National Health Investors Inc (NHI) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors' first quarter 2011 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 5, 2011. I would now like to turn the conference over to Mr. Tripp Sullivan, 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 first quarter of 2011. On the call today will be Justin Hutchens, President and Chief Executive Officer and Roger Hopkins, Chief Accounting Officer. The results, as well as notice 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'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 NHIs judgement as of the date of this conference calls. Investors are urged to carefully review various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission, including risk factors and other information disclosed in NHIs form 10-Q for the quarter ended March 31, 2011, filed this morning. Copies of these filings are available on the SECs website at www.sec.gov or at NHIs 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 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'll now turn the call over to Justin Hutchens.

Thank you Tripp. Good afternoon everyone and thank you for joining us. On the call today, we will cover the first quarter highlights. Roger Hopkins, Chief Accounting Officer for NHI, will talk about our financial results, and I will discuss our investment activity and 2011 guidance.

This was a fairly quiet quarter for us in many respects on paper. But one full of continued execution of our business plan and the underwriting of attractive investment opportunities that should offer additional growth opportunities moving forward. I will now turn the call over to Roger to discuss our financial results.

Thanks Justin, good afternoon everyone. My comments this afternoon are consistent with our disclosures in form 10-Q, our earnings press release and our supplemental battery port filed this morning with the SEC. Normalized funds from operations for the first quarter of 2011 rose 12.6% over the same period in 2010, primarily as a result of lease revenues from our new investments in real estate in 2010, totaling $122.5 million. Normalized FFO for the first quarter of 2011 was $19.330 million or $0.70 per basic and diluted share compared with normalized FFO of $17.174 million or $0.62 per basic and diluted share in the first quarter of 2010.

Normalized FFO for the first quarter of 2011 excludes $154,000 of realized gains on the sale of marketable securities. Normalized FFO for the first quarter of 2010 excluded collections and recognition into income of $1.520 million of past-due rent from one tenant and $290,000 of other adjustments.

Net income for the first quarter of 2011 was $19.093 million or $0.69 per basic and diluted share compared with net income of $15.943 million or $0.58 per basic and diluted common share for the same period in 2010.

During the first quarter, we recognized gains of $2.299 million on the sale of one skilled nursing facility and two medical office buildings to the current tenants. We planned to defer recognition of the tax gain on the sale of the properties by reinvesting the sales proceeds and utilizing the like-kind exchange rules of IRS code section 1031. The reconciliation of our net income to FFO and normalized FFO for the first quarter is included in our earnings release.

Excluding the past due rent described above and recognized in 2010, our revenues for the first quarter of 2011 were up 10.5% compared to the same period in 2010. Rental income on a normalized basis increased $2.353 million or 14.1% in the first quarter due to our new real estate investments in 2010. Straight-line rental income was $910,000 for the first quarter of 2011, as compared to $662,000 in the same period in 2010. Rental revenues exclude the revenues from those properties that were sold or that meet the accounting criteria as being held for sale.

There are five skilled nursing facilities in Texas that we plan to sell to our current tenant. These properties are classified as assets held for sale in our balance sheet and has discontinued operations in our income statement. We plan to defer recognition of the tax gain on the sale of these properties when they're sold. Revenues for properties classified as discontinued operations were $1.229 million in the first quarter of 2011, compared to $1.516 million in the first quarter of 2010.

Our mortgage interest income for the first quarter of 2011 decreased 20% from the same period one year ago to $1.596 million due to normal amortization of our loans, scheduled maturities, and conversion of one note to an owned asset the first quarter of 2010. Lease revenue from our owned assets represented 92% of our first quarter total revenues, whereas interest increase from the mortgage notes represented only 8% of total revenue.

Our operating expenses for the first quarter of 2011 increased 4.6% to $7.204 million as compared to $6.889 million in the first quarter of 2010. Depreciation expense increased $361,000 during the first quarter of 2011, compared to the same period in 2010 as a result of our new real estate investments in 2010. General and administrative expenses include non-cash stock-based compensation expense calculated by the Black-Scholes pricing model and was $2.371 million in the first quarter of 2011 as compared to $1.821 million for the same period in 2010. 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 $2.257 million in the first quarter that will not occur the next three quarters. Excluding the seasonal item, we expect a combined level of general and administrative expenses, legal and tax expense for each of the next three quarters to be in a reasonable range to the first quarter.

Our interest expense and amortization of debt related costs were $513,000 for the first quarter of 2011 due to our borrowings on our bank credit facility. Interest expense reported for financial statement purposes is net of a non-cash adjustment of $1.254 million for the change and fair value of our interest rate swap agreement related to our credit facility.

In November of 2010, we entered into a new $100 million bank credit facility. A total of $50 million was drawn at the end of January on the term loan feature of the credit facility to pay off our revolving credit balance. The term loan has an interest rate fixed with a swap agreement of 3.98% and a maturity of 5 years. A total of $50 million is available to be drawn on a revolving basis with the maturity of 3 years with an interest rate and margin of 250 basis points over LIBOR. We have no borrowings on our revolving credit facility. Altogether, we have a low debt to total-book capitalization of only 9.9% and a low debt to total market capitalization of only 3.7%. There is an accordion feature in the credit facility that could increase the total facility to $200 million. We expect our normal monthly cash flows and borrowings on our credit facility will be the primary source of capital for our new real estate investments for the remainder of 2011.

We ended the first quarter with cash and marketable securities of $42.475 million. Subsequent to the end of the first quarter, we have sold marketable securities, our net proceeds of approximately $11.2 million and net gains for financial statement purposes of $8.6 million. While leveraging our balance sheet is an prudent approach to funding our future investments and real estate assets, we intended that our debt to total book and market capitalization remain at the level that is below our larger peers in the REIT industry. Our company has a history of being a low-leverage, healthcare REIT as it relates to our total book and market capitalization.

We're continually mindful of the risk our borrowers and lessees face in the skilled nursing industry with potential cuts in medicare and Medicaid. Our credit underwriting and our financial strength are important to protecting our income stream, dividends to our shareholders. Certain of our current key financial metrics are our leverage ratio of only 0.11 to 1, our fixed-charts coverage ratio 20 to 1, and unencumbered asset ratio of 7 to 1. I'd now like to turn the call over to Justin Hutchens.

Thank you, Roger. I'd like to remind everyone of the goal for 2011 that we outlined on our last quarter's call, and how we expect to go about executing the vision. Our goal is to be in the position to potentially deliver double-digit total returns to our shareholders, including an approximate 4% increase in the dividends and mid-single digit FFO growth.

We will grow with an emphasis on these metrics on a per-share basis. That means we'll focus on accretive transactions from day one that can be attractively and conservatively financed rather than diluting our shareholders investment with equity offerings to fund lower yielding investments. While I can acknowledge the latter approach is commonplace in our industry, usually leads to top line FFO growth, we characterize ourselves as spread investors with a priority focus on accretive investments on a per-share basis. We remain focused on select investments that offer the best combination of asset quality, credit, and yield. The small-to-midsize deals are readily available to us today as the recent large transactions have taken some of the usual suspects out of this market. We're getting as many looks as we want and we're able to focus on those opportunities that are going to provide adequate spread over our cost of capital. Our relationships and standing within the market also continue to position us as a financial partner of choice among a growing roster of operators.

A good example of these types of deals was demonstrated with our announcement this morning. We completed a purchase of four assisted living communities for $15 million and an initial annual lease amount of $1.275 million plus annual fixed escalators. The communities are all located in Louisiana and will be operated by Selah Management Group. This is an experienced management team that's been in the industry for years. The communities are, for the most part, all private pay and Selah Management Group operates 11 other assisted living and memory care communities in Florida, Mississippi, and Texas.

As we look to our acquisition pace the balance of the year, we're comfortable with the opportunities we see ahead. If you look at our pace for the 2009 to 2010 time period, we completed approximately $250 million of transactions. I would expect that over the course of the next couple of years, a similar acquisition pace is achievable.

There are some risks, though, that were highlighted last week with CMSs proposed rule for fiscal 2012, on payment rates to skilled nursing facilities. The final rule may be quite a bit different than the two options being considered which contemplate a range of a 1.5% increase in Medicare reimbursement to a decrease of 11.3%. This uncertainty will likely slow the investment pace and the skilled nursing sector over the course of the next few months and that will certainly be the case for NHI. We have several newer and high-quality skilled nursing related investments in our priority pipeline that will be slow walked until we have clarity on CMS's intentions. In general, healthcare REITs are pretty insulated. Cap rates have been fairly conservative with limited exceptions. For NHI, I believe this development plays directly to our strengths. We believe our patients along with very conservative underwriting and the strong credit of our largest operator, should set us apart.

National Healthcare Corporation, or NHC, which accounts for 45% of our revenue and our largest operator of skilled nursing facilities, has the strongest credit of any operator. They also account for nearly 65% of our skilled nursing-related revenues. We've calculated NHCs EBITDAR for 2010 to be $143.8 million. The lease payment to NHI was $35.2 million and all other debt service was $513,000. So you can see NHC covers their lease and debt obligations 4 to 1. We are their only landlord and we have their corporate payment guarantee.

In addition, our last 2 transactions with skilled nursing portfolios were underwritten to insulate from potential Medicare cuts. There has been a good bit of speculation on how these proposed rules might affect operators. To help frame the potential impact, I'll walk you through an example. We made a skilled nursing portfolio transaction with six facilities in the first quarter of 2010. We reported, at the time, that this portfolio had a 1.7 to 1 lease service coverage ratio which represents EBITDAR divided by the lease payment. This portfolio has had improved performance in the first quarter of 2011 to a 2.1 to 1 coverage. When stress testing this portfolio with an assumed 11.3% Medicare cut, the lease service coverage would theoretically drop to a 1.78 to 1.

We currently estimate the majority of our borrowers and lessees will be able to withstand the most severe reimbursement reductions if enacted due to their credit quality, profitability, and their debt or lease coverage ratios. Although no assurances can be given as to what the ultimate effect such a medicare reduction would have on each of our borrowers and lessees. However, as we disclosed in our 10-Q, we estimate that 2 mortgage borrowers with an aggregate carrying value of the notes of $39.5 million, may be adversely impacted by the proposed reductions due to the repair mix, the current payment coverage ratios and limited net equities. We are currently in negotiations to purchase these portfolios and have taken other measures to mitigate any risk related to these two portfolios. These are performing loans with interest payments that account for only 2.75% of our total revenue but we want to be proactive in our approach to improving the credit risk on these portfolios.

Turning to our guidance for 2011, our outlook remains unchanged and normalized FFO of $2.83 to $2.93 per share. Again, this depends on investment size and timing but does not include a specific investment volume to either end of the range. Other assumptions remain intact as well, including financing, any new investments during the year, primarily through our existing credit facility, with potential longer-term or agency financing's deployed, a 10% increase in G&A above the full-year 2010 levels.

These are interesting times in our industry. Consolidation is highlighting the long-term growth potential we have all projected while at the same time eliminating some of the competition for new investments. Our selective approach is already paying off in that respect. And we would expect a deployment of capital plan that keeps leverage low, while remaining flexible will support any reasonable amount of investment activity we're able to complete. With that, I'll turn the call over to our operator to take any questions that you may have for us this afternoon.

(Operator Instructions)

John Roberts, Hilliard Lyons.

Roger, you were fading in and out. And the one thing I didn't get is what is the profit you mentioned on the marketable securities you sold?

We sold some marketable securities after the end of the quarter. The financial statement gain being $8.6 million.

$8.6 million on an $11.2 million sale, is that right ?

Yes.

When I was running through the numbers, it seems like you had, instead of interest expense, you actually had $700,000 in an interest gain on the income statement. Is that from the swap?

Yes. It's due you to a non-cash adjustment for the change in the fair value of our interest rate swap agreement that we entered into.

And is that included -- I'm sorry, go ahead, Roger.

So, interest rates have gone up and there is an increase in the fare value of that swap agreement, and so the current accounting rules require you to adjust that fair value in your accounting records and in your financial statements. And to include that in the interest expense line-item on your P&L.

And that came to what, about $0.04 a share, I believe?

That would be right.

And was that excluded from FFO?

That is included in FFO and excluded from FAD.

So from an FFO perspective, that $0.70 would have been $0.66 without that interest rate benefit.

Yes. We look at the fare value and the change in fair value on a quarterly basis as really being an integral part of our decision on the timing of the bank financing and our decision, quite frankly, to enter into the swap agreement. And so, changing fair value is -- we believe to be an integral part of FFO.

Justin, you really didn't talk a whole lot about the acquisition pipeline. What are you seeing now? I know you'd said you had a huge amount after Q1, and looks like you're just going to slow some of the [SNF] acquisition potentials? What are you looking at right now?

I don't really have a [whole] number to report, John. Can I tell you that our pipeline is very active. We're seeing both skilled nursing and assisted living opportunities. Obviously we've prioritized assisted living as we usually do, but even more so given the uncertainty with the Medicare cuts. It's nearly impossible to determine valuation right now. So, we also have opportunities in the skilled nursing space there's going to be a little bit of wait and see to be able to set the pricing appropriately. But overall, I'd characterize it as very active and busy. And part of the reason for that, I think, is that the focus on the larger transactions that the larger peers have had over the past few months and that small portfolio and one-off market is very active with very few of the public REITs focused on it.

That certainly seems to be the case. With the potential reduction in Medicare payments, do you think that creates opportunity for you guys on the SNF front? If everybody else pulls out? Would you take that risk on or you're just -- so not want to take on that risk you're not going to look at things from this environment?

We're certainly looking at investments in the skilled nursing sector but we're not going to be of the risk profile, the go ahead and pull the trigger on an investment until we have absolute clarity on the potential cuts or gain, quite frankly. Because if you recall that's the other option they're contemplating. And certainly when all the cuts are announced and behind us, we'll continue to look and perhaps that will create some opportunities for us. But, to be completely honest, I can't imagine having more volume to pursue than we have on our desk right now in the skilled nursing space. So, I feel like there is an awful lot of opportunity as it is. It's just a matter of waiting until we have clarity on valuation.

If the opportunity presents itself on a seller that needs to get out, would you just underwrite it assuming the cuts would come in?

Right, and that's exactly the type of discussions that we're having with the operators or whoever the seller might be on these portfolios. Everyone's assuming a -- they were talking about ranges that could be considered if a certain amount of cut happens. But, then again we're all pretty comfortable that 11.3% should be the worst-case scenario. Because if history repeats itself, they usually start high and once the feedback's given by HCA and the operators, there's some finessing and it comes out to be a lower number but we don't know that with certainty. So our preference is going to be to wait and see.

My thought is or just a comment is I have to get -- everybody pulls out. You might actually get some pretty decent deals in this environment.

Yes, I could see that happening. Where someone has an absolute urgent need to make a deal happen and no one wants to touch it. Maybe the cup gets factored into the price. But I don't think anything like that has presented itself yet. We'll see over the next several weeks if something like that pops up.

On the purchase you just made, in the press release it mentioned there was escalators but I don't think it had the amount of the escalators?

We didn't disclose the escalator, but the range I give when analysts or investors ask is anywhere from a 2% to 4% fixed escalator.

Jerry Doctrow, Stifel Nicolaus.

Hi, this is actually Dan Bernstein. Jerry had to step away so, I'm filling in here. I had a question on the rental income. It seemed to drop from 4Q to 1Q and I just wanted to make sure there wasn't anything that went on to non-accrual or anything like that, it was a sale of assets or assets moving to discontinued ops? Is that the way I read it right?

Yes, there was nothing unusual that occurred. There may have been movement in the disc. op.

That's what I figured and I just wanted to make sure of that. I really don't have a whole lot of other questions for you. I certainly don't want to ask anymore questions about CMS. I think everybody's asked as many questions as he can on that (laughter). How about turning the table, look a little bit at the senior housing. Obviously given that you're background in assisted living. Are you thinking there's positive trends there as well? We've seen the nicknack data, everything seems to be pointing up. Is that your view as well?

Yes, let me just tell you, I was kind of hoping you'd ask me about CMS because I've thoroughly prepared for the questions (laughter).

Jerry's back, he can ask you about CMS, if you want (laughter.

In regards to the assisted living space and you're referring to just the strength of the operating performance. In the communities we have, we're seeing some improved performance. Quite frankly, they never really fell back much. It was basically flattish over the last couple of years and we're starting to see a little bit of, particularly on the pricing side some occupancy is about the same but a little better. And then the broader industry as I've been out talking to people, I am hearing the same thing. There's a little bit less discounting happening across most markets, which is allowing operators to not only benefit from their in-house rent increases but to be able to push street rates a little bit and also, the occupancy is moving up slowly but it is moving up. So we view it as a very strong sector.

I'm sorry, I am back. The CMS stuff you really did address in your prepared comments. On the securities that were sold, that was like NHC preferred, is that what we understood?

In the first quarter. Yes.

And then the subsequent to quarter is AC or is it some other marketable securities?

It's the other common shares that we have in the public REITs. We weren't specific as to which issuer, but they were all the public REITs.

I think we only know of one. But maybe there is more than one. And what I was just trying to get to, actually, Roger, was how much of that stuff do you still have and is that -- should we be thinking about, I think you have common shares and preferred shares remaining, about what that volume and what you're thinking about using that as a source of funds.

At quarter end, we had over $21 million of fair value in the shares of the public REITs. And so we've sold about $11 million of that. As we disclose in our 10-K and 10-Q, we also have a sizeable amount of shares of LTC preferred stock and we don't have any current plans to sell that or to convert that. We receive a very attractive 8.5% coupon rate on our original investment and we might consider selling that at a later time but only after evaluating all of our sources of investment capital. But it's nothing that we're currently contemplating.

And just back to Justin, you were sort of characterizing it as you're not seeing the big REITs in this space on the Ventas call and the NHP numbers. I guess, NHP would put up $600 million in the first quarter and another couple $100 million post quarter, some of it on small stuff. You're just not running into them, it's just not the competitive environment on the one-off deals?

It really isn't. I can tell you in my 2 years here, we've never run into Ventas, or any of the big 3 as I think you've been calling them. We've seen a little bit more competition when you start getting into the smaller and mid-sized REITs. But an awful lot of our deals come straight to us and we'll stay with them as the first call. But yes, I would characterize it as much less competitive particularly when you get under $50 million in deal size.

And then just my last thing, Justin. I think you talked about consolidation, if I remember correctly as well. Is more of the stuff you're doing just refinancing for existing guys or is it really the industry consolidating among maybe smaller, regional, operators?

Well, the consolidation I was referring to quite frankly was Ventas and NHP. And NHP being, although they're much larger than us, historically they've had a bit of a grassroots strategic focus. So, that's been, at least less noticeable by us lately.

They're counting that as one of the things that Ventas wants to continue. If you're not seeing them, that's fine.

Right but I don't have the view of everything that's happening out in the market. I just know what we see. And one of my perceptions was that just the overall growth of the larger peers in our peer group has left the smaller deal size market more readily available. And the evidence we have is the pipeline growing and then the lack of the other names coming up.

And do you have a sense that some of the big deals with these sexy prices have been drawing more small transactions into the market?

Yes. I do. I think that the positive thing from our perspective about these large deals that have had a lot of attention and press, is that it has directed more operators towards healthcare REITs. So, I think there's been a direct impact on the volume of deals out there. The downside is the price expectations have come along with that. So, there's probably a little bit longer sales cycle as we work through the needs of the operator and trying to balance their expectation of proceeds and then our expectation of having on going cash flow in their operations. But yes, I think your statement is absolutely correct that the large deals have attracted a lot of attention and have really helped to bring more business to the industry.

(Operator Instructions)

Todd Stender with Wells Fargo securities.

Justin, just in speaking to your new acquisition of a 4 assisted living facilities. Is this a new relationship with Selah Senior Care Three?

Yes, it is. It's a new relationship and these 4 communities are new to Selah. So it was a open market acquisition.

And can you speak just to the motivation for the seller? Was this a distressed property? Was there urgency for them to sell anything about it?

There wasn't tremendous urgency and absolutely is not distressed. This is a stabilized portfolio that was acquired by a financial institution 4 or 5 years ago when it was distressed. It's since been managed pretty well and stabilized and has good stabilized operating history and still has some potential upsides. So from the new operator's perspective, and from our perspective, it was a great opportunity to get in to a portfolio that has a little bit of both stabilization and a little bit more value-creation ahead of it.

What do you think the percentage of private will shake out with this?

90%-plus.

And just looking at -- we kind of dial back into the decision around the selling the securities, how are you looking at the gains? When you weigh the tax ramifications, is there a potential special dividend baked into this?

Todd, this is Roger. These marketable securities have been recently been selling at or near all time high-share prices and so we decided to sell a portion of our marketable securities to redeploy the proceeds into new real estate investments. Now, there is a gain that we have shown in the 10-Q and our notes or financial statement purposes. That is not necessarily the same gain for tax purposes. So, at the end of the year, we'll calculate a taxable income and if it's in excess of our cumulative regular quarterly dividends for the year, we would likely pay a special dividend as we've done in certain past years. But you shouldn't interpret the financial statement gain to be a tax gain and to have an immediate impact on the eventual dividends, including special dividends, if you understand that.

I sure do.

Mr. Hutchens, I'll now turn the call back to you. Please continue with your presentation or closing remarks.

Well, I thank everybody for your participation on the call today. We look forward to speaking with you on the second quarter call.

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.