Internalizing Management Gives New Senior Investment Group Clarity, Renewed Focus

REIT magazine: July/August 2019

Susan Givens, CEO of New Senior Investment Group (NYSEMKT: SNR), believes that focusing on the middle ground of affordable independent living allows the REIT to benefit from the positive fundamentals in the senior housing sector, while limiting the risks associated with regulatory changes and reimbursement issues.

In 2014, Givens took over the reins of the new REIT that was spun off from Fortress Investment Group (NYSE: FIG). The senior housing REIT, which owns 133 properties in 37 states, transitioned to internal management at the start of 2019, and is in the thick of several initiatives to improve its portfolio and balance sheet.

“We started with 100 properties, and we made $1 billion in acquisitions right away,” Givens says. “But we also faced some challenges right out of the gate, mostly because of our external management structure.” In late 2017, New Senior began a strategic review to address some of the issues that were hurting the REIT’s attractiveness to investors.

“New Senior faced some earnings challenges because of oversupply and being over-leveraged,” says Vikram Malhotra, an analyst with Morgan Stanley. “In 2018, they underperformed their peers with disappointing net operating income (NOI) growth and had to cut their dividend.” Now, Malhotra says, he’s upgraded his view of New Senior because of its shift to internal management, their asset mix, and their focus on improving their portfolio. “We saw the supply picture improving in the markets where New Senior owns assets better than in the markets where some of their peers are active,” Malhotra says. “So, we expect to see an improving growth trajectory this year.”

A New Beginning—and Continuity—for New Senior

Internalizing management at New Senior meant transitioning staff from Fortress so they could become New Senior staff members and moving headquarters away from Fortress’s offices.

“Investors sometimes didn’t understand which company we were spending time on when we were paying Fortress to manage New Senior,” Givens says. “One priority going forward with our internalized management is that we intend to provide more guidance and insight into our earnings.”

The REIT’s property investment mix is anticipated to stay the course charted since its inception. New Senior, one of the largest publicly traded owners of senior housing, has more than 16,000 beds in its 102 independent living buildings, 30 assisted living/ memory care facilities, and one continuing care retirement community. The continuing care community is a triple net lease property; the others are managed by third-party operators.

“We’re the only pure-play senior housing REIT that owns 100% private pay senior housing,” Givens says. “Eighty percent of our portfolio is independent living communities, which have the lowest acuity rates. We think of this as the middle market of senior housing, which tends to be very expensive. We offer a more affordable product.”

One reason New Senior prefers to invest in independent living is that tenants tend to be younger and healthier than in skilled nursing homes, and also stay longer. “Our average length of stay is three years in our independent living properties and two years in the assisted living facilities,” says Givens. “Skilled nursing facilities have lengths of stay measured in months rather than years.” The average age of tenants in New Senior’s properties is around 80, she says, and the tenants are generally healthy.

“We’ve always invested in private pay senior housing diversified across 37 states,” Givens says. “One thing we’re changing slightly is that, while a majority of our properties have always been independent living communities, now we’re focused even more on that property type. Our asset sales have all been assisted living or memory care facilities.” Givens says their independent living properties have performed better than the assisted living facilities.

“Independent living is generally more attractive than assisted living because there is no reimbursement risk and less regulatory oversight since there’s no health care component,” Givens says. “The average length of stay is longer; there’s less new supply and the margins are higher because there are no direct health care services and therefore labor costs are lower.”

A big focal point for Givens is that independent living can be a more affordable option for seniors since they can individually opt for moderate in-home services if they need them rather than pay the higher costs of a memory care facility.

Strategic Priorities for New Senior

In addition to increasing their transparency with investors, Givens says New Senior has three other strategic priorities for the coming year or two:

Optimizing the portfolio. “We plan to optimize our portfolio with heavy asset management to improve the overall quality of our portfolio,” Givens says. During the first quarter of 2019, nine assets have been transferred to new operators, two assets were sold, and six other assets are being actively marketed.

Diversification of managers. New Senior has six partners that operate their properties, Givens says. One operator accounts for 60% of New Senior’s NOI. “We’re evaluating all of our operators to look at our diversity,” Givens says. “During the first quarter of this year we added two new operators.” New Senior’s biggest operator, Holiday Retirement, has had some challenges across its portfolio, says Malhotra, and so that’s part of the reason New Senior wants to reduce its operator concentration.

Strengthening the balance sheet. Givens acknowledges that New Senior has higher leverage than its peers. “We’re committed to addressing the leverage issue,” she says. “We refinanced $50 million in debt during the first quarter of this year, so we don’t have any near-term maturities for the next few years.”

Supply Issues for Senior Housing

While occupancy rates declined across all senior housing property types in 2018, occupancy rates ticked up slightly from 88% in the last quarter of 2018 to 88.1% during the first quarter of 2019, according to the National Investment Center for Seniors Housing & Care (NIC). Absorption rates in the sector increased from 2.7 to 3% during that same period and inventory growth moderated from 3.5% at the end of 2018 to 3.1% during the first quarter of 2019.

“One reason we like independent living even more in this market is that there’s less new supply of this product,” Givens says. “We’ve seen our rates, NOI, and margins improve in 2019 because of our heavy investment in independent living.” Givens says oversupply issues are market-driven, with some locations where they operate not having any issues with oversupply.

“New Senior has a lot of exposure in Florida, which is generally a lower cost market to develop,” Malhotra says. “New supply was delivered there in 2017 and 2018, while other markets, especially coastal markets, are still experiencing newsupply this year. New Senior saw a lot more supply relative to their peers earlier, but that’s changing now.”

The medium and long-term fundamentals are in place for good performance going forward, says Givens, as long as everyone can navigate the next year or so as supply gets absorbed. “Moderating new supply across all markets is coinciding with the ‘Silver Tsunami’ of anticipated high demand for senior housing starting in 2020, picking up even more in 2021 and continuing through 2028,” Malhotra says.

The number of Americans age 70 and older is anticipated to rise above 45 million by 2020 to over 65 million by 2050, according to Census Bureau estimates.

“I think senior care, and especially the affordability of senior care, will become one of the most important hot topics that everyone will be talking about in the next few years,” Givens says. “Senior housing touches so many of us already, whether it’s ourselves or our parents. Soon it will be relevant to everyone.”

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