Q3 2019 Earnings Call
Good morning, and welcome to the senior housing properties Trust.
Quarter 2019 financial results conference call.
For Kids 10.
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I would like to now turn the conference over to Mike.
Kodesch director of Investor Relations.
Please go ahead. Thank you welcome to senior housing properties Trust call covering the third quarter 2019 result.
Today's call, our Jennifer Frances President and Chief operating Officer rig Sidel, Chief Financial Officer and Treasurer.
Today's call include the presentation by management, followed by a question answer session, we'd like to note that the transcription recording retransmission update conference call are strictly prohibited without prior written consent senior housing properties Trust, we're at an age.
Today's conference call contain forward looking statements within the meaning of the private Securities Litigation Reform Act at 1985 now the securities laws. These forward looking statements are based upon at the natures present beliefs and expectations as of today Thursday November seven 2019.
Company undertakes no obligation to revise or publicly release will result in any revision to the forward looking statements made in today's conference call other than through filings with Securities Exchange Commission, we're at DC.
In addition, this call me may contain non-GAAP numbers, including normalized funds from operations were normalized Depofoam EBITDA were adjusted EBITDA and cash basis, net operating income or cash basis and Hawaii.
Reconciliations and net income attributable to common shareholders to these non-GAAP figures.
I wanted to calculate apropos CAD or fad are available in our supplemental operating and financial data package down on our website at www Dot that's an athree dotcom.
Actual results may differ materially from those projected in any forward looking statements.
Additional information concerning factors that could cause those differences is contained in our filings with the FTC.
Investors are cautioned not to place undue reliance upon any forward looking statement now I'd like to turn call over to Jennifer.
Thank you Michael good morning to our shareholders and call participants and welcome to the third quarter earnings call for senior housing properties Trust.
To begin today's call I'd like to report that with the targeted close date of our restructuring the business arrangements with five star senior living just under two months away.
We're on track and are progressing as planned.
Five star shareholders approving the issuance of five star common stock to SNH and that's an eight shareholders.
Only be meeting milestones is obtaining the requisite licenses from the states in which our assets are located a process, which is well underway and on schedule.
All in all we remain on target for the January 1st 2020 conversion of our Triple net leases to management contracts.
In conjunction with the five star restructuring, we continued to make headway and our disposition strategy, which will both reduced our financial leverage and transform our portfolio to best position SNH for the future.
We previously mentioned that we expect to sell more have under agreement to sell assets valued at approximately $900 million by the end of 2019 to reach our target leverage and we remain on schedule for this objective.
There is abundant capital in the medical office life Science, and senior living acquisitions markets, and we continue to feel comfortable that our pricing and timing goals are achievable.
We now have assets valued at over $740 million enough sold under agreement to sell or the offers received.
We are actively marketing the remainder of our disposition portfolio valued at over $240 million, which we expect to be under agreement by yearend.
As a reminder, on July 1st we also sold our entire equity stake in the Aramark will for approximately $99 million net proceeds.
[laughter] Companys third quarter 2019 results reflected a period of deliberate transition as we continue to set the stage to improve the sustainability of revenue.
Over long term diversified growth and provide reliable returns for our shareholders moving into 2020 and beyond.
Earlier. This morning, we reported a 14.9% decrease in consolidated same property cash basis, and align the third quarter compared to the same quarter last year.
This decrease was expected and was primarily the result at the reduction in five stars met for the full quarter as agreed upon the April transaction.
Moving the Triple net leased senior living communities same property cash basis, I know why was down 4.4% compared to the same quarter last year.
This decrease was mainly the result of 3.9 million dollar were 17.5 per cent per cent same property NOI decline in our managed senior living portfolio.
It's important to spend a minute provides detail on this day decrease as it was driven by a combination of workforce investment initiatives within our managed senior living portfolio that we have discussed on previous calls.
The 140 basis point drop in same property occupancy in the managed senior living portfolio compared to the prior year and several nonrecurring expense items.
First increased wages and benefits and contract labor accounted for $2.2 million at the year over year decrease as we mentioned on previous calls wage pressure in competition for high quality leadership, we made two of the most significant challenges in senior living across all employee type.
To address this five star has increased its commitment to its team members, which we see as an essential move ahead of the conversion of our leased communities to managed.
Additionally, open positions in a tight labor market led to the increased use of costly contract labor.
As third party labor and overtime wages can cost substantially more than that of traditional employees. Five star continues working towards stabilizing its workforce to a high quality permanent team.
We support five stars investment and his team members and believe this will lead to even better service to our residents and ultimately increased occupancy and rent growth.
Next much of our managed communities drop in occupancy that I. Just mentioned is due to Georgia, and South Carolina markets, which continue to face an influx of supply relative to absorption and where our communities faced additional disruption due to transition of leadership.
Improvements in these markets are critical and we look forward to seeing five stars plan successfully implemented.
Finally.
The combination of the impact of filling open positions at our recently completed ground up development of an independent living community in Tennessee and costs related to hurricane Dorian preparation in evacuation roughly accounted for the remainder of this decline.
Moving to our MLP segment SNH. Its portfolio contains over 12 million square feet comprised of 7.4 million square feet of medical office buildings, and 4.7 million square feet life science assets with a weighted average lease term of 6.4 years.
We generated strong leasing results this quarter with 314000 square feet of new and renewal leases executed with a weighted average lease term 6.1 years, 5.1% rollup in rent and leasing costs of just $3, a 97 cents per square foot per year.
Activity for prospective new tenants and renewals is strong with a robust leasing pipeline for bacon space and upcoming expirations.
As we work through our deleveraging efforts, we will continue to focus on leasing tenant retention and operational excellence by leveraging our MRM asset in property management teams.
RMR as local presence and more than 30 offices across the U.S. In addition to the Companys deep bench and wealth of experience provides a competitive advantage for tracking local market trends and demand drivers as well as building meaningful relationships with both our tenants and leasing brokers.
In today's extremely competitive labor market. The RMR group has a heightened focus on developing numerous programs to attract and retain high quality real estate professionals.
As a testament to the success of these programs. It recently won the real estate Management Excellence Award for employee and leadership development from Iran, where the answers you to real estate management and its 2019 global summit in September .
This award recognizes our remarks programs and initiatives for recruiting onboarding retention and professional development.
We believe the breadth strength in recognition of these programs are clear evidence of the benefits SNH receives from RMR shared services platform.
Back to our results. There are few factors that continue to negatively impact our and will be segment results when compared to the same quarter last year first we had an early termination fees paid by attendant last year, who downsize into building in Minneapolis, where we immediately be lease the space with a rollup in rent over 16% and two building vacancies one.
In a property outside of Minneapolis, where we recently completed a repositioning the other building in South Carolina, where a large tenant recently vacated both of which had strong leasing pipeline.
These factors largely drove a 6.3% decrease and our medical office same property cash basis in Hawaii.
However, this was offset by a 6.1% increase in our life science portfolio, resulting in same property cash basis, and a lie in our MLP segment down 30 basis points compared to the same quarter last year.
The increase in the life science cash basis, I know I was mainly the result of the base rent increase at a 1 million square foot property in Seaport District Boston.
This 15 year lease that commenced in 2013 has an 8% rent increase every five years, one of which took effect on January 1st of this year.
As stated in prior quarters plans are underway to redevelop the three building life Sciences campus located in Torrey pines within the greater San Diego market for approximately $100 million.
Torrey Pines is considered one of the top markets for life Science Sciences in the country ranking third behind Boston and San Francisco, the property will undergo a full transformation, which includes complete demolition down to compete in steel.
Following its estimated substantial completion in late 2020, the property will be a prominent class eight campus operating flexible lab in office space as well as modern amenities are already in discussions with possible tenants for the buildings and anticipate an increase to the overall campus square footage and sizable rollup in rent.
I'll now turn the call over back to provide further discussion of our financial results for the quarter.
Thank you Jennifer and good morning, everyone I'll be discussing some of the third quarter financial results beyond what Jennifer just covered.
Normalized FFO for the third quarter of 2019 was $70.1 million or 29 cents per share, which was down 13 cents per share compared to the same quarter last year.
The majority of the decrease in normalized FFO was due to the five star rent reduction in our Triple net lease senior living communities Jennifer mentioned earlier.
In October we declared a 15 cents per share dividend payable in the fourth quarter of 2019.
The normalized AFFO payout ratio for the third quarter based on this dividend was approximately 52%.
General and administrative expenses decreased $21.4 million for almost 70% for the third quarter compared to last year as a result of lower business management fees.
We've accrued no incentive management fee and our managers base fee continues to be paid on market capitalization and not on the historical cost of assets.
We believe the decrease business management fees demonstrates the strong alignment of interest between RMR and estimate shareholders as the reduced market capitalization driven by the reduced stock price in the third quarter translated to a reduction based business management fees paid to RMR and annualized run rate almost $15 million.
Turning to capital expenditures, we spend $15.3 million in recurring Capex and $15.7 million on redevelopment this quarter.
Redevelopment capital split fairly evenly between projects in our MLP segment and managed senior living portfolio.
Our MLP segment, we continue to make progress on the repositioning in Washington, D.C. that we've discussed on prior calls.
And our managed senior living portfolio. The majority of the redevelopment capital expenditures were related to the independent living ground up development at one of our properties in Tennessee, The Jennifer mentioned earlier, which was substantially completed in September .
Going forward, we expect to see increased redevelopment capital expenditures.
As we work to complete the repositioning in Washington, DC begin the redevelopment and Torrey Pines and continue to invest in our senior living portfolio.
As we've previously mentioned.
We also expect to spend about $1500 per unit per year in recurring capital expenditures in our senior living portfolio.
Moving to our balance sheet, we ended the third quarter with $49.5 million, a cash on hand, and $589 million outstanding on our revolving credit facility.
Subsequent to quarter end, we've reduced our borrowings under the revolving credit facility to $517 million as of today using proceeds from dispositions.
As of September Thirtyth, our debt to adjusted EBITDA was 7.4 times and debt to gross assets was 42.4%.
We mentioned last quarter that we expected our leverage to peak during the third quarter and there is no change this expectation as asset sale proceeds from our disposition program will be used to pay down debt to reduce leverage to roughly six times or lower.
That concludes our prepared remarks, operator, please open up line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and do you would like to withdraw. Your question. Please press Star then to at this.
Time, we'll pause momentarily to assemble our roster.
The first question comes from Michael Carroll with RBC capital markets.
Please go ahead.
Yeah. Thanks, Jennifer can you talk to us a little bit about five stars a labor initiatives that they're pursuing right now how much is the operator, increasing individual wages and are these expenses are expected to increase over a multiyear period or should we expect a short time frame up the elevated operating expense growth.
Thanks for your question Mike.
Five stars.
As you said very focused on their labor initiatives through team member engagement that thinking hotter their Ceos, calling it putting people first where they're investing in staff members.
To provide for a culture of higher standards, yes, there's a few things that are going on as far as their initiatives and wage pressure wage pressure.
Isn't going away anytime soon there's there's the kind of the macro.
Issue, where unemployment hasn't been this low since 1969 and the senior livings industry has been especially challenged.
Operators are obviously competing extremely fiercely for qualified employees. So on top of these market conditions five star has had some challenges with with labor as well.
But the initiatives there again, there super focused on.
Hiring and retaining the best employees possible, there's been some as I said theres been some struggle with them in that initially there was some employee uncertainty because of the announcement of there that the doubted existed about their ability to continue as a going concern that's been solved so that.
Issue has gone away.
And then there was some uncertainty that was created with.
Placement of the C suite, So kt has talked about again this.
One of these initiatives is building a culture of accountability transparency and innovation that caused some disruption because I think there were some employees, who decided to leave because they didnt want to work in that that environment of accountability.
Next we announced our disposition program 900 million of.
Disposition of assets, 60% of which were in the senior living space. We then publicly announce specifically what assets were being sold so that cause employee disruption.
Thanks to our head to to pay.
Lastly, overtime and contract labor as a result of that so I think.
You know Haiti's initiative PD in her teams initiative to bring in the best and brightest and it's still a lot of those open positions that have been created because of this disruption.
I don't think that you know as I just said some of those disruption factors have wound down.
But because they're going to continue to focus on workforce and attracting that highly qualified workforce.
I don't think its anytime soon I don't I think it's well into 2020.
Okay, and then what drove the weaker trends in your occupancy and rental rates this quarter and it seems like the managed portfolios follow the brunt of it versus the five star lease portfolio.
I guess is there a reason for that but their friends and or do you expect those trends to continue is there something happening in the the marketplace.
I think it was Oh, we talked about it a couple of markets, specifically, where we really had some some issues the south Carolina and Atlanta markets. There were leadership changes there that causes disruption and so its I'm not sure that it's an overall all community issue it's really.
Just a couple of markets.
And now that Guy.
[laughter] kind of.
Hired new leadership for those markets I think we'll see an improvement.
Okay and last one for me are you seeing competitors in your market cutting rates are offering significant concessions and in order to drive their own occupancy rates higher you're seeing a much more competitive from operating environment.
I think that that there are certainly those that will give a lot of things away to attract residents were trying to our revenue management too.
Our five star is trying to their revenue management to set the correct rates for specific units within their communities and not offer a great deal of concessions.
That's 80 cents, a bunch of time talking about that though.
So so we're going to be more can we're going to be competitive it may just not be by giving things away.
Okay and has that changed has the operating environment more competitive today to say versus 12 months ago or is it the same.
I think it's the same which is which means incredibly competitive [laughter] I don't think that it's hard I think it's hard wouldn't be hard for it to get more competitive than it's been.
Okay, great. Thank you.
Thank you.
The next question comes from.
Todd Stender.
Wells Fargo.
Please go ahead.
Thanks.
I guess, just looking at the third quarter sales and then the.
Properties, you have teed up for sale I guess here in Q4.
So we see we've seen a lot of m. obese more coming I would've thought there maybe for assisted living facilities tucked in there can you just comment on maybe what's left by my Count you said about a 150 million left that's should get you to the 900 million dollar number what's what's left what.
Property type should we see it's a real mix actually thanks for your question. It it's a mix no the m. obese.
No there are our licensing issues that come with the sale of senior living and so and lobbies are in life Sciences assets are just less complicated to sell so you can go under agreement have relatively quick due diligence and and close.
So so that maybe why.
We may have noted some of those Inmobi life Sciences sales, but it is.
It's a mix I don't know that its 50 50, but it's it's not heavily weighted toward one or the other segment.
And then cap rate expectations going into this where did you think you'd see them and the and then wherever you are seeing them now and a in the latest round of stuff that's teed up.
We thought we were going to see around a seven cap and I would say, it's hard you know.
I don't want to talk about the sales to date and the cap rates because we really are talking about a full portfolio. The the full disposition, but we're expecting them to be at are a bit below seven.
Okay.
And then switching gears to the Torrey Pines project. So that's good sized I think you said $100 million yet is that something that's marketable.
It's a premier location and I don't doubt thatll be a class a building but is that the.
Is that the project for you guys right now as you repositioned the portfolio and just stabilize things.
It's a great project for us.
You know it is indeed incredibly.
Marketable submarket within San Diego it.
Yeah. It's just we have lots of interest theres not a lot of class a vacancy in that market. So so we're getting a great deal of interest and and it.
Yeah, we have a development teams who are specifically focused on this asset. So it's a very different team then the teams that are focused on some of the other initiatives.
So so yeah, we're excited about it so not for sale that's not that's something you would hold onto.
It's not for sale, Okay, and then Rick So if you're at a peak or you've seen the peak I guess for debt to EBITDA number for leverage.
You got plenty proceeds coming in from asset sales you'd put you've got a term loan due in January is that something that can be extended or are you going to probably need that maturity and we can see real precipitous decline and leverage.
Yes, I mean, we certainly do have some ability to to refinance some or a portion of it we've got great relationships with with our bank group at this point, though we think we've got more than sufficient capacity between the revolver and the disposition proceeds to take out all the coming maturities.
Yeah again to the extent, we look to refinance a small portion of it down just create more flexibility for us to to be ready to reinvest once we wind down the disposition program and position the company for growth.
But we feel really good about where we are we expect leveraged to tick down again kind of hit the high watermark.
We think you know by the midpoint of next year, we should be down around six and then as we continue to spend on some of the redevelopment throughout next year.
Probably ending next year, you know in the low sixs by 616, so somewhere in that range. So.
Again, we feel very very comfortable with our leverage is we've got some really great assets disposition program is only made the portfolio stronger.
So we feel pretty good about where we are and as the senior living business kind of gets through some of the headwinds and starts to come back well see leverage movies and lower.
Okay. Thank you.
The next question comes from drew Babin with Oh good.
Please go ahead.
Good morning, now this is Alex on for drew I won't be same store NOI growth continues to be negative as you alluded to in your prepared remarks, you know vacancy it's been a major driver, but given you have a material amount of leases expiring over the coming years. When you when should we expect occupancy to stabilize or begin to improve so we can get an NOI growth back to an a positive trajectory.
Thanks for your question.
I would say that we're going to it will be stabilize in the near term. We had a couple of building a as I mentioned in my prepared remarks that.
Kind of dragged us down that this quarter I'm a building in Minneapolis, which is.
We've got a.
Great deal of activity on that you know probably 60% of the building close to to coming to terms the property in South Carolina that has affected us.
Were also in active discussions with a tenant for that building our pipeline of new and renewal leases and we've probably got 600000 square feet of new leases that are in discussions over the entire portfolio and close to 700000.
Square feet of renewal conversations that we're in those are actually conversations that have progressed to the point where were negotiating ela wise as opposed to just a pipeline.
So so if.
We are looking like we're in pretty good shape.
That's something that's real helpful color. Thanks for that on and then just one more question for me Brookdale EBITDARM coverage has been trending lower you know a little bit here in basically for you know almost two years now I know 1.95 times, there's still plenty of cushion, but can you just need your confidence and kind of the stabilization of those assets over the next couple of years and kinda, if you're still comfortable where.
Where they're performing to that.
Yeah I'll take that when this is this is Rick I'm, obviously, our senior living communities leased to Brookdale have continued to perform well with over 1.9 times coverage.
We have seen some deterioration in that coverage, but I really think thats just a function of wage in supply pressure that the entire industries faced a we really aren't concerned about these properties and do expect them to continue to perform in the future.
Perfect. Thanks, Thank you.
The next question comes from Brian Mayer with B. Riley FBR.
Please go ahead.
Yes, good morning, so long as to be clear on the 900 million in asset sales that are targeted that does not include the roughly $100 million RMR shares.
That's correct.
Okay and of the asset that you've been selling has there been a propensity or certain buyer for those as it is it local buyers is it private equity who have you been writing on to the most looking at your properties.
It varies depending on the segments so in senior living it's probably.
It's about 45% either regional or national operators.
Another 30% of the pool, our private equity and then.
It it breaks down into smaller chunks from there. The next biggest I'm interested buyer are weak.
In the M. obese space, it's mostly private equity we have you know the rest of it is pretty evenly spread between read family office some pension funds.
Okay, and then when we think about senior housing supply as we enter into 2020 and 2021.
Typically as it relates to your markets is that lightening up at all and what are your thoughts there.
Well I mean, it's it's lightening up across all of the markets.
Nick recorded in the last quarter that construction as a percentage of inventory was at 6.3% in Q3, which is near the loans about as low as it's been since Q2 2015 within the.
The properties are SNH is properties that are within Nick covered markets.
The units under construction with 7% to 7.2%, so not much higher a bit higher but not much higher and that for US is the lowest ratio since Q1, 2016, and 30 basis points below Q2. So.
So things are looking there looking better.
When you think about what five stars doing with their employee retention efforts are et cetera, and the costs associated with that and you guys converting with them early next year to the right ear format has that changed your for lack of a better word underwriting thought process on.
Going down that road or not really not at all this was.
This is something that we and five star had been talking about.
Long time and.
Absolutely within our expectations and were encouraging hobbies simply initiatives.
Okay, and then just lastly from me Jennifer It feels like with everything you guys are doing that you're probably in the sixth or seventh inning of yeah for lack of a better word this transition pain and that maybe by mid 2020 things are looking you know much better we would you agree or disagree.
With that.
I would agree with that.
Okay. Thanks, that's all for me.
Thank you.
<unk>.
The next question comes from Jonathan Hughes with Raymond James.
Please go ahead.
Hey, good morning.
Good morning.
Do you plan to give 2020 guidance with 14 aging results since the managed senior living portfolio will.
Comprised 30 30, 540% of the total portfolio.
Probably not officially [laughter], we have our policy is not to give guidance, we have tried to be more transparent than than ever with this transition.
Weve I think than fairly transparent on the labor pressure that we've seen in what our expectations where for the.
Managed portfolio.
I think we'll continue to kind of worked with five star to fine tune our budgets for next year and you know we can give some some general direction, but I don't think will officially.
Give official guidance so.
Okay changes there.
Okay Fair enough could you I guess, maybe once a fairly could you maybe share any expectations on G and H trajectory next year is that expected to change materially after the five star transition.
Hi, It really shouldn't our gene is fairly simple the lions share of it is the fees paid to to RMR the manager and as we said in prepared remarks, I mean, they're down 70% or so from last year as a result of our lower stock price I'd like to think as we complete the disposition program and start to this.
Turning the portfolio for growth again that a that we'll see the stock price come up.
I think most of us would be happy to see the fees go back up as long as tight shareholder returns.
Which is our goals so.
It's hard to say, specifically, but again.
Interests are very much a line between our manager and our shareholders.
Through that gene.
Okay.
Yeah look I know that guidance I'm in any additional color with the next quarterly results would definitely be helpful. I'm sure a lot of listeners feel the same way.
Just one more from me.
Looking at the contract with RMR, what is the breakup fee payable to RMR. If they were determined to be that's manager of SNH.
I I don't know what it is off hand, I'm sure our SEC filings have all the information necessary, if you want to calculate it but.
Is everyone on the call can imagine we are laser focused on executing on our disposition plan and reducing leverage in improving the portfolio.
No it's not small task to restructure the senior living Benson position. This company for growth so given the difficult operating environment.
We've been in that is clearly getting our focus.
Again, as Jennifer mentioned prepared remark remarks, we think RMR is doing a lot of really great things.
To help position SNH and really all managed Reits.
So again, just just not focus but I'm sure. It's in our SEC filings if you need it.
Okay, I mean as.
The RMR board looked at I mean, you are selling a lot of asset 900 million or so expected be under contract to me.
When I tell the whole company to close this valuation gap.
I think that you know.
Everything is is considered certainly when we were looking or when the independent committees. We're looking at this transaction that we announced in April all kinds of scenarios were considered clearly the the scenario that we went with was the one that both groups Dod made the most sense and therefore.
The RMR aboard.
Soon supported that.
Okay I'll jump off thanks for the time.
Thank you.
This concludes our question and answer session I was like to now turn the conference over to Jennifer Francis for any closing remarks.
Thank you.
And thank you for joining us on our third quarter earnings call. We look forward to seeing many of you at me in Los Angeles next week.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.