National Health Investors Inc (NHI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the National Health Investors Incorporated fourth quarter 2009 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Monday, February 22, 2010.

I would now like to turn the conference over to Mr. Tripp Sullivan from Corporate Communications. Please go ahead, sir.

Thank you, Frank. Good morning. Welcome to this National Health Investors conference call to review the Company's results for the fourth quarter 2009.

On the call today will be Andy Adams, Chairman and Chief Executive Officer; Justin Hutchens, President and Chief Operating Officer; and Roger Hopkins, Chief Accounting Officer. The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were released earlier this morning. The press release has been covered by the financial media.

As we start, let me remind you that statements in this conference call that are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risk 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 and consider the various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's annual report on Form 10-K for 2009 filed earlier this morning. Copies of these filings are available on the SEC's website at www.SEC.gov or NHI's website at www.nhinvestors.com.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company's earnings release and accompanying tables or schedules, which has been filed on Form 8-K with the SEC this morning. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release.

I'll now turn the call over to Andy Adams. Please go ahead.

Good morning and thank you for joining us on today's call. I will cover the fourth quarter and full year highlights. Roger Hopkins, our Principal Accounting Officer, will talk about our financial results; and Justin Hutchens, President and Chief Operating Officer, will discuss our investment activity and growth strategy in more detail.

This was another successful year for NHI and I'm pleased we ended the year on such a strong note. During 2009, we improved the growth profile of the Company with a solid investment pace, and enhanced our senior leadership with the addition of Justin as President and Chief Operating Officer.

Turning to our investments. We completed two leaseback transactions of four skilled nursing facilities and five assisted living centers during the year for a total of $84 million invested. We also resolved the distracting litigation with Care Foundation of America in December with the agreement and subsequent acquisition of six skilled nursing facilities for a total of $67 million, with an annual lease payment of $6.2 million.

The year has begun in a very positive manner. We closed on a $100 million revolving credit facility with Regions Bank in January, and completed the purchase of the six skilled nursing facilities in Florida earlier this month. Both provide a solid base on which to build during the year.

Finally, I would note for 2009 that our payout ratio decreased from 103% to 87%. Furthermore, we continued to pay out strong returns to our shareholders in 2009 in the form of dividends. We declared a total of $2.30 per share in dividends, which includes a special dividend of $0.10 per share in the fourth quarter. We expect to continue growing FFO and the dividend in 2010. These have been and will continue to be the key drivers to improving our investors' returns.

With that, I will turn the call over to Roger to discuss our financial results.

Thanks, Andy, and good morning. Normalized FFO for the fourth quarter of 2009 was $16,650,000, or $0.60 per basic and diluted share compared with Normalized FFO of $15,468,000 or $0.56 per common and diluted share in the fourth quarter of 2008. Normalized FFO for the current period excludes $1,944,000 in gains and recoveries of previous write-downs on the sale of marketable securities. Normalized FFO for the fourth quarter of 2008 excludes asset write-downs and realized losses on the sale of marketable securities of $1,458,000 and other one-time items totaling $1,313,000.

Net income for the fourth quarter of 2009 was $16,291,000 or $0.59 and $0.58 per basic and diluted share, respectively, compared with net income of $13,367,000 or $0.50 and $0.49 per basic and diluted common share for the same period in 2008. A reconciliation of our net income to FFO is included in our earnings release.

Our revenues for the fourth quarter of 2009 were up 12.4%, to $16,329,000 on the strength of a $2,182,000 increase in rental income offset by an expected decline of $378,000 in mortgage interest income, due to the scheduled amortization of our mortgage loans and loan payoffs during 2009. The rental income increase is due primarily from the addition of nine facilities to our lease portfolio since the fourth quarter a year ago. In addition, we recognize rental income on a straight-line basis over the term of the lease for financial statement purposes.

The decline in mortgage interest was expected due to the normal amortization of our loans. The scheduled loan maturity is in one lone pre-payment of $2,978,000 during the first quarter of 2009. These revenues exclude six skilled nursing facilities in Texas that we are negotiating to sell, as they are classified as assets held for sale on our balance sheet and as discontinued operations in our income statement.

Our expenses were up for the quarter by 12.3% to $4,327,000 due mainly to depreciation associated with the acquired facilities previously mentioned.

Non-operating income was up 62.5% to $3,289,000, as we recognized gains on the sale of marketable securities and recoveries, offset by lower interest income on our bank deposits. For all of 2009, Normalized FFO was $64,341,000 or $2.33 per basic and diluted share, compared with Normalized FFO of $63,668,000 or $2.29 per common and diluted share for 2008.

Normalized FFO for the current period excludes the collection of past due rent and interest from two customers, totaling $2,654,000; recoveries of previous write-downs and gains of $3,480,000; the recognition into income of canceled liabilities totaling $1,493,000; and other one-time income items totaling $626,000. Normalized FFO for 2008 excludes asset write-downs and realized losses on the sale of marketable securities of $4,461,000; the recognition into income of canceled liabilities totaling $4,121,000; a restricted stock forfeiture of $566,000; and other one-time income items totaling $1,313,000.

Net income for 2009 was $64,229,000 or $2.33 and $2.32 per basic and diluted common share, respectively, compared with $57,510,000 or $2.08 and $2.07 per basic and diluted common share for 2008. A reconciliation of our net income to FFO is included in our earnings release.

Our revenues for 2009 were up 10.7% to $64,221,000 on the strength of a $6,737,000 increase in rental income, of which $3,234,000 related to income associated with leases of our newly-acquired facilities; $2 million related to the collection of past due rent from a major tenant; and the remainder related to percentage rent and rent adjustments. Mortgage interest income decreased by $521,000 due to scheduled amortization of our loans, loan payoffs and maturities in 2009.

Total loan principal collections during 2009 amounted to $19,630,000. Our expenses were up for the quarter by -- for the year by 21.9% to $15,743,000, due mainly to depreciation associated with the acquired facilities during 2009; additions to our corporate management and staff; and legal expenses associated with the CFA litigation, which has been resolved.

Non-operating income was up 32.2% for 2009 to $8,581,000, as we recognized gains on sales of marketable securities and recoveries, offset by lower interest income on our bank deposits. We ended the year with no debt outstanding -- quite an accomplishment for a real estate company in this market. We will enjoy it for the moment.

Looking ahead to 2010, based on the transactions we've completed in 2009 and to date, 2010, we expect to report continued year-over-year Normalized FFO growth. We expect to initiate 2010 Normalized FFO guidance and the corresponding future investment in expense assumptions when we report our first quarter results, scheduled for May '10.

I'd like to now -- to turn the call over to Justin Hutchens to talk about our investment activity and growth strategy.

Thank you, Roger, and good morning, everyone. As Roger mentioned, we have one of the lowest leveraged balance sheet in the industry. We are equally as proud of the strength of our portfolio. We are well-diversified by operator, facility type, geography and investment.

At year-end, over 70% of the net investment value of our portfolio was in real estate properties. Almost 75% of our facilities are skilled nursing facilities, with assisted living communities accounting for 19%. A sizable chunk of our portfolio is represented by public operators such as National Healthcare Corporation, Emeritus Senior Living, Community Health Systems, Sun Healthcare, and many other regional operators.

Our portfolio is largely concentrated in markets that have experience with little to no increase in supply during the last two years. There are many reasons for our focus on senior housing and skilled nursing facilities in particular.

First off, the demand characteristics are very attractive but the demographic trends are overwhelmingly strong. The continued aging of our population and the increasing percentage more likely to utilize assisted living and skilled nursing facilities will continue to grow for years to come. I reviewed our operators and believe their credit and coverage will withstand substantial cuts. On the other hand, new supply has been muted, as most new construction has been shelved due to capital constraints.

In our opinion, both the near-term and long-term outlook are very compelling. We will continue to diversify the portfolio with private pay senior housing facilities, especially the assisted living skilled nursing facilities, with higher potential to attract private pay and Medicare patients.

Clearly, we're not the only investor in this market. There are a handful of reasons, however, why we believe we're going to continue to have success. Most of all, we shy away from the broker deals. We rely on our extensive contacts and long-standing relationships in the industry to get preferred looks at off-market or word-of-mouth referrals on one-off assets or small portfolios. Our success in 2009 and to date in 2010 bears this out.

The other piece of our unique story is that, given the relative size, we don't need large-scale deals to move the growth needle. Not having to swallow the weak assets in a large portfolio transaction also affords us the luxury of focusing on more stabilized assets, higher-quality deals, and moderate initial returns backed by strong credit. We define moderate as a targeted initial lease rate of 9% to 10%, with built-in escalators. The average yield over the life of the investment we're targeting is over 12%.

As we've noted before, we're expecting more opportunities this year than in 2009. We are seeing a better connection between bid and ask-on assets; the investment environment is becoming more active. However, let me be crystal-clear that this is not a case of slipping on a blindfold and stepping on the gas. NHI has a long history of underwriting transactions very conservatively and closely managing the credit quality of our portfolio. I would like to emphasize that we will not be stretching for volume.

In summary, we believe we have the right investment strategy for this point in the cycle; a favorable investment climate; manageable operating environment; very disciplined underwriting criteria; and ample capacity. We hope to continue generating strong returns to our shareholders in the coming year and look forward to reporting to you on our progress.

That concludes our prepared remarks and now we'll open up to any questions you may have.

(Operator Instructions). Jerry Doctrow, Stifel Nicolaus.

I had a couple just nitty-gritty things and then a couple broader questions. On nitty-gritty, was CFA mortgage income? Or how much CFA mortgage income was in your Normalized FFO?

Jerry, this is Roger. The CFA income calm during the fourth quarter was $549,000. We reported the total amount in our 10-K of $1,837,000 for the year.

Okay. But $549,000 was the number for the quarter?

Yes.

Okay. I just didn't get to it. And then, how about non-cash comp or --? Is that in --? I mean, if that's in the 10-K, I can just get it there.

Yes. We recorded the entire year's amount in the 10-K just by taking the difference between the third quarter; there was $77,000 in the third quarter -- pardon me, in the fourth quarter. And then we'll be making our decisions in respect to stock compensation for the coming year shortly.

And I guess my last -- well, sort of a little bit different than nitty-gritty. Just straight-line rents were up a little bit higher in the fourth quarter than we had seen before. I know you're giving official guidance next quarter, but just a sense of what's -- is that a good run rate? Or where do you expect straight-line rents to be as we go forward?

Well, it certainly increased on account of our acquisitions. And then when we overlay the CFA acquisition effective February 1, that's going to increase that number even more. So we'll be able to give very specific guidance on that in our first quarter call.

Okay. And I guess in terms of just some of the broader questions, it looked to us like NHC rent dropped a little bit, like maybe $1 million fourth quarter over third quarter. I don't know which of you wants to take that. I was just trying to understand if we're reading that right, and is that because percentage rent dropped or what was going on there?

What that was, Jerry, is we have classified the NHC properties a bit differently in our fourth quarter and year-end supplemental data report. You're probably ticking that number off from there. And we have 38 skilled nursing facilities with NHC and three independent living facilities. So we were able to refine those numbers just a bit in our SDR.

Okay. So it wasn't really the (multiple speakers) [move] --

There's no drop-off. There's no drop-off -- none whatsoever.

No drop. Okay, all right. And Justin, I guess I want to just come back a little bit more color on acquisition environment. Do you see it in AL, more in SNFs? Just any additional color you can give us would be helpful.

We're seeing one-off opportunities and small portfolios in both assisted living and skilled nursing. We tend to move assisted living and skilled nursing properties in our pipeline towards the top of the list that we pursue, because they're going to have the better opportunity to support a better payor mix. We're also desiring newer properties to the extent that we can source those.

Okay. And I'm assuming if you're doing more AL, you're sort of towards the lower end of your expected yields you're talking about. In terms of 9 to 10, I think you were saying was the initial yield. Is that fair to say?

I would -- not in every case. The range of 9% to 10% is safe. Typically, though, you're right; skilled nursing will run a little higher and assisted living might run a little lower. We start with a target rate of 10% and move from there in our underwriting.

Okay. And I guess the last thing maybe -- I don't know if this is an Andy question, but just sort of thinking about use of capital, you've got the credit line but it's relatively short-term. Clearly, with no debt you have the opportunity to add debt.

You've got -- if we were to go -- if we were to start adding debt at some point in the future, assuming you're making acquisitions, how would you kind of rank the choices? I mean, would you do Fannie Mae at this point? Would you do a convert? Would you do -- and is there kind of a minimum chunk of size that makes sense, so you'd move up the line to 50 or 100 or something and then do it? I'm just trying to get a little sense as we think about modeling further, how you're thinking about access to capital.

Good question, Jerry. Let's take the credit facility first. Presently, the Company is in the credit facility, which is $100 million; but the Company is into the facility for $6 million at the present time. So that leaves $94 million just with the credit facility for growth.

Now, beyond that, what are we doing? We're actually just looking at all of our options. Fair to say that in the next probably 60 days and, hopefully, even less, that we'll file an S-3, which will be there just to create all its many options as possible for the Company.

And fair to say also that we expect to file an S-3 that that will open up the equity capital market, convertible debentures, conventional debt. Then we will just continue to look at where Fannie Mae, Freddie and HUD happen to be in comparison to conventional alternatives. And just very fortunate and thankful to be able to be debt-free right now with the exception of the $6 million on the credit facility, and sit back and really be able to analyze all of the alternatives out there; then, hopefully, we'll make the right and most beneficial long-term decisions.

Okay. And if we were making assumptions that it would more likely to be debt, given that you're debt-free versus equity, do you think that's reasonable? And I don't know if I can any more -- if you ranked them today, would you have a preference?

I think that's a reasonable assumption.

Okay. I'll stop there and let someone else ask. Thanks.

John Roberts, Hilliard Lyons.

Jerry has asked most of my questions. But first of all, legal expenses? Obviously, probably high in Q4 based on the CFA deal, but any thoughts what are you going to see going forward there?

We would expect legal expenses to be less than they were in 2009. We're currently evaluating those and coming up with our best estimates for 2010. We'll be able to give more specific guidance on that in our first quarter call.

Okay. It looks like you're focusing mostly on ALFs and SNFs for acquisition purposes, but just going a little bit further beyond what Jerry was asking -- any thoughts of additional property types, other than those two areas, if they come up?

John, this is Justin. We do have other property types that land on our desk and we do evaluate those. But in this market, we're finding stabilized assisted living properties and stabilized skilled nursing facilities that are really right in our expertise. We will -- and also are giving us a yield that we're looking for, with that targeted lease rate of 9% to 10%.

Other property types tend therefore to move down the priority list in our pipeline. I wouldn't ever rule out a good opportunity, but I can say with confidence that we'll primarily focus on assisted living and skilled nursing.

All right, thanks. And finally, the six properties in Texas you're looking to sell, what's the negative expected impact on rental income there? Current value on the balance sheet and any thoughts on the values you're going to get and when they might be sold?

John, this is Roger. I will answer the financial questions and then Justin can talk about the strategy.

But the current rentals are $5 million, and for presentation in the income statement, those are shown as discontinued operations, as the accounting rules would have us to do that. And that's offset by the depreciation of expense that is taken on those facilities. They are carried in the balance sheet as assets held for sale because we do have the intention to sell them, and they have a net book value of a little over $33 million.

In terms of the second part of your question, John, we're still in negotiations on the details of the sale. The most likely buyer is the existing operator, and given the purchase price that we're discussing, feel reasonably confident that we can replace the income if not better it, as the properties sell.

Timing, of course, is going to be an issue and we're going to look for a tax-free exchange opportunity as part of that timing. So there'll be some moving parts. As we get more clarity throughout the year, we'll report on that so that you have the most up-to-date information.

Great. That's all I got. Thanks.

(Operator Instructions). [Gerald Geraghty], Morgan Stanley.

I had some more questions in terms of acquisitions. Do you have a targeted transaction volume amount for the year?

In terms of volume, it's safe to say that we're expecting a similar investment pace to what we had in 2009. What's a little different this year is we've been helped by the big $67 million acquisition, so we're a little bit more front-loaded in terms of our pace; but I would expect a consistent pace with what we saw last year.

So that run rate would be [$67 million]? Is that correct?

Well, again, timing plays a key role, but if you averaged out our acquisitions last year, we ran around $22 million a quarter. But the accretive impact is going to be heavily dependent on timing throughout the year.

All right. And is there (multiple speakers) -- I'm sorry.

Yes. Just remember that also, we've been fortunate enough to jumpstart the investment activity with a $67 million investment in the six facilities in Florida, with $6.2 million lease revenue per year.

Okay. And do you have a targeted split between mortgage investments versus equity real estate?

We don't have a targeted split, but we are moving strategically and will continue to move more work towards owned real estate. Certainly, that's our goal to continue to improve that. I think we have a pretty strong leased portfolio as it stands today and it should continue to grow.

All right. And in terms of the healthcare reform process, how has this -- the process, the fact that it's stalled, how has that affected the acquisition velocity within the space, as far as you've seen?

From our perspective, certainly, we -- there is a global environment when we're doing our underwriting. That will lead to a little bit better coverage ratio expectation if we're going to move forward with an investment. And also, we've taken a close look at our existing portfolio and feel comfortable we're well-positioned for any potential cuts that may occur in Medicare.

Okay. And one final question in terms of your operating portfolio. I was wondering if you can comment on the trends in the EBITDA coverage ratios across the subsectors in your portfolio?

Actually, great question. We don't currently report our coverage ratios. We're relatively comfortable that we're in what the industry average is. Part of our plan over this past year was to improve and increase our disclosure. We've been meeting with investors. We've had the supplemental report that has been disclosed. Certainly, this conference call is a step in that direction. We understand that's more information than some of our peers are making available. We'll continue to evaluate that and look at that in the future.

Okay. Thank you, gentlemen.

Mr. Adams, there are no further questions at this time. Please continue with your presentation or closing remarks.

Okay. There are no more questions. We certainly thank you for your participation on today's call and your interest in NHI, and look forward to speaking with you again on our next call. Thank you, gentlemen.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.