National Health Investors Inc (NHI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors second-quarter 2010 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, August 4, 2010.

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

Thank you. Good morning. Welcome to this National Health Investors conference call to review the Company's results for the second 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 -- actually, yesterday afternoon 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 second 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, 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 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'll now turn the call over to Andy Adams. Please go ahead.

Thanks, Tripp. Good morning to all on the call, and thank you for joining us this morning. I will cover the second-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 followed a very active first quarter with new investments totaling $16.9 million, including a strategic loan participation agreement with a leading HUD lender, a construction loan commitment, and a new leaseback transaction with an existing operator. We also completed a previously disclosed sale of two older assets that continued to bring down the average age of our portfolio.

Looking back over the past 12 months, I'm pleased with the progress we've made in FFO and dividend growth. Furthermore, since June 30, 2009, we have completed over $219 million in [neutral] investments while continuing to maintain one of the lowest leverage levels among all REITs.

As our guidance indicates, and as Justin will explain in a moment, we have clear expectations for additional investments, a strong pipeline, and conservative management of our debt.

Given the strong demand characteristic of senior housing and the demographic trends that continue to work in our favor for the foreseeable future, we are operating in a much different environment than other real estate asset collectives. It will be important for us to focus on our longstanding relationship and maintain underwriting discipline while being very proactive to [source new] opportunities. The platform we have built provides for considerable room for growth in this environment.

Finally, I'd like to highlight that the Board declared in its recent meeting a dividend for the third quarter of $0.605 per share. This represents an increase in the annualized dividend from $2.30 per share to $2.42 per share. Our goal is to continue growing the dividend, but at a pace that allows us to gradually bring down our payout ratio.

We are pleased to continue delivering a solid income return to shareholders through our dividend and our constant, the growth strategy we are executing, will help us deliver a well-balanced total return.

With that, I will turn the call over to Roger Hopkins 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 second quarter of 2010 rose 22.8% over the same period of 2009, as a result of our new investments in real estate and mortgage loans in late 2009 and 2010.

In the second quarter of 2010, we invested $11.5 million in real estate and $5.4 million in mortgage loans. Normalized FFO for the second quarter of 2010 was $19,255,000, or $0.70 per basic and diluted share, compared with normalized FFO of $15,693,000, or $0.57 per basic and diluted share in the second quarter of 2009.

Normalized FFO for the second quarter excludes $573,000 in recoveries of previous write-downs and $40,000 of other one-time items. Normalized FFO for the second quarter of 2009 excludes recognition of income of deferred credits of $1,493,000 and $141,000 of other one-time items.

Net income for the second quarter of 2010 was $19,189,000, or $0.69 per basic and diluted share, compared with net income of $15,415,000, or $0.55 per basic and diluted common share for the same period of 2009. A reconciliation of our net income to FFO and normalized FFO is included in our earnings release.

Our revenues for the second quarter of 2010 were up 30.8% to $19,248,000, as rental income increased $5,528,000. The rental income increase in the second quarter is primarily due to our new real estate investments in late 2009 and 2010, generating rental income of $5,307,000, straight-line rental income of $898,000 for the second 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. Revenues from these facilities were $1,167,000 and $1,250,000 in the second quarter of 2010 and 2009, respectively.

Our mortgage interest income for the second quarter of 2010 decreased 38.2% to $1,602,000. We received $922,000 less interest income during the second quarter from Care Foundation of America, as we acquired our six Florida nursing facilities on February 1 of this year.

Interest income from our existing mortgages decreased by $341,000 in the second quarter of 2010 when compared to the same period in 2009, due to normal amortization of our loans, final maturities, and early payoffs. Interest income from new mortgage investments was $275,000.

Our expenses for the second quarter, excluding recoveries of previous write-downs and non-operating items, increased to $4,580,000 as compared to $3,541,000 in the second quarter of 2009. This increase is due mainly to greater depreciation expense of $1,163,000 associated with our new real estate investments in late 2009 and 2010.

Non-operating income was down 24.4% to $1,285,000, as we maintained lower cash deposits that generated less interest income as a result of using available cash reserves to fund our real estate investment activity.

Our interest expense and amortization of debt-related cost increased $446,000, as we have increased our borrowings on our revolving credit facility to fund new investments.

In June 2010, we completed the sale of two skilled-nursing facilities in Texas to our current lessee for $6,247,000 in cash. These facilities were leased originally in 2005 with a purchase option. We recognized a net gain for financial statement purposes on the sale of $2,004,000. We are deferring recognition of the tax gain on the sale by utilizing the like-kind exchange rules under Section 1031 of the Internal Revenue Code.

For the six months ended June 30, 2010, our new investments in real estate in late 2009 and 2010 had similar positive impacts on our financial results. Rental income increased 45.2% from the same period in 2009 to $35,979,000.

Mortgage interest decreased 20.1% from the same period in 2009 to $3,597,000. Mortgage interest decreased $1,330,000 as a result of normal amortization, final maturities, and payoffs, but was offset partially by $424,000 in interest income received on our new mortgage investments in the past six months.

Our expenses for the six months, excluding recoveries of previous write-downs and non-operating items, increased $3,983,000 for the six months ended June 30, 2010, compared to the same period in 2009.

Depreciation expense increased $2,056,000 due to new real estate investments made in 2009 and 2010. General and administrative expenses increased $2,292,000, primarily as a result of additions to our executive management team staff in 2009 and 2010 and to one-time expenses of $490,000 related to the Care Foundation acquisition in 2010.

Non-cash stock-based compensation expense increased $1,337,000 over the same period in 2009. Out of $2,038,000 of non-cash stock-based compensation expense recorded in the first six months, $1,678,000 was recorded in the first quarter and will not recur in 2010.

Our non-operating income decreased 20.9% to $2,717,000 for the six months ended June 30, 2010, as we maintained lower cash balances, which generated lower interest income. Our interest expense and amortization of debt-related costs increased $632,000 due to increased borrowings on our revolving credit facility.

We ended the quarter with cash and marketable securities of $31,576,000 and an outstanding balance of $43,823,000 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 of only 9.1% and among the lowest of all healthcare 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. This was a good quarter for us. Strong results, the improved outlook in guidance, the increased dividend, and good deal flow. I'll also have commentary regarding our investment strategy.

As Andy mentioned, we have invested over $219 million over the past 12 months. $196 million of that was deployed by way of purchasing and leasing to the existing operator. These transactions have occurred with regional operators with strong credit and operating history that include a blend of existing tenants and new customers. 31% of our purchases are assisted-living communities, and the remaining properties are skilled-nursing facilities, acute psychiatric hospitals.

Due to the locations, age, and maintenance of the facilities that we have purchased, and the need-driven demand characteristics associated with senior housing properties, we consider the properties we have purchased to have a potential for long-term relevance in the respective markets.

A second tier in our investment strategy, and on a much more limited basis, is opportunistic mortgage investment. During the past 12 months, we have invested over $23.5 million in second mortgages and a construction loan.

While investments in mortgages are a relatively small part of our overall strategy, we feel they are a key component to expand our operator network and ultimately put NHI in position to own more assets.

In the case of the construction loan, NHI has the right to purchase the property at stabilization. Altogether, our capital deployment has netted a diversified portfolio of high-quality assets. The average initial yield on the $219 million invested over the past 12 months, 9.86%, [excluding] the fixed annual escalators that typically range from 2% to 4%.

I'd like to also note that we are continuously reviewing our existing portfolio of assets for opportunities to improve the overall credit profile of our portfolio. An example of this is the lease of eight of our properties to Emeritus Senior Living earlier this year. We upgraded the credit profile of that particular portfolio by moving it from a small private operator to a publicly traded senior housing company upon lease expiration.

We'll also continue to evaluate opportunities to prune our portfolio where appropriate and with the goal of improving upon the quality of our assets and tenants.

Turning to investment activity, we continue to have an active pipeline. The investments we completed this quarter are a good example of what we've been able to produce. The leaseback of three assisted-living facilities for $11.5 million is our second transaction with Bickford Senior Living, a strong operator.

Facilities are very well maintained and located in solid markets. One of the facilities was built in 2005, and the other two were built in 1998.

The loan participation agreement with Capital Funding Group helps us gain exposure to the HUD financing market with one of the leading HUD lenders and one that owns a bank. We've already funded $1 million through this agreement and continue to review other opportunities that Capital Funding is bringing to us.

In most cases, we will be participating in a secondary mortgage, or B-notes, with Capital Funding as the first mortgage lender. We will focus primarily on the bridge-to-HUD financing opportunities and underwrite each loan as stringently as we would a purchase leaseback transaction.

The strategic nature of the agreement is that it opens the door to other financings we might engage in or potential relationships that might be created with other borrowers.

The construction loan commitment for Sante' Mesa's Construction and development of a transitional rehabilitation center in Mesa, Arizona, is an interesting opportunity for us. The $13.9 million commitment includes $11.9 million for the construction loan and an additional $2 million when certain operating metrics are achieved.

NHI also has the right to purchase this facility at stabilization. This particular facility will specialize in Medicare-reimbursed rehabilitation care and is in very close proximity to a regional hospital and an orthopedic medical group.

Turning to our guidance for 2010, we are projecting normalized FFO of $2.71 per share to $2.76 per share, which is up from the $2.68 per share to $2.73 a share a quarter ago. The primary assumptions underlying the high and low end of this range are essentially unchanged from last quarter, but I'll touch on each of these briefly.

We've now completed a net $131 million of investments year to date. We have previously projected $30 million of investments in the second half of the year, and based on those investments that we have already closed, we are well on our way to achieving this.

The greatest variability in our range is still determined by timing -- the timing of our financing activity and timing of the additional investment activity. Might also add that our guidance factors in the loss of lease income from the $6.2 million sale of three assets to Legend.

The high end of the range still assumes that we would continue to finance our investments for 2010 through borrowings on the credit facility, which had approximately $56.2 million of availability as of June 30.

The low end of our range assumed that we pursue new debt financings from $100 million to $125 million. We continue to explore the available debt options in the market and are pleased to note that the cost of this capital has come down since the first of the year.

We still expect corporate G&A to remain in the range of $8.4 million to $9 million for the year. That range includes the expected growth in our staff and our capital raising for 2010.

On that note, I'd like to recognize the appointment of Kristi Gaines, the Chief Credit Officer, and the addition of Kevin Pascoe as our Vice President of Asset Management. Both moves reflect the continued growth in our portfolio and highlight the strength of our team.

In summary, positive trends in our businesses are continuing. We are executing well on our growth strategy, and we are proactively working to create new growth opportunities in both the near and long term.

With that, I'll turn the call over to our operator to take any questions you might have this morning.

Thank you. (Operator Instructions). One moment, please, for our first question. And our first question comes from the line of John Roberts, Hilliard. Please go ahead.

Thanks. Hi, Justin and Andy.

Hey, John.

Hi, John.

On the non-operating items -- yes, you mentioned interest or the cash declining as being the most -- biggest factor there. Is there anything else involved there other than the lower level of cash?

No, there's not, John. This is Roger speaking. That's really the main driver of the lower non-operating income.

It just seems, given that interest rates were so low, I just wouldn't have thought that you'd have that much interest income in the current quarter.

Oh, I'm sorry. Now, that's the reason for the decrease. Our non-operating income is composed primarily of dividends on our investments and marketable securities and (inaudible—multiple speakers) --

That would be the LTC preferred?

That's correct.

Any thoughts on that? I know -- I listened to the LTC conference call yesterday, and they were looking to cull their preferred. Do you guys have a strategy of what you want to do with what you have now?

Well, that investment, John -- and this is Andy -- goes back several -- well, many years, as you well know.

Yes.

And it's turned out to be a good investment for us, in our opinion. The conversion is substantially in the money. The yield's been 8.5%. And there may be something that happens down the road, but right now we're very happy and content with the performance of LTC and to maintain our position in that investment.

Okay. Justin, can you talk a little bit about what you're looking at right now as far as potential acquisitions going forward? I mean, obviously, you have a core group of properties you're in. Are you looking to go outside that? Are you looking to maybe expand what you're looking at as far as property ownership goes?

We're still generally focused on assisted-living and skilled-nursing assets. The transitional rehabilitation center that we invested in, although it has a skilled-nursing license, I would say is a little bit of a step out for us. It's going to be more short-term in nature and it'll have a much higher reimbursement on a daily basis.

So we do look at that a little differently than we do the traditional assisted-living and skilled-nursing assets. And few and far between, there might be other property types that we'll evaluate. But generally we're still moving those lower on our priority list so that we can pursue the opportunities that really fit our expertise.

Okay. And I'll ask one final question before I let other people jump in here, but what's your pipeline look like right now? I mean, do you have anything in there? What's the dollar amount of stuff that you're looking at?

I don't know that I have a dollar amount off the top of my head. I can tell you we have much more than we'll ever pursue at the end of the day. I'm comfortable with the guidance we gave. And as you recall, we gave the $30 million number after the second half of the year, after and during our -- after our first-quarter results and during our first-quarter earnings call. So we had real clear visibility on the second half. Should we or if we get ahead of that, certainly we'll update that guidance. But I wouldn't characterize our pipeline as anything but very active.

Very good. Thanks, guys.

(Operator Instructions). Our next question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Hi, good morning.

Hi, Jerry.

Hi, Jerry.

I wanted to just understand a little bit better the participation with Capital Funding. From the couple things you said, my understanding is it's basically short-term funding for bridging to HUD. Capital's doing kind of a first mortgage; you're doing sort of a sub-piece. Just a little bit more about maybe terms and rates and how you're looking at them, coverage. I'm just trying to understand a little bit better what's going on there.

I'll start with coverage. Generally, we're going to underwrite these similarly to we would an owned asset, or even a little better. The skilled-nursing assets, which are generally the ones that are doing the bridge-to-HUD financing these days, we find that they're covering the debt service to above 1.5 to 1.

In terms of the rates, our interest is 14.5% (inaudible—multiple speakers) --

Okay.

-- participation. And generally, as we look at second mortgages, we've been looking for anything from about 15%.

Generally, also, your other question was how -- the term. We're looking for three years and would have the expectation that, although HUD does typically take a long time, that three years should be plenty of time to have the loan taken out.

Okay. And like on an LTV, I mean, are you essentially doing these at 100% or you're doing some smaller amount to --

Yes, certainly not doing 100%. We have a comfort level, generally, and it depends on the specific investment, but our piece has been taking it to an 85% LTV. That's including (inaudible—multiple speakers) --

Okay.

-- of course.

Okay. So they're doing like 70 or 75, and you're taking it up from there?

That's right. And generally, we'll look at 10 to 15.

Jerry, it's Andy. I think a good way to think about it is that wherever we end up, the HUD underwriting is enough to pay off the mortgage under us as well as our mortgage. So we would not be involved in anything that's underwritten that HUD -- once they issue their permanent commitment, wouldn't take out all of the debt, including us.

Okay. And Jack Dwyer, who we know well, but he wants -- he needs a second in there because he just makes it look better with his bank and stuff. Is that --

I think, strategically, for them it just gives them another tool to attract more HUD business. And they'll have lending limits, and then to the extent that they can't cover it, we can step in and fill the void.

Okay. Let's see. And just the other thing, I mean, it seems like every -- a number of other REITs are issuing equity. You talked some about debt. Obviously, the cost equity has come down a lot as well. Do you think about that at all? Do you have an [ATM] in place? I mean, obviously, you've got very little debt out there. So how are you thinking about the relative use of capital as we go forward?

Jerry, this is Justin. We've narrowed our options down to a small handful of unsecured debt options that are relatively attractive. And in terms of equity, that would be a consideration most likely after we put some more leverage in place.

Okay. Okay, I think that's all for me. Thanks.

(Operator Instructions).

This is Andy again. It appears there are not any more questions. And so I would like to thank you for joining us today. And we look forward to seeing many of you at the NIC conference next month and speaking with you on our third-quarter call. Again, thank you very much for joining.

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.