National Health Investors Inc (NHI) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors fourth-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, February 15, 2013. I would now like to turn the conference over to Mr. Tripp Sullivan with 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 2012. On the call today would be Justin Hutchens, President and Chief Executive Officer; and Roger Hopkins, Chief Accounting Officer. The results, as well as notice to the accessibility on this conference call on a listen-only basis over the Internet, were released earlier 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 fact 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 and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31, 2012. Copies of these filings are available on the SEC's website at www.sec.gov or at NHI's website at www.nhreit.com.

In addition, certain terms of use 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 afternoon, everyone, and thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer.

We have put a strong quarter in the books for NHI and completed a year that helped us reach over $500 million in investment volume over the past 3.5 years. We posted a 9% increase in normalized FFO, and announced a special dividend of $0.22. In recognition of this growth, the Board has elected to increase our dividend for the first quarter to an annualized $2.78 per diluted share, which is a 5% annual increase over 2012.

We are excited about our success and the continued growth of the Company. We have a lot to update you on for the coming year, so let me first turn it over to Roger to walk through our financial results. Roger?

Thanks, Justin. 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. I am very pleased to report strong normalized FFO growth for the fourth quarter and the full year. Normalized FFO for the fourth quarter of 2012 rose 9% over the same period in 2011, primarily as a result of revenues from our new investments funded of $82.372 million in 2011 and $146.092 million in 2012, including debt assumed in a RIDEA-structured transaction with Bickford Senior Living.

Comparing our lease revenue from 2012 to 2011, our revenue from our tenant, Bickford, increased $925,000; our revenue from Legend Healthcare increased $788,000; and our revenue from Polaris Hospital Company increased $619,000, due to the timing of our new investments with these tenants in 2011 and 2012.

Normalized FFO for the fourth quarter of 2012 was $23.369 million, or $0.84 per diluted share, compared with normalized FFO of $21.448 million, or $0.77 per diluted share, in the fourth quarter of 2011. Normalized FAD for the fourth quarter of 2012 was $22.771 million, or $0.82 per diluted share, compared with $20.908 million, or $0.75 per diluted share, for the same period in 2011. Normalized FFO and normalized FAD for the fourth quarter of 2012 excluded the impact on net income of adjustments totaling $9.513 million. During the last week of December, we received a payment from a borrower in full settlement of our mortgage note receivable and recognized a recovery of a previous write down of $4.495 million and a gain of $4.65 million related to an equity participation formula in the note.

Net income attributable to common stockholders for the fourth quarter of 2012 was $41.105 million, or $1.48 per diluted share, compared with net income of $18.114 million, or $0.65 per diluted share, for the same period in 2011. Net income for the fourth quarter of 2012 includes the accounting impact of a gain of $11.966 million on the sale of our assisted living facility in Edison, New Jersey. 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 are included in our earnings release, our Form 10-K, and the supplemental data report.

Our revenues for the fourth quarter of 2012 were up 19.9%, compared to the same period in 2011, due to the volume and timing of our new investments in 2011 and 2012. Straight-line rental income was $1.34 million in the fourth quarter. Revenues and expenses for each year presented in our income statements exclude those properties that were sold or that meet the accounting criteria as being held for sale, with such revenues and expenses being reclassified to discontinued operations. This reclassification had no impact on previously reported net income. Rental income from our owned assets represented 89% of our fourth-quarter revenue.

Depreciation expense increased $1.105 million during the fourth quarter of 2012, compared to the same period in 2011, as a result of our new real estate investments funded in 2011 and 2012. Our interest expense and amortization of loan costs was $1.316 million for the fourth quarter of 2012, compared to $1.219 million for the same period in 2011, as a result of additional borrowings to fund our new real estate investments.

Our general and administrative costs for the fourth quarter of 2012 increased $562,000 from the same period in 2011, due primarily to professional fees and the timing of our employee-performance bonuses for 2012. Non-cash stock-based compensation expense was $244,000 for the fourth quarter of 2012. We estimate the market value of our stock options granted each year using the Black-Scholes pricing model. Based on the required inputs to this model, we expect our non-cash expense to be similar to the 2011 expense level. As a reminder, this typically has more of an impact to expense in the first quarter, as compared to other quarters, based on the vesting schedule of the option grants. Approximately 50% of the annual expense occurs in the first quarter.

Normalized FFO for the year ended December 31, 2012 rose 10.4% over the same period in 2011, primarily as a result of revenues from our new investments funded in 2011 and 2012. Comparing our lease revenue from 2012 to 2011, revenues from our tenant, Legend Healthcare, increased $5.262 million, and revenues from our tenant, Bickford, increased $929,000, due to the timing of our new investments with these tenants in 2011 and 2012.

Normalized FFO for 2012 was $88.487 million, or $3.18 per diluted share, compared with normalized FFO of $80.176 million, or $2.88 per diluted share in 2011. Normalized FAD in 2012 was $87.599 million, or $3.15 per diluted share, compared with $80.419 million, or $2.89 per diluted share, for the same period in 2011. Normalized FFO and normalized FAD for 2012 exclude the impact on net income of investment gains, loan writedowns and recoveries, and other adjustments totaling $5.601 million and $6.564 million, respectively, in 2012.

Our debt at December 31 consisted of our bank term loans of $120 million, borrowings on our revolving credit facility of $64 million, and $19.25 million of secured mortgage debt, through our RIDEA-structured investment with Bickford. We have $136 million available to draw on our revolving credit facility. Aside from the mortgage debt that matures in November of 2013, our remaining borrowings do not begin to mature until 2017.

We expect our normal monthly cash flows and borrowings on our revolving credit facility will be the primary sources of capital to fund our new real estate investments in the new term. During 2013, we will carefully evaluate sources of longer-term debt to pay down our revolving credit facility including -- private placement, HUD, and agency debt. We have a very low-leverage balance sheet relative to the value of our net assets and our market capitalization. In addition, in our supplemental data report, we calculate our EBITDA coverage of our interest expense to be 32 to 1.

We ended the year with cash and marketable securities of $22.056 million. In late December, the income recognized from a mortgage note paid off resulted in a special dividend to stockholders of $0.22 per share and was paid on January 31, 2013. This morning, we announced an increase in our first-quarter dividend to $0.695 per share, or an annual dividend rate of $2.78 per share, a 5% increase over the 2012 cumulative annual dividend of $2.64 per share.

I'd now like to turn the call back over to Justin, with comments about our investment activity and the 2013 normalized FFO guidance.

Thank you, Roger.

We had one of our more active quarters in recent memory, with a number of investments, funding commitments, and dispositions. In November, we funded another $10 million to Capital Funding Group, which fully funded the $15 million credit facility we established with them last year. This facility matures in 2015. In December, we closed on a purchase and leaseback transaction on three assisted living facilities, two in Oregon and one in Idaho, for a total of $9 million and an initial lease rate of 7.75%. Milestone operates these facilities and has a strong presence on the West Coast. We also completed a purchase and leaseback transaction on an assisted living and memory care facility in Wisconsin with Landmark Senior Living for $20.2 million and an initial lease rate of 7.75%. Both of these transactions have strong sponsorship and private-pay demographics.

In the area of portfolio management, we announced in December that our tenant, Sunrise Senior Living, exercised their purchase option to acquire our senior living campus in New Jersey for $23 million. We also extended our lease with National Healthcare Corporation, our largest tenant, through 2026. The lease represents 38 skilled nursing facilities and three independent living facilities. Separately, we agreed to sell six older skilled nursing facilities to NHC for $21 million. NHC has one of the stronger credits in the senior care industry and represents approximately 34% of our revenues today, compared with over 70% a few years ago.

This activity in the fourth quarter brought us to $179 million in new investments and commitments in 2012. 82% of that was directed toward private-pay, assisted living, and senior living campuses. We have averaged $128 million per year over the past four years. The timing is always tricky; however, we anticipate investing at a similar pace over the next few years. We remain very selective and disciplined in our approach to making new investments and managing the overall portfolio, although our pipeline is very active.

The competition for new investments is picking up, which I believe reflects the health of the senior care sector. NHI's competition is primarily smaller players, who are becoming more aggressive on pricing. We will continue to prioritize assisted living and senior living campuses and will pursue high-quality skilled nursing facility opportunities at the right price and with experienced operators. The operating environment is as healthy as it's been in some time. Private-pay dynamics are great and absorption continues to outpace new supply, particularly in assisted living and independent living.

Turning to our guidance, we are projecting our normalized FFO for 2013 to be in a range of $3.30 to $3.38 per diluted share. On the bottom end of that range, we are assuming a baseline from Q4 2012, the timing for terming out some debt on our credit facility, and assuming 3% growth from our Bickford joint venture. On the top end of that range, we are adding in assumptions for investment activity as well as 6% growth from our Bickford joint venture.

In regard to the Bickford relationship, we are very pleased with the progress of the growth pipeline. We have three new assisted living facilities under construction, in the joint venture, at year end, representing a total investment of approximately $27 million. The business rationale on this transaction was a strategic partnership with a strong operator, along with additional growth in the RIDEA structure. All of this has proven out, and we are confident in the growth potential of the partnership. The RIDEA structure has been an attractive model for us, and we'll look for additional opportunities to utilize it, along with other growth plans in 2013 and beyond.

Operator, we are now ready for questions.

(Operator Instructions)

Karin Ford, KeyBanc.

First question is on Bickford. Can you give us some operating stats on how the portfolio did in the fourth quarter, just with regards to occupancy, rent growth, and NOI growth?

Sure. I have occupancy. They tick up a little bit. The portfolio is 90% occupied in Q4, and continuing that run rate would lend support to the top end of that NOI growth range I gave, which is 6%.

So, we feel really good about the portfolio performance. It's improved since we made the acquisition. Occupancy is up. NOI growth rate is on pace for the top end of that range, but we've got a whole year ahead of us, so we'll see how it plays out.

Okay. Thanks. (Inaudible) on the lease -- could you talk about your thoughts in why doing that, what you think it does for NHI, what the coverage is on the new lease terms, and how close you think the rent on that new lease is to market levels today?

Okay. Let me start with -- why did we do it? And, your question -- you cut out -- I think your question was related to the National Healthcare Corporation lease extension and asset sale, right?

Correct.

Okay. For starters, as you know, it's a big relationship and National Healthcare has phenomenally strong credit. So, it has been a priority of mine, really since I've arrived here four years ago, to be sure that we could lock in a lease income stream in the long term with them.

They've had priorities in their markets and had some particular assets that they identified that, if they were to purchase them, I think on their side it would be putting a lower cost of capital in place. And for us, it would give us an opportunity to take proceeds and recycle into newer assets. And as you know, diversification has been a big part of our overall strategy, so this was a way to reduce some skilled nursing concentration, and particularly, in older assets, while meanwhile, extending the lease with the phenomenally good credit. So, we can sleep real easy until 2026, I think, on that relationship.

In regards to -- is it a market lease? I can tell you that that portfolio has been the best return in our portfolio. There was an increase in base rent that occurred back in '07. There's a revenue escalator that only gets better as time goes on.

I feel really good about the relationship for NHI, the returns we get on it, and I don't plan on shopping it in the open market, so (laughter) I'll -- but I do look forward to the ongoing relationship with them.

Does the coverage level in the lease change at all?

The coverage in -- their coverage is 4 times, which include -- that's their fixed charge cover. Remember, they don't have any debt and we're their only landlord, so their fixed charge cover is effectively our coverage ratio. I don't see that changing much at all. Actually, it will get a little better because they're going to apply a lower cost of capital to the assets that they're purchasing.

But really, the decision wasn't -- didn't have anything to do with the credit. The credit was strong. It was more around diversification and extending the relationship out to 2026.

Great. Last question is on the guidance. Can you characterize the acquisitions that are underlying the higher end of the range? Is it your typical -- what you've got visible today, or would you say it's characterized more by what you said earlier in your comments, that you're looking to do, roughly, the same volume as you've done the last few years?

Sure. Let me try to give you as much color as I can without giving you an investment guidance, because we try to avoid that. I can tell you that our pipeline is very active -- has not been this active. It's also becoming evident that the broader investment community has realized that the senior care space is a great place to invest so that there is a lot of competition in the space.

We do have visibility on investments. We do intend to keep the same investment pace that we've had, which has been about $128 million a year over the past four years. And depending on the timing, it could impact the top end of the range, so I'll leave it at that.

I'm optimistic about our investment activity and can assure you that we have plenty in our pipeline to consider, but we will remain selective and strategic when we make investments. So, I always like to temper that when I say we're busy, because we're always looking for the right fit as well.

Thanks. Appreciate the color.

Rich Anderson, BMO Capital Markets.

Roger -- and, you might have both said this that it's plenty -- the balance sheet is fine and plenty of room to make your acquisitions, investments. But, can you give a sense of -- I don't know, say something really big came along, how big would that thing have to be for you to have to consider, or want to consider, the equity capital markets, considering your stock has done well, trades at an NAV premium and all the rest? Just curious what your thoughts are on that?

Rich, we don't have any plans, at all, for equity. We believe that if we continue our selective growth approach that we've had over the past three years, that we'll continue to access sources of debt, still remain low levered over that period of time. It would take a very sizable, almost transformational, type transaction for us to consider equity.

Is there anything potentially transformational out there?

If you have something to refer to us, we're happy to look at it (laughter). Rich, we're just staying with our game plan, which has been smaller portfolios and one-off opportunities and relationship-driven opportunities, and there's plenty of those to keep us busy.

Okay. Turning to Bickford and RIDEA, generally. Again, I apologize if you referenced this in your opening remarks, I don't think you did, though. Do you have a number in mind, in terms of what the risk premium you require in a return on a RIDEA transaction versus an equivalent triple-net execution?

You know what -- we tried to look at every investment as a standalone opportunity; and in this case, we had some circumstances that gave us about 100 basis points or better, I think, premium.

Okay.

I liked the opportunity when we made it; because in my view, that priced in some of the potential downside operating risks that we could have, but with all the confidence that the portfolio was going to grow and it was poised to grow and we had an operator that has a track record of creating value over many, many years operating. So I would remind you, too, that there's -- when you see these real estate returns that are reported, there's always cash flow above and beyond that. So for instance, when we did the leaseback deals in this December, we reported 7.75% cap rate, but there's some cash flow coverage that's beyond that; and then, that cash flow coverage above and beyond our lease rate that goes to the operator, they're getting double-digit returns on that.

Right.

And, there's more volatility in that cash-flow stream, so when we look at a RIDEA, we look at it with two moving parts in mind. One is, the price of the real estate, and then the other is the volatility of the cash flow portion of -- the operator's cash flow portion of the whole portfolio. So there's -- in my view, helps support a little bit higher going-in yield if you're going to be an owner of both the operations and the real estate.

Okay. When you look at -- let's say, $100 million of acquisitions in 2013, not that you're saying that's what it is, but what percentage of that do you think would be in the RIDEA camp?

I don't know the answer to that. We are pursuing some potential RIDEA partners outside of the Bickford relationship. Just the Bickford relationship alone, as I mentioned, is adding three new projects that are in construction.

Right.

Those should open towards the end of the year and the beginning of '14. In my crystal ball, today, I would say, conservatively, none of the next $100 million would have a new RIDEA partner. But, I reserve the right -- we do, to change our mind about that.

Okay. You're allowed. Then, the last question, I was curious if you could give us anything on this Elder Trust situation, the lawsuit -- is there any comment you can make about how much we should be worried about that?

I can say this, that there's two nonprofit portfolios, Elder Trust and Senior Trust, they're both paying interest payments to us. They're current on their interest payments. They're both -- we're in litigation over both portfolios, and our public filings are up to date. We had an updated disclosure in our 10-K, but besides that, it's probably not appropriate to comment any further.

Fair enough. Okay. Thank you very much.

(Operator Instructions)

Rob Mains, Stifel Nicolaus.

Roger, a couple accounting questions for you. Bickford -- their share goes out via the minority interest line, I assume. What's the equity income line?

What is which line, Rob?

Equity income on the income statement (inaudible).

On the income statement, you've got the -- our equity in the net income of the operating company. For the fourth quarter, our 85% equity interest in that operating company's net income was $45,000.

Okay. That's not consolidated?

The operating company is not consolidated.

Right, okay. I think, then, that's going to answer my next question. So, there's no -- that's effectively your share of the NOI?

That would be their GAAP net income.

Right.

Yes, that would be GAAP net income.

So, you don't book revenues for their tenant -- for tenant leases nor resident operating expenses?

That's correct. In the structure that the parties agreed to, we don't have control of the operating company. We have a majority financial interest, but not control.

Got it. Okay. The next question -- am I correct that rental revenues do not include revenues from the held-for-sale NHC assets?

That's correct. Those six buildings that we agreed to sell during the last week of December, those would be classified as held for sale, and any revenues and depreciation that we would have normally had in continuing operations, for all periods presented, gets reclassified down into discontinued operations.

Right. So, in the fourth quarter, since third quarter, it was consolidated -- fourth quarter wasn't in your as-reported third-quarter and fourth-quarter numbers, what was the reduction in the top line that you effectively were overcoming there?

Okay. The number for the year, Rob, was $3.368 million that gets reclassified down from continuing operations to discontinued operations.

Okay. And that, said better, that's ratably accrued over the course of the year?

That's correct.

Okay. Then, one last NHC question, the -- is it too early to get an idea what the revenue escalator might be this year, given that 2012 was kind of a tough year for the industry, though I know NHC fared better than most?

It's still too early. During the first -- by the end of the first quarter, we will true up the percentage revenue calculation, as we always do, at that time of the year. We don't know what that number is yet.

Okay. Fair enough.

Last question, Justin, in your comments, you cited more aggressive pricing, and you've talked a little bit about that in the acquisition environment. From whom are you seeing -- is that -- I know that you said that there's people getting interested in senior housing -- is it other REITs? Is it private equity? Is it real estate investors? Where are you seeing the price pressure emanating from?

Yes. The answer is yes (laughter). There are smaller REITs that are the same size as us that are in the marketplace. We don't tend to run into the obvious peers, which would be LTC and Sabra. We don't run directly into them all that often, although it does happen from time to time.

I think a bigger competitor is really the low cost of debt capital that's available to operators through HUD, Fannie, and local bank financing, combined with [friends and family] equity or institutional private equity. There's often a consideration that the operator is making, whether they should use that form of financing, or whether they, in fact, want to sell their real estate. Or, in the case of an open-market transaction, allow us to purchase it and lease it to them. So, there's always the options that the operators have, and fortunately, we've been able to find many very good fits.

I'm not concerned about the competition, but -- primarily, because the volume is up in terms of potential opportunities, but more or less, just encouraged that -- just more signals about regarding the health of the industry.

Got it. Okay. Thank you very much.

Karin Ford, KeyBanc.

Just following up on Rob's last question. Justin, how much do you think cap rates are compressing, based on what you're seeing today?

I think cap rates have been -- you're probably referring to the private-pay assets?

Yes.

I'll say this first -- skilled nursing has been very flat, very predictable. A high-quality lease cap rate -- a lease cap rate on a very high-quality skilled nursing asset, you can get 9%, and we've been able to do that. It even drifts up higher than that, in some cases, but the highest quality asset, 9% is good, and you're buying at a 12%, 13% cap rate on their net operating income, which is about a 1.5 times cover.

Then, in assisted living, there's been -- we drifted down below 8%, for the first time, just in this fourth quarter. So, there's a little bit of compression, but it hasn't been a dramatic move, and no sign in the market that the smaller portfolios and the one-off assets are going to attract the pricing that the large RIDEA deal did from the large cap peer group.

That's helpful.

Just a question for Roger -- you mentioned a few different potential sources for the terming out of the line. Can you talk about what types of indicative rates you've been seeing for longer-term debt today?

I suppose that would depend upon the credit profile of the company, but I would say private placement rates for 10 to 12 years would be 4% to 5%; HUD rates sub 4%; and agency, probably in 5% range, something like that.

That's helpful. Then, last question, what's the timing on the sale of the skilled nursing facilities to NHC? And, am I calculating it right, that's a 14% cap on those deals?

That's a great question. It was -- I think it was a 12% cap on our lease income. That was the purchase price. The purchase would occur in, either in the very last day of this year or the first day of 2014, so we have a whole other year of continuing full lease payment from NHC. Then obviously, they'll write us a check for $21 million when the sale occurs, and then we'll have a reduction in lease income moving forward.

Great. Thank you very much.

Mr. Hutchens, there are no further questions at this time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

I'd like to reiterate our excitement about our progress and our optimism for 2013 and beyond. We appreciate your participation on the call today, and we look forward to speaking with you on the first-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.