New Senior Investment Group Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good day. My name is Alicia and I’ll be your conference operator today. At this time, I would like to welcome everyone to the New Senior First Quarter 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] Thank you. And Ms. Ivy Hernandez, you may begin your conference.

[Ivy Hernandez:]

Thank you. Good morning and welcome to New Senior's earnings call for the first quarter of 2018. Joining us today are our CEO, Susan Givens, our Interim CFO, Bhairav Patel; 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 forward-looking statements are subject to many risks, uncertainties and contingencies. Please bear in mind that actual results may differ materially from any forward-looking statements expressed on this call. I encourage you to review the risk factors and other disclosures contained in our most recent annual and quarterly reports filed with the SEC including the 10-Q we will be filing later today. In addition, the speakers will present non-GAAP financial information. Please review the cautionary statements and reconciliations for our non-GAAP measures, which are included in our supplement and SEC filings. And with that, I'd like to turn the call over to Susan.

[Susan Givens:]

Great. Thanks, Ivy. Good morning and thank you for joining New Seniors' earnings call for the first quarter of 2018. Before we discuss results for the quarter, I’d like to provide an update on our previously announced decision to explore a full range of strategic alternative for the company. As we announced in February, the company’s Board of Directors together with management have engaged legal and financial advisors to conduct the comprehensive strategic review process. This important decision reflects the Board’s continued commitment to maximizing shareholder value. The strategic review is ongoing. As part of this strategic review, the Board has focused on changes to establish a solid foundation for the company’s future. To that end, today we announced an agreement to terminate the company’s triple met leases with holiday and to reposition these 51 independent living assets as a managed portfolio. We believe this transaction represents a significant evolutionary step for the company and carry the host of benefits including attractive economic terms, reduced credit risk, improved operator owner alignment and enhanced transparency. Before describing the benefits of this transaction in more details I’d like to touch on why the lease holiday portfolio became a focus of the strategic review. The leases with holiday are a significant asset for the company accounting for almost half of total portfolio NOI. In the years since entering into the leases, industry trends have weakened the portfolio’s growth has lagged expectations resulting in decline EBITDAR coverage over the last four quarters. As has been widely reported the predicament of declining Lease Bridge is not unique to us it’s an issue being grappled with by many of our peers. Against this backdrop, the Board empowered a special committee of independent directors to discriminate appropriate resolution. This special committee advised by its own legal and financial advisors decides that the company should terminate the lease and enter into a new management agreement with holiday. The special committee negotiated total consideration for the lease termination of $116 million including a $70 million payment and $46 million of forfeited security deposits. The special committee also negotiated the term of a new management agreement, which provide for a management fee equal to 5% of revenue in year one and reduction to 4.5% in subsequent years. In order to foster alignments, the management agreement gives holiday the opportunity to earn a performance-based incentive fee, which is caped to 2% of revenue for truly outstanding results. Importantly the management agreement can be terminated without penalty after the first year. The termination abilities and the entry into the new management agreement are condition upon our refinancing of the portfolio which we expect to complete in the coming days. The special committee’s decision to reposition the holiday leases as a managed portfolio has three key benefits. First, the conversion to a managed structure reduced our credit risk. As I previously mentioned, holiday leases account for almost half of our total NOI resulting in meaningful credit concentration. The portfolio is originally financed with securitized mortgage debt, limiting our ability to address disconnect between portfolio performance and escalating rent. The new financing will be short-term fully prepayable debt and reserve flexibility during the continuance of the strategic review. Second, the conversion quick aligns the value and enhances on our operator alignments. The $116 million of total consideration implies an approximately 30 basis points improvement in asset yield. The new management agreement has favorable terms and is intended to incentivize holiday to drive NOI growth. And as I said before, the management agreement can be terminated without penalty after the first year, so we have the flexibility to transition some or all of the portfolio to new operator if we setup [ph]. Third, the conversion simplifies our portfolio increases the transparency of our operating results. Following the conversion nearly 100% of our portfolio will be owned on a managed basis with IL exposure increasing from 70% to 83%. Since all one of our assets will be held in the managed structure, our portfolio results will directly mere asset performance and any improvement in operating results will accrue to us rather than a tenant. Finally, on the dividend. While we typically announced our quarterly dividend with our earnings, the board continues to evaluate our dividend policy in light of the ongoing strategic review and other relevant factors. We expect the board to make a final determination on the amount of the first quarter dividend by June 1, 2018, which will allow us to make the payment on June 22, consistent with past practices. And with that, I’d like to turn the presentation over to David, to review portfolio results in more detail.

[David Smith:]

Thanks, Susan and good morning everyone. I’ll discuss our portfolio performance for the first quarter. As a reminder, the lease termination agreement we announced today, was signed after the end of the first quarter, so it had no impact on our first quarter result. At the end of the first quarter, our portfolio totaled 133 private pay senior housing properties consisting of 81 managed properties and 52 triple net properties. Same-store cash NOI for our total portfolio decreased 1% compared to the first quarter of 2017. I’ll start off with our managed portfolio, which included 51 independent living and 30 assisted-living properties and accounted for roughly half of our portfolio NOI. Same-store cash NOI for the first quarter decreased 4.8% year-over-year to $22.9 million. Similar to past quarters, we experienced stronger performance in our independent living portfolio which was approximately 72% of our same-store pool compared to our assisted living portfolio. Same-store occupancy decreased 160 basis points year-over-year consistent with our year-over-year performance last quarter, with occupancy trends in our NOI portfolio significantly outperforming our real [ph] portfolio. Encouragingly, we are seeing positive trends heading into the second quarter, with April occupancy achieving our strongest net [ph] months since last August. RevPAR growth for our same-store portfolio remains stable, increasing 1.6% year-over-year to almost $31 million per month, which was in line with our growth reported last quarter. Rate increases on existing residence remained at roughly 3% during the quarter, offset by roughly flat rates on new residence. Throughout the first quarter, we also began to see early signs of less discounting on new residence and are optimistic as we entered the seasonally stronger second and third quarters. We’re also continuing to see same [ph] progress on our four managed assets that we transitioned in the second quarter of 2017 to watermark and great management. With occupancy increasing 210 basis points and cash NOI up 52% quarter-over-quarter. These operators have implemented a new business practices related to pricing, staffing and marketing in order to improve operational performance at the properties. While more work remains to be completed, we’re encouraged by the results delivered thus far. Once again levels of new supply continue to decrease in our portfolio with 12.8% of our total NOI exposed in these supplies. While still elevated, new deliveries for the balance of 2018 are projected to stay [ph] downward. Also, as we have seen in past quarters the majority of new property openings are assisted living properties compared to our primarily independent living portfolio. Finally, our same-store triple net portfolio which included 51 independent living properties in one rental CCRC accounted for the remaining half of our first quarter NOI. Same-store cash NOI for the first quarter was $20.6 million an increase of 3.5% driven by the contractual rent escalators in our owned leases. For the trailing 12-month period ended December 31, same-store occupancy was 87.4% and same-store EBITDA and private was 1.15 times. With that, I’ll turn the call over to Bhairav to discuss our financial results.

[Bhairav Patel:]

Thank you, David. And appreciate, everyone, for joining us this morning. I'll briefly discuss our financial performance for the quarter. NOI for the quarter was $47.1 million compared to $55.4 million for the first quarter of last year. We sold a total of 19 assets during 2017 driving most of the decline in NOI. Our first quarter 2018, same-store NOI for the managed segment was $22.6 million compared to $23.8 million for the first quarter of last year. As a reminder, our teams' results exclude assets sold, or transition to other operators since the beginning of the first quarter of last year. The decline was a result of higher operating expenses, revenues remain stable as we growth offset the impact over decline in average occupancy. Normalized FFO for the quarter was $17.6 million or $0.21 per diluted share compared to $0.29 per diluted share in the prior year. AFFO was $16.8 million or $0.20 per diluted share compared $0.27 per diluted share last year. The decline here is also largely driven by the sale of assets since 2017. Normalized FAD was as $15.1 million or $0.18 per diluted share for the quarter after adjusting for $1.7 million of routine CapEx. Our interest expense decreases $1.1 million from the first quarter of 2017 to $21.9 million. This decline was due to debt repayments from assets sales in 2017 totaling $205 million partially offset by the impact of higher interest rates and our floating rate debt. As of March 31, we had $1.9 billion of total debt outstanding with a weighted average maturity of 4.6 years and an effective interest rate of 4.5%. G&A, management fees and incentive compensation for the quarter declined by 4% year-over-year or approximately $305 million just $2.5 million primarily due to the roll professional fees and administrative cost. At the end of the quarter with $121 million of cash and gross assets of $2.8 billion. Lastly, as we've discussed earlier subsequent to the end of the quarter we are entering into an agreement with holiday to terminate our triple net leases with them upon the satisfaction or certain conditions for total consideration of approximately $116 million. That includes the test termination fee of $70 million and retention and security deposits amounting to $46 million. The determination is finishing upon the refinancing of existing debt which we expect to replace with $720 million of one year freely pre-payable debt. Pursuant to the Termination Agreement, agreed to enter into property Management Agreements with holiday whereby they will manage the property subsequent to the termination. And with that, I'll ask the operator to please open the line for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Chad Vanacore.

[Seth Canetto:]

Hey, good morning. This is Seth Canetto for Chad.

[Susan Givens:]

Good morning. How are you?

[Seth Canetto:]

Doing well, I just have the question on the transition function on that portfolio, why you guys have to refinance with that with this transition I just used to dampen a lot of the short-term upside?

[Susan Givens:]

Turning into your question. The depth we had in place was actually long-term securitized CMBS debt and as you know that has very limited flexibility and doesn't really enable, we need to do very much with the structure that's in place. So, the new debt and the intent of the new debt is to match, the assets and the structure more appropriately and give ourselves ultimate flexibility. We're giving ourselves flexibility one because it's a short-term bridge financing effectively that's fully pre-payable absolutely no cost. Two, as we pointed out and then at a comment, the management structure, managed structure for the assets provides us with flexibility and not that we have any specific plans but to the extent we decided we want to move assets to do operator. So as to do other things, this financing allows us the ability to do that in a way that the prior financing did not because it was tied so strictly to the lease and we really had absolutely no flexibility given the fact that was CMBS debt. So, I get that perhaps or even a different view on the flexibilities feature that kind of what you pointed out, I think this is actually a very good financing that matches how we will own the assets and enable to us to be very flexible in light of all the strategic review analysis that are kind of taking place right now and sort of gives us ultimate flexibility.

[Seth Canetto:]

All right, great. That was very helpful. And then just looking at the occupancy decline, when I look at same-store managed occupancy decline, a 110-basis point sequentially. And I know you guys have mentioned last quarter and this quarter that the supply outlook which were a little bit more favorable. But can you just talk about how much that was impacted by flu versus supply in the quarter.

[Susan Givens:]

Yeah. I mean look, I think it's always very tricky to isolate exactly how much of occupancy declines are associated with kind of one thing versus another. I think I can tell you, we did see is sort of in the third quarter of last year leading into the fourth quarter, we saw some pretty favorable sort of upticks in occupancy particularly with holiday or bigger, our biggest operator given the fact that some of the model changes have been kind of fully implemented. We saw really the back part of Q4 so kind of mainly in December, which then led into January some softness. So, I think consistent with what the rest of the industry has seen. And so, some of that we ultimately think is flu related we heard from our operators that this flu season consistent with others and what others reported was this kind of a bigger drag that has been in previous years. But I think it's hard to kind of directly correlate how much of that define with flu versus industry pressures. But I will say is that I think for our IL product, while we're not happy with a decline a sequential decline in occupancy we still feel like the IL product has holding up better. And we have seen some improvements as we've kind of continued through the year on the occupancy side. So, it's hard to ever kind of isolate and say okay, that was just kind of a Q1 sort of event, but we do feel like we're seeing with softness late in the fourth quarter into the first quarter, we're seeing some improvement now as we continue through the year.

[Seth Canetto:]

All right, great. Thanks. And then just getting back to the repositioning of the lease portfolio. So, I understand you're receiving $116 million, but then you have to pay $65 million for your payment penalty. And then assuming you guys don't sale the portfolio or make any changes, you're going to pay a significantly higher interest expense in the first year given the short-term loan there?

[Susan Givens:]

The interest expense on the debt that will be put in place is higher. It's a one year the term of the loan is one year that doesn't necessarily meaning it needs to be an outstanding for an entire year. And so, all of this kind of dovetails into some of the larger strategic alternatives that we're evaluating. And so, I think to the extent that is not outstanding for year, it would obviously have a reduced sort of the impact on the interest demands. And so, I think you can anticipate that that would be something we'll be focused on. But I think really the increased interest expense in my view, offset by the flexibility that this new debt gives us to go out and pursue a number of alternatives.

[Seth Canetto:]

Perfect. All right. Thanks for taking my questions.

[Susan Givens:]

Sure. Thank you.

[Operator:]

And your next question comes from the line of Vikram Malhotra from Morgan Stanley.

[Vikram Malhotra:]

Thanks. This is Vikram. Just wanted to understand the sort of the underwriting or the expectations if you’ve converted this to shop. Can you kind of talk about sort of scenarios that you envision. How much CapEx will that you know that needs to be print to these assets. What returns you're expecting and maybe just how you see the metrics trending over the next 12 to 24 months?

[Susan Givens:]

Sure. I think first and foremost, when you think about the lease [ph] and you think about kind of how we've been reporting it. When you actually look at kind of the underlying coverage. It was below 10. And so, by converting these assets to a managed structure, there will be some decline in some of the implied NOI because we now only assets under different structure and the NOI the improvement or the decline will of course come to us directly. But just given the fact that the lease was not currently at 10 coverage now converting. We will have some decline in NOI it's hard to kind of predict exactly what that is to really give the fact that we're kind of midyear right now. But I think a way of thinking about it we actually put in the slides and the deck on page four. The current yield on the assets under the lease structure is 7.7% so that's kind of the red plus the escalators that have kind of the red plus the escalators that is kind of step over class couple of years. If you now take sort of the payments that we’re receiving from holiday and you adjust kind of the imply basis and then look at pay and estimate for kind of what NOI could look like for NOI, the - store yield to kind of 8% so what I think about it just from how we own the assets while there is a slight difference between kind of the cash red team and the expected NOI we also effectively own the assets at a lower basis and so our yield actually improved a little bit. That’s one way of thinking about it.

[Vikram Malhotra:]

Okay. And is the innings sort of the headwinds in supply headwinds and other operator maybe have been remains you’d expect sort of if you assume sort of the NOI keeps declining or the underlying the growth will keep decelerating or negative just probably I mean it’s safe to say this probably lot more de-structure obviously introducing the lot more cyclicality and I'm just wondering how you thought about that versus maybe just restructuring the triple net lease sort of what you see in some of your peers where they’ve adjusted the rent bump given some rent concession then improve and taking coverage up?

[Susan Givens:]

Sure, I’ll address your second question first. We talked about this on our notes. It was actually a special committee of the Board of Directors that was formed to evaluate the lease, so I myself did not had input directly into kind of what different structure or kind of features were evaluated so it’s really our special committee that negotiated all these features and so I think we looked a lot of things but I myself can’t kind of directly comment on that because I was not a part of those conversation. But then secondly, I can’t comment on kind of NOI trends and expectations, but I do think it’s very important to make sure that everyone is focusing on this IL and while we’ve seen some softness on the IL side particularly because of the holiday out conversions, our NOI results across our IL portfolio have not neared kind of declines that the rest of the industry has seen surely with IL and memory care. I think when you look at sort of IL same-store numbers they are - kind of 1-ish percent year-over-year and that compares to certainly what you are aware of an industry where the declines have been kind of higher than that and so and plus you add to the fact that holiday had going through any massive model change and I don’t want to predict that’s in the past and that we’re kind of believe through that even though it hadn’t fully implemented. I think the point is now owning these assets on a managed basis when we start to see improvement we get a 100% of that improvement. so, the starting point of these assets and the performance - relative to the rest of the industry, I think it’s actually pretty-pretty good and very favorable considering what we’ve seen across the industry plus when the NOI really starts to kind of improve and pickup we will get all of that process under the lease structure where none of that would actually kind of accrued our benefit.

[Vikram Malhotra:]

Okay. Just one last clarification, the managed side was down what 48 do you have a sense can you tell us since now this is all going to be a managed portfolio what’s with the NOI, total NOI growth have been if this were managed just the triple net were a managed portfolio can you give us sense of the number?

[Susan Givens:]

Yeah, it would have improved that’s all I can say. I think it would have been better, given the fact that we be having really more IL running through our kind of managed numbers and so the concentration of IL would increase, and IL was down much less than our IL memory care asset on a same-store year-over-year basis if that makes sense. So, it only improves our metrics when you start looking at our managed same-store numbers.

[Vikram Malhotra:]

So, the underlying EBITDAR growth for another - underlying EBITDAR growth roughly for the triple nets it was better than the negative 4.8?

[Susan Givens:]

That’s right.

[Vikram Malhotra:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Lee Cooperman from Omega Advisors.

[Lee Cooperman:]

Thank you. I have a series of questions. If I had hired a consultant to work with me in my investment in the company and he build senior housing and he says the properties are worth materially more than it being capitalized in the market, but part of the problem is the contract of the external manager is above market and excessively lucrative. So, my first question are these changes that you have announced this morning designed to transfer value to the shareholders from the external manager and will they enhance the value of company, that is number one. Let me just get all my questions out of you where we can write them down and take them any way you want. Secondly, when you spoke in the last call, you sound very optimistic about the business we have created, and I am wondering where the developments over the last two three months have change that optimism or you still optimistic on the business we have created. Third question I have is, do you have a timetable to conclude the strategic review, and I am speaking about is previously you're optimistic it will be sustainable, now you're implying some kind of dividend cut, announcement that we made on before June 1st, do you think that the strategic review would be completed in line with the dividend announcements, so we have a total picture and you’ll have all the information to respond to at the same time. And lastly, if you have any comment about the fiduciary duty lawsuit which has been certified by the court against the board and the CEO of the company. Any help you can give me in these questions would be great and appreciated. Thank you.

[Susan Givens:]

Yeah, thanks Lee. So, I hopefully got them all down. But, so your first question on kind of the external manager. Look, I think it’s – I can’t comment as you know on exactly what the strategic initiatives that the board is kind of reviewing. But I do think it's safe to say, and I said this before that the board and management, we're reviewing everything. And we know that the external managed structure has been something that’s been a key focal point for folks and I think it's safe to say that that is something that is being looked at very carefully and it's being evaluated as I think you would expect us to be evaluating it. I think your kind of question -- that we announced today, I really view kind of strategic – process that we've entered into as a series of step and this initial announcement I think really puts the company in a position where it can act on the next step in the strategic kind of review process, with a lot more efficiency and ultimately that will create a lot more value for shareholders and that’s really why this is kind of the first of a series of what I expect to be alternative that are announced. So, I can’t specifically comment on what those are, but I think that most importantly this I view as kind of really critical first step that allows us to move with respect to some of the other actions that we are looking at. Number two, your kind of question on the optimism behind the industry. This is a space that we have been involved in for a long time and we have always felt good about the kind of macro trend in this sector. I think we are facing as everyone is facing some challenges with respect to kind of what’s happening in the industry, I don’t think that fundamentally changes our optimism about the space over the kind of medium term and the longer term. But I think we are sitting here today with something that industry weakness plus kind of an operator that underwent a bundle of changes had created some unique challenges for us and some challenges that are unique to us, that are really kind of consistent across the industry. So, we still feel good about the industry but the steps we are taking right now are really more focused on kind of our structure and making sure that we can create a good platform structurally that will enhance shareholder value. And so, I think the assets are sound some of the structural elements or kind of what we’re really focused on kind of really make sure that investors and shareholders get the value they should. Your third question around the timeline, and if the timeline has been established around the strategic review, there has been no specific timeline that we have announced and have kind of put out there, I think it’s safe to say that this is something that we are very actively engaged in the board is very actively engaged. This is not a passive review, this is something that every single of the board members and special committee and other people have been spending a lot of time myself other folks. And if you – has been spending a bunch of time on this. So, our goal and our desire is not to have this be drawn out long process, we think that’s a never good idea and we are working expeditiously to be able to kind of conclude the review process and I can give you kind of a commitment that something everyone here is really working towards. On your dividend question. Just to be totally clear, I think you have asked me previously about kind of the dividend and sort of our expectations around it, I don’t think ever imply that amount was sustainable given the fact that we’ve actually been selling assets and have been doing other and I think your question was specifically if we anticipated do we see the dividends in the midst of the strategic review process which I think of course I can’t comment on what the Board will or not view if it relates to kind of the dividend piece of it. I think that it’s an ongoing conversation of Board having in the midst of the strategic review process so I think that we’ll just have to continue to update the market around of kind of what the dividend sort of looks like and what the view of the Board will be as it relates to that and like I said before we’re actively trying to review and kind of take action around the strategic review process, have that concluded sooner rather than later.

[Lee Cooperman:]

I guess it would be helpful to the shareholders if the negative scenario is no conclusion to the strategic review process and a reduction of the dividend, resetting the dividend with a conclusion as to what is going to happen with the company my hope is that somebody will buy the company materially in an excess that we’re straightening that presently. Is that really hard to believe we raised a substantial amount of money in June of 2015 -- I don’t think in last two years that we’ve reduced the value by almost 50% at least I am hoping that that’s my guess. What about fiduciary loss is this something that we should be concerned about?

[Susan Givens:]

In my view no, I mean nothing new has happened since the 10-K was filed and there is kind of no merit to the lawsuit that’s something that folks here are working through.

[Lee Cooperman:]

Good luck. We hope for a good conclusion in this process.

[Susan Givens:]

Thank you. Lee, appreciate your time.

[Operator:]

And we have no further questions at this time.

[Susan Givens:]

Okay with that, appreciate everyone joining us today and we will be updating you further in the near-term. Thanks, everyone.

[Operator:]

This does conclude today’s conference call. You may now disconnect.