New Senior Investment Group Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good morning. My name is Cindy, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Senior Second Quarter 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. Ms. Ivy Hernandez, you may begin your conference.

[Ivy Hernandez:]

Thanks, Cindy. Good morning and welcome to New Senior's earnings call for the second quarter of 2018. Here today are CEO, Susan Givens; Interim CFO and CAO, 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 about expected events maybe forward-looking statements. These statements are subject to many risks, uncertainties and contingencies and the events described by these forward-looking statements may not occur as expected or at all. I encourage you to review forward-looking statements disclaimer, risk factors and other disclosures 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 discuss 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 now I'd like to turn the call over to Susan.

[Susan Givens:]

Great. Thanks, Ivy. Good morning and thank you for joining New Senior's earnings call for the second quarter of 2018. Today, we announced a plan to internalize the company and other strategic initiatives intended to maximize shareholder value. I’d like to take this opportunity to provide some context for today’s announcement and then describe each initiative in more detail. Afterwards, I’ll turn the call over to David and Bhairav to discuss portfolio performance and the financial results for the quarter. New Senior became a publicly traded company in late 2014 following a spinoff from Newcastle Investment Corp. We were formed as a pure-play senior housing REIT with a $2 billion portfolio of assets and with more private pay exposure than any of our peers. Like Newcastle, New Senior was organized to be externally managed by Fortress. Our initial strategy was to leverage Fortress’ expertise in senior housing to source and acquire additional senior housing assets. During 2015, we successfully executed this strategy acquiring more than 1 billion of assets and growing our portfolio from 99 properties to 154 properties. In 2016, as cap rates continued to tighten, we shifted our focus to integrating our recent acquisitions in pursuit of selected asset sales strategy. We also completed 40 million in share buyback in an effort to address the disconnect between the trading price of our stock and our view of the value of the portfolio. In 2017, along with the rest of the industry, we experienced lower-than-expected operating results which believe was reflected in the trading price of our stock. Throughout this time, our Board has been firmly committed to evaluating ways to maximize value for shareholders. In furtherance of that goal, earlier this year, we announced that our Board had begun the process of exploring a full range of strategic alternatives. The strategic review had been a multistep process and requires a multi-pronged solution. As part of the strategic review, our Board identified several focus areas for the company and considered a number of alternative ways to address each of them. As an initial step, we announced back in May we terminated our triple net leases with Holiday which had several benefits for the company. As we have previously discussed, the conversion to a managed structure reduced our credit risk given the declining coverage of the portfolio. In addition, the termination has simplified our portfolio and increased the transparency of our operating results since we now own the portfolio on a managed basis. The termination also increased our flexibility and enhances our ability to diversify our operator relationships. Today, we announced three additional strategic initiatives, including a plan to internalize the company. These initiatives, together with the prior lease termination, are intended to address the challenges which we believe hinders the company’s growth prospects including the external management structure, capital structure issues and dividend coverage. While we still have a lot of work ahead of us, I’m very optimistic that the measures taken today as a part of the strategic review process will position the company for growth and facilitate additional efforts to maximize shareholder value. So to address each of the initiatives in a bit more detail. First, we plan to internalize the company by the end of the year. We expect internalization to have several benefits including cost savings of approximately 10 million per year. We also expect the internalization will simplify the company’s organizational structure and increase the transparency of our financial results. In addition, as in internally managed company, we will become more comparable to our peers in the healthcare REIT space which we think could bolster interest in our company and expand our investor base. The Board empowered a Special Committee of independent directors to evaluate and negotiate the internalization. Upon the effectiveness of the internalization, we expect to make a payment to our Manager which was negotiated by the Special Committee. The Special Committee advised by its own financial and legal advisors negotiated a payment of $50 million of which $40 million is redeemable 6% preferred stock and the remainder is cash. We expect to enter into definitive documentation for the internalization in the coming months and at that time we intend to announce the details of the go-forward management team which is expected to include several key members of the Manager. We expect the internalization will ultimately be completed by year-end. The second strategic initiative announced today is a plan to refinance a $720 million bridge loan that we entered into in connection with the Holiday lease termination. We expect the new loan to save over 150 basis points of interest expense which could equate to more than an $11 million annually. In addition to cost savings, we designed this refinancing to preserve our flexibility to recycle capital in the event that we identify opportunities to redeploy capital accretively. We expect to close the financing in the fourth quarter. Finally, we adjusted our quarterly dividend to $0.13 per share. As we’ve discussed previously, the Board has been actively reviewing the company’s dividend policy. Our dividend coverage had been an ongoing focus as coverage has declined due to asset sales, the conversion of the Holiday lease to a managed portfolio and continued weakness in operating results across the senior housing industry. After careful consideration of the potential impact of the strategic alternatives announced to-date as well as the company’s potential for organic growth, investment and other initiatives, the Board has determined to reset the dividend to more closely align our payout ratios with industry peers. All of this amounts to a pretty transformational year for the company. There is still a significant amount of work to be done but we believe the initiatives announced today combined with our previously announced initiatives draws us significantly closer to a conclusion of the strategic review. In the meantime, we remain focused on our core business and identifying ways to optimize our portfolio. We believe we have a uniquely attractive portfolio of senior housing assets and the medium and long-term fundamentals of the senior housing industry remain compelling. Now, I’d like to turn the call over to David to review portfolio results in more detail.

[David Smith:]

Thanks, Susan, and good morning, everyone. I’ll review our portfolio performance for the second quarter. But first, I’d like to recap our portfolio composition given the Holiday lease termination that occurred during the second quarter which resulted in the conversion of 51 leased assets in the managed properties. Our portfolio consists of 133 properties with more than 15,000 beds across 37 states. Until recently, we owned about half of our portfolio on a managed basis and the other half subject to triple net leases. This balanced shifted significantly as a result of the Holiday lease termination in May. We now own all but one of our properties on a managed basis. In terms of acuity mix, our managed portfolio is now predominately independent living with over 80% of our NOI coming from this segment. Of our 132 managed properties, 102 are independent living and 30 are assisted living. Now, I’ll turn to portfolio performance for the quarter. There were two key highlights that I would like to note. First, our independent living portfolio experienced very positive trends both year-over-year and quarter-over-quarter. And second, our managed portfolio as a whole had strong and positive performance quarter-over-quarter. Beginning with our year-over-year results, same-store cash NOI for our total portfolio, which includes our managed and triple net segments, decreased 3%. For our managed portfolio, same-store cash NOI decreased 3.3% to 24.9 million, an improvement from our first quarter results. While NOI was down on a year-over-year basis due to weakness in our assisted living portfolio, our independent living portfolio benefitted from very strong trends including stable occupancy and increases in all other key performance metrics. Specifically, on a year-over-year basis, our IL managed properties posted an increase in cash NOI of 2.9%. Sequentially, our managed portfolio delivered solid results with same-store cash NOI of 4.4%. Strong trends in our independent living portfolio also drove these results with same-store cash NOI up 7.8%. Our IL performance was driven by Holiday Retirement, which manages 98% of our IL portfolio and is the largest and one of the most experienced independent living operators in the U.S. Turning to occupancy. Same-store occupancy for the managed portfolio as a whole decreased 140 basis points year-over-year, an improvement from our results last quarter. These results reflect stable occupancy in our IL portfolio which is offset by declines in our AL portfolio. We are pleased to see that the second quarter experienced a largest gain in net move-ins in nearly three years. Notably, the majority of these occurred in June so we’re encouraged by the potential positive impact this will have in the third quarter. On RevPOR, it’s worth noting that our majority IL portfolio limits the comparability of our RevPOR for the results reported by our peers who have majority AL portfolios. As many of you know, assisted living rates are significantly higher than independent living rates because of the care component. Because only 30 of our 132 managed properties are assisted living, our RevPOR is necessarily lower than that of our peers. So for the second quarter, same-store RevPOR was approximately $3,100, an increase of 1.4% year-over-year. Rate increases for existing residents remained at roughly 3% during the quarter and notably the second quarter was the first quarter that we achieved positive re-leasing spreads on new residents, which was in line with the trends that we discussed with you on last quarter’s call. Moving on to new supply. We’re encouraged by second quarter data from NIC that show the seventh consecutive quarter of declining levels of new senior housing construction. Our managed portfolio also experienced favorable trends with new property openings in the second quarter down approximately 50% from peak levels realized a year ago. While supply is still elevated, demand trends are positive and expect and expected to increase with annual population growth over the next five years in our markets expected to be approximately 2.6%, exceeding the national average of just over 2%. Lastly, our triple net performance. Due to the Holiday lease termination, this segment of our portfolio now is just one property, a rental CCRC operated by Watermark. The property generated cash NOI of 1.4 million during the second quarter, an increase of 3% due to the contractual rent escalator in our lease. For the trailing 12-month period ending March 31, occupancy exceeded 89% and EBITDARM coverage was strong at 1.37x. 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 provide a quick summary of our financial results for the quarter. Before I review our financial metrics, I’ll discuss the impact of the termination of leases on 51 properties with Holiday. We terminated the leases on May 14 and received total consideration of 116 million comprised of a 70 million cash termination payment and 46 million of retained security deposits. After adjusting for the write-off of straight-line rent receivables related to the leases and certain assets we assume as a result of the termination, we recorded a gain on lease termination of approximately 40 million. Upon termination, we entered into property management agreements with Holiday to operate the properties. In conjunction with the termination, we repaid over 660 million in secured debt related to the portfolio. As a result, we incurred approximately 32 million in prepayment penalties which along with the write-off of deferred financing costs have been included in loss and early termination of debt of 58.5 million. The debt was refinanced with a one-year floating rate loan of 720 million which, as Susan mentioned earlier, we expect to replace with long-term secured financing during the fourth quarter. Now moving on to our key metrics. NOI for the quarter was 45.3 million compared to 55.6 million for the second quarter of last year, a reduction largely driven by the sale of assets. We’ve sold a total of 17 assets since the beginning of the second quarter of 2017. Our second quarter 2018 same-store NOI for the managed property segment was 24 million compared to 24.6 million for the second quarter of last year. The decline of our same-store NOI was mainly driven by the results of our assisted living assets where revenues were slightly lower as a result of a decrease in occupancy and expenses increased. In contrast, the NOI for our independent living assets was higher compared to the second quarter of last year driven by stable occupancy and consistent rate increases. Please note that although NOI generated by the independent living assets previously leased by Holiday as been included in the managed property segment following the termination, we have excluded it from our same-store results for the managed property segment as the properties were included in the triple net lease segment during the second quarter of 2017. Normalized FFO for the quarter was 12.6 million or $0.15 per diluted share compared to $0.29 per diluted share in the prior year. AFFO was 15 million or $0.18 per diluted share compared $0.27 per diluted share last year. And normalized FAD was 13.8 million or $0.17 per diluted share for the quarter after adjusting for 1.7 million of routine CapEx. The reduction in these metrics is driven by the lower NOI as a result of asset sales as well as high interest expense. Our interest expense increased by 2.3 million from the second quarter of 2017 to 25.8 million. The increase was largely due to higher interest rate on the one-year 720 million secured loan we obtained to repay debt in conjunction with the termination of the Holiday leases. As I discussed earlier, we expect to refinance the current loan with long-term floating rate debt at a significantly lower rate reducing our effective rate and increasing our weighted average maturities to over five years following the refinancing. Our expectation is that the rate on the new financing will be approximately 150 basis points below the rate on the current loan resulting in an approximately $11 million reduction in annual interest expense. G&A, management fees and incentive compensation for the quarter declined by 2.7 million year-over-year. No incentive fees were incurred for the current quarter. We ended the quarter with over 170 million of cash and gross assets of 2.7 billion. The increase in cash compared to the first quarter was mainly a result of the 7 million termination fee received from Holiday. Lastly, our Board of Directors declared a dividend of $0.13 for the quarter payable on September 21 to shareholders of record on September 7. As Susan discussed earlier, the Board has determined to reset the dividend to more closely align the company’s payout ratio with industry peers. And with that, I’ll ask the operator to please open the line for questions.

[Operator:]

[Operator Instructions]. Your first question comes from Vikram Malhotra from Morgan Stanley.

[Vikram Malhotra:]

Thanks for taking the questions. So just wanted to understand the decision to internalize/continue as is and the other changes, was there a comparison -do you actually received sort of an offer, can you talk about kind of the other option you were exploring now that you’ve made this decision?

[Susan Givens:]

Hi, Vikram, sure. So as I mentioned, the strategic review process was a multistep process and the Board reviewed a number of actions as they evaluated kind of different potential outcomes. What we have announced to-date really are pretty significant items that we think can put the company in a very good position to really grow and to maximize shareholder value. A lot of things were looked at, a lot of things were evaluated and like I said it’s kind of a multistep, multi-pronged process. And we’ve now announced a number of those steps and initiatives which we think can really go a very long way in kind of maximizing value.

[Vikram Malhotra:]

Okay, but I guess you can’t say whether you received an offer or not?

[Susan Givens:]

What we’ve announced obviously is what the Board evaluated and determined to be kind of the best course for the company. And I’d say more specifically I think there were two key things as we’ve looked at lots of different initiatives that the Board felt like were impediments to maximizing value, the first being the Holiday lease and the potential concerns surrounding that and the debt that was associated that was pretty limiting. And the second is the structure, the external management structure. So the Board really concluded that the right step was to address those two key items and felt like those items along with some other things would go a long way in facilitating kind of a path to maximizing shareholder value.

[Vikram Malhotra:]

Okay. So I wanted to also just – two more quick questions; one is the G&A savings of 10 million, is that just the ongoing management fee going away or this is like over and above whatever you would have saved from internalizing management?

[Susan Givens:]

Well, in coming up with that estimate we’ve obviously looked at the management fee that is paid to Fortress and then there’s other G&A that the company incurs. And there are kind of puts and takes both ways, because obviously the fee goes away, the management fee to Fortress goes away. There are some other items that would have to be paid by the company as a disconnect from Fortress. So the $10 million number we put out there is an estimate and it could be higher, but we really put that out there as what we think is kind of a good target as we’re thinking about what the ongoing G&A savings will be. If you look at our G&A today, the 10 million is what we think could be saved on an annual basis going forward.

[Vikram Malhotra:]

Got it. So it’s kind of like 15 million was roughly the annual fee, so net of that it’s – you think you’ll save 10 million net of any additional expense that you incur?

[Susan Givens:]

That’s right.

[Vikram Malhotra:]

Okay. And then maybe just last thing in terms of deciding on the magnitude of the dividend cut, can you maybe walk us through some of the assumptions you made for the operating environment for the growth in the portfolio, et cetera, and kind of why is that the right amount or right adjustment?

[Susan Givens:]

Sure. And obviously we’ve had discussions around the dividend for quite a while now and as I’ve mentioned in my remarks, it’s been a focus for the Board. The dividend and kind of where the Board landed on it is a function of a number of things, including the fact that the company has sold over 350 million of assets over the last year or so. And then the conversion of the Holiday lease to a managed contract changes the cash flow profile of those assets. And then kind of overall weakness that’s not specific to us but has been kind of out there across the senior housing industry, those three things were really weighing on kind of the dividend and the coverage. So when the Board evaluated kind of what the right level would be going forward, we took into consideration and into account all the strategic initiatives that have been announced to-date and then looked at what we thought was the appropriate organic growth for the business. I think without commenting specifically on kind of what we put in there, we do have a portfolio that now with the Holiday lease being terminated, a very, very clean portfolio of senior housing assets where the vast majority are independent living and Holiday had – it’s faced some challenges as it changed its operating model and has done some other things. I think the results this quarter show and hopefully show that Holiday is on the path to getting some good growth. We feel good that the paths in some of those model changes are behind us. And so I don’t think we expect that we’ll see considerably outsized growth versus the industry but we do think that our independent living assets specifically are very well positioned now that some of the noise is kind of behind us. And so that was taken into consideration when developing kind of the dividend level and then of course some cash and opportunities and things that could be realized from an investment perspective. All those things were kind of put in to look at what the appropriate dividend level would be and that’s kind of how it came out.

[Vikram Malhotra:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions]. Your next question comes from Lee Cooperman from Omega Advisors.

[Leon Cooperman:]

Thank you. The external manager compensation in theory should be tied to performance and I really question this $15 million buyout. That’s approximately $0.61 per share. What are the results that the external manager delivered? We sold 20 million shares to the public in June of 2015 at 13.75. The stock this morning closed $6.5, down 50%. I think the market’s up 80%. The principles of the manager, yourself included sold properties to the company and would now seem to have been at inappropriate prices which is what’s alleged in this fiduciary duty suit, which has been certified. So should the manager be paid to go away, number one? And number two, how is the $50 million arrived at? It’s a pretty significant sum of money. It’s 10% to the value of the stock. That’s question number one. And the second question is, you keep referring to maximizing shareholder value. So is the process ongoing? Are all these changes you announced designed to enhance the salability of the company? Because I would have thought that any prospective buyer would have been told what to be prepared to do before today’s announcement. So what you prepared to do didn’t affect their thinking and you couldn’t get a price that you thought was attractive. So I’m just trying to understand what do you mean by ongoing strategic review to maximize value? It’s a nice phrase, maximizing value. So far everything has been going in the opposite direction. But any help you could be in those two questions I’d be interested in hearing.

[Susan Givens:]

Sure. Hi, Lee. Thanks for the questions. First, on the payment to Fortress, I mentioned that and I’ll emphasize it again there was a Special Committee that was formed of Board member, independent Board members, they negotiated with Fortress. I, myself, was not included in those negotiations. So how that level was determined and kind of the ongoing negotiation around that, unfortunately I can’t comment on that.

[Leon Cooperman:]

Well, how about putting me in touch with the person that headed that committee?

[Susan Givens:]

Absolutely.

[Leon Cooperman:]

Because I think as a shareholder I’d like to know how they arrived at 50 million for the results that have been produced.

[Susan Givens:]

Happy to put you in touch with them. I unfortunately can’t comment on that. I was not a part of those negotiations. On your second question on shareholder – maximizing shareholder value and kind of how these announcements relate to other things. What I said in kind of the previous question and comment, as we looked at a full range of options, two things that really came up and were pretty notable, one was the Holiday lease and the debt that was associated with that lease that was pretty limiting. The second was the external management structure. And the Board considered lots of things and really by fixing those two things, the Board’s view and my view is that goes a long way in actually getting the company on the right path. The internalization isn’t complete. Definitive documents have not been entered into. A term sheet has been agreed upon but a definitive agreement has not been entered into. So all these things are kind of ongoing which is why we’re not saying one way or another whether it’s ongoing or not. But I’d really point you to when you think about the company as a whole and the Board thought about it as a whole and as we received feedback and worked with our advisors, those two elements were things that really needed to be addressed and focused. It felt like the best path forward was to address them and that could lead to better results.

[Leon Cooperman:]

So what you’re basically saying is that the promise of doing this thing is not nearly as effective as getting them done and they’re all getting done – when they’re all done, their values will be greater than they are today and therefore the shareholders are better waiting for a resolution rather than rushing into something now which would have reduced the price less than optimal. Is that what you’re saying?

[Susan Givens:]

I think certainty is always a much better path. So I think by addressing these two items, we are not just talking about them. We actually are addressing them and we’re coming to a conclusion on them which I think then can lead to better outcomes for the shareholders. So that’s – yes, we’re saying the same thing. It’s really giving people certainty versus just talking about them as hypothetical I think is always the right path.

[Leon Cooperman:]

Terrific. So if you could introduce me to the head of the Special Committee, I’d love to chat with them because I’m in the business – I don’t make money if I don’t make money for my investors and I get paid if I make money. And Fortress is in that kind of business. So get $50 million for the results that have been delivered thus far strikes me as inappropriate. Now what we were to do is if the company is ultimately sold for anything remotely approaching where we sold it to the public, then maybe Fortress could get a payment then, but they shouldn’t get the 50 million for what results have been delivered thus far. That’s one person’s view and I’m sure you’ll hear from other people. But thank you for your responses.

[Susan Givens:]

Thank you, Lee. I appreciate it.

[Operator:]

[Operator Instructions]. At this time, there are no further questions.

[Susan Givens:]

Okay. Thank you everyone for joining us and we will be talking to you soon.

[Operator:]

This concludes today’s conference. You may now disconnect.