New Senior Sees Assisted Living Slump Amid Push to Internalize Management

Though assisted living and memory care headwinds held back New Senior Investment Group (NYSE: SNR) in the third quarter of this year, not all the news was bad for one of the largest senior housing owners in the country.

In particular, a stronger showing among its independent living communities and progress in ongoing efforts to internalize the company’s management has given executives at the real estate investment trust (REIT) cause to strike an optimistic tone. New Senior’s portfolio spans 133 private-pay senior housing properties in 37 states, with about 15% of its net operating income (NOI) coming from assisted living and memory care assets, and more than 80% coming from independent living properties.

All but one of those assets are owned on a managed basis, following the conversion of its 51-property Holiday Retirement independent living portfolio. That repositioning was first announced last May and was intended to reduced its credit risk and increase operating transparency.

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“Our independent assets were up, year-over-year, on an adjusted same-store basis, while our AL-memory care assets were down significantly,” CEO Susan Givens said during Thursday’s earnings call with analysts and investors. “Combined with the strategic initiatives we’ve announced to date, I feel optimistic about the company’s future.”

On the whole, the New York City-based REIT — which is currently still managed and advised by an affiliate of Fortress Investment Group (NYSE: FIG) — logged a third-quarter 2018 net loss of $20.3 million, and a total NOI of $40.7 million. Additionally, the company saw normalized funds from operations (FFO) of $4.7 million, and an adjusted funds from operations (AFFO) of $9.8 million, or $0.12 per diluted share.

Management negotiations continue

New Senior has made good headway on its ongoing strategic review process this quarter, Givens said Thursday. The effort is currently expected to wrap up by the end of 2018.

“On the operational side, we’ve made a ton of progress and are really working towards having all the operational components completed with the expectation that the internalization will be done by the end of the year,” Givens said Thursday. “So, we’re in a good place.”

Earlier this year, New Senior moved to distance itself from Fortress as part of that process. If all goes according to plan, the initiative would boost New Senior’s financial transparency, reduce the REIT’s general and administrative expenses by roughly $10 million annually, and also grow the company’s institutional ownership base.

As part of that planned internalization, New Senior would terminate a management agreement with Fortress and pay a total consideration of $50 million, made up of $40 million in preferred stock and $10 million in cash. The Fortress affiliate likely could force New Senior to redeem half of the preferred stock starting at the end of 2020, and the other half beginning at the end of 2021.

“As an internally managed company, we will become more comparable to our peers in the healthcare REIT space, which we think could bolster interest in our company and expand our investor base,” Givens said. “I’m very optimistic that the measures taken to date as part of the strategic review process will position the company for growth and facilitate additional efforts to maximize shareholder value.”

But the move met with some criticism at the time, particularly from hedge fund billionaire and New Senior shareholder Leon Cooperman, CEO of Omega Advisors.

“I find [the payment] offensive,” Cooperman told Senior Housing News in August. “… Fortress has not done a good job.”

There are other ongoing efforts that could help the company. In October, the REIT successfully completed the refinancing of a $720 million bridge loan with Freddie Mac, arranged through KeyBank Real Estate Capital.

“The new loan resulted in savings of over 170 basis points of interest expense, or $12 million annually, which was even better than expected,” Givens said. “In addition to cost savings, we designed this refinancing to preserve our prepayment flexibility, and to enable us to recycle capital in the event that we identify accretive opportunities.”

Bittersweet portfolio results

For the REIT’s senior housing portfolio performance, it was a night and day split.

The company’s independent living side saw an adjusted same-store cash NOI up 1.3%, and occupancy increased 60 basis points to land at 88.1% for the third quarter of 2018. Generally, the REIT is seeing a slowdown in new supply for the independent living segment, with inventory growth exceeding absorption by only 40 basis points in the third quarter, according to New Senior Managing Director David Smith.

The REIT’s assisted living segment, however, fared poorly during the third quarter of 2018. The communities’ adjusted same-store cash NOI was down 18%, while occupancy declined 300 basis points, year-over-year. However, about 40% of the company’s 30 assisted living assets saw positive year-over-year NOI growth, Smith noted.

“But this was more than offset by the remaining assets that had significant declines in NOI,” Smith said. “We are highly focused on addressing these property performance issues through a number of asset management initiatives, with a goal being to improve the overall quality of our AL portfolio and its resulting portfolio metrics.”

On the whole, there are signs that certain market pressures may let up in the months and years ahead. The REIT reported a sizable reduction in new openings within 10 miles of its properties. Specifically, New Senior saw just 10 new openings in those areas for the quarter, a slowdown of about 75% from the peak new openings it saw in the second quarter of last year. Furthermore, the vast majority of those openings — 90% — were assisted living properties.

“And based on current data from NIC, we expect new openings in 2019 to be significantly lower than 2018 levels, which bodes well for our portfolio,” Smith said.

New Senior is also starting to see some of the benefits spurred on by major management changes at the largest operator in its independent living portfolio, Holiday, which is owned by Fortress.

Looking ahead, the REIT will keep a close eye on its assisted living portfolio, and aim to improve performance where it can.

“We’re at a good juncture where we’ve had a lot of strategic initiatives we’ve been focused on, now we’re really focusing on taking a hard look at those assets and working through with our operators to see if we can make some changes,” Givens said. “I think the bigger question mark is kind of the AL assets, and what we can do with those assets. But, we feel good about where we’re positioned kind of going into next year.”

As of market close on Thursday, New Senior’s share price had dipped 6.82% to $5.33.

Written by Tim Regan

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