New Senior Investment Group Inc.
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Good morning, my name is Nicole and I'll be your conference operator today. At this time, I would like to welcome everyone to the New Senior Investment Group First Quarter 2016 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. David Smith, you may begin your call.

[David Smith:]

Good morning. I'd like to welcome you to New Senior's first quarter 2016 earnings call. Joining us today are Susan Givens, our CEO, and Justine Cheng, our CFO. 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, and actual results may differ materially from such forward-looking statements. In addition, Susan and Justine will present some non-GAAP information. I encourage you to review the cautionary statement regarding forward-looking statements and the reconciliations of non-GAAP measures in our earnings release and investor presentation, and to review the risk factors contained in our annual and quarterly reports filed with the SEC. With that, I'd like to turn the call over to Susan.

[Susan Givens:]

Great. Thanks, David, and good morning everyone. And thank you for joining us today for New Senior's first quarter 2016 earnings call. As usual, we posted an investor presentation on our website this morning, and I'll be referring to pages in that presentation during my remarks. Q1 was another strong quarter for the Company and marked a positive start to 2016. As many of you know, we completed $1.3 billion of acquisitions last year. In this quarter, we were focused on collaborating with our operating partners to generate organic growth across our diversified portfolio. Once again, our same-store occupancy growth outpaced the overall market and helped contribute to a 32% increase in our AFFO per share from Q1 2015 to Q1 2016. Today, we have one of the largest portfolios of independent living and assisted living properties in the U.S., and we are part of one of the most compelling industries in the world. Our target demographics, individuals age 70 and older, is the fastest growing cohort in the U.S. population and is expected to grow six times faster than the total population over the next 20 years. Yet, the industry that caters to this demographic is highly fragmented and is characterized by a massive supply/demand imbalance. We think we're uniquely positioned to benefit from this imbalance because we have the largest concentration of private pay assets among our peers. Over 90% of our NOI is comprised of private pay, independent living, and assisted living properties, with limited exposure to Medicaid or other government funding. So we take comfort in the overall composition of our diversified portfolio, and we feel very good about our growth prospects. I'll spend a few minutes discussing highlights for the quarter before I turn it to Justine to discuss the financial results in more detail. Turning to Page 5, first, the Company continues to generate impressive financial growth, demonstrating the success of our acquisition strategy, the quality of our portfolio, and our commitment to driving strong results. Total NOI for the quarter increased 45% year-over-year, while normalized FFO for the quarter was $0.32 per basic share, representing a 19% increase over the same period of 2015. And AFFO was $0.29 per basic share, representing a 32% increase over Q1 2015. Second, our diversified senior housing portfolio continues to generate solid growth, and we're very pleased with how our assets are performing in the current market environment. On a same-store basis, our managed portfolio had outsized occupancy growth of 180 basis points year-over-year, and NOI grew 2.3% from Q1 2015 to Q1 2016. Importantly, our total managed portfolio experienced a 20 basis point gain in occupancy on a sequential basis. That's a stark contrast to the industry as a whole, which generally experienced the occupancy declines that are typical for the first quarter of the year. We also saw solid growth on our triple net portfolio, where total occupancy was up 90 basis points year-over-year. Third, on the heels of announcing $100 million share repurchase program at the end of last year, we completed a $30 million tender offer in January at a price of $9 per share. In total, we've purchased $40 million of stock at an average price of $9.05 per share, and we've decreased our share count by about 4.5 million shares. Frankly, we don't believe stock buybacks always make sense, but we believe our repurchases were a great investment because we were able to buy back our stock at a steep discount to our NAV. As we've said before, we estimate that the full year accretion from these purchases equates to about $0.05 to $0.07 of NFFO and $0.04 to $0.06 of AFFO. Today we have close to 90 million of remaining capacity under our buyback program, and we will continue to evaluate buying back stock if we see a significant discount to NAV. We continue to be very mindful of our stock price and remain focused on improving value for shareholders. As we've discussed, we are exploring selling non-core assets, and doing so could generate liquidity to make good investments, including buying back stock and repaying debt. We also think that asset sales would demonstrate that there's a disconnect between the value of our assets and our stock price. While some of the larger REITs have pulled back from acquisitions, private equity and regional buyers have remained very active and interest continues to be very strong for high-quality senior housing assets with growth potential. We have observed that the market has changed a little, and there's been more interest for smaller portfolios or individual assets versus larger portfolio transactions. As a result, we're being very strategic about how we sell assets in order to maximize returns for shareholders. We've made good progress this quarter and will continue to post you as we move forward. Now turning to page 6, I'll spend a minute on our financial performance. Our financial results continue to be very strong. NOI was up 45% in Q1 2016 versus Q1 2015, and NFFO per share was up 19%, while AFFO per share was up 32% over the same period. At the same time, the return on our invested equity has increased from about 9% in Q1 2015, to 10.4% this quarter, which really speaks to the quality of the investments we've made. Turning to page 7, today our managed portfolio includes 96 properties across 33 states. Average occupancy across the entire managed portfolio increased 460 basis points from 83.7% in Q1 2015 to 88.3% in Q1 2016. On a same-store basis, occupancy was up 180 basis points from 83.5% in Q1 2015 to 85.3% in Q1 2016. And NOI grew 2.3% over that same period. It's important to note that our portfolio is still maturing and stabilizing. And while we've seen pretty tremendous growth over the last several years, our occupancy is still lower than industry averages. We think that's a function of historic under management, not the intrinsic quality of the assets. And together with our experienced operators, we can continue to drive occupancy and NOI higher. It's also worth noting that beginning next quarter, our same-store pool will start to reflect a good portion of the IL acquisitions we completed in 2015. So we'll become a more meaningful pool to measure our overall performance. Page 8, turning to our triple net portfolio, which includes 58 properties across 24 states, the vast majority of our triple net assets are independent living, and nearly 80% of our NOI comes from these stable, high-quality assets. Performance here continues to be strong, with coverage for the total portfolio at 1.26 times, and average occupancy of 88.9% for the trailing 12-month period ended December 31st. That's up 90 basis points over the same period of last year. On a same-store basis, coverage remains solid at 1.24 times, and occupancy was 88.8%, up 80 basis points year over year. Now turning to page 9, through our acquisition strategy, we have actively sought to improve the overall quality, stability, and growth profile of our portfolio, and our results are beginning to reflect the benefits of our efforts. Of the 54 properties we acquired in 2015, 49 are 100% private pay, independent living assets. So our IL exposure increased from approximately 60% to nearly 70% of NOI from Q4 2014 to Q1 2016. As a result, we now have a portfolio that's ever better positioned, with higher occupancy, higher margins, and greater geographical diversification. To put it in context, total occupancy for our managed portfolio increased 470 basis points, from 83.6% in Q4 2014 to 88.3% in Q1 2016, and margins increased 500 basis points. As we all know, strong performance is ultimately attributable to buying the right assets at the right prices and about partnering with good operators to drive results. We think we've done that, and we're really proud of the platform we've built. Today, our expansive portfolio includes a balanced mix of higher growth and stable assets and benefits from an unusually high proportion of private pay assets, which we believe sets us apart from others. Turning to page 10, going forward, we believe our portfolio is optimally positioned to continue to benefit from strong organic growth, as we have very deliberately built a unique senior housing portfolio with complementary growth and occupancy characteristics. We're really proud to be the only pure-play senior housing REIT out there, and our strategy has been and continues to be to focus on private pay, independent, and assisted living properties. Over 90% of our NOI is private pay, which means our NOI is more stable and less vulnerable to economic changes, and we're relatively insulated from the regulatory changes we're seeing in today's environment for the government-reimbursed sectors of healthcare. As you can see from the chart on the lower left side of the page, we've continued to experience significant occupancy gains across each of our product types, while the overall MC data has shown more muted growth. Notably, our occupancy increase of 180 basis points this quarter compared to flat occupancy for the industry and marked our fifth straight quarter of growth in excess of the industry average, as proof of the embedded growth within our portfolio. As it relates to new supply, we are seeing new competition in our market and continue to monitor its potential impact on our properties. That said, approximately 70% of our portfolio is concentrated in independent living properties where the level of new construction remains at less than half the level of assisted living. Independent living is really the gateway to senior housing, and the lower price point, combined with the lower acuity environment, make it an attractive option for a larger number of seniors. Despite recent volatility in the market and concerns around new supply, we believe the senior care industry is one of the most exciting and compelling industries to be invested in. Our properties serve over 19,000 seniors and provide critical housing and care for the aging population. The industry is changing, with technology playing a critical role in the delivery of healthcare and the patterns and behaviors of the aging population. Many of these technologies could improve the attractiveness and operational efficiency of senior housing. And as the owner of senior housing properties, we are uniquely positioned to benefit from these changes. As a new generation of older adults emerges, we intend to work with our operators to develop new and better ways to serve residents at our properties. These opportunities, coupled with the large, macro demographic trends, are why we remain so excited about the long-term prospects for our business. So with that, let me turn it over to Justine, who will discuss the financial results in more detail and wrap up.

[Justine Cheng:]

Thanks, Susan, and good morning everybody. I'm pleased to report that New Senior kicked off 2016 with solid growth in both asset and company performance. Our same-store managed portfolio posted year-over-year NOI growth of 2.3%. Breaking that down, same store revenues grew 3.6% year-over-year, and 60% of that growth is attributable to our strong occupancy gains of 180 basis points. On the right side, our portfolio realized steady revPOR growth this quarter of 1.4%. Rate generally held strong in our higher occupied properties, with 2.5% to 4% growth, and at certain leased out [ph] properties and markets, rate growth was a bit more muted due to the use of marketing incentives. Generally, our strategy has been that once we get to more stabilized occupancy levels, we can push on rates. And in the interim, we are very focused on the careful use of incentives to make sure we strike that right balance between occupancy gains and revPOR growth. Expenses grew in line with revenues at 4.1% year-over-year, predominately driven by higher labor costs across the portfolio. This expense growth is due to higher occupancy, budgeted wage increases, higher staffing levels at certain properties, as well as the extra operating day in the quarter. As a result, same-store NOI margins dipped slightly to 27% this quarter, down 30 basis points sequentially. On our lease portfolio, which accounts for roughly half of our earnings, we saw strong cash NOI growth at 10.6% year -over-year. This is due to the benefit of our annual escalators, along with the addition of one property we acquired last May. On a same-store basis, our cash NOI grew 4.4%. NOI for the entire portfolio was $57.3 million. Year-over-year, NOI growth was 45%, which primarily reflects the 33 new assets that we have added since last year, as well as strong organic growth. Turning to our total Company earnings, our NFFO was 26.5 million or $0.32 per basic and diluted share. On a year-over-year basis, NFFO grew 19%. AFFO for the quarter was 23.9 million or $0.29 per basic and diluted share, representing a 32% year-over-year increase. Both NFFO and AFFO in Q1 includes total G&A and management fees of 8.3 million and total interest and tax expense of 22.6 million. Our normalized FAD, which adjusts AFFO for 2.1 million of maintenance CapEx, was 21.8 million or $0.26 per basic and diluted share this quarter. Q1 total CapEx was 4 million, which annualizes to roughly 1450 per unit, and half of that relates to maintenance CapEx. And lastly for the quarter, our Board of Directors declared a $0.26 dividend, which represents a 90% payout ratio in AFFO and 100% payout ratio of our normalized FAD. Now looking at our capital structure, this quarter we continued to make improvements, completing our 30 million tender offer in January for 3.3 million shares at $9 per share. To quickly recap, since we launched our share buyback program in December 2015, we have repurchased a total 40 million of New Senior equity at an average price of $9.05 per share. At the end of Q1, we have 82 million shares outstanding. On our balance sheet, we ended the quarter with 2.2 billion of debt with low cost of funds of 4.1%. 60% of our debt is fixed rate, and we have no significant maturities until the end of 2017. In addition, we have maintenance covenants in only two of our mortgage financings, which has a balance of 150 million combined. At the end of the quarter, we ended with total cash of 80 million of which 30 million to 40 million is available for investment. Turning to page 12, taking a step back, if you look at our performance since inception, we have delivered solid and consistent growth for investors across all key metrics. Our NOI has almost grown 50% from a little over a year ago and our NFFO and AFFO is up significantly, 23% and 53%, respectively. Turning to slide 13 to conclude, we had a good portfolio performance in Q1, with industry leading occupancy gains and solid NOI same-store growth. We believe that our private pay senior housing portfolio is well positioned to grow. Half of our managed portfolio is composed of stabilized assets that we expect to grow in line with industry and the other half of the portfolio still has meaningful occupancy upside to grow at a faster rate. Our Company earnings posted solid year-over-year growth in NFFO and AFFO, and our dividend increased 13% year over year. Lastly, we stayed disciplined around our capital allocation decisions and are focused on generating attractive returns for our investors. And with that, I will now turn the call over to the operator to open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Paul Morgan from Canaccord. Your line is open.

[Paul Morgan:]

Just a couple of questions, first on the asset sales, if I kind of look back at last quarter's presentation, there was sort of little bit more of a focus on kind of that part of the plan than what I see this quarter. And I'm just wondering whether kind of it still is kind of an important part of how you see this year evolving or whether, I don't know, your initial experience with marketing the assets or whether the stock move or anything like that is going to change the way you're thinking about kind of the volume and then using proceeds for a buyback.

[Susan Givens:]

Yes, sure. To kind of summarize, no, our view of it has not changed at all. We've taken a little bit of a different stance, and I commented on this briefly, but I can elaborate. We originally really went out with some portfolio deals. And what we found in the market, there's a lot of interest and very strong interest. But we were able to kind of garner more interest when we started looking at the assets on an individual basis, and in many cases putting together portfolios that were single assets or two assets, that kind of thing. So we're changing and pivoting our strategy a bit in order to really maximize proceeds. So we saw that we could, in some cases, generate kind of a 50 basis point sort of tightening on the cap rate side if actually could break up the assets instead of doing some portfolio sales. So it's, I think because of that, we're trying to be really careful and strategic about how we sell the assets, but our overall strategy has not changed at all. We're just trying to be really smart about it and make sure that we can actually get the best price possible for our assets.

[Paul Morgan:]

Okay, great. Thanks. And then, on the Holiday portfolio, you've talked about how Holiday's been rolling our revenue management. And I'm just kind of wondering whether I know I saw the sequential pickup in occupancy in the first quarter, normally kind of a seasonally slower period maybe. And I'm wondering kind of how the experience has been between the kind of tradeoff between rate and occupancy and whether maybe some of the revenue management initiatives have had an impact on that.

[Susan Givens:]

Yes, sure. I think, I mean, to bifurcate it a little bit, so most of the revenue management sort of initiatives are really focused and centered around independent living properties, so the pure kind of bread-and-butter Holiday model properties. And those are a big portion of our triple net assets and then, of course, of the kind of 2015 acquisitions that we did. And so we're seeing there -- and sorry, I should note that the IL properties that we acquired last year are not yet into our same-store numbers. So when you look at the revPOR kind of growth, it doesn't necessarily include a lot of those holiday assets, where a lot of those revenue initiatives are relevant, if that makes sense. So, but if we look at kind of those IL properties, although it's not captured in our same-store numbers, we are seeing very solid revPOR growth and we're seeing that being able to look at kind of revenue and have the tools and the modeling capabilities that kind of have not existed historically in the industry. It's actually really helping us get smarter and helping Holiday make good decisions about kind of where to price units. And what we're seeing kind of across the board with those Holiday assets is we're getting very, very strong revenue growth. So there, within the Holiday IL portfolio, solid occupancy growth, not the same as what we've seen on some of our other, as we call them, kind of mom-and-pop acquisition assets, where the occupancy growth has been really pretty significant, with the Holiday kind of steady, IL properties we've seen solid occupancy growth, but there's we've seen lots of kind of pick up on the rate side. What we are seeing on our same-store pool, I think which is reflected in our numbers, our strategy has always been to buy assets where we think there's meaningful kind of upside, and we buy these small assets or small portfolios from kind of mom and pops. And so there, occupancy tends to be lower. And we really have always taken the approach, and it's a strategy that's worked very well for us, that initially you try to increase occupancy and then you try to increase rate. And so we have very strategically gone through our portfolio with our operators and focused on driving occupancy kind of first and foremost across properties that need additional bumps, and then we start implementing kind of price initiative. So it's a very normal sort of flow for us, and that's kind of what you're seeing and what we continue to see now.

[Paul Morgan:]

And just lastly, you've got the breakout in the managed portfolio with the 42 assets and kind of that 43rd asset where you had the problems last year. So if I look at kind of the total with 43 with the same-store NOI at kind of 0.5, do you think that will be the trough for that number? Because I know that over the course of this year, obviously, you're going to be adding more assets to that pool. And then also, I would expect that one asset to start to kind of reverse as those issues anniversary and you've resolved them there. So do you think that kind of that first quarter number is going to end up being the low?

[Susan Givens:]

Yes. I mean, I think -- so a couple things that are going on this quarter in particular, right. So one, as opposed to lots of others in the industry, in the first quarter of last year, we had a very strong Q1 in 2015. And kind of going back to Q1 2015, our same-store growth was 6.3%. So when you look at Q1 of this year, we are coming off of a really strong quarter last year. So the 2.3% that we posted, I think is actually a very good number when you consider kind of what our Q1 2015 was. So that is something to kind of take into consideration. But, yes, as we have that -- that asset is actually, happily, is back kind of fully functioning and should be kind of creating a lot of uptick in our numbers beginning in Q2 that should contribute positively to our same-store numbers.

[Operator:]

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

[Susan Givens:]

Great. Thanks everyone for joining us, and we look forward to posting you next quarter. Thank you.

[Operator:]

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