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New Senior Investment Group Inc  (SNR)
Q2 2019 Earnings Conference Call
Aug. 02, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to the New Senior's Second Quarter 2019 Earnings Call. My name is Sylvia and I will be facilitating the audio portion of today's interactive broadcast.

[Operator Instructions]

At this time, I would turn the floor over to Mr. Jane Ryu, Vice President.

Jane Ryu -- Vice President

Good morning and welcome to New Senior's earning call for the second 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 supplements 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 a 10-Q, that we will be filing later today. We undertake no obligation to publicly update any forward-looking statements, 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, thank you, Jane. Good morning and thank you for joining New Senior's earnings call for the second quarter of 2019. I will spend a few minutes discussing the quarter and then I will turn the call over to David to review the portfolio performance and the financial results.

Overall, we had a very productive quarter, as we continued to make progress across our key focus areas. Reflecting on our first six months, as an internally managed company, I'm very happy with what we have accomplished over a relatively short period of time.

Overall, we successfully completed the internalization and a transition of the new Company, which was a significant endeavor. We posted solid portfolio and financial results, consistent with our guidance. We've implement plans to address our underperforming assets, we have significantly increased the flexibility of our balance sheet, and we have made a number of positive changes to our corporate governance, including the appointment of a new independent director with significant senior housing and REIT experience.

While we still have a lot of work ahead of us, we have made a significant progress toward achieving our goals for the year. And I'm very optimistic that the measures taken today will help position the Company for future growth.

With that as a backdrop, I will quickly touch on Q2 performance. 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 independent living asset continue to generate positive same-store results. But as we have never experienced for a number of quarters, the positive performance across our independent living portfolio, was offset by continued weakness in our assisted living and memory care portfolio, which I will discuss in more detail in a minute.

While we're disappointed with the results of our AL portfolio, we are encouraged by the trends we are seeing across our IL assets and we remain optimistic that our IL portfolio will continue to perform during the second half of the year. Along those lines, I'm pleased to report that we are increasing the midpoint of our 2019 guidance range, resulting in an updated range of $0.62 to $0.67 per share.

Now turning to our strategic priorities. At the beginning of the year, we identified 4 key focus areas for 2019. I will briefly give an update of our progress across each. First, optimizing our portfolio. Our top priority is to improve the overall quality and performance of our portfolio, through a combination of intensive asset management, operator transition, asset dispositions and CapEx enhancements.

Our IL asset, which represent approximately 83% of our total NOI, had generally been much more stable than our AL assets and that trend continued throughout the first-half of 2019. For the second quarter of 2019, the IL portfolio was up, 1.3% year-over-year, representing the fifth straight quarter of positive year-over-year growth.

Meanwhile, our AL portfolio, which represents only 13% of our total NOI, was down at disappointing 11.7% year-over-year. Overall, our AL assets continue to face ongoing and persistent pressure from new supply and labor shortages. While the occupancy declines have moderated, our AL operators are struggling to increase rates and manage labor expenses in the face of new supply and a tight labor market.

In response, we have been working very hard to address our under-performing assets, and we've implemented a series of initiatives, aimed at improving performance. So far this year, we've completed the transition of nine under-performing AL properties to new operators. We've sold two under-performing assets that were generating negative cash flow, and we've implemented plans to sell additional under-performing assets.

Collectively, we put initiatives in place to proactively address 50% of our AL assets and put this portfolio on a path to benefit from these positive changes. However, despite all the work, we continue to face challenges and persistence under-performance across the AL portfolio. As a result, we are exploring a range of further alternatives, which could include additional operator transitions, capital investments to turnaround and repositioned assets and more sizable asset sales.

Overall, our goal is to get our portfolio to a place, where we can generate strong and consistent NOI growth. Our IL assets, which make up the vast majority of our portfolio, have held up incredibly well despite weakness in the sector. Over the past several years, our IL assets have consistently outperformed our AL assets and we've observed the same trend play-out across the industry. We believe we have a unique portfolio of assets and we want to position ourselves to benefit as trends improve across the industry.

Second, managing our operator concentration. We've recognized the benefits of having a diversified portfolio of operators and we continue to evaluate all of our operator relationships, as we seek to improve performance and position the Company for growth. So far this year, we've engaged two new operating partners, with significant experience in the senior housing industry.

As we move forward, we're actively engaged in discussions with additional new operators about potential opportunities across our entire portfolio. We're excited about these new relationships and we believe that partnering with some of the best operators in the industry will provide fresh perspective and creative ideas, that will help put the company on a path to benefit from future growth.

Third, strengthening our balance sheet. We're committed to strengthening our balance sheet with a goal of reducing leverage over time and increasing flexibility. During the second quarter, we strategically took advantage of the unique interest rate environment and executed a $350 million interest rate swap, converting floating rate debt-to-fixed rate debt and increasing our fixed rate exposure from 24% to 43%.

The swap allows us to maintain the flexibility of floating rate debt, while simultaneously reducing interest rate volatility. Going forward, we're continuing to explore opportunities to address our balance sheet, including refinancing options, to further lower our debt cost and strengthen our liquidity profile.

And lastly, increasing the transparency of our financial results. We provided guidance for the first time in February and as I mentioned earlier, following the second quarter, we're improving the mid-point of the range. Additionally, we continue to refine our financial reporting and I believe we're providing very insightful information, on the performance of our IL portfolio, as compared to our AL portfolio.

As we move forward, we will continue to work to enhance and improve our financial reporting, with the goal of continuing to increase financial transparency. In conclusion, it was an active and productive quarter and we continue to make significant progress, as we move through the balance of the year. Our entire team has worked very hard and we have made significant changes with the objective of repositioning the Company for future growth. There is still a lot of work to be done, but we are on a good path, and we are excited and optimistic about what's ahead.

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 thanks everyone, for joining us on the call this morning. First, I will discuss our Senior Housing portfolio performance for the second quarter and we will end with the review of our financial results and 2019 guidance.

At the end of the second quarter, New Senior portfolio was comprised of 131 private-pay senior housing properties, diversified across 37 states. Portfolio trends this quarter, remained consistent with prior quarters, with our IL portfolio delivering 1.3% same-store NOI growth year-over-year, which is more than offset by continued weakness in our AL portfolio, resulting in same-store NOI being down 0.5%. Sequentially, we realized, solid NOI growth for the portfolio. Same-store NOI was up 3.2% with growth in all key metrics, including 10 basis points of occupancy growth, 0.5% growth in RevPOR and a 90% basis points increase in margins.

Now I will breakdown our portfolio by acuity and start with our IL portfolio performance, which represented 83% of our NOI in the second quarter. Same-store cash NOI for our IL portfolio increased 1.3% year-over-year. These results were driven by a solid RevPOR growth at 1.6%, offset by an occupancy decrease of 40 basis points.

While this occupancy decline was wider than last quarter's year-over-year results, our adverts have continued to push rate, as the portfolio has experienced three straight quarters of accelerating RevPOR growth. Despite some occupancy pressure, margins held up and remained flat year-over-year, as Holiday continues to do a great job of managing expenses at our properties, notably on labor. Throughout the second quarter, the IL portfolio realized positive net movements during every month, resulting in occupancy increasing 10 basis points sequentially and also netted positive in July, a good trend as we continue to peak summer leasing season.

Furthermore, IL releasing spreads for new residents were positive and increasing for the third straight quarter, also an encouraging trend. Rate increases on existing residents were also once again stable at approximately 3%.

Now let us move on to our AL portfolio, which accounted for only 13% of our NOI. Results this quarter remained challenged with same-store NOI down 11.7%, similar to the results we reported in the first quarter. The portfolio managed to grow RevPOR 0.9%, but realized an occupancy decline of 20 basis points to 81.4%, which was a low for the portfolio and similar to the all-time occupancy lows the AL industry realized during the second quarter.

Margins also declined significantly and fell 300 basis points, which was again driven by labor cost pressures, where we sell labor up over 5%. We continue to realize significant differences on expense trends between our IL portfolio and our AL portfolio, which can be attributed to the new supply and labor pressures in the industry and their resulting impact on margins and NOI. One of the reasons, we like IL is because there is no healthcare provider in our properties, which has resulted in lower labor cost pressures than we have seen in our AL properties.

To put it into context, labor expenses in our IL portfolio were up just over 2% year-over-year, while labor expenses in our AL portfolio exceeded 5%. As of last quarter, our portfolio was negatively impacted by a few assets that materially affected performance, which we were marketing during the quarter to continue our efforts to improve the overall quality and performance of our portfolio. Excluding these fixed assets from the same-store portfolio, would have resulted in a positive 0.6% growth for the portfolio and improving them 110 basis points.

As mentioned previously, we completed the transition of nine under-performing AL properties in the first quarter of this year. Results, during the second quarter, representing the first full quarter under our new operators, were down significantly. While it is typical to see these types of declines right after transitions are completed and while we had anticipated these results, it's something we are closely monitoring. All of the transition properties experienced turnover in critical leadership positions and faced significant disruptions. But at this point, they made great progress in stabilizing this leadership team and have established improved processes and programs, which are crucial steps toward improving the performance that we expect to see in this portfolio.

Lastly, I will touch on new supply. Overall, levels of new supply remain high, but the trend continues to improve, in the 99 primary and secondary markets covered by Nick, trailing 12 months starts declined again this quarter and are down over 30% since the highest reached in the fourth quarter of 2015.

In our markets, new openings continue to decrease, with property openings in the second quarter down nearly 60% year-over-year, and we currently expect full year new deliveries to be down compared to 2018.

Now I will move onto our financial results, balance sheet and outlook for 2019. Beginning with earnings, AFFO for the second quarter was $13.6 million or $0.16 per share, consistent with last quarter and in-line with our expectations and guidance for the year.

NOI for the second quarter increased 2%, versus the first quarter to $41.1 million, driven by our independent living portfolio performance as I just discussed. Interest expense decreased 1% sequentially to $23.5 million, primarily due to slightly lower LIBOR during the quarter and a full quarter's benefit from a $50 million refinancing completed at the end of the first quarter. G&A was $5.4 million for the second quarter versus $5.0 million in the first quarter.

Turning to the balance sheet. As Susan mentioned, during the quarter, we completed the execution of a $350 million interest rate swap, resulting in the improvement of our fixed rate debt exposure from 24% to 43% and lowering our floating rate debt exposure from $1.4 billion to $1.1 billion. The swap allows us to lower our risk from interest rate volatility and provide further stability to our earnings, while also maintain the flexibility of the mortgage done on our properties.

As it relates to debt maturities, we're remaining incredibly well positioned, with no maturities until the fourth quarter of 2021. With that maturity representing only 4% of our total debt.

And lastly, 2019 guidance. We are improving the mid-point of our AFFO guidance range by $0.005, resulting in an updated range from $0.61 to $0.67 per share to $0.62 to $0.67 per share. Our assumptions underlying this guidance, can be found in our earnings release that we issued this morning.

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

Questions and Answers:


[Operator Instructions] Your first question comes from Michael Gorman from BTIG.

Michael Gorman -- BTIG -- Analyst

Thanks, good morning.

Susan Givens -- Chief Executive Officer


Michael Gorman -- BTIG -- Analyst

Hi. Susan, if you could maybe talk a little bit about the alternatives that you laid-out for the AL portfolio and just how you are thinking about them, internally, specifically, kind of -- what do you have to see from these properties to pursue an operator transition or more CapEx investment versus just going with the disposition?

Susan Givens -- Chief Executive Officer

Yeah. Sure. It is a great question. I -- and just to frame it a little bit -- we have evaluated our AL assets. Our initial step was to look at the asset where we thought that the real estate was good. We like the markets, and we thought that perhaps the new operator could drive better performance. Or we thought that, it just didn't make sense to kind of stay within our portfolio, either because we didn't think, there was a lot of growth to come or we didn't think, the market really was there for us.

So we did a whole -- sort of detailed bifurcation of the portfolio, initially to go after the AL assets and that resulted in a lot of decisions that we made already. So transitioning nine assets, selling some assets, and I think, that's really the result of kind of where we landed on that were result of those factors I just talked about.

I think that what we have seen though is, despite a lot of those kind of actions, we are still seeing our AL assets and the subset of our AL assets under-perform. So we've addressed a bunch of them. But then we have other ones that kind of pop-up and have persistent problems. And so we're not done with our work and -- as I would sort of characterize it.

So we had hoped that we would address some of the real laggards and then we have our portfolio in a good place on the AL side. But unfortunately, we're still seeing some weakness and so we are now tackling those other assets and trying to determine whether we should transition even more assets, whether we should really put some additional CapEx and turn them around ourselves or if we just think, it makes sense to sell them to get out of those markets and out of those assets.

So I think, that all the things I described are kind of on the table right now and we're working through that sort of as we speak with the overarching goal to be let's get our portfolio to a place, where the real positive grower. So the IL assets, which are up 1.3%, that becomes our headline versus having those assets be dragged down by a handful of other underperformers. So there is a lot there, but hopefully that answers your question a little bit?

Michael Gorman -- BTIG -- Analyst

Yes, definitely. Thank you. And then, I guess, kind of sticking with that on the same-store side. Obviously, this sector likes to focus on year-over-year, and you've got that full year guidance of flat to down to 3%, but pretty strong sequential number in the second quarter. Is that a trajectory that we can expect through the back half or is that 3% sequential going to moderate a little bit and into the second-half of the year?

Susan Givens -- Chief Executive Officer

You know -- As a sequential stuff, as you know, there is seasonality and there are other factors that kind of go sequentially. The third quarter tends to be, sort of -- the peak leasing season, and so that is a strong leasing season. The third quarter also, sometimes you see higher expenses because it's summer months and all the utilities and that kind of factors into it.

I think, as we sit here, we think that there are some reasons to have sort of, a positive view of the balance of the year. I think, we are seeing some positive trends on the move-in inside and, clearly, on our IL portfolio. So I think, we feel good about that, but is it going to be 3% kind of sequential growth in Q3? I think, that's hard to say, but I think, if you just look at kind of nominal dollar growth sort of third quarter, fourth quarter, versus this quarter, we feel good about that.

Michael Gorman -- BTIG -- Analyst

Great. Thanks. And then maybe the last one for me, some good color on the settlement in the press release. Can you just guys talk about the expected timing of the proceeds, right? Because since it's a settlement, should we expect this to be a third quarter event? Or is there still the possibility that there's going to be an appeals process here?

Susan Givens -- Chief Executive Officer

Look, I'm obviously not a lawyer. But I think, the view is that it's a pretty high probability that we're kind of done and that's behind us. And In that case, I think, the proceeds are expected to come in at the very end of the third quarter and that might triple at the beginning of the fourth quarter. But I think, there's -- as far as I understand it, there's a low probability that it does not come in. I think, a lot of the work has been done, and it's pretty, kind of, final at this stage.

Michael Gorman -- BTIG -- Analyst

Fantastic, thanks everybody.

Susan Givens -- Chief Executive Officer

Thanks, Mike.


Your next question comes from Drew Babin from Baird.

Andrew Babin -- Robert W. Baird -- Analyst

Hi, good morning.

Susan Givens -- Chief Executive Officer

Hi, Drew.

Andrew Babin -- Robert W. Baird -- Analyst

Quick question on the asset sales. Are you able to give us kind of the cash NOI contribution from those assets that were sold in the quarter, as well as the assets that you are currently marketing or alternatively, you kind of a way to triangulate that number?

And I think, you've mentioned in the past, that may be looking at per bed basis is the better way to kind of evaluate the sales, given that the NOI contribution is not great from those assets, but I guess, how much NOI does go away with these dispositions?

Susan Givens -- Chief Executive Officer

Yeah. I'll let David kind of comment on the per unit of stuff. But I think, the way to think about it is not significant NOI contributors and in fact, kind of free cash flow negative. So from a cash flow profile for the Company is a very much a positive. It will help our cash flow profile. And then NOI very, very, very small and not something that will at all -- kind of, impact our financial.

So I view it as, these assets were small in size and a distraction from kind of an upper management perspective but then, also, negative contributors to cash. So a good result for us. And you won't see an impact to kind of our financials other than positive ones.

And David, I'll let you comment on the pricing.

David Smith -- Executive Vice President, Chief Financial Officer

Yeah, Andrew. Just on the pricing itself, like if you look at those two assets again, it's in the 50,000 to 75,000 a unit range. So, obviously, not indicative of the overall quality of our portfolio. So really getting some -- getting rid of some under-performers in our portfolio.

Susan Givens -- Chief Executive Officer

And I think Drew you asked about some other stuff we are selling. Those assets, I think are higher per unit valuations, just given the nature of the assets. I think, it's a little too early to say exactly, where we kind of land on some of the other stuff. But I don't think, you can draw conclusions from the two assets we just sold to what it might look like, if we do kind of further asset sales because these things are pretty bespoke. But I think, needless to say, good news for us, we have a pretty low basis in most of these assets, and we're being sort of thoughtful about what makes sense and what can really kind of put the portfolio in a better place.

Andrew Babin -- Robert W. Baird -- Analyst

So from a cash to NOI perspective, the additional assets sales will likely look like what was sold in the second quarter or likely getting to a period where maybe the NOI contribution's a little bit higher on what you're selling, kind of as you go?

Susan Givens -- Chief Executive Officer


[Technical Issues]

I think the line was cut off. So I think a lot of our participants were cut off. So we might want to give it a minute.

Okay, Crystal. Okay, well, I apologize. It seems like there is an operator issue here. So we very much apologize, if people have questions, please reach out to us directly. Thanks for your time.


[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Jane Ryu -- Vice President

Susan Givens -- Chief Executive Officer

David Smith -- Executive Vice President, Chief Financial Officer

Michael Gorman -- BTIG -- Analyst

Andrew Babin -- Robert W. Baird -- Analyst

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