New Senior to Reposition Underperforming Holiday Portfolio

New Senior Investment Group Inc. (NYSE: SNR) is repositioning its 51-property Holiday Retirement portfolio as its review of strategic alternatives moves forward.

Susan Givens, CEO of the New York City-based real estate investment trust (REIT), called the decision to reposition the Holiday portfolio “a significant evolutionary step for the company” during a Thursday call with analysts and investors.

The move is intended, in part, to encourage the nation’s largest independent living operator to improve its financial performance, as the growth of the Holiday portfolio has “lagged expectations” in the years since New Senior entered into the aforementioned triple-net leases.

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“The new management agreement has favorable terms and is intended to incentivize Holiday to drive NOI growth,” Givens said.

Specifically, New Senior is set to pay a management fee to Holiday once the 51-property portfolio transitions into a managed portfolio. The fee will be 5% of effective gross income for the first year and 4.5% for subsequent years. If the Holiday portfolio achieves certain performance thresholds, New Senior will also pay the operator a yearly incentive fee in an amount up to 2% of the Holiday portfolio’s effective gross income.

Additionally, the management agreement can be terminated after one year, without penalty.

“We have the flexibility to transition some or all of the portfolio to a new operator, if we so choose,” Givens said.

Winter Park, Florida-based Holiday is one of six operators New Senior currently counts as a partner—and, until the 51 Holiday properties officially transition into a managed portfolio, they remain 51 of the 52 total properties New Senior has under a triple-net lease structure.

In the first quarter of 2018, New Senior’s same-store triple-net average occupancy dropped to 87.4% from 89.5% in the first quarter of 2017. For the managed portfolio, same-store average occupancy fell from 87% to 85.4%.

New Senior’s other operating partners include Oregon-based Blue Harbor Senior Living, Atlanta-based Thrive Senior Living, Minneapolis-based Grace Management, Tucson, Arizona-based Watermark Retirement Communities and Vancouver, Washington-based JEA Senior Living.

Increasing flexibility, promoting transparency

New Senior anticipates that its agreement with Holiday will reduce its credit risk, improve overall owner-operator alignment and boost the transparency of its operating results. New Senior is managed by an affiliate of global investment management firm Fortress Investment Group; Holiday is majority owned by private equity funds managed by Fortress.

New Senior expects to receive $116 million of total consideration as part of the deal, with $70 million in cash and $46 million in retained security deposits.

Still, the lease termination can only go into effect if New Senior completes a refinancing of the existing debt on the Holiday portfolio, which, as of March 31, had an outstanding face amount of roughly $666 million.

New Senior expects to refinance the existing debt with a one-year, $720 million secured loan bearing interest at LIBOR plus 4% for the first six months and growing by 50 basis points after the sixth monthly payment date and by another 50 basis points following the ninth monthly payment date.

If New Senior successfully refinances the existing debt, the REIT is anticipated to incur about $65 million of prepayment fees and expenses.

The company received some questions about the re-finance on its earnings call, given that the costs related to that “dampen a lot of the short-term upside,” in the words of Stifel analyst Seth Canetto.

The new financing offers New Senior more flexibility than the previous CMBS debt, Givens replied.

“I think this is actually a very good financing that matches how we will own the assets and enable to us to be very flexible in light of all the strategic review analyses that are … taking place right now, and sort of gives us ultimate flexibility,” Givens explained on the call.  

Holiday has had a particularly transformative past 18 months. In February 2017, the provider announced it was abandoning its signature, live-in manager operating model for a more traditional set-up. Then, in April 2017, Holiday announced it was relocating its corporate headquarters to Winter Park, Florida. In the following weeks, it warned of massive layoffs.

Holiday has not yet begun reaping the benefits of its new management model, Givens suggested, adding that New Senior is going to benefit when it does thanks to transitioning to the management structure. 

“I think the point is now owning these assets on a managed basis, when we start to see improvement, we get 100% of that improvement,” Givens said. “Under the leased structure, none of that would accrue to our benefit.”

Holiday expressed confidence that the agreement will strengthen its business.

“We are committed to providing the best service possible to our residents and associates, and this transaction helps us to do that,” Holiday Retirement CEO Lilly Donohue said in a statement to Senior Housing News. “It will improve our cash flow, strengthen our business, and allow us to devote more resources to helping older people live better.”

Following the lease conversion, New Senior’s portfolio will comprise 132 managed properties and one leased asset across 37 states.

Strategic review ongoing

New Senior’s first-quarter 2018 revenue of approximately $99.2 million missed analysts’ expectations by about $4.6 million. The company’s first-quarter funds from operations [FFO] of 21 cents missed analysts’ expectations by 2 cents.

As of Thursday, the REIT’s strategic review process, which was announced in February, is ongoing.

“This is something we are very actively engaged in,” Givens said. “This is not a passive review.”

And, though the REIT has not put out a timeline as to when the process will be completed, it considers the Holiday portfolio repositioning as a step in the right direction.

“I view [the agreement] as kind of really critical first step that allows us to move with respect to some of the other actions that we are looking at,” Givens said.

Hedge fund billionaire and New Senior shareholder Leon Cooperman, CEO of Omega Advisors, chimed in on Thursday’s earnings call, noting that it seemed inevitable that the company’s dividend would be cut, and asking whether the portfolio repositioning will transfer value from New Senior’s external manager to shareholders. The REIT has come under fire in the past given that New Senior, Holiday and Fortress are all intertwined. An ongoing lawsuit alleges that a 2015 acquisition of 28 Holiday properties was to Fortress’ benefit but resulted in a loss for shareholders.

“We know that the external managed structure has been something that’s been a key focal point for folks, and I think it’s safe to say that it is something being looked at very carefully and it’s being evaluated [in the strategic review] as I think you would expect us to be evaluating it,” Givens said.

He is hoping for a sale of the REIT “materially in excess” of where it’s trading presently, Cooperman said.

New Senior’s shares were down 12.12% as of market close Thursday, trading at $7.61.

Written by Mary Kate Nelson

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