New Senior Investment Group Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good morning. My name is Lashona and I will be your conference operator today. At this time, I would like to welcome to the New Senior Investment Group Second Quarter Earnings Conference Call. [Operator Instructions]. Thank you. I will now turn today's call over to Mr. David Smith to begin. Please go ahead, sir.

[David Smith:]

Good morning. I'd like to welcome you to New Senior's second-quarter 2015 earnings call. Joining us today our 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. I encourage you to review the cautionary statement in our earnings release and investor presentation regarding forward-looking statements 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:]

Thanks, David and good morning, everyone and thank you for joining us today for New Senior's second quarter 2015 earnings call. We posted an investor presentation on our website just a few minutes ago and I'll be referring to pages in that presentation during my remarks. I'd like to start off by saying that Q2 was another strong quarter as evidenced by our continued strong portfolio performance, our robust financial results and the successful execution of our acquisition strategy, all of which I'll discuss in more detail in a few minutes. Turning to page 4, I'll give a quick overview of New Senior. New Senior is the only publicly traded, pure play senior housing REIT and today, our portfolio includes 124 high quality senior housing assets with nearly 16,000 beds in 32 states. As most of you know, we've recently signed up a deal to acquire 28 independent living properties from Holiday and once we close which we expect to do a little later this quarter, our portfolio will include 152 properties with nearly 19,000 beds in 37 states. Over the last three years, we've assembled one of the largest portfolios of independent and assisted living properties in the U.S.. It's now worth over $3 billion and we think it's a very unique, hard to replicate portfolio. Our target demographic, individuals age 70 and older, is the fastest growing cohort of the U.S. population. 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 over 90% of our NOI is comprised of private pay, independent and assisted living properties. That's the largest concentration of private pay assets among our peers and a portfolio state we're extremely proud of. In terms of asset type, 70% of our assets are independent living, 22% are assisted living memory care and the remainder are rental CCRCs. We either lease these assets under triple-net leases or hire a manager to operate the assets and we have a balanced mix of each. As a result, we believe we're positioned to deliver continued strong organic growth from both contractual rent increases and participation in market growth. In addition, we've partnered with best-in-class operators and over 80% of our NOI is managed or leased by the top three largest senior living operators in the U.S.. Since becoming a standalone public company in November 2014, we've been focused on creating value through a combination of three things. First organic growth from our existing assets. Second, pursuing our successful, two-pronged acquisition strategy and third, continuing to improve our capital structure. Our business plan has been simple and consistent and our results demonstrate that we've executed on all components of our strategy. Now, let's turn to page 5 to review some of the highlights from the quarter. First, New Senior continues to generate incredibly impressive financial growth, demonstrating the strength of our portfolio and our commitment to driving strong results. Importantly, this was the first quarter to reflect results from initiatives that were completed at the end of the first quarter, including the Hawthorne acquisition and the refinancing that closed at the end of March. And while it's still early, the new acquisitions have already exceeded our expectations. Total NOI grew 45% from $33 million in Q2 2014 to approximately $48 million in Q2 2015. Including the recently announced Holiday acquisition, total NOI would have been more than $58 million, representing a 76% increase over the same period of last year. Normalized FFO for the quarter was approximately $24 million or $0.36 per basic share and AFFO was approximately $21 million or $0.31 per basic share. As a result of the strong performance, we increased our dividend by 13% in Q2 versus Q1 which represents a conservative 84% payout ratio on AFFO. Second, our portfolio continues to outperform the overall senior housing market by just about every measure. On a same-store basis, NOI grew 4.5% from Q2 2014 to Q2 2015 with occupancy up 120 basis points year-over-year. Importantly, our same-store portfolio also experienced a 50 basis points gain in occupancy on a sequential basis in Q2 which we believe is a pretty tremendous accomplishment considering the industry as a whole experienced occupancy decline. We also saw very significant growth on our triple-net same-store portfolio where occupancy was up 240 basis points from 80% in Q2 2014 to 90.4% in Q2 2015. Our triple-net same-store portfolio is 100% IL and we believe this speaks to the strength and resiliency of IL in the current market. Third, we've continued to successfully execute on our acquisition strategy. During the quarter, we closed on approximately $100 million of smaller acquisitions where the expected blended initial NOI yield was approximately 7%. In June, we also announced the holiday acquisition I mentioned before which I'll discuss in a little more detail on the following pages. Year to date, we've closed and/or announced $1.2 billion of acquisitions, including 49 IL properties, two assisted living memory care properties and one rental CCRC. Finally, raised approximately $270 million of net proceeds through an equity offering in June. The proceeds from the offering will be used to finance a portion of the holiday acquisition. After closing on holiday, we expect to have approximately $100 million of investable cash so we have plenty of liquidity and we do not plan to raise equity for the remainder of the year. We've been extremely active in acquiring new assets over the past few years and our track record of getting deals done has been very good. That said, our view is that the market is incredibly competitive right now and we've begun to see cap rate compression trickle into the smaller deals which is where we've had a lot of our success. We've also been incredibly rigorous and disciplined around our acquisition strategy and because of that we're being very cautious about the deals we do. We're very comfortable passing on acquisitions that don't meet our high standards and we think now is a very good time to focus on driving performance across our existing portfolio. We're also exploring potential selected dispositions of non-core assets where we might be able recycle the capital into other high yielding investments or reduce leverage. Turning to page 6, let's spend a minute on the financial performance. Our financial results were really strong and we think that reflects our portfolio's embedded growth potential as well as the quality of the investments we're making. As I mentioned, the second quarter includes the impact from acquisitions that closed at the end of the first quarter as well as the cost savings achieved from our refinancing that was also completed at the end of Q1. And as a result, all of our primary financial metrics were up significantly in Q2. Total NOI was up 22% versus Q1. Normalized FFO per basic share was up 33% as compared to Q1, while AFFO per basic share was up 41% versus Q1. It's worth stepping back and reflecting on how the business has performed since the time of the spinoff and if you look at the chart on the bottom right, you'll see our financial results have been very impressive. At the time of the spin, we presented illustrative financial information that showed annualized normalized FFO of approximately $1.42 per share and annualized AFFO of approximately $1.08 per share, assuming the investment of cash on hand at the time of the spinoff. This quarter, on an annualized basis our normalized FFO and AFFO were $1.44 and $1.22 per share respectively. That's a 13% increase in our AFFO relative to the illustrative AFFO we presented. At the end of the day, it's all about performance and our performance has been spot on and even better than expected, so we feel very good about financial results. Now, turning to page 7, we'll go into a little more detail on the managed portfolio. For Q2 2015, our managed portfolio included 66 properties across 23 states with 20 IL properties and 41 assisted living memory care properties. We continue to be very pleased with the performance of our managed portfolio and we believe the results speak to the strength of the portfolio, the high quality nature of the assets, as well as the embedded growth potential of the assets we acquire. Occupancy across our entire managed portfolio was up significantly this quarter. It grew from 83.7% last quarter to 86.2% this quarter, representing a 250 basis point increase. That's a significant increase and it was primarily the result of the acquisition of the Hawthorne Independent Living Portfolio at the end of Q1 2015. [Indiscernible] the portfolio was high occupancy which has increased the overall quality of our managed portfolio, while also bringing in more private pay assets. On a same-store basis, occupancy was up 120 basis points in Q2 versus Q2 2014 and up 50 basis points on a sequential basis, a pretty remarkable achievement when the rest of the industry experienced declines this quarter. As I mentioned, same-store NOI was up 4.5% in Q2 2015 versus Q2 2014 and up 7.3% quarter-over-quarter. One of the reasons we feel so strongly about the growth potential of our portfolio is because our occupancy is still lower than the industry averages. We think that's a function of under management, not the intrinsic quality of the asset. Today, we've seen tremendous growth coming out of our portfolio as new assets respond to our institutional ownership and that's resulted in outsized same-store growth. Despite the significant growth we've already achieved, our same-store occupancy is still 84.4% while the industry average is 91%. To illustrate the growth potential of our portfolio, it we increased occupancy across our managed portfolio to the industry average of 91% and held everything else constant, we estimate that that could generate an incremental $2 million to $2.5 million of NOI or $9 million to $10 million of NOI on an annualized basis. That should give you a sense as to why we believe there's tremendous upside to come out of our existing portfolio. Page 8, 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. We have very favorable escalators built into our deals that average about 4% to 5% annually and performance has been very solid across the existing portfolio with coverage of approximately 1.3 times and average occupancy of 88.2% for the trailing 12 month period ended 3/31/2015. Similar to our managed portfolio, occupancy in Q2 was very strong, coming in 20 basis points higher on a sequential quarter basis. If you look at the chart on the bottom right side, you'll see our same-store triple-net portfolio which includes the 51 assets we acquired from Holiday at the end of 2013. As you can see, performance on that portfolio continues to be very strong. Coverage has increased and occupancy has grown 240 basis points from Q2 2014 to Q2 2015. The results speak for themselves and really demonstrate that holiday has been a terrific partner for us. Turning to page 9, so I wanted to take a minute to touch on what we believe are the key distinguishing characteristics of our company, as well as some of the initiatives we're working on to drive value. On this page, we've laid out some of our key highlights and initiatives and I'll briefly touch on these points on the following pages. Page 10, first, 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. We think our portfolio is incredibly unique versus others in the market. Over 90% of our NOI is private pay which means our portfolio is incredibly stable and less vulnerable to economic or regulatory changes and no one else has a portfolio that includes so much private pay. On top of that, approximately 70% of our NOI comes from independent living assets. These assets are really as close to multifamily as you can get. 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 in assisted living and 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 clearly demonstrate the benefits of owning private pay IL assets. While the rest of the industry experienced occupancy declines this quarter, we had significant growth. Page 11, second, we believe our unique acquisition strategy really sets us apart from others in the market and has been a significant contributor to our outsized growth and overall performance. When we decided to create this business three years ago, our strategy was simple. Take our 15 plus year track record of investing in senior housing, create a business focused on acquiring senior housing assets and do so by developing a two pronged acquisition strategy. That has been our strategy since day one and it continues to be our strategy today and so far the results have been very successful. On the one hand, we focused on sourcing and underwriting smaller off-market transactions where we think the assets are undervalued or underperforming. At the same time, we selectively source larger portfolio deals which tend to include more stable, higher quality assets that can improve the overall profile of the company. Our relationship with Fortress has given us access to some fantastic larger deals. The small deals are incredibly important to us and unlike some of our larger peers, a one or two asset portfolio can make a real impact on our business. We also like the small deals because they tend to trade at higher cap rates and generate strong growth. However, only doing small transactions makes it hard to achieve scale and realize the benefits that larger, more stable portfolios can provide. If you look at what we've done to date, the vast majority of the deals we've completed have been smaller deals. In total, we've done 24 portfolio deals since 2012 and 21 of those have been less than $250 million in value. Only three transactions have been what we would consider portfolio deals. So while the larger deals grabbed the headlines, we've been much more active pursuing smaller acquisitions and this is where we think we'll continue to spend the majority of our time. If you look at the chart on the bottom left, you see why we like the small deals so much. This chart refers to what -- this chart shows what we refer to as our 2012 vintage acquisition and includes all of the small mom and pop acquisitions that were done in 2012. When we acquire small portfolios, we typically expect that it will take two years for the portfolio to stabilize. So these assets have had the opportunity to benefit from improvements. As you can see, the results have been excellent. Occupancy has increased 170 basis points, RevPAR is up 17%, NOI has grown 46% and importantly, the implied cap rate has increased over 360 basis points. Now, if you look at the chart on the lower right, you'll see the impact of one of our larger portfolio transactions, the Hawthorne acquisition. Here, we've shown what our managed portfolio looked like in Q2 with and without the impact of the Hawthorne Portfolio. Again, the results here are equally impressive and this high quality IL portfolio really improved the overall profile of our managed assets. Total occupancy across the managed portfolio increased 200 basis points. NOI margins increased 390 basis points. Our overall INTERNATIONAL exposure increased from 13% to 41% and the average age of our assets went down by three years. So we truly believe that having a balanced acquisition strategy that gives us a foundation of stable, more mature assets that are complemented by higher yielding, higher growth assets is the right mix for us and will result in continued and strong performance. We've been very active on the acquisition front over the last few years and this year alone we've announced and/or closed $1.2 billion of acquisitions. We're incredibly excited about the deals we've done so far, but we also believe that now is a good time to focus on our existing portfolios. We've done a couple of larger deals this year and at this time, we're only pursuing smaller, tuck-in acquisitions with outsized growth. And even those need to exceed our very high return thresholds in order to make sense for us right now. Now turning to page 12, the recently announced Holiday acquisition is clearly an acquisition that falls into the larger acquisition bucket. As I've said, we had a lot of success pursuing smaller one-off transactions and that will always be core to our strategy. But as we've shown, there are real benefits to selectively doing larger transactions. We don't believe every large deal works for us and we're very disciplined about the large deals we do spend time on since the larger deals can be more competitive and the pricing tends to be higher. For example, Holiday has sold seven portfolios so far and we've only pursued two of those transactions because the pricing didn't make sense for us or because we were busy pursuing other initiatives. But this transaction worked for us. We expected to be accretive and it will greatly enhance the long-term value of our company. It's worth noting that Holiday's portfolios are very homogeneous and the portfolio we acquired is very comparable to all the other portfolios that Holiday has sold. It includes 28 hard to find, 100% private pay independent living assets. The total purchase price is $640 million and the implied cap rate is 6.4% which is incredibly competitive in other similar deals in the market. Occupancy on the portfolio is 88% today which is a good healthy level, but we believe there are opportunities for further improvement. Assuming relatively modest growth assumptions, our 6.4% cap rate can easily turn into an implied cap rate of 7% to 8% over a relatively short period of time. If you look at the chart on the bottom right, you'll see why we trust Holiday as an operator. The chart shows what Holiday has done with a portfolio of 51 assets that we acquired in December 2013. Occupancy has increased significantly from around 88% at the time of the acquisition to 90 plus percent today. Having a strong relationship with Holiday gives us a competitive advantage and their proven track record of success makes us confident that they can achieve similar results with this portfolio. Now, turning to page 13, I want to spend a minute on our balance sheet. We have been and continue to be very committed to improving our capital structure. Since the time of the spin, we have successfully replaced our fragmented property level financing with lower cost, more flexible agency debt and we have successfully increased our fixed rate debt from 50% to 60% of our overall debt. And we have cap rates -- interest rate caps across the vast majority of our floating rate debt to help insulate us from an increase in interest rates. As we move forward, you can expect to see us very focused on reducing our leverage. Our leverage is higher than our peers and while we believe our leverage is supported by the stability and the quality of our assets, we're still focused on bringing it down. We expect our leverage to decline as a result of organic growth and that decline could be as substantial as approximately two turns depending on our growth rate. On top of that, we're considering other more deliberate options to reduce leverage, including selective non-core asset sales. So now turning to page 14. With that, let me spend a minute on how we think about our growth and valuation. Using our annualized AFFO per share this quarter which was $1.22 as a starting point, let's assume that grows by 7% to 10% as a result of our in place portfolio which would mean a bump in AFFO to roughly $1.30 to $1.35 per share. If the Holiday acquisition adds another $0.04 to $0.07 to AFFO that would bring AFFO to $1.34 to $1.42 per share. If we invest the cash on our balance sheet, that could add an incremental $0.03 to $0.04 of AFFO, bringing the number to $1.38 to $1.46 per share. These are rough numbers but it gives you a sense of how much growth we think can come out of the company without raising any more equity. Now, on valuation we're trading at a discount to our peers despite outsized growth, a demonstrated track record of high quality accretive acquisitions, posting really strong financial results and increasing our dividend by 13%. In our view, the discount is way too steep and we don't think it will last given the uniqueness and the quality of our portfolio, the embedded growth potential of our portfolio, our disciplined acquisition strategy and our focus on deleveraging and our commitment to growing dividends for shareholders. That's why we're really excited about our prospects and with that, I'll turn it over to Justine who will discuss the financial results in more detail.

[Justine Cheng:]

Thanks, Susan and good morning, everyone. I'm pleased to report a terrific second quarter with our financial results. Across all measures you'll see solid growth. It's also important to note that we closed on three properties mid-quarter and the full benefit of those acquisitions are not yet reflected in Q2. Turning to our property financials, our NOI year-over-year was up 45% from $33 million to $48 million and sequentially grew 22% from $40 million. Two-thirds of this increase was driven by our managed portfolio which as Susan discussed, saw outsized organic growth and benefited from the acquisitions we completed since last year. For this segment, NOI year-over-year grew 86% from $11 million to $21 million and 61% sequentially from $13 million. Our triple-net portfolio also performed well, where NOI year-over-year grew 27% from $22 million to $28 million and 4% sequentially. Looking at our company's earnings, normalized FFO grew quarter-over-quarter from $18 million to $24 million. That is up 33% from $0.27 to $0.36 per diluted share. Our AFFO which adds back non-cash items such as straight-line rents, sequentially went from $15 million to $21 million. That is up 36% from $0.22 to $0.30 per diluted share. Normalized [indiscernible] which deducts maintenance CapEx grew sequentially from $13 million to $19 million this quarter. And that's up 40% from $0.20 to $0.28 per diluted share. On our dividend, we paid out $17 million or $0.26 per share, up 13% versus Q1. This represents a payout ratio of 84% of AFFO per basic share which is in line with our peers and provides further upside. Turning to our balance sheet, we ended Q2 with $2.8 billion of gross assets which represents 124 properties. These properties are financed with low cost debt of $1.7 billion at a blended cost of funds a little under 4%. This quarter, we also issued 20 million shares in our first secondary offering as a standalone company, raising $267 million of net proceeds and bringing ending basic shares outstanding to 86.5 million. The offering provided us with ample liquidity to fund the pending holiday transaction and post-closing will have over 100 million in dry powder. In addition, we're looking at adding a corporate revolver which will add to our financial flexibility going forward. Turning to page 16, we'll wrap up here. We're extremely pleased with our results in the second quarter for the first half of the year. We had fantastic operating performance from our existing assets which outpaced the industry. We continue to deliver on our accretive acquisition strategy to further drive our organic earnings growth. As a result, we posted solid company results which exceeded our initial expectation and we also increased our dividend by 13%. Looking forward, New Senior is very well positioned with ample liquidity to prudently grow. I look forward to reporting our progress next quarter and will now turn the call over back to the operator for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Lucy Webster with Compass Point.

[Lucy Webster:]

Could I touch on the leverage and the delevering that you were talking about? I understand the sort of natural delevering over time. But I wanted to understand what you're thinking about leverage on acquisitions, especially since I believe that the purchase of the timber portfolio is the same 70/30 debt to equity split. So my sense is that if your leverage on acquisitions stays the same then your leverage overall remains elevated. But I just wanted to get your thoughts on that.

[Susan Givens:]

Yes, sure. We did keep the leverage pretty consistent with what our historical leverage is on the timber portfolio, on the Holiday acquisition that is. And our view on that was really kind of twofold. On the one hand, we needed to raise equity to fund a portion of that acquisition and so we were mindful of raising enough equity to fund the acquisition and give us some dry powder, but not raising so much equity that we really took advantage of kind of a deleveraging sort of equity event there. So we made the decision that given the fact that the assets we were acquiring were all IL assets, 100% private pay, it made sense to keep our leverage kind of flat with the acquisition. I think our view is that with other acquisitions, particularly assisted living, memory care, those tend to lend themselves better to slightly lower leverage. And I think what you could expect to see us doing is going forward putting less debt on some of those smaller kind of tuck-in acquisitions. And then of course, as I had mentioned, one of the things we're considering is now we have 152 assets in our portfolio. And with 152 assets, you've got a great portfolio of great assets but of course, as we've grown there are certain markets where we might think we have too many assets or other markets where we think we maybe have enough IL exposure. And so we're selectively considering pruning our portfolio to give us the best presence in the best markets and we could potentially use proceeds from some of those sales to either recycle capital, as I mentioned or kind of modestly delever. So those are all tools that we have in our toolbox that we could potentially use.

[Lucy Webster:]

And then could you talk about how you're thinking about the deployment of the rest of the liquidity that you have? Maybe when you think the cadence of future acquisitions happens now that you've seen cap rate compression and decided to focus more on the current portfolio.

[Susan Givens:]

Sure. I think first and foremost, we think having $100 plus million of capital puts us in a terrific position. And as Justine mentioned, in addition to the cash that we have, we're also looking at some other liquidity tools, including a revolver and other things. And so first and foremost, being in a great liquidity position in a market like the one we're in we think is a good place for us to be. I think what you have seen from us institutionally as investors is that we think that there are times in the market when it makes sense to sit back and actually wait for potentially some dislocation to take place. And I think that's the market that we're in right now. We've done great deals so far. We feel very good about the transactions that we've done, but we don't feel pressure to put capital out just for the sake of putting capital out. And we really feel like there could be some things that kind of shake up over the next little while as the market remains pretty overheated. And so we're moneymakers here and our view is to truly take the cash that we have, be in a good kind of liquidity position and then that will set us up nicely to take advantage of some opportunities as they arise. So we're looking at deals. We continue to always look at deals and that's our strategy. But what I would say is that we really have to have deals that are very high returning transactions right now in order to make sense for us. And we're okay sitting on a little bit of cash for a little while, because we think it will afford us the opportunity to do some really interesting things.

[Lucy Webster:]

And then if I could just touch on the equity raise that you guys did in June. Obviously, that was a pretty healthy discount to NAV and I was just wondering, do you guys have any sort of internal limits around future equity raises and the discount to NAV? And how do you think about that in terms of longer term down the road when you have to raise equity again? Is there anything sort of internally that you monitor or say you're out of cash, what are you thinking there?

[Susan Givens:]

And I think as I mentioned, we have no plans to raise equity for the balance of this year. And I think that's an important message to get out there and to make and that really is where we're right now. So if and when at some future date we have opportunities that arise, we evaluate the opportunities. We evaluate the returns that the opportunities will generate for us in combination with raising equity. We really look at all of our valuation metrics in making that decision. So I don't want to give you our exact kind of formula to how we think about it, but I think what I can say is that of course we will evaluate at any point in time that we're considering raising equity and make sure that if we do raise equity, it's because we're buying assets that will generate near term and long-term value for our shareholders. But again, we have no plans to raise any equity. We don't need to raise equity and that's not something that's on our radar right now.

[Operator:]

Your next question comes from the line of Juan Sanabria with Bank of America.

[Juan Sanabria:]

Just wanted to follow-up on your comment with regards to dispositions. Can you put a dollar number on what you're looking to do potentially just to get a sense of the quantum of potential deleveraging that you could be pursuing via this option?

[Susan Givens:]

Yes, I'm a little reluctant to throw an exact number out there. I think we've been spending a lot of time and really focused on that and as I've said I think it's a function of nothing other than having 152 properties right now and really wanting to refine and have the best portfolio we can possibly have. And what happens when you acquire portfolios, as we all know, is that sometimes you get a great portfolio but you might have assets that you like better than others. And so really, pursuing this strategy is really an offensive move for us to really get the best portfolio we can possibly have out there. So I don't want to give you an exact number, but I think --

[Juan Sanabria:]

How about a range?

[Susan Givens:]

I don't want to give you that now. I think it's safe to say that between our organic kind of growth and then potentially having some selective pay downs, we could put ourselves in a better place with respect to our leverage. But at the same time, as we look to potentially sell non-core assets, we also will evaluate whether it makes some sense to recycle that capital in high yielding investments. So I don't want to give you a range right now.

[Juan Sanabria:]

Okay and then I think you previously spoke on $130 million of deals that were pending that you thought would close. Can you give us a status update on that? Maybe any indication on pricing and how you're planning to fund those and just generally maybe just how you're thinking about the firepower to do deals with [indiscernible] of cash and maybe using some of what seems to be a revolver coming into place.

[Susan Givens:]

Yes, sure. So those are acquisitions we still have in our pipeline. And so those would require just a very modest amount of our kind of dry powder. So we're still working on those and we still think those meet our very high standards. And so anything we're looking at kind of beyond that -- those in contract acquisitions really have to have pretty good returns in order for us to find them interesting right now. But the $130 million is still in our pipeline and we're still working on closing those which we expect to kind of close later this quarter.

[Juan Sanabria:]

And sorry, with regards to the firepower you have left or how much capacity do you have given your current liquidity to do acquisitions?

[Susan Givens:]

Those acquisitions really will only take a kind of modest amount of equity. So we will have kind of north of $80 million of equity post those acquisitions.

[Juan Sanabria:]

Post the $130 million?

[Susan Givens:]

Yes.

[Juan Sanabria:]

Okay. And then how should we think of the [indiscernible] growth as some of the new acquisitions are eventually folded into the same-store pool? What kind of range of growth are you thinking of from an NOI perspective?

[Susan Givens:]

Sure, I mean so on the existing 124 assets we have, right, that includes a mixture of assets we've owned for nearly three years and some of the newer transactions that we've done. And so when I think about kind of breaking the growth into buckets, I look at the 124 which are the assets that we had at the end of the quarter and we expect that to grow in the near term anywhere from kind of 7% to 10% because that really reflects some of the stabilization that we expect to get out of some of the newer acquisitions. So if you take the existing portfolio that will grow at kind of 7% to 10%. Then you look at the new Holiday acquisition and the occupancy there is already very high. So our expectation is that will grow at a kind of 4% to 6% growth rate. So lower than the rest of the kind of in-place 124 assets. When you blend that all together, you get an implied growth rate of kind of 6% to 8% and our view is that the longer term kind of growth prospects for that combined business is anywhere from kind of 4% to 6% because we still think that once we get a lot of the growth to come out the existing portfolio, the longer term growth that we can have will still kind of generate sort of 4% to 6% for us.

[Juan Sanabria:]

Okay. And just lastly, could you just give us a sense of where you see cap rates? You noted that some of the smaller deals are seeing some compression for sort of the different buckets and whether or not you're ruling out participating in any potential further sell downs of the holiday portfolio.

[Susan Givens:]

Sure. I think what we've always liked about the small deals is that the cap rates on the smaller transactions have hovered around kind of 7% to 8% and really the deals we've liked have been in the kind of 7.5% to sort of 8% range. We have seen recently the expectations for some of these mom and pop sellers have been getting kind of into the 6s. And so our view is the overall market is kind of driving seller expectations there. And so for some of the smaller deals where we used to be seeing cap rates that were kind of 7.5%, we have seen some people looking for kind of sub-6 levels. And so -- I'm sorry, sub-7 levels. And so because of that, we really have decided to take a little bit of a step back and only do the small mom and pop deals if they can generate the same kind of outsized growth that we've already seen on the smaller deals that we've done. So there is compression on the smaller deals, but I truly believe that there will be some dislocation that will come out of the market. We've seen this before. We've seen it in senior housing before and we think that having capital and sitting and waiting for some of that dislocation to occur will put us in great position.

[Juan Sanabria:]

And the comments on further Holiday portfolio sales?

[Susan Givens:]

Look, I think we always look at transactions in the market and we always look at deals that are out there. Sitting here today, I think we have a very good portfolio. I like the amount of Holiday assets that we have in our portfolio today. We feel very good about our exposure to Holiday and the fact that the vast majority of our assets are IL. I don't know that we need to race to do another transaction with them right now, but of course as you would expect, we look at all interesting deals in the market. And so that's what you can expect to see us do here. But as I said, we're more focused right now on doing the smaller tuck-in transactions. We really don't envision doing a larger portfolio deal at this point.

[Operator:]

Our next question comes from the line of Paul Morgan with Canaccord Genuity.

[Paul Morgan:]

Just there's a been a lot of concerns voiced in the market about the NIC data and supply growth broadly and AL but even IL as well. And you alluded to it in your opening comments. But maybe you talk a little bit about the impact that you might be seeing in your markets and whether the best supply factor is kind of one of the key things you're looking at when you're kind of exploring your non-core asset sale.

[Susan Givens:]

Yes, sure. I mean obviously, we spend a lot of time looking at the data. We look at the data but we also are on the ground in our markets to really see what's happening kind of first hand. And clearly, there's new competition coming in. It is market by market and you have to look and see sort of what's going on in individual markets. But yes, I mean I think we have seen the trends with kind of new development coming online rise over the last several quarters. What I have said and what we're consistent about is that's one of the reasons why we like IL so much because, yes, there's new competition coming in on the IL side, but the data is pretty compelling when you look at kind of inventory or construction versus inventory. You look at the entire kind of senior housing space, I think those numbers are sort of 4.5-ish percent. When you look at just IL alone, it's under 3%. And so that's a pretty big difference across the kind of overall industry. And I think what we see is that IL certainly has been less impacted in the markets that we're in and we like the fact that we do have so much IL kind of exposure, because we wouldn't say that we're totally insulated from new development, but we're more insulated. And so yes, that does factor into how we're thinking about potentially looking at kind of non-core asset sales. But it also, as I said, when you are acquiring portfolios you end up with some assets that you like, some you don't love as much. And so our kind of decision-making is not just about the supply side. It's about a lot of factors. But clearly supply and what's happening in our markets is part of our decision.

[Paul Morgan:]

On the sales, I mean I appreciate you're not quite ready to give more detail about it, but how should we think about the timing of when we'll get -- when you'll decide the volume and kind of what kind of timing? Will it be by next quarter you'll have some more clarity on dispositions? Or is it something like -- this is a new program that will be ongoing and you're starting it now and then it'll be over time?

[Susan Givens:]

I think it's more of a program that will be ongoing. This is not a massive plan we're rolling out. This is more a pruning of our portfolio. And so I think we don't intend to come out with a large strategic plan to sell assets. We intend to kind of selectively evaluate, as we always do. And I think we will kind of tell people about some of the dispositions that we're doing as they come up. But we don't intend on rolling out a large kind of plan to announce it.

[Paul Morgan:]

Okay and then just lastly, just a little clarification. You said in response to I think the last question about the non-same-store portfolio and you gave a blended 6% to 8% growth I think it was. Maybe this is an apples to apples, but how would you -- how does that compare to the 4.5% same-store NOI number in your managed portfolio in the second quarter? Is that -- was the 4.5% in line with your expectations, above? And as the other assets start to bleed in over the next few quarters, can we expect that number to grow based on what you -- the comments you just said?

[Susan Givens:]

Yes, we do. I mean without getting too far into the specifics of it, the 4.5% we obviously feel very good about. As you know, over the last several quarters our same-store growth has been extraordinary. It was kind of 16%. Going back to last year, it was 10% in Q4 and then 6.3% last quarter. And then obviously 4.5% this quarter. We think the same-store number will actually increase next quarter. There was kind of a onetime event at one of our properties and that has already kind of been changed. And so we think that going forward the number will be kind of much higher. And in fact, if you look at the quarter-over-quarter growth in our same-store portfolio that was north of 7%. So that should give you a reasonable sort of idea of the fact that there's still a lot of growth to come out of the kind of same-store portfolio. But the result was 4.5%. We didn't want to adjust it or give any sort of adjusted same-store. We just wanted to report the same-store numbers as they were, but we know that there was kind of a onetime thing that occurred in this quarter that will not be in there in the next quarter.

[Paul Morgan:]

So maybe something more like what you posted in first quarter?

[Susan Givens:]

That's right.

[Operator:]

Our next question comes from the line of Daniel Bernstein with Stifel.

[Dan Bernstein:]

I just want to also just go back on your comments in terms of potential for dislocation in the market. Were you referring to anything specific like construction or wage inflation that you're seeing that gets you concerned? Or is that just more of a general comment that the market is a little frothy and frothy markets always come back?

[Susan Givens:]

It's more about that. I think as we sit here today and we just look at the overall market, this isn't specific to senior housing, this is just as we're seeing things kind of generally, it feels like a pretty heated market right now. And our view is that that creates opportunities and that's kind of the DNA we have here. That's where we've had a lot of success in senior housing is where we've had a lot of success across other businesses here. And so we have seen that having cash and being in a position to take advantage of potential disruptions is kind of where you want to be. So there's nothing specific to senior housing other than the fact that what we're seeing are kind of some pricing expectations that we think are a little bit crazy. And so I think that's what's driving part of our thought process. But it's more of a kind of macro comment.

[Dan Bernstein:]

Okay. And also just in terms of the large portfolios out there, you seem to pull back a little bit from that given the pricing. Some of the other -- your peers that reported earlier had talked about maybe seeing some more retrading of transactions and maybe cap rates aren't backing up. But have you seen some -- any signs that the demand for seniors housing in terms of at least the large portfolios has kind of backed off a little bit? Or is the demand still very heavy to keep cap rates where they are even lower?

[Susan Givens:]

I think the demand is the same. I think people are still very interested in senior housing because the fundamentals are so compelling which is why we still love senior housing. And so I think the absolute kind of fundamentals and the macro kind of longer-term trends continue to remain intact. I think everyone is probably looking at kind of the pricing and making sure that it makes sense. And I can't speak to our peers, but obviously, there have been things that have happened across kind of the REIT space over the last few months and that might impact how people are feeling about prices. But I can only comment on what we're doing and what we're seeing. And our view has been and continues to be that we will only do deals if we think they are the right deals for us to be doing and we think the pricing kind of makes sense. And so we have not done any sort of massive kind of retrading across our assets. It's just that we don't have assets that rise to sort of the investment committee process for us unless we already think the returns are sort of very compelling.

[Dan Bernstein:]

Okay and then in terms of the small deals, when you talked about compression there, is that sort of compression B assets catching up with the cap rates that we've seen on A assets? Or is it just across the board in terms of quality?

[Susan Givens:]

Yes, I think it's just across the board. I think it's just you had -- there really was a pretty wide spread for a while between kind of the larger deals and the smaller deals. And I think that's probably just tightening a little bit. And it's not to say we aren't finding interesting opportunities out there. It's a kind of general comment that you are seeing some of the smaller sellers probably just get kind of better information about the larger deals, more things are being brokered for sure. And so of course, brokers have an impact on that kind of expectation. So it's not that they're lesser quality assets where the pricing expectations are higher. It's just that I think some of the smaller sellers have become smarter about where the larger deals are trading in the market.

[Operator:]

And there are no further questions at this time.

[Susan Givens:]

Great. Thank you very much. We appreciate everyone joining us and look forward to talking to you guys soon.

[Operator:]

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