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New Senior Investment Group (NYSE: SNR) is a publicly-traded real estate investment trust with a diversified portfolio of senior housing properties across the United States. The Company is one of the largest owners of senior housing properties and currently owns 123 properties in 32 states.
New Senior was formed as a wholly owned subsidiary of Newcastle Investment Corp. We were subsequently spun off and began trading as a separate publicly-traded entity on November 7, 2014.
We are externally managed and advised by FIG LLC, an affiliate of Fortress Investment Group LLC, which is a leading global investment management firm with $67.5 billion of assets under management as of December 31, 2014.
New Senior Investment Group Inc.,
1345 Avenue of the Americas
New York, NY 10105
Paul: Welcome, everybody. My name is Paul Morgan from Canaccord Genuity and I'm happy to welcome the New Senior Investment Group executive team. To my left, we have Susan Givens, Justine Cheng, David Smith and Matt Lucas. I will hand it over to Susan to go through some of the presentation, we'll open up to Q&A, and I'll ask some questions, as well. Susan?
Susan: Great. Thanks, Paul. Hi, everyone. I'm Susan Givens. I'm the CEO of New Senior. I appreciate you guys coming and joining us. I know this is one of the later sessions in the last couple days, so we appreciate you guys sticking with us. I'll spend a few minutes talking about our business. I'm sure there are varying degrees of knowledge around our story, so I wanted to give a brief overview, and then we'll open it up to questions. Feel free to dive in and ask us anything you would like.
We are a senior housing REIT. We were spun out of Newcastle about six months ago, a little over six months ago. Our focus is to be an investor, and be primarily and solely focused on senior housing, so we are the only pure-play senior housing REIT out there. Today, we have over $2.5 billion of assets. We are all independent living, assisted living, and memory care assets. One of the things I'll talk a lot about, which we think really differentiates us from others, is we are very much focused on the private-pay sector of the market. Over 90% of our NOI is comprised of private-pay senior- housing assets. We think that's really a differentiator when you're looking at other healthcare REITs out there, and we'll talk about that a little bit more. We have 125 properties today, a little under 16,000 beds, and we're very well diversified across 32 states.
We are externally managed by Fortress. When you think about Fortress, and you think about senior housing, Fortress has been one of the largest and most successful investors in senior housing over the last 15 years, so we'll talk about that a little bit. Fortress had very large positions in Brookdale, Holiday Retirement, and other senior-housing assets. We think that gives us a great advantage, and we'll talk about that a little bit. One of the things we like to talk about is the fact that being externally managed by Fortress gives us access to deal flow, certainly gives us efficiencies around cost of capital and things like that, which we think is also a huge benefit.
We've been very acquisitive. We have grown our portfolio, really, over the last two and a half years from a standing start, and we decided to start buying assets into Newcastle from zero assets to 124 assets today. Of course, we've done that through very thoughtful and careful acquisitions. We tend to try to target acquisitions where the cap rates are a little bit higher than what some of the larger healthcare REITs are buying assets at, and we think that that sets us apart. We've been very successful, and we have had a strategy that has really worked for us. In the first quarter this year alone, we closed on about $600 million of acquisitions. To frame that, last year, for the full year, we closed on about $320 million of acquisitions, so we are already well ahead of our pace on the acquisition side from what we did last year, which we'll talk a little bit more about.
As many of you know, the reason why we like our business is the reason why I think lots of people like the business, is that the fundamentals in the senior-housing space are just so powerful, and one of the reasons we have been long-standing investors in the senior-housing space is really just the macro trends. Of course, the supply-demand, demographics, and trends that you see, we feel as strongly about them today as we did 15 years ago when we first started investing in this space. I know lots of people are familiar with those.
Let me just turn to page five for those of you who do have presentations. I think we maybe ran out. We're going to try to get a few more, but I will be referencing some of the information on the pages in front of you. Page five shows our portfolio today. As I mentioned, we are the only pure-play senior-housing REIT in the public markets today. Really, when we decided to create this vehicle, we saw that there was a void in the market for pure-play senior housing, and so we decided to really use our knowledge and our background in the space to fill that void. We are now one of the largest owners of senior housing. We have a $2.5 billion-dollar enterprise value and a market cap of a little over $1 billion dollars. Again, 124 properties, about 16,000 beds, and we're in 32 states. If you look at the map in the upper right-hand corner, we're very well diversified. We're in some of the key markets that you want to be in from a senior housing perspective. Importantly, we have concentration and clustering in some markets that I think is really beneficial for us.
One of the big points I will talk about, we are 90% private pay, so, again, our focus is very squarely on independent living and assisted living. Today, about 41% of our properties are managed. 59% are triple net. We like that balance. I think we think about a target of roughly 50-50. It, of course, depends on the deals and what we're seeing in the pipeline, but we like the balance of stable, recurring rental payments offset by growth and getting some of the upside from our managed portfolio.
If you're looking at the charts on the bottom of the page, some of the things, I've mentioned, but just talking about the mix of our portfolio. About 65% of our NOI comes from independent-living assets. As we talked about, we really think that's a differentiator for us. Independent living, we like it, because it's all 100% private pay. We like it, because it's less susceptible to regulatory changes and scrutiny. Being an investor in senior housing for many years, we have really found that that's a niche that we think is a really important one, and is a good one. We will talk about a little bit, I'm sure, but we have also seen less new development come into the independent-living space, which we think is also a very positive thing for us. 26% of our NOI comes from assisted living and memory care, and then we have a small portion of our portfolio that are rental CCRCs. We have no stand-alone, skilled nursing, so our only skilled-nursing exposure is really in the form of our CCRCs, where we have five CCRCs today. As I mentioned before, a very balanced mix between managed properties and triple net. About 60% of our NOI comes from triple net. That's 58 properties in our portfolio, and 41% comes from our managed assets, and that's about 66% of our properties.
We also have really terrific operator relationships. We have a great relationship with Holiday, who is the second largest operator in the senior-housing space today. Today, about 70% of our NOI comes from that relationship. We think they're a terrific independent-living operator, so they really have operated the assets that fits their mold. They have a very unique structure, and we think that they have done a terrific job, so we think that that's a great partnership that we have.
Another one of our very good partnerships is with Blue Harbor. Their focus is on assisted-living and memory-care properties. We have been partnered with them, really, since we started buying assets into Newcastle about three years ago. They are very good at helping us when we go out and identify new acquisition opportunities, figuring out if there are ways we can improve the properties. They're a kind of scrappy operator, as I like to describe them. They really focus on helping us as we look for opportunities to improve performance.
We never look for assets that are under-performing; we look for assets that we call "under-managed," where we try to take ... Really, what it is is years of experience having owned operators, and really apply that on the acquisition side to underwriting and purchasing acquisitions that we think are interesting. We also, on a smaller scale, have four other operators that we have relationships with. Really, my view on that, and we'll talk about it, is to start developing those relationships first on a smaller scale, test them out, see how those partnerships work. If they do work, and we think the operator's are doing a good job for us, we can then expand those relationships over time. I think as we think about our growth and think about expanding our portfolio, we will certainly expand our relationships and our operators, but I'm very focused on making sure we have the right operators in the properties that we own, and if we see opportunities to expand those partnerships, we certainly will do so.
Page six, just a quick snapshot of our company, because we are relatively new. The evolution of our business. As I mentioned, we are externally managed by Fortress. What we really saw as an opportunity a couple of years ago, as the private-equity businesses that owned Brookdale and Holiday really came to the end of their fund lives and needed to start returning capital to investors ... Those businesses were sold out of Fortress, either through the public markets with Brookdale, or with Holiday, there have been a series of portfolio sales that have taken place in the market. We sat down and said, "What do we think about senior housing today versus what did we think about it ten, fifteen years ago?" Our conclusion was we thought that it was a great time to continue being an investor in the senior-housing space.
What we decided to do was, on a small scale, start buying assets into Newcastle and really start to see if the thesis held and see if we actually could find interesting opportunities. We were very successful right out of the gates. We found a couple of portfolios that had performed extremely well. Our first acquisition was a portfolio of eight assets that were acquired that were assisted-living and memory-care assets. Once we saw some early success, and our strategy held together, we decided to keep going. Really, over the last two and a half years, we've grown the portfolio from that first eight-property acquisition to where we are today.
We decided about the time ... about a year ago, that it made sense for us to actually spin the business out and become a stand-alone company. At the time, we had about 100 assets. Since the time of the spin-out, we've grown. We've added another 24 properties to our portfolio, so we're 124 properties today, as I mentioned, and about $2.4 billion of investments. Really, a pretty remarkable growth trajectory, as we've talked about, but our view is this is really just the beginning. We've done it through very careful, very good acquisitions. We really target higher-yielding acquisitions than, maybe, others out there. So far, that has really panned out for us. It's certainly what we'll talk about and what you can expect to see from us going forward.
Page seven. I've talked about a lot of these highlights, but I'll just touch on them briefly before turning it over for a little bit of Q&A. As I mentioned, you'll hear me say it time and time again, we really like the pure-play senior-housing space. We think there is enough to do as we think about senior housing, and as we think about all sectors, but what we always try to figure out is where are there big opportunities, and where are there opportunities where there may be a lot of people looking at opportunities in that space, but it's a big enough sector that a lot of us can be successful. Because of that, we really size the senior-housing space as a space where there's plenty to do by purely focusing on independent living, assisted living, and memory care. We really don't foresee or plan to start investing in stand-alone, skilled nursing. We think others are terrific at that. We think it's certainly an interesting asset class for certain people. It's really just that our strategy is to focus on private pay. Like I said before, 90% private pay today. We'd like to see that increase. We plan to have that increase, and that's really where we'd like to be.
I talked about before, but our portfolio is very well diversified. We have some of the best operators out there in the market. The fact that we do have a balance of triple-net and managed properties fits very well with our strategy and what we're trying to do. It gives us some stability. It gives us just a consecutive rent payment on the one hand, and then it also gives us the upside and the growth that we like to see on the managed portfolio. We've had a lot of success, as I mentioned. Our same-store NOI growth has really outpaced the overall market. Q4, which was the first quarter that we reported on a stand-alone basis, our same-store growth was 10%. I think the rest of the market had same-store growth somewhere in the three-ish percent. For last quarter, Q1, our same-store growth was 6.3% Again, I think the rest of the industry had growth of about 3.5%. Really outsized growth relative to some of our peers. It's a function, certainly, of the types of assets that we acquire. As I mentioned, on the managed side, we look for assets where we think there's opportunity for improvement. We don't try to buy real estate that we don't think is good real estate; that would not get us anywhere. We really try to focus on assets where there's little things you can do to really tweak the performance and that will drive growth.
Again, the other thing we have in place ... I've talked a lot about the managed growth. We also have triple net. Escalators are very favorable. Our initial lease yields were pretty favorable when we set the leases in place. Our escalators are, on average, about 4%, where I think the rest of the market has escalators closer to 3%. We only have three triple-net leases in place today. We have one very large lease with Holiday. We have a second lease with LCS, which is another very strong ... They're the third-largest senior-housing operator out there. We just recently closed on an acquisition, a very high-quality asset in the middle of downtown Philadelphia where another very high-quality operator is operating that property.
Again, very strong performance in numbers. I think if any of you guys have followed us, we spun out. I was very, very focused on giving people a little bit of guidance, if you will, around what we thought we could achieve and what we were focused on right out of the gates. The three things I outlined for people when we were spinning out: We were very focused on making sure that the performance for underlying assets continued to be what we thought they could be, so have outsized growth relative to what we were seeing in the market, and just have organic growth coming from our portfolio. We were very focused on getting our cash ... We had a bunch of cash that came with us at the time that we spun out. We wanted to get that cash invested. We wanted to get it invested in very high-quality properties, and so it was very important to us to get that done in fairly short order, given the fact that we did have that cash on our balance sheet.
We were also very focused on improving our capital structure. At the time that we spun out, really, under Newcastle, the way we had financed our acquisitions was we put property-level debt against the assets as we bought them. We saw that there was a big opportunity, obviously, given where the market was and given what rates were, to go out and do a larger refinancing to bundle our assets together and to reduce our cost of funds by about 150 basis points, so we did that.
We did all three of those things. We set out for people that those were our objectives. By the end of the first quarter, we had successfully completed all of those objectives. Again, as I mentioned before, the same-store growth in our portfolio, well in excess of the market, so 6.3% for last quarter. We think that really signifies and shows the organic growth that's embedded in our portfolio. It is terrific. Still, our managed portfolio, the occupancy hovers around 85%, so there still is a lot of growth that we expect to come from that portfolio.
On the acquisition side, we have ... Actually, early in April, we had basically invested all the cash that we had at the time that we had spun out. We invested in a couple of transactions. One very notable transaction where we acquired 17 very high-quality, independent-living assets from long-standing investors in the senior-housing space. We were able to do that on an off-market basis, directly with the sellers. We were able to do that, in large part, given our relationship with the sellers. They have been people who have really been pioneers in the senior-housing space. They were looking to sell the assets. They came to us. We've known them for a very long time. They wanted to do a transaction quickly. Holiday happened to be the operator on those assets, so they knew that we obviously knew Holiday and that we could move very quickly. We were able to deploy our cash in very high-quality assets at very good returns.
Then, as I mentioned before, we refinanced our capital structure, where we basically took out all of our floating-rate debt and refinanced it with Freddie Mac financing, where we reduced our cost of funds from about 4% to 2.5%, which resulted in close to ten cents of NFFO savings for our shareholders. Really, our next phase and what we're focusing on right now is identifying very high-quality acquisitions. We have a very strong pipeline. We, like others, put out a target pipeline. We have about $3 billion of assets we're looking at. Of course, not all of those will come to final contract, but we're spending a lot of time really scouring the market and trying to find good deals. We certainly, like others, find that there are ... You have to spend more time out there looking at a lot of deals in order to find things that are interesting, but we feel very, very good about where we are, and we're excited about continuing our lives as a public company on our own. With that, I will open up to questions.
Speaker 3: I’m trying to understand your acquisition goals. Do you have any type of target for portfolio size, amount and operators you can produce each quarter? Holiday, specifically, I understand that you have a good relationship, but just as the portfolio grows, just bringing in more operators.
Susan: Sure. The operator question, I'll take first, and then we can talk about our own goals for growth.
The way we think about our operators and our exposure to operators. We, first and foremost, want the best operators for the assets that we have, so when we're acquiring assets, we try to figure out who do we think is going to be the best operator for these assets. I want diversification so long as it's diversification for the right reasons, not necessarily diversifying to be able to say, "I have a lot of operator relationships."
One of the reasons we used Holiday as an operator is because the type of asset that they actually operate for us. In a sense, if you're familiar with Holiday, it's a very ... It's a model that, actually, they're very good at; they're the best at. They tend to have ... They have a structure where they call it "the co-manager model." They have two couples that live at the property, and they really are terrific at operating assets under that format.
We have acquired lots of other assets where we have not had Holiday as the operator, because Holiday's expertise is not in the assisted-living or memory-care side of things. They are really independent living. We like having, and we want to expand, our operator relationships, but we want to do it for the right reasons, and we want to do it because we think that they're the right operators for those assets. If we find opportunities where there are other operators, we have been open to it, and we've done it, but we don't look to diversify our operator relationships just to be able to say we've diversified them.
Speaker 3: Is there anybody on the fringe that you're working with currently that, really, you can see growing the relationship?
Susan: All of them. Yeah, all of them. Really. Our strategy, which I'm always a fan of, is to test things in a small way, and then once it works out, then you can expand that into a larger relationship. Given our size, what we've done is we've partnered with some newer operators, and we're testing it out. Some of those relationships are newer. Some of them, we actually have had close to six to nine months, and they're doing a terrific job. We're learning a lot. It's helping even on the underwriting side, and it's helping us with our relationships with our other operators. At this point, I think all of our operators that are new operators ... I'm looking at these guys. We'd be happy to do more deals with.
Sorry, your first question. I'm sorry. The portfolio. We're $2.5 billion today. We want to get to a number that's much larger than that over a relatively short period of time, but we also want to grow in a smart manner. I think if you look at where we started three years ago, we went from zero to $2.5 billion. As we're thinking about it, we think it's an achievable target over the next 18 months to double in size, but that's general framework. That's not a perfect number I'm giving you. Those are numbers we kick around ourselves. Of course, a lot of it ... We're not going to do deals for the sake of doing deals. We have proven time and again, and we can talk about it, there have been some deals that we thought we were going to do, but we decided not to do, because they weren't the right deals. That's how we'll continue to grow.
Speaker 4: On your managed portfolio, do you always own 100%, or do you own 80 or 90 percent?
Susan: We always own 100%. We are the owners, and then we partner with our operators.
Speaker 4: My other question is, do you plan to keep the external management, or do new employees work for Fortress?
Susan: That's right. We are all employees of Fortress, but the group up here spends all of their time ... I spend 100% of my time ... These two spend 100% of their time on just New Senior. Justine, who's our CFO, still has some other responsibilities, but I would say 90% of her time is spent on New Senior. The only way it works in this format is to have a team of people that are dedicated to the company. I've been at Fortress for a very long time. We've tried lots of different ways of doing this, and this is really the only way we can be successful. That is, having a team of dedicated individuals. It's not just the executive management team, candidly. It's our accounting team. It's our FP&A team. It's our acquisition team. We have a ten-person acquisition team that's really out there, scouring the universe for deals. We have a ten-person asset management team that only focuses on this company. Really, even though we are externally managed, everyone is an employee of Fortress, the team of people spends 100% of their time on this company.
Speaker 4: nvestors are generally not fans of externally managed REITs, right?
Susan: I think investors should look at all external management structures independently. I think, and we talk to people about this a lot, as you can imagine, I think there have been some companies out there who have demonstrated that there's not a complete alignment between the investors and the external manager. I think that's unfortunate, because I think there are external management structures where the alignment can exist. What I encourage people to do, and we'll help people do it ourselves, is to actually look at how the structure is set up.
I think one of the ways our structure is different from, maybe, others out there ... I know people in the REIT sector have had experiences, and they haven't been positive experiences. Our structure is based on equity and the returns that are generated on an equity basis. What that means is, if investors are making money, that means then fees are then being paid to Fortress. We are not incentivized to go out and buy assets for the sake of buying assets, just to grow bigger. In fact, we're dis-incentivized to do that, because the only way that Fortress gets paid real money that's interesting money to Fortress is if the returns exceed a certain hurdle, and that's an equity return, and that's a cumulative equity return. It doesn't get reset quarterly. It doesn't get reset annually. It is over the lifetime that you're investing the capital.
I think under a structure like that, I think you can be very well aligned, and, in fact, everyone is hoping for the same things. I think on top of that, when you think about external management, something I encourage people to do is to think about the external management and to think about their expertise in that particular sector. When you think about Fortress, and you think about senior housing, as I mentioned at the beginning, Fortress has really been ... and, if not, then one the most successful investors in senior housing. This is not just an external management vehicle operating in a new sector where they don't have a lot of history or track record. This is really ... Of the things Fortress has invested in, this is top three, and I would put in that bucket senior housing, transportation, and financial services. I think that gives investors a very unique position to be able to be involved with a senior-housing investor who has been very successful in the space, and to be properly aligned.
Speaker 5: You mentioned something in the beginning about getting higher cap rates.
Speaker 5: I can't imagine your competitors are actually turning down higher cap rates.
Speaker 5: You also talked about not getting into distressed or somewhat under-performing properties?
Speaker 5: Can you explain how you get these higher cap rates?
Susan: Yeah. I think you're exactly right. It's not as if larger competitors are saying, "Hey, look. I'd rather pay more." What it really boils down to is, by and large, a lot of the things we're looking at just do not hit the radar, nor should they hit the radar screen, of our much larger competitors. We're 124 assets today. We're a billion-dollar market cap. For us, going out and looking at a single-asset acquisition or two assets or three assets, that moves the needle for us, and that can actually be very meaningful for our portfolio. Our acquisition team, we've got ten people out there who are literally going and looking and sifting through deals and really looking to find opportunities. It's not that other people are unwilling to pay the prices we are; it's they're not looking at them, necessarily, because for one of our much larger peers, it wouldn't make sense for them to utilize their resources to go out and be buying a $20 million-dollar acquisition. For us, it does move the needle. That's what we like. We're flying under the radar a little bit.
What we also like is looking for acquisitions that are really properties where ... A perfect example is a mom-and-pop, owned-operated property. One I like to talk about, which is one of the acquisitions we've done, three assets in a market. They're all a couple miles apart, owned and operated by a family for a very, very long time had a decline in occupancy. The quality of the real estate is very good. The market is very good. The care is very good, because first and foremost, care has to be good. Really, what the properties are lacking is a sophisticated sales function. Through our history of investing in senior housing, you need sales. We have really discovered that, many times, people focus on care; they don't focus on sales. You need different people doing the care function than do the sales function. A lot of times, with these mom-and-pops, they overlap. The same people that are doing the care are actually selling the product. What we look for is an opportunity where we think that there is not the proper sales function in place.
We also look for assets where we think the pricing is under market, or off market. Sometimes, the prices are too high; sometimes, they're too low. We look for assets where we think that we can bring tools that we think that we and our operators have, to actually get the pricing right.
Then the third thing we look for are expense reductions that can be made. These are not difficult things to do, but as a mom-and-pop owner/operator, they don't necessarily have access to the supply contracts, the food contracts, the negotiated insurance rates that we or our operating partners can bring to the table. Years ago, we negotiated contracts for Brookdale and Holiday that are still in place today that can be passed on to our operators, so you can take the cost of food, which is, sometimes, when we buy assets, seven dollars a day, per resident, down to four dollars a day, per resident. It's low-hanging fruit that really drives growth.
It's not that these are assets that aren't interesting to other people. It's, candidly, that some of the larger owners of assets out there, it wouldn't be worth their time and energy to actually focus on those types of things. That answer your question?
Speaker 5: I guess in 18 months, will you be too large where these acquisitions don’t have an impact to you?
Susan: No, I think there's still plenty to do, and, actually, we like the strategy. We like ... We'll grow, but I think it'll still be a very worthwhile strategy for us. We have already balanced going after the higher-yielding, more-growth assets with more stable acquisitions. We bought portfolio from Holiday which was already in the 90%-occupied zip code. They've had very stable performance. We structured that as a triple-net lease. That provides a very solid, good, high-quality, stable portfolio. We can balance with the growthier assets, which is what we like. We still think there's plenty to do on those small, onesie, twosie-type deals. Even if we grow, we can still do those, and they can move the needle. We've got a long way to go until we hit the point where some of our much larger peers wouldn't see some of those acquisitions as interesting.
Paul: I think we're out of time. If anybody has questions, maybe you can talk afterwards and answer that.
Susan: Yeah, sure.
Paul: Thanks, everybody for your time.
Susan: Thank you very much, everyone. I appreciate it.