New Senior Investment Group Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good morning, my name is Melissa, and I will be your conference operator today. At this time, I’d like to welcome everyone to the New Senior Second Quarter 2017 Earnings Conference 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, I will now like to turn the call over to Ivy Hernandez.

[Ivy Hernandez:]

Good morning, and welcome to New Senior's earnings call for the second 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. Forward-looking statements describe the company's current expectations with regard to future events. Please bear in mind that actual results may differ materially from current expectations. I encourage you to review the cautionary statements regarding forward-looking statements and the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, the speakers will present non-GAAP financial information. Please review the cautionary statements and reconciliations for our non-GAAP measures, which are also include in our annual and quarterly reports filed with the SEC. With that, I'd like to turn it over to Susan.

[Susan Givens:]

Great. Thanks, Ivy and good morning everyone and thank you for joining us today for New Senior's second 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 remind our listeners about the composition of New Senior’s Investment portfolio. Today, we are one of the top 10 largest owners of private pay senior housing properties in the U.S. with $3.1 billion invested and 148 properties located across the United States. We're part of the $300 billion senior housing industry, which is of course a part of the $3 trillion healthcare industry. We believe our business has really attractive prospects. As we've pointed out before, our target demographic is the fastest growing segment of the U.S. population with a growth rate of five times the overall population in the near-term. As a result of the strong long-term fundamentals of the senior housing industry, new sources of capital have continued to be attracted to investing in the sector. Looking more closely at our portfolio, we operate through two segments. Triple net lease properties and manage properties and the NOI generated by our portfolio is derived pretty evenly from each of these two segments. As I’ve been widely reported, the senior housing industry is facing near-term challenges, as new supply and increased competition continue to impact performance. And we've seen these broader industry dynamics at work in our own managed portfolio. However, our managed portfolio includes both independent living and assisted living facilities and supply and competition pressures have affected each differently. I often refer to this at the tail of two cities. Our independent living facilities have generally fared better than our assisted living and memory care properties, which had seen weakness in performance generally consistent with what the rest of the industry has experienced. In response, we've been very proactive about transitioning AL/memory care assets to new operators in pursuing selective asset sales, with the goal of improving the overall quality of our portfolio. Our work is not done, but we're pleased with the progress we've made to date and we continue to see solid demand for senior housing assets and we intend to continue to explore asset sales and evaluate new operator relationships. At the same time, our independent living properties were impacted this quarter by the operating model changed the Holiday, our largest operator has recently implemented. As many of you know, Holiday has transitioned its properties from a co-manager operating model to a more typical executive director model and we believe the change resulted in temporary, but above average declines in occupancy at our independent living communities. We expected that the change would bring some volatility and we really saw that this quarter. The good news is that Holiday has completed the rollout of the new model, and we've already begun to see occupancy steadily increased over the last several months. So we're optimistic that the new model is taking root and will ultimately contribute to better performance. There's no doubt that were 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 $56 million. Normalized FFO for the quarter was approximately $24 million and AFFO was approximately $22 million, all relatively flat versus last quarter. On a per share basis, that's normalized FFO of $0.29 per diluted share, and AFFO of $0.27 per diluted share. Across our total portfolio, same-store cash NOI decreased 1.7% 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 6.5% 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 down slightly quarter-over-quarter. In addition, as part of our ongoing efforts to improve the quality of our portfolio, we completed the sale of two assets in June of this year for $33 million, bringing our total assets sales to $72 million and we have over a $100 million of additional sales under contract for otherwise in process, which we hope to close later this year. We've been very deliberate about our assets sales strategy and we believe our efforts have paid-off, as we’ve seen solid continued interest in our assets. And lastly, we transitioned four underperforming assets to two new operators in the second quarter. 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.

[David Smith:]

Thanks, Susan and good morning everyone. At the end of the second quarter, our portfolio totaled 148 private pay senior housing properties, consisting of 90 managed properties and 58 triple net properties. Same-store cash NOI for the total portfolio decreased 1.7%, compared to the second quarter of 2016. First, I'll discuss our managed portfolio, which includes 51 independent livings and 39 assisted living properties, and accounts for roughly half of our total portfolio NOI. Our managed portfolio same-store cash NOI for the second quarter decreased 6.5% year-over-year to $26.3 million. As of prior 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 270 basis points year-over-year, driven by large decreases in our IL portfolio. Similar to last quarter, the majority of this decrease was driven by our properties operated by Holiday, which as Susan mentioned, recently completed change in its operating model that was completed over the last year. And while we experienced some disruption during the conversion, we began to see improving fundamentals at the properties during the second quarter with occupancy increasing 50 basis points from April to June. These positive occupancy trends in IL portfolio have also continued into July. Importantly we continue to believe that this operating model change, which introduces a true business leader at each community, will result in more cohesive operating teams at the properties, and will have positive impact on performance and resident satisfaction over the long-term. Same-store RevPOR increased 2.1% year-over-year, representing our third consecutive quarter of improved year-over-year RevPOR growth. Across our portfolio, our operators on average have realized rating increases of 3% to 3.5% on existing residents, which was partially offset by flat rates for new residents, due to the continued use of rent discounts and incentives that meets competitive operating environment. Total expense growth for the quarter remains moderate, increasing 1.6% year-over-year. Additionally, we saw increased labor cost pressure this quarter, with labor cost on a per resident basis up 3.7%. These cost pressure where more prevalent in markets with new supply and more widespread in our assisted living portfolio, as compared to our independent living portfolio. Last quarter, we discussed four underperforming asset that we were in the process of transitioning to new operators. We're pleased to report that these transitions were completed during the second quarter and while still early we are encouraged with the initial results of the properties and look forward to updating you in the coming quarters on expected operational improvements. Turning to new supply, while still elevated, we are continuing to see decreased levels of new supply in our markets. Managed assets with new supply exposure totaled 15.8% of our total NOI, down from our peak of 17.8% in a third quarter of 2016. These improve results are consistent with broader industry trends, as reported by NIC. Based on current NIC data, we expect elevated levels of new openings for the balance of 2017 that we continue to remain encouraged as the majority of these properties are assisted living, while our portfolio is predominantly independent living. Furthermore, due to a lower level of new supply in independent living, NIC continues to project more stability in occupancy levels for the sector over the next four quarters. Turning to our triple net portfolio, which accounts are remaining half of our NOI, we have 58 properties including 52 IL, five rental CCRC and one AL. Same-store cash NOI for the second quarter was $23.7 million, an increase of 4.3% due to the contractual rent escalators in our leases. For the trailing 12-month period ending March 31, occupancy was 87.0% down 50 basis points quarter-over-quarter and EBITDARM coverage sales slightly to 1.17 times. Our leases have an average remaining life of 13 years and our schedule lease maturity is in 2029. With that, I'll turn the call over to Bhairav to discuss our financial results.

[Bhairav Patel:]

Thank you, David. And thanks everyone for joining us this morning. I'll quickly recap our financial results for the quarter. Our NOI for the quarter was $55.6 million, compared to $57.9 million for the second quarter of 2016. Part of decrease in NOI is attributable to the sales of fixed assets, they were completed in the last year. Excluding assets sold or transition same-store managed NOI was $26.1 million, compared to $27.4 million for the second quarter of 2016. The decrease was primarily driven by a decrease of 270 basis points in same-store occupancy. We’ve been able to partially mitigate declining our occupancy by increasing rates and focus on managing expenses. Normalized FFO for the quarter $24.4 million or $0.29 per diluted share, compared to $0.33 per diluted share in the prior year. AFFO came in $22.2 million or $0.27 per diluted share, compared to $0.30 per diluted share last year. After adjusting AFFO for approximately $1.9 million of routine CapEx during the quarter, normalized FAD came in at $20.3 million or $0.25 per diluted share, compared to $0.28 per diluted share last year. Not included in metrics, I just discussed, is gain of $18.3 million from the sale of couple of assets from our managed portfolio during the quarter. G&A management fees and incentive compensation totaled $10.5 million for the quarter, compared to $8 million for the second quarter of 2016. The increase was attributable to incentive compensation payable on the sale of assets. Our interest expense for the quarter totaled $23.5 million, compared to $22.8 million in the second quarter of 2016, primarily due to higher interest rates on our floating rate debt, which accounts for 40% of our total debt outstanding. During the quarter, we extended the maturity of approximately $100 million in floating rate debts schedule to mature in October of this year by one-year, leaving us with no debt maturities for the remainder 2017. At the end of the quarter, we have $2.1 billion of total debt outstanding with weighted average maturity of approximately five years and in effective interest rates of 4.4%. Those assets remained unchanged at $3.3 billion and the end of the quarter with $60 million in cash on hand. Lastly, our Board of Directors announced, a dividend of $0.26 per common share. The dividend is payable on September 22 to shareholders of record on September 08, and represents 96% AFFO generated during the quarter. That concludes the formal remarks in the deck, I’ll ask the operator to please open the line for questions.

[Operator:]

[Operator Instructions] And our first question comes from line of Vikram Malhotra, Morgan Stanley.

[Vikram Malhotra:]

Thank you. Just as two quick questions. So one within the managed pool, can you just give us sense of how the metrics occupancy expense in AFFO and FAD between AL and IL?

[Susan Givens:]

Yes. Sure. I may think on – we alluded to that, but AL occupancy and really RevPOR end margins. We’re fairly consistent kind of what's happening in the broader market. We’ve seen occupancy continues – there kind to be pressured on the AL side giving ahead of competitive pressures. Then on IL side, we really had sort of outsized occupancy declined this quarter, really due to the Holiday operating model change. So I'd say when you look at both of them, I think at AL side is generally consistent with kind of broader market trends, where the IL was kind of outside of market trends, because of one-off stuff that's going on with Holiday. So I think the good news with the Holiday assets, they were able to maintain very kind of steady and good RevPOR growth. So we had occupancy declines the RevPOR was very strong and margins were able to hold up better on the IL side, whereas we’ve seen kind of a different phenomenon on the AL side, where occupancy is under pressure. And then we still have – we have rate growth but not quite as higher rate growth on the AL side. And then therefore the margins are compressed a little bit, and we don't break out the metrics by segment, but hopeful that gives you a general sense that, we are seeing rate hold up better on the IL side which had a good sign now that the Holiday model has been fully implemented because we see like we're now in a good position to actually get growth out of that assets again.

[Vikram Malhotra:]

Okay. And what else the new managers or the directors, now the new model, what are they doing? Can you give us some examples of how they try to gain share or pickup into back half?

[Susan Givens:]

Yes. Sure. Well, I think you’re similar with the operating model that Holiday had in places historically, it was the live income manager model where few couples actually lived within the properties, and while that has been a very successful model for Holiday for a number of years, that's very different than the industry norms which is where you have – our management team led by an Executive Director overseeing the property and running day-to-day operations and really focused on occupancy – focused on NOI and treating the asset sale like a little middle of business. And so what they're doing now is, which kind of the focused leadership in the form of an ED their power to make decisions and to push sales and to really drive performance at the assets in a way that the co-manager model that not necessarily have been setup for so. It is – there is lot of focus on sales and a lot of focus on kind of making sure that the pricing is competitive in the market. And it's just putting kind of the right people in the leadership positions in the properties versus having kind of couples they just live in the properties and oversee the property. So it’s more professional leadership can be believe that, that’s kind of what it is at the end of the day and it's a model that has proven to be successful with others and there are other in the market that have converted from the co-manager model to an ED model and a kind a lot of success and we believe that’s the right model over no longer period time and just it will take growing chance anytime here. You're kind of changing something and switching it around. So more professional leadership, what it was down to.

[Vikram Malhotra:]

Okay. And then just quickly the last one. You mentioned, it sounded like trends will supply were considered to be issue on inventory growth to the balance of the year. Just any updated parts on the dividend just to where FFO came in or AFFO came in?

[Susan Givens:]

Yes. I mean, we don’t comment on our dividend on a go-forward basis. And it’s obviously something we spend a lot of time thinking about and working with our board and discussing with them. So you guys think, we – all we can say is something we’re looking at focused on and we will continue to be talking to our board about it.

[Vikram Malhotra:]

Okay, great. Thank you.

[Susan Givens:]

Thanks, Vikram.

[Operator:]

And your next question comes from the line of Paul Morgan, Canaccord.

[Paul Morgan:]

Hi, good morning. On the assets sale is $18 million gain, on a $33 million sale. Is that correct?

[Susan Givens:]

That’s right.

[Paul Morgan:]

There is anything unusual about that – about that transaction given the size of the gain relative to the trend to the value.

[Susan Givens:]

I mean, nothing unusual other than the fact that we bought the asset at the good price. And sold them at a much better price and it’s two – there two assets that we helped for a while. We had seen some improvements that we thought we’re good. But we don’t think the assets made sense for the portfolio over a longer-term period. And so part of our strategy is to really refine our portfolio and make sure we're getting out of assets in markets that we don't think makes sense for us over a longer period of time. So I would actually characterize it as, it’s kind of the ideal sale, where we’re able to get out of an non-core market for us or get out of some assets that we maybe think we need to move out them and we're able to sell them at a price that’s good that's kind of what we're always shooting for.

[Paul Morgan:]

I guess one of the other ways as sort of looking at assets sale program, I guess repeated think of it in terms of underperforming assets that when calls in the portfolio, we’re sort of improve the same-store metrics sort of being apply. I guess this is an one of those, but maybe as you look at the $100 million that you have in the pipeline. Is it more along the lines of what you just did or there some that your kind of taking out portfolio that have been dragging it down lightly?

[Susan Givens:]

Yes. The assets of our program is really focused on getting assets out of our portfolio that we don't think are the right fit and really match up with our growth goals and kind of desires. And so that’s the vast majority of every think we sold, really fits in into that bucket. Even though, we were able to generate a gain on that assets sale that we just did it, it still includes that the asset that we’re concerned about kind of longer-term growth prospects and really wanted to make sure that we address that. So it’s combination of two assets sales are exactly the same. But I characterized the vast majority of our sales that we have either done or in progress as really improving the quality of our portfolio. And I think just kind of throw some metrics out there. I think our NOI would basically on the AL side has definitely would have been improve by call it, 300 basis points or something like that. It had the asset sales that we have in progress actually being completed. So really that's not a –that's not a perfect number, but it's to give you a general sense of the fact that we're really trying to sell assets that will improve the performance of our portfolio.

[Paul Morgan:]

Okay. The 300 basis points improvement to what metric is that?

[Susan Givens:]

We don’t breakout IL versus AL, as you know kind of NOI numbers. But it would have been improved our AL, NOI numbers by 300 basis points, the year-over-year growth.

[Paul Morgan:]

Okay, okay. That’s helpful. And then in kind of going down that path little further I guess. Just in terms of the same-store metrics and it seems like you might have some catalyst that could help sort of in play that the same-store numbers whether it’s stabilization kind of Holiday operational model. The impact of – as you just said, the asset sales and supply starting to either off in some of your portfolio. I mean, we’re going haven’t seen it yet, in terms of numbers. But as you look forward, what do you think the timing might be before, likewise in the managed portfolio for it’s implied the same-store number for to recover.

[Susan Givens:]

Yes. Look I think it’s something we’re focused on – I think that some other stuff with the lot with the Holiday model changes and all that. We – like I said, we’re beginning to see signs that kind of the key initiatives are taking route and our in place, since we’ve seen over the last several month occupancy. Clear on the IL has actually steadily increased and so those are all good indication. But I think having everything fully work through the systems. It takes a little bit time, so kind of end of the year beginning in next year is – when I think we’re really kind of focused and targeted to start to see things really go the other way, hopefully sooner. But I think, it’s being realistic about the timing of kind of all these things walking through the systems that’s probably the right time line. But I think, things will improved sooner than that. Just given what we’re seeing right now, what we’re seeing kind of going into the third quarter even.

[Paul Morgan:]

Okay, great. Thanks.

[Susan Givens:]

Thanks, Paul.

[Operator:]

And our next question comes from the line of Chad Vanacore of Stifel.

[Seth Canetto:]

Hi, good mooring. It’s Seth Canetto on for Chad.

[Susan Givens:]

Hi, Seth.

[Seth Canetto:]

Hi, I just had first question on the properties that were sold. And then they transferred assets. Can you just update me that there where leased or managed?

[Susan Givens:]

Sure. All the properties, we sold and transferred where managed properties.

[Seth Canetto:]

Okay. All right, great. And then you guys mentioned the improvement in the IL supply outlook from the NIC data. And do you guys have had strong RevPOR growth. Do you think there's a chance maybe next quarter that you can use those discounts on the new residents. It seems like you're getting a good rate on the employees residents but any thoughts of maybe cutting out all discounts.

[Susan Givens:]

Yes. But it’s a careful balance right. And you have to be pretty considerate about and deliberate about what you're doing. I think it's there is their operators are very focused on making sure that they're not only getting increases on in place residence, which is typically a little bit easier. But also getting increases on new resident coming to the door and not having to get this counter or things like that. And in some instance discounts are not a bad thing and then actually, you get residents into the property. So we work carefully and close the other operators and kind of try to find the right balance. Certainly, our hope is once there’s kind of less occupancy pressure, you can start to push rate on new residents and that's typically what we see. So I think as we're seeing occupancy increase on the IL side, hopefully, that's the phenomenon we can you know kind of continue to see but it is the balance.

[Seth Canetto:]

All right, thanks. And then just switching gears to the Holiday retirement management transitions. Is there any way to parsed out like that impact from the management transition versus new supply or is that management transition much more detrimental the occupancy than and you guys had originally assumed?

[Susan Givens:]

I think is really difficult to breakout what’s attributable to the model change versus kind of market. To answer your question, yes, I mean the occupancy was probably impacted a little bit more than we had anticipated. We knew that there be volatility, I mentioned that, and we expected that. I think these are on a really good job, really not handling that and making sure that they’re doing everything they can to really work with residents and make sure that people understand the model change. But I think it's difficult to kind of decipher how much of that is market versus model. The only thing we can look at is that our IL asset even prior to the last couple of quarter as the rest of the market had seen some softness had held up very, very well. So even if the composition and pressures in the larger market were impacting AL assets or IL assets, we’re continuing to steady growth on kind of the revenue side and NOI side. So that give us some comfort that, hopefully, what we’re seeing now is really meanly attributable to the model change but it's that would just be speculation more than anything else.

[Seth Canetto:]

Okay. And then just drilling down the wage pressure, is that spin also from the Holiday disruption where you're bringing in the right people in those properties and you have to pay them more? Or can you give us any color on what markets are seeing the highest wage pressure and because that just all driven from new supply?

[Susan Givens:]

Sure. Yes, actually the wage pressure that we’ve seen is really – it’s haven’t been on the IL side. It's really been on the AL side, more than anything else. And so that's where we’ve seen kind of most the increases and it’s pretty clear that it’s impacting our AL asset more so than the IL assets and it is in market that you would expect I think more competitive markets we are – our operators are kind of fighting for talent and having to pay for more and that's what we're seeing. I think in fact on the IL side, I think our wage numbers were flat versus on the AL side. I think wages per resident were up kind of 3% plus. So it’s really more on the AL side, which seems directly link the competition in our view.

[Seth Canetto:]

All right, great. Thanks for taking my question.

[Susan Givens:]

Thank you.

[Operator:]

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

[Susan Givens:]

Great. We’ll appreciate everyone joining us today, and we talk to everyone soon. Thank you.

[Operator:]

Thank you for joining today’s conference call. You may now disconnect your line.