Q2 2019 Earnings Call
Good morning, and welcome to the senior housing properties Trust second quarter 2019 financial results Conference call.
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I would now like to turn the conference over to Michael Kodesch Director of Investor Relations.
Please go ahead.
Thank you welcome to senior housing properties Trust call covering the second quarter 2019 result.
Joining me on today's call are Jennifer France's President and Chief operating Officer, and Rick Sidel, Chief Financial Officer and Treasurer.
Todays call includes a presentation by management, followed by a question and answer session.
I would like to note that the transcription recording and retransmission of today's conference call are strictly prohibited without the prior written consent of senior housing.
Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 90, 95, and other securities laws.
These forward looking statements are based upon senior housings present beliefs and expectations as of today Thursday August eight 2019.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC.
In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, EBITDA or adjusted EBITDA and cash basis, net operating income or cash basis and Hawaii.
Reconciliations of net income attributable to common shareholders to the non-GAAP figures and the components to calculate AFFO CAD or fad are available in our supplemental operating and financial data package found on our website at www Dot SNH read 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 SEC investors are cautioned not to place undue reliance upon any forward looking statements now I'd like to turn call over to Jennifer.
Thank you Michael good morning to all of our shareholders and call participants.
We are pleased to announce the company's second quarter 2019 results as this transitional year remains on course to improve the sustainability of revenue deliver long term diversified growth and provide reliable returns for our shareholders moving into 2020 and beyond.
The progress on completing the restructured business or in arrangements with our largest tenant five star senior living is advancing as planned.
On June 11, 2019, five starvation important milestone in completing this transaction with us.
Thanks to our shareholders voted in favor of issuing five star common stock to SNH and SNH shareholders in satisfaction of one of the conditions to restructuring five stars business arrangements.
Meanwhile, we continue to move through the requisite licensing applications with the states in which our assets are located.
In order to transition the assets from Triple net lease term idea all in all we remain on target for the January one 2020 conversion.
In conjunction with the five star restructuring, we continue to make headway in our disposition strategy, which will both reduce our financial leverage and transform our portfolio to best position SNH for the future.
We've previously mentioned that we expect to sell or have under agreement to sell assets valued at up to $900 million by the end of 2019 to reach our target leverage.
There is abundant capital in both the medical office and senior living acquisitions markets and we continue to feel comfortable that our pricing and timing goals are obtainable.
As a reminder, the makeup of our disposition portfolio is weighted towards senior living communities and noncore properties and our MLB segment and we are currently engaged with brokers on each property.
Year to date, we have sold 13 assets from our medical office segment and three skilled nursing facilities for an aggregate gross sales price of approximately $40 million.
Also we currently have two medical office buildings, and 32 senior living communities under agreement to sell for almost a $160 million.
Additionally, there are 60 properties that are in various stages of the marketing process, which makes up the balance of our disposition program.
Also on July 1st we sold our entire equity stake in the RMR group for approximately $99 million in net proceeds this sale gives us increased flexibility in meeting our leverage goals.
The second quarter's results reflected continued stability from our MLP segment and definitive transition in our senior living Triple net lease portfolio.
Earlier. This morning, we reported an 11.1% decrease in consolidated same property cash basis, and NOI in the second quarter compared to the same quarter last year.
This decrease was primarily the result of the $19.4 million reduction in five stars rent for the full quarter as agreed upon in the April transaction.
Excluding the Triple net leased senior living communities same property cash basis, NOI was up 50 basis points compared to the same quarter last year.
Same property cash basis, and ROI in RMB segment increased 3.4% in the second quarter compared to the same quarter last year, driven by a 7% increase in our life science properties, mainly the result of the base rent increase at our 1 million square foot property in the Seaport district of Boston.
This 15 year lease that commenced in 2013 has an 8% rent increase every five years, one of which took effect on January onest of this year.
The medical office portfolio was roughly flat to prior year quarter, and the same property cash basis.
The 190 basis point drop in MLB same property occupancy was due to two properties. We've discussed on prior calls a 140000 square foot property in the Minneapolis market and a 94000 square foot building located in Fremont, California in the San Francisco Bay area.
We are in advanced discussions with several prospects for the recently reposition Minneapolis property and believe that we will release, a large portion of it in the near term.
Despite this temporary drop in occupancy scheduled rent growth and strong releasing spreads almost entirely offset its effects on our medical office same store NOI growth.
SNH is MLB segment contains approximately 12.4 million square feet comprised of 7.6 million square feet of medical office buildings, and 4.7 million square feet of life science assets with a weighted average lease term of 6.4 years.
We generated strong leasing results during the quarter with over 300000 square feet of new and renewal leases executed with a weighted average lease term of 15.3 years and a 6.2% roll up in rent.
And average leasing costs of just 50 cents per square foot per year.
Furthermore activity for potential new prospects and tenant renewals, a strong creating a robust leasing pipeline for vacant space or upcoming exploration.
As stated in our prior quarters plans are underway to redevelop the approximate 160000 square foot rebuilding life Science campus located in Torrey pines within the greater San Diego area. Torrey Pines is considered one of the top markets for life Sciences in the country ranking third behind Boston and San Francisco.
The property will undergo a full transformation to both the buildings and the site, which includes complete demolition down to the concrete and steel.
Following its estimated completion in late 2020, the property will be a prominent class eight campus offering flexible lab and office space as well as monitored amenities.
We are already in discussions with possible tenants for the buildings and anticipate an increase.
To the campus the overall campus square footage and a sizable roll up in rent.
Our managed senior living portfolio same property occupancy decreased 40 basis points compared to the same period in the prior year as we expected same property cash basis into why was down primarily due to increased salaries and wages, which were up $1.4 million on a same property basis.
As we said some of the biggest challenges in senior living our wage pressure across all employee types and fierce competition for quality leadership.
To address this five star has increased its commitment to its team members, which we see as a much needed strategic move.
Additionally, high employee turnover in the past led to the increased use of costly contract labor five star hopes to eliminate third party labor entirely and replace it with higher quality permanent workforce.
We support five stars investment in its workforce and believe this will lead to even better services to residents and ultimately increased occupancy and rent growth.
Our triple net leased senior living portfolio had rent coverage of 1.52 times for the 12 months ended March 31 2019.
This includes 1.55 times coverage from the five star leases, which incorporates the new reduce rent, resulting from the transaction agreement announced in April .
We will continue to report the coverage of these leases until their transition to the new management agreements, which we expect will happen on January Onest 2020.
I'll now turn the call over to Rick to provide further discussions on our financial results for the quarter.
Thank you Jennifer and good morning, everyone.
I will be discussing some of the second quarter financial highlights beyond what Jennifer just covered.
Normalized FFO for the second quarter of 2019 was $81 million or 34 cents per share, which was down 10 cents per share compared to the same quarter last year.
Nine cents of the decrease in normalized FFO came from our Triple net leased senior living communities largely due to the full quarter effect of the reduction in five stars right.
In July we declared a 15 cents per share dividend payable in the third quarter of 2019.
The normalized AFFO payout ratio for the second quarter based on our new dividend was approximately 44%.
As we stated on our last call. This dividend is based on a target payout ratio of approximately 80% of projected cash available for distribution. After the conversion of the leased communities and after selling assets to meet our leverage target.
General and administrative expenses decreased $20.2 million or almost 70% for the second quarter compared to last year as a result of our lower stock price and therefore, a reduced base business management fee paid and no estimated 2019 incentive fee accrued to our manager.
As our manager is currently being paid on total market capitalization and not the historical cost of assets. We believe this decrease demonstrates the strong alignment of interest between RMR and SNH shareholders as the reduced market capitalisation driven by the reduced stock price in the second quarter translated to an annualized run rate of about $15.3 million less to base business management fees paid to RMR.
We remind investors that this reduction in the base business management fee is not deferred or recapturable by RMR in any way.
Turning to capital expenditures, we spent $9.6 million in recurring capex and $19.1 million on redevelopment this quarter.
The redevelopment capital split between projects in our MLB and managed senior living portfolios.
In our MLB segment, we completed a single tenant to multi tenant conversion of a property in Minnesota and made progress on the repositioning in Washington, DC that we've discussed on prior calls.
In our managed senior living portfolio. The majority of the redevelopment capital expenditures are related to the 91 unit expansion of one of our properties in Tennessee that we've also discussed on prior calls.
Going forward, we expect to see redevelopment capital expenditures in our MMP segment as we continue the repositioning in Washington, DC and as we begin the redevelop our property in Torrey Pines.
In our senior living portfolios, we expect to spend about $1500 per unit in recurring capital expenditures each year.
We are assessing the additional capital needs of the properties being transitioned the RIDEA structure and look forward to investing in these assets with the goal of growing occupancy and revenue and creating stronger terms.
Moving to our balance sheet. We ended the second quarter was $48 million cash on hand, and $690 million outstanding on our revolving credit facility.
Subsequent to quarter end, we reduced our borrowings under our revolving credit facility to roughly $555 million as of today using proceeds from asset sales and the sale of the RMR shares.
The dividend yield on our investment in the RMR shares was 3% based on the June Thirtyth closing price and we were able to use the proceeds from the disposition of the shares to reduce debt that was costing us 3.6%.
During our ownership period, we generated a 283% return on this investment.
As of June Thirtyth, our reported debt to adjusted EBITDA was 6.9 times debt to gross assets was just under 43%.
As mentioned in previous calls, we expect our debt to adjusted EBITDA to peak during the third quarter of 2019.
We plan to have assets up to $900 million sold or under agreement to sell by the end of the year.
In order to reduce debt to adjusted EBITDA of roughly six times or lower.
That concludes our prepared remarks, operator, please open up the line for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily.
To assemble our roster.
The first question comes from Michael Carroll of RBC capital markets. Please go ahead.
Good morning, guys, Jason on for Mike.
Good morning.
Got a question.
On the $900 million and asset sales so the RMR stake included in that.
No we've identified.
We've actually as I said in the past identified $1.2 billion in asset. So we can hit that $900 million disposition target.
The RMR group.
Sam share sales certainly helps us create flexibility, but we still are on target target to sell 900 billion in assets.
Okay got it and then how do you guys think about senior housing supply.
Moving forward into 2020 and 2021.
Well, yes.
Turning to the Nic data.
Construction starts are.
Continuing to trend lower.
That doesn't mean that there isn't still inventory growth there is.
But I think that were.
We're happy to see the construction starts are trending lower.
Hopefully hopefully I think it's probably been five quarters, four or five quarters that that trend has has.
That's been happening so.
Hopefully that will continue on.
Got it and then.
I was wondering what your expectations are for the shop in 2020. So if you have construction starts.
Trending lower paired with the elevated labor costs, how do those two things balance out and then what are your expectations for the portfolio.
Jason This is Rick I hope, we've been fairly clear are transparent that we anticipated double digit declines.
In in ROI in 2019 and that we expected. Some continued pressure in 2020, we do we have modeled it a little flatter.
And just to to.
Go a little further into that new supply within our markets.
The current Trs portfolio, we actually saw slightly higher inventory brought this quarter than the Nic did and as a result that resulted in the 40 basis point decline in occupancy so.
We are really.
Happy and confident in the things that five star's new management team are doing and investing in the portfolio and the workforce and we believe there they are doing the right things to turn the business around and.
It's very much in line with our expectations so far.
Okay. Thank you guys.
Thank you.
The next question comes from Todd Stender of Wells Fargo. Please go ahead.
Thanks, just to go back to the disposition volume you're expecting the language in the release suggests that.
Yeah, you may sell or have under contract does that suggest that some of that 900 may bleed into 2020, just from a timing basis.
Thanks, Todd for your question yes.
We do think that will be under agreement will have closed on a a big chunk, but we'll be under agreement to close by year end.
Thats really due to licensing issues in the senior living space.
So we were with the transition from Triple net to right.
SNH is getting licensed and all the the for all of the senior living communities and we don't want to put that.
Licensing at risk.
And so we've we've decided that while we're still marketing those assets, we expect that we'll be under agreement and then the closing will happen.
After the first of the year.
Okay and then in addition to the 900. So theres. Another 120 million is that purely snacks and is that in your same timing expectations.
The steps are included in our 900 for the most part and the vast majority of them are already under agreement. We've we've had some progress selling a few and we expect more to close throughout the end throughout the rest of this year.
Okay.
And then Rick just to stick with you.
If you are.
I guess on a leverage basis, I guess its debt to EBITDA will peak this quarter.
Does that suggest the timing for dispositions could be sooner than later, because you're going to be using that.
Disposition proceeds to pay down your line.
We will I think.
I think we are likely to have a lot of properties under agreement at the end of the third quarter. It won't surprise me. If we have a lot of Q4 closings now.
We know.
A lot of folks are very interested in our execution on our plans and as Jennifer said, we're very.
Confident that we'll be able to execute as as we had planned.
Yes, I think from overall leverage metrics and what we'll report.
Leverage will peak peak sometime in Q3.
If we can close some of these properties in September versus October will.
We may report lower leverage but.
If we wind up with October closings, it'll likely peak.
930.
Okay. Thank you.
Thanks.
The next question comes from Bryan Maher of B. Riley FBR. Please go ahead.
Mr. Amar. Please go ahead from B. Riley.
Hi, Good morning, I was on mute.
Kind of a bigger picture question when we look at occupancy trends a lot of the calls we get is whats going on with senior living occupancy in general in the face of new supply and when we look at your supplemental we see you know modest but still increases for like the last three quarters or so you know kind of around that 84% blended all in what is in your view kind of the optimum level for senior living occupancy for the assets that you own.
I would love to see them in at 90%.
I think that assisted living is dragging the senior living industry down.
'cause assisted living is.
Across all in all all ownership is at an all time low and independent living I think across all ownerships is at about 90%.
This is according to Nic data, so we could pull assisted living up a bit I think 90% would be a good target.
And how do you weigh because because we have noticed also you know, there's there's quarters where rates going up and maybe occupancy is going down a little bit you know what type of flexibility do your properties have in managing the rate occupancy you know variables.
Well you know I think the five star has been.
Working on revenue management across the portfolio and and.
Trying to get that rolled out and that will give them a great deal of flexibility and you know as as as properties become more occupied you're able to push rate a bit more.
We're also.
With revenue management able to be a little more dynamic in what you're charging for different types of units across the community.
So I think I think if that continues.
You know just keeping an eye on the market and then the internal market within the communities will help them to.
Hopefully push occupancy and then push rate.
So that's it.
Basically decentralized decision at the property level or where along the management food chain or those decisions really being made I think it's both local and within corporate it's a combination of the two.
Okay, and then shifting gears for a minute over to the five star.
Transition what are the would you consider the major hurdles between now and January one.
To get that done and is there any risk that it doesn't get done on January one because I think I recall, you guys, saying, it's kind of like an all or none if it doesn't happen January one of 2020. It then gets pushed out to January one of 2021 is that does that all still correct.
It is there were two hurdle.
Really and the first one was that the vote that has already occurred five star shareholder vote, and so that hurdle.
That milestone has been met the next is licensing the communities with a triple net lease structure. The operator is license and the communities and with the RIDEA structure. The weakness in H. will be licensing. So we have a team of experts that are working on that licensing.
Now and so we feel still feel confident that that will hit that milestone as well and be able to have this transition happen at year end.
Okay and then just last for me I think you made the comment Jennifer that there was kind of a lot of money out there that gives you confidence you'll be able to get the 900 million sold who are the most profound buyers youre running into when you're selling and marketing these assets.
Yeah, I think it's across the spectrum.
You know there is a I think that there are a lot of private operators or private buyers with operators in hand.
We're seeing a lot of that we are still.
A buyer out there.
And we will then manager in hand, there may be some kind of small JV partnership with an operator, there's still private equity out there, but I think it's it's the private private buyers and the rates.
Okay. Thanks, that's all for me.
Thank you.
The next question comes from Bruce Bhavan of Baird. Please go ahead.
Hi, good morning.
Good morning.
Question on.
Just to kind of forecast different scenarios for RIDEA fundamental for senior housing fundamentals into next year. It would sound like a 900 million and dispositions.
[laughter] keep leverage down in a scenario, where RIDEA senior housing probably gets less bad and maybe get closer to flat.
Are there any scenarios, you're underwriting internally, where all the fundamentals remain.
Down.
High single digits year over year next year might that necessitate more dispositions to keep leverage low presuming that remaining investment grade as a high priority.
We have certainly modeled it a number of ways and we feel like we've been fairly conservative with what we've talked about publicly again, we don't.
Fisher only give guidance, but we've tried to be as transparent as possible about expecting double digit declines this year and kind of flat into next year. So.
We do take our ratings very seriously and.
I know the rating agencies in particular are looking to see us execute on that plan and we still are very confident that we'll be able to do that.
Again, I don't think I can stress enough. How excited we are about things that five star is doing to kind of turn the business around.
Against also encouraged by some of the slowdown in new construction starts but.
No I don't think we'll need to sell more assets I mean, I think we will have an ongoing regular capital recycling program.
But that will be more to fund external growth accretively versus bringing our leverage back in line.
And just like a follow on on that if I may.
Saying that we're we're pleased with the with what five star is doing they just announced a new CEO COO. That's been hired so the new senior management team there with the new CEO now a new COO they have a new CFO .
About this before but it's a it's a whole new team there and were really.
Encouraged by the progress we think they can make with that new senior management team.
Thank you for that Adam one more from me just circling back to the Torrey Pines property and talking about there being a roll up upon re occupancy of that property.
Is that on a GAAP basis.
Relative to the prior lease or I know it was a long term lease on the prior one that maybe had higher expiring cash rent how do you expect to kind of just on a cash basis initial rents.
The trend relative to.
We're scripts expired.
I've been looking at the GAAP numbers, and it's a substantial roll up in GAAP rents.
I think it's probably flat in cash.
But we tend to look at it in a gap.
Net basis and again.
Rents are really ticking up out there seems like every quarter.
Rents are getting pushed up.
Okay, great. Thanks for the color.
Okay.
And we have a follow up from Todd Stender of Wells Fargo. Please go ahead.
Thanks.
Just back to the state licensing.
You guys need that to participate in the right idea and is it state by state. So it may not necessarily be an all or none can you, maybe just kind of flesh that out a little bit.
Yes, it is state by state.
But we are.
Pushing very hard to have it be Paul.
There is.
Yes, there is certain timing expectations and how long it takes by state and our team is very tied into when those applications need to be filed in order to get them in time.
So we are really pushing.
For it to be and all.
Getting license and all of the communities. That's right. There are some contingency plans in place we do have some flexibility.
To the extent it was just.
A property or two or are small.
List of them, but.
We are as Jennifer said really pushing and planning to to get it all done by the end of the year.
Is that something you'll announce as they happen or is that something we we just hear on conference calls I guess on a quarterly basis.
I mean, we can report on progress at where if we I guess really all the licenses we expect to be effective one 120, and if there were to be a bump in the road that was significant we would certainly talk about it but I really can't envision that scenario right now, but under a positive.
Acceptance or you get the license would you release that information I guess, an or announced the licensing we're applying for licenses that will take effect on one one.
So so for instance, if we know that it takes 120 days to get a license then there.
Their scheduling that application so that it then applying.
A few days before that 120 days, so I think that the goal isn't to apply early and get license in November .
I think the goal is to get license so that it lines up with the.
The end of the year, the beginning of the 2020.
Got it thank you.
Sure.
This concludes our question and answer session I would like to turn the conference back over to Jennifer Francis for any closing remarks.
Thank you and thank you for joining us on our second quarter earnings call, we've been active quarter of investor events coming up including non deal Road shows in Chicago, New York and the minute Atlantic. In addition to attending Nick and the BMO real estate conferences, we look forward to seeing many of you at these events. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.