National Health Investors Inc (NHI) 2015 Q4 法說會逐字稿

Hello everyone. This is Colleen Sullivan, Director of Investor Relations. Welcome to the National Health Investors conference call to review the Company's results for the fourth quarter of 2015. On the call with me today is Eric Mendelsohn, President and CEO; Roger Hopkins, Chief Accounting Officer; and Kevin Pascoe, Executive Vice President of Investments.

The results, as well as a notice of the accessibility of this conference call on a listen-only basis over the Internet were released this morning before market opened and the press release has been covered by the financial media. As we start, let me remind you that any statements in this conference call, which are not historical facts, are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance.

All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31, 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 in the 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 Eric Mendelsohn.

Thank you, Colleen. Hello, everyone. We're glad you could join us today.

I'm pleased to say that NHI has wrapped up another banner year. We reported an 11.2% increase in normalized FFO per share and a 9.3% increase in normalized AFFO per share year over year.

As we take a look back at 2015, we continue to position the Company for creating shareholder value by expanding our financial toolbox with more capability. Over the course of the year, we implemented an ATM, expanded the revolver, and termed out debt at extended maturities, taking great advantage of the low interest rate environment. We also grew the portfolio with new and existing partners at over $310 million of investment activity, $83 million of which was from existing relationships. We consider repeat business a high compliment.

Before we take a deeper dive into the numbers, I'd like to take a moment to welcome John Spade to the team. John will join us as Executive Vice President of Finance. His extensive experience in real estate, senior housing, and finance will be a great add to NHI and will amplify our ability to offer customers, investors, and analysts an operational perspective.

I'd also like to welcome Jerry Taylor, our new Director of Business Development. Jerry comes to us with a background in senior housing operations and has a wealth of industry knowledge, contacts and expertise. He will be a valuable asset to NHI as we continue to grow with high quality operating partners. I'll now turn the call over to Roger to walk us through the financials. Roger.

Thank you, Eric. Hello everyone.

I am pleased to report exceptional financial results for the fourth quarter. For the quarter, normalized FFO increased to $1.17 per diluted share, while normalized AFFO increased to $1.03 per diluted share, which represents a 10.4% and 9.6% increase, respectively, over the fourth quarter of 2014.

Normalized FAD for the fourth quarter increased to $1.04 per diluted share which is a 9.5% increase from the previous year. These results reflect the high volume of investments in late 2014 and over $310 million in 2015 related to acquisitions, loans, and development activity. Furthermore, we have kept our leverage low and did not term out recent borrowings on our revolving credit facility with longer term fixed rate debt or with new equity on our ATM program until November and December, as Eric will discuss later.

Our revenues for the fourth quarter increased 28% over the same period in 2014. Our interest expense increased to $10.1 million in the fourth quarter due mainly to our terming out of $225 million of borrowings on our revolving credit facility to fixed rate private placement debt in early January 2015. Our general and administrative expenses for the fourth quarter were $2.5 million or 4.4% of our revenue.

Due to the immediate vesting of a portion of stock options granted during the first quarter of 2016, we expect our general and administrative expenses in the first quarter will be in the range of expenses incurred during the first quarter of 2015, which were $3.85 million. During the fourth quarter, we had gains on the sale of marketable securities of $23.5 million, which Eric will discuss in a moment.

As for our current investments, we continue to fund our mortgage and construction loans for Timber Ridge, a premier [interstate] community in Issaquah, Washington. We have funded $83.4 million thus far and estimate we will fully fund our $154.5 million commitment by the end of 2016. As we have previously disclosed, we estimate that we will receive repayment on our construction loan in 2017, leaving a mortgage loan balance of $60 million for which we have scheduled a 10 year maturity.

I am pleased to report a 5.9% increase in our quarterly dividend to $0.90 or $3.60 on an annual basis. We currently estimate this will result in a FFO payout ratio in the low 70% range and an AFFO payout ratio in the low 80% range. Moving on to guidance for 2016. The normalized FFO guidance is $4.82 to $4.88 per share and the normalized AFFO range is $4.29 to $4.33 per share.

We do not include an estimate of investment volume in our guidance range. However, we include future investments with existing and new tenants for which we estimate are reasonably likely at the present date.

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

Thank you, Roger.

Starting with our balance sheet metrics, net debt to annualized EBITDA was a conservative 4.2 times at the end of the fourth quarter. Our weighted average debt maturity is 7.1 years. Our existing weighted average cost of debts is 3.77% and our fixed charge coverage is a healthy 6.1 times.

Turning to the revolver, as of December 31, 2015 we had $34 million outstanding with an available capacity of $516 million. On the ATM, in the fourth quarter we sold 830,506 shares at an average price of $60.37 for net proceeds of $49.4 million. We also monetized securities held for investment. In the fourth quarter, we converted our LTC preferred stock to 2 million shares of common and then sold 1 million of the common at an average price of $42.16.

I'm happy to report that our taxable gain of $23.4 million was completely sheltered and retained for future deployment. We also sold our positions in Ventas and it's recent spinoff, Care Capital Properties, for a gain of $334,000, which was also sheltered. As of December 31, 2015, we owned 1,293,000 shares of LTC common stock. The proceeds for both the ATM and the LTC transactions were used to fund our various construction loans, a recent acquisition, and to pay down the revolver.

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 portfolio EBITDARM coverage is a strong 1.98 times. This portfolio coverage now includes our senior living communities investment. The combined EBITDARM coverage would be consistent with the prior quarter if excluded from the calculation.

Our skilled nursing coverage remains solid at 3.09 times and our senior housing portfolio is steady at 1.27 times. National Health Care Corporation which accounts for 18% of our cash revenue and over half of our skilled nursing revenue continued to perform well with a strong 3.91 times corporate cash coverage and has some of the strongest credit metrics in the public healthcare sector.

Our relationship with Holiday represents 16% of our cash revenue. The occupancy on the portfolio remains stable an average of 90.9% for the third and fourth quarters. The EBITDARM coverage ratio was 1.21 times at quarter end. We have been in close contact with the management at Holiday as they have seen recent changes to their team and we are monitoring the portfolio closely.

We continue to believe the buildings and markets in our Holiday portfolio are of premium quality and the portfolio metrics have been steady so far into 2016. Senior living communities accounts for 15% of our cash revenue and is performing on par with our underwritten pro forma. As expected, entry fees for the year were lumpy, but outpaced the prior year and we are encouraged by the activity to date in 2016.

The SLC portfolio has an EBITDARM coverage of 1.24 times on a trailing 12 month basis as of quarter end and on average has increased occupancy each quarter during 2015. The Bickford joint venture which accounts for 13% of NHI's cash continues to provide year-over-year growth. The same store EBITDARM is up 3.9% when comparing the year ended 2015 to the prior year and occupancy increased for the same time period.

The sequential quarter and quarter-over-quarter were down in the second half of 2015 due to increased contract labor, wage increases overall, and higher costs on workers' comp and health insurance. Bickford has implemented strategies to combat these pressures. Furthermore, both occupancy and revenue per unit have improved.

Lastly, during the fourth quarter Bickford encountered nonrecurring expenses associated with the integration at the Ohio communities in the Focus portfolio. The buildings are now back to running smoothly. Absent the one time charges the Focus properties continue to show improvement and four of the five new development projects are under way, with the remaining one planning to break ground soon. Moving on to new investments.

In January we announced the acquisition of a 98 unit independent community in Chehalis, Washington. The community was leased to a partnership between Marathon Development and Village Concepts Retirement Communities. The lease is 15 years with an initial rate of 7.25% plus annual escalators. The community is currently 95% occupied and comes with available land for expansion.

Our pipeline remains very active with a healthy level of senior housing and skilled nursing opportunities under review. And we continue to receive off-market opportunities from our existing client base.

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

Thank you, Kevin.

NHI is well positioned as we enter into 2016. We remain low levered and poised to act on any opportunities this uncertain market may provide. We observe with great interest that other higher levered REITs must dispose of real estate in order to delever. This may present opportunity for us, given our balance sheet capacity.

Our focus remains on expanding relationships with our existing partners and creating relationships with new ones. In 2016 we will continue to focus on asset management of our existing portfolio. I'm very proud of the NHI team and our operating partners and look forward to what 2016 brings our way.

With that, we will now open the line for questions.

Thank you very much, ladies and gentlemen.

(Operator Instructions)

And our first question comes from the line of Juan Sanabria with Bank of America. Please go ahead.

Good afternoon, guys. Thanks for the time.

Hi, Juan.

Hey, Eric. On the RIDEA, can you just walk us through your expectations for 2016 on occupancy, RevPAR growth and on the expense side which I know was an issue this quarter?

Hey, Juan, this is Kevin. So far into 2016, what we've seen just from an activity standpoint, the occupancy looks to be holding and we hope improving based on the he metrics we've seen so far. But they look solid. Revenue per you unit should remain solid.

The factor that is a little bit of a wild card is the expense side. We've been working on that or looking at it with Bickford. They've been working on it and revising some of their practices just to make sure that they can keep costs at a level that is more commensurate with what they've experienced in the past.

One of those things is their prior experience was hiring certified staff. What they're doing now is opening up the application process to those that are not certified and then getting the training and certifying them post hire. So things like that is what they're doing to make sure that they can keep those costs in check and that's what we're going to be working on over 2016.

And would those increased certified staff that they hired, is that because of new supply is just making it harder to keep employees?

There's an element of new supply. I would not point to new supply directly, though. It's just a labor market where people have the option to go do other jobs.

And to be competing for a $10 to $12 wage person in some of these markets we're seeing a shortage of those types of workers. And they just need to put practice in place so they can attract and retain talent at the facilities.

Okay. And then on the deal floor I think Kevin you kind of alluded to this a little bit, what are you guys focused on, what are you seeing as the most interest opportunities? And if you could comment on roughly a range of what is included in guidance, it seemed to be very opaque?

This is Eric. On deal flow, we're seeing just as robust a pipeline as we always have. I think that there's some price discovery going on in terms of people's expectations. We've seen a couple of deals fall apart and show up again with lowered pricing. o I'm heartened by that.

In terms of product flow, I think that the higher acuity spectrum products like SNF and memory care and other hospital like products are starting to see some rising cap rates. But assisted living and senior housing in general is still pretty sticky in terms of pricing.

Okay. Great. Just one last quick one from me.

Guidance for 2016 for G&A, I think Roger alluded to the first quarter this year being similar to last, but you've hired a couple of people. Any sense of what we should be expecting for the full year?

Really -- we haven't really given any particular guidance on that. I think the first quarter of 2016 will be similar to 2015 for the reasons that I gave about the immediate vesting of a portion of stock options.

We will have growth in G&A as you mentioned for the year due to our recent hires and just normal expected increases in G&A, inflationary type items, salary increases, and that sort of thing. But we're not really projecting anything out of the ordinary for 2016.

Thanks, guys.

Thank you.

And our next question comes from the line of Chad Vanacore with Stifel. Please go ahead.

Good afternoon, all.

Hey, Chad.

Just thinking about your RIDEA portfolio versus your triple net. How should we be thinking about 2016 growth assumptions on those?

This is Eric. I'll take the first part of that question.

Keep in mind, our RIDEA is where our development function resides, so last year we had three new developments come online. This year we'll probably have four come online and there's five under construction, the fifth will be 2017, first quarter. So there is a baked in pipeline, if you will, in our RIDEA that will generate growth.

And it's kind of darkly humorous. Everyone's worried about oversupply but in so far as our RIDEA is concerned, we are the new construction and we are the buildings that are shiny and new and fill up quickly. The three that we opened last year are now stabilized and part of the -- two of them are in the same store under our length of time protocol and third one will come in next quarter. Does that answer your question, Chad?

That's part of it. Thinking about just the RIDEA portfolio, on a same store basis other REITs that have larger shop portfolios are thinking somewhere in the 1% to 3% range for growth next year. Would you say you're in that range, above it?

I would say we're at least in that range. With the new construction coming on, we should -- there should still be growth built into the portfolio, plus there's some pretty good traction that they're seeing with as I mentioned earlier with Juan on the metrics that we're seeing so far into the year. So we're still encouraged by the profile of that relationship and the growth that it can bring.

And then I notice that you had been using the ATM in the fourth quarter. Should we expect you to use more of that in the first quarter, just to keep your leverage low, or will that be just more opportunistic?

We're opportunistic. It has a lot to do with our share price and our capital needs. Part of the art and science of using the ATM is balancing that against our share price and against our leverage ratio, which we like to keep below five times EBITDA.

All right. That's it from me for now. Thanks.

Thanks, Chad.

And our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Thank you. Good afternoon.

I think you dodged Juan's question regarding the acquisition range that's embedded in guidance. I'd like to take another stab at that. Just the bit that you're saying is included with existing or new tenants in that range.

This is Roger. Yes, this is Roger.

As we stated, we have included what we presently see and have a great deal of clarity on. We obviously plan with our existing tenants and with new tenants potential transactions well in advance.

There are certain conditions that affect the timing of those type of transactions, but we feel very good about those and that's why those are baked in. We don't give up volume. But as you've seen, what we've done over the prior years and sort of our average volume per year, --

Roger, is there a way to quantify the contribution from those to the FFO guidance? So your 485, how many pennies are coming from new net investment? I don't care as much how much it is, I'm just kind of curious what the contribution is, how you're getting to basically 3.6% growth off of the normalized 4Q run rate?

Well, there is obviously investment activity built into this and so the growth that you're seeing in FFO would include new dollars, new lease income, and the depreciation of those assets which would be added back. And then you're also seeing AFFO growth. We have typical AFFO growth through our escalators and then you're seeing it through new lease revenue. So as I say, we don't give a dollar amount that's impacting this but only to say that we have a good deal of confidence on the transactions that we're working on and --

Have you layered in a positive impact from net investment activity in the guidance?

The positive impact --

Yes, so is investment activity accretive in 2016?

Yes.

Acquisitions versus dispositions?

Yes.

You have some incremental FFO coming from net investments embedded in the guidance you've given?

Absolutely.

But you just don't want to say how much?

That's right.

Okay. That's fine. Do you have a leverage target or average leverage that's embedded in this guidance or is it just assumed constant leverage?

Well, our leverage -- there's an ebb and flow to our leverage and based upon our deal activity we also are funding two commitments, one to our client LCS in Issaquah, Washington and the other to the Bickford developments. And so we are mindful of our leverage.

If we get up to five times annualized EBITDA, that is sort of a limit that we've set for ourselves as we demonstrated in the past. We've raised equity. We've also liquidated some marketable securities. And so we're very mindful of that as we layer in investments.

Congratulations by the way on the LTC preferred. Do you have the timing or the date of that conversion, just so we could figure out the impact from 4Q to 1Q?

That was in November and then we were able to sell 1 million shares of LTC, really just a little bit at a time. Fortunately, that share price held up nicely in November and December and was a good source of capital for us.

Safe to assume that other income would come down, though, as -- is that where that income comes in? Is it the interest income or other income?

Yes, and the common is actually paying more than the preferred.

Is that come into the same line?

Yes, yes.

Okay. And I'm sorry, I don't know if I caught this. Is it safe to assume that you would continue to liquidate the rest of that -- of the LTC shares, common shares?

Hey, Jordan, this is Eric. We would be opportunistic about that. We would match fund it with a suitable investment if we needed equity. So we're in no particular hurry to sell it, but everything's on the table.

Okay. Last one and then I'm done. Your marketable securities portfolio is actually now $73 million including the LTC common, which you described as that's probably north of $40 million of it, if not more.

But you've got some other slugs in there of some debt securities, et cetera. Is all of that fair game for sale just strategically? How are you thinking about that portfolio?

This is Roger again. We have almost 1.3 million common shares of LTC, so that is the lion's share of that. We've also got some other funds with one of our banks that's invested in some government backed debt securities.

And so we look at this as a pool of potential capital. We get a nice return on these investments now. We're happy to hold them. But as Eric said, we'll be opportunistic as we need capital to fund our acquisitions.

Okay. I'll hop back in the queue. Thank you for the time.

Thanks, Jordan.

And our next question comes from the line of Todd Stender with Wells Fargo. Please go ahead.

Thanks. Thanks for the color regarding the LTC preferred.

Can you guys talk through the decision to convert that? It's been a long-standing holding. I believe 8.5%, it's a pretty good yield. Want to get your thoughts on what prompted the conversion.

Hey, Todd, it's Eric. So it's interesting the way you can look at the LTC investment.

The original face amount of the investment was $38 million and the interest rate on the $38 million was 8.5%. But when you convert the preferred to common, that preferred is now worth between $80 million and $84 million and it's paying a dividend of 5 point something percent, which is an increase in your yield of over $1 million.

So would you rather have 5% on $85 million or 8.5% on $38 million? Oh, and by the way, if I told you that you could convert it and sell it without any tax consequences or capital gains, would that make your decision easier? So that's the way we thought about that investment and we felt that it was a good time to pull the trigger on that, given that we had a lot of depreciation available to shelter any gains.

Got it. Thank you, Eric.

And then you gave a target of five times debt to EBITDA, kind of a ceiling if you will. Can you talk about what sources of debt capital you're looking at right now?

I know in the past you've tapped the unsecured term loan market of upwards of 12 years. And with benchmark rates down maybe spreads might be a little bit higher, can you just talk about where your debt capital sources could be and for how long you're looking out for?

Sure. As you know, we're very mindful that as a REIT and to be rated by a bonding agency you need to have less than 15% of your debt secured. So even though we're not rated, we do keep that in mind and like the optionality of knowing that we would qualify for bond rating if need be.

In the meantime, what we've noticed is that the private placement market and dealing with the life companies offers a better value. They're lower closing costs, there's no ongoing rating subscription fees and there's no annual opinion letters and there's no risk of being downgraded if something should happen that would result in a downgrade.

So for the time being, our focus would be on the private placement market as long as that's still cost effective. And as our portfolio grows, we would certainly consider HUD debt or other secured debt, similar to what we did last year with Fannie Mae. I think we got an interest only 10 year loan at 4% -- or less than 4%. So that's good debt in my opinion.

That's helpful. Thanks, Eric.

Sure.

And our next question comes from the line of John Kim with BMO Capital Markets. Please go ahead.

Thank you. Your full portfolio coverage, rent coverage dropped 9% to 1.98. But you didn't acquire anything in the fourth quarter. So what is this attributable to?

Hey, John, this is Kevin. It's not attributable to any change in the portfolio, just the methodology. Prior to this quarter, senior living communities, which was our new investment beginning the first quarter of 2015 would have been the first reporting period, was held out for the last couple quarters. It is now included in that calculation.

So because of its size relative to the portfolio, that coverage now is 1.98 times including that. Excluding it, it would be similar to the coverage that you saw last quarter. So really no change to the portfolio, just a change in the methodology to make sure all of our investments are included.

And then can you provide us a rough guide in converting EBITDARM to EBITDAR coverage?

It varies by portfolio, based on what your assumptions are for management fees and CapEx. Roughly speaking, it's 0.1 to 0.2 on coverage.

Got it. Okay.

Your lack of acquisitions this quarter, is there anything that we should read into this? Are you trying to be more conservative on your balance sheet or using widening bid/ask spreads or how should we interpret this?

We're pretty picky about what we buy and who we buy it with. There's no lack of deal flow and there's no lack of dialogue concerning acquisitions, it's just finding the right fit for us.

And I also feel like we're in the midst of a repricing event in the market. I think that some of the large players that have been buyers in the past are going to be sitting on the sidelines for a while they digest and solve for bigger issues and that will lead to better pricing and more opportunities.

Okay. I'm not sure if it's fair to put John Spade on the spot at this moment, but if I can, can I just ask what your views are on Brookdale, and the integration history that it's had with Emeritus?

John's start date is March 8th, so I'll make sure that he responds to your question then.

All right. Then maybe I'll just -- my last question then will be on the LTC preferred.

Sure.

On your answer to Todd's question I think that makes sense, it's not necessarily anything new. So was the decision a Board driven decision or was this, Eric, a particular goal of yours?

It's been a topic between Management and the Board for quite some time, so I can't take full credit for it. But it certainly appeared to make good economic sense and the timing worked out wonderfully in terms of the market and in terms of something that I could affect during my early tenure.

Okay. Great. Thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Rich Anderson with Mizuho Securities. Please go ahead.

Thank you and good afternoon.

Hi, Rich.

As I often do -- hello. As I often do, I like to start off with a potentially basic question and that is with LTC conversion, is the conversion the taxable event or was the selling of the shares the taxable event?

Well, no, it was not a taxable event at conversion. And the sale of the common would ordinarily be a taxable event except we were able to shelter that. And because of our dividend and return of capital and depreciation, which goes into the calculation of taxable income, we were able to retain 100% of those proceeds.

Okay. Got it. But I mean, I guess the question is how much was -- how much is the fact you still own 1.3 million shares a function of just protecting your taxes or if you could have done it -- or could you have done it without incurring a special dividend type of scenario? I'm just curious how much is motivated by raising capital, how much is motivated from a tax perspective.

We did want to spread the sale out over two different tax years, because the amount of shelter we have is about as much gain as we realized. So there was some of that going on and I couldn't help noticing that in January LTC stock appreciated a little more. So it's a good thing we held some dry powder and still have that capability.

I'm sure they appreciate that.

And so the next topic on asset sales, Eric, you mentioned the advantage of not having to sell assets to delever like some of your peers. Are you meaning that they're kind of out of the market or are you meaning that you might be a buyer of assets from other REITs? Or both?

Both. I've noticed that some of their earnings calls REITs are talking more about dispositions than acquisitions. And I don't know that the pricing sweet spot has happened yet, but it could happen soon.

And we would be interested in looking at distressed situations where other people have to sell when they need to raise capital. That's usually a good time to be a buyer.

Have you approached or been approached as a potential candidate to pick up some assets from your peers?

I am calling peers daily, yes.

Okay. You called HCP?

I talk to HCP all the time, so --

Okay.

About a number of things.

Okay. And that leads me to my last question.

Understanding your strong coverage with NHC, I'm curious what your kind of the NHI view and appetite might be in the post acute world today, given some of the real and maybe sentiment pressures to that business -- line of business. Where do you stand on how this whole thing shakes out and how does that translate into your interest in building a greater position in this space, rather than reducing it?

Sure. Yes, obviously we're watching the ManorCare and the Genesis situation with great interest. And I'm concerned that their market disruption will infect operators who have nothing to do with Genesis or ManorCare.

Our operators, NHC, Legend, HSM, Discovery, they're not having any of the types of problems that you're reading about. They're not being investigated by the Department of Justice. They're getting the correct amount of reimbursements and they have no such problems.

So we would like to do more business with our existing operators and there are some other operators out there who we believe are also high quality and worth investigating, doing business with. Does that answer your question?

Well, do you think it gets worse just as a general rule, not maybe your world, but just generally in post acute do you think it gets meaningfully worse before it gets better? Or do you think this is a lot of sensationalism around something that is a necessary part of the healthcare delivery system long term?

Well, it does seem to be wrapped up in a whole other basket of woes. You look at what's happened to REIT prices of their stock overall and I think interest rate worries have something to do with that. I think macroeconomic pressures have something to do with that.

And then the sentiment can flip to a glass is half full mentality or half empty, rather, and I think we're seeing some of that now. It could be an over reaction and that things may not be as bad as they seem.

We'll keep an eye on it. Thanks for the color.

Sure.

And there are no further questions at this time. I will turn the call back over to you for any closing statements.

Thank you everyone for joining us today and we look forward to seeing you on investor road shows and conferences soon.

Ladies and gentlemen, that does conclude our call for today. We thank you for your participation. Have a great rest of the day. You may disconnect your lines.