National Health Investors Inc (NHI) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors Incorporated Third Quarter 2010 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 Thursday, November 4, 2010.

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

Thank you. Good afternoon. Welcome to this National Health Investors conference call to review the Company's results for the third 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 notice of the accessibility of this conference call on a listen-only basis over the Internet were released earlier this morning, and a 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 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 third quarter filed 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 that release.

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

Good afternoon, everyone, and thank you for joining us. On the call today we will cover the third quarter highlights. Roger Hopkins, Chief Accounting Officer for NHI, will talk about our financial results, and Justin Hutchens, our President and Chief Operating Officer, will discuss our investment activity and 2010 guidance.

We continue to take advantage of a favorable operating environment for senior housing. Our results demonstrate the accretive acquisitions we have sourced as well as the solid performance of a portfolio backed by strong operators.

On the financial front, we've created a strong foundation to continue our growth on an accretive basis with a new term loan and credit facility. As Justin will cover in more detail later, there is a tremendous amount of activity going on in our sector. I think it's important that our investors hear that the hallmarks of NHI's investment philosophy -- patience, conservative underwriting, day-one accretion, and our commitment to provide strong total returns and a steadily growing dividend remain unchanged.

There is an optimal balance between opportunistic investments and prudent financial discipline. We believe that we have struck the right balance and will continue executing that strategy.

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

Thanks, Andy. Good afternoon, everyone. My comments this afternoon 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 third quarter of 2010 rose 18% per share over the same period of 2009 as a result of our new investments in real estate and mortgage loans in late 2009 and 2010. For 2010, we have funded $98.4 million in real estate and mortgage loans, plus converted a mortgage loan with a balance of $22.9 million to an owned asset.

Normalized FFO for the third quarter of 2010 was $20,025,000, or $0.72 per basic and diluted share compared with normalized FFO of $16,900,000, or $0.61 per basic and diluted share in the third quarter of 2009. Normalized FFO for the third quarter excludes $2,000 in gains on the sale of marketable securities. Normalized FFO for the third quarter of 2009 excludes collection and recognition into income of past-due rent of $2 million, past due interest of $654,000, and smaller items totaling $141,000.

Net income for the third quarter of 2010 was $17,334,000, or $0.62 per basic and diluted share compared with net income of $17,473,000, or $0.63 per basic and diluted common share for the same period in 2009.

A reconciliation of our net income to FFO and normalized FFO is included in our earnings release.

Excluding the effect of collection and recognition into income of past due rent and interest in the third quarter of 2009, our revenues for the third quarter of 2010 were up 26% as rental income increased $4,402,000. The rental income increase in the third quarter is primarily due to our new real estate investments in late 2009 and 2010 generating rental income of $3,944,000.

Straight line rental income was $739,000 for the third quarter. Rental revenues excludes six skilled nursing facilities in Texas that we plan to sell, as they are classified as assets held for sales in our balance sheet and as discontinued operations in our income statement. Revenues from these facilities were $1,188,000 and $1,250,000 in the third quarter of 2010 and 2009, respectively.

Mortgage interest income for the third quarter of 2010 decreased 18% from the same period in 2009, primarily due to normal amortization of our loans, final maturities and early payoffs.

Our expenses for the third quarter increased to $4,280,000 as compared to $3,700,000 in the third quarter of 2009. This increase is due mainly to greater depreciation expense of $837,000 associated with our new real estate investments in late 2009 and 2010 but partially offset by lower legal costs in 2010.

Non-operating income was down 33.1% to $1,241,000 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 costs increased $453,000 as we have utilized borrowings on our revolving credit facility to fund new investments.

For the nine months ended September 30, 2010, and our new investments in real estate in late 2009 and 2010 had similar positive effects on our financial results. Excluding the effects of collection and recognition into income and past due rent and interest in 2009 and 2010, rental income increased 36.6% from the same period in 2009. Mortgage interest decreased 19.5% as a result of normal amortization, final maturities and payoffs.

Our expenses for the nine months excluding recoveries of previous writedowns and non-operating items, increased $4,561,000 for the nine months ended September 30, 2010, compared to the same period in 2009. Depreciation expense increased $2,891,000 due to new real estate investments made in 2009 and 2010.

General and administrative expenses increased $2,357,000 primarily as a result of additions to our executive management team and staff in 2009 and 2010 and to one-time expenses of $490,000 related to the CARE Foundation acquisition in 2010.

Noncash stock-based compensation expense increased $1,427,000 over the same period in 2009. Out of $2,203,000 of noncash stock-based compensation expense recorded in the first nine months, $1,678,000 was recorded in the first quarter and will not recur in 2010.

Our non-operating income decreased 25.2% to $3,958,000 for the nine months ended September 30, 2010, as we maintained lower cash balances, which generated lower interest income.

Our interest expense and amortization of debt related costs increased $1,087,000 due to increased borrowings on our revolving credit facility to fund new investments. We ended the quarter with cash and marketable securities of $23,305,000 and an outstanding balance of $28,234,000 on our $100 million revolving credit facility.

We have a low debt-to-total book capitalization of only 6% and among the lowest of all REITs.

I'd now like to turn the call over to Justin Hutchens to talk about our investment portfolio, our new credit facility, and our guidance for 2010.

Thank you, Roger. Good afternoon, everyone. This was a quarter marked for its strategic significance under the surface. We focus on asset management of the portfolio, building our acquisition pipeline, and ensuring that we have an appropriate capital structure to support our projected growth. The end result was continued growth and normalized FFO, an updated outlook for the year, and a more attractive and flexible capital structure.

We closed the financing today that was structured to give us more flexibility to closely match our investment pace. We don't want to raise capital that we can't deploy in short order, which led to the election to term out the $50 million of our credit facility with a new five-year term loan, fixed debt to 3.98%, and a new $50 million revolver at LIBOR+250 maturing in three years to replace an existing $100 million facility maturing in 2011.

The new facility also has a $100 million accordion feature that again creates more flexibility, but ensures we have access to the capital, if needed.

Given the news recently around the $4 billion in large senior housing portfolio deals announced in our space this quarter, I think it's worth a refresher on the type of investor we are. We are patient investors focused on safe and systematic growth of the dividend. Our growth orientation is certainly more aggressive when compared with years past, but we haven't changed the core of who we are. We are opportunistic while remaining disciplined. You will not find us sacrificing returns or credit risk for the sake of growth. Our investments must be accretive from day one.

Specifically, our third quarter investment pipeline equaled $1.1 billion of which we have identified roughly $100 million as high priority, and it includes investments that generally meet our underwriting criteria. We'll likely close $10 million to $20 million of the priority pipeline by year-end, and we'll continue to pursue the rest of the pipeline.

So you can see we're getting a lot of looks, but we remain selective.

Turning to our guidance for 2010, we have tightened the bottom end of our orange to normalized FFO of 2.73 to 2.76 per share, which is up from the 2.71 on the low end a quarter ago and represents 17% to 18% growth on a per-share basis. Results this quarter allowed us to narrow the range, and we have also changed a couple of assumptions based on our projected fourth quarter activity.

We have completed and/or committed $131 million of an investment through September 30. Our guidance includes a total investment volume of $131 million to $150 million of investments for 2010. The timing of these remaining investments is likely to be late in the quarter, so there will be very little impact from these in the 2010 results. We'll get the full benefit in 2011.

Our range reflects the decision to finance our investments through the new term loan and borrowings on the credit facility that I mentioned a moment ago.

Corporate G&A is expected to be in the range of $8 million to $8.5 million for the year, reflecting the growth in our staff that has occurred through the year in capital raising costs.

In summary, we expect a solid finish to the year in terms of operating performance and investment activity. The trends remain positive, and we remain disciplined in an increasingly competitive environment. With that, I'll turn the call over to our operator to take any questions that you might have for us this afternoon.

Thank you. (Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Just a couple of nitty-gritty things first. On the line on the -- the new line -- is there a floor on LIBOR? I think you had one on the old one, or is there not a floor on LIBOR?

There is no floor on LIBOR.

Okay. And how much do you have out on the -- we didn't have as much on the line as the new term. So is there some unused -- obviously, you've drawn the whole 50. Is there available cash then that's gone up based on the -- on drawing the term? Or am I just thinking about it wrong?

We actually have 90 days to draw the $50 million. So we anticipate within the next 90 days that --

You'll have money -- okay. Okay. Okay, that's helpful. And the LTC preferred, if it hasn't already, the interest rate on the common, on the conversion, starts sneaking above the preferred. Any thoughts about either converting or what you would do with that or are you happy just to leave it as is?

Still thinking.

(laughter)

Okay.

Jerry, still thinking and always thinking.

Okay, all right, we'll leave it at that. That's fine. There were a couple of cost things just on the quarter, and I think you touched on this, maybe, with your guidance. But I think G&A was a big lower. You were expecting to add people. You're not going to maybe add people in the fourth quarter. I'm just trying to understand. And there were a couple of other just small items that -- expenses were a little bit lower than us, and I was just wondering if we could get a little more color on that stuff.

Jerry, this is Roger. I think, as we were able to view the last quarter, other than perhaps some costs associated with the new credit facility, we were able to get a better view of what our G&A costs would be in the last quarter. So that's why that has come down a bit.

And your 8 to 8.5 is a good number for the year as a whole?

Yes.

Okay. Is the run rate for the third quarter a good number or you do expect some additions to drive it up in 4Q?

We think that there will be some costs associated with the credit facility and other capital-raising costs that we have. So it will be a bit higher in the fourth quarter. It will come in between 8 and 8.5.

Okay, all right. And then discontinued ops -- there was a little bit more earnings than I think we have. These are sort of nitpicks, but they make a little bit of difference in terms of a penny or two. Is that something that's likely to continue or come back down?

I would say that's a good run rate for revenue from discontinued operations. It was 188 for the quarter.

Okay. And if you're going to draw the term -- if you can just clarify where you are now on cash, and is there anything out on -- there's nothing out on the line. Just where are we -- again, I'm just trying to get the fine-tuning for what that interest costs are going to look like for 4Q?

Well, Jerry, this is Roger again. We are able to pay down our line of credit through available cash flow on a monthly basis and then draw that again for dividends and for investments. And so as Justin has said, within the next 90 days we think that we will be around $50 million, and then we'll draw on the term loan.

Okay. And you're running the -- basically, you're running it up on the -- is the existing -- the new line is fully in place so you're drawing it up on the new line or the old line until the term goes into effect?

Yes, in essence, we're drawing on the new line. We've got the capacity there, and then we'll just pay the revolver off with the term loan.

Okay, yes. Sorry to be --

And still have the revolver in place that way.

Yes, yes, I understand. It's just that the interest rates are a little bit different, so I'm just trying to make sure that I'm clear on it. Thanks.

And just one more, maybe, if I could. Are you still there?

Yes.

I understood your comments about acquisitions and discipline and I certainly understand where you're coming from. TRS, under any circumstances, something that you would take a look at? Or probably more likely to just -- to do traditional leasebacks?

Jerry, this is Justin. We actually have entertained the TRS structure on a specific acquisition we pursued. We didn't win the deal, but I think when you have the combination of high-quality assets and an established high-quality strong credit operator to partner with, it can make some sense. And one of the aspects we like about it is that it could help us to compete a little bit better on pricing because of the potential upside that they get from the operations aspect of it. But it's not something that we're aggressively pursuing. It's just if all the stars align, and the perfect assets and perfect operator lineup, we'll consider it.

Okay, okay. And do you think there's a minimum size for going through that effort in terms of how big it would have to be?

I don't think so. The opportunity that we considered, the operator wanted to use the structure as a growth vehicle. So it was small, relative to us and to the operator's total size involved, which is different from The Atria and the Merrill Gardens where virtually the whole company is going into the structure. This would have been more of an acquisition vehicle. So the size wasn't really a consideration.

(Operator Instructions) Brandon Austin, Benator.

Hey guys, can we just -- what kind of cap rate are you guys looking at nowadays when you buy stuff?

This is Justin. There's a wide range of cap rates out there in the assisted living space. I'll start with skilled nursing. The skilled nursing cap rates have been the same for 15 years. They've been basically in a range of 12 to 14 caps, and everything we've seen is really right within that range.

From a lease cap rate perspective, 10% on a skilled nursing asset. We think that market is still there or somewhere around 10.

In the assisted living space, the cap rates have been more aggressive. There's the large portfolio deal that went for six and seven caps. We don't get involved in that market. That's really not our market. We're looking at smaller one-off opportunities. Both tend to be better cap rates closer to 10, even low double digits. From a lease rate standpoint, 8.5 to 9.5 on assisted living asset is still out there for us. Although I have to say the assisted living market is certainly getting more aggressive and more competitive.

When you guys are looking at how competitive rates are, to what extend can you guys use your balance sheet at this point? I guess you're getting to the point where your net cash is starting to move toward zero, even after the security sale. So before it was kind of like we can only get 1% of our cash, so it's kind of easy to justify stuff. Now you're going to have to pay "x" percent on your debt. So does that crimp your model a bit? Or how do you guys look at that?

Well, our cost to debt capital is very low. So we feel comfortable that we can get a fairly aggressive spread over our cost of capital with the investment that we have in our pipeline. So the market, from that standpoint, is still very good.

Do you have a sense of how much excess liquidity you guys have or you might have if you wanted to use it?

Well, we have -- if we go with our earlier commentary, we would have put away $50 million on the term loan. We would have an additional $50 million available on the revolver, and then an accordion feature that can grow that revolver another $100 million. So altogether, you're between $150 million to $200 million, if you want to look at it from that perspective. We also have marketable securities. Those are available as well. But with the cost of debt capital being so low, we're pursuing that route.

Okay. And then looking forward to next year -- I know it's early -- but do you have a sense of -- I guess you guys said you're spending $130 million, or investing $130 million this year. Do you guys have any sense of is that a good number to use, going forward, or is this an exceptional for you in terms of investing?

Well, we're going to give our guidance for 2011 on the next conference call. And we do want to evaluate our deals by investment basis. We tend to be selective. So based on the size of our pipeline right now, we do have a lot to look at and evaluate, and we'll have a better feel for that in a couple of months. But I guess the best answer I can give to you is that we have plenty to work on, and anticipate having more growth. We just haven't decided how much yet next year.

Let me just add to the availability of capital that the Company might have question. Just -- there's other mortgages out there that potentially could be paying off in a high probability over the next 12 months. It could be a shorter period of time that could yield a bigger amount of dollars to the Company as well.

Okay, that's what I was referring to, actually, was potential liquidity as opposed to what you actually have contracted with your banks right now. Thanks.

Right, okay.

(Operator Instructions) And there are no further questions from the phone lines at this time. Mr. Adams, I will now turn the conference back over to you to continue with the presentation or closing remarks.

Well, that is the conclusion of the presentation, but we certainly appreciate everybody's time today and thank you very much for joining us. We look forward to speaking with you on our fourth quarter call. And, with that, we'll sign off.

Thank you. And, ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.