National Health Investors Inc (NHI) 2022 Q1 法說會逐字稿

Greetings and welcome to the National Health Investors' First Quarter 2022 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, May 10, 2022.

It is now my pleasure to turn the conference over to Dana Hambly. Please go ahead.

Thank you and welcome to the National Health Investors' Conference Call to review the company's results for the first quarter of 2022. On the call today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer.

The results as well as notice of the accessibility of this conference call on a listen-only basis were released after the market closed yesterday in a press release that's been covered by the financial media.

As a reminder, any statements in this conference call which are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call.

Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended March 31, 2021. Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireit.com.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in NHI's earnings release and related tables and schedules, which have been filed on Form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release together with other information provided in that release.

I'll now turn the call over to our CEO, Eric Mendelsohn.

Thank you, Dana. Hello, and thanks for joining us today. It has been 1 year since we communicated our initial plans to optimize our portfolio through $250 million to $400 million of asset dispositions, lease restructurings with operators where we have confidence in their ability to recover and tenant transitions to new and existing partners, including SHOP joint ventures.

We've accomplished a great deal in the past year. We have completed approximately $262 million in asset sales since that time, including $214 million in sales of underperforming senior housing properties. We expect to complete dispositions exceeding $100 million in net proceeds of several other underperforming properties in the first half of this year.

These dispositions will have minimal impact on our cash NOI as the properties aren't contributing much rental income. We restructured the Bickford lease effective April 1, which is consistent with the plan that we communicated in November.

Bickford is a valued partner to NHI. And we're confident that our new leases create a more sustainable relationship that improves our coverage, generates excess cash flow that can be used to repay NHI's deferral balance and provides more capital for Bickford to reinvest and maintain our buildings.

Recall that we have a fair market value reset after 2 years on the rent, so their success will be our success as well. We reached another great milestone for our company as we transitioned the remaining legacy holiday properties into 2 new SHOP ventures with Merrill Gardens and Discovery Senior Living in April.

While it's still early stages, we've been pleased with the transition so far and look forward to providing much more detail on these ventures in our second quarter report. These types of ventures, coupled with our traditional triple-net strategy, make NHI a formidable competitor for new business and senior housing.

The balance sheet is in great shape as we reduced debt by over $275 million in the last 12 months and maintained leverage within our target of 4x to 5x net debt to adjusted EBITDA despite significant deferrals and nonpayment from Welltower for 8 months.

The pipeline is starting to rebuild. And we recently announced a $240 million share repurchase plan. So we see plenty of near-term opportunity to deploy capital without the need to issue equity. We included a new slide in our supplemental that outlines the activity undertaken in our portfolio optimization.

I described the slide as busy, and this is intentional. We knew the process would introduce volatility to our cash flow and that there would be unforeseen obstacles that we'd have to navigate along the way. We've tried to communicate our plan through regular business updates but understand that the many moving pieces made for difficult forecasting.

Our operators continue to deal with operational challenges. However, we feel like we're in a better position now to forecast these challenges. We are now happy to report that we've largely completed portfolio optimization and reached an inflection point, which has greatly improved our visibility.

As a result, we recently issued guidance, which John will discuss in more detail in his review of our quarter results. John?

Thank you, Eric, and good day, everyone. Beginning with our net income per diluted common share for the first quarter ended March 31, 2022, we achieved $0.18 compared to $0.78 for the same period in 2021 and sequentially up $0.04 from the fourth quarter in 2021.

There are a number of items that impacted our first quarter results, which are outlined in our earnings press release. For our FFO metrics per diluted common share for the first quarter ended March 31, 2022, sequentially compared to the fourth quarter, NAREIT FFO decreased $0.02 to $1.05 from $1.07 and normalized FFO increased $0.04 to $1.10 from $1.06.

Sequentially, for the first quarter, our normalized funds available for distribution increased $6.8 million from the fourth quarter. The sequential quarterly increase in FAD was largely driven by the recognition of the $8.8 million holiday lease deposit, which we've previously discussed and lower interest expense.

This was offset by additional rent concessions previously announced lease modifications, dispositions and higher legal expense. The results we achieved for the first quarter are in line with the midpoint of our recently issued guidance for 2022.

Reconciliations for our pro forma performance metrics can be found in our earnings release and 10-Q filed yesterday at sec.gov. Our first quarter dividend of $0.90 per share was paid on May 6, 2022, and represents normalized FFO and FAD total dollar payout ratios of 81.9% and 78.3%, respectively.

As announced yesterday, our Board declared our second quarter dividend of $0.90 per share for shareholders of record on June 30 and payable on August 5.

Turning to the balance sheet. For the quarter ended March 31, we reduced our debt by approximately $275.7 million since the end of the first quarter of 2021. Our net debt to adjusted EBITDA leverage ratio was 4.9x. Please keep in mind that our Q1 leverage ratio is not adjusted for the seasonally higher first quarter noncash stock option expense.

While still within our stated financial policies, we expect to see immediate improvement in our leverage ratios as we have transitioned the legacy holiday portfolio to new operators and recommenced receiving NOI from those facilities.

We recast our revolving credit facility during the first quarter and increased the available credit to $700 million from $550 million. On April 30, we had $85 million outstanding under the revolver and $16.4 million in cash. We did not issue any equity through our ATM program during the first quarter and do not expect to issue equity during the second quarter.

We continue to have approximately $416 million available to us under our ATM program as well as $240 million remaining on our recent stock buyback program. On April 18, we issued annual guidance, which includes NAREIT FFO per share in a range of $4.32 to $4.42; normalized FFO per share in a range of $4.38 to $4.48 and FAD in a range of $201.8 million to $206.4 million.

Our 2022 guidance includes $8.8 million in rent from the holiday lease deposit recognition during the first quarter, $6.9 million from a settlement payment related to the Welltower lawsuit, $76 million in investment funding on existing commitments, NOI commencing from our SHOP portfolio beginning April 1, based upon assumptions consistent with amounts communicated in prior calls and rent concessions, asset dispositions and loan repayments throughout 2022, including the repayment of an existing $111 million, 7.35% loan at the end of the second quarter.

Our guidance does not assume any benefit from future unannounced acquisitions or any repayment on outstanding deferral balances. Other assumptions can be found in the April press release.

With that, I'll now turn the call over to Kevin Pascoe to discuss our portfolio. Kevin?

Thank you, John. I'll concentrate my comments on our major asset classes and operators as well as business development and pipeline activity.

Starting with our senior housing needs-driven portfolio of 92 properties. This group has experienced the most disruption from the pandemic and has been where most of our portfolio optimization efforts are focused. As Eric noted, we completed approximately $214 million in senior housing dispositions and have restructured a couple of leases with large tenants, including Bickford.

We restructured the Bickford lease on schedule with annualized rent for the portfolio set at $28 million. On a trailing 3-month basis, the portfolio's lease coverage is above 1x. And we expect that to trend higher as sales and leads have been improving.

We are still in the process of selling some Bickford buildings, which will improve cash flow to the enterprise and lessen the need for future assistance. That said we did not provide any rent concessions for Bickford in April. And we are not forecasting any concession for May.

We are determining the appropriate level of repayment for their deferral balance and are targeting a minimum repayment of $3 million annually with reductions of up to $6 million contingent on Bickford meeting specific performance targets and completing certain property dispositions.

On April 1, we transitioned 6 legacy holiday properties to Merrill Gardens and 9 properties to Discovery Senior Living, both of which are joint ventures under Senior Housing Operating Model or SHOP.

Transitions are generally disruptive. But we are optimistic based on early results and feel confident that the annualized NOI contribution will be in the low to mid-teens, with future incremental upside of $6 million to $8 million.

The 13 CCRCs in our portfolio, which account for 30% of our annualized cash revenue net of deferrals, have performed great. SLC, our largest tenant, had EBITDARM coverage of 1.18x, which actually was an increase from 1.1x in the prior period when excluding PPP loans.

Coverage in our other CCRCs declined year-over-year, but was still comfortable at approximately 1.57x. The skilled nursing portfolio, which represents 35% of annualized cash revenue, net of deferrals continues to have solid EBITDARM coverage at 2.71x, including 3.61x at NHC and approximately 1.9x for other operators.

This resilience is primarily attributable to NHC and Ensign, which represent approximately 75% of the SNF portfolio. Our other 5 SNF operators under leases have received minimal rent concessions since the pandemic began. And we did not provide any assistance in April.

We are hopeful that CMS' final reimbursement rule is more favorable than the proposed rule. But we still don't expect the overall health of our SNF operators to materially change, if that is not the case.

Regarding recent business development, we announced a new construction loan with Encore Senior Living for $28.5 million in the first quarter and just exercised our purchase option with Encore for a 53-unit AL memory care property in Wisconsin for $13.3 million.

We also transitioned 3 properties in Illinois that were under NOI-based leases to Encore under a 15-year master lease, which will see rent ratchet up to $1.5 million annually starting in year 3.

We funded $3.4 million net under our mezzanine loan with Montecito during the quarter, bringing the total balance to $15.8 million on the $50 million commitment. We are starting to see an improvement in the pipeline, including shorter-term financing deals and to a lesser extent, longer-term triple net lease deals as we'd still characterize the current environment as a seller's market.

We are seeing more radio-type opportunities following our announcement on the Merrill Gardens, the Discovery joint ventures. While we see these structures as another avenue for growth in the senior housing industry, the near-term focus is on investments in our own organization to ensure we have resources in place that will make SHOP as steady NOI contributor.

Said another way, we need to make sure we get these joint ventures right before looking to expand the platform.

With that, I'll hand the call back over to Eric.

Thank you, Kevin. We're grateful to be turning the page on this chapter of our history as we look to take advantage of our strong financial position to reignite our growth rate.

Before turning the call over to Q&A, I'd like to welcome Tracy Colden, as the newest addition to NHI's Board of Directors, which she will be joining on June 1. We conducted a nationwide search and Tracy really stood out as the best fit. And we are really pleased to have her unique perspective in the boardroom.

Operator, we'll now open the line for questions.

(Operator Instructions) Our first question is from the line of Rich Anderson with SMBC.

So on the Bickford buy or payback of the deferrals, just so I understand, it's $3 million a year, but a sort of a monthly installment up to a total of $3 million per year at a minimum. Is that the right way to think about it?

Rich, it's Kevin. That's the right way to think about it. What we're looking at right now is kind of the formula and timing of the payment. So there -- as they continue to increase performance, they will have a minimum payback. And then to the extent they're doing better than that, they will be paying more. But for now, what we're targeting is that $3 million annually number.

Okay. And then for the first quarter, you said $9.8 million in concessions and maybe this is similar, but can you define concessions? Are those all deferrals or a combination of deferrals and abatements. Maybe you could just clarify that? Or is that just the Bickford restructure to finance more?

Rich, this is John. It's both. So roughly, you can see it in Page 20 of our supplemental.

If it's there, then I could find it myself. Okay. 79.7% collection in the first quarter, 94.1% collection in April. Can you reconcile that for me again what -- would we expect the second quarter to average to something well below 94.1% as the month plays itself out, just any clarification there?

Sure. This is John again. So, hopefully not and what you're seeing there are some of the effects from the adjustments we're making to long-term leases. And so as we do that, obviously, collections should improve unless we have additional deferrals or abatements that we didn't expect. So that's the way I would think about it, characterize it.

Okay. And last for me. Recognizing the Bickford restructure and all the work that went into that, what is the magic behind 4 master leases?

And was there any thought to simplifying the Bickford relationship and sort of consolidating into something like one master lease? Or is there some real benefit to breaking them out into 4 separate one?

Well, let me take it initially because one reason is we have some of the properties secured by debt and the requirement there is to separate those properties into a different lease structure. Then I'll turn it back over to Kevin for the rest of it.

Sure. I mean the big part that John hit on already is these had different elements of debt to them over time, which NHI is working on. There was HUD originally, there's Fannie dead on some. And then part of it is just a function of acquiring different portfolios over time. So yes, there is a consideration given to reducing it down. We're still working through some pieces with them. But simplification is always a priority for us. So that would still be on the table in the future. But for now, we're keeping them in their buckets, partly for debt reasons, but partly just to kind of keep things status quo while we work through the issues. And then once we kind of get to the end and have a recasting of the relationship when we do a fair market, that would be likely something we'll have on the table.

And Kevin, maybe just one quick one for you. You're expanding RIDEA now that you've gotten the holiday transitions done. What percentage of your SHOP -- excuse me, what percentage of your senior housing portfolio appears at least a potential for a conversion from triple net lease to RIDEA. What's the opportunity set there?

Well, I would say we've looked at it more from a new business perspective than we have from a conversion perspective to date. That's not to take it off the table. If there's a good opportunity for NHI to capture some upside, we will absolutely have those conversations. But I think about it more as a tool in the tool belt from an acquisition and relationship building perspective at this point in time.

We have a question from Austin Wurschmidt with KeyBanc Capital Markets.

So you guys mentioned for the 15 holiday assets that were transitioned to reach kind of that low to mid-teens NOI range annualized, I believe. So what was the quarterly run rate for those assets, the quarterly NOI for those assets in the first quarter? And what are you assuming in guidance that that ramps to by the end of this year?

I guess I'll take that one. This is John. So we haven't really given you that information about the first quarter. There was a lot of noise in the first quarter. I don't know that, that would be a meaningful number to provide you. For the second quarter, though, which is more meaningful, what you'll see is on -- roughly along that run rate that you just mentioned. However, it will be somewhat staggered because there'll be a little bit of transition effects in the second quarter. But we clearly see it ramping in the third and fourth quarter to get to that number that we've been talking about that you just mentioned. So I hope that helps.

No, that is helpful. And then as you look to -- as you look to restructure these deals, I don't know if this has been provided or not but are the management fees are you basing those on revenue or NOI with these new operator relationships?

This is Kevin. The management fees are based on just revenue and it's a typical market management fee. What we've done with these is create a joint venture where they participate in the upside, but it's not through a management fee structure. It's more through an earn-out and valuation of the property over time plus sharing of cash flow down the road. But that's as a function of their, co-invest, not just the management of the building.

That's helpful. And then, just maybe talking a little bit about the investment backlog. You mentioned it's starting to build. Any sense on sort of timing or volume as we think about sort of match funding that with the dispositions and then how the investment backlog breaks down maybe by product type that you're targeting?

Sure. So this is Kevin again. We remain opportunistic. And I think that's just how NHI has been in the past is we continue to work relationships and see where opportunities come up and where that marries up to be able to match fund it would be amazing. But frankly, that's not always how deal flow works. It's a little more choppy. And I would still characterize like I said in my prepared comments that it's still a bit of a choppy market. We are starting to see some more deal flow, as you say, looking at various opportunities on both the equity and debt side. We did close on a couple of deals with Encore. So again, making some inroads and servicing our existing relationships. And we still have commitments to fund throughout the year.

So you'll still see a reasonably steady level of investment by NHI servicing those existing commitments. And then we're still looking for new opportunities, but we're being patient there.

(Operator Instructions) We do have a question from Omotayo Okusanya with Mizuho.

Just a couple for me. Bickford, I don't know if you can share any more details just around the formulation that helps to determine what the monthly minimum payments will be? I mean, just kind of give us a very high level of how you kind of determine that with them. And also exactly what circumstances they get kind of that $6 million credit of the $26 million of deferrals that are still out there?

Omotayo, it's Kevin. From the incentives perspective, it's really around incentivizing them to do things that we would like to see that organization get to very broad strokes. It's around at an enterprise level, getting to a portfolio occupancy. It's getting to a portfolio margin. It's being able to complete some of the dispositions that we've been working on. There's some -- we have some purchase options with them. So there's some discussion around how those get treated and maybe some a win-win or a share depreciation scenario as it relates to some of those buildings. So NHI gets a good purchase price and they get some relief.

So there's a few things that we're talking about there that would be really help everybody. And then, on the formulation of the payback, that's really what we're saying is that's what we're working on now is when does those minimum payments start, what does the formula look like. We have all sketched out in terms of what the formula looks like based on the production of NOI from NHI's portfolio subset and how that gets paid over. What we're really looking at is the pro forma, the lease-up schedule and when the hard minimum payments would come up and what those bullets might look like because we want to make sure we do it thoughtfully, where we're not getting back into a place where having to recast anything.

So I would tell you that through the first quarter, with some of the late winter COVID spikes and some of the labor issues that we're seeing in the marketplace that moved the goalpost a bit for a lot of operators in terms of how they're thinking about leasing back up and when NOI stabilizes. So again, we're just trying to be mindful of that and thoughtful how we set the schedule. So we don't have to keep revisiting it.

And then the $1.3 million of deferrals in April to the 3 operators. Was any of that to a new operator at all?

Tayo, this is John. To a new operator that hadn't been talked about in the past, no. But I would say that some of those operators are more recent sort of phenomenon and -- we've got more work to do. But we're down to the -- let's just call it the last 10%, 15% of our optimization strategy.

That's helpful. And then last one for me, if you don't mind. Again, just with the rising rates, again, we get the EBITDA rent coverage which is helpful. But given that we don't really know the capital structure of a lot of the tenants. I mean are there any tenants where again, rising rates start to cause a real issue because they have a bunch of debt maturing, or they have high leverage? Just anything like that, that may be on your radar screen that suddenly put someone on your watch list?

Tayo, it's Kevin again. So that's a conversation that we have with all of our customers. And we try to make sure we're talking to them at least quarterly, if not monthly, or even the people that aren't being discussed time and time again here. But to our knowledge, is not there's not any significant maturities or debt recaps that are happening in the portfolio that would negatively affect the credit behind our customers. But it is a topic and something we're mindful of.

And there are no further questions at this time.

Thanks, everyone, for your interest, and we'll see you in person at NAREIT in a couple of weeks.

That concludes the call for today. We thank you for your participation and ask that you please disconnect your lines.