New Senior Investment Group is “taking a hard look” at its assisted living / memory care communities, which are “weighing down” growth in overall portfolio net operating income and occupancy, CEO Susan Givens said Thursday during the New York-based real estate investment trust’s third-quarter earnings call.

Adjusted same-store cash net operating income in the assisted living / memory care portfolio is down 18% and occupancy is down 300 basis points (3%) year-over-year, she said. For now, the 30 properties, which account for 15% of New Senior’s overall net operating income, are a “question mark” in the REIT’s portfolio, Givens added.

Twenty-one of the assisted living / memory care communities are operated by Blue Harbor Senior Living. Other operators outside of independent living and continuing care retirement communities for New Senior include JEA Senior Living, Thrive Senior Living and Grace, according to a third-quarter supplement issued by the REIT.

Underperformance in assisted living and memory care is being driven by a subset of communities, Givens said. She did not indicate which properties have been problematic.

“Nearly 40% of these 30 assisted living assets experienced positive year-over-year net operating income growth, but this was more than offset by the remaining assets that had significant declines in net operating income,” Givens said. “We are highly focused on addressing these property performance issues through a number of asset management initiatives, with a goal being to improve the overall quality of our assisted living portfolio and its resulting portfolio metrics.”

Initiatives will be detailed in future earnings calls, Givens said. In prepared remarks, she seemed to imply that some operator changes may be under consideration. “We have very intentionally created flexibility with our management agreements to enable us to make operator changes as necessary,” she said.

Independent living performance

Performance of the assisted living / memory care communities stands in contrast to that of the 102 Holiday Retirement independent living communities in New Senior’s portfolio, executives said.

“Year-over-year, the independent living portion of adjusted same-store cash net operating income was up a solid 1.3%,” New Senior Managing Director David Smith said. “Occupancy increased 60 basis points to 88.1%, outperforming recent industry data from [the National Investment Center for Seniors Housing & Care], which posted a decline of 30 basis points.”

The independent living portfolio accounts for more than 80% of New Senior’s total net operating income, he said.

The REIT’s independent living properties traditionally have outperformed its assisted living / memory care properties, Givens noted. Company executives said they expect positive trends to continue.

“Industry trends for independent living remain more favorable than assisted living, with lower levels of new supply along with inventory growth exceeding absorption by just 40 basis points in the third quarter, the narrowest spread realized since the second quarter of 2017,” Smith said. “In general, independent living benefits from longer length of stay, higher margins and lower regulatory risk.”

Across its entire portfolio, adjusted same-store cash net operating income decreased 2% year-over-year, Smith said. Occupancy averaged 86.2% in the third quarter in the portfolio of managed properties (132 of New Senior’s 133 properties, located across 37 states) and 88.7% in the Watermark Retirement Communities rental continuing care retirement community that is under a triple-net lease.

‘Significant’ progress on other initiatives

Givens said the REIT is making “significant” progress on previously announced initiatives that are part of a comprehensive strategic review to address issues thought to have “hindered the company’s growth prospects.”

A plan to bring management in-house should be completed by the end of the year, she said.

“We expect the internalization to have several benefits, including cost savings of approximately $10 million per year,” Givens said. “We also expect the internalization will simplify the company’s organizational structure and increase the transparency of our financial results. In addition, as an internally managed company, we will become more comparable to our peers in the healthcare REIT space, which we think could bolster interest in our company and expand our investor base.”

Also resulting from the review, New Senior completed the refinancing of a $720 million bridge loan in October, after the third quarter ended.

“The new loan resulted in savings of over 170 basis points of interest expense, or $12 million annually — even better than expected,” Givens said. The REIT had expected to save $11 million in interest annually.

The original loan had been set to mature in May 2019. “In addition to cost savings, we designed this refinancing to preserve our prepayment flexibility and to enable us to recycle capital in the event that we identify accretive opportunities,” Givens said.

Also as part of the strategic review, the company’s dividend was cut in half, from $0.26 to $0.1, in August, “which brought our payout ratio more in line with our peers,” she added.

And triple-net leases on 51 Holiday independent living communities had been converted to a managed structure in the second quarter, “which reduced our credit risk and increased the transparency of our operating results,” Givens said. Those assets represent almost 40% of total net operating income for New Senior, she said.

New Senior is the only “pure-play” senior housing REIT in the United States and the only one that is 100% private-pay, Givens said, adding that the portfolio is the eighth largest in the country.

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