National Health Investors Inc (NHI) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the National Health Investors fourth quarter 2013 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, February 18, 2014. I would now like to turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead, Sir.

Thank you, Gina. Good morning. Welcome to the National Health Investors conference call to review the Company's results for the fourth quarter 2013. 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 this morning and 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 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, 2013. 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 and 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 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 ended the year at the high end of our previous guidance, with $0.90 of normalized FFO in the quarter, a 7.1% increase. The $3.55 per share for the year represented an 11.6% increase from 2012. Normalized AFFO and FAD were also up for the quarter and the year.

Our announced and completed investments reached over $751 million for the year, with the closing of the Holiday transaction backed up by successful execution of a follow-on offering and expansion and extension of our credit facilities. Performance across the portfolio continued to meet our expectations, and the Bickford joint venture was once again a solid contributor. I will speak more to these transactions and trends as well as the improvements for our balance sheet in a moment.

Now, I will turn the call over to Roger to report our financial results.

Thanks, Justin. Good morning, everyone. My comments this morning are consistent with our disclosures in Form 10-K, our earnings press release and our supplemental data report filed this morning with the SEC.

We are pleased to report another quarter and full year with strong financial results. Normalized FFO for the fourth quarter of 2013 was $26.749 million, or $0.90 per diluted common share, compared with $23.369 million or $0.84 per diluted share in the same period in 2012. Normalized AFFO for the fourth quarter was $24.624, or $0.82 per diluted common share, compared with $22.029 million or $0.79 per diluted share for the same period in 2012.

Normalized FAD for the fourth quarter was $25.542 million or $0.86 per diluted share, compared with $22.771 million or $0.82 per diluted share for the same period in 2012. Our normalized results for the fourth quarter of 2013 excluded the impact on net income of a purchase liability of $3.256 million, that was written off into income, as our tenants earn out period had expired, and we were not required to fund the liability, which we had previously assessed as probable.

Net income attributable to common stockholders for the fourth quarter of 2013 was $27.776 million or $0.93 per diluted share, compared with net income of $41.105 million or $1.48 per diluted share for the same period in 2012. Net income for the fourth quarter of 2013 included gains of $2.888 on the sale of three skilled nursing facilities and an assisted living facility. Net income for the fourth quarter of 2012 included the recovery of a previous write down of $4.495 million plus a gain of $11.996 million on the sale of an assisted living facility.

We plan to defer recognition of the tax gain on the sale of these facilities by 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, normalized AFFO and normalized FAD.

Our revenues for the fourth quarter were up $6.918 million, or 26.7%, 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 $2.125 million in the fourth quarter.

The revenues from our RIDEA structured joint venture with Bickford amounted to $5.258 million in the fourth quarter and represents 14.6% of our total revenues from continuing operations. Our RIDEA joint venture with Bickford currently owns 29 assisted living and memory care facilities of which two opened during the fourth quarter and are not yet stabilized, and there is also one facility under construction.

As described last quarter, our annual contractual lease revenue from the operating company and the joint venture is $18.836 million, plus annual escalators and operating cash flow. New facilities construction -- constructed pay rent at a 9% annual lease rate.

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 expenses being reclassified to discontinued operations. This reclassification had no impact on previously reported net income.

Revenues from discontinued operations in the fourth quarter related to three skilled nursing facilities sold in December to our tenant Fundamental, and one assisted living facility sold in October to our tenant Weatherly Associates. Rental income from our owned assets represented 91% of our fourth-quarter revenue. Interest income on our notes represented nearly 6%, and investment income represented 3%.

Depreciation expense increased $1.835 million in the fourth quarter of 2013, compared to the same period in 2012, as a result of the timing of new real estate investments in 2012 and 2013. Our interest expense and amortization of loan costs increased $1.902 million during the fourth 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 fourth quarter includes amortization of debt costs of $107,000.

Our general and administrative expenses for the fourth quarter of 2013 increased 17% from the same period in 2012, due primarily to the addition of one person to our management team and to incentive compensation and professional fees. Share based compensation expense was $253,000 for the fourth quarter. We estimate the market value of our stock options granted each year using the Black-Scholes pricing model.

For 2014, we estimate our share-based option expense will be approximately $2.5 million of which approximately $1.7 million will be expensed during the first quarter according to the vesting schedule of the stock options. Normalized FFO for the year ended December 31, 2013 rose 14% over the same period in 2012, primarily as a result of revenues from our new investments funded in 2012 and 2013. Our revenues increased 26.3% from 2012 to 2013.

Our lease revenues from our assisted living and memory care facilities managed by Bickford increased $9.422 million, and lease revenue from Legend Healthcare increased $2.059 million. For 2014, we estimate our revenues from Holiday will be $43.76 million, of which $31.915 million is cash rent and $11.845 million is straight line rental income for accounting purposes.

Normalized FFO for 2013 was $100.935 million, or $3.55 per diluted share, compared with normalized FFO of $88.487 million or $3.18 per diluted share in 2012, an increase of 11.6% per diluted share. Normalized AFFO in 2013 was $94.43 million, or $3.33 per diluted share, compared with normalized AFFO of $83.86 million or $3.01 per diluted share in 2012, an increase of 10.6% per diluted share. Normalized FAD in 2013 was $99.127 million, or $3.49 per diluted share, compared with $87.599 million or $3.15 per diluted share for the same period in 2012.

Normalized results for 2013 exclude the impact on net income of the $3.256 million purchase liability written off to income. We ended 2013 with cash and investments in marketable securities of $23.962 million. Our debt at December 31, 2013 consisted of borrowings of $167 million, on our unsecured revolving credit facility with a maturity of 4.5 years, an unsecured bank term loans of $250 million with a maturity of 4.5 years, unsecured bank term loans of $120 million with a maturity of 6.5 years, and approximately $80 million of Fannie Mae secured debt maturing in July, 2015, prepayable without penalty at the end of 2014.

At December 31, 2013 we had $83 million available to draw on our revolving credit facility. At December 31, 2013 we have ongoing construction projects with three tenants totaling $25 million relating to three new assisted living facilities 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 $8.133 million. 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 and new investments in 2014. We are pursuing a number of available and attractive options to pay down our revolver with debt instruments that will have longer-term maturities.

We continue to pursue HUD's secured financing for a small portion of our portfolio to pay down our revolving credit facility and extend the debt maturity beyond 30 years. Each of these forms of new debt capital we are considering 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 the first half of 2014.

As shown in our supplemental data report, we calculate our EBITDA coverage of our fixed charges to be 12 to 1. We calculate our consolidated debt to be 5.3 to 1. However, by annualizing our rental income from our 2013 acquisitions, our consolidated debt to EBITDA is less than four to one.

For example, for the Holiday acquisition at the end of December, we added $250 million of debt to our balance sheet. The full EBITDA from this acquisition will be reflected in our 2014 results. We believe the debt metrics mentioned are important to maintaining a low leverage profile for NHI.

I'd now like to turn the call back over to Justin with comments about our investment portfolio and our 2014 normalized FFO and normalized AFFO guidance.

Thanks, Roger. Turning to our portfolio statistics, lease service coverage remains very strong with a weighted average lease service coverage ratio of 2.92 times. We have provided details on the ratios for our property types on page 6 of our supplemental.

EBITDARM is up 7.2% sequentially in the Bickford RIDEA portfolio while occupancy was 86.2% for the quarter, which is a 140-point basis point improvement over the prior quarter. I will also note that the Holiday portfolio is ahead of our underwritten performance for Q4 and thus far in 2014. Investment volume reached $751.6 million for the year, with the completion of the Holiday transaction in late December.

We also closed the $135 million transaction with Bickford Senior Living during the middle of the year that significantly expanded our RIDEA partnership. This was a busy year, and we demonstrated our ability to close quickly and remain disciplined.

We don't expect to be in the market elephant hunting for the large transactions. However, we have proven that we can and will opportunistically execute large transactions. Our typical growth pace will be between $100 million and $200 million a year.

The pipeline remains active with mostly private pay senior housing and senior care assets. Pricing has remained tight. We will maintain discipline, though, and continue to source through our proprietary pipeline.

Turning to our outlook, we are introducing new estimates for normalized FFO and normalized AFFO. Given the significant amount of straight line rental income that is generated from the Holiday transaction, year-over-year, it's nearly triple what we had in 2013, we have added the normalized AFFO measure. This should be a more accurate picture of the organic growth we can achieve from the NHI portfolio and is comparable to what we've seen among some of our peer groups.

As you recall, CapEx isn't really an issue for us. It's primarily the straight line GAAP adjustment. For 2014, we expect normalized FFO to be in a range of $3.92 to $4 per diluted share. We expect AFFO to be in a range of $3.44 to $3.50 per diluted share.

These estimates assume Q4 as the baseline, adjusting for the acquisitions made during the quarter, along with the three dispositions we completed, the terming out of debt on our credit facility and a range of 3% to 6% growth from the Bickford joint venture. I want to make it clear that the top end of our range does not include investment activity.

We are excited about the outlook for the year. We recently increased the quarterly dividend by another 6.2%, and the acquisition of the Holiday portfolio has accelerated our growth curve. We remain true to our roots and very appreciative of the relationships we have with leading operators. We look forward to working together with them in 2014 and delivering the performance we have all come to expect from NHI.

Operator, we are now ready for questions.

(Operator Instructions)

Karin Ford, KeyBanc Capital Markets.

First question, Justin, is you mentioned your sort of normalized acquisition volume goals. It sounds like they remained roughly steady at $100 million to $200 million for 2014. Just given the increased size of the Company post Holiday, I guess I was surprised that number wasn't a little bit bigger, just to try to maintain your external growth trajectory. Just talk about your thoughts now that you are a bigger entity and how you plan to maintain the external growth profile of the Company.

Sure. First, let me just clarify that I mentioned that our fiscal growth pace is $100 million to $200 million. That wasn't meant to be a guidance number for 2014. I was just pointing to the fact that we've run a little lower on average, previously, compared to 2013.

In terms of our opportunities to grow moving forward, I feel very good about our opportunities. The pipeline is very active with marketed and direct referral transactions. One of my favorite stats to share is the fact that we've had multiple transactions with 11 of our customers over the past five years. So, our ability to get repeat business is proving to be a strong part of our growth plan, and we still continue to add customers.

The marketplace is active. The marketplace is also competitive, but our existing customer base, and some other relationships we've been nurturing has helped us to continue to grow, and we expect to have continued growth this year and beyond.

So, I like how we are positioned from a growth standpoint. We are just not giving an investment volume number as part of our guidance. Our guidance has other assumptions, but it does not include investment volume.

That's helpful. Thanks. Second question is can you just give us more detail on what the components are of the 3% to 6% Bickford guidance?

Sure. All that is, is looking at their EBITDAR and assuming that it either grows 3% or 6%. We didn't include any underlying revenue or expense expectations to get to that number.

Can you just give us a sense, is it expecting big occupancy gains in the portfolio this year? Are you expecting to get good rate growth? Can you talk about that?

One thing that helped was that Q4 had a little bit of a pop in terms of occupancy. Thus far in Q1 we think that number is holding. So, that should position us for a good year. The flu season was muted, so occupancy levels have been able to hold a little better. Bickford has historically been pretty consistent with their expense management. There is some seasonality considerations, due to the weather that we've had in the Midwest that may impact Q1. For the year, I think it's very reasonable to expect 3% to 6% growth, as they've been at a 6% level over the past 10 years.

Thanks. Last question. Are there any purchase options or loan payoffs that you are expecting in 2014, and are they included in guidance?

We have -- nothing material. There is -- I think most of the potential disposition activity that we would have had in our portfolio has already occurred. So, I would expect 2014 to be quiet on that front.

Great. Thank you.

Todd Stender of Wells Fargo.

Justin, just clarify, you don't have investments assumed in the high end of your guidance?

We do not have investments activity assumed in the high end of our guidance.

Okay. And the press release just had some wording on the top end of the range we are adding in assumptions for investment activity.

We meant to change that. We failed to do so. We are going to file this transcript so that it's widely available to everybody to see that, in fact, the investment activity was not included in the top end of our guidance.

Okay. Just growth from Bickford?

That's right.

Okay. That's helpful. Thank you. On the low-end, I guess, Roger, there's some assumptions for terming out your debt. If you could just share maybe what your -- if there is a mix of debt and equity or is it strictly just debt? Maybe some of the interest rates surrounding that.

Yes. As we have said in previous calls, it is always a priority of ours to term out our debt; pay down the revolver. We are looking at several options right now. And as I stated in my prepared remarks, they would come with higher interest rates, but certainly longer maturities. And we still continue to evaluate all those debt options. At this point, we are not evaluating equity to pay down the revolver but strictly debt options.

I would just add that we also plan to significantly expand our liquidity by the middle of the year, as well.

Okay. Good. Just kind of on that theme, just want to get an update on how the Board feels about where NHI's debt levels are, as leverage metrics edge higher. It's all to fund new acquisitions but just kind of get an update on the feeling of how the Board looks at debt.

The Company has always been low leveraged. And our plan is to continue to stay low leveraged. Roger mentioned a metric that -- when you bring in the full effect of Holiday into 2014, that we expect our debt to EBITDA to be below 4 times, which would put us at the very low end of the range.

Clearly, we are comfortable leveraging up a little bit, in order to take down investment activity. But, the intent in the long-run is to maintain a low leverage profile as we have an overriding goal of being one of the most of bankable companies in any given cycle.

Todd, I just wanted to point out that we only had eight days of revenue on the Holiday acquisition, as we closed that in late December. Yet, we put the entire amount of $250 million in new debt on the balance sheet. So, it's sort of skews that metric.

Okay. That's helpful. Thank you, Roger. Finally, are you are aware of any other more the Holiday portfolio coming to market, and would you acquire more? Are you full, so to speak in that investment class?

I would say this. I think if there is any activity with Holiday, we will be in the discussion or at least at the table, which is good because they are a very large owner of real estate. They've been a great relationship. Whether we have an appetite for more is going to be a consideration on a deal by deal basis.

Okay. Thank you.

Daniel Bernstein of Stifel.

I wanted to talk a little bit about more what you are seeing in terms of the type of portfolios that are out there. Are they mainly in senior housing? Are you looking at other areas such as skilled nursing? Again, investment spreads in senior housing is fairly low. I was just wondering if you are going to go ahead and tilt the investment portfolio back to something else that's a little bit higher yielding.

Sure. We certainly have -- through our acquisition activity in 2013, the diversification of our portfolio has changed dramatically where skilled nursing is only 40%. So, we have room to grow in that category. It's not a category that we look at as often as we do senior housing because of the reimbursement risk, but we have made some opportunistic investments in that asset class, and we do it when we have a very high degree of confidence in the strength of the operator and the strength of the assets in the markets. So, we certainly wouldn't rule out growing in that category.

We still maintain, though, that private pay senior housing is the top priority, and we continue to look at opportunities there. If you can stay in the smaller portfolio or one off asset marketplace, you can preserve -- certainly preserve some pricing spread. But, I do agree that there's -- definitely the pricing is tight. I would expect to see cap rates drift up a little bit when we have the next move in increased interest rates. But, certainly in the market today, I think that we will continue to have relatively low cap rates in the private pay market. And NHI, though, plans to participate in both senior housing, potentially skilled nursing moving forward. We like our opportunities to get fairly solid spreads.

Are you seeing any signs that cap rates might move up? In other words, are you seeing any deals that were more in the market a few months ago or six months ago that are coming back now and getting repriced? Or, is that just an assumption that as cost of capital goes up, eventually cap rates will follow?

I don't see any evidence of repricing yet. I think the reason for that is there's a tremendous amount of investor interest and liquidity entering the sector. But, I do think just the natural evolution will be an increased interest rate will cause cap rates to rise eventually. The margins will get too tight, and we will have to have something -- something's going to have to happen, and I think we will certainly have investment yields go up a little higher. But, right now today in the market I don't see any change occurring.

Okay. That's all I have. Thank you very much.

(Operator Instructions)

(Operator Instructions)

Juan Sanabria, Bank of America.

Just wanted to follow-up on the financing assumptions. Could you just give us a range of what you expect to refinance on a long-term basis? Is 5% a good sort of number plug into our models? Or is that to conservative?

You know what, we purposely did not give that detail in our guidance, because we would rather come out with the exact numbers for you when we do, in fact, do the refinancings. So, if you can't get by for now using our guidance range and the assumption that you can use within that range, absent any acquisition activity, I hope that helps you complete your model. But, we are not in a place right now to really make that assumption for you.

Okay. Just a couple follow-ups. Any sort of guidance you can give on a G&A run rate or what you expect for the year?

Roger, do you want to address that?

Yes. I would expect that the run rate for G&A will be similar to 2013. We project, as I mentioned in my prepared remarks, the non-cash compensation expense is going to be roughly the same, the additions to our staff and normal increases. So, we don't project anything at this point that would materially alter that.

Okay. Great. Just a question to you, Justin. You kind of referenced the fact that you are proud of the amount of repeat business you've done with relationships. Do expect to be able to maybe increase the size of your Bickford RIDEA joint venture throughout 2014?

Yes. The Bickford RIDEA joint venture will grow in a couple ways. One is we have two assets that Roger mentioned opened late last year. They've opened with -- they are both approaching 50% occupancy already. We expect them to stabilize throughout this year. When we bring those into the mix, you will see some growth with the new acquisitions. We have another one in line with them that we think opens the middle of 2014. So, our total properties with the Bickford relationship will be up to 30 at that point.

We have a purchase option on six properties for $97 million. The timing on that is related to the performance, when Bickford bought the buildings from their previous partner on those fixed assets, they purchased them for about a 7% cap. We agreed that the joint venture could buy at the same price. But, we wanted to wait till the NOI had stabilized a little bit more. So, our price would be a little bit north of an 8% cap on that portfolio.

And then we are also considering expanding several of the communities that are 100% occupied, so that we can, of course, attract more volume. So, I think there are quite a few opportunities to grow that relationship.

Okay. So, you said that the purchase option was for $96 million, and that's potentially an 8% cap? And that could potentially happen this year?

We have the right to do it, really, at any time. We are just waiting to see the performance stabilize, and there's indications that might happen this year.

Okay. Thank you very much. Just one last question. I noticed $3.2 million, I think, investment gain. Did you guys monetize any of your equity holdings in some of your REIT peers? If not, any thoughts on maybe monetizing those?

Roger?

The $3.2 million gain in the fourth quarter was strictly related to the write off of that purchase liability. It was an earn out liability that we previously assessed as probable. The earn out period expired. We did not have to pay that. And so, for accounting purposes, you have to take that into income. So, we normalized that adjustment during the fourth quarter.

Okay. And any thoughts on your equity holdings? I'm assuming those are still in place, then?

They are. Our marketable securities and preferred stock holdings in other REITs are still there. There's been no change during the quarter.

Okay. Thanks, guys.

There are no further questions at this time. Mr Hutchens, I will turn the call back over to you to for any closing remarks.

Sure. I'm going to close with what I think we highlighted for everybody, and that is the fact that NHI is as strong as we've ever been. If you look at diversification of the portfolio to a heavier amount of private pay, the lease service coverage ratio being at 2.9 times and then the continued growth prospects that we've had over the past several years and the opportunity to grow with existing relationships, and we continually source new relationships.

We are very encouraged and excited about our results and look forward to delivering more good results to shareholders as we move forward throughout the year. Thank you for joining the call we will look forward to talking to everybody on the next call.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.