Q3 2019 Earnings Call

Good day and.

And welcome to the news senior investment group third quarter 2019 earnings Conference call.

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Tom I'd like to turn the conference over to Jay Roueche Vice President.

Please go ahead.

Good morning, and walk you need here are you called it a third quarter 2019.

Today, I see that given our CEO , Rob tell I'm, sorry, Yes, Oh, yeah, I've already Marina del Taco.

Before I turn the call over to use that I'd like to highlight that this morning, I believe that our quarterly level that the reconciliations of GAAP and non-GAAP financial measure Handicap, our website I think there I'd dot com before he got please note that our discussion will exclusively focused on non-GAAP measure otherwise.

During this call we don't need will make forward looking statement I find the private Securities Litigation Reform Act today.

No forward looking statements regarding <unk> actual results may differ materially for those Jack.

Oh, they have made all the cost be evaluated together with the right. The uncertainties that occurs that particularly that was the risk factor and the other disclosure in our most recent annual and quarterly reports filed with that.

Okay.

[laughter].

I really probably in the upcoming day.

We undertake no obligation to publicly update any forward looking statement. What are the result, affirmation you care about or otherwise and now I'd like to kind of call over to our CEO .

Great. Thanks Jane.

Good morning, and thanks for joining me in your earnings calls for the third quarter of 2019.

I'll spend a few minutes discussing the strategic transaction that we announced this morning as well the results for the quarter now for the call over to Morocco to review the portfolio performance financial result.

I mean, you didn't have a year, we set out on a new patent internally managed company.

Hi.

Good on it we are set of initiatives aimed at repositioning the company for future success.

I believe today's announced sale of our entire [laughter] living and memory care portfolio represents another major step forward and the continued transformation of anything here [laughter].

And it demonstrates our ongoing commitment to maximizing shareholder value.

Today, we announced that we have entered into definitive Ferguson sale agreement to sell our entire portfolio.

Okay and memory care properties for 385 million.

The portfolio includes 28, all memory care properties across 14 states and currently managed by different operators.

From a financial perspective, the transaction is expected to materially improved cash flow without significant [laughter].

As we discussed over the last several quarters a top priority for us has been to improve the overall quality and performance of our portfolio.

Our Iowa, which currently represents approximately 83% for a total NOI.

Generally been much more stable than our Ala and.

And that trend that you dropped 2019.

For the third quarter clean I've seen the Io portfolio was up nearly 7% year over year representing.

Great quarter of positive year over year growth.

Meanwhile, our portfolio, which represents only 14% of our total NOI was down a disappointing 10% year over year.

In response to the trends, we worked very hard to address our underperforming assets and we implemented a series of initiatives aimed at improving performance.

Despite all the work, we faced challenges and persistent underperforming crop the l. portfolio.

As a result, we have yet we're in a range of further alternative including additional operator transition capital investments to turn around and reposition assets and more sizable asset sale.

Ultimately concluded that a failed the entire portfolio would enable us to simplify our business achieved several of our strategic goals for the company, including enhancing the overall quality of our portfolio and strengthening our balance sheet.

Importantly, the sale will be Aon memory care portfolio will enable us to dedicate more focus towards growing our core business, which is low acuity private pay senior housing.

Some of the benefit from the transaction include first better positioning the company for growth.

Following the sale our company will have a simple and straightforward portfolio about underneath you independent living assets and want to CCRC.

The transaction will enable us to focus on our core independent living properties, which generally benefit from higher operating margin longer length of stay lower like you're right lower regulatory risk.

And what new supply than Aon memory care.

Additionally, our I O portfolio served the attractive private pay no market demographic.

We are extremely well positioned to benefit from back growing demand in this segment.

Going forward, we will continue to focus on attractive senior housing assets and partner with best in class operators to grow our business.

Second the transaction screens, the company's capital structure and liquidity.

We intend to use the net proceeds from the sale of the AOL portfolio to reduce debt by approximately 350 million.

Additionally, along with the sale, we expect to refinance our largest near term debt maturity and as a result, we will significantly improve our debt maturity profile as we won't have any material debt maturities until 2025.

Lastly, a significant number of D.A.O. properties were losing money on fully levered basis and by selling the A.O. portfolio, we expect to improve the caf <unk> cash flow profile the company.

And third the transaction reduces overall portfolio volatility.

Despite representing a relatively small percentage of our overall and why the Alf portfolio has had a prolonged negative impacts our overall financial result.

Trend that we would've expected to continue into 2020 and beyond.

Hi, selling email portfolio, we're left with an eye off portfolio had a strong track record of delivering stable result, [laughter], we outperformed our more challenged AOL.

Overall I truly believe it the transaction as a win win for all parties involved I didnt evil dots to focus on our core I all properties and it puts our email properties and the has an owner group better positioning to and that the necessary pipeline and capital into repositioning yacov for growth.

We expect the transaction to close in the first quarter 2020, and we look forward to opinion further as we move towards closing.

Now I'll quickly talk on Q3 performance.

Yeah look over the quarter was 17 cents per share inline with our expectation and guidance for the year.

Rob will discuss in more detail, but all the portfolio side, we had another good quarter was solid and why performance.

Importantly, our independent living out, but I continue to generate positive same store results.

Let me now spirit for a series of quarters, the positive performance across our I O portfolio was offset by continued weakness in our ale portfolio.

Like others in the senior housing market, we continue to be a number of challenges that are impacting occupancy expenses across both our AOL and Io portfolio. We're encouraged by the trends that we're seeing across our I laugh at and we remain optimistic that our I O portfolio will continue to outperform I'd be approach the ended the year.

Along those line I'm pleased to report that we're narrowing our 2019 guidance range and increasing the midpoint, resulting in an updated range 64 to 67 cents per share.

So far this year our results have been align with our expectation and we expect that trends continue for the balance here.

It's also worth noting that the sale the ale portfolio, but I just discussed won't have any impact Mark Twain 19 guide.

Now turning to our strategic priority.

At the beginning of the here we identified four key focus area for 2018, and I'll briefly give you an update our progress across each.

First optimizing our portfolio.

I've got one a top priority for the company has been to address the underperformance of the A.O. portfolio.

And we believe the transaction that was announced today represents a significant step into right direction.

Overall, our goal is to get our portfolio to a place where we can generate strong [laughter] NOI growth.

We believe we have a unique portfolio of assets that are well positioned to benefit as trends improve across the industry and we now have the ability to focus our attention on Friday performance across our core Iowa.

Second managing our operator concentration.

Holiday retirement is our largest operating partner and currently manages assets that account for or over 80% of our ally.

And Oh leasing up if they all the ale portfolio holiday will account for over 90% ever and why.

Obviously holiday isn't important partner of ours, and we believe they have done a terrific job operating profit.

That said, we recognize the benefit of having a diversified portfolio operators and we have spent considerable time developing and growing relationships with existing and new freighters.

We're excited about these relationships and we believe that partnering with some of the best operated in the industry will provide fresh perspective in creative ideas that will help put the company on a path to bad debt for future growth.

Third strengthening our balance sheet.

We're committed to strengthening our balance sheet with the goal of reducing leverage over time and increasing flexibility.

So far this year, we implemented several initiatives aimed at improving our capital structure, including taking advantage of the interest rate environment by executing interest rate swap and putting a corporate revolver in place.

With the A.O. portfolio sale, we will take another step towards improving our balance sheet by reducing our leverage and extending our average debt maturity profile.

I think that got addressing our balance sheet will be a multi step process will take time, but I'm pleased with the probably the crop progress we're making.

Lastly, increasingly transparency of our financial trouble.

We provided financial guidance for the first time in February and as I just mentioned following the third quarter, we're improving the midpoint of the range.

Rafi year, we continue to refine our financial reporting and as we move forward well continue to work to enhance an improved transparency of our financial result.

In summary were approximately 10 month instead of the company's life had an internally managed company and I'm extremely pleased with the progress that our team has made on each of our strategic priorities over a relatively short period of time.

Well I work isn't done or momentum is strong and me continues to position the company for future growth and the creation of long term shareholder value.

Now I'd like a friend of call. It Liberace review portfolio financial results in more detail Rob.

Thanks, Susan and thanks, everyone for joining us on the call. This morning.

Beginning with a review of our portfolio performance for the third quarter, followed by an update on the financial results in 2019 Guy.

Our portfolio composition remained unchanged compared to the previous quarter with 131 private pay senior housing properties across 37 states.

Consistent with what we have seen over the past few quarters, our I O portfolio continued to post positive results growing cash NOI <unk>, 0.7% year over year.

However, our airport for their continued to face challenges, resulting in total same store cash and why being down 27% year over year.

Let me for the breakdown the managed portfolio results between our I O inhale properties to highlight the divergent trends between the portfolios.

Let's begin with our I O properties that represent 83% over total cash in what.

As I mentioned earlier cash in life, where our I O portfolio grew by 27% year over year.

Once again, we saw solid revpar growth of 1.9% year over year, which was more than offset.

Occupancy decline.

Therefore trends have been improving steadily for Io portfolio, driven by increasing convergence between rent increases on existing residents up 3% and releasing spreads which continued to turn positive.

Now, let's look at Yale property, which represented 14% or total cash and why.

We experienced another challenging quarter with same store cash in a wide down 10% year over year.

Occupancy declined by 60 basis points year over year and great growth was just about flat <unk>, 0.2%.

We have not seen the same convergence with respect to releasing spreads as we have seen in Ohio pool.

In order to combat occupancy pressures, yes, you know operators this like no rent as evidenced by the declining Rep portrait.

That resulted in lower revenues and although we did see they were caused ease a bit expenses were still higher year over year further compressing margins.

Our same store airport books was nine properties that were transitions to new operators in the first quarter a funny 19.

We continue to see occupancy declines in these properties as a result up the transition.

Additionally, turnover in critical leadership positions, which to ditch typical with respect to set transition.

Further increased coughing depress margins contributing to another challenging quarter for the transition data.

Well the sequential basis or same store cash NOI was down 2.6%.

The decrease was driven by a decrease in operating margins, mainly due to the expected impact of seasonality on expenses.

Our same store operating expenses increased by approximately one point threemillion enough rich I utilities expense as a result at the higher temperatures of someone wants accounted for 1.1 million.

Additionally, our same store portfolio on a sequential basis also includes the reason, we transition IL properties, which experienced another challenging quarter as the new operators continue to stabilize operations.

This further drive down the road results for the quarter on a sequential basis.

Susan mentioned or subsequent to quarter and we entered into an agreement to show all the for assisted living properties.

We expect this to help us focus and build on the positive trends that are than merged with respect to our I O pool.

Further illustrate this point, excluding IL properties or same store cash NOI for the current quarter would've been up 27% year over year and would have been up on a year over year basis. During each were 29 team.

Lastly, just a few points in supply.

Overall, new construction remains high relative to historical levels, but the trend continues to improve.

Starts in the 99 primary and secondary markets Cobain, they continue to decline or almost 40% below the highest notably at the end of 20 as a team.

No markets, we continue to see a similar trend with new openings down 55% year over year, and a full year, new deliveries expected to be down significant leap compared to 2018.

We're also encouraged to finally see demand exceeds supply for the first thing over three years as absorption continues to grow in supply continues to trend lower.

Now I'll provide an overview of our financial results balance sheet and I hope of American 90.

Yeah, a couple for third quarter was 14 million or 17 cents per diluted share compared to 16 cents per diluted share in the prior quarter <unk>.

The increase was primarily driven by interest savings that are flowing read that benefited from labor decline that occurred during the quarter.

In order for the second quarter was 40.4 million down 2% sequentially, mainly due to a seasonal increase in operating expenses combined with another challenging quarter for transmission assets.

Interest expense for the quarter was 22.7 million or 3% lower compared to prior quarter driven by a decrease in library compared to previous quarters I just mentioned.

Total generic remained unchanged compared the prior quarter at 5.4 million.

Also included in our piano. This quarter is approximately 38 million of net proceeds received with respect to the settlement of the Dirty lawsuit filed on behalf of the company.

We use the proceeds to pay down a portion off the outstanding balance on our revolving credit facility. Although included in net income. These proceeds have been excluded from our key non-GAAP measures.

Our balance sheet remain relatively unchanged compared to the prior quarter with gross assets of 2.6 billion and cash and cash equivalent to 35 known.

As it relates to that we had 1.8 billion in face amount outstanding as up the ended the quarter with a weighted average coupon of 4.4% and a weighted average maturity or 4.7 years.

Additionally, as a result, the transaction to sell Oreo portfolio, we expect to Paydown and refinance more support that scheduled to mature in or prior to 2022.

Subsequent to the refinancing we do not expect to have significant maturities until 2025, which is expected to substantially increase the weighted average maturity of our debt.

Lastly on guidance, we are tightening or is a full guidance range to 64 to 67 cents per shirt from 60 to 67 cents per share increasing the midpoint of the range, but then.

Our underlying assumptions can be found in our earnings release that we issued this morning include the ball same store managed nationwides ranged from negative 3% to zero percent.

I will assume the 2.5% cast DNA of 18 million and 84 million diluted shares outstanding.

That concludes my remarks, and I will now turn it over to the operator to open the line for questions.

Thank you.

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

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At this time, we will pause for a moment somar roster.

And our first question today will come from Michael.

<unk>.

B T. G. Please go ahead.

Thanks, Good morning.

Hi, Mike how are Ya.

I'm good how are you.

[laughter], So you talked a little bit about some of the strategic options you guys look that before deciding on a portfolio sale.

Can you spend a minute and kinda talk on a once you decided that the sale was the correct way to go kind of what the process looked like obviously I assume you can't disclose who the buyers at this point, there maybe a little bit of context around them their size.

End of how they came to the table. If you could just give us some more color on that that'd be great.

Sure.

I think I'm, just kind of stepping back omni l. assets, Yeah, first and foremost we've always like Yale sector and some of these assets have been a part of our portfolio for over seven years, so either out that we like.

And we think that's baseball no facing some challenges that they could you know place to be about that over a longer period of time I'm really when when we kind of sat down and thought about different things here trying to achieve with our company.

We felt like a dropping the A.O.L. portfolio was kind of a a topic, we need to do and so I'm. There are lots of options that I laid out some of them that we took a look at considered but we also considered all those options in concert with bigger or strategic things.

We're trying to accomplish what the company, namely our balance sheet and I'm really trying to begin to tackle that and so we looked at a full range of alternative and we really felt like a full exit from that segment at that point in time made the most sense for us I think that importantly.

Hi, I'm you know in a portfolio of 28 assets. There are some some great half dozen more challenged assets and I think where we sat on our said from a capital perspective, they would require some capex to be invested and I think that other groups out there in that space right now that have a real focused on A.O.L. long history.

With a always have time in capital to reposition those assets or better suited to own the necessary no point in time. So on the group that we're selling to the very sophisticated institutional buyer with a long and successful track record I'm in the space, we have a lot of respect for them.

And we think that you know as I said in my comments on it it's a real win win for US. It allows us to narrow our focus but it really gives them an opportunity to to only assets and that's refer that makes sense and we want the opposite to exceed their partners. We feel very strong withdraw at least just body armor.

Breeding partners and we want only the best thing for the that that's already he was a good alternative for everyone.

Okay, great. Thanks, and then if it just a.

But on the debt pay down or the end the debt refinancing.

Can you talk about some of the initial terms that you're seeing or kind of what you think you're going to see when you go to refinance the 2022 debt and maybe included in that the any potential prepayment penalties.

Yeah sure. So I'm here, we're pretty far along the path on I'm refinancing. So what will happen I'm here is that we have our largest I'm kind of near term. If you will maturity than 2022 and in total it's about 650 million of debt. So.

And with this deal will pay off that that and right now that that crosses some of the l. assets into mile assets that will pay off the 650, and then we will refinance the I'll ask that with about 300 million I've I've, new debt and so it sounds we're seeing right now are actually pretty favor.

A ball compared to the existing debt that we added place I think that the function of where we are kind of in the interest rate environment, obviously, you've seen with yeah. This weekend and you know beyond so turns are free pretty good and it will push out as I said, our overall maturity.

No file so that our next significant maturity will be 2025. So we've already you know we need a lot of probably gone that reviving wanting to do it kind of in concert with you know the sale. So we feel good about where we are on that.

Great and just because they're going to be a penalty associated with the prepayment I'm on that 650.

It's very very minimum all because we are refinancing some of the assets would be you know the same counterpart. So I'm there are some minor penalties, but but nothing significant.

Excellent Thanks Susan.

Thanks.

Our next question today will come from drew Babin of Baird. Please go ahead.

Hey, good morning.

True.

Just one related question through a mike's questions I'm older debt prepayment activity or is it all released its 2022 maturities or some of those maturities sort of in the interim.

Being taken curves as well in conjunction with us.

There's there are a little bit stagger, but most of 'em are either 2020 to your before we have actually three financings in total two of them are very very small until the largest if you look at our if you look at our on balance sheet in our maturity schedule, there's about 500.

The million dollar a piece of debt and that the debt that matures in 2022, and then there are smaller pieces that were maturing before so that's the headline point is with that we really have no significant maturity and until you know 2025. So I think when you look at our.

Our capital structure, the 2022 with the one who we've been focused on for a lot. The reason so that you know pushes that out and there are couple smaller maturity.

Okay.

That's all from me on the balance sheet fraud, but kind of moving to [noise], the operating portfolio, where the transition assets, maybe getting weaker than you would initially expected during the quarter I guess the decision to sell all ill, obviously that businesses had some struggles this year.

I guess as far as the goals over the transition assets and the operators who are working with there.

It was anything going meaningfully negative compared to your expectations or is it just more of kind of an industry issue.

Yeah sure you know when when you translate that that American first transitioning out that is always it hard decision as we transition I said previously we know that when you transition you should expect to see some deterioration before you.

Some improvement so we had modeled in and expectation that we would be some deterioration and we and we saw that I think we have seen with somebody asked them you transitioned to performance had been even weaker than we had anticipated and I think that actually though.

Last month or so we've seen some signs of improvement so that that's good but I really don't think that we made a decision to sell the entire AOL portfolio simply because of that the assets that we transitioned to new operators, which shows those operators because we either existing relationship with them or are we.

Seem that they've gotten great thing, but other assets that we had a lot of confident and frankly still do you have confidence in those operators, but this is a bigger strategic decision for us and so we wouldn't know made a decision based off of one quarter's worth of perform and this was really about you're trying to accomplish other thing for our assets.

And we hope the assets continued to improve its just that I think all the options. We had in front of I've made the most time for us to take advantage of what you know what the full portfolio sale.

Okay. That's in the context of potentially transitioning idle assets in the future currently managed by holiday.

Yes, I was trying to get a read out just the track record of transitioning properties and sort of how that could go it sounds like you're you're still pretty happy with the transitions that have occurred absorbed there longer term satchel.

But I guess, what I'm getting at is in the future should you transition I O properties currently managed by holiday or the reasons why it's significantly easier to transition I O properties versus say that one memory care I imagine the lower acuity, probably makes it a bit easier or would a bit less disruptive can maybe give us a free.

More to work with you know substantially happens in the future.

How much noise might there be an additional transitions that happen and would it be west noise.

Yes, it's a great question, Andrew I'm, something obviously, we spend a lot of time thinking about so I think you you answered in card I think that a couple a couple comments one our view is that when you're transitioning assets that are already pretty stable and are performing pretty well I'm not.

It's kind of a different set of facts and leave to kind of left deterioration and then when you have an asset that's challenge for lots of reasons and so I'm you know just summarize.

Transitioning assets that are already performing pretty well usually is a better I'm sort of outcome and trying to transition out that that piece is a lot of challenges I'm stuck and I hear things that transitioning I'll ask that is often easier than transitioning AOL that I don't think transitioning any assistance it easy, but I think.

Slightly simpler with the Io business because of the lack of health care and it's just you know candidly a little bit less complex, but I do think transitioning it is hard and I think you have to be really thoughtful about the partners I think that the industry as a whole spending a lot of.

Hi, I'm thinking about structure as an alignment I know a lot of people are talking about that right now and we're spending a lot of time thinking and talking about that so there are ways in which you can try to mitigate some of the deterioration with transition you have operating partners that you're truly aligned with and so.

Those are things that we're thinking about and considering but I do think it easier or well nothings easy I can get easier to transition you know I laugh that but I think most importantly, it's something we're being really thoughtful around and really trying to make sure that we're learning from you know that hit.

Three I'm good news that you have a decent you know history. If you do look at and refer to but but it's something we're pretty focused on.

Great and that's all from me. Thank you.

Thanks drew.

Our next question today will come from Daniel Bernstein of capital one. Please go ahead.

Good morning.

Dan and.

Congratulations on the transaction.

I guess does one also just.

I wanted to clarify on the cap rate that you quoted in there that fivenine is up before or after maintenance cap batch.

I'm not before that's just that's an N.Y. Katherine just and I know why cabaret, okay be clear that and then.

On the balance sheet, I know you're refinancing the debt, but it was there any consideration to repay the preferred stock on by fortress, Yeah, that's pretty expensive capital.

Right just.

Understand what you know what was the consideration to refinance the debt versus maybe trying to pay off some of that for sure.

No that's an option for at the we say we pay a $350 million that that could include that preferred you're you're exactly right that New York, our highest cost if you will and so you know that's something that that that we're considering so we're just at this point you know looking at 350, and then which pieces we.

Let me conclude to repay what kind of decided to move forward.

Okay, and then that is the capex maintenance capex difference between the eye on the L. just trying to understand.

The difference is there and yeah for modeling purposes. Once you get once you sell Oh portfolio, how we shouldn't be you thinking about the capex for the Io.

Let me maybe both on the maintenance and maybe a EBITDA enhancing as well.

Oh sure I mean on average our maintenance Capex is about you know 1500 across all of our asset I think that are are a deal or is it higher usually kind of closer to 1700, and our I O is about 12 under and of course is very biopsy.

But to give you some general parameters if our total average of 1500 I out you know 1200 of that kind of 1500.

Well, that's that's very helpful. And then one last question.

Now that you you're selling the portfolio you or your rightsizing some of the balance sheet.

Yeah, you clearly have operator concentration what holiday what's in the pipeline, but [laughter], obviously, you've been working very hard on this and you all transaction the refinance debt, but could you tell us some about what you're working on and the pipeline.

Whether it's all you know.

<unk>, yeah, whether its triple that or right. They operating structure, where are the kind of items that you're looking at in the pipeline.

We can think about maybe for the future.

Yeah sure I mean I think.

You know obviously addressing some of the issues that we've had to a drop and you know that's in our top priority, but you know we continuously lock in consider kind of what's out there and I think our strategy around you know selling the AOAC that is driven in large part by our belief that there's a re.

Well opportunity with lower acuity private pay assets at a very attractive price point. So we're spending a lot of timing as we think about different you know operators and relationships and how to grow the business.

You know working with people that we think have some real interesting thoughts around that segment. We think that there are fewer people kind of focused on that segment and we think that our portfolio on given how can we have such a strong you know kind of presence in that space makes sense breast meat you have to refocus there at the same time.

You know I don't think that bites, telling me A.O.L. portfolio now that precludes us from ever looking at El assets like I said like the stacked or we think it's interesting. We just think of transaction makes sense for us right now, but but the majority of what we're kind of focusing on looking at is in line.

Our core you know kind of business at this moment and I think I'm a lot of the people at operators out there like the lower acuity kinda I all market and so there are lot of people that are coming to us which is great for us and yeah. I think it's a pretty interesting segment right now.

Do you have any otherwise or perhaps what's under contract or close to that or maybe that's where just the.

[laughter], you know where were focusing on kind of what that at hand, but we're always understand.

And you know looking at the on form you know strategy for that business and so thats kind of you know what what's with all the here.

I appreciate that's all I have thank you.

Okay.

Ladies and gentlemen, this well conclude our question and answer session.

And at this time I'd like to turn the conference back over to Susan Gibbons for any closing remarks.

Well, great really appreciate everyone. Joining us this morning, and thank you guys for on your time and well look forward to updating you with my report.

Okay.

The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.