New Senior Investment Group Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good morning and welcome to the New Senior Fourth Quarter and Full-Year 2016 Earnings Call. My name is Casey 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. For those of you on the stream, please take note of the options available in your event console. At this time, I would like to turn the show over to Ivy Hernandez.

[Ivy Hernandez:]

Good morning. I’d like to welcome you to New Senior’s fourth quarter 2016 earnings call. Joining us today are Susan Givens, our CEO; Bhairav Patel, our CFO; and David Smith, Managing Director. Before I turn the call over to Susan, I’d 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, the speakers may present 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. And with that, 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 Senior’s fourth quarter 2016 earnings call. Following my remarks, David will review portfolio performance and Bhairav will review our financial results. Before we discuss our results for the fourth quarter, I want to take a minute to quickly recap our strategy in 2016. We entered 2016 having completed over $1 billion of acquisitions in the year before. So in 2016, we shifted our focus from acquisitions to integrating our new assets. During this time, we also completed selective asset sales, intended to gradually improve the overall quality of our portfolio, and we collaborated with our operating partners to improve operations and position our assets for future growth. Now turning to the highlights for the quarter. First, total NOI for the quarter was approximately $57 million. Normalized FFO for the quarter was approximately $26 million, or $0.32 per basic share and AFFO was approximately $23 million, or $0.27 per basic share. Second, across our total portfolio, same store cash NOI increased 1.1% year-over-year. For our managed portfolio, same store NOI was relatively flat year-over-year on an account – on account of an 80 basis point decline in occupancy, which was offset by rate growth and lower expenses. Looking at just IL assets within our managed portfolio, same store NOI was up 2.3% year-over-year. Our triple net portfolio posted a 4.3% increase in same store cash NOI year-over-year, at the same time EBITDARM Coverage has declined for several quarters, so we’re monitoring that trend very closely. And third, we completed the sale of another two assisted living / memory care assets in January of this year for $15.5 million, and we used the net proceeds to pay down debt. The sale improved NOI margins of the total managed portfolio by 80 basis points. To-date, we have completed roughly $39 million of sales and we’re actively marketing a couple of additional portfolios now. For 2017, we continue to focus on driving organic growth. To that end, we’re exploring the possibility of diversifying our operator relationship, while continuing to pursue selective asset sales. We’re operating in a competitive market and supply and other factors are exerting pressure on growth. Nevertheless, we remain confident in the medium and long-term fundamentals of our industry. So with that, let me turn it over to David.

[David Smith:]

Thanks, Susan, and good morning, everyone. Our managed portfolio totaled 94 properties at the end of the fourth quarter comprised of 53 independent living and 41 assisted living properties, and represented half of our total portfolio NOI. With the addition of 28 properties to our same-store pool in the fourth quarter, our same-store pool now include substantially all of our managed properties, or 90 out of 94 properties. Same store managed NOI for the fourth quarter was $28.3 million, a decrease of 0.1% year-over-year. Occupancy in the portfolio decreased 80 basis points. We see RevPAR growth of roughly 1%, as our operators have continued to increase rates 3% to 5% on existing residents, though this was partially offset by the continued use of rent discounts and incentives on new residents. As a result, our revenue is up slightly at 0.2%. As in the third quarter, our operating partners continued to do an excellent job with managing expenses, as total property operating expenses increased only 0.4%. Looking specifically at labor costs and normalizing for changes in occupancy, labor costs per resident increased just 1.8%, which was in line with the increase we saw in the third quarter. While competition for labor is competitive, our operators again continue to manage expenses effectively in the fourth quarter. Also, similar to the third quarter, our IL portfolio continuing to outperform our AL portfolio. Our IL portfolio, which represents approximately two-thirds of our same store pool achieved same store NOI growth of 2.3%. We also saw stronger rate growth in IL with RevPAR increasing 2.9% year-over-year. Sequentially, our same store portfolio achieved positive results with NOI up 1.4% for Q4 versus Q3. While occupancy decreased 70 basis points, RevPAR was up 0.7%, along with a 50 basis point increase in NOI margin. We continue to monitor the New Senior housing supply environment and remain focused on maintaining our competitive position in our respective markets. Within our markets, we experienced a high number of new openings during the fourth quarter and consistent with industry trends, substantially all of these were AL properties. On a positive note, our managed portfolios NOI exposure to new supply within a five-mile radius decreased 120 basis points sequentially to 16.6% of total NOI. As we look into 2017, we expect full-year to have a similarly high number of new openings as 2016, with roughly half opening in the first quarter. Similarly, substantially all of these new deliveries will be assisted living product. As many of you know, since our inception, we’ve constructed the portfolio as differentiated from our peers with our IL focus, which accounts for roughly 70% of our NOI. We continue to be uniquely positioned in today’s environment, given the composition of our portfolio. As we work through our budgeting process during the fourth quarter, one of our key areas of focus in light of the current operating environment was designing a targeted and strategic plan with respect to our CapEx investments for 2017. This year, we plan to increase our per unit spend our CapEx by approximately 10% to 15.75 per unit with significantly more being spent on a portion of our portfolio located in markets experiencing new supply pressures. This increased spending coupled with proactive investments by our operators in marketing, branding and staffing should enhance our portfolios ability to remain competitive and attractive in 2017. Our triple net portfolio, which accounts for the remaining 50% of our NOI is comprised of 58 properties, including 52 IL, five rental CCRCs and one AL. Total NOI for the fourth quarter was $28.2 million. This portfolio generated an attractive unlevered cash return of 7.3% for the fourth quarter. Same-store cash NOI growth for this portfolio was 4.3% due to the contractual rent escalators in our leases. For the trailing 12-month period ending September 30, occupancy was 88.0%, down 40 basis points quarter-over-quarter and EBITDARM Coverage fell slightly to 1.19 times. Lastly, our lease maturity schedule remains strong with no maturities until 2029 and an average remaining life of 14 years. 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’ll start by discussing some of our key metrics. Our NOI and cash NOI for the quarter were $57.1 million and $51.3 million, respectively, both of which were mostly unchanged compared to the prior year. Normalized FFO was $26 million, or $0.31 per diluted share, compared to $29.8 million, or $0.34 per diluted share in the prior year. AFFO was $22.5 million, or $0.27 per diluted share compared to $25.7 million, or $0.30 per diluted share in the prior year. Normalized FAD, which adjust AFFO for approximately $2.3 million of routine CapEx was $20.1 million, or $0.24 per diluted share. For the managed portfolio, total 2016 CapEx was $17.2 million, about 50% of that CapEx spend was for non-routine items. A few items to note in the P&L. As discussed in the last call, we sold two AL/MC assets for $23 million early in the fourth quarter. The sale of these two assets generated a gain of over $13 million. Management fees, incentive compensation and G&A combined were $9.5 million compared to $8.6 million last year. Year-over-year, our interest expense increased by about $0.5 million to $23.1 million. A couple of quick comments on the balance sheet. Gross assets were $3.3 billion and we ended the year with $58 million in cash. We had $2.2 billion of total debt outstanding at the end of the year with a weighted average maturity of approximately five years and an effective interest rate of 4.2%. Finally, let me discuss a couple of events that have occurred so far in 2017. In January, we sold two additional assets for $15.5 million for a gain of approximately $4 million. Proceeds from the sale were used to pay down $14.7 million in debt. These properties have been classified as held for sale on our balance sheet at year-end. Lastly, our Board of Directors announced a dividend of $0.26 per share for the fourth quarter. The dividend is payable on March 22 to shareholders of record on March 10, and it represents 96% of AFFO generated in the fourth quarter. I will now turn the call over to the operator to open the line for questions. Thanks.

[Operator:]

[Operator Instructions] And your first question comes from the line of Chad Vanacore with Stifel. Your line is open.

[Aaron Wolf:]

Hi, good morning, all. This is Aaron Wolf calling on behalf of Chad Vanacore, how is everyone doing?

[Susan Givens:]

Good. How are you?

[Aaron Wolf:]

I’m doing well. Thank you. Just a quick question on the five underperforming assets. Are those – are you planning to dispose of those, or turning them around?

[Susan Givens:]

It’s fully dependent on the individual assets. We can have business plans for each of them. We tend to have for specific business plans for all of our assets that we’re focused on. So of those five, I think, we have a few that we’re actually considering selling and a few that we’re working with either our existing operators, or in certain cases, considering transitioning to new operators to try to improve performance. So it’s a little bit of a mixed bag. Each of the five individual assets has a little bit different story. But I’d say at a high-level, it’s kind of both. It’s some of the assets we’re looking at selling and some we’re really just focused on improving operations. We think the potential is there. We just need to get the right operators to kind of focus on the right thing.

[Aaron Wolf:]

Okay, great. Thank you. And just to confirm the $2 million in incentive compound on the sale of the real estate assets that’s flowing through the management fees and incentive comp line item on the P&L, correct?

[Susan Givens:]

That’s correct, yes.

[Aaron Wolf:]

Okay, great. Thank you so much for taking my questions.

[Susan Givens:]

Thank you.

[Operator:]

And your next question comes from the line of Paul Morgan with Canaccord. Your line is open.

[Paul Morgan:]

Hi, good morning.

[Susan Givens:]

Hi, Paul.

[Paul Morgan:]

It is in terms of the asset kind of sales, how are you thinking about 2017 in terms of the volume number of assets and maybe, should we expect to see any kind of impact, I mean, I assume maybe you’re targeting some of the assets that have been struggling, and so could that influence kind of the trajectory of same store NOI for the managed portfolio over the course of 2017?

[Susan Givens:]

Yes, I mean, thus far our focus has really been on trying to sell assets that we don’t think kind of fit with the portfolio that we’re trying to build over a longer period of time. And so that has meant most of the assets we’ve sold have or actually all of them that we’ve sold and with the ones targeted to sell have been assisted living / memory care assets in markets that we don’t see as kind of a long-term markets for ourselves. So, I would hope that our numbers would be positively impacted by the sales that that we’ve done to-date and any future sales we do, because we are trying to kind of get the assets that we don’t think have the right kind of long-term trends within them out of the portfolio. I think, it could be that as we consider other asset sales, we might look to opportunistically sell assets that we think could provide kind of a good gain for the company. It could enable us to kind of recycle capital. So, we – I’m hesitant to put a specific number out there. But I think, you’ll expect to see kind of more of the same from us, which is selling assets that don’t fit within the portfolio and or selling assets where we think, we are able to buy at a good price and we can sell it an even better price and then use that capital and redeploy it.

[Paul Morgan:]

So when you say redeploy, are you thinking in terms of the kind of CapEx renovations, or would you actually consider looking at new acquisitions with the proceeds?

[Susan Givens:]

I think it’s consistent with what we said before. We have to kind of evaluate at the time. It could be redeploying some of the funds into the assets and sales. It could be paying down debt. It could be looking at our stock for repurchases. It could be looking at acquisitions. It really kind of depends on what’s available to us in terms of kind of opportunities when we actually generate those proceeds. As you just saw with the sale we just did in January, we’ve repaid debt, we thought that was a good use of capital and that allowed us to de-lever a little bit and that kind of best use of capital at the time. So I think, each time we sell assets, we’ll kind of evaluate with what the opportunities are in front of us.

[Paul Morgan:]

Okay. And then just going back to the managed portfolio for the same store numbers, I mean, you provided with and without kind of five assets, and I noticed on a sequential basis those were the same. Could you maybe provide some color on the five? And are those going to be sort of reverting back towards the bulk of the portfolio, especially now that you have a bigger same store pool, I mean, are you still breaking them out, or are we kind of continue to see them broke out as we look in the 2017? And I mean, do you have any type of outlook for what same store is going to be like for the managed portfolio?

[Susan Givens:]

Yes. So we provided the breakout this quarter just because we thought the last few quarters, and we wanted to make sure, we’re kind of giving the information for those five assets. But we didn’t sort of emphasize the data there on the call. So we kind of want to strike a balance of making sure people had that information, because certain folks you’ve talked to have found it useful. And we wanted to make sure we were identifying the same pool of assets to be weren’t – kind of having. We didn’t have a different pool of assets sort of every quarter. So we try to be pretty transparent and consistent in the delivery of the information. The good news is, I think for many of those assets in that kind of five, we are seeing some improvements and we’re seeing a positive trend. I mean, I don’t want to kind of indicate exactly what we think the growth will be sort of next year, obviously, pretty, or this year, it’s pretty early. But we’re seeing some positive trends, which is good. I think, as far as the total same-store portfolio is concerned, the growth we’re expecting is pretty much in line with what the industry has indicated. We do have more IL assets, which I think thus far has really helped us. And we’re hoping that, IL continues to kind of remain pretty stable. But I think overall, it’s a fair assessment to expect that our growth will be relatively in line with industry.

[Paul Morgan:]

Okay, great. Then just last question, do you have any kind of color on how the changes to your holidays management model have played out in terms of on the ground in terms of your portfolio?

[Susan Givens:]

Yes, it’s still early. We’re still collecting information and sort of assessing what it all means. I think the good news is that, the model is the right model for the assets over kind of medium and long-term and having executive directors in place. We believe creates the right kind of leadership structure within the properties and we’re seeing that those individuals are seeking kind of more ownership and accountability within the assets. So we think that that’s a good thing. I think there – any kind of changes, sometimes some properties take a little bit of time to kind of to work through those transitions and we’re seeing that with some properties. But by and large, we’re seeing the units that have become available to rent out. There has been some good success around leasing out those units. And the fact that there now are kind of two new available units within each other properties is actually a good thing and we’ll help kind of properties over a longer period of time. But I think the whole model has not even – the transition has not been completed. And so I think it’s kind of too early to say whether it’s going to ultimately be kind of a near-term success. But we certainly think over the long-term, it’ll be a good thing.

[Paul Morgan:]

Okay, great. Thanks.

[Susan Givens:]

Thank you, Paul.

[Operator:]

And there are no further questions at this time. I will now turn the call over to Susan.

[Susan Givens:]

Great. Thanks, everyone, for joining us. Happy to follow-up with additional questions, and we’ll be talking very soon. Thank you.

[Operator:]

And ladies and gentlemen, this concludes today’s conference call. You may now disconnect.