National Health Investors Inc (NHI) 2015 Q2 法說會逐字稿

Hello, everyone. My name is Colleen Sullivan, Director of Investor Relations, and I welcome you to the National Health Investors conference call to review the Company's results for the second quarter of 2015. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were released yesterday after market close in a press release that's been covered by the financial media.

As we start, let me remind you the statements in this conference call that are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve 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 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, 2015. Copies of these filings are available on the SEC's website at www.sec.gov or on 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 have 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.

Thank you, Colleen. Hello, everyone, and thank you for joining us. I'm pleased to report we put another excellent quarter in the books, as 2015 has proven to be a productive year for us this far, with over $297 million in investments. This is one of our strongest starts to date.

Following my commentary, Roger Hopkins, Chief Accounting Officer, will review the Company's performance for the quarter. Eric Mendelsohn, Executive Vice President, Corporate Finance, will discuss our capital stack and balance sheet metrics. Kevin Pascoe, Executive Vice President of Investments, will cover our portfolio performance and new investments.

I am thrilled to report outstanding results for the second quarter. We reported a 9.5% increase in normalized FFO per share and a 7.4% increase in normalized AFFO per share.

We continue to create value for our shareholders by creating cash flow growth on a per-share basis above and beyond our healthcare REIT peer group averages.

I always like to remind NHI shareholders that we offer strong balance sheet metrics that rival that of a large cap company combined with the growth profile of a smaller company, where each investment yields a more meaningful impact.

We are finding better investment yields in new development, small portfolio, and one-off lease-back transactions.

Much of our growth and our ongoing success depends on our high-quality operating partners. Kevin will highlight the solid and consistent performance of our NHC, Bickford Senior Living, and Holiday Retirement Corporation portfolios.

I'm also pleased to report that Senior Living Communities, our large entrance fee portfolio investment that we made in Q4 of 2014, is exceeding our internal forecast for lease service coverage with a 1.5 times EBITDARM coverage on a trailing three-month basis.

I'm also pleased about our recent acquisitions, totaling $88 million, which are great examples of relationship-oriented directly referred transactions that have been our bread and butter for the past several years.

We remain disciplined in our underwriting with an eye toward long-term success.

I will now turn the call over to Roger to provide some color on the quarterly results.

Thanks, Justin. Hello, everyone. As Justin mentioned, we have recorded another strong quarter of financial performance for the second quarter of 2015.

Normalized FFO increased to $1.15 per diluted share while normalized AFFO increased to $1.01 per diluted share, which represents a 9.5% and 7.4% increase, respectively, over the second quarter of 2014.

Normalized FAD for the second quarter increased to $1.02 per diluted share, which is a 7.4% increase from the previous year. These increases reflect the results of our large investments in late 2014 and in 2015 related to acquisitions, construction, and loans with industry-leading companies in the senior housing industry.

Our general and administrative expenses for the second quarter were $2.5 million, or 4.5% of our revenue, as compared to $1.8 million, or 4.2% of our revenue, in 2014.

Our payroll and related expenses have increased due to additions to our management team and corporate staff.

Our consulting and professional fees have increased due to the volume of new investments and new financing arrangements.

Marketing expenses have increased as we continue to expand our brand awareness and promotional activities.

Turning to our existing investments, we continue to fund our construction and mortgage loans to a premier entrance fee community in Issaquah, Washington, named Timber Ridge. We have funded $48 million thus far in 2015, and estimate we will fund the full $154.5 million commitment over the next 18 months.

As we have previously disclosed, we estimate that we will receive repayment on one of our loans in 2017, leaving a mortgage loan balance of $60 million, for which we have scheduled a 10-year maturity.

In June, we received full payment of a mortgage loan of $11.7 million from one of our borrowers located in Mesa, Arizona. This loan was due in July.

In June, we also received $491,000 from the settlement of bankruptcy proceedings from one of our former borrowers in a matter that dates back to more than 10 years.

In June, we also committed to a plan with our tenant Fundamental to sell two skilled nursing facilities in Texas that were part of a disposal group of six skilled nursing facilities that are over 40 years old and that were originally under contract to sell to Fundamental beginning in 2011. One facility was sold in 2011, three were sold in 2013, and the remaining two are expected to be sold by September 30 this year.

As previously disclosed, upon completion of the four-property disposal in 2013, the lease amount was fixed at $250,000 per month for the remainder of the original lease scheduled to expire in February 2016. We have anticipated this loss in future revenue and expect to offset it with revenue from our new investments.

Moving on to our dividend, yesterday we announced a second-quarter dividend of $0.85 per common share, which is 10.4% above the same quarter in 2014. The normalized FFO dividend payout ratio was 73.9% for the second quarter.

Turning to guidance, we have updated our estimates for the full year. The range for normalized FFO is $4.55 to $4.59 per share and the normalized AFFO range is $4.02 to $4.04 per share. Our guidance range allows for the uncertainty in the structure and timing of the financing to fund our previously announced investments.

I'll now turn the call over to Eric Mendelsohn to discuss the capital plan and balance sheet metrics.

Thank you, Roger. We've had a busy quarter, expanding our borrowing capacity on the revolver and extending debt maturities.

Let me start with our industry-leading balance sheet metrics, which include the following. Net debt to annualized EBITDA was 4.2 times for the quarter. Our weighted average debt maturity is 7.5 years. Our weighted average debt cost of capital is 3.56%. And our fixed charge coverage remains a very solid 6.3 times.

During the quarter, we expanded the capacity of our revolver. We amended and increased our $450 million credit facility to $550 million, extended the maturity to June 2020. The amended credit facilities provide for a $550 million unsecured revolving credit facility with interest at 150 basis points over LIBOR; and three existing term loans which remain in place totaling $250 million, also maturing in June of 2020 and bearing interest at 175 basis points over LIBOR.

These loans are swapped, with a notional amount of $130 million fixed at 3.91% until 2020 with an interest rate swap agreement in place; a second amount of $40 million fixed at 3.29% until 2019; and a third notional amount of $80 million being fixed at 3.86% until 2020.

The facilities can be expanded under an accordion feature up to an additional $250 million. The amendment accomplished three things. It increased our capacity and liquidity and also extended our loan maturity.

As of June 30, we had $101 million outstanding on the revolver with an available capacity of $449 million.

Turning to our at-the-market shelf offering that closed earlier this year, the Company did not issue any equity under the ATM during the second quarter.

I will now turn the call over to Kevin Pascoe, who will cover portfolio details and new investments. Kevin?

Thank you, Eric. I'll start with our portfolio performance. The EBITDARM covered ratio is 2.18 times. Our skilled nursing coverage remains very strong at 2.98 times, while our senior housing portfolio is 1.31 times.

Our relationship with Holiday Retirement Corporation accounts for 16% of our cash revenue. The Holiday Retirement portfolio of independent-living communities continues to improve occupancy, ending the quarter with 92.8%, compared to 91.6% at the end of the prior quarter.

The cash flow cushion remains solid, with an EBITDARM coverage ratio of 1.23 times.

Senior Living Communities is performing ahead of our underwritten pro forma. SLC accounts for 15% of our cash revenue. The SLC portfolio has an EBITDARM coverage of 1.23 times on a trailing 12-month basis and a 1.57 coverage on a trailing 3-month basis through June 30 of this year.

National Healthcare Corporation, which represents 18% of our cash revenue and over half of our skilled nursing revenue, continues to perform consistently and enjoys a 3.91 times corporate cash coverage.

The Bickford joint venture, which accounts for 12% of NHI's cash revenue, continues to deliver strong performance and growth opportunities. This contribution to NHI's revenue has grown 13.2% when comparing total revenue from Q2 2015 to the same period in 2014.

The portfolio EBITDARM is up 15.2% when comparing the second quarter of 2015 to the second quarter of 2014 and is up 1.4% sequentially.

The current occupancy in the total portfolio is 85.5%, up from 80.8% in the prior-year quarter, and improved 40 basis points sequentially.

The five new development projects continue to move forward, and each one has a planned ground-breaking by the end of 2015.

Moving on to new investments, as Justin mentioned, year to date we have announced over $297 million of investments. At the beginning of July, we announced $67 million purchase of three senior living communities in North Carolina, Indiana, and Tennessee, and a sale lease-back transaction with affiliates of East Lake Capital Management.

The 413-unit portfolio is 86% occupied and comprised of 205 independent living, 137 assisted living, and 71 memory care units. These communities are 100% private pay and are operated by New Horizons Senior Living, an affiliate of East Lake Capital Management.

The lease term is 10 years, with renewal options at a lease rate of 7% plus 3.5% fixed annual escalators for the first three years and 3% thereafter. The GAAP yield is 8.12%. NHI has committed to fund up to $8 million of incentive payments based upon financial performance of these communities. This transaction is a product of NHI's relationship-oriented off-market pipeline.

Earlier this week, we announced the NHI Bickford Senior Living joint venture acquired Fairfield Village, a 92-unit assisted living and memory care community in Lancaster, Ohio, near Columbus, for $21 million. Fairfield Village will be leased to the joint venture under terms structured to comply with RIDEA provisions. The community was valued at an 8% capitalization rate on its trailing net operating income performance.

Built in 2006, the community is 95% occupied, 80% private pay, and generates approximately $3,900 in revenue per unit per month. Operations will be managed by Bickford Senior Living. This acquisition expands the NHI Bickford Senior Living joint venture to 32 communities in six states. The purchase was funded with borrowings on NHI's revolving credit facility.

In summary, the portfolio continues to perform well and we continue to find accretive relationship-driven investments.

With that, I will hand the call back over to Justin.

Thank you, Kevin. As you can tell from the results, NHI is on very solid footing. We have found success growing with industry-leading operators while managing our balance sheet conservatively and ultimately delivering shareholder value.

Thank you for your ongoing interest in the Company. We will take questions at this time.

(Operator Instructions) Juan Sanabria, Bank of America Merrill Lynch.

Hi, good morning, guys.

Hey, Juan.

How are you doing?

Good.

I was just hoping you could speak a little bit to -- the Bickford RIDEA portfolio on the same-store pool saw some declines in the EBITDARM sequentially and on a year-over-year basis. What drove that? Was it the flu that we've heard some of your peers talk so much about -- and actually some dismissed? But just hoping for some color there.

Sure. Hey, Juan, this is Kevin. We did see a higher number of move-outs due to flu, but occupancy has flattened out so far in the third quarter. There is some wage pressure that we mentioned last quarter on the hiring and retention of employees.

And there is some pressure on revenue and margin due to replacing higher-acuity residents that move out with lower-acuity residents, but again, so far this quarter it's flat with Q2.

And Juan, I just wanted to highlight, if you don't mind, but I just wanted to highlight the total portfolio performance, Kevin mentioned in the prepared remarks, is up 15% year over year, which is, I think, a critical point. Because we have a stabilized same-store portfolio that at a minimum produces 3% growth for NHI because we have a preferred payment arrangement in the joint venture. Anything better than that, we'll keep 85% of it.

But in the total portfolio the strategy, of course, has been to get some low-hanging fruit picked in the focus properties, which are turning nicely. And then also enjoy the outsized returns from the new developments. So the 15% year-over-year growth for the whole relationship is, I think, an important highlight.

And then I think just to follow up on Kevin's comment that the sequential same-store performance looks to have flattened so far this quarter so it doesn't look like there's any type of trend forming.

Okay, and are you expecting occupancy to tick up? And maybe if you could just comment on if the expense increase is sort of a one-time nature or one point in time, or if you reset wages annually at this time of the year, or how that works.

There is a wage increase that occurs at Bickford that they're experiencing that is one time in nature. We'll see an offsetting rent increase that comes in a couple months; that'll help preserve margins.

Occupancy so far looks flat. Historically third quarter is a growth quarter, not just for Bickford but for the industry. So we'll see what happens, but so far it looks flat.

Okay, great. And on a separate note, if you could just comment on what you're seeing in the pipeline, what your focus is, mix of asset types, and maybe cap rates, if you don't mind.

Sure. We noted on the prepared remarks some recent transactions; one was a one-off acquisition, the other was a small portfolio. Portfolio came at a 7 cap, the one-off came at an 8 cap. The smaller transactions, I think, are most representative of our current pipeline, and particularly the relationship-oriented direct-referred transactions like those, and even some that we would consider with our current customers is a good representation of what we're seeing.

Some of the larger deals in the marketplace we've noticed that have a $100 million or more price tag attached are attracting interest from non-traded REITs in particular who are bidding quite high. So we've managed to stay out of that market, focus on our historical niche, which is really the ones and twos and small portfolios, and we have a healthy pipeline.

We also have an extremely healthy development pipeline with $170 million committed over the next year and a half. So I would say that we have quite a bit of growth built in through the developments and then we have quite a bit under review that are our bread and butter, which is the smaller transactions.

The cap rates I mentioned are -- I'd just say that the cap rates I mentioned are in the neighborhood of what we're seeing.

Okay. Do you think we'll see any inflection in cap rates, given what's happened in the capital markets? Are you seeing any re-trading or hearing of any re-trading of portfolios or any thoughts there?

Yes, just broadly, interestingly enough, even though there's been a tick-up in the cost of capital and the 10-year's drifted up a bit, cap rates on the large transactions seem to be continuing to fall. So clearly there's going to be a point in time when rates go up enough that there'll be a bid-ask disconnect and I think there will be a little bit of a slowdown in deal activity in the marketplace and then a reset of cap rates to follow, which will generate more activity again.

But at least from my point of view, none of that's happened yet; there's still very aggressive pricing.

Thanks Justin.

You bet.

Todd Stender, Wells Fargo.

Hi, good morning, guys.

Good morning.

Justin, can you provide more details around the incentive payment that you entered into through your acquisition of the East Lake properties? Maybe what went into the negotiation? Just want to see if the seller was asking more and that you're spreading out some of the purchase price over a longer duration.

Yes, I'll take the first part and then Kevin can jump in and give you a little bit more nitty gritty in terms of how they achieve the earn-out. But the thought behind the earn-out -- it was the opinion of the operator that there's upside in the portfolio. We agree.

There's no guarantee they'll achieve it, but if they do the benefit to NHI is really two things. It creates more cash flow cushion, more coverage for us. And also it gives us the opportunity to deploy more capital on a performing asset.

So the earn-out really is a reward to the operator for creating value but it also creates value for an NHI shareholder because it's worked into our lease basis.

And what I'll add to that is the test for us is over a trailing 24-month period. So these communities, as they get repositioned and stabilized and the operator creates that upside, there will be a healthy cushion, as Justin mentioned, on the lease payment.

And it will be taken over a trailing 24-month period so it's really just kind of paying the coverage back down to what we would see to be a normalized level once they achieve that performance. The plan is in place, working, but it's, again, 24 months before they will have that ability to access it.

So this is under a triple-net lease, right?

That's right.

Okay. Was the opportunity there to enter into a RIDEA if you do agree that there should be some upside here?

Well, there's kind of two points of view on that. I think in the case of this particular portfolio, we were most comfortable entering into the triple-net lease and allowing the operator to build more credit through cash flow growth, give us cushion over NHI's income stream, and then get the return that we get through the lease payment by deploying more capital.

We went in at a 7 cap. We have solid escalators on this as well. So we feel like we're capturing some upside; I think there's a 3.5% escalator.

Three years, correct.

Yes, for the first three years. So we found a way to capture some upside while still enjoying the security, if you will, of a triple-net lease structure.

Thanks, Justin. And how about coverage? What was this entered in at and what do you think it's going to project it to be?

We entered at about a 1 to 1 cover and projected better than 1.25 or more once they realize stabilization.

Okay, thanks. And I think you guys said the RIDEA structure that you just entered was another asset with Bickford -- did I catch that right?

That's right.

And it was a pretty high yield, of 8%. It was above what your net lease asset went out at, 7%. Can you just talk about that pretty high yield? How do you guys arrive at that?

Well, in that case you're buying -- it is a joint venture asset so you're buying the operations and the real estate. We're going to triple-net; we're really just putting the value on the real estate portion of the asset. So there's a little bit of higher yield attached for that reason. It's a one-off asset; that generally attracts a little bit higher yield.

And the seller had previous transactions with NHI and I think they gave a lot of credit as well to just surety of close and the fact that they know they could count on that we would deliver when we said we would deliver.

And what kind of risk reward profile would you say that asset has? Is it -- what's the occupancy and how do you guys look at that asset?

Yes, this is Kevin. So the occupancy there is pretty stable; it's about 95% occupied. There's some upside with taking a community 100% private pay and also having -- Bickford typically runs a little bit higher acuity. So I think that can attract a little bit higher rate over time. So there is some upside there, but generally it's a very stable, well-performing community.

Great. Thanks, guys.

Thanks, Todd.

(Operator Instructions) Jordan Sadler, KeyBanc Capital Markets.

Thanks, good morning.

Morning.

So first question is just, given the capital markets environment, what's sort of the appetite on the investment front right now? Is your cadence changing at all? I mean, is the pace of play going to be a little bit more moderate for the rest of the year given sort of the commitments that you already have, or are you seeing sort of a steady flow out there and you'll just continue to execute? How are you thinking about it?

Well, let me just couch what I'm about to say with the fact that we really don't give investment volume guidance. But I'm happy to speak a little bit to the pacing. We've had the best start in terms of volume that we've had in seven years so far this year. And so we're off to a strong start.

We've had -- if you look at the last couple years, the years finish strong. But this year we've started out stronger.

The pipeline at this time has the development commitments which I mentioned, but there also are some smaller transactions as well that I would describe if we're able to execute as kind of a steady execution opportunity.

But we're only halfway through the year so it's hard to predict exactly what will happen. But I like where we're positioned and feel really good about the growth we've delivered so far this year.

Okay, I guess along the same lines or in the same context, what's -- you've got the ATM in place. In terms of using that, you're comfortable using that to fund. But where do you want to be, leverage-wise, and how are you thinking about leverage, including the sort of development commitments?

Jordan, this is Eric Mendelsohn. First of all, we're very mindful of the ATM's dilutive effect so we want to marry its use with our acquisition and development pipeline when we do use it. And as you probably know and have figured out, our formula for funding acquisitions and development is 60% equity, 40% debt.

That said, looking at the development pipeline, which is a very predictable capital need, and in the case of Timber Ridge repayment schedule, we'll probably rely primarily on our revolver, our recently-amended revolver, for the debt portion of those capital needs.

And just to remind you, that Timber Ridge project, when it opens in 2017, the entrance fees collected from the new residents pays the principal down on the debt. So we're expecting about a $90 million repayment at that time and then we'll keep in place a $60 million senior loan. But we'll have a de-leveraging event throughout 2017 through the entrance fees, which are over 80% presold at this point.

Okay. Last one -- Justin, just any update on the purchase option properties or appetite there?

Nothing. No news on the purchase option properties. Thanks for asking, though. (laughter)

Thank you. We'll yield the floor.

Thank you.

And at this time there are no further questions over the phone lines.

Well, very good. We sure appreciate everybody's interest in NHI and look forward to speaking more on the next call.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect. Have a good day.