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New Senior Investment Group Inc  (NYSE:SNR)
Q1 2019 Earnings Call
May. 03, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Tammy and I'll be your conference operator today. At this time, I would like to welcome everyone to the New Senior First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Jane Ryu. Ms. Ryu you may begin.

Jane Ryu -- Vice President

Good morning, and welcome to New Senior's earnings call for the first quarter of 2019. With me today are Susan Givens, our CEO; David Smith, CFO; Lori Marino, General Counsel; and Bhairav Patel, EVP of Finance and Accounting.

Before I turn the call over to Susan, I would like to highlight that this morning's press release, our quarterly supplement, and the reconciliations of GAAP and non-GAAP financial measures can be found on our website at newseniorinv.com. Before we begin please note that our discussion will exclusively focus on non-GAAP measures unless otherwise indicated.

During this call we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. No forward-looking statements can be guaranteed and actual results may differ materially from those projected.

Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in the Risk Factors and in other disclosures in our most recent annual and quarterly reports filed with the SEC including the 10-Q that we will be filing later today. We undertake no obligation to publicly update any forward-looking statement whether as a result of new information future events or otherwise.

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

Susan Givens -- Chief Executive Officer

Great. Thanks, Jane. Good morning, and thank you for joining New Senior's earnings call for the first quarter of 2019. I'll spend a few minutes discussing what we accomplished this quarter and how we're thinking about the business going forward, and then I'll turn the call over to David to discuss the portfolio performance and the financial results.

The first quarter of 2019 marked our first quarter as an internally managed company, and I'm very pleased with our overall performance as well as the significant progress we made toward achieving our goals for the year. As previously discussed the internalization was completed on January 1st, and I'm happy to report that the transition is substantially completed.

During the first quarter, we relocated the company's headquarters, and completed the hiring of key roles. With our team in place and the transition largely behind us, we're focused on the next phase of the company's life and on executing our plans for the business.

So far we're off to a very strong start. AFFO for the quarter was $0.16 per share in line with our expectations and guidance for the year. David will discuss in more detail, but on the portfolio side, we had another good quarter with solid NOI performance. Importantly, our core IL assets continue to generate positive results with NOI growing 2.3% year-over-year offset by continued weakness in our AL memory care portfolio.

Overall, we're encouraged by the trends we're seeing across our IL portfolio, and we remain optimistic that our core portfolio will continue to perform as we move through the balance of the year. As I discussed last quarter with the completion of the internalization, we identified four strategic priorities for 2019. And I'll briefly give an update of our progress across each.

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. Our top priority is to improve the overall quality and performance of our existing portfolio through a combination of intensive asset management, operator transition, asset sales, and CapEx enhancement.

While the majority of our assets have outperformed the overall industry, certain assets have dragged down our total results. So, as an initial step, over the last several months, we undertook an extensive process to reunderwrite our entire portfolio to determine which assets we want to keep, which assets we want to transition to new operators, and which assets we want to sell.

Our core IL assets, which represents over 80% of our total NOI had generally been much more stable than our AL memory care assets, and this quarter was no exception. For the first quarter of 2019, the IL portfolio was up 2.3% year-over-year while our AL memory care portfolio , which represents only 14% of our total NOI was down 11.9% year-over-year. Given this imbalance, we have initially focused our efforts on addressing the AL memory care portfolio.

During the quarter, we completed the transition of nine under-performing AL memory care properties to new operators including transitioning three properties to Grace Management, an existing operator and transitioning the remaining six properties to two new operator relationships, Integral Senior Living and Phoenix Senior Living.

While an improvement in performance won't happen overnight, we believe we have the right operators in place for these assets to drive stronger performance at the properties over the long term. On the asset sales side, we've recently closed on the sale of one AL memory care property, and we have another asset that's expected to be sold by the end of the second quarter with proceeds from the sales being used to pay down debt. These assets have been generating negative cash flow.

So, while modest in size, the sales will improve under-performing assets -- will remove under-performing assets from our portfolio and improve cash flow for the company. In addition, we're currently marketing another six assets for sale. Collectively, we have implemented plans to proactively address 50% of our AL memory care assets and put this portfolio on a path to benefits from these positive changes.

Overall, I'm incredibly pleased with what we've accomplished over a relatively short period of time. And I think we've made significant progress toward improving the quality of the portfolio and positioning the company for growth. As we move forward, we intend to continue to actively evaluate opportunities across the portfolio.

Second, managing our operator concentration. We recognized the benefits of having a diversified portfolio of operators, and we continue to actively evaluate all of our operator relationships as we seek to improve performance and position the company for growth. To that end, in connection with the operator transition, we recently engaged two new operating partners with significant experience in the senior housing industry, Integral Senior Living and Phoenix Senior Living.

Integral operates over 40 properties and has been in the business for 20 years and Phoenix operates roughly 30 properties with nearly 10 years of operating experience. We're excited about these new relationships and look forward to being partners with these new operators.

Third, strengthening our balance sheet. We're committed to strengthening our balance sheet with a goal of reducing leverage over time and increasing flexibility. As I've previously discussed, we recognized that our leverage is higher than our publicly traded peers. While our balance sheet won't be fixed overnight, we're focused on it, and have already taken measures to increase our flexibility.

During the first quarter, we completed the refinancing of a $50 million secured loan, and as a result, we have no scheduled maturities within the next two years. Going forward, we're continuing to proactively evaluate opportunities to reduce leverage and lower our debt costs.

And lastly, increasing this transparency of our financial results. We provided financial guidance for the first time in February with the goal of giving investors better insight into our earnings potential. We believe this financial transparency along with increased alignment between management and shareholders will enable us to work toward expanding our investor base.

Following the first quarter I am pleased to reaffirm our previously stated 2019 AFFO guidance range of $0.61 per share to $0.67 per share. As a reminder, this range assumes same-store managed cash NOI growth of negative 3% to 0%.

In conclusion, it was a very active and productive quarter, our first as an internally managed company. We have a unique portfolio of senior housing assets that are well positioned to take advantage of the compelling medium and long-term fundamentals of the senior housing industry. We've made significant changes with the objective of repositioning the company for future growth.

We outlined a clear set of priorities and we continued to be focused on executing our plan. While there's still a lot of work to be done, we're very excited and optimistic about the company's future.

Now I would like to turn the call over to David to review portfolio and financial results in more detail. David?

David Smith -- Executive Vice President, Chief Financial Officer

Thanks, Susan, and good morning, everyone. I'll start today with a discussion of our senior housing portfolio performance and will end with a review of our financial results and 2019 guidance.

At the end of the first quarter New Senior's portfolio was comprised of 133 private pay senior housing properties diversified across 37 states. As you'll hear more detail shortly, overall trends in our portfolio were consistent with last quarter with same-store cash NOI for our managed portfolio increasing 0.2% year-over-year.

We experienced strong performance in our IL portfolio including same-store NOI growth of 2.3% partially offset by continued weakness in our AL portfolio. As we mentioned previously, we transitioned nine AL assets to new operators during the first quarter. As a result, these properties have been moved out of our same-store pool, which is in line with our same-store definition.

Consistent with our commitment to increase transparency, we have provided enhanced disclosure this quarter breaking out the performance of this transition portfolio along with providing additional trailing five-quarter performance for our same-store portfolio broken out by IL and AL.

I'll start with our independent living portfolio performance, which represents over 80% of our NOI. Same-store cash NOI for our independent living portfolio increased 2.3% year-over-year driven by solid RevPOR growth of 1.2% and a 50 basis point increase in margin to a strong 40%, offset by a slight decline in occupancy of 20 basis points.

Notably, with this quarter's results, our IL portfolio has experienced five straight quarters of improving year-over-year margin growth. While the IL portfolio experienced seasonal occupancy softness in the first quarter, we're optimistic by recent leasing trends with solid and positive net movements experienced in both March and April as we enter peak leasing season.

As it relates to IL resident rates, trends on releasing spreads for new residents moving into our properties remain encouraging, as they are positive for the second straight quarter. Stability on rate growth for existing residents continued with increases of approximately 3%.

Turning to our assisted living portfolio, which accounts for only 14% of our NOI. Same-store cash NOI remained challenged and decreased 11.9% year-over-year. While rate growth was stable at 1.1%, the portfolio continued to experience occupancy and expense pressures, notably on labor, which resulted in margins decreasing 300 basis points.

Our same-store results were impacted by a few select assets that brought down our overall performance. In a continuation of our efforts to improve the overall quality and performance of our portfolio, we have begun to market these six assets for sale. If we were to exclude these assets from our portfolio, our same-store managed NOI growth would have increased from 0.2% to 1.5%. So, you can see, they're having a pretty significant impact on the portfolio performance.

Onto new supply. We're continuing to see improving supply and demand trends across our senior housing portfolio. For the past three years, independent inventory growth has outpaced absorption in our markets. However, that trend reached an important inflection point in the first quarter where supply and demand have converged as a result of decreasing levels of inventory growth and increasing levels of demand of nearly 3%.

As one of the largest owners of private pay senior housing in the U.S. we're encouraged by this trend and the benefits that it can provide to New Senior. Now I'll turn to our balance sheet and financial results, along with our outlook for 2019. On the heels of completing nearly $850 million of refinancing activity in the fourth quarter, we continued our focus on improving our balance sheet during the first quarter.

In March, we refinanced the $50 million secured loan that was scheduled to mature in May. The new loan has a rate of LIBOR plus 275 basis points, a savings of approximately 35 basis points from the prior loan and a term of three years with two one-year extension options. As a result of this refinancing, we remain well positioned from a debt maturity standpoint with no maturities for the next two years.

We're continuing to evaluate our capital structure for opportunities to lengthen maturities, lower the cost of funds and improve our fixed rate exposure. Turning to financial results. For the quarter, AFFO was $13.2 million or $0.16 per share, which was in line with our expectations and guidance for the year.

NOI for the first quarter was $40.3 million, a decrease of 7% versus the fourth quarter primarily due to one-time expense benefits received in the fourth quarter along with the seasonality experienced in the first quarter of every year in the industry.

Interest expense totaled $23.7 million, a decrease of 2% compared to the fourth quarter due to realizing a full quarter's benefit from the $850 million of debt refinancing activity, we completed in the fourth quarter. G&A was $5 million for the first quarter, a decrease of 28% compared to the fourth quarter. This significant decrease in G&A is due to the savings realized as a result of the internalization of the company, which we completed on January 1st.

Lastly 2019 guidance. As I mentioned, our first quarter results were in line with our guidance and expectations, and we are reaffirming our previously provided guidance of $0.61 to $0.67 of AFFO per share. Our assumptions underlying this guidance that we previously provided in February remained the same and can also be found in our earnings release that we issued this morning.

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

Questions and Answers:

Operator

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

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. David, I wanted to clarify on the guidance. There were a few line items, new line items there. I just want to clarify if that's a change or that's just sort of moving just from other areas of the income statement, the compensation expense related to transition awards, and then the equity-based comp that kind of went from $0.02 to flat?

David Smith -- Executive Vice President, Chief Financial Officer

Yes. Sure, Vikram. Great question. So it's simply just a change in geography. So the -- in connection with the internalization, we granted to the executives and the team stock and cash transition awards that was previously in the equity-based compensation line in guidance. And just given that's a kind of a nonrecurring item, we moved that up to normalized FFO to be consistent with how peers have treated in the past.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. The guidance is the same.

David Smith -- Executive Vice President, Chief Financial Officer

Correct. That's correct.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. And then just on the same-store guidance, I mean, it seems like you guys are tracking better than anticipated. So, I'm just wondering why sort of keep the same zero to negative 3% range?

David Smith -- Executive Vice President, Chief Financial Officer

Yes, sure. On that question Vikram, I mean, as you point out, we had a good first quarter. Results were just over flat, so we're pleased with the performance this quarter. One thing to keep in mind is, as you may remember, when we reported our last quarter, we had a number of one-time benefits in the fourth quarter of 2018. And so as we look out for the balance of the year, we do continue to expect NOI to continue to increase sequentially throughout the remainder of 2019, but depending on the comparison periods there can be some lumpiness and notably I'd point to the fourth quarter 2018.

Susan Givens -- Chief Executive Officer

Yes. Vikram I'll just add that, obviously, it's something we're continuously evaluating. And I think as you know and as we've discussed, we gave guidance for the first time in conjunction with kind of year-end results. And so we're constantly monitoring it and talking about it, and we'll revisit it as we move through the balance of the year.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. But, as of today, it would suggest that there were decelerating trend throughout the year?

Susan Givens -- Chief Executive Officer

Not on a sequential basis. I think it's just when you look at kind of the year-over-year quarterly period there's seasonality built in. There's different things that happen kind of when you're looking at 2018 versus 2019.

I think as we look at it, it's positive, that we're expecting kind of sequential stability and grow through the balance of the year. And it's just whether you have some periods that on a year-over-year basis don't have quite a favorable of a growth number say like the fourth quarter because the fourth quarter of 2018 had a few one-time items in it. And so therefore you've got to take that into consideration.

Vikram Malhotra -- Morgan Stanley -- Analyst

Got it. Okay. And as on the asset sales or the planned asset sales, I'm assuming these are negative cash flow. So, maybe talking cap rate is stuff. But can you give us a sense of what the sort of per-unit expectations are?

Susan Givens -- Chief Executive Officer

Yes, I mean, what I can say is, not all of them are negative cash flowing assets, but I think there are some that are. And we're thinking about it and looking at it, this is really a part of our entire kind of reunderwriting of our portfolio.

So, we went through and tried to determine, which assets are under-performing, but also importantly which assets do we think are just not necessarily well positioned as it relates to our portfolio and our core strengths and what kind of fits in with our overall portfolio.

So, there are a number of the reasons why we identified certain assets to be sold. I think the common theme is that they do -- they have been under-performing. But whether they're negative cash flowing or not there's a little bit of different story for each of them. I think the per unit numbers I'm not sure we even published those.

But, I think, we think about it, the good news for us is that we're selling these kind of above our basis. And so that's a good thing by and large. But we think most importantly it will kind of clean up some of the under-performing assets and really have our results be more in line with the vast majority of our assets, which have been very strong and performing.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Great. And then just last one any update or any thoughts you can provide around holiday and sort of Fortress' plan for holidays?

Susan Givens -- Chief Executive Officer

I'll give you my thoughts on Holiday, I think, Holiday at this point has very successfully addressed three of their four leases, I think, we as the kind of biggest counter-party to Holiday, I think, that's very positive and very good for their business. And I think when you look at our IL results this quarter and over the last few quarters that's basically Holiday as our operator.

And I think the performance speaks to how well they're doing right now. So, this quarter our same-store NOI was up 2.3%. Last year, it was up kind of, sorry, last quarter it was up a little bit over 2%. So, I think, when you look at those results and compare those to the broader market, we feel really good about how Holiday is doing and how Holiday is performing. I think that we are, of course, kind of constantly talking to them and in very kind of active dialogue around their business.

And I think that we recognized their importance to us. They recognized our importance to them. And so I think if you ask me how I feel about them as a counter-parting as a business today versus 12 months ago, I feel much, much better in light of the fact that their leases have been addressed in the -- their company is in a much better sort of position. It's growing really well and they can be focused on the growth side versus some of these lease issues that they had.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. Thank you.

Susan Givens -- Chief Executive Officer

Thanks, Vikram.

Operator

Your next question is from Drew Babin with Baird.

Drew Babin -- Baird -- Analyst

Hey, good morning. Thanks for taking my question.

Susan Givens -- Chief Executive Officer

Hi, Drew.

Drew Babin -- Baird -- Analyst

Hi. Quick question on some of these management contracts, the new ones with Grace, Integral and Phoenix. There's been a lot of talk from your peers on conference calls about RIDEA conversions and just sort of the alignment of incentives in the new agreements. I mean, I was hoping you could talk somewhat about the new agreements, the New Senior's made with these operators. And to the extent that Holiday is replaced specific assets down the road or transitioned. What's important to New Senior in negotiating these new leases and sort of what is the basic structure look like for not leases, management agreements?

Susan Givens -- Chief Executive Officer

Sure. It's a great question and it's something we are spending a lot of time talking about and discussing with our operators. I think that when you look at our portfolio, we obviously have the vast majority of our assets are subject to management agreement. And the good news for us is, that by and large we have a lot of flexibility on our side to do lots of things with those management agreements.

But I think importantly as we move forward and I think as the industry moves forward everyone is spending a lot of time trying to ensure that there is proper alignment between kind of the owners and the operators of the assets. And one of the things we have done with several of our operators is to rethink the kind of traditional fee structure, which has historically just been based on a percent of revenue to try to create realignment around NOI growth even CapEx. And so in our new agreements we factored those items in.

So, we have incentive fees and incentive hurdles that really align our operators we think. And it's something we continuing to try to tweak. I think historically a lot of times you saw, if there were incentive elements, they were so hard for the operator to even hit that it almost didn't really incentivize the operators properly. So, we're trying to change that and trying to be pretty proactive.

The good news from our standpoint is because we have so many assets that are subject to management agreement. We can test a little bit and we can try things out and work very collaboratively with our operators, which I think is why we're getting a lot of operators wanting to work with us right now because we have so many assets that we can try to adopt kind of a different new model.

So, we're in full agreement that changes need to be made and we're doing that. And the good news is that the assets perform, our operators make money, we also make more money. So we have added some of those elements into our new contracts.

Drew Babin -- Baird -- Analyst

Great. That's helpful. And then your investor presentation mentioned that both Grace and Integral also do focus on independent living in addition to assisted memory care. I guess where does that stand as a focus for them? And are these operators potential kind of obvious transition beneficiaries to the extent that you transition out of any Holiday management agreements going forward?

Susan Givens -- Chief Executive Officer

Yes, it's a good question. I think as you can imagine, we are thinking about kind of anything and everything. And as I said to Vikram it's our -- we're very pleased with our Holiday performance and how they're doing with those assets. And I think that we're very close with Holiday and talking to them on an ongoing basis, but we are also very aware of our concentration with Holiday.

And that's something we're spending a lot of time talking about and a lot of time thinking about. So, yes, as we're thinking about new operator relationships that is something that we're thinking about and that factors into kind of the conversation.

I've always said and I continue to say, I think, when you establish new operator relationships goods to kind of starts small and to test them out and not just for performance reasons, but just to make sure that the asset management style and the reporting and all of that culturally kind of fits and works well.

So, we've had good experience over the last kind of two years building relationships with someone like Grace. So, we started off with three assets gotten into rhythm with them. It's been a productive relationship and now we're giving them a few more assets.

So, yes, we're thinking about options and alternatives across the portfolio because that would be prudent for us to be doing that, but we also are pleased with kind of our operators that we haven't transitioned. And I think you kind of see that in our actions.

Drew Babin -- Baird -- Analyst

Okay. That will make sense. And just one last one for me, are there any markets geographically that are experiencing exceptionally positive or negative performance that has more to do with the market than the operator? And I guess is it sort of a supply issue, a demand issue? Does anything kind of stick out as you look across the portfolio?

Susan Givens -- Chief Executive Officer

Yes, I mean, David can comment as well. But I mean one thing that we have observed our asset by and large are what we characterize as kind of middle-market assets.

And I think when you look at new deliveries in our market, we've seen, and this is a broad kind of general statement. We have seen the deliveries are actually coming down, new deliveries, new buildings coming online have actually been coming on in our markets were in some of the bigger kind of more primary markets deliveries have been going up pretty steadily.

And so I think that when you look at our IL assets and where we sit, I think, part of that speaks to why we've seen some positive NOI growth. And each market is a different story, but I think there is sort of a common theme that we've seen that there has not been a whole lot of new stand-alone IL products that competes directly sort of with our products in our markets, but obviously we don't have competition. Of course we do.

But I think that there have been fewer stand-alone at our price point IL buildings in our market, which I think probably seeks why we've seen a lot of strength within our IL portfolio. I don't know, David, if you want to add some color?

David Smith -- Executive Vice President, Chief Financial Officer

Yes. Maybe just one thing as it relates to how we're thinking about the portfolio and optimizing the performance there, Drew. The six assets that we're currently marketing right now, those assets are concentrated in the Salt Lake City and Dallas markets.

And so as you're probably well aware those are some markets where there's been quite a bit of new supply being delivered over the past few years and that sort of been seeing some pressures on performance. So that's more just again a supply issue and why we're focused on transitioned those -- properties out of the portfolio.

Drew Babin -- Baird -- Analyst

Great. That's all from me. Very helpful. Thanks.

Susan Givens -- Chief Executive Officer

Thank you.

Operator

At this time there are no further questions. I would now like to turn the call over to Susan Givens for closing remarks.

Susan Givens -- Chief Executive Officer

Great. Well, I appreciate everyone joining us. And we will be in touch and look forward to talking to everyone in the upcoming months. Thank you.

Operator

Thank you for participating in today's conference call. You may now disconnect.

Duration: 31 minutes

Call participants:

Jane Ryu -- Vice President

Susan Givens -- Chief Executive Officer

David Smith -- Executive Vice President, Chief Financial Officer

Vikram Malhotra -- Morgan Stanley -- Analyst

Drew Babin -- Baird -- Analyst

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