New Senior Plans to Internalize Management, Pay Fortress $50 Million

New Senior Investment Group (NYSE: SNR) is distancing itself from external manager Fortress Investment Group (NYSE: FIG) and internalizing its operations, executives announced Thursday.

The move is being made as part of the New York City-based real estate investment trust’s (REIT) ongoing strategic review process, which has not yet concluded, CEO Susan Givens implied during a call with analysts and investors. New Senior is a major owner of senior housing property, with a portfolio of 133 senior housing properties in 37 states. The largest operator in its portfolio is independent living giant Holiday Retirement, which is owned by Fortress.

The internalization is expected to make New Senior “more comparable to [its] peers in the health care REIT space,” and could increase investor interest in the company, Givens added.

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Still, some aspects of the internalization process—like a proposed $50 million payment to Fortress—have already drawn criticism.

“I find [the payment] offensive,” hedge fund billionaire and New Senior shareholder Leon Cooperman, CEO of Omega Advisors, told Senior Housing News. “… Fortress has not done a good job.”

Time to internalize

New Senior formed in 2014, as a spin-off of Newcastle Investment Corp. The REIT’s share price was above $19 in the fall of 2014, and has since declined, trading at about $7 as of a week ago.

In light of this performance, New Senior first announced its strategic review process in February. At the time, the REIT’s board of directors had convened a special committee comprising independent and disinterested directors to address specific elements of the strategic review.

On August 7, the special committee reached an agreement in principle with the REIT’s external manager—an affiliate of Fortress Investment Group—to internalize New Senior’s management function. The decision is expected to boost New Senior’s financial transparency, reduce the REIT’s general and administrative expenses by about $10 million per year, and potentially grow New Senior’s institutional ownership base, Givens noted Thursday.

Right now, New Senior is externally advised and managed by the Fortress affiliate, and all of the individuals who provide services to New Senior are employees of the Fortress affiliate. Additionally, in exchange for the services of the Fortress affiliate, New Senior pays it certain fees, including a management fee and, potentially, an incentive fee.

As part of the planned internalization, the aforementioned management agreement will be terminated, and New Senior will pay a total consideration to the manager of $50 million, made up of $40 million in preferred stock and $10 million in cash. The Fortress affiliate is expected to be able to force New Senior to redeem 50% of the preferred stock starting at the end of 2020, and the remaining 50% starting at the end of 2021.

The special committee expects that New Senior’s management team after the internalization will include numerous employees of the Fortress affiliate. Additionally, the Fortress affiliate is expected to keep providing certain services, at cost, to New Senior during a transition period following the internalization.

New Senior expects the process to have wrapped up by January 1, 2019.

Cooperman’s criticism

New Senior’s plan did not sit well with Cooperman.

“[Getting] $50 million for the results that have been delivered thus far strikes me as inappropriate,” Cooperman said on Thursday’s call. ” … If the company is ultimately sold for anything remotely approaching where we sold it to the public, then maybe Fortress could get a payment then, but they shouldn’t get the $50 million for what results have been delivered thus far.”

In an interview with Senior Housing News, Cooperman noted that an eventual sale of New Senior still appears to be on the table.

“From what I can read—the body language—when they fix these issues, then [the company] will be more salable,” he said.

Financial performance

New Senior’s second quarter 2018 revenue of $108.85 million beat analysts’ expectations by almost $5 million. The company’s second quarter 2018 FFO loss of 18 cents was in line with analysts’ expectations.

On the whole, New Senior’s independent living properties fared better than its assisted living properties in the second quarter, David Smith, New Senior’s managing director, said during Thursday’s call.

For instance, REIT’s same-store occupancy for its managed portfolio fell 140 basis points year-over-year, due to the independent living portfolio’s “stable occupancy” being counteracted by occupancy declines in the assisted living portfolio.

Additionally, the second quarter saw the largest gain in net move-ins in almost three years, Smith said.

“Notably, the majority of these occurred in June so we’re encouraged by the potential positive impact this will have in the third quarter,” he explained.

As of market close on Thursday, New Senior’s share price had fallen 13.48% to $6.16. The company had not responded to Senior Housing News’ request for comment as of press time.

Written by Mary Kate Nelson

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