New Senior Investment Group is moving a group of 51 Holiday Retirement communities that have “lagged expectations” from its triple-net lease portfolio to its portfolio of managed properties as part of an ongoing strategic review process first announced in February, the real estate investment trust said Thursday.

The lease termination agreement was signed May 9, after the first quarter ended, and associated refinancing is expected to close later this month, New Senior said.

“This I view as a really critical first step that allows us to move with respect to some of the other actions that we are looking at,” New Senior CEO Susan Givens told shareholders, analysts and others on the REIT’s first-quarter earnings call.

As part of the termination agreement with Holiday, New Senior said it will receive $116 million, including a $70 million termination payment and $46 million of retained security deposits.

Sabra Health Care REIT’s take

On Sabra Health Care REIT’s first-quarter 2018 earnings call Thursday, Chairman, President and CEO Rick Matros had this to say about the deal between New Senior Investment Group and Holiday Retirement:

“That’s a good outcome for Holiday. Those 51 facilities have been a burden on the guarantor sub. So from our perspective, that’s a real positive. It’ll strengthen the guarantor sub. So, it was a constructive deal. As I think everybody knows, New Senior is going through a process right now, and that new agreement and that new structure will help them, theoretically, in their process as well. So for us, it was good news. I know the Holiday team feels really good about that negotiation and getting those 51 facilities out of the guarantor sub.”

When asked whether Sabra would consider taking similar actions with its Holiday portfolio, Matros said no.

“We have to remind everybody, it’s independent living. It’s not a healthcare model. …Their [earnings before interest, taxes, depreciation, amortization and restructuring or rent costs] margins are 40%. It’s a pretty healthy business.”

New Senior made the deal, Matros hypothesized, because “it gives them a little bit more flexibility when they talk to buyers.”

“We don’t see ourselves doing anything different from Holiday,” he added, “In fact, we would like to do more with Holiday. There just haven’t been the opportunities. Independent living isn’t a huge space in the States the way it is in Canada. And there really is almost no new development on independent living. The only development we see that ever relates to independent living is when guys are building campuses, whether they’re full [continuing care retirement communities] or multi-level senior housing facilities, they may have some IL cottages or units.”

Matros said Sabra’s $400 million acquisition pipeline is “almost entirely senior housing” and that in addition to the pipeline, the REIT is focused on divestitures and small deals.

“By year-end, assuming no other skilled divestitures, we’ll have skilled exposure down to 61%,” he said. “That’s down 13% from August 2017 and just four points higher than where were pre the merger with [Care Capital Properties].”

Holiday will receive a management fee equal to 5% of revenue in the first year and 4.5% in subsequent years. Additionally, Holiday could receive a performance-based incentive fee of up to 2% of revenue.

The property management agreements signed by Holiday can be terminated without penalty after the first year, “so we have the flexibility to transition some or all of the portfolio to new operators,” Givens said.

The leased Holiday portfolio became a focus of the REIT’s strategic review, Givens said, because the properties accounted for almost half of total portfolio net operating income.

“In the years since entering into the leases, industry trends have weakened,” she said. “The portfolio’s growth has lagged expectations.”

The three main benefits of the transition to New Senior, the CEO added, are reduced credit risk, improved operator-owner alignment and a simplified portfolio.

“Following the conversion, nearly 100% of our portfolio will be owned on a managed basis, with independent living exposure increasing from 70% to 83%,” she said. “Since all of our assets will be held in the managed structure, our portfolio results will directly mirror asset performance, and any improvement in operating results will accrue to us rather than a tenant.”

Holiday is majority-owned by private equity funds managed by New Senior’s manager, but the REIT said that the termination and management agreements were negotiated and unanimously approved by a special committee of the New Senior Board of Directors, members of which were “independent and disinterested” and who were counseled by independent legal and financial advisers.

As part of New Senior’s strategic review process, the REIT is evaluating its dividend policy and expects to announce a decision about the first-quarter dividend by June 1.

“While the amount of such dividend has not yet been determined, it may be less than dividends declared in prior quarters, and such difference could be material,” the company said in a press release issued in advance of the earnings call.

About the review process in general, Givens said, “I can’t comment on exactly what strategic initiatives the board is reviewing, but I do think it’s safe to say — and I’ve said this before — that the board and management, we’re reviewing everything.”

No specific timeline has been announced regarding the process.

“Our goal and our desire is not to have this be a drawn-out, long process,” Givens said. “We think that’s never a good idea, and we are working expeditiously to be able to conclude the review process.”