National Health Investors Inc (NHI) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the National Health Investors fourth 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) I would like to remind you today's call is being recorded Thursday, February 17, 2011.

Now I have the pleasure to turn the call over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you. Good afternoon. Welcome to the National Health Investors conference call to review the Company's results for the fourth 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 in a press release that's been covered by the financial media.

As we start, let me remind you the 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 various disclosures made by NHI in its periodic reports filed with the Securities & Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31, 2010, filed this morning. Copies of these filings are available on the SEC's website at www.sec.gov or NHI's website at www.NHIREIT.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 the Company's tables and schedules which has been filed on Form 8-K with the SEC this morning. Listeners are 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.

Good afternoon, everyone, and thank you for joining us. On the call today we'll cover the fourth 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 2011 guidance.

This was another good year for NHI and an example of the benefits of our balanced approach to growth. We generated FFO per share growth of 18.5%, raised the recurring annual dividend by 7.3%, significantly improved our capital structure by terming out a $50 million bank loan for five years at $0.0398, and we still have $50 million of unused credit facility available. And lastly, we completed $141 million of transactions. We will adhere to our strategy of balanced growth in 2011, as we continue to pursue opportunistic investments and prudent finances with the ultimate goal of generating increased shareholder returns in a steadily growing dividend. In that vein, I am pleased to announce that the board has recently increased the quarterly dividend to $0.615 per share, or $2.46 per share annualized.

I will now turn the call over to Roger Hopkins, our Chief Accounting Officer, to discuss our financial results.

Thanks, Andy. Good afternoon, everyone. My comments this afternoon are consistent with our disclosures in Form 10-K, our earnings press release, and our supplemental data report filed this morning with the SEC.

Normalized FFO for the fourth quarter of 2010 rose 20% per share over the same period 2009, primarily as a result of revenues from our new investments in real estate and mortgage loans in late 2009 and 2010. For 2010 we have funded $111.4 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 fourth quarter of 2010 was $20,031,000, or $0.72 per basic and diluted share, compared with normalized FFO of $16,650,000, or $0.60 per basic and diluted share, in the fourth quarter of 2009. Normalized FFO for the fourth quarter excludes $378,000 in legal and professional expenses related to our consideration of a capital offering of either public debt or equity. Instead, we chose to enter into a new bank credit facility on terms that are more favorable to NHI. Normalized FFO for the fourth quarter of 2009 excludes $1,944,000 in gains and recoveries of previous write-downs on the sale of marketable securities.

Net income for the fourth quarter of 2010 was $16,955,000, or $0.62 and $0.61 per basic and diluted share, compared with net income of $16,291,000, or $0.59 and $0.58 per basic and diluted common share for the same period in 2009. A reconciliation of our net income to FFO and normalized FFO for the fourth quarter and year is included in our earnings release. Our revenues for the fourth quarter of 2010 were up 22% compared to the same period in 2009. Rental income increased $4,036,000 in the fourth quarter due to our new real estate investments in late 2009 and 2010. Straight line rental income was $910,000 for the fourth quarter. Rental revenues exclude the revenues from those facilities that meet the accounting criteria as being held for sale.

There are six skilled nursing facilities in Texas that we plan to sell to our current tenant, one of which was conveyed in January. In addition, we sold two medical office buildings to our current tenant this month. We plan to defer recognition of the tax gain on the sale of these properties by reinvesting the sales proceeds and utilizing the like kind exchange rules of IRS Code Section 1031. These properties are classified as assets held for sale in our balance sheet and as discontinued operations in our income statement. Revenues from these properties were $1,334,000 and 1,518,000 in the fourth quarter of 2010 and 2009, respectively.

Our mortgage interest income for the fourth quarter of 2010 decreased 24%, the same period one year ago, to $1,576,000 due to normal amortization of our loans, final maturities and early payoffs during 2010. Our expenses for the fourth quarter increased to $4,796,000 as compared to $4,169,000 in the fourth quarter of 2009. This increase is due mainly to greater depreciation expense of $752,000 associated with our new real estate investments in late 2009 and 2010. But primarily offset by lower legal and other administrative costs of $125,000. Non-operating income was down 62.5% to $1,232,000 as we recognized $1,944,000 in gains and recoveries of previous write-downs on the sale of marketable securities during the same period in 2009.

Our interest expense and amortization of debt related costs increased $289,000 as we have utilized borrowings on our revolving credit facility to fund new investments during 2010. For the year ended December 31, 2010, our new investments in real estate and mortgages in late 2009 and 2010 yielded significant positive financial results for NHI. Normalized FFO for 2010 was $76,483,000, or $2.76 per basic and diluted share, compared to $64,341,000, or $2.33 per basic and diluted share, for 2009, an increase of 18.5%. Normalized FFO for 2010 excludes the collection of past due rent of $1,520,000, recoveries of previous write-downs of $573,000, expenses of $378,000 related to an abandoned capital offering, and certain other adjustments of $248,000. Normalized FFO for 2009 excludes the collection of past due rent and interest from two customers of $2,654,000, recoveries of previous write-downs and gains of $3,480,000, recognition of the income of deferred credits totaling $1,493,000, and other adjustments totaling $626,000.

Net income for 2010 was $69,421,000, or $2.51 and $2.50 per basic and diluted share, respectively, compared to $64,229,000, or $2.33, $2.32 per basic and diluted share, respectively, for 2009. Excluding the effects of collection and recognition into income, past due rent and interest in 2009 and 2010, rental income increased 34.8% to $71,653,000 in 2010. Mortgage interest decreased 20.6% to $6,743,000, primarily as a result of normal amortization, final maturities and pay offs of principal. Our owned assets accounted for 92% of our revenue during the year, whereas our mortgage interest income accounted for 8% of revenue. Our expenses for the year, excluding recoveries of previous write-downs and non-operating items, increased $5,189,000 compared to 2009. Depreciation expense increased $3,643,000 due to new real estate investments made in 2009 and 2010. General and administrative expenses increased $2,441,000, primarily as a result of additions to our executive management team and staff, 2009 and 2010, and to one-time expenses of $490,000 related to the acquisition of six skilled nursing facilities in 2010, and $378,000 of legal and professional fees described earlier.

Noncash stock-based compensation expense increased $1,515,000 in 2010. The market value for all stock option awards is estimated using the Black-Scholes pricing model, and is expensed over the vesting period of the individual grants. Our non-operating income decreased 39.5% to $5,191,000 for 2010. We had lower interest income of $1,157,000 as we maintained lower cash balances during 2010. And we had $1,685,000 more in gains from the sale of marketable securities in 2009. Our interest expense and amortization of debt related costs increased $1,377,000 in 2010 due to increased borrowings on our revolving credit facility to fund new investments.

In November we entered into a new $100 million bank credit facility. A total of $50 million can be drawn on a revolving basis, with a maturity of three years, with interest at a margin of 250 basis points over LIBOR. A total of $50 million was drawn by us last month on the term loan feature of the credit facility, which has interest fixed at 3.98%, with a maturity of five years. The proceeds were used to pay off the revolving portion of the credit facility. There is an accordion feature in the credit facility which could increase the total credit facility to $200 million.

We ended the year with cash and marketable securities of $25,140,000 and an outstanding balance of $37,765,000 on our revolving credit facility. We have a low debt to total book capitalization of only 7.9%, and among the lowest of all REITs.

I would now like to turn the call over to Justin Hutchens to talk about our investment activity and our normalized FFO guidance for 2011.

Thank you, Roger.Good afternoon, everyone. We finished the year the way we planned with $10 million of investments completed in the quarter, bringing us to $141 million in 2010. Continue asset management of the portfolio, fine tuning of our investment pipeline, maintain a strong balance sheet. More importantly, we delivered strong growth in FFO and another increase in the dividend announced this morning at an annual rate of $2.46 a share. Our guidance for 2011 reflects our thoughts on the upcoming year and how we believe we can put capital to work on an accretive basis with our shareholders. We're projecting normalized FFO of $2.83 to $2.93 per share. Guidance depends on investment size and the timing, but we did not want to tie us (inaudible).It does, however, assume we finance new investment during the year, primarily through our existing credit facility and potential longer term for agency financing employed, as well. Guidance also assumes that our G&A is up approximately 10% above the full year 2010 level to account for staffing additions last year, noncash stock compensation and legal expenses.

We reported during our previous conference call that our investment pipeline is roughly $1 billion, which we identified $100 million as high priority. It still holds true, and our priority pipeline has, in fact, grown since. We continue to get as many looks as we want, and are able to focus only on those that provide adequate spread for cost of capital. Despite this pipeline, we're hesitant to commit targeted volume for 2011. We do not focus on the volume of investments but rather the return or yield above our cost of capital. Timing of our investments plays a huge role in our FFO growth, with our focus on select investments that offer the best combination of asset quality, credit. Our transactions in 2010 bore this out with our investments being completed at an average initial yield of 9.87% with annual escalators. This approach compares very favorably to much lower initial yields in large portfolio transactions.

Our primary emphasis is on growing both FFO and the dividend on a per share basis. We're not solely focused on the FFO growth in the aggregate acquisition volume. It requires a focus on transaction, financings that are immediately accretive to our shareholders and sustained over time. We're striving to achieve mid-single digit FFO growth on a per share basis. This outcome, combined with a dividend increase in the neighborhood of 4% per year, puts NHI in the position to potentially deliver double-digit total returns to our shareholders. If our investment volume pushes us above that rate during the year, we would much rather over deliver on that growth later than to start the year promising a number we would have to stretch to make, just on our philosophy. We're operating in an environment that will ultimately reward a patient approach over the long-term, deploying of a capital plan that keeps leverage low yet flexible to match our investments.

With that, I will turn the call over to our Operator to take any questions that you may have for us this afternoon.

Thank you. (Operator Instructions) The first question comes from the line of Jerry Doctrow with Stifel. Please proceed with your question.

Thanks. Justin, you were a little faint, so if you could get closer to the mic, that would be great. I just had two things. One was to get a little more color on the acquisition pipeline. You talked about it being $1 billion, you talked about the priority. Are you looking more at skilled? More at assisted living? Any more color. Some of the other REITs that have reported this week were talking about a lot of deals driven by consolidation. Again, I was curious on your thoughts. And then, I noticed you're starting to dispose of some assets, so was just wondering about the rationale for that and whether we can expect more? Are you trying to trim the portfolio in certain ways?

Sure. I will start with the acquisition pipeline. What I was referring to was, during our last call, I made a comment that our pipeline was $1 billion, that we had prioritized $100 million of it. And what we found is that, in fact, that priority pipeline has grown since then. And in terms of a little color, still pursue assisted living facilities probably with the highest priority, and we're getting looks in that category. There are some skilled nursing facilities in our pipeline. And in both cases stabilized opportunities. We're looking into some specialty hospitals, as well. And then in all three categories we're considering construction opportunities. Largely, the type of transactions we're going to pursue are going to be motivated by a company's desire to grow and use the traditional leaseback opportunity to help them get the liquidity to do so, more a debt maturity. And we're not usually playing in the same field as our larger peers when they're talking about consolidation, large brokered deals. We tend to, even if we get offered those, tend to move those out of our pipeline so we can focus on smaller more relationship-driven opportunities.

Okay. And how much development would you be comfortable with?

We haven't really set a target. It is certainly not going to be more than 20% of our investment, say, on an annual basis.

Okay. And then just the dispositions, what was driving those, and were you trying to prune the portfolio in some way, and should we expect any more of that?

There has been a couple of different reasons. Mainly we just want to trim any asset that is older or just a little bit outside of our specialization. We'll go ahead and negotiate with the tenant to buy it. The MOBs were an example of that. The portfolio that's held for sale is a portfolio of older skilled nursing facilities that we just as soon move out of our portfolio. But the tenants see it as an opportunity to lower their cost of capital and want to keep it so we negotiated selling those assets. It is certainly not the primary driver of our business plan, by any means. I think the term trimming is probably a good characterization of our disposition activity.

And is there a lot more of that we should just be thinking about in terms of net investments? When you think about your guidance for the year, you are assuming that level? What level of dispositions are you assuming?

The only other disposition that we have out there that we're expecting is that portfolio that is held for sale. And, quite frankly, we had that same portfolio a year ago on the same call. And the reason is they're pursuing HUD financing and it is just been a slow process. So we're anticipating that one sticks around for most of the year. But even if it goes sooner, we're comfortable we can replace the income.

Okay. And Roger probably said this, and I am sure it is on the balance sheet, but what's the total volume of held for sale, total dollar amount?

Jerry, the total dollar amount is $36,853,000. That's a combination of the six skilled nursing facilities of $33,000,420 and the two MOBs of $3,000,433.

Okay. Okay, that's great. I am assuming you will probably sell them at a gain. We're not talking about any losses there, we're talking about some sort of gain? Was that what you'd anticipate?

Yes.

Okay. Thanks. That's all for me.

Thank you. (Operator Instructions)The following question comes from Todd Stender with Wells Fargo Securities. Please proceed.

Hi, guys. Thanks for taking my call. Just sticking on that theme, can you go into some of the pricing that you realized? I think, Roger, you mentioned at least one of the six SNFs in Texas was sold in the first quarter already. Was it one or two that were sold?

Yes. We actually conveyed one property of the six in January of this year essentially at book value, no gain or loss on that property.

Is there an initial lease yield or anything we can get our hands around?

You mean on the replacement income?

Just on the sale price. Is there a way to look at what the pricing is going for?

The lease income on that property was only affected by 1%. Very small impact.

And how about the MOBs? How about the cap rates they were sold at?

I am sorry. What was that?

You sold some MOBs so far. Did I get that right?

Yes, we did.

And did you disclose what the cap rates were that you sold them at?

No, we did not. But we did have a gain that we deferred into a 1031.

Okay. Just switching gears, can you give some color just on the current lending environment from your end, loans made to tenants or developers? Maybe some of the terms that you look for. And if the move in the ten year bond since the fall has impacted any of the pricing?

I'm going to take the second part of your question first. Our pricing, as we have looked to offer loans, has not changed much. And that's largely because when we look to give a loan, we're generally looking at second mortgages or a mezz loan or a construction loan. And all three are in the category of high yield these days. So, for example, the construction loan that we bid, last year was at 10%. I think that market is still there. It would vary between 9% and 10%. The second mortgages put out between 12% and 14%. I should have mentioned that earlier when Jerry asked the question. We do pursue those on a more limited basis. And they're strategic, it is an opportunity to reduce our yield a little bit by putting some of that money to work at 12% to 14%. And puts us in a position potentially to buy assets. And, in some cases, that's negotiated on the front end with basic construction loan that we did last year. So it will be part of our business. But generally our rates aren't too much in those categories.

Okay. Just my final question. Your posture on new acquisitions? Do you position more of your acquisitions towards combination facilities or standalone facilities? Whether they be assisted living or SNF, you will take those, as well. Is there any real slant in that respect?

Just based on our existing pipeline, we're seeing more standalone. There are some campuses that we're seeing, but generally the majority of our pipeline is standalone assisted living and also a handful of skilled nursing.

Okay. Thank you.

Thank you. (Operator Instructions)Mr. Adams, we have no more questions at this time.

On behalf of those of us here at NHI, I would like to thank all of you for your participation today. And we look forward to speaking with you on our next conference call. Thank you.

Thank you. Ladies and gentlemen, that does conclude our call for today. We thank you for your participation and ask that you please disconnect your lines.