New Senior is a small equity REIT, operating in the highly-fragmented, but very large and rapidly growing senior housing space. New Senior is struggling with a heavy debt load (they’re trying to sell more assets to pay down debt), and they’re also struggling with a small handful of troubled operators. It seems if New Senior can get through near-term challenges then there are plenty of healthy profits (and dividend payments) ahead, and for this reason we’ve ranked it #14 on our list of “15 Attractive +7% Yields Worth Considering”.
However, considering New Senior’s external management group was recently acquired by a large, deep-pocketed, Japanese firm (Softbank) that is looking to deploy cash, there may be a more direct way for New Senior to get through its near-term challenges. In our view, there are clear benefits (the cost of debt could be dramatically lowered) and incentives (there are significant “economies of scale” opportunities in the large and growing senior housing space) for Softbank to acquire New Senior at healthy premium to its current market price.
About New Senior
New Senior Investment Group (SNR) is a publicly-traded real estate investment trust (“REIT”) with a diversified portfolio of senior housing properties (managed properties and triple net leased) located across the United States.
Very Importantly, New Senior relies on private pay sources of revenue which are considering more stable and predictable compared to government reimbursed property types which rely significantly on payments from Medicaid or Medicare. For this reason, New Senior is dramatically less sensitive to healthcare law changes that currently weigh heavily on peers, such as Omega Healthcare (OHI), for example.
The property mix includes mainly Independent Living and Assisted Living properties.
The company recently released its fourth quarter financials which show strong improvement in net operating income, but the company continues to struggle with debt and negative earnings.
According to the earnings release: “The year-over-year decrease in the fourth quarter net loss was primarily driven by a gain on sale of real estate of $13.4 million and a decrease in expenses of $6.8 million.” Specifically, New Senior sold $38.5 million in assets over the last six months and the proceeds were used to pay down debt.
Also, as noted by the company, it is currently considering strategies to deal with five trouble operators.
When asked during the fourth quarter earnings call about the five underperforming assets, New Senior CEO, Susan Givens, explained: “So of those five, I think, we have a few that we’re actually considering selling and a few that we’re working with either our existing operators, or in certain cases, considering transitioning to new operators to try to improve performance.”
Many investors at attracted to New Senior because of its big dividend yield (currently 10.2%). However, the dividend does not have a large margin of safety. For example, New Senior’s quarterly dividend payment is 26 cents per share, but its Adjusted Funds From Operations (AFFO) and Funds Available for Distribution (FAD) just barely cover the divided, as shown in the following table.
And worth noting, the tax treatment of the most recent dividend (as shown in the following table) was largely a return of capital, not a qualified dividend (this means you defer the tax payment until you sell the shares, unless your cost basis has been totally returned to you before then).
New Senior’s Management
There are a lot of interesting things going on with New Senior’s management and leadership team. For starters, New Senior has no employees. The company is externally managed and advised by FIG LLC, an affiliate of Fortress Investment Group LLC, which is a leading global investment management firm. Further, affiliates of Fortress manage private equity funds that currently own a majority of New Senior’s largest tenant, Holiday. And Blue Harbor, New Senior’s second largest tenant, is also an affiliate of Fortress. So there are some significant conflicts of interest here.
Additionally, New Senior’s CEO, Susan Givens, is also a Managing Director in Fortress’s Private Equity group. Further, the chairman of New Senior’s board, Wesley Edens, is a principal and a Co-Chairman of the Board of Directors of Fortress Investment Group. Further still, New Senior board member, Michael Malone, is a former Fortress Managing Director.
More interesting still, Fortress recently announced it will be acquired by Japanese technology giant SoftBank Group for about $3.3 billion in cash. In our view, it is critically important to consider the intentions of Softbank before investing in New Senior.
With Sofbank now basically calling the shots at New Senior (because Softbank now essentially owns New Senior’s external manager and board of directors via Fortress), it’s important to consider New Senior from the perspective of Softbank. From Softbank’s perspective, New Senior is very small (New Senior’s market cap is less than $1 billion, Softbank’s is around $77 billion), but New Senior does fit into a larger growing real estate play by Softbank which includes not only its management interest in New Senior but also its ownership and management of New Senior tenants and Fortress affiliates Holiday and Blue Harbor. And according to the Wall Street Journal article:
“SoftBank believes it can double Fortress’s