National Health Investors Inc (NHI) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for seeing by. Welcome to the National Health Investors second 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 today, Monday, August 6, 2012. I would now like to turn the conference over to Mr. Tripp Sullivan of corporate communications. Please go ahead, sir.

Thank you, Nelson. Good morning, everyone. Welcome to the National Health Investors conference call to review the Company's results for the second 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 earlier this morning in a press release that has been over 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 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 June 30, 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 reconciliation is provided in the earnings release together with all other information provided and released. I 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.

We stayed on plan during the quarter. We remained disciplined on our investments, closely managed our portfolio and kept plenty of dry powder available for potential new investment activity planned in the second half of the year. As a result, we were able to raise our guidance and increase the quarterly dividend. We'll talk more about all of those 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 the consistent with our disclosures in Form 10-Q, our earnings press release and our supplemental data report filed this morning with the SEC.

Normalized funds from operations for the second quarter of 2012 rose 6% over the same period in 2011, primarily as a result of revenues from our new investments funded of $82.4 million in 2011 and $29.6 million so far in 2012. Lease revenues from our tenant, Legend Healthcare, increased $1.2 million due to new investments made in the fourth quarter of 2011 and the second quarter of 2012. Normalized FFO for the second quarter of 2012 was $21,386,000 or $0.77 per diluted share compared with normalized FFO of $20,179,000 or $0.73 per diluted share in the second quarter of 2011.

Normalized funds available for distribution for the second quarter of 2012 was $21,010,000 or $0.76 per diluted share compared with $19,724,000 or $0.71 per diluted share for the second period in 2011. Normalized FFO and normalized FAD for the second quarter of 2012 excluded the impact on net income of write-offs and expenses related to an early lease termination which I will discuss in a moment, and other adjustments of $155,000. Normalized FFO and normalized FAD for the same period in 2011 excluded the impact on net income of gains of $8,655,000 on the sale of marketable securities and a $988,000 change in the fair value of a previous interest rate swap agreement.

Net income for the second quarter of 2012 was $16,928,000 or $0.61 per diluted share compared with net income of $25,117,000 or $0.90 per diluted share for the same period in 2011. Net income for the second quarter of 2012 and 2011 includes the accounting impact of the adjustments, write-offs and other expenses mentioned above. Large transactions that are infrequent or unpredictable in nature that affect net income are adjusted in our reconciliation of our net income to normalized FFO and normalized FAD and is included in our earnings release and our Form 10-Q in the supplemental data report.

In June 2012, due to material noncompliance with our lease terms, we terminated our lease with a former tenant of forward assisted-living and memory care facilities in Minnesota and transitioned the lease to a new tenant, White Pine Senior Living. As a result, during the second quarter we realized lower cash payments of $450,000 from our former tenant. We wrote off an additional $126,000 in billed receivables. We incurred $171,000 in legal and other direct expenses and incurred a non-cash write-off of straight-line rent receivables for accounting purposes of $963,000.

The former lease provided for an annual lease amount of $2,204,000, whereas the new lease provides for a higher annual lease amount of $2,338,000 plus annual fixed escalators. In addition, the first six months of the lease contains additional supplemental rent payments of $410,000 that will be recognized into income over the initial term of the lease of 13 years.

Our revenues for the second quarter of 2012 were up 10% compared to the same period in 2011, when you exclude the impact of the early lease termination in 2012 and the gains on sales of marketable securities in 2011. Straight-line rental income was only $14,000 in the second quarter after the write-off of $963,000 related to the Minnesota lease. Rental income for each year excludes the revenues from those properties that were sold and 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 $1,247,000 in the second quarter of 2012 compared to $1,275,000 during the same period in 2011. Rental income from our owned assets represented 87% of our second-quarter revenue.

Depreciation expense increased $466,000 during the second quarter of 2012 compared to the same period in 2011 as a result of our new real estate investments in 2011 and 2012 and facilities that are leased to Legend Healthcare.

Our interest expense and amortization of loan costs was $747,000 for the second quarter of 2012 compared to $601,000 for the same period in 2011, when we exclude the change of $988,000 in the fair value of the previous interest rate swap agreement in 2011. 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 second quarter of 2012 increased $300,000 from the same period in 2011, due primarily to $171,000 in direct expenses related to the early lease termination described above, to $95,000 of transaction costs of acquisition classified as a business combination for accounting purposes, a $90,000 legal somewhat related to one of our subsidiaries, and was partially offset by lower stock-based compensation expense and corporate overhead.

Stock-based compensation expense was $248,000 for the second quarter of 2012 and is expected to be the same for each of the next two quarters. Altogether, our second-quarter normalized operating results met our internal forecast. Normalized funds from operations for the six-month period ended June 30, 2012 rose 11.8% over the same period in 2011, primarily as a result of revenues from our new investments funded in 2011 and 2012. Lease revenues from our tenant, Legend Healthcare, increased $2.4 million due to new investments made in the fourth quarter of 2011 and in the second quarter of 2012.

Normalized FFO for 2012 was $42,761,000 or $1.54 per diluted share compared with normalized FFO of $38,256,000 or $1.38 per diluted share in 2011. Normalized funds available for distribution in 2012 was $43,093,000 or $1.55 per diluted share compared with $39,458,000 or $1.42 per diluted share for the same period in 2011. Normalized FFO and normalized FAD for 2012 excluded the impact on net income of previous write-offs -- on net income of write-offs and expenses related to the early lease termination discussed previously and other adjustments. Normalized FFO and normalized FAD for the same period in 2011 excluded the impact on net income of gains of $8,809,000 on the sale of marketable securities and a $266,000 change in the fair value of a previous interest rate swap agreement.

Our debt at June 30 consisted of our bank term loan borrowings of $120 million. We have a low debt-to-book capitalization of only 21.2% and a low debt-to-market capitalization of only 8.2%. We expect our normal monthly cash flows, borrowings on our revolving credit facility and potential longer-term debt will be the primary source of capital to fund our new real estate investments for the remainder of 2012. 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 market peers in the REIT industry.

We ended the second quarter of 2012 with cash and marketable securities of $22,942,000.

This morning, we announced that our third quarter dividend will increase from $0.65 to $0.67 per share for shareholders of record on September 28, 2012, and will be paid on November 9, 2012.

I would now like to turn the call back over to Justin with comments about our 2012 normalized FFO guidance.

Thanks, Roger. As I look at where we stand halfway through the year, I like how we're positioned. The investing climate is very favorable with experienced operators looking for growth capital. We are staying disciplined on underwriting with attractive yields and high-quality assets. The reimbursement environment appears to be normalizing, and the pipeline of new opportunities remains full.

On our last call, we talked about the investment and financing activity we completed in early May, so I won't rehash all of those details about the restructured credit agreement with Capital Funding Group or our new unsecured credit facilities. During the quarter, we completed the acquisition of a 125-bed skilled nursing facility in Kyle, Texas for a purchase price of $13.5 million. The facility opened in 2010 and is already stabilized with attractive pay mix and strong cash flow. Through the first half of the year, we have invested or committed $58 million in capital and a weighted average initial yield of approximately 10%. With clarity on potential investments in the second half, we have adjusted our guidance accordingly.

We are now projecting our normalized FFO for 2012 to be in a range of $3.08 to $3.13 per diluted share. The bottom end of the range is a baseline from Q2, and the high end of the range assumes new investment activity.

Before I turn it over to the operator, I'd like to comment on what Roger noted earlier about the tenant transition we completed with four of our assisted living memory care facilities in Minnesota. When we made his initial investment in early 2010, we were attracted to their high-traffic locations, excellent demographics, mix of private pay and the strong operations at the asset level. We had no shortage of strong, interested operators to take on these assets and on terms that make this transition essentially a wash in the end.

In summary, NHI's business plan to grow and diversify is being executed at a measured pace and I'm encouraged by the prospects to continue our progress. With that, we will be happy to take any questions that you may have for us this morning.

(Operator instructions) Daniel Bernstein, Stifel Nicolaus.

I figure I'll have to ask questions on this call. On the new transition, the new tenant lease, that $2.3 million lease term -- is that cash or is that straight line?

The $2,338,000 is a cash number.

Okay, and that have to straight line in -- and it is going to be straight line, I presume?

We will have straight line. There are fixed escalators, and we will straight-line that over the term of 13 years.

Okay, and on this transition -- did you have multiple tenants looking to transition into the facilities at this point, or was this a preferred tenant that you had or second choice that you had back in 2010?

We actually had about half a dozen companies interested in stepping into that lease, and we went with a Minnesota operator that operates over 20 buildings, had familiarity with the markets, and it turned out to be a really good fit for the portfolio.

Okay, and then the other question I had was, how do you define normalizing investment environment, Justin? Just -- or is the seller more willing to sell their assets at the price you are looking for, or is the volume of investment opportunities increasing? Just trying to understand your comment about the normalizing investment environment?

You know, actually, what I meant to say was normalizing reimbursement environment.

Okay.

And I was referring to, of course, the kind of benign Medicare news as it relates to skilled nursing facility reimbursement.

In terms of investment environment, it has been relatively consistent with what we've seen over the last couple of years. There's plenty of opportunities in the small deal size market. We are selecting those that are a combination of high quality, experienced operators and then, ultimately, a relationship fit for our Company in the long-term. And those are the investments you'll see us continue to execute. So I feel comfortable that we will continue to grow on a similar pace that we have over the last few years.

Are you seeing any more --

(multiple speakers) $310 million a year.

Okay. Are you seeing any more development opportunities beyond Bickford at this point?

We have agreed to review and commit up to 8 projects with Bickford Senior Living, and so far we've actually committed to 3 of them, all 3 of which we expect to break ground on this year. So we're on about $9 million per project at a 9% yield. And then in terms of our construction pipeline, because of the relationship with Bickford, we are not -- I wouldn't expect us to see much more outside of that relationship, at least as it pertains to assisted living. That has pretty much fulfilled our appetite for new development.

Okay, I appreciate the time. I'll jump off the call and let somebody else ask a question.

Todd Stender, Wells Fargo.

Can you tell us again who the tenant was on the lease termination in Minnesota?

Sure, it's technically an affiliate of White Pine Senior Living. White Pine, now with our floor -- I think they operate a total of 25 buildings, all in Minnesota; they have a few in Wisconsin as well. So it's our floor, we are right in their backyard, and they are an experienced operator, great track record. The transition went very smooth. We even had the benefit of their solid track record with the state of Minnesota because it accelerated the licensing approval of it. So we feel really good about White Pine.

And who was the old tenants who moved out?

It was an affiliate of Suite Living.

And does Suite Living lease any other space from you guys?

No.

Okay, and what prompted the termination?

The previous owner had other business interests that put a strain on cash management, so we agreed to a cooperative transition that brought in the new operator that would be 100% focused on our buildings and the assisted living business in general.

And was the new lease underwritten about what you typically underwrite your coverage at?

It was, yes. What's interesting in this case is the underlying cash flow of the buildings remains very solid. It was more of a -- at the parent levels, just a cash management concern. So in this case, you had -- the old party can go pursue their other business ventures and not have the headache of managing these buildings. The new party gets to step into in-place cash flow, and they agreed to make payments to us that makes it a cash wash, basically, for the year.

Okay, that's helpful. And then can you just give us an update on where the elder trust loan is and maybe just refresh us on that deal that didn't turn out to be acquisition for you guys this quarter?

Okay, so in the case of elder trust, that's a nonprofit borrower that is, we believe -- it has not occurred at this point, but we believe that the Attorney General's office may assign a receiver to review the future of that portfolio. In the case of that portfolio, NHI has been interested in pursuing the acquisition of those assets, leasing it to a solid tenant. The AG office in the state of Tennessee has approval authority over the transfer of all nonprofit assets. So they are taking a closer look. We are waiting for their determination so that we can know who we are dealing with in terms of a receiver, and then as we know more we will keep our investors updated about the progress. But the intent is to continue the pursuit of the acquisition, and if anything changes, as I said, we will let everybody know. Todd, is that the investment you were referring to?

Yes, and just -- yes, that was the bulk of it. And then part two would be, is elder trust -- have they been current on their loan payments to you guys?

Yes, there are. They are absolutely current.

Okay, and just finally, it looked like the Texas SNF you acquired was purchased through -- was it an option you had on the facility? And how did you obtain that?

Sure. When we acquired the portfolio of Legend last October, we had the option to purchase this. We didn't want to bring it in immediately because it had not reached a stabilized cash flow yet. So we just wanted to give it a few more months to season it and make sure that it actually reached the potential to support our purchase price. And it certainly has, and we went ahead and closed on the transaction.

Okay, thanks, guys.

Karin Ford, KeyBanc Capital Markets.

Just a couple more questions on the tenant transition. Was there any deferred maintenance on the assets, and are you guys spending any capital as part of the transition?

No, there's no capital being spent and the buildings are in good repair.

Okay, any other assets in your portfolio that might have similar issues or that you have any concerns about at this time?

No.

Second question is just on the Polaris Hospital development. Is that still on track to be completed and start paying rent in the fourth quarter?

Yes, in fact, they are hosting an open house this week. And we projected that they would actually open the hospital at the beginning of the fourth quarter. And so far, we feel very comfortable that that's right on plan.

Okay. And just finally, on the pipeline, is there any change to the characteristics of the pipeline's assets versus loans or any change as far as the timing of when you expect to close some deals in the second half?

Okay, I'm going to start with your timing question first and then I'll get to the asset type. The timing was actually considered in our guidance. The top end of the guidance range assumes that we are going to close investments in the second half of the year. So we're into the second half of the year and we left room in the guidance, should we go ahead and close on those transactions. The asset types that we have been pursuing have really -- remains unchanged. I know we've had a sprinkling of loans and we've had a little bit of construction activity, but the bulk of where we focus is in stabilized assets, and primarily we have been pursuing the assisted living portfolios that are 90% private pay, and then also, particularly in the case of Legend Healthcare, where we've had the opportunity to purchase a new skilled nursing facility, something that's going to attract a quality mix that's above market averages as well as a high-quality physical plant, and something that's going to have relevance to the long-term, we have been pursuing those skilled nursing facility investments as well. So those are really the two types of assets that we are pursuing, and you should expect us see us continue to execute on the acquisition of those assets.

Some of your competitors have talked about increasing interest in memory care assets. Are you guys looking at anything on the memory care side, and what is your feeling on that product?

Well, we have been -- if you look at the assisted living assets we have been pursuing, a majority of them have a combination of assisted living and memory care. And in fact, all of the new buildings that we are developing with Bickford, including -- up to 8 of them, but particularly the 3 we have already committed to -- has both assisted living and then a secure memory care portion of the community. So yes, there is solid demand for memory care services. It has been our experience and even my experience in a previous life operating, that the combo communities do very well to retain residents as they advance in their disease, whether it's Alzheimer's or other dementia-related issues. The communities that we are building capture that need.

Also, freestanding memory care facilities can do very well, and we have, I think, only one in our portfolio now. We are not pursuing those just primarily because Bickford's model is just going to go with the combo community. And it has worked very well for them, and we have confidence in it.

Thanks for the color.

(Operator instructions) Rich Anderson, BMO Capital Markets.

Justin, you said you didn't see any other problems in the portfolio, that something like this could surface in the near-term. But how quickly did this issue come together? I don't know if it was even a glimmer in your thought process, that is, this lease termination during the first quarter results. I was wondering how quickly this thing transpired.

Yes, it really happened in Q2. So we had only, I think, $120,000 that we ended up writing off, and then we promptly quit collecting rent as we worked through the transition to the new operator. So it really happened very fast. And because of the route we took to facilitate the transaction, where all parties were in agreement, there was no litigation and we had the full cooperation and support of the state of Minnesota, it moved very swiftly.

And then the other thing, too, that I just mentioned that helped with that is that the locations are high traffic and the occupancies were solid and the cash flows were solid. So we had a lot of interest from operators. So it was a very quick blip on the radar.

Okay, so you didn't see any indication of it, obviously -- what I mean, as you look forward, maybe you had a little bit more of an eagle eye on the situation like this surfacing. Have you taken a closer look at the rest of your portfolio, given how quickly this thing came together on you?

You know what? We didn't have any material insight that there would be issues, but mostly due to the quality of the assets we were able to -- and the cooperation of all parties were able to move it pretty quick. And actually, our asset management is very, very detailed and also communicative with our tenants. We have much oversight, and that's in part why we were able to move so quick. So I feel comfortable in our ability to manage the portfolio and actually think this is good evidence that we can move past issues pretty quickly.

Okay, good enough. Expense acquisition cost, I think, was about $95,000 for the quarter. What would you say is a reasonable number to be thinking about if you guys achieve like $100 million of investments during the course of the year, which has been your norm? What is a good kind of acquisition cost percentage of that gross number of investments?

Well, this is Roger speaking here. In the case of those transaction costs that were expensed, they were required to be expensed because they were a business combination. Quarterly, transaction costs are capitalized into the purchase cost and are carried on the balance sheet. So, while there are (multiple speakers) it's really difficult to anticipate what those would be. They would be a very small part of any purchases that we would make.

Right, but I mean FFO requires you to expense your acquisition-related costs in the calculation of your FFO metric. And so those are the expenses I am trying to target, I guess.

It has always been a relatively low number for us because most of those expenses are picked up by the operator.

Okay.

So in this case it was, just to Roger's point, just an accounting requirement because it was classified as a business combination, so we had to expense those expenses that did apply to us rather than capitalize them. And so I wouldn't expect a big material run rate in terms of acquisition costs. (multiple speakers) Unless the type of transactions that we pursue changes, and if that happens we will always incorporate it into our guidance, of course.

Got it. You mentioned the payments that the former operator -- by the way, is Suite Livings spelled S-W-E-E-T? I just want to make sure I have it (laughter)

No, it's S-U-I-T-E.

Okay, got you. They are the ones paying -- is that the $410,000 you said that they are going to reimburse you for? Is that the number?

That's what the amount of supplemental payments are going to be over these first six months, from the new tenant.

Okay, so where is the reimbursement that you mentioned they're making you whole on the cost that you incurred? Where is that going to show up?

Well, the point is we have a higher base lease from the new tenant. And then we were able to negotiate additional supplemental payments. So we're looking at on a cash flow basis, that we are getting more cash flow from the new tenant and that is helping to offset the loss of cash that we incurred the second quarter.

So Suite Living doesn't have to -- you are not going to go after them or there is not going to be any issue regarding the write-offs or the receivables and the legal costs that you incur? All that stuff is, aggregating it all up with the supplemental payments you are getting from new tenants, that's good enough for you? Is that basically what you're saying?

That's right, and then trade, we had the cooperation of Suite Living during the transition. So it was cooperative all the way around, which was clearly in the best interest of the residents and families of these communities. And so we were able to move it pretty quick, and those liabilities that Suite Living might be accountable to -- they have been relieved of that liability.

Okay, and then last question -- Justin, you mentioned the reimbursement environment -- I'm sorry -- the regulatory and reimbursement environment kind of stabilizing, becoming maybe more of a benign factor for you on a go-forward basis. Because of that, do you have less appetite for RIDEA structure because your core business seems to be doing okay from a reimbursement perspective? Or is RIDEA just as sort of on the radar screen as it was maybe earlier six months ago?

Right, okay, so the RIDEA structure is still of interest to us. What we like about it is the opportunity with private pay assets to outpace our typical 3% escalator that we get in our current model. So we are interested in that. We're also interested in having an operating partner that can pursue open market, distressed acquisitions, where we can benefit from the upside. And we also like the upside opportunity on the development as well.

So there's many reasons to continue to pursue the RIDEA structure. And one thing I've mentioned if we do get into such a relationship, we want to make sure that the operator is firmly committed to working with NHI and that we have, if not involvement in their whole company, at least adequate involvement, that we have their full attention on the asset that would include in the JV. So that's a criteria. And then we are also looking for returns that are representative of operating risk, and so we will try to get something done that's maybe a little better than market so that we feel that we are protected as cash flow fluctuate over the years. But yes, we are still very much interested in it. And in fact we even added some disclosure about our interest in pursuing it in our 10-Q, and I suspect we will have more updates down the road as we get more comfortable with the model.

So is a possible scenario you buying an operator to fold into NHI and make that be the avenue by which you grow it from there? Or is that one way of pursuing the RIDEA structure, or maybe the most likely way?

The most likely way would be a joint venture, where NHI has a majority ownership, but not 95% or 100% ownership, so that -- we are not exiting an operator. They still have adequate skin in the game to be motivated to continue to grow the business. So it would be a majority, but not a 100% acquisition.

Great, thanks for the color.

And I am showing no further questions. Mr. Hutchens, I will turn the call back to you.

Okay, thank you for the participation on our call today. We look forward to speaking with you on the third quarter call.

Ladies and gentlemen, that does conclude the conference call. We thank you for your participation and ask that you please disconnect your lines.