National Health Investors Inc (NHI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the National Health Investors first quarter 2010 conference call. During this presentation all participants are in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded on Monday, May 10, 2010. It is now my pleasure to turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you, Pamela. Good morning. Welcome to this National Health Investors conference call to review the Company's results for the first quarter of 2010. 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 noted to the accessibility of this conference call on a listen-only basis over the internet were released earlier this morning in a press release that has been covered by the financial media. As we start let me remind you that statements in this conference call that are not historical fact 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 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 Form 10-Q for the first quarter 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, reconciliation to 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 that release. I will now turn the call over to Andy Adams. Please go ahead.

Thanks, Tripp. Good morning and thank you for joining us. On the call today I will cover the first quarter highlights. Roger Hopkins, our Chief Accounting Officer, will talk about our financial results and Justin Hutchens, our President and Chief Operating Officer, will discuss our investment activity and 2010 guidance. We mentioned last quarter that there were many benefits to our platform, low leverage of $34 million and focus on the senior housing industry. I think that we are seeing those benefits clearly demonstrated in our results and in our outlook for the year. This was one of our most active quarters for investments in some time with over $104 million in transactions completed. In addition to the CFA transaction that we discussed on our last earnings call, we completed two lease-back transactions in California and Minnesota and closed a second mortgage on a facility in Texas.

Justin will discuss these investments in more detail, but I would like to highlight the geographic operator and investment diversity these transactions bring to our portfolio. Each is backed by strong cash flow and offers attractive yields. We have a strong platform for growth this year. We will remain active in sourcing accretive investments and further developing our pipeline. Our leverage remains among the lowest of all REITS and we will conservatively manage our debt as we execute our growth strategy. This is a favorable market for us. We will work hard to continue generating strong returns to our shareholders. On that note, I would like to highlight that the board declared a dividend for the first quarter of $0.575 per share. Our goal is to continue growing the dividend, but at a pace that allows us to gradually bring down our payout ratio. With that, I will turn the call over to Roger to discuss our financial results.

Thanks, Andy. Good morning, everyone. My comments this morning are consistent with our disclosures in Form 10-Q, our earnings press release, and our supplemental data report filed this morning with the SEC. Normalized FFO for the first quarter of 2010 rose 12.7% over the same period in 2009 as net result of our new investments in real estate and mortgage loans in 2009 and 2010. In the first quarter of 2010, we invested $100.9 million in purchases of health care real estate and $3.2 million in mortgage loans. Normalized FFO for the first quarter of 2010 was $17.174 million or $0.62 per basic and diluted share, compared with normalized FFO of $15.098 million or $0.55 per common and diluted share in the first quarter of 2009. Normalized FFO for the current period excludes $1.520 million from the collection and recognition into income of past due rent from our former tenant, RGL Development, related to eight assisted living facilities.

Effective January 1, 2010, we leased these facilities to America's Senior Living for an increase in revenue of $350,000 in 2010 over the former lease. The new lease has an initial term of 15 years. Normalized FFO in the first quarter of 2010 includes the addition of onetime items totaling $290,000. Normalized FFO for the first quarter of 2009 excluded recoveries of previous writedowns of $1.077 million, a settlement payment on a terminated lease of $642,000, and other onetime items totaling $161,000. Net income for the first quarter of 2010 was $15.943 million or $0.58 per basic and diluted share, compared with net income of $15.049 million or $0.55 per basic and diluted common share for the same period in 2009. A reconciliation of our net income to FFO is included in our earnings release. Our revenues for the first quarter of 2010 were up 39.2% to $20.449 million on the strength of a $5.674 million increase in rental income and an $83,000 increase in mortgage interest income.

The rental income increase is due primarily from our new investments in 2009 and 2010 and the resulting rental income of $3.835 million, the collection and recognition into income of past due rent of $1.520 million, increases in percentage rent of $139,000 from our largest customer, NHC, and smaller lease adjustments of $180,000. We recognize rental income on a straight line basis over the term of the lease for financial statement purposes, which totaled $605,000 in the first quarter. Rental revenues exclude the six skilled nursing facilities in Texas that we plan to sell, as they are classified as assets held for sale in our balance sheet and as discontinued operations in our income statement. Income from these facilities was $1.250 million in the first quarter of 2010 and 2009. Our mortgage interest income for the first quarter of 2010 includes $560,000 from Care Foundation of America. These facilities were acquired by us on February 1, 2010.

Excluding Care Foundation, mortgage interest would have declined $477,000 from the same period in 2009 due to payoffs of three mortgage loans in 2009 and the normal amortization of our loan portfolio. Our expenses, excluding recoveries of previous writedowns that are required to be reported as reduction of expenses, increased to $7.189 million from $4.058 million in the first quarter of 2009. This increase is due mainly to increased depreciation expense of $891,000 associated with our new real estate investments in 2009 and 2010 and to general and administrative expenses of $2.217 million. General and administrative expenses increased due to additions to our corporate management and staff in 2009, due to increased stock-based compensation expense calculated by the Black-Scholes pricing model, and due to onetime expenses of $490,000 associated with the closing of the Care Foundation acquisition.

We have typically awarded stock options during the first quarter of the year, so there is a seasonal non-cash expense associated with stock- based compensation of $1.678 million out of $1.821 million in total for the first quarter that will not occur in the next three quarters. Nonoperating income was down 17.4% to $1.433 million, as we had lower bank deposits and less interest income as a result of using available cash reserves to fund our real estate investment activity. We ended the quarter with cash and marketable securities of $26.029 million and an outstanding balance of $33.935 million on our $100 million revolving credit facility. Even with our investment activity during the quarter and the use of our credit facility, we still enjoy a low debt to total book capitalization ratio of only 7.2% and among the lowest of all health care REITS. I'd now like to turn the call over to Justin Hutchens to talk about our investment activity and our guidance for 2010.

Thank you, Roger. Good morning, everyone. I will begin with a discussion regarding our investment pipeline. I would echo what Andy mentioned earlier. This was a very active investment quarter for us. With $104 million of investments completed through the first quarter, we are off to a good start to the year. We were able to take advantage of several opportunities earlier in the year. The investments we made continue to diversify the portfolio. One transaction was the opportunistic purchase lease-back of an acute psychiatric hospital in California. Well established in the market with strong demand characteristics, the hospital offers a very attractive yield backed by a proven operator. The four assisted living and memory care facilities in Minnesota, our lease to Suite Living Senior Specialty Services, who has a number of facilities in the state and is planning to add several more.

They are a strong operator as well, and the lease provides a good initial yield with escalators. The last two investments were second mortgages we closed that are secured by one assisted living and three skilled nursing facilities in Texas and Oregon. Both loans have a fixed interest rate between 12% and 14%. We are still much busier and seeing a lot more activity in our pipeline than we did last year. There is some increased competition. However, we are still seeing several deals that are being presented as a direct referral. We rely on our extensive contacts and longstanding relationships to get preferred looks at off-market or word-of-mouth referrals on single and multiple asset portfolios. Recall that we tend to pass on the large brokered transactions as we prefer not to compete against ourselves on pricing. There are enough opportunities out there, and we are still small enough in size that we don't have to reach to do deals.

Our underwriting remains conservative. There are opportunities available in skilled nursing and assisted living with assisted living certainly more active than a year ago. There is a better connection between bid and asked than previously. Part of that is driven by the cost of capital being low. Turning to our guidance for 2010. We are projecting normalized FFO of $2.68 to $2.73 per share, representing 15% to 17% growth on a per-share basis. We have outlined in the release our primary assumptions underlying the high and low end of this range. I'd like to spend some time on those this morning. With $104 million of investments completed to date, we are projecting $30 million of additional investments that would likely be in the second half of the year. The pipeline remains active. The greatest variability in our range will come from our decision on how we finance our previous and projected investment activity; in particular, the timing of that financing.

The high end of the range assumes that we would continue to finance our investments for 2010 through borrowings on the credit facility, which had approximately $66 million of availability as of March 31st. The low end of our range assumes that we pursue new debt financings of $100 million to $125 million. We are not at the point where we want to get more specific in terms of the type of financing. We will continue to monitor the credit markets, the appropriate financing option that minimizes the downtime in deploying that capital. Finally, we are assuming that corporate G&A would remain in the range of $8.4 million to $9 million for the year. This range reflects the estimated growth in our staff and costs associated with our capital raising in 2010. These estimates also assume that the performance of our existing portfolio remains fairly consistent with revenue growth coming from previously negotiated lease escalations and the additions to the portfolio we have made over the past 12 months.

In summary, a good start to what we are projecting will be another positive year for NHI. We have some runway for executing our growth strategy and a strong platform to execute. We look forward to reporting on our progress during the year. That concludes our prepared remarks and now we will open it up to any questions you may have.

(Operator Instructions) And our first question comes from the line of John Roberts from Hilliard Lyons. Plead prose with your question.

Good morning, Justin, Andy. First question, you had a $1.520 million in past due rents you collected in this quarter. Is any of that ongoing or was that all extraordinary?

This is Roger, John. That is not expected to recur in the future. That was really the windup of our business relationship with our former tenant. That lease was due to expire on December 31. We released those facilities to Emeritus. And so by March 31, we wound up the former business relationship and they were able to pay us a sizable portion of the past due rent and we don't expect any further collections on that.

All right, Roger. So the rent from the new lease was in the first quarter numbers?

Yes, the past due rent of $1.520 million was in our first quarter number.

Yes. But the rent from the new tenants on those properties was in the Q1 numbers?

Yes. Yes.

Right. What's the cost expected on the credit line? What are you currently paying?

We are currently paying 3.5% on our borrowings under the credit facility.

And is it LIBOR based?

There is a floor. It's LIBOR but there is also a floor.

What's the spread to LIBOR?

2.5% over a 1% floor.

Okay. The legal expense, I know it's come down from, obviously, from the Q1 last year because of the getting all that litigation out of the way, but is that [283], is that a good run rate for going forward?

You are exactly right. There was litigation going on and so we expected it to be less. There is really no way to predict depending on the transactions that we do. There is really no significant expectations there for a large increase.

John, this is Justin. In our guidance we are assuming that the run rate stays the same.

Okay, Justin. How about the franchise and excise taxes? I would have anticipated they would go up a bit and it looks like they were about flat year-over-year.

There is nothing unusual in there. We accrue those on a quarterly basis and so again I would expect about the same run rate.

Okay. Justin, quick. I was scribbling down here quick and I may have missed this number. Did you put a number for expectations on acquisitions the remainder of the year?

Yes, John. It's $30 million and we are projecting that to occur in the second half of the year.

All right, so nothing in Q2?

If we have more activity, certainly on the next call we will update that, but at this time we are projecting $30 million to occur in the second half of the year.

And you wouldn't be adverse to doing more than that if it came along?

We will continue to source opportunities. Certainly we have many that they are under review. We will be conservative in our selection. And we will be opportunistic. So if the right opportunity comes along we will be prepared to take advantage of that.

Super. Thanks, guys.

Thank you. And our next question comes from the line of Jerry Doctrow from Stifel Nicolaus. Please proceed with your question.

Thanks, good morning.

Good morning.

Just a couple of things, sort of some big, some little. I guess on maybe acquisitions, sticking with that for a second. Justin, any color on the mix of assets and yield, because obviously if you do skilled it is going to be a lot less than something else. Are you kind of just assuming a mix or an average yield in your guidance?

Sure. We are seeing a mix of both skilled nursing and assisted living assets. The yield has not changed. On our previous call we mentioned a 9% to 10% starting yield. That range still holds. Typically skilled nursing will start a little higher. Assisted living might start a little lower depending on the specific opportunity. And then the average yield over the life of the lease that we see, depending on the lease terms and escalators, usually runs a little bit better than 12%.

Okay. And are you straight line, so it is 12% GAAP and the 90/10 is the cash. Is that -- ?

Yes.

Okay. Let's see. And then just on the financing, you suggest that, I think, you were going to look at options that minimize the negative arbitrage of doing the deal and not being able to reinvest. I guess I want to just get a sense of what the range of things that you are considering. Does it include like a at the market program, secured debt. Just what kinds of things do you think are out there at this point or that makes sense for you guys.

Jerry, this is Andy. We are looking at all of the options out there, as was referred to earlier. Presently we have $100 million credit facility in place with about $65 million remaining on that. We still could increase our bank debt credit facility, just as an example.

Okay.

And that -- it's just a nice position to be in when you are looking at all of the alternatives that are available to you. So with -- kind of look at that as the insurance policy on raising capital. And then in the mean time, though, before we decide to pull the trigger on any kind of permanent type of financing, we definitely will evaluate all of the alternatives out there.

Okay. Okay. And at this point nothing looks better than anything else or you are just try to keep your options open?

I certainly think the last part of your statement is very true. We trying and keep our options open. We are keeping our options open. And you know what all the options are out there. There are a lot of interesting options out there.

Okay, okay. So then a couple of technical things. We actually typically have been adjusting out transaction costs. So -- and this $290,000 of add backs I want to just clarify what was in that and then also see if I can identify transaction costs and whether you took those out or not when you normalized.

Jerry, this is Roger. We had $490,000 in closing costs specifically to the CFA transaction which we took out. We also took out $200,000 of an income item associated with our Orangeburg facility. We sold some accounts receivable that we had acquired in that initial acquisition. We thought that was certainly unusual and rare enough and so that netted down to $290,000 that you see in our supplemental data report.

Okay. So that net 200 -- I got it, $298,000 to add back. And then when you do guidance normalized, the CFA income in there, I know you have only been recognizing it sort of on a as received basis. Are you assuming it's in for the year? I wasn't quite clear.

Jerry, this is Roger again. Yes we include the CFA interest that are normalized FFO net income.

Okay. Let's see here. Okay, I think that's all.

Jerry, that's the interest.

Right, right. The interest, right. I understood. I think we have been taking it out. I Just want to make sure that we are sort of apples to apples here. That's fine. Thanks.

And Jerry, you understand after February 1st we have lease income.

Right, right, because they have switched to the new operator. Yes .

Mr.Doctrow, do you have any further questions?

No, no, that's all. Sorry.

Thank you, sir. Once again, ladies and gentlemen, if you would like to register for a question, please feel free to press the one followed by the four now. Gentlemen, our next question comes from the line of [Brandon Austin from Benator]. Please proceed with your question.

Hi, guys. Great quarter. I love the acquisition when that balance sheet tiers. I wanted to ask you guys about the balance sheet. The press release I did not get a full copy of the balance sheet. Can you guys just walk through your cash and marketable securities, including the marketable investments that you guys have. What's that stand at right now?

This is Roger. Our cash at the end of the first quarter was $4.363 million and our marketable securities is in the stock of other REITS, a total of $21.666 million. And these are high liquid.

Okay. So as you guys make acquisitions are you using that as a source of -- are you going to continue to use that as a source of funds to make your -- I mean, obviously, you need more money than just that. But can we expect that number to be drained down, that $21 million?

This is Justin. We certainly do review the performance of those assets regularly. They are income producing for us. So we will just evaluate those and keep a close eye. We did actually sell some common stock that we held in the fourth quarter of last year. And it's a regular discussion we have as we are considering our options.

And so can you guys just remind me, I think I might have missed it earlier, how much money do you guys have available on your line to make acquisitions?

We have $66 million available.

And that's the LIBOR plus 2.5% with a minimum of 3.5%?

It's a LIBOR floor of 1% plus 2.5%

Right, okay. And I guess have you guys looked at or considered -- obviously, your strong balance sheet is not something we have done in the past, but have you guys looked, I'm sure you've looked at everything, but in terms of attractive rates on say secured debt or anything like that. Do you guys ever see a need where it would make sense if you need to raise 100 or 150 as opposed to 50 or 70 to go to market rather than drawing on your line.

Yes. As I mentioned with Mr. Doctrow earlier, we are looking at all the options right now.

Okay. All right, great. Thanks, guys. Great stuff.

Thank you.

Thank you Mr Austin for your question. Mr. Adams, I will turn the conference back to you to continue your presentation or your closing remarks. Mr. Adams.

Yes, okay. Yes, operator, thank you. And thank you to all of our participants today for your participation in this call and for your interest in NHI and we will look forward to talking with all of you at the next earnings conference call. Thank you for joining us.

Thank you, Mr. Adams. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you and have a wonderful day.