National Health Investors Inc (NHI) 2012 Q1 法說會逐字稿

Welcome to the National Health Investors First-Quarter 2012 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 Friday, May 11, 2012. I would now like to turn the conference over to Tripp Sullivan with Corporate Communications. Please go ahead.

Thank you, Kathy, good morning. Welcome to the National Health Investors conference call to review the Company's results for the first quarter of 2012. 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 of the accessibility of this conference call on a listen-only basis over the Internet, were released yesterday afternoon 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 and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended March 31, 2012. Copies of these filings are available on the SEC's website at www.SEC.gov or at 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 accompanying tables and schedules, which has been filed on Form 8-K with the SEC. 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. Please go ahead.

Thank you, Tripp. Good morning, everyone, and thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer. This is a strong start to the year, with solid FFO results, a nice pace of investment activity, further improvements to our balance sheet, and an upward adjustment to our guidance range. We'll talk about that in more detail in a few minutes. First, let me turn the call over to Roger to walk through our financial results.

Roger?

Thanks, Justin. 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 yesterday afternoon with the SEC. Normalized funds from operations for the first quarter of 2012 rose 18.2% over the same period a year ago, primarily as a result of revenues from our new investments funded in 2011; most notably, higher lease revenue from Legend Healthcare of $1.3 million, and Selah Management Group of $395,000. We also realized higher percentage rent income of $426,000 from our largest tenant, NHC, and incurred $939,000 in lower stock-based compensation expense. Normalized FFO for the first quarter was $21.4 million, or $0.77 per diluted share, compared with normalized FFO of $18.1 million, or $0.65 per diluted share a year ago.

Normalized funds available for distribution for the first quarter was $22.1 million, or $0.79 per diluted share, compared with $19.7 million, or $0.71 per diluted share a year ago. Normalized FFO and normalized FAD for the first quarter of 2011 excluded a $1.3 million change in the fair value of a previous interest rate swap agreement, and gains on the sales of marketable securities of $154,000.

Net income for the first quarter was $18.4 million, or $0.66 per diluted share, compared with net income of $19.1 million, or $0.69 per diluted share a year ago. Net income from the prior-year period included $2.3 million of gains on the sale of real estate. Reconciliations of all these measures for the first quarter are included in our earnings release, our Form 10-Q, and supplemental data report. Our revenues for the first quarter were up 9.7% to $24.1 million compared to the same period a year ago. Straight-line rental income was $1.1 million in the first quarter, compared to $910,000 a year ago.

Rental income for each year excludes the revenues from those properties that were sold or that meet the accounting criteria as being held for sale. There remains five skilled nursing facilities in Texas that we plan to sell to our current tenant when they obtain long-term HUD financing. These properties are classified as assets held for sale in our balance sheet, and as discontinued operations in our income statement. We plan to defer recognition of the tax gain on the sale of these properties when they are sold. Income from properties classified as discontinued operations was $1.2 million in the first quarter compared to $1.3 million during the prior-year period. Rental income from our owned assets represented 89% of our first-quarter revenue.

Depreciation expense increased $497,000 during the first quarter as a result of our new real estate investments in 2011. Our interest expense and amortization of loan costs was $575,000 for the first quarter, compared to $513,000 a year ago, when we exclude the change in the fair value of the previous interest rate swap agreement. The higher interest expense is indicative of our higher borrowings to fund our new investments in healthcare real estate.

Our general and administrative costs for the first quarter decreased $1.1 million from a year ago, due primarily to lower stock-based compensation expense calculated by the Black-Scholes pricing model. General and administrative expenses for the first quarter included stock-based compensation expense of $1.4 million, and is expected to be approximately $245,000 for each of the next three quarters. Our first quarter operating results exceeded our internal forecast, mainly due to higher percentage rent income from NHC, and lower stock-based compensation expense. Neither of these positive items is expected to recur in the next three quarters.

Our only debt at the end of the first quarter was our borrowings of $95.3 million on a revolving credit facility. We have a low debt to total book capitalization of only 18%, and a low debt to total market capitalization of only 7%. On May 1, 2012, we announced that we have entered into an amended $320 million unsecured credit facility that includes $120 million of combined five-year and seven-year term loans that were immediately drawn to pay down our revolving credit borrowings and to fund future investments. Justin will discuss this later.

We expect our normal monthly cash flows, borrowings on our revolving credit facility, and potential longer-term debt will be the primary sources of capital to fund our new real estate investments for the remainder of 2012. Though we plan to leverage our balance sheet to fund our new real estate investments in the short-term, we intend that our debt to total book and market capitalization remain at a level that is below our larger peers in the REIT industry.

We ended the first quarter with cash and marketable securities of $18.7 million. Yesterday, we announced that our second-quarter dividend will be $0.65 per share for shareholders of record on June 29, 2012, and will be paid on August 10, 2012.

I'd now like to turn the call back over to Justin with comments about our investment activity and 2012 normalized FFO guidance.

Thanks, Roger. Our investment activity during the quarter and to-date in the second quarter was consistent with our expectations to source attractive investments that utilize our operational and development expertise. The 10-year lease extension with Jackson Hospital Corporation in March was a good example. This was our only material lease maturing in 2012, and we were able to commit an additional $8 million for renovations and additions to their acute care hospital in Jackson, Kentucky. The lease is backed by the credit of Community Health Systems, one of the strongest operators in the hospital sector.

In March, we also announced an agreement with Bickford Senior Living to develop up to eight assisted living and memory care communities over the next three years, with an investment of approximately $9 million each. We expect to break ground on three new communities by the end of the year. The economics of this transaction are compelling. We are getting a 9% lease yield, plus escalators, with a 3% cash yield during the construction period, while the remaining 6% will be added to the lease [spaces]. We're also able to build for about $50,000 less per unit than current acquisition pricing in the market.

We are quite comfortable with our partner. Bickford Senior Living is an experienced operator and developer. They lease eight assisted living and memory care communities from NHI. Of the 42 communities in total that they operate, they've built 40 of those, and a total of over 150 they've constructed for other operators over the years.

Our agreement with Capital Funding Group, or CFG, restructures an existing credit agreement we had with them that enables CFG to deploy the capital more rapidly as bridge financing. The interest-only loan closed with $5 million drawn. CFG is one of the more active lenders in the healthcare market today, and we look forward to building on this long-standing relationship.

None of this activity would be possible without one of the more pristine balance sheets in the industry. A little over a week ago, we amended our existing unsecured credit facility to increase it to $320 million with an interest rate of 140 basis points over LIBOR. $120 million of that is in five- and seven-year term loans that were drawn down immediately. We also have an accordion feature on the facility that provides for an additional $130 million of total borrowings.

The five-year term loan is for a total of $80 million, with an interest rate of 140 basis points over LIBOR, and the seven-year term loan is for a total of $40 million with an interest rate of 150 basis points over LIBOR. Earlier this week, we entered into an interest rate swap agreement that fixed that seven-year term loan at an interest rate of 3.04% over the life of the loan. We have effectively eliminated all debt maturities until 2017, and locked in exceptionally low interest rates.

Turning to our guidance for 2012, based on the investments completed to-date, we are raising guidance to a range of $3.05 to $3.13 per diluted share and normalized FFO. The primary assumption on the low end of the range is a baseline from Q1, and the high end of the range assumes new investment activity.

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

(Operator Instructions) Karin Ford, KeyBanc Capital Markets.

Justin, if you could, just give us maybe a little bit more detail on the investment assumption that you might have embedded in the high end of guidance? I know you had said $100 million previously, did you raise that up higher? Or is it just $100 million less what you did in 1Q?

I'll certainly give you a little more color. I'm not sure if this is going to get you exactly what you're looking for, Karin. But the way we've outlined our growth goal is really by looking at what we've been doing over the last few years. I'll just remind everybody that in 2009, we invested $89.5 million.

In 2010, it was $141.5 million, and in 2011, we either invested or committed about $100.4 million. The run rate's basically been about $100 million or a little bit more on average and that was basically our expectation going into this year. The tricky part is always the timing of the investments; though really, the shorter answer is that the top end of the range incorporates investments that we plan to make and the timing will probably have an impact on it, as well.

Anything --?

I don't really have an exact second half of the year number for you, necessarily.

Okay. Anything imminent that you could give us more detail on?

I'm not really offering more detail on it, but I can tell you that the range incorporates investments that we have absolute clarity with.

Okay. Has your appetite for skilled nursing changed at all, given what appears to be a benign 2013 reimbursement environment?

NHI's view on skilled nursing over the past few years has really been to make investments only when it's a very high-quality skilled nursing asset. That usually means it's a newer physical plant that attracts a higher percentage of Medicare and private pay. Last year, when there was some uncertainty, we didn't invest all until we had clarity on the rule and then, as you know, we closed on a portfolio at the end of the year.

We have an overriding goal of reducing our skilled nursing holdings to about 50% of our total revenue and we're at about 66% now. I think, in time, it will continue to go down, but to the extent that we come across opportunities that are either on a campus, for instance, a higher-end living campus or are a newer property that attracts the quality pay mix that I mentioned, we'll still make those investments. But what you most likely won't see us do is pursue large portfolios of just the traditional skilled nursing facility. We're just really not even entertaining those investments at this time.

That's helpful. Can you give us some color now that you've had a quarter of the new Medicare rate regime where your SNF coverages shaking out? Is hitting the 3.0 level that you expected, or the mitigation efforts that your tenants -- performing as you had expected? Just give a sense there?

Absolutely. In fact, we don't normally report our coverages, but I prepared for this question. The answer is, we projected that after the new reimbursement levels were implemented, that the coverage in our SNF portfolio would be three times overall, and that's exactly where it is. We're really right on track. Everyone's doing relatively well adjusting their operations to the new levels of reimbursement.

Great, thank you.

(Operator Instructions) Todd Stender, Wells Fargo Securities.

Within the last recent quarters, most of the investments have been construction loans and renovation financing. Going forward, what does that mix look like if you're going to contrast new acquisitions versus the lending within your current pipeline?

Okay. That's a great question. Really just going back to the fourth quarter of last year, we bought a stabilized portfolio of newer skilled nursing facilities that was about $55.5 million. Then we have had the loan that we announced and the construction program that we mentioned, but we're also pursuing stabilized assets. I suspect you'll see us, as part of achieving that guidance range, close on some of those assets throughout the rest of year. There'll be a good mix of development which, by the way, our development pipeline's pretty much full.

We selected Bickford Senior Living as our partner because there's really no one in the assisted living industry that has their combined operating and development experience. When I say no one, there really is nobody. We're excited about that partnership. We may do some other select development investing, but it's probably going to be coupled with investments in stabilized assets. We really don't have any visibility on much further development at this time, so the priorities are really those stabilized asset acquisitions.

Thanks, Justin. Are the stabilized assets more in assisted living combination facilities and if so, can you just share what kind of pricing you're seeing?

Sure. Primarily, we're pursuing still newer skilled nursing facilities and then assisted living and senior housing campuses that attract mostly private pay. In the case of a new skilled nursing facility, that would be considered just very top of the market in terms of overall quality, we're squarely at about a 9% lease yield. In the case of these high-quality private pay-backed assisted livings, we're closer to an 8% lease yield. The range in the one-off assets right now, we're seeing in the market is, in the assisted living space is in the high 7%s to the low 8%s. Overall in skilled nursing, you can get all the way up to the mid-9%s and to 10%, but based on the type of assets that we're pursuing, we're on the lower end of that range.

Okay, that's helpful. Just looking at the lease extension with the Kentucky River Medical Center, what was the outcome going to look like had you not provided the $8 million in renovation? How was that lease negotiation going to shake out?

The guarantor and operator's a Fortune 200 company, so it was a long negotiation, because there's leverage on both sides. Ultimately, their goal to stay in the market long-term was to reposition the hospital. Our goal with them, given their strong track record and they're very strong credit, was to extend the lease. It really just became a win-win opportunity because we're very happy to make an additional $8 million investment with them given their credit, getting good yield on that investment, it improves our asset and we pushed the maturity out 10 years. It wasn't an overnight type of discussion, it went on for about a year getting ready for the lease renewal and it turned out to be I think a win-win opportunity for both companies.

Does the return on that asset change at all? Does your cost basis go up and they just generate a return off the new higher cost basis?

Yes, the cost basis goes up and the return is generated on the new capital that's deployed.

Okay. Thank you.

Mr. Hutchens, I'll now turn the call back to you for your closing remarks.

Thank you for the participation on our call today. We feel as though we're off to a very strong start and look forward to speaking to you again on our 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. Have a great day.