New Senior Investment Group Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good morning, my name is Rachelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Senior Third Quarter, 2016 Earnings Call. All lines are placed on-mute to prevent any background noise, after the speakers remarks there will be a question and answer session, [Operator Instruction] Thank you. Ivy Hernandez, you may begin your conference.

[Ivy Hernandez:]

Good morning, and welcome to New Seniors third quarter 2016, earnings call. With me today are Susan Givens, Chief Executive Officer; Bhairav Patel, Chief Accounting Officer and Interim Chief Financial Officer; and David Smith Managing Director. As we begin, I would like to point out that certain statements made today may be forward looking statement. By their nature, forward-looking statements are subject to a number of risks and uncertainties. As described in the company's SEC filing. Actual results may differ materially from management's expectations. And the company disclaims any obligation to update forward-looking statement. In addition, please note that reconciliation of the non-GAAP financial measures referenced on this call, can be found in the investor presentation posted to New Senior website. Now I'd like to turn the call over to Susan.

[Susan Givens:]

Great, thanks, Ivy and good morning everyone, and thank you for joining us today for New Seniors third quarter 2016 earnings call. We posted an investor presentation on our website this morning, and I'll be referring to page in that presentation. Following my remark, David will review portfolio performance and Bhairav will review our financial results. Before we discuss the results for the third quarter, I want to take a minute to quickly comment on the overall industry. The key attributes of our portfolio in the trends we're seeing in the market. Today, we have one of the largest portfolios that independent living and assisted living property in the U.S. And we're part of one of the most compelling industries in the world. Our target demographic individuals age 70 and older is that fastest growing cohort of the U.S. population and expected to grow six times faster than the total population over the next 20 years. Our strategy has been and continues to be focused on private pay, Independent and assisted living properties. And as you can see on Page 3, 100% of our NOI from private pay asset and 71% of our NOI is from independent living assets. To put in context, those are the largest concentration of private pay and independent living assets among our peers. We recognize the volatility in the market, and acknowledge concerns around the senior housing sector, but we believe the senior care industry is one of the most exciting and compelling industries to be invested in. As I mentioned before, 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 can 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 the 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 and to drive growth across our portfolio. These opportunities coupled with the large macro demographic trends, are why we remain so optimistic about the long-term prospects for our business now. Now, turning to the highlight for the quarter on Page 4; I'll spend a few minutes discussing key take away for the quarter before turning it over to David and Bhairav, to discuss the result in more detail. First, the company continued to generate solid financial results. Total NOI for the quarter was approximately $57 million up 7% versus the same quarter last year, while normalized FFO for the quarter was approximately $26 million or $0.31 per basic share up 3% year-over-year. And AFFO was approximately $23 million or $0.28 per basic share up 4% year-over-year. Second; across our portfolio total cash, NOI decreased modestly year-every-year. Our same store manage portfolio, experience occupancy in 80 basis point year-over-year. But the occupancy growth was offset by modest rate growth in an increased use of incentive. And these factors resulted in that 3.2% decline in managed same store and NOI year-over-year. At the same time, our IL asset -- that had a great quarter. To put our managed same store NOI resulting in context, we broke out the performance of our IO managed assets, and we analyze the impact of individual asset in our same store results. This quarter our IL assets, posted very strong results, with NOI up 8.8% year-over-year, as a reminder about 63% of our total manage portfolio is now independent living asset, versus only 47% of our same store portfolio, and all those purposes, we calculated that, excluding five of our underperforming assets, total cash NOI would have been up 2.1% year-over-year, and our same store manage NOI would have been up 2% year-over-year. Those numbers are obviously alternative, but I think it really tells you that many of our assets are performing far better than the aggregate results might suggest. And third, we're happy to report that we recently completed the sale of two assisting living memory care asset, as part of our strategy selectively sell non-core assets. Turning to page 6, the purchase price of approximately $23 million represent the cap rate of about 6% in the sale generated a $13 million gain, in total the investment represented up 40% levered IRR, and equated to a multiple of 2.4 times our invested equity, so a good result by just about any measure, obviously this is not a large transaction, but we believe it demonstrates the value of our assets. We continue to be very mindful of our stock price, and we continue to view our current valuation, with our stock trading at a 7% to a 7.5% implied cap rate, as a significant discount to the underlying value of our assets, the sale also improved enhance portfolio margins by 20 basis points. We've been very deliberate and careful with our disposition, and we will only look to sell assets if it's at the right price and makes sense for the company. We view this as a good strategic decision, not a defensive measure. We're actively marketing a couple of portfolios now, and we're focused on continuing to harvest gains, obviously this is all market dependent, but what we've seen so far is that there continues to be interest for high quality senior housing assets. And with that, let me turn it over to David.

[David Smith:]

Thanks Susan and good morning, everyone. For the third quarter our managed portfolio total 96 properties, comprised of 53 independent living and 43 assisted living and memory care. NOI attributable to our managed portfolio represented roughly half of our total NOI. Total manage documents increased 120 basis points year-over-year to 88.1%, primarily due to our acquisition of 28 highly occupied independent living properties in the third quarter 2015. RevPOR decreased 7 points -- 7% year-over-year, as a result of the greater number of IL assets, and the fact that IL has a lower price point than AL. Total managed NOI increase 15.6% year-over-year to 28.9 million, our same store pool currently represents 2 thirds of our total managed portfolio, or 64 properties. On a year-over-year basis our same store portfolio experienced a 3.2% decline in NOI, we benefited from strong occupancy growth of 80 basis points which exceeded the industry's decline of 20 basis points, at the same time rep for growth was muted at 0.1% year-over-year, with moving fees per new resident decreasing 14%, rep results also affected by an increase in acute mix towards independent living, which has a lower price point than assisted living, this shift accounting for about a 50 basis point decline. On the expense side, we experience solid expense control this quarter, with total operating expenses growing 2.9%, excluding a one-time step up and management fees that certain assets, total expenses would have increased only 2.4%, this reflects our operate success managing labor costs, which only increased 1.7% per resident. Next quarter, essentially all of our portfolio will be included in our same store pool, with the addition of 28 high quality, 100% private pay independent living properties, we purchased in August 2015, which we expect will provide additional stability to our same store results. Given the size of our current pool, a few properties can have an outsize negative impact on our results. As Susan mentioned, excluding from our same store pool five properties that had has significant declines in year-over-year NOI. Our NOI would have increased 2.0% year-over-year, which illustrates a significant impact, a few properties can have on our current same store pool, we continue to be strong proponents of our portfolio strategy, which is focused on the independent living sector. The IL assets in our same store portfolio, generated strong NOI growth at 8.8% year-over-year, which included rep for growth of 2.7%, and occupancy growth of 110 basis points, a significant portion of this growth was from holiday [ph] managed assets we acquired for $435 million in March 2015, which has turned out to be an outstanding acquisition for us. Our IL performance continues to demonstrate why we attracted to the subsector senior housing, one, longer length of stay of roughly three years provide greater stability in cash flows, two less new supply with IL construction rates continuing to be at half of the rate of a AL construction. Importantly, our conversations with lenders at the recent Nick Conference indicate they are pulling back significantly on new construction financing, which should keep construction levels online going forward. This is also evident in the recent Nicks data which shows a steady decrease in IL construction starts, along with Nick's projection for IL occupancy to remain flat over the next four quarters. And lastly, higher NOI margins with our IL portfolio margins exceeding 40%, compared to AL mid-twenties, given these characteristics we look forward to the increase in the IL proportion of our same store portfolio from 47% today to approximately 65% next quarter, when the 20 IL properties purchased in the third quarter 2015 roll into our same store pool. The other half from NOI, comes from a triple net portfolio, which is comprised of 58 properties including 52 independent living, five rental CCRC and one assisted living. Total NOI for the third quarter was 28.2 million. Same store cash NOI growth for this portfolio was strong at 3.9%, due to the contractual least escalations in this portfolio. For the trailing 12 month period ending June 30, occupancy was 88.4%, down 40 basis points year-over-year, and EBITDA coverage dipped slightly from 1 to 1.2 times, notably our holiday portfolio which comprises approximately 80% of our triple net lease portfolio, achieved its best NOI performance since acquisition with that September results, along with average occupancy for the third quarter up 20 basis points on a sequential quarter basis, so the recent trend in this portfolio are positive. We continue to maintain next only maturity schedule with an average remaining life for 14 years and no maturities until 2029. And finally, our triple net portfolio continues to generate a strong on leverage return of approximately 7.2% on a cash basis, and 9.0% on a gap basis. With that I'll turn the call over to Bhairav to discuss our financial results.

[Bhairav Patel:]

Thank you, David, and good morning everyone. I would walk through our financial results for the quarter a summary of which included on Slide 10. Our NOI and cash analyzed for the quarter was $57.1 million and $52 million; an increase of 7% and 9% respectively year-over-year, the increase is primarily driven by the acquisition of 20 -- 28 independent living properties in August of last year, normalized at the AFFO was $25.7 million or $0.31 per diluted share, an increase of 3%year over year, adjusted AFFO was $22.9 million or $0.28 per diluted share, an increase of 8% year-over-year. Normalized sat which adjusts AFFO for approximately 1.7 million a routine cap-ex was 21.1 million or $0.26 per diluted share this quarter an increase of 8% compared to prior year. G&A and management fees were $7.5 million for the third quarter, although G&A management fees combined increased by $0.3 million year-over-year, the decline as a percentage of total revenues to 6%, decline of 1% compared to last year. Interest expense increased 15% to $23.1 million this quarter compared to last year. The increase was primarily a result of the financing of the 28 independent living facilities acquired last August. We had $2.1 billion of net debt outstanding at the end of the quarter with a weighted average maturity of 5.6 years and an effective interest rate of 4.2%. We also recorded income tax expense of $7,82,000 compared to $3,78,000 benefit to prior year. For the managed portfolio, total CapEx was $3.8 million and our annualized spend was approximately $1,400 per unit. About 50% of the CapEx spend was for our non-routine items. Gross assets remained unchanged at $3.3 billion at the end of the quarter with $73 million in cash and cash equivalents. Subsequent to quarter-end, we sold two ALMC properties for $23 million at a gain of over $13 million. These properties have a base of approximately $10 million and have been classified as held for sale and included in another assets on our balance-sheet as of September 30. In connection with the sale we paid down $13.7 million in debt associated with the properties. Lastly, our Board of Directors announced a divided $0.26 per common share. The dividend is payable on December 22 for shareholders of record on December 8. It represents 92% of AFFO which is generally consistent with prior quarters. I will now turn the call over to the operator to open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from Saf [ph] from Stifel. Your line is open.

[Unidentified Analyst:]

Good morning. Thanks for taking my question. First question, just on the opening remarks and comments about technology and older dots emerging and serving the unique needs. Are you guys seeing average age of new residents increased and maybe delay seniors moving into independent living facilities, would that dampen occupancy or any color there?

[Susan Givens:]

We are seeing average age across the board increase, it is not going to last couple of years. So we've seen both the average age on the assisted living side moving up a little bit and we have seen that happen on the independent living side. I think happily for us with independent living, we're also seeing that the length of stay has really kind of remained pretty consistent and so while we are seeing people coming to independent living a little bit later there are staying sort of in the same amount of time historically, because as we see across kind of the world, people are living longer, healthier lives; so everything has kind of shifted as we have seen it. So I don't think that's actually dampening occupancy on the IL side, in fact I think it's actually helping occupancy on the IL side because IL facilities are increasingly able to you know accommodate a slightly older population versus what they have been in the past.

[Unidentified Analyst:]

All right, great. And then last quarter they looked like we had backed out four performing assets from the same-store growth for illustrative purposes. This quarter it's five properties, is the mix of these the same as last quarter which was mostly AL assets and are there I guess repeat of spenders in this pocket?

[Susan Givens:]

Yes to both of the questions. So the vast majority of those assets are IL I think all except for one our IL assets and there are properties that were in the bucket last quarter as well. So what that tells us and again we just try to show that to just kind of illustrate the impact more than anything else but we have couple who were pretty focused on and we have seen performance follow-up at few of those properties more so than the entire portfolio and we just want to be sort of clear with folks that it's not systemic across the entire portfolio, just the couple of assets where we have seen some challenges but it really is more concentrated on the AL side for sure and that's why when you look at kind of numbers and you purse them apart you see that for us independent living has held up very well and in fact this is a great quarter for independent living, it's really the assisted living assets which -- we're not happy about that but it does comprise a smaller percentage of our overall portfolio but those are the assets where we have seen more challenges.

[Unidentified Analyst:]

All right, great. And then have your thoughts changed about maybe selling of these underperforming assets rather than trying to stabilize them. It just seems like recently private equity buyers are more interested in opportunity assets?

[Susan Givens:]

Again, that's a great point and we've seen that. So yes, I think without kind of saying too much you know some of the assets that we are looking to dispose of are some of the assets that you know are either under performers or assets that we feel less confident about future growth prospects under our ownership. So yes, to answer your question and I think that we are really focused to put the portfolios so we can optimize our portfolio and actually have the best assets in our portfolio that are positioned not only kind of to perform in the current market environment but to continue to grow and so -- so, yes.

[Unidentified Analyst:]

Okay, thanks. And then last question and I'll hop back in the queue. Given where your stock price is trading today, can you just update us on your thoughts about the use of proceeds from dispositions and sort of how you are thinking about maybe repaying debt or funding acquisition for those proceeds?

[Susan Givens:]

Yes, sure. I mean it's consistent with what it's been and I think we always try to make decisions around use of proceeds taking a longer term due versus kind of reacting to stock price fluctuations over a day or so but really the plan is consistent which is to actually kind of looking kind of proceeds post this position and determine what's the best use of capital. We are repaying debt as a part of the use of proceeds associated with this acquisition so debt paid down is happening in conjunction with that so that's what's going on. And the assets proceeds beyond that you know that's something we are still considering exactly what to do it but all the options that we talked about historically remain intact.

[Unidentified Analyst:]

All right, great. Thanks for the answers.

[Susan Givens:]

Thanks so much.

[Operator:]

Your next question comes from Paul Morgan from Canaccord. Your line is open.

[Paul Morgan:]

Good morning. You mentioned the drag from you know recent some of the assets can you give any color on that is there any geographical stories you know where that's more of a requirement these days and then just kind of more setting back a little bit I mean do you guys have a road map or you think you know based on what you are seeing you will see the manage things store, numbers can turn back into a positive territory?

[Susan Givens:]

Sure so to take your first question on incentives. We are seeing the use kind of incentives concentrated and kind of with select assets more than others, we are seeing it in areas where there is more competition and so we are seeing our operators use it as a tool to drive you know kind of occupancy I think when you look at our numbers you are seeing the occupancy is going up but there is also increased incentives and so we are working with our operators to try to strike that balance and I think for us being part of the strategy has always been acquiring you know under managed as we call them assets and really the first step is kind of getting occupancy to a stabilized level and then you push rate in other things. And I think that works great with some of the assets I think you perhaps need to perhaps take a different approach assets and so I think right now we are certainly seeing that it is not widespread across the portfolio but with some of the assets where there has been some more competition and you know new builds coming online, we are seeing the operators deferred to kind of the easiest thing to do which is to offer incentives and we move in in order to get new residents in the buildings. And that has to be managed very, very carefully because we have talked about before it all boils down to the operations so it tends to be more with new competition has kind of resent which is not a surprise. I don't think and so that's your first question. The second question, you know we have seen some positive momentum with our IL assets recently which to sort of say okay we don't think it will drag with the couple of our assets but I think we are pretty focused along with our operators on those five assets to be pointed out on really trying to drive some improvements there and you know it's getting new management teams in the properties. It's making sure the regional teams are focused on the right thing just making sure the sales folks are trained properly and are focused on how to sell kind of in the current market sourcing, so some positive signs there. But I think to give a specific kind of date and number would be a you know a bit premature but we are seeing some positive trends which is good.

[Paul Morgan:]

Okay, and then you mentioned earlier marketing a couple of portfolios and I know that was something you were doing earlier in the year, and then back if I remember correctly kind of stepped back a little bit from that, is that right and then is what you just talked about today, yet indication of just kind of what you're saying in terms of activity in the market, is this something that you think could be transacted in on a couple of months or it's sort of more of a soft process.

[Susan Givens:]

Yes sure, we should be clear there about -- I mean we're on we're not marketing any large portfolios at this point, we really taking the strategy recently which would have been successful to go out and really kind of have a couple of assets in a bunch of sort of smaller portfolios, that we're seeing a lot of traction, that's where we are seeing a lot of interest from kind of private equity buyers and other parties. So, that approach we're taking, that's very similar to what we just did but that the sale and we just completed and so as you can see from the numbers are very successful sale. So, we're really kind of trying to take that strategy and kind of do that on a go forward bases. So, you're doing large scale portfolio that more kind about that same type of thing, and there is things here and now we're working on as we speak, these things like we've always kind of talked about a little bit fluid but we've got some LOIs signed on, some portfolios, we've got other things that -- we've got bids due and another thing kind of happening right as we speak. So there is a decent amount of activities, and I would say kind of verses where we were in the beginning of the year it does seem like the interest level is higher and people are more willing to kind of transact and to sort of move, verses in my view people were just interested in looking at things in the beginning of the year, but not as interested in kind of being serious and really kind of moving forward. We have good interest level, but importantly from my perspective we're getting good interest level at good prices, and again the deal we just -- we do we just announced here it really is terrific pricing, it allows us to like I said sell AL Memory Care assets good shifting even more our portfolio to independent living, and it was at a great price. Like I said it's not the largest transaction ever announced but it to be able to buy assets and be able to book a pretty significant gain over a relatively short period time and the investors at the end of the days of being able to buy something and generate kind of a return on your investment equity a close to 2.5 times is great. And so that were targeted on giving out -- targeted and focused on doing in that we're kind of thing and seeing more of in the market right now.

[Paul Morgan:]

All right, thank you. Did you mention what the impact on the same store results might have been if you'd included the 28 IL portfolio little roll into the pool next quarter. Would you move the needle much?

[Susan Givens:]

We did not much, but I think it would have been sort of relatively similar.

[Paul Morgan:]

Okay. Greats thanks.

[Susan Givens:]

Thanks, Paul.

[Operator:]

There are no further questions in the queue at this time. I'll turn the call back over to the presenters.

[Susan Givens:]

Great. Well, appreciate everyone dialing in and we look forward to updating everyone in the coming weeks and months. Thanks everyone.

[Operator:]

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