National Health Investors Inc (NHI) 2013 Q3 法說會逐字稿

Welcome to the National Health Investors third quarter 2013 conference call. (Operator Instructions) I would like to turn the conference over to Tripp Sullivan, of Corporate Communications. Please, go ahead, sir.

Good morning. Welcome to the National Health Investors conference call to review the Company's results for the third quarter of 2013. On the call today would be Justin Hutchens, President and Chief Executive Officer, and Roger Hopkins, Chief Accounting Officer.

The results, as well as noted to the accessibility on this conference call on a listen only basis over the internet were released last night in a press release that has 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 risk 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.nhireit.com. In addition, certain items 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 will turn the call over to Justin Hutchens. Please go ahead.

Thank you, Tripp. Good morning everyone. Thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer. We reported $0.94 of Normalized FFO in the quarter, a 17.2% increase and greater than we had anticipated which Roger will explain in a moment.

We have completed $258 million investments year-to-date and experienced great performance from our portfolio, particularly the Bickford joint venture. I will go through all of that in more detail in a few minutes. Roger will walk through our financial results.

Thank you. Good morning. 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. I am very pleased to report strong normalized FFO growth for the third quarter of 2013.

Normalized FFO for the third quarter rose 17.2% over the same period in 2012 primarily as a result of revenues from our new investments funded of $241,549,000 in 2013.

Normalized FFO for the third quarter was $26,193,000, or $0.94 per diluted common share, compared with $22,357,000, or $0.80 per diluted share in the same period in 2012. Normalized FAD for the third quarter was $25,359,000, or $0.91 per diluted share, compared with $21,736,000, or $0.78 per diluted share for the same period in 2012.

Normalized FFO and Normalized FAD for the third quarter of 2013 excluded the positive impact on net income of a recovery of a previous write down of $2,061,000. This write down was related to a note receivable but ended up being paid in full in the amount of $3,293,000.

Net income attributable to common stockholders for the third quarter of 2013 was $42,744,000, or $1.53 per diluted share, compared with net income of $14,351,000, or $0.52 per diluted share for the same period in 2012.

Net income for the third quarter includes the accounting impact of the recovery of $2,061,000, plus a gain of $19,370,000 on the sale of six skilled nursing facilities to our tenant National Healthcare Corporation.

We plan to defer recognition of the tax gain on the sale of these facilities by the utilizing the like-kind exchange rules under section 1031 of the Internal Revenue code. 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.

Our revenues for the third quarter were up $7,450,000, or 30.6%, compared to the same period in 2012 due to the volume and timing of our new investments in 2012 and 2013. Straight line rental income was $1,713,000 in the third quarter. The revenues from our RIDEA structured joint venture with Bickford amounted to $5,387,000 in the third quarter, and represents 16.8% of our total revenues from continuing operations.

Our RIDEA joint venture with Bickford currently owns 27 assisted living and memory care facilities and also has three facilities under construction. As described last quarter, our annual contractual lease revenue from the operating company in the joint venture is $18,836,000, plus annual escalators and operating cash flow.

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.

Revenues from discontinued operations in the third quarter related to six skilled nursing facilities that we sold to our tenant NHC, in August. Rental income from our owned assets represented 91% of our third quarter revenue. Interest income on our notes represented 6%. Investment income represented 3%.

Depreciation expense for financial statement purposes decreased $59,000 in the third quarter of 2013 compared to the same period in 2012, as a result of certain assets being reclassified in 2012 that were previously held for sale. Absent that reclassification in 2012, depreciation expense would have shown an increase of $1,894,000 in the third quarter of 2012 (sic -- 2013), compared to the same period in 2012. This increase is indicative of our growth in new real estate investments in 2012.

Our interest expense and amortization of loan costs increased $2,436,000 during the third quarter, compared to the same period in 2012 as a result of additional borrowings to fund our new real estate investments in 2012 and 2013.

Interest expense in the third quarter includes amortization of debt costs of $110,000. Our G&A expenses for the third quarter of 2013 increased only $118,000 from the same period in 2012. Share based compensation expense was $253,000 for the third quarter. We estimate the market value of our stock options granted each year using the Black-Scholes pricing model.

Our Normalized FFO for the third quarter of 2013 was $0.94 per diluted share, which is over stated our expected third quarter results by $0.03 per diluted share due to the timing of the sale of the six facilities to NHC, the timing of our purchase of eight skilled nursing facilities from our former, not for profit borrower Elder Trust which we leased to NHC, and lower G&A costs.

We ended the third quarter with cash and investments in marketable securities of $21,027,000. Our debt on September 30, 2013 consisted of borrowings on our unsecured revolving credit facility of $191 million, unsecured bank term loans of $120 million with a maturity of almost 7 years, and $80 million of Fannie Mae secured debt maturing in July 2015.

In August we paid off a secured mortgage debt of $19,250,000 scheduled to mature in November. We have $59 million available to draw on our revolving credit facility.

At September 30, 2013, we have ongoing construction projects with three tenants totaling $38,500,000 relating to three new assisted living facilities, and expansion and renovation of a senior living campus, and an expansion and renovation of an acute care hospital. The total funds advanced so far on these projects for land and construction amounts to $21,254,000.

We expect our normal monthly cash flows and borrowings on our revolving credit facility will be the primary sources of capital to fund our operations for the remainder of 2013. We continue to evaluate long-term debt financing options. Each of these forms of debt capital will come at a higher interest cost as compared to our revolving bank credit.

We currently estimate that we will have one or more of these longer term debt instruments in place in 2014. As shown in our supplemental data report we calculate our EBITDA coverage of our interest expense to be 17 to 1. On an annualized basis our consolidated debt to EBITDA is 3 to 1.

I would like to turn the call back over to Justin with comments about our investment portfolio and our 2013 Normalized FFO guidance.

Thanks, Roger. Looking at our portfolio statistics, lease service coverage remains very strong with a weighted average lease service coverage ratio of 2.88 times. As a reminder, you can find details on the ratios for our properties on page 6 of our supplemental.

NOI is up 6% sequentially in the Bickford RIDEA portfolio, while occupancy was 85.2% for the quarter, which is a 90 basis point improvement over the prior quarter. Our new investment volume is $258 million for the year.

Our pipeline continues to be very active with mostly private pay senior housing assets. We have added 12 new operators to our portfolio over the past five years and had already repeat business with half of those operators.

We have also grown our portfolio with a handful of our long-term existing customers. We plan to continue to grow by servicing our current customers and continue to look for opportunities to add new operators to the mix.

Turning to our outlook, we are raising and tightening our guidance for Normalized FFO for 2013 and raising the top end of the range to $3.53 to $3.55 per diluted share. In regards to capital planning, we have plans to continue to term out debt with staggered maturities over the near and long-term.

Due to our low leverage balance sheet, we still anticipate that we won't need to raise equity in the near term absent a transformational investment opportunity. In summary, the pipeline is strong and has been consistently strong for the past several quarters.

The business environment is favorable. We are creating new relationships among operators, and deepening the existing partnerships that we have currently. Our win/win approach has resonated with operators and has us on track for another great year for NHI.

Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from Karin Ford, with KeyBanc Capital Markets. Please proceed with your question.

Good morning. My first question was just on the terming out of the line. I think in the past you have talked about a couple of options, maybe a secured HUD option, and then a private placement. Are those two options still on the table, and can you give us an update as to what you think indicative rates might be for you guys on those two items? I know you said 2014. If you could pin point a little better on timing, that would be helpful.

Karin we wish we could nail down the timing. That is a little bit uncertain at this point. We certainly believe those options continue to be available to us. We believe that the indicative rates for HUD would be in the range of 4%. We believe that private placement perhaps in the 10- to 12-year range would be 5%, perhaps more. But, of course, those rates are fluid and wouldn't be known absolutely until we execute on either one of those instruments.

That is helpful. My second question is on the capital lines. Given the increase in your cost of equity today, I know your leverage level still remains low and below your longer term target. But do you feel a greater sense of urgency? Especially in light of the fact you said the pipeline continues to be really good. Do you feel a greater sense of urgency to perhaps tap the equity market sooner than you'd previously thought?

This is Justin. I mentioned in my prepared remarks that absent a transformational investment, we don't anticipate utilizing equity in the near term. If our volume gets ahead of schedule, certainly we would entertain it. At this point in time if we just were to grow at our targeted pace which is usually around $100 million to $150 million a year, we think we could utilize debt all through 2014.

There is a debt maturity that Roger mentioned that occurs in 2015. It's Fannie Mae debt, $80 million. The cost of that debt is 7%. That would probably be a consideration in 2015 to utilize equity, particularly when we can pay down that relatively expensive debt, but in the near term, we are just going to continue to utilize debt financing, utilize the sources that Roger mentioned most likely, and match the timing up with our investments that we plan to make in 2014. Like I said, if we get ahead of schedule then we would certainly consider equity at that time.

Thanks. Last question. Any change that you are seeing in the marketplace in terms of cap rates, or any change in your required returns on investment?

From last quarter we really haven't experienced any change at all.

Thank you.

(Operator Instructions). Our next question comes from Todd Stender, with Wells Fargo. Please proceed with your question.

Good morning, guys. It is obvious your debt profile is very low relative to the peer group but it continues to edge higher due to your active investment pace. Could we get an update on how the board feels about where NHI's debt level is going? I'm sure they like the growth of the Company but it is coming from a level they probably got used to, essentially no debt for quite awhile. I'm just kind of getting their pulse of how they feel about it.

Sure, Todd. This is Justin. We have targeted four to five times fixed charge cover and four to five times debt to EBITDA. If we can manage to those metrics we'll continue to be in the lower part of the peer group in terms of leverage.

So essentially relative to the peers, sometimes it adds up to seven or eight times. That is helpful. If you can give some color, and correct me if I am wrong, is Discovery Senior Living and Chancellor Health, are they new to your portfolio?

Discovery Senior Living is a new customer. They came to us this year. We have entered into really two transactions with them. One is to acquire a campus in Alabama that includes independent living and assisted living. It was a CCRC that had been converted to a rental model. It is a very good fit given the senior housing background that Discovery has.

We have also committed financing to construct an assisted living project in Naples, FL with them. Chancellor Health Care is an existing customer. We had purchased campus last year in Loma Linda, CA. It's independent living, it's skilled nursing.

We've agreed recently with Chancellor to fund the construction of an assisted living community on that campus. And also, we just made a purchase of an assisted living property in the Baltimore area of Maryland that will be leased to Chancellor, and operated by Chancellor, so we've had an opportunity to expand that relationship.

Thanks. Justin, if you can expand on the yields that you look at on new development? Whether it's in the Baltimore area, or in California, is there any difference in some of those initial yields?

Well, the yields that we went with in this case, we went with -- the Maryland property by the way is not a development. It is a stabilized asset. We charged 8% for that.

We do think there is some opportunity for operational improvement that Chancellor will benefit from and of course they'll -- we will benefit from the credit standpoint. We charge 9% on the construction. There is about 100 basis point premium that we get for financing the construction, but of course the risk profile of that construction is lower than most because it is being built on an existing campus that has natural built-in feeders that can refer to the new assisted living community.

That is helpful. Lastly, the loan to Bickford, was that at 9%?

The loan to Bickford, the mezz financing was -- I think it was 11%.

Just getting a feel for some of the comparisons with the (multiple speakers).

The same is the case with the loan to Discovery. In both cases we charged 12% actually, so we get double digit interest rates on those mezz loans that we make that are committed as part of a construction financing.

That is helpful. Thank you, Justin.

Thanks, Todd.

Next question from Daniel Bernstein, with Stifel. Please proceed with your question.

Good morning. I am going to switch away from the senior housing and look at the NHC lease coverage that was up, it looks like, year-over-year. When we look at a lot of other reporters on the skilled side and the REIT side, it looks like lease coverage has deteriorated I assume from sequestration. What do you think is helping NHC's lease coverage on a year over year basis? Are they doing something different, do they have some competitive advantages over skilled competitors? I am trying to understand the strength in that portfolio.

One thing that was our understanding across the board is that summer was relatively weak in skilled nursing. We have a quarter lag in our coverage ratio. It will be interesting to see them updated. I don't expect much change, but there could be some change when we add in Q3. NHC's coverage ratio is based on corporate coverage. We own about half of their real estate assets.

They have a whole 'nother group of assets that are unencumbered, plus they have other lines of business that are included in that corporate coverage. They are offsetting any SNF performance change with ancillary businesses. Obviously they are doing a good job with that, and they're at 4.1 times cover. Non-NHC SNFs are covering at 1.82 times. We feel really good about their performance moving forward as well.

Are the non-NHC SNFs corporate coverage or is that property level?

The non-NHC SNFs are property level coverage.

Okay. So anybody doing ancillaries, or adding home health, et cetera, is not going to benefit on that.

Right.

There is a lot of talk in the industry about senior housing construction, where that is heading. Have you changed your investment criteria in any way in terms of what cap rates you are looking for, whether you do triple net, or RIDEA, and in particular, also, whether you've thought about CapEx needs on properties you are looking at? Has any of your investment due diligence changed as a result of the tick up in construction in seniors housing?

One part of our due diligence that has always been in place is to check to see if there is new supply entering the markets where we're contemplating investment. For the past five years the answer was generally, no. Now, of course there is new supply we are finding as we look at various markets. I would consider that a change.

The criteria has not changed but the results are different, because there is in fact new supply being added in several markets. In terms of our overall investment criteria, we are going to be mindful of the new supply and particularly the price point that the new supply would have to support when they enter a market.

One advantage that we have, for instance with the Bickord construction, is that we are financing at $150,000 a unit which is relatively low given the fact that the price point that product attracts is around $5,000 a unit. So we have some room -- we have a little bit of wiggle room when we enter a market. Generally we enter as a price leader, but not always. There are some markets where we will enter with a new product and not be the price leader.

But to the extent that there is new construction that is entering as the price leader in the market as long as we are operating in a mid to high price point product, or we own a mid to mid high price product, I feel like we are somewhat insulated from the new supply, so that is something we look at. But, the dynamics are changing due to new construction. There is no question about it.

Good news is, the demand is still very strong. Performance is solid across the industry. So we remain very confident moving forward as we continue to make investments in private pay senior housing.

Are there any geographies you would in particular want to invest in or not invest in as a result of what you are seeing in the construction data or what you're seeing on the ground that may not already be in the construction data?

I would say this. Two states that we have noticed, at least in our due diligence, to have a seemingly very active construction pipeline, is Florida and Texas. So we are very focused on those two states and paying attention to the new supply coming on board.

Naturally, those are two states that support a rapidly growing aging demographic, so it makes sense there would be more supply being added there. But I do think that there is a lot of operators and investors that have figured out that there is an aging supply, particularly in Florida. If you can enter with a new product that is well located, then you can probably take the market share.

There are some attractive opportunities in Florida. But there are probably markets at the risk of being over built. We are watching that very closely.

Do you think maybe the newer assets will take market share from the older?

I do. The trick is, though, and I don't think everybody will be successful doing this, you have to be able to build efficiently enough that you do not have to be the price leader to compete in the market. If you go at the high end of the market, I think some developers and operators are going to price themselves out of markets which will lead to distress and then probably a repricing of the asset. But given where construction costs are, and the experience we've had, I do think there are opportunities to enter markets, not be the price leader, which positions you well to take from the price leader as well as compete with other mid to high-priced point product.

That was great color. Thank you.

We have a follow-up question from Karin Ford, with KayBanc Capital. Please proceed with your question.

Along the same lines, you have a nice rebound in occupancy in the RIDEA portfolio both year over year, and quarter over quarter. Can you talk about what the outlook is looking like for occupancy? There is still some sell off there; just your thoughts as we head to the seasonally slower period here. Do you think occupancy will continue to trend up?

I don't mind telling you that we have visibility on a very strong revenue quarter in our joint venture with Bickford. That is assuming occupancy stays flat. The reason for that is there is some carryover from the occupancy increase we had in Q3. Also, they have a seasonal rent increase they do. There is a lot of the increases that happen to happen in the month of November.

I also expect expenses to drift up as well in Q4. But altogether, we think we are looking at a strong quarter. I don't have a feel for anything beyond that but I will also add this, just a little color. That improvement that the portfolio had in Q3 did not include any benefit from those turnaround assets I mentioned on a previous call.

There has been a lot of focus there by Bickford management. We expect improvement in those assets over time as well. So I look forward to that improvement down the road a bit. Meanwhile the rest of the portfolio has drifted up and they have done a good job managing the portfolio from every perspective.

That is helpful. Thanks. On the investment side are there any big portfolio transactions in the pipeline under consideration today and/or do you expect any additional deals to close before year end?

We have several hundred million dollars under review right now. It may be the busiest pipeline we have had, at least since I have been here at NHI. There are no guarantees, of course, we may close zero of it. We are very busy.

I wouldn't rule out a year end close, but I wouldn't predict one either. Our guidance, of course, doesn't consider any investment activity that would happen, because anything that does happen, the benefit occurs in 2014. When we get around to giving our 2014 guidance we will have more clarity at that point.

Big deals? Are they in that pipeline?

Let me say this. You know our profile. I always say someday we will have that transformational large opportunity and when we do, like to your question earlier, we will consider raising equity. Then again that deal hasn't come yet. In five years we have been making a living off the small portfolios and the one off assets and have done a great job executing on that game plan. We are always open to large transactions but generally that is not in our wheelhouse.

Finally a housekeeping question. The guidance language in the press release mentioned a tick-up in G&A in the fourth quarter. Can you give us more color on that?

This is Roger. We had lower G&A than we expected in the third quarter. We think we will have a little bit higher G&A in the fourth quarter relating to tax, capital planning, year-end compensation, these sorts of things. I think our investment activity over 2013 is a driver of a lot of that expected G&A in the fourth quarter.

Okay. It's like a few hundred thousand dollars, or something like that?

Yes.

Thank you.

Next question from Adam Joseph, with West Main Partners. Please proceed.

Good morning, guys. The comment you made in reference to the states of, let's say, Texas and Florida. What are you seeing on the pipeline for potential opportunities if we move out west, Arizona, California? Do you have any sense on what that growth channel might look like in the future?

I can tell you I have seen some development in Arizona both in the senior housing and in Medicare supported sub-acute market. California is, I'm sure you know, a very difficult state to generate a new development because it takes an awful long time to get projects underway. We are not seeing a lot of volume in California. Any other states out west? There's none that are really jumping out at me in terms of having an above average amount of development volume.

Finally, so I am clear, did you say there was $59 million left on the revolver? Is that correct?

Yes. $59 million left. One thing I should point out, too. We have an accordion feature where we can tap another $150 million. I am very confident that if we need to move quickly that we have plentiful access to capital to continue our investment activity until we in fact term out the line.

Great. Thank you.

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

Okay. Thank you. I am sure you can tell we are very upbeat and positive about the results at NHI and the outlook for the Company. We appreciate your time on the call, and look forward to talking again on our next call.

That does conclude the conference call for today. Thank you for your participation, and ask that you please, disconnect your line.