New Senior Investment Group Inc.
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Good morning and welcome to the New Senior Fourth Quarter and Year End 2017 Earnings Call. My name is May [ph] and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions] At this time, I would like to turn the show over to Ms. Ivy Hernandez, Senior Vice President.

[Ivy Hernandez:]

Good morning and welcome to New Senior's earnings call for the fourth quarter and full year 2017. Joining us today are Susan Givens, our Chief Executive Officer; Bhairav Patel; our Chief Accounting Office and Interim Chief Financial Officer; 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 included in our annual and quarterly reports filed with the SEC. And with that, I'd 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 fourth quarter 2017 earnings call. In addition to our fourth quarter results and dividend, today we announced that our Board of Directors had been exploring strategic alternatives in an effort to maximize shareholder value. Our Board engaged JP Morgan and [indiscernible] to help us conduct a thorough review of a variety of options. I'd like to take a minute to provide some context for this ongoing review. New Senior was formed a little over 3 years ago when we spun out of Newcastle in November 2014. We quickly assembled one of the largest portfolios of independent living and assisted living properties in the U.S. with nearly $3 billion of investments. Today we're the only pure play senior housing REITs and our portfolio the 8th largest in the U.S. has the unique attribute of being a 100% private hag [ph]. As has been widely reported, the senior housing industry has been facing near-term challenges as new supply and increased competition continue to impact performance. These industry dynamics and other factors have exerted negative pressures on our own portfolio. Nevertheless, we continue to believe that the senior care industry is one of the most exciting and compelling industries to be invested in. As we pointed out before, our target demographic individuals aged 70 and older is the fastest growing cohort in the U.S. population and is expected to grow 6x faster than the total population over the next 20 years. We think our platform is uniquely positioned to benefit from this dynamic because a 100% of our NOI is generated by private pay, independent and assisted living properties. In addition, approximately 80% of our portfolio is concentrated in independent living properties where there has been less new competition. The level of new construction for IL remains at less than half the level of AL. Independent living is really the gateway to senior housing. The lower price point combined with the lower acuity environment make it an attractive option for a larger number of seniors. Despite the strength of our portfolio and the attractive of the industry in which we operate, we believe certain characteristics of our Company have caused us the trait at a discount to our asset value. Unfortunately, the measures we've taken to-date including stock buybacks and the tender offer in 2016, as well as the implementation of a selected asset sales strategy had not driven our stock price performance. Against this backdrop, our Board of Directors has been conducting a process to explore and evaluate a full range of strategic alternatives focused on maximizing shareholder value. While I can't say much more about the ongoing strategic review at this point, I want to reiterate that our focus is on maximizing shareholder value. With that, I'll turn the call over to David and Bhairav to discuss the results of the quarter.

[David Smith:]

Thanks, Susan and good morning, everyone. At the end of the fourth quarter, our portfolio totaled 133 private pay senior housing properties, consisting of 81 managed properties and 52 triple net properties. Same-store cash NOI for our total portfolio increased 1% compared to the fourth quarter of 2016. First, I'll discuss our managed portfolio, which includes 51 independent living and 30 assisted-living properties and accounts for roughly half of our portfolio NOI. Same-store cash NOI for the fourth quarter decreased 1.5% year-over-year to $24.9 million. Our independent living portfolio, which is roughly 70% of our same-store pool, slightly outperformed our assisted-living portfolio. Sequentially we saw improved NOI trends with same-store cash NOI up 2.4% driven by strong NOI growth in our independent living portfolio, as a result of improved expense controls by our operators. Occupancy for the same-store portfolio decreased 150 basis points year-over-year, at less pronounced decline than in the third quarter when same-store occupancy decreased 170 basis points. This progress was driven by improved year-over-year trends in our independent living portfolio as it continues to recover from the changes in the holiday operating model change that were implemented in early 2017. Same-store RevPOR increased 1.6% year-over-year to $3,100 per month. Rate increases on existing residents remained at roughly 3% during the quarter but were partially offset by the continued use of rent discounts and incentives on new resident rates which were down roughly 1% year-over-year Same-store expense growth for the quarter was moderate increasing 1.4% year-over-year as a result of highly effective cost controls by our operators. In particular, labor expense on a per resident basis increased 2.8%, an improvement of 80 basis points compared to our third quarter results. Expense trends had remained consistent with those experience throughout 2017 which include heightened labor cost pressures and markets with new supply along with more pressure in our assisted-living portfolio versus our independent living portfolio. Fortunately, levels of new supply decreased once again in our markets and reached another low point this quarter with only 14.1% of our total NOI exposed to new supply. New deliveries in the fourth quarter were generally in-line with third quarter deliveries and down significantly from the peak level experience in the second quarter of 2017. For 2018, we expect new openings to remain elevated. However, substantially all of these new properties are assisted-living versus our predominantly independent living portfolio. As Susan mentioned, long-term demand trends remain attractive for senior housing. Population growth rates within a 5-mile radius of our properties are projected to increase 50% over the next five years to 2.5% versus 1.7% historically, and industry absorption levels remain near all-time highs. Finally, our same-store triple net portfolio, which includes 51 independent living properties and one rental CCRC accounts for the remaining half of our NOI. Same-store cash NOI for the fourth quarter was $19.9 million, an increase of 4.4% driven by the contractual rent escalators in our leases. For the trailing 12-month period ending September 30, same-store occupancy was 87.7% and same-store EBITDARM coverage was 1.17x. 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 an overview of financial performance for the quarter. NOI for the quarter was $53.7 million compared to $57.1 million for the fourth quarter of last year. A majority of the decrease was driven by the sale of 21 properties since the beginning of the fourth quarter of 2016 with 15 of these properties sold in the fourth quarter of 2017. Our fourth quarter 2017 same-store NOI for the managed segment was $25 million compared to $25.5 million for the fourth quarter of last year. This excludes assets sold, or transition to other operators since the beginning of the fourth quarter of last year. The decrease in mainly driven by higher operating expenses, with revenues for the same-store portfolio remaining stable as higher rates offset the impact of decrease in average occupancy. Normalized FFO for the quarter was $22.9 million or $0.28 per diluted share compared to $0.31 per diluted share in the prior year. AFFO was $20.1 million or $0.24 per diluted share compared $0.27 per diluted share last year. The decline here is once again largely driven by the sale of assets since the fourth quarter of 2016. Normalized FAD was $18.5 million or $0.22 per diluted share for the quarter after adjusting for $1.5 million of routine CapEx. Our interest expense remain unchanged at $23.1 million compared to the fourth quarter of 2016 as debt repayments offset the impact of higher interest rates on our floating rate debt. We paid down approximately $205 million of debt in 2017, most of which was floating rate debt which now accounts to 36% of our total debt outstanding compared to 40% as of the end of 2016. As of December 31, we had $1.9 billion of total debt outstanding debt with a weighted average maturity of 4.8 years and an effective interest rate of 4.4%. Also subsequent to year end, the extended maturity of $15 million in floating rate debt given the second quarter of 2018 by one year. As a result, we had no debt scheduled to mature in 2018. G&A, management fees and incentive compensation for the quarter declined by over $2 million year-over-year to $7.4 million primarily due to there being no incentive compensation payable to the manager at this quarter compared to $2.1 million in incentive compensation payable to the manager for the fourth quarter of 2016. Another notable item on our P&L for the quarter was a GAAP gained on sale of approximately $15 million from the sale of 15 properties in two separate transactions. One other transactions was the sale of 9 assisted-living and memory care facilities located in Florida from a managed portfolio while the other was the sale of 4 CCRCs, one assisted living facility and one independent living facility located in Texas from our lease portfolio. We received proceeds of approximately $110 million from the sales after paying down over $175 million of debt. The gain is excluded from our non-GAAP metrics. We ended the year with $137 million of cash and gross assets of $3 billion. Our cash balance increased substantially compared to the third quarter as a result of the disposition activity I just discussed. Lastly, on February 22, our Board of Directors declared a quarterly cash dividend of $0.26 per share common share. The dividend will be paid on March 22 to shareholders of record on March 8. And with that, I'll ask the operator to please open the line for questions.

[Operator:]

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

[Vikram Malhotra:]

Is it possible maybe for you to give us a sense of some of the things we are looking or sort of thinking about as you explore the strategic alternatives; maybe you can just touch upon potential internalization of management?

[Susan Givens:]

As we mentioned in the press release, we've been exploring a full range of alternatives and unfortunately, I really can't say more beyond that but I think the understanding is really we're looking at everything and our Board is looking at everything, so that includes kind of everything you would expect.

[Vikram Malhotra:]

And is there a time by which this review would be completed?

[Susan Givens:]

No, we don't have a specific timeline on the process, it's been ongoing and we're working through it and unfortunately, we don't have a specific timeline around it and so that's really all I can say about it.

[Vikram Malhotra:]

And then just one operational question for me. Maybe David, if you could talk about the improvement that you've seen both Q-over-Q and even from a second derivative perspective year-over-year; is there anyway you can sort of maybe break this out into how much of it is the benefit from change in operating strategy that the operator has implemented versus sort of a dip in supply in your markets that you referenced?

[David Smith:]

Yes, I mean it's tough to pinpoint exactly Vikram, I will say quarter-over-quarter we had some savings in two key areas, one was maintenance and one was marketing. I think on the maintenance side again, as how they implemented this model change, there was the volatility that we had in Q4 and Q1 of 2017 and as corporate and everyone improved the coronation of oversight of the new model, we had savings from the maintenance side. And then on the marketing side of the business, we had some less referral fees paid out, Q3 going into Q4.

[Susan Givens:]

Just to add to that; I think -- it's a combination, right, a little bit of -- we do continue to see the less new supply in a lot of our markets because we have such a high concentration of IL and so that continues to play out and while we're certainly seeing competition, I think it's been little bit less than what we've seen with some of our AL assets. And then as David pointed out, we did see this quarter some improvements with some of our biggest operators on a quarter-over-quarter basis which I think really speaks to the fact that some of the changes that have been made have started due to be implemented and we're starting to see some positive results from there. Of course, it's just a quarter, so we're focused on making sure that's ongoing but we feel pretty good about what we saw at least this quarter.

[Vikram Malhotra:]

One of your peer sort of mentioned in Florida post the hurricanes, there have been some mandatory requirements that have upgrade specifically, things like air conditioning etcetera; is that something you're implementing as well?

[Susan Givens:]

Yes. It's kind of an ongoing regulatory requirement that has not been totally finalized yet. It will be something that will have to be implemented across really our assisted-living properties. Again, I think this is -- it's less of a requirement for independent living and so happily for us we do have more independent living, we of course have assisted-living exposure in Florida but I guess it's something that your operators have had to do as well.

[Operator:]

Your next question comes from the line of Chad [ph] of Stifel Nicolaus. Your line is open.

[Seth Canetto:]

This is Seth Canetto of for Chad [ph]. First question on the exploration of strategic alternatives; can you guys tell us when the process started and just to confirm, I know you said that you're exploring a whole range, does that include a sale of the whole company as well as just maybe some parts of the portfolio?

[Susan Givens:]

No, I can't specifically comment on when the process started but I think the language in our press release speaks to it. We have been exploring alternatives with the Board, so we've been working on it, it's been ongoing; so that's kind of your first question. Number two, just to sort of reiterate what I'd said before, we're exploring a full range of alternatives, and so that really includes everything that you would expect and so I think that's the best way I can respond to that question.

[Seth Canetto:]

And then switching gears to occupancy and how that is trended; I know in your opening remarks you guys have mentioned that the level of new suppliers decreased in certain markets but I did notice the same-store managed occupancy declined sequentially. Can you just talk about what was the driver that decreased?

[Susan Givens:]

Sure. I mean we're still seeing some pressure and we've still seeing that there is near supply and we've seen that there is this other competitive dynamic that play. I think happily for us, at least while it was -- it declined sequentially, the decline -- and the rate of decline has narrowed and has slowed down. So I think -- of course seeing the numbers go down quarter-over-quarter is never what we hope for but I think in the environment that we're in right now seeing the decline lessen was really what we've been focused on and importantly, there are multiple parts to the equation. So while we've seen occupancy continue to sort of face some challenges, we've seen steady rate growth and we're seeing in place rates growth at pretty strong levels, so we feel pretty good about that and so we're focused on the occupancy piece but we're down quarter-over-quarter 40 basis points which is a pretty good sort of outcome considering what we've seen over the last 12 months or so.

[Seth Canetto:]

And then you completed the $296 million of slated dispositions in the fourth quarter; when you guys expect to reinvest that in new acquisitions?

[Susan Givens:]

As you might expect, that's all a part of our exploration of strategic alternatives. So that goes into the mix and so I can't really comment on that, that's just a part of the overall announcement we made about the strategic alternatives.

[Operator:]

Your next question comes from the line of Lee Cooperman of Omega Advisors. Your line is open.

[Lee Cooperman:]

I realize you're limited in what you can say but let me just first congratulate you on the announcement, I think it's the right thing to do for the shareholders. And what I'm trying to figure out to be honest with you is the alignment of interest; I've always been suspicious with externally managed companies though I have a very high regard for the people at Fortress [ph]. But do you think the interests are totally aligned here that the process will lead to a favorable outcome because I think one of the ways of creating value is I think the fees being paid to the external manager or probably above market, and so the extent the fees were normalized or reduced that would accrete to value to the equity owners. And other things I'm just looking at -- I just think the stock is disconnected from reality, we raised a lot of money in 2015 and 2013 in three quarters, so I asked myself was that much value destroyed? If I add back to depreciation to your book value, it's a number materially above what we're trading at. Well I guess what I'm really asking; I realize you're limited in what you can say but do you feel that the likely outcome will be positive relative to where the stock was trading prior to this announcement?

[Susan Givens:]

Lee, look you addressed the sort of question about favorable outcome for shareholders, that's what we're focused on and that is kind of the only focus of this entire process. We have an independent Board that is working very closely with us and that's their key objective. So yes, I do think that the alignment is there and I think that that is what we are working tirelessly to do for shareholders and I think we're very well aware of the stock price and have been -- and that's why we along with our Board have really embarked on this process. So yes, so -- to answer your first question. Your second question; it's hard for me to say exactly where it all lands but that's our focus. Our focus is on trying to maximize value for shareholders as best as we can and I think that given the set of -- sort of options we have at our disposal, we can do that.

[Lee Cooperman:]

Congratulations, you announced the right thing and I have a lot of confidence in the folks of Fortress [ph] in doing the right thing. Thank you.

[Susan Givens:]

Thanks, Lee.

[Operator:]

There are no further questions at this time.

[Susan Givens:]

Well, great. We appreciate everyone joining us this morning. And we will look forward to updating everyone. Thank you very much.

[Operator:]

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