Assisted Living Struggles Continue to Weigh on New Senior

New Senior Investment Group (NYSE: SNR) continues to make progress on its turnaround agenda, and is prioritizing assisted living, which continues to struggle with oversupply and labor costs.

The performance disparity between the New York City-based real estate investment trust’s independent living and assisted living segments was on display during its Q2 2019 earnings call Friday, August 2. For the quarter, New Senior reported total revenue of $116 million, a 6.2% increase over the same time frame last year.

For the first six months of 2019 — New Senior’s first six months as an independent operator — the company reported $233.6 million in total revenue, an 11% increase over the first half of 2018. New Senior reported normalized funds from operations (FFO) of $0.14 per share, $0.01 below analysts’ estimates.

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The earnings come as New Senior continues to internalize its operations and put distance between itself and Fortress Investment Group (NYSE: FIG). New Senior announced in April that it reached a $53 million settlement with Fortress, Holiday Acquisition Holdings, and members of its board of directors.

The lawsuit stemmed from a 2016 lawsuit alleging New Senior’s 2015 acquisition of 28 properties from Holiday Retirement for $640 million was greenlit to benefit Fortress executives at the expense of New Senior shareholders.

Also in Q2, New Senior entered into a three-year, $350 million interest rate swap, improving its fixed rate debt exposure to 43%. The company sold two underperforming assisted living and memory care communities for $14 million, and used the proceeds to reduce its debt load.

“We had a very productive quarter as we continued to make progress across all of our focus areas,” New Senior CEO Susan Givens said during a Friday morning earnings call. “Reflecting on our first six months as an internally managed company, I’m very happy with what we’ve accomplished over a relatively short amount of time.”

A tale of two segments

New Senior’s portfolio spans 131 private-pay senior housing properties in 37 states, with 13% of its net operating income (NOI) coming from assisted living and memory care assets, and 83% coming from independent living properties.

The portfolio’s second quarter success continued to be bifurcated. Same-store NOI growth decreased 0.4%, year over year, but improved 3.1% over Q1 2019. New Senior’s independent living segment improved 1.3% year-over-year, the fifth straight quarter with positive growth.

That growth was more than mitigated by the performance of New Senior’s assisted living and memory care segment. Same-store cash NOI for the segment fell by 11.7%, compared to Q2 2018.

“Our [assisted living] assets continue to face ongoing and persistent pressure from new supply and labor shortages,” Givens said. “Our operators are struggling to increase rates and manage labor expenses in the face of new supply and a tight labor market.”

To address the lagging assisted living performance, New Senior is looking at all of its options. The company transitioned a total of nine properties to new operators, and now has relationships with seven operating partners. Three of those newly transitioned properties went to Grace Management, an existing operator relationship for New Senior; four went to Integral Senior Living, a new operator relationship; and two others went to Phoenix Senior Living, another new operator with the REIT.

New Senior is also exploring sales of other underperforming assisted living assets, in addition to the two dispositions it completed in the quarter. The company is proactively looking at ways to reposition up to 50% of its assisted living and memory care assets.

Despite these recent moves, New Senior continues to face persistent challenges across its assisted living portfolio, and is considering further transitions, capital investments to underperforming properties, and more sizable asset sales, Givens said.

“Our goal is to get our [assisted living] portfolio to a place where we can generate strong and consistent NOI growth,” she said. “Our [independent living] assets, which make up the vast majority of our portfolio, have held up despite weakness in the sector.”

Analysts were cautiously optimistic with New Senior’s earnings report, noting the results were relatively stable.

“We continue to believe that the steps [New Senior] is taking to improve the company are the right ones,” BTIG Managing Director and REIT Analyst Michael Gorman wrote in a note to investors.

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