New Senior Investment Group Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good morning. My name is Heidi. And I will be a conference operator today. At this time, I would like to welcome everyone to the New Senior Investment Group third 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. Ivy Hernandez, you may begin your conference.

[Ivy Hernandez:]

Good morning and welcome. 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 information. Please review the cautionary statements and reconciliations for our non-GAAP measures, which are also included in our annual and quarterly reports filed with the SEC. With that, I would like to turn the call over to Susan.

[Susan Givens:]

Great. Thanks, Heidi. And good morning, everyone. And thank you for joining today for New Seniors third quarter 2017 earnings call. I'll quickly recap the results for the quarter and then I'll discuss the recently announced asset sales. Following my remarks, David will review portfolio performance and Rob will review our financial results in more detail. Total NOI for the quarter was approximately $54 million. Normalized FFO for the quarter was approximately $23 million or $0.27 per diluted share. AFFO was approximately $21 million or $0.25 per diluted share. On a same-store basis, cash NOI for the total portfolio decreased 1.9% year-over-year. This decline was driven by the results of our managed portfolio, which were partially offset by the growth in our triple net lease portfolio. For our managed portfolio, same-store cash NOI was down 6.6% year-over-year, primarily on account of weakness across our AL portfolio. Our IL portfolio also experienced pressure due to the change in operating model implemented by Holiday. On a positive note, our managed portfolio posted consistent RevPOR growth of 2% and a same-store occupancy pickup of 50 basis points quarter over quarter. Our triple net portfolio posted a 4.5% increase in same-store cash NOI year-over-year due to the contractual rent escalators. EBITDARM coverage was down slightly quarter-over-quarter. Now, turning to the asset sales, we recently announced $296 million of asset sales under contract, which include sales of both managed and leased assets. We actually closed the managed portfolio sale on November 1, which was $109.5 million for nine AL Memory Care assets in Florida. The other sale under contract is a portfolio of six triple net lease properties for $186 million, which we expect to close by the end of the year. This is significantly advanced our stated objective of pruning our assets to enhance the overall quality of our portfolio in a number of key areas. The sale of the nine managed assets removed several non-core and underperforming AL Memory Care assets our portfolio. To illustrate, if we exclude the assets sold from our third quarter managed portfolio results, occupancy increases 70 basis points, RevPOR increases 2.4% and NOI margin improves 140 basis points. Second, the sale of the six leased properties will eliminate our lowest covering triple net lease portfolio and would improve third-quarter EBITDARM coverage from 1.16 times to 1.18 times. Third, the sales will increase our IL exposure from 73% to 81%. And lastly, the sales will improve our geographic diversification by reducing our NOI concentration in our top three states from 39% to 32%. In aggregate, the sales are expected to generate approximately $110 million in net proceeds and will give us significant dry powder for new investments and other initiatives. We're actively evaluating new opportunities for the redeployment of the proceeds, which could include new investments, paying down debt and/or buying back stock. We look forward to updating you further once the remaining sale closes. And with that, let me turn it over to David.

[David Smith:]

Thanks, Susan. And good morning, everyone. For the third quarter, our same-store portfolio totaled 129 private pay senior housing properties, consisting of 77 managed properties and 52 triple net properties. Same-store cash NOI for the total portfolio decreased 1.9% compared to the third quarter of 2016. First, I'll discuss our same-store managed portfolio, which includes 50 independent living and 27 assisted-living properties and accounts for roughly half of our portfolio NOI. Same-store cash NOI for the third quarter decreased 6.6% year-over-year to $24.2 million. As we have experienced throughout 2017, our IL portfolio, which is roughly 70% of our same-store pool, continued to outperform our AL portfolio. Occupancy for the same-store portfolio decreased 170 basis points year-over-year, but improved 50 basis points compared to the second quarter. In another sign of improvement, the third quarter year-over-year decline was less pronounced than in the second quarter when our same-store pool decreased 270 basis points year-over-year. Similar to last quarter, we experienced slightly more occupancy pressure in our IL portfolio. As we discussed in prior quarters, this impact was primarily due to the change in operating model implemented by Holiday, which affected over 90% of our IL portfolio and was completed at the beginning of the second quarter of 2017. Since completion of the conversion in April, our same-store IL portfolio has realized occupancy increases every month, with a total increase of 160 basis points from April to September. We continue to believe that this model change will positively impact property performance over the long-term. Same-store RevPOR increased 2.0% year-over-year. We're encouraged that RevPOR has remained stable through each quarter in 2017. Across our portfolio, our operators continued to realize strong rate increases of just over 3% on existing residents, which was partially offset by the continued use of rent discounts and incentives on new resident rates, which were down roughly 1%. Total expense growth for the quarter was 4% year-over-year. In particular, labor cost growth on a per resident basis increased 3.6%, consistent with our second quarter results. We again saw labor cost pressures in markets with new supply, along with more pressure in our assisted-living assets versus our independent living portfolio. As it relates to new supply, while still elevated, levels of new supply in our markets continued to decrease. Since the third quarter of 2015 when we began providing this information, our new supply exposure has reached a low point this quarter, with 14.8% of our total NOI exposed to new supply. New openings decreased significantly in the third quarter, but that we currently expect elevated levels of new openings through early 2018. We do remain optimistic as approximately 90% of these openings are for assisted living properties whereas our portfolio is predominately independent living. Despite the elevated new supply environment, NIC continues to project stability in senior housing occupancy rates over the next four quarters, which illustrates the continued strong demand for senior housing, as evidenced by all-time high absorption rates in the third quarter. Finally, our same-store triple net portfolio, which includes 51 IL and one rental CCRC and accounts for the remaining half of our NOI. Same-store cash NOI for the third quarter was $19.9 million, an increase of 4.5% due to the contractual rent escalators in our leases. For the trailing 12-month period ending June 30, same-store occupancy was 88.3% and same store EBITDARM coverage was 1.18 times. Our leases also have an average remaining life of 13 years in our first scheduled lease maturities in 2030. 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 dive right into our financial performance for the quarter. Our NOI for the quarter was $54.3 million compared to $57.1 million for the third quarter of last year. The decrease was driven by the sale of six properties since the same period last year as well as a decline in same-store NOI for the managed segment. Our same-store NOI for the managed segment was $24 million compared to $25.5 million for the third quarter of last year. This excludes assets sold, transition to other operators or classified as held-for-sale as of September 30. And the asset sales Susan discussed earlier were classified as held-for-sale. The decrease in our same-store NOI was driven by higher operating expenses, resulting from increased labor cost pressures. Our operators' ability to continue to recognize strong rate increases on existing residents allowed us to partially offset the overall increase in labor expenses as well as the decline in year-over-year occupancy. Normalized FFO for the quarter was $22.7 million or $0.27 per diluted share compared to $0.31 per diluted share in the prior-year. AFFO was $20.6 million or $0.25 per diluted share compared $0.28 per diluted share last year. After adjusting AFFO for approximately $1.8 million of routine CapEx during the quarter, normalized FAD came in at $18.8 million or $0.23 per diluted share compared to $0.26 per diluted share last year. G&A and management fees increased slightly to $7.8 million for the quarter compared to $7.5 million for the third quarter of 2016. Our interest expense for the quarter totaled $23.9 million compared to $23.1 million in the third quarter of 2016, primarily due to higher interest rates in our floating-rate debt, which account for 40% of our total debt outstanding. At the end of the quarter, we had $2.1 billion of total debt outstanding with a weighted average maturity of approximately five years and an effective interest rate of 4.5%. Before moving on to the balance sheet, I quickly wanted to highlight one last thing on the P&L. For the quarter, we recorded $1.5 million in other expenses, which almost entirely consists of damage remediation and other incremental costs resulting from Hurricane Irma, which impacted 25 properties we own in areas affected by the storm. Moving on to the balance sheet, we ended the quarter with $48 million of cash and gross assets of $3.2 billion. As Susan mentioned, subsequent to the quarter, we completed the sale of nine AL/MC assets in our managed property segment for $109.5 million. As a result of the sale, we received net proceeds after fees and expenses of approximately $24 million. In conjunction with the sale, we paid down approximately $79 million of debt. During fourth quarter, we expect to recognize a gain of approximately $7 million in connection with the sale. Lastly, on November 2, our Board of Directors declared a quarterly cash dividend of $0.26 per common share. The dividend will be paid on December 22 to shareholders of record on December 8. And with that, I will ask the operator to please open the line for questions.

[Operator:]

Thank you. [Operator Instructions]. Your first question comes from the line of Chad Vanacore with Stifel. Please go ahead.

[Seth Canetto:]

Good morning.

[Susan Givens:]

Hi there.

[Seth Canetto:]

First question, just on the dispositions and then use of proceeds going forward, given where the stock price is today and assuming it remains kind of around this level, are you guys more likely to repurchase stock or deploy the proceeds in new acquisitions?

[Susan Givens:]

I think we will have to evaluate at the point in time that we're making that decision. I think if you look at where our stock is today, it's obviously a pretty attractive investment, just given kind of how it's been trading. So, we will evaluate our stock along with other opportunities. But I think it's fair to say that our stock represents a pretty good investment right now.

[Seth Canetto:]

Okay. And then just looking at the acquisition outlook and sort of your pipeline and the opportunities out there, can you just give us an update on the environment in terms of where cap rates and what the pipeline looks like?

[Susan Givens:]

Yeah, sure. I think our view is that there are a lot of deals out there. It seems like there are kind of smaller deals or a few larger deals in the market. But by and large, it seems like they're kind of smaller portfolios that are trading – there's a lot of capital in the space and in the world more broadly. And I think what we're seeing is that cap rates are still pretty low. And as we're looking at things, we're trying to be pretty disciplined around what we do. And we also want to make sure that, to the extent, we're looking at opportunities, we're looking at what we think is solid real estate that has kind of good prospects. So, it is a, I think, pretty competitive environment. I think there's lot of private equity capital that has been around and is continuing to look at senior housing assets. And that's probably keeping cap rates pretty low. So, I think we have to kind of evaluate that and really consider that as we're looking at investment opportunities. I think that's a good sign as it relates to selling stuff. And I think that's why we had some success around selling our assets. So, I think it's hard to be too upset about that. But I think it does mean we have to be pretty disciplined if we're looking at new investments, given [ph] cap rates are pretty low.

[Seth Canetto:]

All right. And then, the managed portfolio, I got that nice 50 basis points sequential occupancy gain in the quarter. How should we think about occupancy going into the fourth quarter for the managed portfolio? And given the dispositions, what are really expectations there?

[Susan Givens:]

Sure. Look, we're, obviously, pretty encouraged by the fact that the quarter-over-quarter trend was up. We haven't seen that the last couple of quarters. And I think both kind of Dave and my points about the Holiday model transition. I think we included a chart here that really showed that the occupancy kind of hit its lows on our IL portfolio in the second quarter of this year. And we've nice, steady gains each month since then. And so, as we move into kind of the balance of the year, we hope that that kind of momentum keeps going. And I think it was obviously a really good thing to get rid of or sell, I should say. Some of our AL Memory Care assets that, I think, have dragged down our portfolio. So, I think we feel like we don't want to be overly sort of optimistic about sort of the industry as a whole, but I do think we're seeing some good movement on the occupancy side. And our hope is that we can keep those gains. At the same time, really kind of have the rate increases and that will translate into NOI pick ups over the kind of the next couple of quarters. So, without kind of giving direct sort of visibility into Q4, we feel good about sort of where we're headed and, obviously, very encouraged about the fact that the quarter-over-quarter occupancy was up.

[Seth Canetto:]

Okay. And then real quick, last question from me, on the new openings that decreased just in terms of the industry and the expected elevated levels of new openings in 2018, I think I missed. What's the percent of the AL and new openings and how do you guys kind of look at the industry going into 2018?

[Bhairav Patel:]

Yes. Sure, Seth. So, if you look at the NIC data itself and our markets, we had over 90% of the openings are in the assisted-living side of the business versus our portfolio, which is now over 80% independent living. We feel good about that. I think the data, this quarter, what we saw on our markets is consistent with the industry where the new openings trailed off. I think some of those projects got pushed to later this year, early next year, but the over the long-term, again, we feel good about our portfolio, just given the uniqueness and majority IL component to it.

[Seth Canetto:]

All right, great. Thanks for taking my question.

[Operator:]

Your question comes from the line of Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thanks for taking the questions. Good morning. Maybe I missed this in the opening remarks, I know you gave the adjusted occupancy and RevPOR growth. Ex the asset sales, what would the same-store NOI be in the managed portfolio if you excluded those assets.

[Susan Givens:]

Yeah. I don't think we actually put that out there. I think the way we're sort of thinking about it is that the NOI margin is up pretty significantly. It's up 170 kind of basis points, with the exclusion of those assets. And so –

[Vikram Malhotra:]

If we just assume a similar – is there something unique about the expenses as well or was the impact more on revenue and occupancy? Because we can then assume the expense growth and estimate it.

[Susan Givens:]

Yeah. These are AL Memory Care assets. So, they tend to have kind of lower margins than our independent living assets, but there was nothing sort of funky about these assets that had higher expenses than your kind of typical AL Memory Care assets. It was more on the occupancy and revenue side.

[Vikram Malhotra:]

Okay. And within the expense growth, can you give us a sense of what was the growth in comp and labor expenses versus non-labor related expenses?

[Bhairav Patel:]

Are you asking just in markets with new supply? Is that what you're saying, Vikram?

[Vikram Malhotra:]

Just overall – the overall expense growth that you saw, kind of what was the growth in the labor component versus non-labor?

[Bhairav Patel:]

Yes. So, on the labor side, as I mentioned in my remarks, we had 3.7% growth in labor costs per resident, which was consistent with our second quarter results.

[Vikram Malhotra:]

Okay, got it. Got it. And then, just your comments on the last question, just on the balance sheet and dividend. I guess, as you continue to prune the portfolio, how are you thinking now about the dividend, just given where FAD is now versus sort of the – just leverage. I'm just trying to understand, kind of capital allocation from here, what are you prioritizing and just your views on the dividend?

[Susan Givens:]

Yeah. Obviously, we didn't change the dividend this quarter. And on a going-forward basis, it's something we discussed with our board and it's a conversation that we have on an ongoing basis. And we can't comment on it on a going-forward basis. But this quarter, it was obviously kind of – it was consistent with what it's been previously.

[Vikram Malhotra:]

Are you sort of modeling in – given where FAD is, are you modeling in sort of a pick up from here because you, obviously – as you keep disposing assets, there's going to be a dilutive impact as well.

[Susan Givens:]

We don't give guidance on the dividend. We never do. And so, we're not saying something different than what we said in the past. It's just that we have an ongoing conversation with the board. Obviously, selling assets generates proceeds that we hope to reinvest in some fashion. Like we said, that could either be investments, stock, other things, but we're not going to comment and we can't. It's a board reviewed conversation we had this quarter.

[Vikram Malhotra:]

Okay. And then, just to clarify your goal – target on leverage over the next 12 months, given the proceeds, et cetera, can you give us some sense of what that goal is, where do you want leverage to be?

[Susan Givens:]

We'd like leverage to come down. I think the challenge that we face is that our cost of funds is pretty low. And so, I think when we think about using proceeds to repay debt, that's just not the best use of proceeds right now. Our leverage is coming down, in part because of we're selling some assets. We have that's been paid off. And so, if you look at kind of where our leverage will be post these asset sales, it will actually come down modestly. But I think when we just think about what's the best use of our capital, when we've got debt that – the cost of funds is kind of 4-ish-percent, it doesn't make a whole lot of sense in our view as we sit here to use those proceeds to pay off debt. There are other investments that are kind of more accretive.

[Vikram Malhotra:]

Okay, great. Thanks, guys.

[Susan Givens:]

Thanks, Vikram.

[Operator:]

And your next question comes from the line of Lee Cooperman with Omega Advisors. Please go ahead.

[Lee Cooperman:]

I have a series of questions. We're not growing. So, it's obvious that income is key to the investors in the security. You guys are intelligent people. You've entered into a series of transactions here. And given your plans, are these transactions pro forma accretive or dilutive to FFO, is question number one? And what assumptions are you making in arriving at that response? Second, you have a bunch of measures of income, FFO, normalized FFO, AFFO, normalized FAD. What is the measure that you guys look at to determine the dividend, which is the most important measure? Third, do you have a targeted return on equity? And fourth, do you guys have a view of the NAV of the company? I have a view of the NAV of the company. I think the stock is substantially below NAV. Have you guys ever thought about returning the money to shareholders and liquidating the company because we're selling at a price substantially below I think the NAV of the company? So, these four questions, if you can help me, I would appreciate it. Thank you.

[Susan Givens:]

Surely, I will try to take them kind of as you – I'm not sure I got the – I think I wrote down the final three. Can you to be the first one quickly?

[Lee Cooperman:]

The first one is, we're not growing. So, obviously, the key return element to the shareholder is the dividend. And you've entered into a series of transactions. Now, I know why you don't want to project the dividend, but you can say, pro forma, what is the impact on AFFO when all these transactions close and given what you are likely to do with the money. Will this accretive to your distribution, dilutive to your distribution, just directionally?

[Susan Givens:]

So, the assets that we targeted for sale, they are assets that we think don't really shift the hurdles that we want to actually have it on our portfolio over a longer period of time. And so, we chose those assets because we think using the proceeds we can generate from the asset sales and reinvesting it in other things, we can be much more accretive to our overall portfolio than what these assets themselves can generate today. As an example, one of the portfolios, really on a kind of net cash flow basis, was not contributing significantly to our overall cash flow, and so that's part of the reason why we chose to actually divest that portfolio. Of course, it depends on what we use the proceeds to buy. But we think given the opportunity set in front of us, we can take these proceeds and reinvest them in assets that will generate better return for us. That's why we made the decision to do that.

[Lee Cooperman:]

That's what I would assume frankly. So, the answer to my question is, it ought to be accretive.

[Susan Givens:]

That's right. Assuming the reinvestment –

[Lee Cooperman:]

Okay, okay. Second question was, what measures should I look at most carefully to determine the distribution? Is it normalized FFO or AFFO? What do you guys look at when you determine what you want to pay us?

[Susan Givens:]

Yes. And we look at everything. But I think the industry as a whole, tends to look at FAD, which is funds available for distribution, and that tends to sort of be a metric that people focus on. People look at other – depending on kind of the capital structure of a particular business, people look at other kind of items as well. But I think it's an industry kind of practice to look at that and we look at that. We look at other kind of metrics as well.

[Lee Cooperman:]

So, my conclusion is, since the dividend is above FAD, you're optimistic that FAD will improve?

[Susan Givens:]

Look, it's hard to say that. Of course, we're hopeful that our FAD improves, but that's hard to –

[Lee Cooperman:]

Well, that said that what you're making by having a dividend in excess of FAD.

[Susan Givens:]

Sure, yeah.

[Lee Cooperman:]

Okay. Return on equity, basically, what's a reasonable assumption for this business, the way you are running the business? 10%? 12%?

[Susan Givens:]

Yeah. We've always targeted kind of low to mid-teens returns. That's been sort of how we always thought about it, given our leverage profile. And, happily, most of our assets have actually generated in excess of that on the assets themselves. So, we really look – when we're underwriting assets, we look for something that has kind of a mid-teens return. And then, of course, there are some expenses that are coming out when you look at the company as a whole. But on an asset level, deal by deal basis, we're targeting midteens return. We have never wavered on that targeted threshold. And so, when you look at our return on equity, we consistently generated 10 plus percent yield, which is, I think, a decent return as you're looking at kind of the interest rate environment that we're looking at right now.

[Lee Cooperman:]

And the final question is, you may have your own view, but I think the assets are worth at least 12, maybe more per share, and the stock is struggling to stay close to $9. With this big discount, have you guys ever thought about giving the money back to shareholders and let them reinvested in the way that they want to invest it, or is that a highly unlikely outcome?

[Susan Givens:]

Look, I think we share your view that the stock is trading below NAV. I think we look at lots of things and discuss lots of things here and with our board. So, I don't want to comment on any of that specifically, but all I would say is that, of course, part of the reason we're spending so much time really trying to right size our portfolio if we didn't right is because we do believe the stock is trading at a discount to NAV and we're trying to tape steps to bridge that gap.

[Lee Cooperman:]

All right. Thank you very much. Work hard. And thank you very much for your commitment.

[Susan Givens:]

Thanks, Lee.

[Operator:]

And there are no further questions in the queue.

[Susan Givens:]

Great. Thanks, everyone. Appreciate your time. And we will look forward to talking to you soon.

[Operator:]

This concludes today's conference call. You may now disconnect.