New Senior Investment Group Inc.
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good morning, and welcome to the New Senior Investment Group’s Fourth Quarter and Full Year 2015 Earnings Call. My name is Janna, and I will be your facilitator in the audio portion of today’s interactive broadcast. All lines have been placed on mute to prevent any background noise. At this time, we would like to turn the show over David Smith, Vice President. Go ahead sir.

[David Smith:]

Good morning. I'd like to welcome you to New Senior's fourth quarter and full year 2015 earnings call. Joining us today are Susan Givens, our CEO; and Justine Cheng, our CFO. Before I turn the call over to Susan, I would like to remind you that certain statements made today may be forward-looking statements. Forward-looking statements describe the company's current expectations, and actual results may differ materially from such forward-looking statements. In addition, Susan and Justine will present some non-GAAP information. I encourage you to review the cautionary statement regarding forward-looking statements and the reconciliations of non-GAAP measures in our earnings release and investor presentation, and to review the risk factors contained in our annual and quarterly reports filed with the SEC. With that, I'd like to turn the call over to Susan.

[Susan Givens:]

Thanks, David, and good morning, everyone, and thank you for joining us today for New Senior's year-end 2015 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. I'd like to start off by saying that I'm pleased to report, that in our first year as a stand-alone company, we had generated above-average portfolio growth and posted consistently strong earnings. For the fifth quarter in a row, our same-store occupancy growth outpaced the overall market, and since the time of the spin, our AFFO per share has increased 58%, all while completing acquisitions of $1.3 billion in high quality senior housing portfolios. Over the last three years, we've assembled one of the largest portfolios of independent living and assistant living properties in the U.S., and we think that's a very unique and hard to replicate portfolio. Today, we feel better than ever about the overall composition of our diversified portfolio as we've added more stable high-quality private pay independent living assets over the last 12 months. We believe our assets have attracted growth prospects and we feel very good about our market positioning for the year ahead. I'll spend a few minutes discussing highlights for the quarter and the year, and I'll also spend a little bit of time discussing how we're thinking about the business going forward, before I turn it over to Justine to discuss the financial results in more detail. So I'll jump to Page 5 of the presentation and quickly review the highlights. First, throughout 2015, the company generated solid financial results. Normalized FFO for the quarter was approximately $30 million or $0.35 per basic share, and AFFO was approximately $26 million or $0.30 per basic share. For the full-year 2015, normalized FFO was $1.28 per basic share and AFFO was $1.10 per basic share. And we increased our dividend by 13% in the second quarter of 2015 to $0.26 per basic share. Second, our diversified senior housing portfolio continues to outperform the overall senior housing markets. On a same-store basis, our managed portfolio NOI grew 4.5% from 2014 to 2015, with occupancy up 150 basis points year-over-year. Third, we successfully completed $1.3 billion of acquisitions during the year, growing our portfolio from 100 properties at the end of 2014 to 154 properties today. Importantly, these acquisitions enhance the overall quality and composition of our portfolio, which I'll talk about in a little more detail in a minute. On the capital structure front, we greatly improved our balance sheet by replacing short-term property level financing with longer term lower cost funding. In total, we raised $1.2 billion of debt during the year and successfully lowered our total cost of funds by 80 basis points, all while extending our average debt maturities. We have no significant debt maturities until the end of 2017, and we feel very good about our overall liquidity as we move into 2016. And finally, we announced a $100 million share repurchase program at the beginning of December, and bought back $40 million of our stock in a combination of open market purchases and a tender offer. The buybacks are a great investment, given trading levels for both our stock and senior housing assets. We continue to view our current valuation as a significant discount to the underlying value of our portfolio, and we remain very focused on closing this gap, which I'll discuss in more detail. Now turning to Page 6, I'll spend a minute touching on our financial performance. If you look back at our overall business performance for 2015, you'll see that our financial results have been really strong. NOI was up 49% in Q4 2015 versus Q4 2014, and NFFO per share was up 35%, while AFFO per share was up 58% over the same period. The chart on the lower right-hand side of the page shows that AFFO per share has grown 58% from $0.19 per share in Q4 2014 to $0.30 in Q4 2015. At the same time, if you look at the return on our invested equity, you will see that number has been about 9% to 11%. Turning to Page 7, I'll go into little more detail on the managed portfolio. Today, our managed portfolio includes 96 properties across 33 states. We're very pleased with the occupancy growth across the portfolio, which has been driven by the acquisition of high-quality independent living assets. Importantly, we are seeing occupancy gains while we are also seeing consistent rate growth. Average occupancy across the entire managed portfolio increased 310 basis points from 83.5% in 2014 to 86.6% in 2015. On a same-store basis, occupancy was up 150 basis points from 82.7% in 2014 to 84.2% in 2015, and NOI grew 4.5% over that same period. It's worth noting that over the course of this year, our same-store pool will start to reflect acquisitions that we completed in 2015, so it will become an even more meaningful pool to measure our overall performance. To put it in context, our same-store pool was 32 assets for Q4 2015, and we acquired 53 managed assets throughout the year. In Q4 2016, our same-store pool will include nearly all of those new assets. Page 8. Turning to our triple net portfolio, which includes 58 properties across 24 states. Performance here continues to be strong with coverage for the total portfolio of 1.28x and average occupancy of 88.9% for the trailing 12-month period ended September 30. That's up 110 basis points over the same period of last year. On a same-store basis, coverage remains solid at 1.26x and occupancy was 88.7%, up 90 basis points year-over-year. Now turning to Page 9, I want to touch on our acquisition activity this year and discuss how we think about our overall portfolio composition. 2015 was obviously a very active year for us on the acquisition front. We completed a total of $1.3 billion of acquisitions, growing our portfolio from 100 properties at the end of 2014 to 154 properties today. Our acquisition strategy was focused and deliberate and we wanted to improve the overall quality, stability and grow the profile of the portfolio, and happily that's what we've done. Of the 54 properties that we acquired, 49 are 100% private pay independent living assets, so our IL exposure increased from 61% to 71% of NOI from Q4 2014 to Q4 2015. As a result, we have a portfolio that’s well positioned with higher occupancy, higher margins and greater geographical diversification. To put it in context, total occupancy for our managed portfolio increased 450 basis points from 83.6% to 88.1% year-over-year, and margins increased over 500 basis points. It goes without saying that the type of acquisitions that you do matters, and we've always had a specific, rigorous and disciplined acquisition strategy. 2015 was all about adding assets that improved the overall portfolio and positioned us for future growth. Page 10. So while our operating and financial performance has been strong, it has been a difficult market for healthcare REITs including us. To put it plainly, we don't think our stock price reflects the quality of our financial performance or the value of our assets. Our stock has continued to trade at what we think is a significant discount to the underlying value of our assets. Under these conditions, and given the expected returns on alternative investment opportunities, buying back our stock is a really attractive investment. In December, we announced a $100 million stock buyback plan and we were able to buy 10 million of shares in the open market before the end of the year. Pricing on open market purchases could be really attractive but the downside is that you’re subject to volume limitations, which means that it takes time to complete a meaningful investment. So we accelerate our buying efforts by launching a $30 million tender offer which we completed in January. In total, we've purchased $40 million of stock at an average price of $9.05 per share, and we decreased our share count by about 4.5 million shares. These purchases were very attractive and we estimate that the full-year accretion from these purchases equates to about $0.05 to $0.07 of NFFO and $0.04 to $0.06 of AFFO. Additionally, these purchases were also very accretive to NAV, and we estimate that the resulted in $0.40 to $0.50 of NAV accretion. Today, we have close to $90 million of remaining capacity under our buyback programs and we will continue to evaluate buying more stock so long as the valuation gap persists. Turning to Page 11, we've talked about what we accomplished in 2015, and now I want to discuss what we’re focused on for 2016. We are already well into the year, and as we think about it, we are focused on three primary initiatives to drive shareholder value

[Justine Cheng:]

Thanks, Susan, and good morning, everyone. 2015 was a really good year for New Senior across all key financial metrics. Our $1.3 billion investment activity drove strong earnings growth, both on a nominal and per-share basis. When you look at our portfolio performance, NOI for the fourth quarter was $58 million. That was a 8% increase sequentially and a 49% increase year-over-year. Most of the increase came from new acquisitions, and although our Q4 same-store pool posted strong occupancy and revenue growth, our expenses included some non-recurring charges in the quarter. For the full-year 2015, new acquisitions coupled with strong organic growth for the full-year, resulted in NOI reaching $199 million. That represents a 39% increase over last year. As Susan highlighted, our full-year 2015 same-store pool had year-over-year above market occupancy gains of 150 basis points, and rate increases of 3.9%. That translated into strong year-over-year revenue growth of 5.8%, of which, 65% came from the rate and 35% came from occupancy gains. Our triple net lease portfolio, which accounts for roughly half of our NOI, grew with contractual annual escalators of 4.4%, while coverage held steady at 1.28x. Turning to our company earnings in Q4. Our NFFO was $30 million or $0.35 per basic share, or $0.34 per diluted share, resulting in a 17% sequential and a 35% year-over-year increase. AFFO for the quarter was $26 million or $0.30 per basic and fully diluted share, posting 11% sequential and a 58% year-over-year increase. Both NFFO and AFFO this quarter includes G&A and management fees of $9 million, and interest and tax expense of $19 million, of which, includes a one-time deferred tax asset from our TRS of $2 million. Our normalized FAD, which adjusts AFFO for maintenance CapEx was $23 million or $0.27 per basic and diluted share. Q4 CapEx was $3.6 million, which annualizes to approximately $1,400 per unit and roughly 65% of that or $900 per unit relates to maintenance CapEx. And lastly for the quarter, we declared a $0.26 dividend, which is a 13% year-over-year increase. This represents a 87% payout ratio on AFFO and a 96% payout ratio on our normalized FAD. Looking at the full year for the company, our NFFO was $98 million or $1.28 per basic or $1.27 per diluted share. AFFO was $84 million or $1.10 per basic or $1.90 per diluted share. And normalized FAD was $77 million or a $1 per basic or $0.99 per diluted share. In total for 2015, we distributed to shareholders $17 million of dividend or $0.98 per basic share. On the capital structures front, we took measures this year to improve our overall position. This year we raised total debt of $1.2 billion, while decreasing our overall cost of funds by 80 basis points. We increased our fixed rate exposure to 60% and capped our floating rate debt. We had no significant debt maturities until the fourth quarter of 2017 and extended our overall maturity from six to seven years. Today, we sit on $2.2 billion of debt, which is roughly see 65% net debt to gross investment, and our overall cost of funds remains low at 4%. We have good liquidity on the books and ended the year with a $117 million of cash. After the impact of our $30 million tender offer and working capital reserves, we will have roughly $35 million to $45 million in total available cash and 82 million of basic shares outstanding. In summary, 2015 was a great year of strong performance. And looking ahead, we believe our portfolio is well positioned to capitalize from the favorable demographic trends. With 10,000 baby boomers turning 65 years old every day, only 50 basis points in penetration in this cohort will result in 100% occupancy across the industry. We are optimistic that our assets will capture some of that growth, and that our operators will continue to deliver solid results. In addition in 2016, we are focused on prudently recycling capital through our non-core dispositions, further driving incremental shareholder value. I will now turn the call over to the operator and open the line for questions.

[Operator:]

[Operator Instructions] We’ll pause for a moment to compile the roster. Your first question comes from Paul Morgan with Canaccord. Your line is open.

[Paul Morgan:]

Hi, good morning.

[Susan Givens:]

Hi Paul.

[Paul Morgan:]

If I look at the same-store for the managed portfolio and if you go either at the EBITDAR line or your NOI line, you mentioned the operating expenses and somewhere we talked about in the last call as well, but now they are up 8% on a same-store basis. Could you give more color there? It looks like you said there were some - I think you - I heard you say that there is some non-recurring component in there. So maybe you could break that out, and how should we think about over the course of next couple of quarters what that's going to look like?

[Justine Cheng:]

Sure, Paul. In the fourth quarter, we did see a couple of one-time expenses in that line. There were three big categories. The first one was a property tax true-up, which was roughly $420,000. That is certainly one-time that relates to a historical acquisition where we didn’t accrue to the new assess value. The second large item which is one-time in nature was on the labor side, that was incremental $150,000 of agency staffing, and that related specifically to one property where we had two key positions open. And lastly, the last adjustment was relating to bad debt clean up that we were undertaking through the fourth quarter, and that was another $205,000. And so if you normalized for all those expenses, actually our expense growth was in line with kind of our revenue growth. And so our occupancy - I mean, our same-store growth would have been flat.

[Susan Givens:]

Yes. And Paul, it’s Susan. Obviously there is always stuff that happens at the properties, right. And so there - and we can't predict exactly whether you're going to have agency needs in one quarter versus another. But I think it's safe to say that as we kind of outlined, we think that our higher growth assets are going to continue to growing faster than the industry. So we've seen historically, it's clearly a function of the fact that we acquire assets where we think there are opportunities for improvement. And so it's a kind of growth we've seen across those higher growth assets historically has been in the 7% to 8% range. That will be more muted as we move forward, but we still think our growth on those assets is going to be well outside of what folks in the industry are talking about as kind of the more stabilized growth going into 2016 and 2017. Does that answer?

[Paul Morgan:]

Yes, well, probably yes, that's sort of very helpful. And so if I just do the math, and that’s - so that was about $700,000, $800,000 kind of what sounded like one-time items. And if I were to look at your same-store managed number and adjust the NOI for that, then we get to something like, what was it like, 2%-plus, I’m not doing the math quickly enough but something like that.

[Susan Givens:]

That’s right. It’s right around there, yes.

[Paul Morgan:]

Okay. So more importantly then, going forward, you haven't talked about guidance. Are you going to - is there anything you’re comfortable discussing whether in terms of on a same-store basis or bottom line?

[Susan Givens:]

Yes, the reality is our same-store pool this year raised 32 assets, next year by the end of the year, as I mentioned, it will include almost all of our managed assets, so nearly 96 assets. So we were are a little bit reluctant to put out very specific guidance just given the fact that our same-store pool is going to be growing so much over the course of this year. What we tried to do is frame how we think about kind of the buckets within the business. And so obviously if you look at 50% of our NOI comes from the managed portfolio, and on a cash basis, if you break that into two different buckets which roughly contributes equal amounts within the managed buckets, so 50% higher growth assets, 50% more stable, what I would say is that the 50% higher growth, we expect that to grow at much higher rate than what the industry will see on average, so call it anywhere from 4% to 6%. Then if you look at the more stable assets, we'd expect those to grow more in line with what other folks in the industry are talking about, probably a little bit more growth is what we are projecting, given the fact that we’ve seen pretty good rate increases already take effect. So for the more stable IL assets, you can say it’s sort of growth in line with the industry. Then on our triple net, on a cash basis obviously, we know exactly what those growth numbers look like. So I think it's fair to say when you add all that up, we are still expecting on a cash basis our NOI to grow faster than what other folks in the industry are talking about.

[Paul Morgan:]

Okay, great. That was helpful. And just my other question. On the deferred tax asset and TRS that you mentioned, was that something that you had anticipated last quarter? I just ask, your FFO came in around what you had been talking about, but we didn't have that at least fully in our model. And so I'm looking for offsets whether there was any offset in kind of what you had expected on the negative side in the fourth quarter?

[Justine Cheng:]

Yes, look, we didn't necessarily expect - I mean, part of what happens with the year-end work, right, is first of all, it’s our first year as a public company, so a lot of full-year work is being done in the fourth quarter. And so this is something that came up as we were going through the process of completing the year-end audit work. And so it's obviously a non-cash item, but it's something that was picked up. So we weren't necessarily anticipating it. That being said, it's not material, and so we clearly have talked about it and disclosed it but we didn't necessarily forecasted in our numbers.

[Paul Morgan:]

Okay. Thanks. I'll hop off. Thanks.

[Operator:]

[Operator Instructions] Your next question comes from Lucy Webster with Compass Point. Your line is open.

[Lucy Webster:]

Hey, good morning guys. My question is sort of pretty broad-based. I'm just hoping that you can talk a little bit more about how you're thinking about prioritizing spending in terms of share repurchases versus reducing leverage. Are you repurchasing shares up until a certain point, and then you would think about reducing leverage, or is that sort of maybe a double-edged sword where you would do both initiatives at the same time, more so in the context of potentially reducing leverage also leading to some form of multiple expansion in the stock as well?

[Susan Givens:]

Yes. The way I think about it is so long as our stock trades at a big discount to what we think is a value of the assets, the best investment we can make is in our stock. And so if we can be buying our stock, like I mentioned, at cap rate that implied sort of 7.5% to 8% cap rate, that's a good investment and that's how we should be spending our cash. If at some point that changes, then we would look at whether it made more sense to reduce leverage. But I think we are looking at this really as a smart way of investing our capital, and when you see dislocation like what we’ve seen sort of in our stock price, we think that the best way to deploy our capital is buying assets or assets at a 7.5% to 8% implied cap rate. It's hard to find senior housing assets out in the market at those levels right now, and I think the best use of our cash is to buy our own stock, if that, like I said, changes, then it may make more sense to look at reducing leverage, but we'll have to evaluate when we are looking at what the best decision is at that time.

[Lucy Webster:]

I agree. That's all I had. Thank you. Very helpful.

[Operator:]

Your next question comes from Chad Vanacore with Stifel. Your line is open.

[Chad Vanacore:]

Hi good morning all.

[Susan Givens:]

Hi Chad.

[Chad Vanacore:]

So just for a start off with a clarifying item. In the press releases you’ve got a $2.2 million benefit, and that is $2.2 million tax benefit, but then there is a $1.8 million charge. So can you walk me through what the math on that is and what the net benefit is?

[Justine Cheng:]

Yes, the $1.8 million is actually depreciation and amortization charge, and so it washes out when you get to our FFO and AFFO metrics. The $2.2 million tax benefit was what we were just talking about, that relates to the TRS where we made a straight line adjustment, and so our overall numbers don't get impacted but the taxes for the TRS do.

[Chad Vanacore:]

All right. But you referred to a net benefit of $2.2 million and we have a benefit and a charge that kind of bounced at each other.

[Justine Cheng:]

Yes.

[Chad Vanacore:]

Okay. All right and then…

[Justine Cheng:]

And that’s for the full year.

[Chad Vanacore:]

Okay. So you also mentioned actively marketing couple of portfolios. So roughly how much in dispositions should we think about in 2016, and give us any idea about timing?

[Susan Givens:]

Sure. So without putting specific number around it, the way we are looking at what we want to sell is we've obviously kind of looked at all of our assets. We look at them all the time and identified what would equate to about 10% of our total assets. And so this is give or take a little bit, but we've got a $3 million investment - sorry, $3 billion investment portfolio. We've identified assets that represent about 10% of that, that would make sense to sell for lots of reasons. As I said in my remarks, we would only look to sell assets if we can book the gain and make sense for our portfolio composition and all of that, but that's roughly the bucket in the pool that we are looking at. Then in terms of timing, these things are always a little bit fluid. We’re out there in the market right now. We have lot of good traction. Our hope and our goal is that we could have some deals closed in the second quarter, but that timing can always move, but that's what we are targeting and that’s where we are moving towards and we feel pretty good about it. But I think I don't want to give you exact dates around it and also the processes we have going on right now are obviously competitive. And so I want to be a little bit careful about what we say, but hopefully that brings it a little bit for you.

[Chad Vanacore:]

Okay. That's helpful. Also assuming that you booked the gain and you get these proceeds, should we assume that you’re using that to delever or like share buybacks?

[Susan Givens:]

Yes, so little bit to Lucy’s point, we would so long as our stock price is at a meaningful discount to what we think is the NAV, we would buyback our stock. So we would sell assets and then we would take that capital and buyback our stock. It's very simple math how I think about it, right. If we can sell assets at a 6% to 7% cap rate, that's obviously a very fairly large range, but that's the range that can just point to and we can buyback our stock at a 7.5% to 8% cap rate, that’s just math and that makes a lot of sense. And so until that disparity narrows, we would look to buyback our stock. If and when hopefully that does happen, then it would make more sense for us to use the cash to actually delever.

[Chad Vanacore:]

All right. And then just one other question thinking about 2016 NOI growth expectations, how should we think about those in terms of occupancy rate overall?

[Susan Givens:]

Sure. Justine?

[Justine Cheng:]

Yes, on the occupancies side, I think we'll see definitely similar kind of gains with that. As Susan said, our assets have a lot of embedded growth in them. And on the rate side, this year we saw 3.9% rate growth and we think that will continue into 2016.

[Chad Vanacore:]

All right. I'll hop off. Thanks.

[Operator:]

There are no further questions in the queue at this time. I will now turn the call back over to Susan for closing remarks.

[Susan Givens:]

Thanks everyone for joining us. We look forward to talking to you guys further.

[Operator:]

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