New Senior Investment Group Inc.
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

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

[Ivy Hernandez:]

Thank you. Good morning, and welcome to New Senior's Earnings Call for the Third 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 may be forward-looking statements, which are subject to many risks, uncertainties and contingencies and the expected events described in these forward-looking statements may not occur as expected or at all. I encourage you to review the 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 after this call. In addition, the speakers will discuss non-GAAP financial information. Please review the cautionary statements and reconciliations for our non-GAAP financial 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. Thank you, Ivy. Good morning, everyone, and thank you for joining New Senior's Earnings Call for the third quarter of 2018. Last quarter, we announced a series of strategic initiatives intended to maximize value, including a plan to internalize the Company's management function. During the quarter, we made significant progress towards the completion of those strategic initiatives. I'll recap those initiatives, before discussing our performance for the quarter. And then I'll turn the call over to David and Bhairav to discuss portfolio performance and the financial results in more detail. The strategic initiatives announced to-date are part of a comprehensive strategic review by our board. The strategic review is intended to address certain challenges. That we believe have hindered the Company's growth prospects including the external management structure, low lease coverage, capital structure issues and dividend coverage. The strategic review has been a multi-step process resulting in the following key initiatives to-date. First, the termination of triple net leases on 51 Independent Living assets and their conversion to a managed structure in May, which reduced our credit risk and increased the transparency of our operating results. Second, a re-set of the Company’s dividend in August, which brought our payout ratio more in-line with our peers. Third, a plan to refinance a $720 million bridge loan in the fourth quarter. And lastly, a plan to internalize the Company's management function by year-end. In October, we successfully completed the refinancing. The new loan resulted in savings of over 170 basis points of interest expense, or $12 million annually even better than expected. In addition, to cost savings we designed this refinancing to preserve our prepayment flexibility. And to enable us to recycle capital in the event that we identify accretive opportunities. With the refinancing in October, three of the four strategic initiatives have been completed and we are on track to finalize the fourth initiative, the internalization by year-end. As we previously, discussed we expect the 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 an 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. While, we still have a lot of work ahead of us, we have made significant progress towards achieving our goals for the company. I'm very optimistic that the measures taken to date as part of the strategic review process will position the company for growth and facilitate additional efforts to maximize shareholder value. Now, I'll briefly discuss our current portfolio composition and on how we think about our portfolio going forward. This was the first full quarter in which we owned on a managed basis the 51 independent living assets that were previously a part of our triple net lease segment. Since these assets represent nearly 40% of total NOI and were owned by the Company in both comparison periods, we've reported adjusted same-store results this quarter to capture the impact of these independent living assets on our same-store results. We also believe that gives a more accurate representation of the trends we're seeing across the business. Today, we have a straight forward portfolio of 133 assets, with all but one asset owned on a managed basis. We're the only pure play senior housing REIT and our portfolio the eighth largest in the U.S. has a unique attribute of being 100% private pay. In addition, over 80% of NOI is derived from independent living more than any of our peers. Our independent living assets have generally outperformed our Assisted Living/Memory Care properties and the third quarter was no exception. Our independent living assets were up year-over-year on an adjusted same-store basis. While our AL memory care assets were down significantly. I think there are a few key takeaways worth noting. First, while we've experienced some of the same challenges that have impacted others in the senior housing space, we had positive growth this quarter across our independent living assets. And, we remain optimistic about our prospects going forward given the significance of independent living to our total NOI. Second our AL Memory Care assets only represent 15% of our total NOI. So, it's a relatively small piece of our total company. Third, within our AL Memory Care portfolio the underperformance is really driven by a subset of those assets. And lastly, we have very intentionally created flexibility with our management agreements to enable us to make operator changes as necessary. And we are focused on 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. Combined, with the strategic initiatives announced to-date. I feel optimistic about the company's future. Now, I'll turn the call over to David to review the portfolio results in more detail.

[David Smith:]

Thanks Susan and good morning everyone. At the end of the third quarter New Senior’s portfolio was comprised of 133 private pay senior housing properties diversified across 37 states. Our portfolio makes us one of the top 10 largest owners of senior housing in the U.S. Following the lease conversion we announced in May, we own our entire portfolio on a managed basis, except for one triple net lease property. The key takeaway for the third quarter is that our independent living portfolio, which accounts for over 80% of our total NOI continues to achieve positive results with increases in both cash NOI and occupancy. The positive results of IL portfolio have been offset by some weakness in our AL portfolio, which we’re focused on addressing. Adjusted same-store cash NOI decreased 2% year-over-year. This figure represents our entire portfolio of 133 assets, including the 51 IL assets that were converted from a lease to managed structure in the second quarter of 2018. The strength of our IL portfolio is not totally apparent in our same-store results. So, let me break down that number. Year-over-year the IL portion of adjusted same-store cash NOI was up a solid 1.3%. Occupancy increased 60 basis points to 88.1% outperforming recent industry data from NIC, which posted a decline of 30 basis points. Industry trends and independent living remain more favorable than assisted living with lower levels of new supply along with inventory growth exceeding absorption by just 40 basis points in the third quarter. The narrowest spread realized since the second quarter of 2017. In general, IL benefits from longer length of stay, higher margins and lower regulatory risk. Our assisted living portfolio which represents just 15% of our business continues to face some challenges. The AL portion of adjusted same-store cash NOI was down 18% and occupancy was down 300 basis points year-over-year, nearly 40% of these 30 AL assets experienced positive year-over-year NOI growth. But this was more than offset by the remaining assets that had significant declines in NOI. We are highly focused on addressing these property performance issues through a number of asset management initiatives, with a goal being to improve the overall quality of our AL portfolio and its resulting portfolio metrics. We'll look forward to providing additional color in the coming months on these initiatives. Lastly, our new supply, there has been a significant reduction in new openings within a 10 mile radius of our properties. In the third quarter, we had 10 new openings, which is down approximately 75% from our peak new openings realized in the second quarter of 2017. 90% of these new openings in the third quarter were assisted living properties. And based on current data from NIC, we expect new openings in 2019 to be significantly lower than 2018 levels which bodes well for our portfolio. 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 will briefly recap our financial results for the quarter. NOI for the quarter was $40.7 million compared to $54.3 million for the third quarter of last year, primarily due to the sale of 15 assets in the fourth quarter of 2017 and the lease termination for 51 IL assets earlier this year. Normalized FFO for the quarter was $4.7 million or $0.06 per diluted share, compared to $0.27 per diluted share in the prior year. AFFO was $9.8 million or $0.12 per diluted share, compared to $0.25 per diluted share last year. Normalized FAD which further adjust AFFO for routine capital expenditure was $7.7 million or $0.09 per diluted share. Our results were impacted from higher interest expense due to the one-year bridge financing of $720 million we put in place in connection with the termination of the lease for 51 IL assets. Our interest expense increased by $5.4 million from the third quarter of 2017 to $29.3 million, driven largely by the increase in our effective interest rate due to the bridge financing. This bridge loan was refinanced in October with a seven year loan priced at LIBOR plus 232 basis points. After adjusting for the refinancing our effective interest rate dropped to 4.7%, which is expected to lower our interest expense by approximately $12 million on an annualized basis. It also increased the weighted average maturity of our outstanding debt to 5.3 years with limited debt coming due in the next 12 to 18 months. Our G&A and management fees totaled $6.9 million for the third quarter, a reduction of $0.9 million year-over-year due to lower professional fees and reimbursements. We expect this line item to decline significantly following the internalization of the company’s management function. Our balance sheet remained relatively unchanged with gross assets of $2.7 billion and a cash balance of $157 million as of the end of the third quarter. And lastly, our Board of Directors declared a dividend of $0.13 for the quarter, payable on December 21 to shareholders of record on December 7. With that, I'll ask the operator to open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Vikram Malhotra [Morgan Stanley].

[Vikram Malhotra:]

Thanks for taking the question. Just on the internalization, any updates there, any reasons that could derail the process or delay the process?

[Susan Givens:]

Hey, Vikram, it’s Susan. So the Special Committee and Fortress continued to work on definitive documentation on the internalization. And from our standpoint, on the operational side we've made a ton of progress and are really working towards having all the operational components completed with the expectation that the internalization will be done by the end of the year. So we're in a good place.

[Vikram Malhotra:]

Okay. If you assume the internalization had occurred as of the start of this last quarter, what would the $0.09 in FAD be, to give me the lower G&A and interest expense as Bhairav just mentioned?

[Susan Givens:]

I don’t know that we have that off the top of our head. I mean, there's a couple of things going on this quarter, right, because we had the bridge loan in place that wasn't refinanced until October. So there's a little bit of noise in the quarter, separating aside from the internalization. But as we've talked about we've spent the internalization will amount to $10 million of annual savings. So if you look at our share count that’s a couple pennies.

[Vikram Malhotra:]

Okay. And then just last question on the – from an operations perspective, you mentioned this – David, mentioned this pension improvement, I mean, lower supply, next year as you guys see it. How should we think about sort of the trajectory of occupancy from here into 2019? And I know you don't give guidance but a lot of your peers have also reported seeing an uptick sequentially in occupancy. So I guess my question is there a scenario where we actually start to see faster same-store NOI growth next year?

[Susan Givens:]

We certainly hope so. I think as we talked about and David mentioned in his comments. IL such a significant part of our portfolio and going forward, our managed portfolio will really be a very clear and understandable portfolio of independent living. The trends we've seen there have been very positive. We saw positive NOI growth. We saw occupancy growth this quarter on a year-over-year basis. And so we have reason to feel optimistic that that trend can continue. Obviously a lot of changes were implemented through the system over the last year is really is the holiday operating model change. And so we're now starting to see some of the benefits from those changes in our numbers. But as we talked about the AL portion of our portfolio continues to face some challenges. And we're pretty focused on addressing those assets specifically I think. We're at a good juncture where we've had a lot of strategic initiatives we've been focused on, now we're really focusing on taking a hard look at those assets and working through with our operators to see if we can make some changes. So we can start to generate some growth from that portfolio. So like David said, the good news is that it's not a huge chunk of our portfolio but it is weighing down our total NOI growth and our total occupancy growth. But if you take those kind of underperformers out, we are seeing positive trends and we are seeing positive growth. So I think we have every reason to feel very good about. What we're going to see kind of going into next year. On the IL side, I think the bigger question mark is kind of the AL assets. And what we can do with those assets. But we feel good about where we're positioned kind of going into next year.

[Vikram Malhotra:]

Okay, great. Thank you.

[Susan Givens:]

Great, thanks.

[Operator:]

And there are no further questions.

[Susan Givens:]

Great. Well, thank you everyone for joining us. And we will be in touch with everyone soon. Thank you.

[Operator:]

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