy for the same-store portfolio decreased 220 basis points year-over-year, driven by large occupancy decreases in our IL portfolio. As many of you know our largest operator, Holiday, has been transitioning its operating model by replacing live-in property managers with professional executive directors. The transition began in the third quarter of 2016, and we believe it has caused some temporary disruption at the properties. However, the good news is that Holiday has now completed the transition for our IL portfolio and is focused on leasing the newly available units. Long term, we think the operating model change, which introduces a true business leader at each property, and results in a more cohesive operating team at the community, will have a positive impact on performance. Same-store RevPOR trends continue to improve and increased 1.8% year-over-year. Similar to last quarter, our operators have continued to achieve rate increases of 3% to 5% on existing residents, which was partially offset by the continued use of rent discounts and incentives for new residents as the operating environment continues to remain competitive given pressures from new supply. Expense growth has remained moderate, increasing 1.7% year-over-year. We have continued to see consistency in our labor cost per resident, which increased 2% this quarter compared to 1.8% last quarter. So we remain encouraged by our operators' ability to effectively manage labor costs. On May 1, we transitioned three underperforming properties to a new operator, and as Susan said, we expect to transition one of our most challenging assets on June 1st. NOI for these four assets collectively was down 21% year-over-year. The three properties transitioned on May 1st, which are located in three states, are now being operated by Grace Management. Grace is a new operator relationship for New Senior and is headed by executives with extensive experience in the senior housing industry. The fourth property, which is located in the Dallas MSA, will be transitioned to Watermark, an existing operator relationship for New Senior. With the focus and skill set of the Grace and Watermark management teams, along with management agreement terms designed to enhance alignment and drive performance, we are optimistic about the prospects for these communities going forward. Lastly, levels of new supply in our markets decreased slightly in the first quarter compared to the fourth quarter of 2016, consistent with the broader industry trends, as reported by NIC. New supply affected managed assets representing 16.5% of our total NOI and we saw a meaningful divergence in performance in markets with new supply versus those without. We also continue to expect an elevated number of properties coming online for the balance of 2017, though the majority of these properties are assisted living as compared to our majority independent living portfolio. As we discussed last quarter, we continue to expect increased CAPEX spending in our portfolio for the year, with targeted amounts in markets with new supply. This spending, along with continued proactive asset management activities similar to the transitions I mentioned, is expected to drive performance in our portfolio. The remaining half of our NOI is derived from our triple net portfolio, which comprises 58 properties, including 52 IL, five rental CCRCs, and one AL. Cash NOI for the first quarter was $23.7 million and the portfolio generated an attractive unlevered cash return of 7.5% for the first quarter. Same-store cash NOI growth for this portfolio was 4.3%, due to the contractual rent escalators in our leases. For the trailing 12 month period ending December 31st, occupancy was 87.5%, down 50 basis points quarter-over-quarter and EBITDARM coverage was flat at 1.19 times. Lastly, our lease maturity schedule remains strong, with no maturities until 2029 and an average remaining life of 14 years. With that, I'll turn the call over to Bhairav to discuss our financial results.

[Bhairav Patel:]

Thanks, David and good morning, everyone. I'll provide a quick overview of our financial results for the quarter. Let's begin by reviewing some of our key metrics. NOI for the quarter was $55.4 million compared to $57.3 million in the prior year. Cash NOI for the quarter was $51.1 million compared to $52.5 million in the prior year. NFFO was $24.3 million or $0.29 per diluted share compared to $0.32 per diluted share in the prior year. AFFO was $22.3 million or $0.27 per diluted share compared to $0.29 per diluted share in the prior year. After adjusting AFFO for approximately $1.7 million of routine CAPEX during the quarter, normalized FAD came in at $20.6 million or $0.25 per diluted share compared to $0.26 per diluted share last year. One driver of the decrease in our key metrics is lower NOI, as management fees and G&A remained stable at $7.8 million or 7% of total revenues. It's also worth noting that the total results reflect lost income on assets sold at the end of 2016 and the beginning of 2017. As a reminder, in January, we completed the sale of two assisted living and memory care assets for $15.5 million, resulting in a gain of about $4 million. We used the proceeds from the sale to pay down $14.7 million in debt. Gross assets remained unchanged at $3.3 billion and include $50 million of cash on hand at the end of the quarter. We had $2.1 billion of total debt outstanding at the end of the quarter, with a weighted average maturity of approximately five years and an effective interest rate of 4.3%. In April, we extended the maturity of $98 million of floating rate debt to October 2018. As a result, we have no debt maturities coming in 2017. And finally, our Board of Directors announced a dividend of $0.26 per common share. The dividend is payable on June 22nd to shareholders of record on June 8th and represents 96% of AFFO generated during the first quarter. I will now turn the call over to the operator to open the line for questions.

[Operator:]

Thank you very much. [Operator Instructions]. Our first question comes from Paul Morgan with Canaccord. Your line is open

[Paul Morgan:]

Hi, good morning. As you think about the assets where you've been kind of transferring management, is there I mean, what's the common theme among them, is it just kind of ad hoc kind of one-off REIT justifications or is there something in terms of, Holiday, for example, where it just doesn't fit? And do you see more of them beyond kind of what you've been targeting in the second quarter here?

[Susan Givens:]

Yes, sure. So the first part of your question, the consistent sort of theme across the board is that they're all AL/memory care assets. That's what we've been transitioning. So we have not been really that focused on the IL assets to date, because the IL performance has been generally more stable than what we've seen on the AL/memory care side. And it's a combination of operators we're moving the assets from. So it's not one operator that we've sort of focused on, so we have of the four assets, I think three are with Holiday and one has been with Blue Harbor. So, what we've really tried to do is we're trying to be very deliberate and make sure that the assets are in the hands of the right operators. And I think in some instances, while the operators that we had in place had the best intent, they just weren't the right fit for those particular assets. And we think the new operators that we put in place are better situated in those markets for those types of assets, meaning layout, all that kind of stuff. And so we've really tried to be pretty proactive about it. I do think you can expect to see more, as we're continuing to refine the portfolio and I think it's a good opportunity for us to evaluate kind of sale or transition, and that's what we're doing. And the assets we've transitioned, we feel good about the longer-term prospects and we think they're good assets. We just think we need, for lack of a better term, kind of new blood in there to actually try to improve performance. And the good news is the operators we've put in place are actually very excited about their position as the operators, so that gives us a lot of hope and optimism. So I think it's never an easy thing to transition assets away from operators and it takes time to identify the right operators. But we're well underway in that process. And I think we feel very good about that and it will lead to better results for us.

[Paul Morgan:]

Thanks and then you talked about the changes in the Holiday property management model and kind of longer-term upside from leasing the units and having sort of more professional management in there, but maybe, at least I kind of underestimated the short-term dislocation with some folks who really like the model maybe, or just sort of changing management out. How -- I mean, how should we think about the ramp of that in terms of the sort of absorbing the dislocation versus sort of realizing the potential, I mean, are we -- what inning are we in here, how long do you think it'll be before we see some benefits?

[Susan Givens:]

Yes, I think change is always something that takes a little bit of time. And I think we all have acknowledged that the model that Holiday is moving towards is the right model for the properties over a longer period of time. I think we were surprised, quite honestly, that there was sort of as much of an occupancy reaction as we've seen. And it's hard to say whether that's because of the operating model change or that's because of kind of industry trends. But I think what we do feel better about is that while we saw pretty big occupancy shifts, we also are seeing that RevPOR has remained very strong on the IL properties. So I think for this quarter it was about 3%, a little bit over 3%. So we're seeing that there's a lot of strength on the IL side with respect to pricing. And so people who were coming into the properties are actually willing to pay the prices that we want and also, the existing residents are actually stepping up to pay higher prices. It's just that we've seen a little bit of a dip on the occupancy side. So, I think the team in place is working very hard at Holiday to really get their hands around that and I think they're doing a lot of good things to get the occupancy to kind of stabilize. But I think we could see some further declines on the occupancy side as they are continuing to transition their model here. But I do -- I focus, not just on occupancy, but also on kind of NOI, and I think what we did see this quarter is that NOI was held up relatively well in light of the fact that we did see kind of some drops on the occupancy side. So I think we could see, to answer your question directly, I think we could see a little bit more softness on the occupancy side, and hopefully the rate growth continues to kind of stabilize everything.

[Paul Morgan:]

Okay, then just lastly, in terms of kind of where the dividend is and so your comfort with any kind of coverage gap and willingness to sort of bridge it versus your proceeds from asset sales, and maybe kind of quantifying how much more you have in asset sales. I mean, certainly, that's one option for you, but it kind of depends on where you are at, maybe things will level out in terms of AFFO?

[Susan Givens:]

Yes, sure. I mean the dividend is something we're always looking at and always discussing with our Board. I think we are very, very focused on asset sales at the moment, and I think it could be -- we talked about we have some other asset sales that are under contract and we've got another portfolio that we're working towards kind of getting under contract. So I think we're constantly evaluating sort of all the things that go into the dividend. But at the moment, we're very focused on sales and kind of moving that forward.

[Paul Morgan:]

Okay, great, thanks.

[Susan Givens:]

Thanks Paul.

[Operator:]

Thank you. Our next question comes from Vikram Malhotra from Morgan Stanley. Your line is open.

[Vikram Malhotra:]

Thank you. So just on the Radea [ph] side, maybe I missed this, but in the managed portfolio what was the growth rate between IL and AL?

[Susan Givens:]

Yes, I'm not sure that we -- I don't know that we actually put that out there, but I think as David remarked, and as I said as well, the AL portfolio continued to underperform the IL portfolio. So consistent with what we've seen in the last few quarters, IL has really performed a lot more strongly than what we've seen on the AL/memory care side. But I don't think we actually have provided those exact splits.

[Vikram Malhotra:]

Okay. And as you -- as occupancy in the near-term moves lower, does that sort of benefit on the expense side, maybe you just don't need the same staffing levels, how does that work?

[Susan Givens:]

Yes, no, that's right. We've actually seen our expenses have not ticked up quite as much as we had thought they would, and I think that is exactly a function of the fact that our operators, I think, are doing a pretty good job of rightsizing the expense structure in light of the movements on the occupancy side. So I think going back to kind of last year, we saw some bumps on the expense side, as I think operators were sort of surprised by some of the movements on the occupancy side. I think now, 9, 12 months later operators have gotten very good at managing the expenses and kind of reacting to different movements on the occupancy side, which I think you're seeing if you look at our expense numbers, I think those numbers reflect that.

[Vikram Malhotra:]

Okay. And then just last one, as you transition these two new operators, what -- are there discussions in terms of first, just to clarify, are these mostly the managed properties that you are transitioning or is it a combination?

[Susan Givens:]

They're all managed properties.

[Vikram Malhotra:]

Okay. So as you transition them, what are the operators, in terms of their plans et cetera, are they assuming more discounting going forward, are they assuming more CAPEX in the assets, what are they sort of thinking in terms of doing differently?

[Susan Givens:]

Yes, sure. I think it's a lot of focus on the sales side. So there are a lot of sales strategies that they're implementing that they've used at other properties that they think could work here. In certain cases, it's CAPEX, they're putting a little bit more money into the property, repositioning some of the properties, actually converting some of the units from one type, so say from AL/memory care to more IL, that's happening in one of the properties. So it's a little bit of everything, as you would expect. But it's really going into each of the properties, having a specific business plan for those individual properties, and generally speaking that involves kind of sales and different strategy on the sales side and repositioning whether that means repositioning the products mix or repositioning on the CAPEX side.

[Vikram Malhotra:]

Okay, great. Thank you.

[Susan Givens:]

Thanks Vikram.

[Operator:]

Thank you. I would now like to turn the call back to Susan Givens for closing remarks.

[Susan Givens:]

Great, thank you. I appreciate everyone joining us today, and we look forward to talking to everyone soon. Thank you.

[Operator:]

Thank you very much. Ladies and gentlemen, this concludes today's call. You may now disconnect.