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Edited Transcript of SNR earnings conference call or presentation 22-Feb-19 2:00pm GMT

Q4 2018 New Senior Investment Group Inc Earnings Call

New York Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of New Senior Investment Group Inc earnings conference call or presentation Friday, February 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Jon Smith

New Senior Investment Group Inc. - Executive VP & CFO

* Jane Ryu

* Susan Givens

New Senior Investment Group Inc. - CEO & Director

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Conference Call Participants

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* Kevin Rich Egan

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the New Senior Fourth Quarter and Year-End 2018 Earnings Call. My name is Jennica, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions) This event also features streaming audio, which allows you to listen to the show through your PC speakers.

At this time, I would like to turn the show over to Jane Ryu, Vice President.

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Jane Ryu, [2]

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Good morning, and welcome to New Senior's earnings call for the fourth quarter of 2018. Before I turn the call over to Susan, I would like to remind you that certain statements made today may be forward-looking statements, which are subject to many risks, uncertainties and contingencies. The expected events described in these forward-looking statements may not occur as expected or at all. I encourage you to review the forward-looking statement disclaimer, risk factors and other disclosures in our most recent annual and quarterly reports filed with the SEC, including the 10-K we will be filing after this call.

In addition, the speakers will discuss non-GAAP financial information. Please review the cautionary statements and reconciliations for our non-GAAP measures, which are included in our supplement and SEC filings.

And now I'd like to turn the call over to our CEO, Susan Givens.

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Susan Givens, New Senior Investment Group Inc. - CEO & Director [3]

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Great. Thanks, Jane. Good morning, and thank you for joining New Senior's earnings call for the fourth quarter and full year 2018. Today marks our first earnings call as an internally managed company, which is an exciting event for me and everyone at New Senior. The internalization was effective January 1 after many months of work by our board and our team at New Senior. I want to thank everyone for their efforts in completing the internalization on schedule and as planned.

Importantly, the internalization represents a fresh start for all of us. Today, I'm joined by David Smith, our CFO; and Bhairav Patel, our EVP of Finance and Accounting. I'll spend a minute discussing our strategic priorities as we move forward, and then I'll turn the call over to David to discuss portfolio performance and financial results.

Following the completion of the internalization on January 1, our board formally concluded its review of strategic alternatives, which we initially announced in February of last year. The strategic review was intended to address certain challenges that we believe had hindered the company's growth prospects, including the external management structure, low lease coverage, capital structure issues and dividend coverage. As part of a comprehensive review of strategic alternatives, the company completed several initiatives throughout 2018, which have meaningfully enhanced the company's operating flexibility, capital structure and corporate governance structure.

There were 4 key initiatives. First, in May, we terminated triple net leases on 51 independent living assets and converted the assets to a managed structure, which reduced our credit risk and increased the transparency of our operating results. Second, in August, we set the company's dividend to a level the board believes is appropriate for the internalized company and which is more closely aligned with peer payout ratios. Third, in October, we refinanced a $720 million bridge loan, resulting in annual interest expense savings of approximately $12 million. And lastly, on January 1, we completed the internalization of the company's management function. The internalization resulted in a dedicated management team, the appointment of a new Chairman of the Board and the relocation of our corporate headquarters. As we've previously discussed, we expect the internalization to have several benefits, including simplifying our organizational structure, creating better alignment between management and shareholders, generating meaningful G&A cost savings and increasing the transparency of our financial results.

In addition, as an internally managed company, we are now more comparable to our peers in the health care REIT space, which we think could bolster interest in our company and expand our investor base. While we still have a lot of work ahead of us, we've made significant progress towards achieving our goals for the company. I'm very optimistic that the measures taken to date will help position the company for growth.

Going forward, we remain committed to identifying opportunities to maximize shareholder value. In the near term, we've identified several strategic priorities for 2019, which I'll briefly summarize. First, optimizing our portfolio. As one of the largest owners of senior housing in the United States, we believe we have a unique real estate portfolio that's incredibly well positioned to benefit from medium- and longer-term trends in the senior housing industry. While the majority of our portfolio has outperformed the overall industry, certain underperforming assets have dragged down our total results. We intend to focus on improving the overall quality and performance of our portfolio through a combination of intensive asset management, operator transition, selective asset sales and CapEx enhancements. We have a significant amount of flexibility to transition and sell assets given that the majority of our portfolio is owned on a managed basis and our agreements with operators can generally be terminated without penalty. We have already begun to transition and sell certain underperforming assets, and we intend to continue to actively evaluate opportunities across the portfolio.

Second, managing our operator concentration. We currently have 6 operating partners. Holiday Retirement is our largest operating partner and currently manages assets that account for approximately 80% of our total NOI. Blue Harbor is our second largest operator and currently manages assets that account for 12% of our total NOI. While we view both Holiday and Blue Harbor as some of the strongest senior housing operators in the space, we recognize the benefits of having a diversified portfolio of operators. To that end, we recently engaged 2 new operating partners, and we continue to actively evaluate all of our operator relationships as we seek to improve performance and position the company for growth.

Third, strengthening our balance sheet. We're committed to strengthening our balance sheet with the goal of reducing leverage over time and increasing flexibility. We recognize that our leverage is higher than our publicly traded peers. Our balance sheet won't be fixed overnight. It will take time, but we're focused on it, and we've already taken measures to increase the flexibility of our balance sheet by entering into our first revolving credit facility at the end of last year. This financing enabled us to use cash on hand to pay down debt and allows us to reborrow in the event that we identify uses for our cash. In the near term, we will look to reduce leverage primarily through sales of underperforming assets and improved performance from assets transitioned to new operators.

And lastly, increasing the transparency of our financial results. With the internalization now complete, for the first time, we're providing financial guidance with the goal of giving investors better insight into our earnings potential. We believe that this financial transparency, along with increased alignment between management and shareholders, will enable us to work towards expanding our investor base.

Now I'll briefly discuss our portfolio composition and trends we're seeing across our portfolio. Today, we have a portfolio of 133 assets, with all but one asset owned on a managed basis. We're the only pure-play senior housing REIT, and our portfolio, the eighth largest in the U.S., has the unique attribute of being 100% private pay. Over 80% of our NOI is derived from independent living, which is more than any of our peers. In addition, there are a limited number of affordable private pay senior housing options available in the market, and the price point of our independent living product, which is generally much lower than assisted living, enables us to provide a much-needed senior housing option that's viable for a larger base of seniors.

Our independent living assets had generally outperformed our assisted living and memory care properties, and the fourth quarter was no exception. Our independent living assets were up year-over-year on an adjusted same-store basis, while our assisted living and memory care assets were down significantly. Our assisted living and memory care assets only represent 15% of our total NOI, so it's a relatively small piece of our company, but the portfolio continues to be impacted by underperformance of a subset of these assets.

We have very intentionally created flexibility with our management agreement to enable us to make operator changes and sell assets as necessary. We're focused on addressing these assets and have -- already have plans underway to sell and transition certain assets. While we've experienced many of the same challenges that have impacted others in the senior housing space, we had positive growth this quarter across our independent living assets. And we remain optimistic about our prospects going forward given the significance of independent living to our NOI.

With that as a backdrop, I'll give a quick overview of our 2019 guidance. We expect 2019 AFFO to range between $0.61 and $0.67 per share. This range assumes same-store managed cash NOI growth of negative 3% to 0%. As I mentioned previously, this is the first time in the company's history we're providing guidance, which we think marks an important transition for us as an internally managed company. Going forward, we expect to continue to provide guidance on a periodic basis, which is consistent with our peers in the industry.

In conclusion, we believe we have a uniquely attractive portfolio of senior housing assets, and the medium- and long-term fundamentals of the senior housing industry remain compelling. We've made significant changes with the objective of repositioning the company to maximize value for shareholders. We believe there's still a lot of work to be done, but we're very excited for the next chapter of our life as an internally managed company, and I feel optimistic about the company's future.

Now I'd like to turn the call over to David to review portfolio and financial results in more detail and to provide some additional color around our guidance. David?

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David Jon Smith, New Senior Investment Group Inc. - Executive VP & CFO [4]

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Thanks, Susan, and good morning, everyone. I'll start today with a review of the performance of our senior housing portfolio, and then we'll discuss our financial results and 2019 outlook.

At the end of the fourth quarter, New Senior's portfolio was comprised of 133 private pay senior housing properties diversified across 37 states. The key takeaway for the fourth quarter is that our independent living portfolio, which accounts for over 80% of our NOI, experienced another positive quarter with same-store NOI growth of 2%, along with improving RevPOR growth. This is slightly offset by softness in our assisted living portfolio, which I'll turn back to in a minute.

Same-store cash NOI for our total portfolio of 133 assets increased 0.3% year-over-year, which reflects an increase of 0.2% for our managed senior housing portfolio and an increase of 2.8% for our single triple net asset.

Now I'll discuss the performance of our IL and AL portfolios. I'd also like to note that we have reorganized our financial segments and made corresponding changes to our supplemental reporting package. Previously, we had 2 financial segments: one for managed assets, which included our IL and AL assets; and one for our triple net lease assets. Since all but one of our properties is now owned on a managed basis, and also since our IL and AL properties have experienced differing performance trends, we have shifted to 3 segments: one, managed independent living; two, managed assisted living; and lastly, triple net lease. We hope this information is useful and welcome your feedback.

Year-over-year same-store cash NOI in our independent living portfolio increased 2%. RevPOR was up 0.8%. And from a pricing perspective, we also experienced our first quarter of positive IL re-leasing spreads on new residents, along with consistent rate increases on existing residents of approximately 3%. Occupancy declined slightly by 20 basis points, but we still fared better than the IL industry occupancy decline of 40 basis points.

Our assisted living portfolio remains challenged, with same-store cash NOI down 8.7%. However, the decline in the fourth quarter was less pronounced than the double-digit decline we reported last quarter. While RevPOR growth remains stable at positive 1.3% year-over-year, this was offset by an occupancy decline of 140 basis points and a margin decline of 210 basis points, primarily due to labor cost pressures.

As we discussed on last quarter's call, we have been highly focused on addressing the performance issues in our assisted living portfolio. And as Susan mentioned, we have been active in 2019 on this initiative. We have identified several AL assets that we intend to sell in 2019, and we expect to use the net proceeds from these sales to pay down debt. The sale of these assets will improve the quality of our portfolio and also our key portfolio metrics.

In addition, we have identified 9 assets that we expect to transition to new operators by the end of the first quarter, 5 of which are with either Holiday or Blue Harbor. These transitions will result in 2 new operator relationships, Integral Senior Living and Phoenix Senior Living, and also expand our existing relationship with Grace Management. We're excited to establish new operator relationships and look forward to working with the teams at Integral and Phoenix. And as Susan mentioned, we're continuing to evaluate our total portfolio through opportunities to improve the quality of our portfolio and increase its diversification.

Now I'll discuss our balance sheet, financial results and outlook for 2019. During the fourth quarter, we completed nearly $850 million of debt refinancings that resulted in improving the average maturity of our debt from 3 years to over 5 years and lower the average cost of our debt by 40 basis points to approximately 4.6%. Furthermore, we have minimal near-term debt maturities, with only 6% of our total debt scheduled to mature over the next 3 years.

Our refinancing activity during the fourth quarter consisted of the following: In early October, we refinanced the $720 million secured loan with Freddie Mac. The loan has a term of 7 years and bears interest at LIBOR plus 232 basis points, an improvement of approximately 170 basis points or $12 million annually versus the prior financing. Then in December, we entered into our first revolving credit facility with a pricing of LIBOR plus 250 basis points. Credit facility has a total capacity of $125 million and matures in December 2021 with a 1-year extension option. Proceeds from the credit facility, along with cash on hand, were used to pay out approximately $125 million of existing debt that was scheduled to mature in 2019 and 2020. Credit facility adds flexibility to our capital structure by allowing us to more efficiently manage cash. We appreciate the support we received from our inaugural bank group for this facility and look forward to growing our relationship with them.

Turning to financial results. For the fourth quarter, AFFO was $13.8 million or $0.17 per share, a 42% increase compared to our third quarter AFFO of $0.12 per share. The improvement was primarily driven by the $12 million of annualized interest expense savings from our $720 million bridge loan refinancing, along with an improvement in NOI versus the third quarter. Results for the quarter include the benefit of roughly $0.02 per share from lower operating expenses as a result of onetime reversals of accruals related to property taxes and workers' comp as well as lower utility costs.

NOI for the fourth quarter was $43.4 million, an increase of 7% versus the third quarter due to improved performance in our IL and AL managed portfolios as well as the onetime items previously mentioned. Interest expense totaled $24.2 million, a decrease of 14% compared to the third quarter, driven by the savings of -- from the refinancing of our bridge loan, which resulted in a decrease of 40 basis points in the average coupon of our total debt to 4.6% for the fourth quarter.

G&A and management fees were $7 million for the fourth quarter, in line with our third quarter. We expect total G&A will decrease meaningfully beginning in the first quarter of 2019 as a result of the internalization of the company, which we completed on January 1.

On the balance sheet, total cash decreased from $157 million to $72 million as of December 31, primarily due to the use of cash to pay down debt that was refinanced with our new revolving credit facility as well as debt refinancing costs.

Now I'll finish with our outlook for 2019. This is the first time we have provided guidance, which is the result of our commitment to improving transparency and communication with investors and analysts. We expect AFFO per share to range between $0.61 and $0.67 per share, which reflects the following 4 assumptions: One, we assume that same-store NOI for our managed senior housing portfolio will range between 0 to minus 3%. In general, we expect trends that we have experienced in our portfolio to continue, with our IL portfolio continuing to outperform and our AL portfolio continuing to experience pressures. Two, we assume G&A of $19 million to $20 million. Three, for our debt, which is approximately 76% floating rate, we assume LIBOR is at the 12 -- December 31 spot rate of 2.5%, which is in line with forward curve estimates. In terms of sensitivity to changes in LIBOR, every 25 basis point change equates to approximately $0.04 per share. And four, we assume approximately 84 million of weighted average diluted shares outstanding.

With that, I conclude my remarks and ask the operator to please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Vikram Malhotra of Morgan Stanley.

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [2]

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This is Kevin on for Vikram. Just a couple of questions here. And definitely, thank you for the guidance. I think that's very helpful. But -- so one question I had was in terms of the managed same-store operating guidance. It seemed like the trend was pretty positive for the fourth quarter. And I understand you mentioned a couple of onetime operating expense accruals and lower utilities that was driving perhaps some of that positive performance. But in terms of the negative 3% to 0%, can you give any color around what you're thinking of in terms of top line versus expense growth?

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Susan Givens, New Senior Investment Group Inc. - CEO & Director [3]

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Sure, Kevin. Yes, look, I think you're picking up on the right sort of trend. We are seeing some favorable trends. We did see continued favorable trends in the fourth quarter, particularly on the IL side. I think what you're seeing in the guidance is still some weakness around, really, the AL portfolio and a little bit less kind of optimism around what can be done kind of in 2019 with those assets. Obviously, we're addressing them. We're transitioning and kind of selling certain assets. But when it came to providing guidance, we really looked pretty closely at what we've seen over the last couple of years with those assets and are assuming pretty consistent kind of pressure with the AL portfolio when it comes to guidance and really pretty comparable trends on the IL side. So if you look at kind of full year 2018, we're sort of expecting pretty comparable performance in 2019 on the IL side versus what we got in 2018. Q4 did have some seasonality benefits, and so we wanted to be cautious about kind of drawing too much of a positive conclusion just based on Q4. So I'm not sure that totally answers your question, but hopefully, a little bit of color there.

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [4]

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Yes, definitely. Very helpful. And then just one question in terms of the construction, the percentage of inventory, I noticed the compare in 3Q to 4Q that it's gone down within a 5-mile ring. But it seems it's picked up a little bit within the MSA. Can you provide any color around just what you're seeing in terms of supply pressure trends and in terms of just, I guess, the overall construction trends in your areas?

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David Jon Smith, New Senior Investment Group Inc. - Executive VP & CFO [5]

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Yes, sure, Kevin. This is David. I think if you look at our overall portfolio, we saw, again, decreasing new openings throughout 2018. Going back, we -- our portfolio had peak new openings in the second quarter of 2017. So consistent with what you're seeing in the industry, overall levels of new supply have continued to tick down in our portfolio during that time and were down significantly 2018 versus 2017. As we look out, based on the current data from NIC, looking at 2019, I think new supply levels are still expected to remain fairly elevated. But again, the [Stars] data has come down, which is encouraging. I think if you -- as we look at our portfolio in 5- and 10-mile radius, the trends remain the same, where the majority of those new openings are in the assisted living product, again, as comparable to our portfolio, which is 80% independent living. So I think we're encouraged by that trend as well. So overall, like, I'd say trends remain positive, and we'll continue to see how 2019 plays out.

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [6]

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So for the construction versus inventory, which I assume that, that is actually comparable in terms of community type, meaning if it's 100% AL that you're sticking with the construction versus inventory just for AL. Is that right?

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David Jon Smith, New Senior Investment Group Inc. - Executive VP & CFO [7]

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No, that includes both acuity types. So in our disclosure, that construction versus inventory number is both types of acuity in our markets.

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [8]

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Okay. And then just one more question. In terms of the strategic review, now that you've concluded it, can you give any color just in terms of what you consider and kind of how the process went?

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Susan Givens, New Senior Investment Group Inc. - CEO & Director [9]

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Sure. I mean, I can say some things. Obviously, I'm a little bit limited in what I can say. I think what you saw in terms of the initiatives that we took really were the items that when we looked at all of the alternatives were the biggest impediments to kind of putting the company in a good position. So most notably, the external management structure and then the lease that we have with Holiday that was terminated back in May. And then, of course, the dividend was the overall issue. And so I think we took a very proactive approach to addressing what we thought were kind of real impediments to putting the company in a good place. And so I think that we certainly -- and like I said in my comments, we still think there's more that can be done as a company to drive kind of value when we're focused on those initiatives. But I think we've taken a huge number of steps and made a lot of progress to put the company in a good place.

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Operator [10]

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(Operator Instructions) And at this time, there are no further questions in queue. This concludes today's conference call. You may now disconnect.

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Susan Givens, New Senior Investment Group Inc. - CEO & Director [11]

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Thank you, everyone, for joining us. We'll talk to you shortly.