National Health Investors Inc (NHI) 2017 Q1 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 first quarter of 2017.

On the call with me today is Eric Mendelsohn, President and CEO; Roger Hopkins, Chief Accounting Officer; Kevin Pascoe, Chief Investment Officer; and John Spaid, Executive Vice President of Finance.

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 before market opened in a press release that's 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 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 March 31, 2017.

Copies of these filings are available on the SEC 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 NHI's earnings release and related 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, and welcome, everyone. We're glad you could join us today.

I'm pleased to say that 2017 is off to a great start. Year-to-date, we've executed $133 million of investments; gained 2 new operating partners, the LaSalle Group and Ravn Senior Solutions, and expanded our footprint with several of our existing relationships.

From a financial standpoint, we're delighted to report a 7.8% share increase in normalized FFO and an 8.7% increase in adjusted FFO per share over the same period 1 year ago.

We continue to focus on conservatively managing the balance sheet while growing with high-quality operators and creating value for our shareholders.

I'd like to take this opportunity to suggest that NHI is becoming a REIT of choice among many regional operators. We have cultivated many relationships with new and potential clients over the past few years and these relationships are starting to bear fruit.

We offer our operators a financial partner that is accessible, reliable, responsive, nimble and cost-effective. These qualities are important to our regional operators, and oftentimes, that results in closed transactions at favorable terms.

I'll now hand the call over to Roger Hopkins to walk through our financial results in detail.

Thanks, Eric. Hello, everyone.

For the first quarter of 2017, normalized FFO increased to $1.25 per diluted share compared to $1.16 for the same period 1 year ago. And normalized AFFO increased to $1.13 per diluted share compared to $1.04 1 year ago.

These non-GAAP financial metrics reflect our investment volume since March of last year, including $133 million of new investments so far this year.

Our strategy continues to be to deploy a careful mix of debt and new equity to maintain our low leverage profile.

NHI's total revenues for the first quarter showed strong growth of 12.5% over the same quarter in 2016. This growth has been primarily fueled by our new investments with the Ensign Group, Bickford Senior Living -- Senior Living Communities and East Lake Capital Management.

We unwound our RIDEA joint venture with Bickford Senior Living on September 30 of last year and converted Bickford's participation to a triple net tenancy with assumption of existing leases and terms.

NHI now has revenue from 40 Bickford facilities, plus 4 in construction.

Our general and administrative expenses for the first quarter increased to $4.1 million, due primarily to an increase in noncash share-based compensation and other incentive compensation.

Our noncash stock-based compensation expense in the first quarter was $1.5 million.

We estimate noncash compensation expense to be approximately $340,000 in each of the next 3 quarters, and currently estimate our total general and administrative expenses will be approximately $3 million during each of those same periods.

We now have 15 full-time employees and continue to outsource functions such as legal, internal audit, tax compliance, IT and payroll, to other professional firms. This business model is very efficient and has served us well over the years.

As mentioned last quarter, our management team is focused and incentivized on annual growth in AFFO on a per share basis.

This non-GAAP metric excludes the accounting convention of noncash straight-line rent income and gives credit to our actual lease escalators and to our investments, for which no straight-line rent calculation is required.

And importantly, it ensures our focus on making accretive new investments over our blended cost of debt and equity capital.

We are pleased to report on the continued success of our loan investment and the Phase 2 expansion of the Timber Ridge entrance-fee community in Issaquah, Washington, which opened during the fourth quarter last year.

We had funded $94.5 million in a construction loan to the project and have currently received $72.5 million in repayments from new entrance fees. These repayments were used to pay down our bank revolver balance.

In the first quarter, we reported a 5.5% increase in our quarterly dividend to $0.95 per share or $3.80 on an annual basis.

We currently estimate our total dividends for 2017 will result in a normalized FFO payout ratio in the low 70% range and a normalized AFFO payout ratio in the low 80% range.

Moving on to guidance for 2017. The guidance ranges given in our February call have remained unchanged.

We have successfully executed on transactions so far this year that support those estimates.

The normalized FFO guidance range is $5.06 to $5.12 per share, and the normalized AFFO range is $4.61 to $4.65 per share.

We do not include an estimate of investment volume in our guidance range, however, our guidance includes the effects of expected transactions for which we have clarity, including financing transactions.

I'll now turn the call over to John Spaid, who will discuss our capital transactions.

Thank you, Roger. As of March 31, our debt capital metrics were net debt to annualized EBITDA 4.5x; weighted average debt maturity at 5.8 years; weighted average cost of debt at 3.62%; and our fixed charge coverage ratio at 5.7x.

Looking at the revolver, at the end of the first quarter, we had $187 million outstanding with an available capacity of $363 million.

As noted in the press release last month, we sold roughly 1.12 million shares of common stock through our ATM program during the quarter. The shares were sold at an average price of $72.31 per share, resulting in net proceeds, after commissions, of $80 million.

Net proceeds were used to fund a portion of the acquisitions announced during the first quarter, ongoing development pipeline and loan commitments, and to maintain our low leverage metrics.

Moving on to our marketable securities.

In Q1, we sold our remaining 250,000 shares in LTC common stock, resulting in net proceeds of $11.7 million.

As we move through 2017, NHI's sources of capital will continue to be: cash flow from operations; cash flows from loan receivable repayments; revolver proceeds; term debt proceeds and equity issuances from our ongoing ATM program, as required, to fund our general corporate and investment capital needs, and as required, to maintain our low leverage balance sheet.

I'll now turn the call over to Kevin Pascoe to discuss the portfolio.

Thank you, John. Looking at our portfolio as of fourth quarter end, the EBITDARM coverage ratio is 1.8x.

Our skilled nursing coverage is 2.71x and our senior housing portfolio is 1.26x.

Our relationship with senior living communities represent 17% of our cash revenue and has an EBITDARM coverage ratio of 1.29x on a trailing 12-month basis, as of fourth quarter end, which includes our fourth quarter acquisition of the Evergreen Woods community in Connecticut.

National HealthCare Corporation, which accounts for 16% of our cash revenue, has a corporate fixed charge coverage of 3.64x.

Holiday Retirement represents 15% of our cash revenue and has an EBITDARM coverage, as of fourth quarter end, of 1.19x.

As discussed last quarter, Holiday has been working on transitioning their community management model to a traditional management team. The transition is ongoing, and NHI has been in regular communication with Holiday about its transition, as well as its plan to move its corporate offices to Florida.

Bickford Senior Living accounts for 14% of our cash revenue and has an EBITDARM coverage ratio of 1.21x for the trailing 12 months, ending December 31.

Occupancy on the stabilized portfolio was 91 -- 90.1%, and the 3 recently opened development properties continue to lease up nicely.

The remaining 2 NHI owned development properties are scheduled to open in mid-2017.

NHI also has 2 additional developments with Bickford that are underway under a loan structure, where NHI has a favorable purchase option at stabilization, which includes a new project in Michigan that NHI closed on in the first quarter.

Moving on to other new investments. In February, we announced the purchase of 2 assisted living and memory care facilities, totaling 86 units in Hendersonville, North Carolina, to Ravn Senior Solutions, which is led by industry veterans, Steve Morton and Ted Turner.

The neighboring facilities, now known as Carolina Reserve, have a lease term of 15 years at initial lease rate of 7.35%, plus annual fixed escalators. With this purchase, NHI was granted a purchase option of a third building in the Raleigh/Durham market.

In early March, we announced the acquisition of a 126-bed skilled nursing facility in New Braunfels, Texas, for an investment of $13.9 million. The facility was leased to an affiliate of the Ensign Group.

The acquisition is the first of 4 that NHI had previously committed to, and will be added to the existing lease at an initial rate of 8.35%, plus annual lease escalators based on inflation.

The facility, which opened in September 2015, joins the current Ensign assets comprised of 15 skilled nursing facilities located in Texas.

The purchase window will open on another facility toward the end of this year with the 2 purchase windows opening on 2 additional facilities in 2018.

During first quarter, we also announced the purchase of a 102-unit assisted and memory care facility in Portland, Oregon, for $26.2 million with lease-back to Prestige Senior Living.

This facility was added to the existing Prestige master lease that is comprised of 3 skilled nursing facilities and 1 assisted living facility and has a remaining term of 12 years.

The new investment has an initial cash yield of 7%, plus annual fixed escalators.

Towards the end of the first quarter, we announced the purchase of 5 memory care facilities totaling 223 units.

The facilities, located in Texas and Illinois, were purchased for $61.8 million and leased back to the LaSalle Group who operate its facilities under the name Autumn Leaves.

The LaSalle group is a family-owned company who develops, owns and operates 46 memory care communities across the U.S. The lease term is 15 years at an initial cash yield of 7% with annual fixed escalators.

Our pipeline remains solid with good opportunities to add to our existing relationships and expand our current customer base with accretive deals.

The marketplace is competitive and we remain selective to make sure we are adding high-quality operators and communities.

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

Thank you, Kevin. And operator, we'll now open the line for questions.

(Operator Instructions) And our first question is from Chad Vanacore with Stifel.

So I was just thinking about the occupancy on the Holiday portfolio, given the changes in light of facility leadership management changes. So could you give us an idea of where it was last quarter and then where it is this quarter?

Sure, Chad. It's Kevin. The occupancy through the transition has softened a bit. It was around 90% last quarter. It's down a little bit through the transition. They've had good leasing volume. They've just got to [whip] the transition, make sure they get the buildings back to where they were. But as I mentioned, they've had good move in activity so far for the quarter.

And keep in mind, each building gets 2 new units they didn't have before, right? So there's a mathematical change in the denominator now.

All right, good point. Have they related to you how far through the transition they are? And when they expect things to really stabilize and then turn around?

Well, at least as it relates to our portfolio, all the manager units have been released now. So in terms of -- they're rentable and available to the public, and about 60% of those have been leased. So as I mentioned, they've had good leasing activity generally in the portfolio, but also leasing of those units. So still some transition to happen, but they are making progress there.

All right. Then, so you're having some good success, expanding your operator relationships. So can you tell us how these relationships translate in a deal flow for NHI, any off-market transactions in your development pipeline? What are you seeing? And maybe any premium or discount, too, which you see with marketed transactions?

Chad, this is Eric. I always like to point to Page 5 of our supplemental that shows the breakdown every year of deals that generate from existing clients and deals that come from new clients. And you can see that, at least thus far, this year, we're a little better weighted on new clients. But ideally, that chart should be 50-50 or in that range, because we do get a lot of organic growth from existing clients who just pick up the phone and call us first when they find a local off-market deal. And that's, if I had to point to a secret sauce, that would be it.

And our next question is from Jordan Sadler with KeyBanc Capital.

Wanted to just go through the acquisition pipeline. It sounds -- you're off to a very good start. Wondering where you stand and what the pipeline looks like today?

Jordan, if it's so good, why didn't it get a thumbs up on your report?

Well, it didn't get a thumbs down.

Okay, so sideway thumb is the new up?

I mean, to be fair, I think you guys said last quarter, you specifically, Eric, said the year is off with a bang. It started off with a bang. So I think we were all expecting pretty good things, so, hence the in-line.

Okay, all right. Well I'll let Kevin talk about the pipeline and...

Sure. As you've seen from the first quarter, we've had a very good first part of the year here and we continue to work on the relationships we have. As we mentioned in the call, we don't give specific volume targets for the year, but feel very good about the pipeline that we have. There is a lot of activity in the market, still very competitive. But with our relationships, with our existing operators, and the ones we've been cultivating, as we've shown here in the first quarter, we feel good about our position.

What does the mix look like, in terms of the pipeline today? And is there anything that you're shying away from? I mean, are you still as active on the SNF side?

Well we've been very selective on the skilled side. Where we've done transactions, it's been on newer properties with very good credit quality customers. That won't change. So I would tell you that it's still something that we're evaluating. We're not out of the market necessarily, but we still keep our underwriting criteria intact, in terms of what we're looking for, for skilled nursing and for all of our asset classes for that matter. So it's something we're very selective and unless it kind of fits that mold, we're a pretty quick pass on something that doesn't fit it.

And how -- go ahead.

Sorry, I was going to say, I mean, the pipeline really hasn't changed in terms of the type of things that we're looking at. It's still very heavily weighted towards senior housing; skilled nursing is still an option, but again, it's got to be a good fit for us. But the only thing that I'd say is kind of off the table that we've said before has been like LTACs, that's not been a space that we want to do much in.

In MOBs, we don't even sign confidentiality agreements anymore. They're just priced out of our comfort zone.

Okay, for the time being. So it seems like it'd be pretty senior housing focus. Have underwriting criteria changed at all?

For us? Not at all.

Yes. For you guys in the last 90 days or so? Or have you moved the needle at all?

No, I bet if you lined up the deals that we've just signed with deals that we did last year, they'd be pretty close to the same strike zone. So, I mean, you'll have pretty good visibility into what we're thinking, what we're buying, and how we're buying it, if you just line up last year and this year, and look at cap rates and occupancy and price per unit.

Okay. And then I guess, lastly, on portfolio coverage. On the senior housing side, what's the expectation today for how that should trend in your portfolio among your operators for the rest of the year?

Jordan, it's Kevin. So it's something that we continually monitor in the portfolio. We feel good about the relationships we have and the opportunities they have within our portfolio, one specifically would be Bickford. So as we -- as those developments continue to lease up and we add those to the portfolio, we would expect that to add coverage over time. So, I mean -- and there's other opportunities within each relationship that we have to be able to expand coverage. So again, something that we watch closely, but there's definitely things within each one that can help to add to the coverage that they currently have.

Okay. Lastly, just on the ATM usage. I mean, does that -- is that sort of the financing vehicle of choice for the time being, in terms of trying to keep the leverage in this range?

Compared to debt, yes, compared to other forms of equity. We look at everything. But it's a very efficient low cost, in terms of fee, method of raising equity to match fund what we're doing and maintain our leverage. This is John, by the way.

And we're fresh out of LTC stock. Our friends at LTC are -- we can just admire them from afar, no longer as shareholders.

And our next question is from Todd Stender, Wells Fargo.

John or Eric, I guess, just to stay in that last theme. After the LTC stocks sale, what's left in the marketable securities portfolio?

We have nothing left.

Okay. And then, Kevin, when you think about the development projects that are expected to open this year, can you just talk about the lease-up expectations around those? And if there is anything that has changed, I guess, in maybe your underwriting of those, from when you initially penciled them out a couple years ago?

Todd, just to be clear, you're asking about Bickford?

Yes.

Yes. So for any of our underwriting that we would do, particularly as it relates to Bickford, and if it's a larger community, it might be a little bit longer timeline. But we evaluate an 18-month lease-up, to be conservative, and they have outpaced that on a pretty regular basis with each of the communities we've opened. But we wouldn't necessarily change the way that we evaluate a new opening based on that. We would look at each one on its own merit and still -- probably still look at that 18-month window for a lease-up and stabilization standpoint.

And any new supply coming around those? Have you noticed anything tick up that would change your underwriting of those?

Not at this time, no. We evaluate the portfolio on a regular basis. The markets that we've been developing in have been very strong and they have received those communities really well.

And just one last one for you, Kevin. Just, any more details on the LaSalle transaction? Did any loans or construction agreements come along with this deal?

No. What we released is this kind of the start of the relationship there, they are a developer, owner, operator. So over time would expect to have some opportunities to expand that relationship, which is a big part of why we do any transaction, is to kind of get that relationship and be able to help them grow over time. So we'll be talking with them on a regular basis to see how we might be able to do that.

All right, Kevin. And actually I do have one last one, maybe for Roger. Your line of credit is upward, and just shy of $200 million, how big does that get to before you start thinking about turning that out?

Todd, in the past, we've drawn that up to maybe 50%, maybe as much as 60%, before we've looked to turn that out into a longer-term instrument. So we've got a ways to go yet.

And our next question is from John Kim, BMO Capital Markets.

Eric, there's been a couple of large M&A transactions in the healthcare REIT space recently. Can you just comment on how this impacts your business, if at all? You sort of alluded to being priced out of MOBs. But I'm just wondering if you had any additional commentary?

Well, obviously, there is a lot of chatter surrounding the Sabra-CCP deal. We were very interested to note Rick's remarks regarding his desire to have investment grade credit and lower capital, which is something -- if you priced our debt, it would resemble investment grade pricing. So I understand his need to be more competitive.

We're certainly as interested as the next REIT in M&A opportunities. We continually survey the landscape, talk to the same investment bankers, and look at it both ways, obviously, as a buyer or a seller. And we just have never found the right fit. We'll continue to look.

And as long as we're competitive on our capital costs and our ability to find new business and to grow, you probably won't see any transformational deals from us because transformational is, and oftentimes is a code word for, not very accretive. And we're only interested in a deal that can be accretive and shareholder-friendly. So those are my thoughts.

Do you think there's going to be any opportunities to buy some assets out of any acquirer? Either Sabra through the CCP acquisition or HTA?

Possibly. We've looked at disposed asset sales from the Welltowers and the HCPs of the world, and they seem to be the province of private equity and other players that are willing to use more leverage and take on more risk for a return, based on future performance. And our lot in life as a REIT is to trade some modicum of future performance for stabilized cash flow. Our shareholders have a very low tolerance for risk, and the deals we make, show a preference for in-place cash flow that's sustainable. And a lot of these deals that are dispositions are the opposite of that. They're really better suited for private equity.

Roger mentioned in his prepared remarks, outsourcing a lot of the accounting and legal functions and other functions and keeping your staff pretty limited, as far as number of employees. At what asset base do you need to start thinking about internalizing some of those functions?

Well, good question. We review that from time to time. I mean, we have grown from 14 to 15 employees this year. So we do add staff as necessary. I would say that probably in increments of $250 million, we probably start thinking about additional asset managers or accountants, assuming that $250 million is maybe 25 buildings. So -- and that doesn't necessarily mean that we would hire someone, but we think about that a lot and talk about it a lot. We're obviously growing at a fairly good rate every year, so I would look for that.

John, this is John Spaid. So even in a large G&A setting with larger revenues, sometimes it just makes a lot of sense to have external consultants do work. For example, internal audit is a great example of that, where the internal auditors from external sources have a very broad breadth of experience and also ability to draw from all kinds of different talents inside the organization, as opposed to trying to recreate the wheel internally. So growing doesn't necessarily really require a lot of additional people when you think of it that way.

Okay. And then just to follow up on the utilization of your ATM. When deciding when to raise capital through this program, can you just remind us what you primarily look at? Is it your share price in isolation? Or do you look at, for instance, your implied cap rate which is acquisition costs or your relative performance. If you can just share with us your thoughts on that?

Well, look, we're not market timers. And most important to us and our Board of Directors is, maintain our low leverage and being consistent about that. That doesn't mean to say that we can't have moments where the market is going through a period of distress. In fact, March, after the fed raised interest rates, we saw, in a short period of time, where the markets were a little bit distressed. But we're going to continue to tap equity, as necessary, as we make investments to rightsize our capital structure, to maintain a lot of dry powder. And I think the market's rewarding us for doing just that and being disciplined like that.

And our next question is from Richard Anderson of Mizuho Securities.

My cutting questions on M&A have been asked and answered. But I guess, when it comes to the Sabra CCP deal, to what degree did you have a look? And how far along in that look process did you decide it wasn't for you, if that in fact did happen?

We did not have a look. So, short answer there.

Did you shield your eyes? Or was it not offered?

Did we look away? Did we pretend not to see them? No, there was none of that. We were not invited, and we have good relationships with all the investment banks involved. I'll certainly follow up with them and see what the story was there. But I can tell you that that's probably not a deal we would have pursued. It would change our stripes in terms of being a SNF REIT, and I don't think that's the direction we're headed in.

Right, understood, and that's clear on what you said today in this call. But -- and so the question is, if you kind of are more inclined to be thinking about senior housing, to what degree are you on the lookout for very meaningfully large transactions as opposed to one-off-type deals? I mean, is there anything out there that's kind of shielded from view a little bit, that you're -- that you would be more inclined to? Or are you perfectly happy going at one or a few at a time?

Well, good question, Rich. We do look at the majority of deals that you see traded like the Brookdale deal that was done with HCP and Blackstone. We were very interested in that and spent a lot of time on it. But like I was saying earlier, being a REIT, our hands are constrained by our leverage metrics. And unless we're willing to make some assumptions on future performance and lever up a deal beyond our comfort zone, we're not going to be able to be competitive with private equity. And that's just our lot in life.

So in the meantime, as we wait for the right megadeal to come along, we just continue with our 2s and 3s which, on any given year, could add up to between $300 million and $500 million, which is not a bad way to grow.

Okay. And do you have any unique or profound view, if it's at all possible, on the administration and the President and repeal and replace? And how that affects at least the skilled nursing side of the house? Do you think it's impacting the way you're -- or influencing your decision to be more senior housing focused, just curious how the politics are playing in your mind these days?

I'm very careful about broaching that topic. I'll just give you a couple of headline thoughts. One is, I can't help but notice that the talk of the new tax code changes has really helped the share price of operators like NHC, which got a really nice boost in their stock based on, among other things, the assumption that any tax change, as an operating company, would fall to their bottom line. So that's been good. And if I was an operator, I'd be issuing equity to take advantage of that to either lower leverage or grow -- promote growth.

And then as far as the Affordable Care Act, we're all just sitting in the bleachers, watching, aren't we? We don't know where it's going to end up. And now it's with the Senate, so it's kind of making progress in fits and starts. As a senior housing-focused company, we don't have much exposure to the ACA. And as an owner of SNF buildings, that's mostly Medicare.

But I think, it just behooves us, as a nation and as a population, to do the best we can to take care of people who need insurance and need care, because if they're not well cared for, they will end up in Medicare or hospitals or some sort of subsidy program that does affect our operators. So while we don't have a direct stake in ACA, we're definitely having above average interest in what's going on and where it ends up.

And our next question is from Juan Sanabria, Bank of America.

This is [Catherine] here with Juan. Just 1 quick question for me going back to the SNF coverage levels that you discussed in your prepared remarks. Given the ongoing operating pressures as a factor, just wondering what the NHC coverage levels look like on a facility level basis?

I'm sorry. You broke up just a little bit there. You said the NHC coverage levels?

Yes.

Yes, so we -- well, as we'd prepared in the remarks there, the corporate fix charge is 3.64x. We haven't -- we don't give the facility level. There has been some softness in their coverage. It's gone down some. I mean, it's still very strong at the 3.6 plus level, but it was over 4 at some level. They -- at one point.

They had some additional new developments that have been a little bit of a drag, just from a lease-up and cash flow standpoint. And there is -- they did some changes on their balance sheet to put a little bit more debt on, they're still extremely low leveraged. So that's changed, just kind of the denominator and the numerator, for some degree, to -- on the fixed charge, but still very strong company.

And our next question is from Todd Stender, Wells Fargo.

Just a follow-up here. On the modeling side, G&A ticked up a little bit in Q1. I don't know if I missed this. Was there anything in Q1 that would have us bring down our G&A for the rest of the year?

Todd, this is Roger. G&A is higher in the first quarter because of the vesting of a certain part of our option grant that comes in the first quarter. And so that's dictated by vesting. Our value of the auctions themselves, as calculated by the Black-Scholes model, is higher this year due to past volatility and our share price, like a lot of other REITs. So when we factor all that together, we think that we will come down to about a $3 million per quarter in total G&A.

And there are no further questions at this time. I'll turn the call back over to you, gentlemen.

Thank you, everyone, and we'll look forward to seeing you at NAREIT or other conferences where we meet with investors and analysts.

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. Everyone, have a great rest of the day. You may disconnect your line.