New Senior Investment Group Inc.
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good morning and welcome you to New Senior Investment Group's Second Quarter 2016 earnings call. My name is Tayshaun 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 David Smith, Vice President.

[David Smith:]

Good morning. I'd like to welcome you to New Senior's second 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. 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 materials, 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 second quarter 2016 earnings call. We posted an investor presentation on our website this morning and I’ll be referring to pages in that presentation during my remarks. Before we discuss our results for the second quarter I wanted to take a minute to quickly recap our capital allocation strategy over the last 12 months and how we demonstrated our continued commitment to increasing shareholder value. Around this time last year as we began to notice meaningful cap rate compression for senior housing acquisitions, I announce that we would shift our traditional focus on acquisitions to driving performance across our existing portfolio. The decision came on the yield of over $1 billion of acquisitions in the prior 12 months. So there was plenty of work to do in terms of integrating new assets. As we pulled back on new acquisitions we capitalized on market volatility by deploying cash to buy back our stock in the open market as a part of a tender offer. These repurchases were completed earlier this year at a nearly 25% discount to where our stock is today. Given the absence of compelling acquisitions and the steep discount at which we were trading this is a great use of our capital. During this time we have also been evaluating selective asset sales and as I’ve said before the point is to improving our portfolio if and when it makes sense in light of our portfolio’s overall composition and our ability to recognize gains. We are looking to do this on a modest scale as we currently have a couple of pending sales that we hope to close in October. Now turning to the presentation I’ll spend a few minutes discussing key takeaways for the quarter before turning it over to Justine to discuss the financial results in more detail. On page 4 I’ll quickly review the highlights for the quarter. First the company continues to generate strong financial results. Total NOI for the quarter was approximately $58 million. Normalized FFO for the quarter was approximately $28 million or $0.34 per basic share and AFFO was approximately $25 million or $0.31 per basic share, all up over last quarter. Second, this quarter we continue to focus on achieving organic growth across our managed portfolio of 96 assets. For certain assets, our operators have pursued a strategy of increasing occupancy to stabilize levels as a precursor to really pushing on rates. This strategy has produced outsized occupancy growth, as you can see from our same-store portfolio, which experience occupancy growth of 120 basis points year-over-year. That said the occupancy gains were accompanied by a more modest rate growth in an increased use of incentives resulting in revPOR growth of 1.3% year-over-year. In addition higher expenses offset revenue growth producing a 3.7% decline in same-store NOI year-over-year. In order to put this in context, we broke out the performance of our IL assets and we analyzed the impact of individual assets on our same-store pool. This quarter our IL assets posted very stable performance with NOI up 2.6% year-over-year if we pro forma for the 28 IL assets we purchased in August 2015. As a reminder about 60% of our total managed portfolio is now independent living assets versus only 44% of our same-store portfolio. In addition if you exclude four of our underperforming AL Memory Care assets, our same-store growth would have been up 2% year-over-year. These numbers are obviously illustrative, but I think it really tells you two things. First our same-store portfolio still doesn't include about one-third of our total portfolio and small movements within the portfolio have a meaningful impact on our same-store results. But not necessarily on the overall financial results as evidenced by the fact that our NFFO and AFFO were both up this quarter versus last quarter. And second, our same-store pool is currently heavily weighted towards AL Memory Care and it’s not necessarily representative of the strength of our overall portfolio, which is primarily IL. That being said today more than ever, we're focused on collaborating with our operating partners to generate organic growth across our entire portfolio. And while a lot of progress has been made, we believe we still have significant room for further improvements. And lastly, this quarter we continue to make progress on our plan to make selective asset dispositions. We have assets under contract for sale and we expect those sales to close in Q4. We're not ready to get into the specifics on the deals just yet, but I will say that our asset disposition strategy has continued to evolve as the market has changed. And we're focused on being very strategic about how we sell assets in order to maximize returns for shareholders. Now turning to Page 5, I will spend a minute on our financial performance. Overall, our financial results continue to be very strong and we remain focused on steady and consistent sequential quarter growth. NOI for the quarter was up slightly versus last quarter. While NFFO per share was up 6% on a sequential quarter basis and AFFO per share was up 7% over the same period. At the same time, the return on our invested equity stands at around 11%, which we believe really speaks to the quality of the investments we've made and the strong returns that our portfolio continues to generate. Turning to Page 6, I’ll spend a little more time on the managed portfolio. Today, our managed portfolio includes 96 properties across 33 states. Average occupancy across the entire managed portfolio increased 210 basis points from 86.2% in Q2 2015 to 88.3% in Q2 2016. On a same-store basis, occupancy was up 120 basis points from 86.1% to 87.3% and NOI was down 3.7% year-over-year. On a sequential quarter basis, same-store occupancy was flat and NOI was up 2.1%. It's worth reiterating that our same-store portfolio continues to represent a relatively small portion of our overall portfolio and is currently heavily weighted towards AL Memory Care. Specifically today our same-store managed portfolio includes 64 assets, which represents 66% of our total managed portfolio and 34% of our total company portfolio. The mix in our same-store pool is 56% AL Memory Care and 44% IL, compared to 40% AL Memory Care and 60% IL for our total managed portfolio and 30% AL memory care and 70% IL for a total Company. Obviously that's a lot of numbers but the point is that we have a disproportionate concentration of AL Memory Care in our same-store pool compared to both our total managed portfolio and our total Company portfolio. We like AL Memory Care as a component of an IL dominant portfolio but it can’t introduce volatility, which we saw this quarter. Page 7, now 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 is currently solid with coverage for the total portfolio of 1.24 times down a little from last quarter and average occupancy of 88.8% for the trailing 12-month period ended March 31. That's up 60 basis points over the same period last year. On a same-store basis coverage was at 1.22 times and occupancy was 88.8% also up 60 basis points year-over-year. Turning to Page 8, through our acquisition strategy, we have actively sought to improve the overall quality, stability and growth profile of our portfolio. And our results are really beginning to reflect the benefits of our efforts. Going forward we believe our portfolio is awesomely 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 think our portfolio is incredibly unique versus others in the market a 100% of our NOI is private pay which means our portfolio is incredibly stable and less vulnerable to economic or regulatory changes. On top of that approximately 70% of our NOI comes from independent living assets. We like IL because it's more stable, there's less regulatory oversight, the margins are higher and the average length of stay tends to be much longer than an Assisted Living in Memory Care. In addition we're seeing less new supply coming into the market on the independent living side as compared to AL memory care, so that means less new competition. Our results demonstrate the benefits of owning private pay IL assets and we expect that our IL assets will continue to provide stability to our overall portfolio as IL asset become a larger part of our same-store pool. Taking a look at the chart on the lower right hand side of the page, you'll see that NOI from IL assets in our same-store portfolio grew 1.6% year-over-year. In addition to those IL assets, we have 28 IL assets in our managed portfolio that we acquired last August. We expect those assets to have a positive impact on our same-store performance and calculating NOI on a pro forma basis to include these produces NOI growth up 2.6% year-over-year. Again this is just illustrative, but it helps show how our assets are performing today and how we are positioned for future growth. Page 9, before I turn it over to Justine, I want to briefly discuss the continued strong demand fundamentals both near-term and long-term in the senior housing industry and why we continue to be excited to be one of the largest owners of senior housing in the U.S. We're really proud to be the only pure play senior housing read out there and our strategy has been and continues to be to focus on private pay, independent and assisted living properties. Our target demographic – individuals age 75 and older is the fastest growing cohort of the U.S. population and is expected to double over the next 20 years. So the long-term demand remains strong as we all know. Over the next 10 years, the annual growth rate in the 75 plus population is also expected to double from an annual growth rate of 1.8% today to 4.3% by 2025. So the near-term trends are also extremely favorable for the industry. A comparable look into the projected demand in our market produces a similarly strong outlook for our portfolio over the next five years. Looking within a five-mile ring of each of our managed properties the annual growth rate for the 75 plus population is expected to increase approximately 50% over the next five years to 2.1% versus 1.4% for the past five years. Our properties have achieved strong historical growth and we think we're uniquely positioned to benefit from continued growth going forward, which is why we remain very 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 everyone. I'm pleased to report solid company performance for new senior second quarter earnings. In Q2, we had total NOI of $57.9 million an increase of 20% year-over-year. That reflects the growth in our asset base from 124 to 154 properties today. Sequentially our total portfolio NOI was up 1% and roughly half of that was generated by our managed assets, which grew at a steady rate of 2% quarter-over-quarter. Our total same-store managed NOI was up 2.1% this quarter versus last. And on a year-over-year basis had a 3.7% decline. Our occupancy growth was strong year-over-year with 120 basis point gain and the pool saw steady revPOR growth of 1.3%. Digging further into rate our stabilized properties with over 90% occupancy saw higher revPOR growth of approximately 4% year-over-year. Well not surprisingly revPOR growth at our lower occupied assets was impacted by the heavier use of incentive. Our overall revenue growth of 2.8% year-over-year was offset by the increase in expenses this quarter, which primarily was driven by budgeted higher labor costs and higher property taxes for the same-store portfolio. As Susan discussed, we believe that our same-store performance is not necessarily indicative of our total portfolio’s growth prospects. Given the small size of the same-store pool is only 64 assets. The pool is highly sensitive to relatively small nominal dollars changes. To highlight that just four assets was able to drive down our same-store results meaningfully. Excluding these four assets our same-store occupancy growth would have been up 220 basis points and same-store NOI growth would have been up 2%. revPOR growth would have been up 2.2% year-over-year. Turning to our lease portfolio, which accounts for the other half of our earnings, we saw strong same-store cash NOI growth of 4.4% year-over-year. Looking at total company earnings our NFFO was $27.7 million or $0.33 per diluted share. On a year-over-year basis NFFO declined 8% and was up 3% quarter-over-quarter. AFFO for the quarter was $25.2 million or $0.30 per diluted share flat year-over-year and up 3% quarter-over-quarter. The NFFO and AFFO in Q2 include total G&A and management fees of $8 million and total interest and tax expense of 22.3. Our invested interest rate for the quarter was 4.2% on our $2.1 billion of secure debt, which has an average maturity of six years. Our normalized FAD, which adjusts AFFO for roughly $2 million of routine CapEx was $23.1 million or $0.28 per diluted share this quarter. Q2 total CapEx was $5.6 million and year-to-date our annual spend is roughly 1750 per unit of which 44% of that or 750 per unit relates to routine CapEx. And lastly for the quarter our Board of Directors declared a $0.26 dividend which represents an 87% payout ratio on AFFO and 93% payout ratio on our Normalized FAD. In summary, New Senior had solid financial results for the quarter and looking forward we believe our portfolio is well-positioned in today’s current market environment. And with that I'll turn the call over to the operator for any questions.

[Operator:]

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

[Paul Morgan:]

Hi, good morning.

[Susan Givens:]

Hi, Paul.

[Paul Morgan:]

Could you provide a just a little more color about the four assets that you excluded, are those all AL and kind of what drove I mean obviously it’s a pretty sizable decline in their same-store NOI.

[Susan Givens:]

Yes, sure. Yes, they are all AL assets and actually if you dig into it a little bit further even it's really one asset that is accounting for the vast majority of kind of what's going on there. So it's really like any portfolio we'll have couple of assets that we're focused on and there will be volatility with the asset and that’s kind of what we saw from those four assets and in particular from that one asset. We along with our operator are spending a lot of time kind of focused on that asset, but I think it just highlights the fact that our same-store pool just is relatively small even to this day and so fluctuations which happen have a bigger impact on our same-store pool then perhaps others who have a larger same-store pool. So we just – we wanted to show the information just to kind of give a framework because we don't think the total numbers are indicative of the overall performance of the portfolio, but at any given time you do have one asset or a couple of assets that you're more focused on and that's what we have in this case. But it's really driven more by one asset than anything else.

[Paul Morgan:]

Okay. And are those I mean are those four about one I mean are these assets that you might consider for the need for sale bucket or it just something that we’re, you know you can be – they could stabilize and it's going to recover.

[Susan Givens:]

We're more focused on stabilizing and then recovering, because I think they are opportunity assets for us and candidly I think those are assets we’d rather hold because we want to get the benefit of increased NOI versus looking at assets that might make more sense where we can maximize kind of price. I'm not sure these would be the ones we put in that bucket. So these are – they're good assets and we just think that getting our operators kind of focused on improvements is kind of what we should be focused on it and in most things as people know in this business it boils down to the people running the property on the ground every day. And at this one particular building we're talking about we had some turnover with the key kind of management positions asset property and that has now been corrected and I mean knock on what it’s kind of early, but it seems like we're seeing improvement. So we like seeing that kind of trend with assets. And so we'd rather focus on improvement than necessarily selling the asset at this point.

[Paul Morgan:]

Okay. And if I understand your break out correctly on a sequential basis I see the pool it’s bigger anyway. But broken out versus with – is it a same-store NOI growth was about the same. So I mean am I right to confer that that means there has already been some stabilization in the four assets

[Justine Cheng:]

You're exactly right. We already saw some stabilization. It really impacted us kind of in the back half of last year and sort of into the first quarter, so already we're seeing some improvement which is exactly what we want to see. But you're exactly right, it's mainly a result of performance coming in last year.

[Paul Morgan:]

Where these not in the pool until this quarter.

[Justine Cheng:]

They were, it was in the pool, but it wasn't in the pool all of last year, because it was an asset that was acquired in 2014. So it kind of was in some of the periods, but not all the periods.

[Paul Morgan:]

Okay. And then just could you maybe give a little bit of color around your statement that your disposition strategy has been evolving and then I think that was – is it a couple of assets that you expect close in October.

[Susan Givens:]

That's right. So I think what we're trying to do, we've been pretty candid about that. Is we're trying to be smart about how we sell assets and I think our view, and my view is that the market and the market continuously is changing and we've seen a lot of movement. We started off when we first kind of came out and started talking about selling assets. We witnessed that the reason – we're not that active and so the buyer universe as we talked about last quarter was really kind of more of the private equity funds. And then kind of regional owner operators that continues to be true although I think the reserve of becoming a little bit more active, but what we've seen is that the private equity folks in particular, they're less focused on really kind of stable steady assets and they're more focused on what I would describe as opportunity assets where they can generate real yields on the kind of those mandates for private equity folks. And so we’ve wanted to be smart about what we are looking to sell. And so we've had a lot of assets, we contemplated selling. We’ve talked to a lot of potential buyers. And the assets we're selling we feel very good about them. We feel good about their pricing. We feel good about where we're expected to transact, but we are trying to make sure that we are maximizing prices and so our strategy is evolving as the market evolves.

[Paul Morgan:]

And as you do close deals, any change in kind of what you are picking up in terms of these proceeds.

[Susan Givens:]

No change, I think we just need to evaluate at the time that we actually close the transaction kind of what the best use of capital will be at that point in time. So I think it's everything is still on the table we’ll just have to evaluate when we actually close the transactions.

[Paul Morgan:]

Okay. Great and then just real quick last question going back to the same-store number. Do you have I’m sorry, if its in the stuff somewhere but do you have the total portfolio same-store NOI growth with the triple net assets.

[Susan Givens:]

We don't have. We have not shown that historically or kind of now even if there’s something we can consider kind of including on a go forward basis, but it’s not something we've shown historically.

[Paul Morgan:]

I mean if I look back towards the back of the something looks like I mean in your year-over-year same-store NOI reconciliation you got triple net assets in there. I mean it looks like they are up and I would expect them to be just stay on the lease front. Is there anything, any reason that wouldn't be the case.

[Susan Givens:]

I mean our triple net assets…

[Paul Morgan:]

I felt you provided this before [ph].

[Susan Givens:]

Yes. I mean year-over-year our triple net assets are up 4.4%. So I mean if you – you could add it all together. It’s not that we haven’t actually done that which we can and we have talked about it but it’s – triple net assets are up 4.4%.

[Paul Morgan:]

I mean look, I guess my perspective it is – it makes sense to do I mean your peers certainly provide total as well and its your strong bumps in the leases so it’s something that's worth highlighting it, right. That’s it from me, thanks.

[Susan Givens:]

Thanks, Paul.

[Operator:]

[Operator Instructions] Your next question comes from the line of Chad Vanacore from Stifel. Your line is open.

[Chad Vanacore:]

I would apologize for missing most of the prepared remarks, but can you remind me on what you're thinking as far as any change in the amount of dispositions. And then now what we're thinking about timing.

[Susan Givens:]

Yes, sure. So the amount of dispositions that's evolving kind of as we progress. So I don't want to give a specific number. I think what we've said historically is we had highlighted or identified roughly 10% of our portfolio that we might sell, if the pricing was right, if it made sense for us to actually consider that, that was not a commitment to sell that amount that was not sort of a plan per se. It was really just identifying assets that we would look to potentially sell if it made sense. And so that we still have kind of that list of assets that we would do something with it if it made sense. But I think as I was saying before we're just trying to be very careful and smart about what we're doing. And so we're trying to maximize proceeds and that's meant that we’ve shifted our strategy a little bit. I definitely say that the timing is slower than we originally anticipated. And we started looking at selling assets. I mean its – that to be totally candid, we've seen that. It's in part because of the buyer universe, when you don't have the big REITs out there buying you're really dealing with counter parties that move at a slower pace. So some of it's just candidly out of our control. And then of course there is licensing approvals, it varies by state kind of what has to happen in particular states around what you need to get done. So the timing of it is a little bit fluid, but I’d say we feel as a summary point, we feel very good about the deals we're doing. And so if it means taking a little bit longer to do those deals, I'm okay with that, because it means we're doing the right kinds of deals and we're doing that at good prices. And at the same time, we're still generating decent return from the assets that we're holding within our portfolio, until we actually have sales to be done.

[Chad Vanacore:]

All right. Thanks, Susan. And then just think about the proceeds from those dispositions still thinking about share repurchases as a primary use of those proceeds. And then – and dispositions – or have done acquisitions after that.

[Susan Givens:]

I think we would still consider all of our options, we nothing has changed in terms of what we would look at and that could include share repurchases, it could include debt repayment, it could include making acquisitions or investments to the extent we saw things that made sense. So the same thing we kind of highlighted in the past continue to be what we would be focused on and it just we’ll have to make that decision at the point in time that we're ready to make it and it will depend on a variety of factors. But nothing has changed and it's – we're still focused first and foremost on maximizing proceeds to the extent we’re selling assets. And from there we'll have good options and we can make decisions based on what I think will be good choices.

[Chad Vanacore:]

All right. And then just one question on the financials, looks like management fees were up sequentially. Why would that be, what's driving that?

[Susan Givens:]

Sure. So on our assets particularly within our AL Memory Care portfolio, we have contractual bumps in place on the vast majority of our assets, which kick in after two years. So you'll see an increase for some of our assets that we have now owned for two years. There has been a step up in those management fees. So that's what's going on there.

[Chad Vanacore:]

All right. And how should we figure that stepping up in say the next 12 months or so.

[Susan Givens:]

Those should be the last step up because we don't have step ups on our IL assets. So at this point all with the exception of just maybe a few AL assets are kind of in our pool and have already stepped up. I think both there might be some modest and maybe a couple of assets. But by enlarge all of our assets that are subject to step up has stepped up. So I don't expect that to go up from a step-up it would only go up to the extent revenue on NOI is increasing.

[Chad Vanacore:]

Okay. And then just one more from me. What's a good quarterly run rate assumption on G&A?

[Justine Cheng:]

The $8 million number that we posted this quarter is a good kind of run rate number to use

[Chad Vanacore:]

All right. That’s it from me. Thanks.

[Susan Givens:]

Thanks, Chad.

[Operator:]

There are no further questions at this time. I turn the call over to Susan for closing remarks.

[Susan Givens:]

Great. Well thank you everyone for joining us and we look forward to catching up soon. Thank you.

[Operator:]

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