REIT owner of independent, assisted living facilities delivers outsized NOI growth while assembling a high-quality portfolio.
By Matt Valley and Jeff Shaw
It’s been an extremely fast start out of the gate for New Senior Investment Group, the publicly traded healthcare REIT (NYSE: SNR) spun off from Newcastle Investment Corp. in November 2014.
The New York City-based company has already completed or announced $1.2 billion in acquisitions this year, including the $640 million acquisition of a 28-community portfolio of private pay, independent living senior housing properties from affiliates of Holiday Retirement. The purchase of the Holiday portfolio — 3,298 units spread across 21 states — was completed in August.
In March, New Senior closed on the acquisition of 17 private pay, independent living senior housing properties from affiliates of Hawthorn Retirement Group for approximately $435 million. The portfolio is 100 percent private pay and contains 2,082 units located across 10 states.
While these mega deals have provided New Senior with high-quality assets that boast a track record of strong and consistent performance, that’s only part of the story. The REIT also specializes in smaller transactions, under $250 million, in which it acquires “undermanaged” properties that offer significant upside potential.
Leading the aggressive growth strategy at New Senior is CEO Susan Givens, who has over 15 years of private equity and finance experience. Prior to becoming CEO of New Senior, Givens served as CFO and treasurer at New Residential Investment Corp., a publicly traded REIT that invests in mortgage servicing-related assets.
Seniors Housing Business recently spoke with Givens about the niche New Senior is carving out for itself in the healthcare REIT space, the acquisitions climate and deal volume, plus her unique academic background.
Seniors Housing Business: New Senior Investment Group emphasizes to prospective investors that it is the only pure play, publicly traded seniors housing REIT. What advantage does
that gives the company in the marketplace?
Susan Givens: Over the last three years, we’ve assembled one of the largest portfolios of independent living and assisted living properties in the U.S. It’s now worth over $3 billion, and we think it’s a very unique, hard-to-replicate portfolio.
Fortress Investment Group LLC (NYSE: FIG), our manager, has a 15-year track record of investing in seniors housing with Brookdale Senior Living, Holiday Retirement and others. It’s a space Fortress knows well, and Fortress has been one of the largest and most successful investors across the sector.
Our target demographic — individuals age 70 and older — is the fastest growing cohort in the U.S. Yet the industry that caters to this demographic is highly fragmented and is characterized by a massive supply-demand imbalance.
SHB: Against that backdrop, what’s New Senior’s strategy?
Givens: By our estimates, there are approximately $300 billion of senior housing assets in the U.S., but nearly 70 percent of those properties are owned by “mom and pops” — operators that own fewer than 10 properties.
We think we’re uniquely positioned to benefit from this dynamic because we seek to acquire these small, mom-and-pop assets, which generally aren’t on the radar screens of our larger peers.
What’s more, 70 percent of our net operating income (NOI) comes from independent living assets, and these assets are really as close to multifamily as you can get.
We like independent living because there’s less regulatory oversight, the margins are higher and the average length of stay tends to be much longer compared to assisted living.
In addition, we’re seeing less new supply coming into the market on the independent living side, so that means less new competition.
REIT’s structural strengths
SHB: New Senior is externally managed by Fortress Investment Group, which has $72 billion of real estate assets under management and is one of the most active firms in private equity real estate and capital raising. What does externally managed mean exactly and what’s the significance?
Givens: In the simplest of terms, New Senior has no employees. We are all employees of the manager, Fortress. However, even though we are all Fortress employees, our team — which includes acquisitions, asset management, legal, tax, finance and other departments — is dedicated to working on New Senior.
This arrangement enables us to leverage the extensive expertise of Fortress and it gives us access to the 15-year track record that Fortress has in the space, which is extremely useful when it comes to sourcing and structuring transactions.
Importantly, it also gives us access to an incredibly talented pool of Fortress employees who have relevant M&A, corporate finance, asset management, capital markets and legal expertise that can be tapped as the need arises.
So, being externally managed gives us access to a broader pool of talent than would be the case if we were an internally managed company.
SHB: Are there any other advantages of being externally managed by Fortress?
Givens: Because of Fortress’ relationship with major banks and brokers and Fortress’ large-scale private equity platform, external management also gives us access to larger deals and enables us to leverage our strength on the capital markets side to get better pricing with banks.
Lastly, we’re also able to leverage the Fortress national vendor contracts to save on operating expenses such as food, utilities and maintenance supplies, which is a huge benefit to our operating partners.
SHB: Can you clarify the business relationship today between Fortress, Holiday Retirement and New Senior? For example, will Holiday still operate the 28 communities it sold to New Senior for $640 million?
Givens: Holiday has been owned by private equity funds that are managed by Fortress since 2007. Fortress has a long-standing relationship with Holiday.
In the past couple of years, Holiday has been selling its real estate and has announced seven transactions to date, two of which New Senior has purchased.
New Senior has been, and we expect it will continue to be, Fortress’ dedicated vehicle for investing in the seniors housing industry.
While the private equity funds have a finite life to them, New Senior is one of the permanent capital vehicles at Fortress, given it is a public company with no time period upon which the equity has to be returned to investors.
Growing for the right reasons
SHB: Since 2012, New Senior has made investments in seniors housing totaling $3.1 billion. That’s tremendously rapid growth. Is New Senior likely to acquire more properties before the year is out, or is the company content to digest what it has in the short term?
Givens: When we decided to create this business three years ago, our strategy was simple: create a business focused on acquiring seniors housing assets, and do so by developing a two-pronged acquisition strategy.
On the one hand, we focus on sourcing and underwriting smaller, off-market transactions where we think the assets are undervalued or underperforming.
At the same time, we selectively source larger portfolio deals, which tend to include more stable, higher-quality assets that can improve the overall profile of the company.
Since 2012, we’ve completed or announced 24 transactions, 21 of which were smaller deals and three that were larger deals. We expect to continue to target a mix of small and large deals going forward.
We also expect to continue to acquire private pay seniors housing properties over the long term. But we are focused on only doing the right deals, not just doing deals for the sake of doing deals.
We’re very focused on acquisitions, but there are times where it makes sense to digest for a little bit. That’s where we are now.
SHB: In what way is the 28-property acquisition from Holiday a game changer for New Senior?
Givens: We’ve had a lot of success pursuing smaller, one-off transactions, and that is a core component of our strategy. But there are benefits to selectively doing larger transactions.
This portfolio includes 28 private-pay independent living assets. It increased our overall private-pay exposure to 92 percent, it increases our independent living contribution to 70 percent of our NOI, and it adds five new states to our portfolio.
Occupancy on the portfolio is 88 percent today — which is a good, healthy level — but we believe there are opportunities for further improvements.
Holiday will remain the existing operator at the properties, so it eliminates operator transition risk. We also expand our relationship with Holiday, which is the largest operator of independent living properties in the U.S. and has delivered strong performance on our existing properties that it operates.
Having a strong relationship with Holiday gives us a competitive advantage, and its proven track record of success makes us confident that it can achieve similar results with this portfolio.
SHB: Some 48 percent of New Senior’s NOI is derived from properties that are triple-net leased to operators. The other 52 percent comes from managed properties. What does “managed” in this case mean exactly?
Givens: The managed portfolio is a structure whereby we enter into a property management agreement with an operator and pay the operator a base management fee on revenue and, in some cases, an incentive fee based on performance. We are then the direct recipient of the NOI at the property, so we typically place our higher growth acquisitions in this structure as it allows us to capture the operational upside at the properties.
SHB: That sounds similar to the RIDEA (REIT Investment Diversification and Empowerment Act) vehicle used by Ventas and Health Care REIT for growth opportunities.
Givens: Yes, it’s similar. The only difference is the RIDEA structure is only used for assets where there’s a healthcare component, such as assisted living or memory care. Here we have a significant concentration of our portfolio in independent living.
Bumpy ride in stock market
SHB: When the company was spun off last November, the stock price was over $19 per share. This interview is being conducted in early August 2015, and now the share price is just over $12 per share. What accounts for that drop in the stock price?
Givens: Spin-offs are always different from initial public offerings (IPOs). Since it involves taking assets from one company and spinning them out into a new company, sometimes the initial stock price and where the stock lands is a little less straightforward than with an IPO.
Since we were spun off, we have done exactly what we told the market we would do. We invested our cash on hand in attractive acquisitions, including a $435 million acquisition of 17 private pay independent living assets that closed in March. We refinanced our capital structure with the completion of our $670 million Freddie Mac financing in March that lowered our overall effective rate of our debt by 85 basis points and extended our overall term of our debt.
Lastly, we generated strong organic growth with 6.3 percent same-store growth in NOI in the first quarter and 4.5 percent in the second quarter for our managed portfolio, which has been among the highest in the industry.
We’re trading at a discount to our peers despite outsized growth, a demonstrated track record of high-quality accretive acquisitions, posting really strong financial results and increasing our dividend by 13 percent.
In our view, the discount is way too steep, and we don’t think it will last given the uniqueness and quality of our portfolio, the embedded growth potential of our portfolio, our disciplined acquisition strategy, our focus on deleveraging and our commitment to growing dividends for shareholders.
SHB: The REIT is less than a year old, so does name recognition become a factor in trying to attract investors?
Givens: It’s less about name recognition and more about having a number of quarters of strong performance that provides a track record. When you’re a new company, it’s not about the name. It’s about making sure that shareholders understand the financial profile, what the prospects are and the potential of the business.
Expect more organic growth
SHB: With cap rates currently pushing so low and the price per unit so high (both set records in 2014 and are on pace to do so again in 2015), what impact does that have on your investment strategy?
Givens: The environment for acquisitions remains extremely competitive and the cost of capital has increased for REITs, so we continue to be very disciplined on the acquisitions front. While we have completed or announced $1.2 billion of acquisitions so far this year, we will likely focus more attention on organic growth of our existing portfolio versus new acquisitions in the near term.
Fortress has experience investing through various economic and capital market cycles. The long-term fundamentals of this sector are excellent, and we remain confident we will continue to find attractive investment opportunities over the long term.
SHB: Does New Senior do ground-up development projects?
Givens: We have not done any to date. As we grow and continue to evolve, development is something that we may consider. But right now we’re focused on cash-flowing assets that contribute to our dividends.
SHB: If acquisition prices continue to generally rise and cap rates fall, does development become less risky?
Givens: While the economics can look favorable on a build-versus-buy basis, you have to account for the fact that it takes a few years to lease up the properties. There’s money going out the door to pay to develop the properties, but you won’t have money coming in from the properties for a couple years.
Portfolio’s vital signs improve
SHB: What is the average occupancy rate across New Senior’s portfolio as of the second quarter of 2015?
Givens: The occupancy rate of our managed portfolio was 86.2 percent for the second quarter, which increased 310 basis points versus last year as a result of strong growth in the existing portfolio and the acquisition of a highly stabilized portfolio of independent living properties earlier this year.
While this is lower than the industry average (NIC reports an average occupancy rate of 89.9 percent for seniors housing industry-wide in the second quarter), our strategy entails purchasing high-quality, though “undermanaged” properties, which tend to initially have lower occupancy.
As our operators implement more sophisticated sales and marketing programs post-acquisition, along with benefiting from lower expenses from participating in the national vendor contracts that Fortress has, we anticipate outsized increases in occupancy and NOI over time. We expect to reach industry occupancy levels within two to three years of acquiring a portfolio.
SHB: To what extent do you tour the properties in your portfolio?
Givens: I tour the properties a lot. My background and how I grew up in the investment business taught me you have to be on the ground. You have to look, touch, feel and see things in order to be a good investor.
My management philosophy is to get out there to see things, talk with people and hear what’s happening. If you always rely on summaries from people, you get part of what’s happening, but you don’t get the entire picture. I’m an avid believer in hitting the road and visiting our properties to see what’s going on.
Atypical academic background
SHB: You earned an MBA from Harvard Business School, but your bachelor’s degree from Middlebury College in Vermont was in political science. How do you apply that political science background to the REIT business?
Givens: I was also a French minor, so that’s a real curveball. The foundation of a liberal arts education is to emphasize critical thinking and broaden your overall learning scope.
A lot of the knowledge that you gain from political science, history or any other liberal arts major is directly applicable to the business world: critical thinking, analysis and decision making. All of those skills set you up nicely to be a business leader. I’m a strong advocate of liberal arts education. That, in combination with my business degree and years of work experience, has positioned me for this role.
SHB: Is there anything you like most about your job?
Givens: What I like most is no two days are exactly the same. There are new challenges and new opportunities every day, and I’m learning a lot. Most of us will have siblings, parents, grandparents or loved ones that end up needing the services that seniors housing provides. A few in my family have lived in assisted living and seniors housing. I respect the people that provide the services and run our properties. It’s such a critically important part of our society. I’m learning a lot every day.
SHB: You’re one of a handful of female CEOs in the healthcare REIT space. Deb Cafaro of Ventas and Lauralee Martin of HCP are two others that come to mind. Do you see yourself on the leading edge in that regard?
Givens: They are certainly terrific role models for me. Being able to watch what they and others have done in their respective businesses is exciting for me. I hope to one day be a fraction as successful as they have been. It’s provided me a lot of incentive, and they are strong role models to look at.
In the investment community across the board, women are taking on increased responsibilities. That’s a great thing. If I can be a part of that, along with the many others before me, then I’m happy to be able to do that.