National Health Investors Inc (NHI) 2017 Q2 法說會逐字稿

Hello, everyone. This is Colleen [Shaller], Director of Investor Relations. Welcome to the National Health Investors Conference Call to review the company's results for the second 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 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-Q for the quarter ended June 30, 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.

Hello, everyone, and thank you for joining us today. I'd like to start by inviting you to attend our upcoming Investor Day this fall. We'll be hosting investors and analysts in Greenville, South Carolina at Cascade's Verde, a CCRC operated by Senior Living Communities. And this event will take place on Tuesday, September 19, and will feature a management presentation, a Q&A session and a property tour. We hope to see you all there. For more detailed information, see our Investor Relations section on our website.

Moving on to earnings. I'm happy to say that Q2 was another strong quarter for NHI. Normalized FFO increased 8.2% and adjusted FFO increased 7.3% per share compared to the same quarter in 2016. In a year that has seen weak public buying activity, NHI has continued to grow with both new and existing customers. Year-to-date, we've executed $158 million of investments. And as Kevin will discuss later, we just gained a new operator, Evolve Senior Living. We've spoken in the past about the potential deals to be had as new developments, inexperienced operators and inexperienced capital play out in the market. The building, now run by Evolve Senior Living, is a great example of that. This building was purchased out of bankruptcy from an owner-operator who lacked the skills needed to run the business. NHI partnered with a local operator to take advantage of a premium property at a distressed price. As the lending markets begin to tighten up, we expect to see an increase in similar deals crossing our path. Many of these deals will be similar to the opportunities seen during the recession.

NHI is well positioned to take advantage of these opportunities with a competitive cost of capital, excellent operators and deep relationships in the senior housing industry that lead to healthy deal flow.

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

Thanks, Eric. Hello, everyone. I'm pleased to report excellent financial results for the second quarter as they are reflective of steady investment growth over the past year with new and existing tenants and a low cost of debt and equity capital with which to fund them. In addition, we finalized amended lease agreements with our tenants, HSM Florida and Bickford Senior Living, which Kevin will discuss later.

Normalized FFO per diluted share increased 8.2% to $1.32 compared to $1.22 for the same period one year ago. Normalized AFFO increased 7.3% to $1.18 per diluted share compared to $1.10 one year ago. With approximately $158 million of announced investments so far this year, we continue to deploy a careful mix of debt and new equity to maintain our low leverage profile.

NHI's total revenues for the second quarter showed strong growth of 14.1% over the same quarter in 2016. This growth has been primarily fueled by our new investments in 2017 and the full year impact in 2017 of investments made throughout 2016. For the second quarter of 2017, our general and administrative expenses were $2.5 million. And when compared to the same period one year ago, increased slightly due to additions to our corporate staff and in incentive and noncash share-based compensation. Our noncash stock-based compensation expense in the second quarter was $342,000 and is estimated to be approximately the same for each of the next 2 quarters.

We currently estimate our total general and administrative expenses will be between $2.5 million and $3 million during each of those same periods. For the first 6 months of 2017, revenues increased 15% over the same period in the prior year. Normalized FFO increased 8% over the prior year and normalized AFFO increased 7.9% over the prior year.

Over the last 12 months, we have liquidated our long-held investment in LTC common stock, thereby generating approximately $75 million in proceeds that had been used to fund real estate investments. General and administrative expenses have increased approximately $1.5 million when compared to 2016, primarily due to additions to our corporate staff, incentive compensation and to our noncash stock compensation expense calculated by the Black-Scholes pricing model. 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 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 and 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 into our investments for which no straight-line rent calculation is required. Importantly, it assures management's focus on making accretive new investments over our blended cost of debt and equity capital.

For 2017, we increased our quarterly dividend 5.5% to $0.95 per share or $3.80 on an annual basis. We currently estimate our total dividends for 2017 will result in 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. We have raised our normalized FFO guidance from a range of $5.06 to $5.12 per share to a new range of $5.22 to $5.26. Likewise, we have raised our normalized AFFO guidance from a range of $4.61 to $4.65 to a new range of $4.70 to $4.72.

We have successfully executed on transactions so far this year that support those estimates. 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. We have confidence in our guidance ranges for 2017 and in the full year impact of those investments in 2018.

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

Thank you, Roger. For the quarter ended June 30, our debt capital metrics were net debt to annualized EBITDA at 4.3x; weighted average debt maturity at 6.1 years; weighted average cost of debt at 3.5%; and our fixed charge coverage ratio at 5.9x.

Looking at the revolver. At the end of the second quarter, we have $188 million outstanding, with an available capacity of $362 million. We did not make use of our ATM equity program during the second quarter. However, we continue to have $319 million available under our shelf prospectus filed February 22, 2017.

As mentioned in our Q2 earnings press release, on August 3, 2017, we closed on a new syndicated $800 million unsecured credit facility, which replaces our existing $800 million revolver and term loan facility. The new facility lowers our borrowing costs, consolidates our 3 bank term loans into a single term loan, allows greater flexibility in the investments we may make and extends the maturities of our revolver and term loans to 2021 and 2022, respectively.

With the payment of the 10-basis point extension fee, our revolver may be extended one year to be coterminous with our term loan. At closing, and reflective of our current leverage ratio, the 30-day LIBOR spreads on our new credit facility were reduced 35 basis points from 150 to 115 basis points for our revolver and 45 basis points from 175 to 130 basis points for our term loan. In addition, our revolver transitioned from our unused capacity fee of 40 basis points to a facility fee of 20 basis points. On a trailing 4-quarter pro forma basis, we estimate the improved pricing under the new facility would have been approximately $0.05 accretive to AFFO.

Additional details may be found in our 10-Q and accompanying SEC filings.

We are grateful to all our banking partners as well as our private placement lenders for all their hard work and cooperation. I'll now turn the call over to Kevin Pascoe to discuss the portfolio.

Thank you, John. This quarter has been a great example of NHI's focus on accretive investments, good asset management and strong tenant relationships, combining to produce consistent positive results. Our lease renewal with health services management is just one example that showcases these priorities and the results they lead to. The new lease, effective this May, consists of a $9.8 million lease payment, which is an increase of over $2.5 million when compared to the original lease. The lease carries fixed escalators of 2% with a lease term of 12 years and two 5-year extension options.

Under the new lease, the trailing 12 EBITDARM coverage ending 3/31 would have been 1.7x. We are delighted to continue our partnership with HSM. They're an outstanding operator with a great track record. They currently run over 20 skilled nursing and assisted living facilities in the South and Midwest. The NHI-owned facilities run by HSM which are all located in Florida, average above four-star rating. In addition, 4 of these buildings have a Gold Seal designation which is a remarkable feat.

Of the 683 licensed nursing homes in the state, only 25 other buildings have received the same recognition. With each investment, we focus on partnering with high-quality operators like HSM, which helps NHI continue to deliver consistent results.

Turning to the overall portfolio. At the end of first quarter, the EBITDARM coverage ratio on the portfolio was 1.76x. Our skilled nursing coverage was 2.64x and our senior housing portfolio was 1.27x.

Looking at our larger operating leases. Senior Living Communities, which represents 17% of our cash revenue, had an EBITDARM coverage ratio of 1.34x on a trailing 12-month basis as of first quarter end. Our relationship with National HealthCare Corporation accounts for 16% of our cash revenue and has a corporate fixed charge coverage of 3.63x. Holiday Retirement had an EBITDARM coverage of 1.18x as of first quarter end and represents 15% of our cash revenue. The leading indicators from the portfolio are positive coming out of the second quarter of this year, as the community manager transition has been fully implemented. Occupancies for July ended at over 91%, which is the highest since November of 2016.

Our partnership with 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 March 31. During the quarter, we signed a lease extension on 32 existing Bickford buildings, extending the lease of 13 buildings for 5 years and 19 buildings for 14 years. The development properties continue to lease up nicely ahead of their respective pro formas. Bickford has now opened all of the NHI-owned development properties. The 2 remaining developments with Bickford underway are under a loan structure where NHI has a favorable purchase option at stabilization.

One project is slated to open in the fourth quarter of 2017 and the other is expected to open in the third quarter of 2018. During the quarter, we further expanded our relationship with Bickford when NHI acquired a 60-unit assisted living in memory care Community in Lansing, Michigan. NHI's initial investment was $10.4 million plus an additional commitment of $475,000 for capital improvements, which is expected to be fully funded over the first lease year.

The building, originally built in 2001, will be renovated and leased to Bickford Senior Living. The lease has a term of 14 years with renewal options at an initial lease rate of 7.25% plus annual escalators. The acquisition brings a total number of NHI facility leased to Bickford to 43.

In addition to this new investment, Monday, we announced the $10 million mortgage of a 40-unit memory care community in Rye, New Hampshire. The community, originally built in 2013, is managed by Evolve Senior Living, a small operator with solid industry experience and good growth prospects. The loan will have a term of 5 years with renewal options at an interest rate of 8% and NHI will have an option to purchase the property after stabilization.

At the end of July, NHI made a land acquisition for $4.8 million and entered into a ground lease with Acadia Healthcare. Acadia leases and operates Trust Point Hospital in Murfreesboro, Tennessee, a 101-bed acute care general hospital specializing in rehabilitation and inpatient psychiatric treatment. NHI and Acadia agreed to extend Acadia's purchase option out 2 years to 2020. With the land addition, Acadia will expand its operations by building a 116-bed hospital on the campus that will be utilized for additional psychiatric programs.

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. We hope to see you all at our Investor Day, September 19. And with that, we'll now open the line for questions.

(Operator Instructions) And our first question comes from the line of Chad Vanacore with Stifel.

So just thinking about your new investment with Evolve in New Hampshire. Is this more of a one-off type investment? Or is there more opportunity to be done beyond that?

Chad, it's Kevin. If we're talking specifically with Evolve, that's I think the idea that we have with each of our relationships to try and help them grow over time. So it's our expectation that we can help them into the future. But in -- and also as Eric kind of mentioned, there are some other deals in the marketplace that would be similar in terms of just value-add that we think we might be able to get some better pricing on. So we're -- we remain to be on the lookout for those types of opportunities.

All right. So moving on to senior housing. The Holiday portfolio, they have had a change over in their executive management structure. What's been the impact on occupancy in the quarter?

So for the second quarter recently ended, we actually saw a pretty good outcome. They're starting to get some traction on their sales programs and making the manager model changes at the communities that's fully implemented along with the sales training program. So in the last 3 months, we've seen consecutive net occupancy growth in the portfolio with July ending over 91%. So we still are watching closely. But the leading indicators for occupancy are positive right now.

All right. That actually sounds pretty good. And you've got another portfolio that Ensign has leased from you, which had been struggling. Can you give us an update on -- and some color there?

I'm sorry, Chad. With Ensign?

Yes.

The new (inaudible)

Yes, so with -- you're asking specifically about the new addition, is that right?

No, I was actually asking about the Legend portfolio. But we can talk about the new additions as well.

Yes, so they're -- I think they've mentioned this on their call as well, that transition is taking a little bit longer than they expected. But they're expecting some better results in the second half of this year. The leading indications there are positive as well. So again, it's been something that's taken a little bit longer. But they're seeing the tide turn in their favor and something that they think they're going to have some positive outcomes the second half of this year.

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

This is Katie Morgan on for Jordan. And just touching upon the Holiday portfolio. I was wondering if you could discuss their coverages and how you expect them to trend over the second half of '17 given the changes at the management level.

Sure, this is Kevin. The coverage, the EBITDARM coverage, on the portfolio is 1.18x through the first quarter and we're watching it closely. We'll see, as the occupancy improves, how that trends. For now, it's pretty steady. So we're again watching it closely. But that EBITDARM coverage has been steady through the information we have.

And then separately, during the quarter, you guys made a land acquisition with Trust Point Hospital. And you mentioned that they will be developing an additional hospital on the land. Would you be interested in funding the expansion on the property?

Yes, this is Kevin again. We would be very interested in growing our relationship with Acadia. So this was one kind of foray to help them out. We had already owned the land and improvements with the existing hospital. So this was a way for us to allow them to expand the footprint. To be honest with you, they've got a very, very good cost of capital. So it was little more efficient for them to do the improvements themselves. But if they would like us to do some development with them, we'd be more than happy to do that. As it stands, we just did a ground lease, they'll do the improvements and we were able to negotiate an extension to the purchase option they have. So we'll keep the lease in place for at least 2 more years beyond what we already had in place.

(Operator Instructions) And our next question comes from the line of Richard Anderson with Mizuho Securities.

Kevin, when you went through the EBITDARM coverages, could you like quantify what it would be on an EBITDAR basis for each of those top 4 that you listed?

So from a conversion standpoint on senior housing, if you take out an industry standard management fee, you're probably looking at about 0.1 to 0.15 on the coverage.

Okay. All right. And so -- so it doesn't matter because it's so big. And it's a fixed charge number. I understand. Okay. Roger, something that you guys always say in guidance every quarter is the guidance doesn't include acquisitions except for acquisitions that it does include -- I don't know exactly how you put it. But like I hear one thing and then you say but it does include stuff we have certainty on or something like that. So can you tell me then what is in the guidance and what is not? Is it just the stuff that you've completed? Or is there an assumption of more? It's the part I never really understood.

Yes. We have had a significant growth in our guidance for the full year. We have the full last half of the year impact of the investments that we've made so far, about $158 million. We do have ongoing construction development projects, loan commitments. Those are fully disclosed in our 10-Q. We've got about $94 million of loan commitments and development commitments that we will fund over the course of the next year. We also talk about the significant renewal of the lease with HSM of Florida, with some very excellent skilled nursing facilities there. That is an incremental increase of about $2.5 million in base rent per year. This lease also has a fixed escalator. And so there'll be some straight-line rent in the FFO number. And then finally, John in his remarks talked about the amended and extended credit facility, bank credit facility. This is an $800 million facility that we had. And we were able to reduce our interest rates by 35 basis points on the revolver and 45 basis points on the bank term loans. So you take the investments we've made, the HSM lease, the credit facility. We've also done a smaller renewal with a portion of the Bickford assets which we talk about and that is what drives this increase now in guidance and positions us well for 2018. We do have clarity on transactions the last half of the year, including financing transactions with which to pay for those investments.

Okay. So I just want to be clear that there's no additional unannounced acquisitions in the guidance. I got other types of transactions and loan commitments and what not. But no other third-party acquisitions in the guidance, is that correct?

This is Eric. Hey, Rich. No, that isn't correct. The guidance also includes some acquisition activity and even some disposition activity.

Okay. All right. But...

The trick, Rich, is we're looking at the fourth quarter now. So it's either not going to be a material impact to 2017, it's more of a 2018 thing. And a lot of times, we do transactions where we have to assume debt, and we're not really in control of when it closes. We're waiting for HUD or some other lender to approve and those things move at a snail's pace. So we have to be careful about relying on that revenue showing up and when.

Okay. So when you say the company does not include an estimate of investment volume in its guidance range, that just means that there's something in there or you're just not telling us what it is. Is that right?

Basically, yes. I mean, we're not going to make forward statements we can't. We don't want you to rely on something we can't deliver on, right?

Right. But if the number -- if the guidance includes it, why not just tell us what it is. I mean, I don't know.

Because it's proprietary, Rich. These are deals that haven't closed yet.

Well, okay. I guess I like a little mystery in life. But so much of a guidance.

There you go.

And then Eric, you started off the conversation talking about purchasing assets out of bankruptcy and it's -- I got really kind of interested and then we didn't hear much more about it in the call. So the question was asked earlier, I can't remember who it was. But what's the kind of the opportunity set there, something along those lines. Is it just a couple more deals that you see that you could buy out of bankruptcy and kind of have a value-add motif to it? Or is it a bigger opportunity given some of the disruption that's happened in the senior housing space as of late?

I think while we're seeing what used to be a trickle of distressed buildings has turned into a regular flow, whether or not that's going to increase or maintain remains to be seen. But we are seeing more half-filled buildings that were just opened and belly flopped. And if you can get those at the right price, even if it's in an overbuilt market, you'd have an advantage kind of like Sam Zell's Grave Dancer strategy.

Okay. So for this purchased out of [banks], did you say how big the involved deal was? I don't remember if you did.

$10 million.

Was that the loan that Kevin talked about?

Yes.

Okay. I guess I zoned out on that one.

Because as a REIT, we don't really want to buy unstable properties that don't cover that would make guys like you unhappy. So the way to shelter that is to do a loan.

That's my fault, I didn't draw that line. I apologize for that. So it's an 8% on the loan. Is that what you said, Kevin?

Yes.

Okay. And trickle of distress into flow means we could see an increment into your loan book at least in the short term as these deals kind of flow?

Correct.

Our next question comes from the line of John Kim with BMO Capital Markets.

Sort of not a question, but in your 10-Q this quarter under Risk Factors, you added a new section regarding breaches in security of information. I was wondering if there was any particular reason why you added that this quarter?

Well, this will be in our 10-K next year. And so we're giving notice of that. This is an item that is of great concern to all companies and the SEC. And so we take it very seriously, and we think that we have as good a measure as we can possibly have to safeguard information. And when you think about what we collect, we're collecting proprietary information on our tenants and borrowers. And that's really the significant private data. And so anything can happen. We all read stories about hacking and that sort of thing, but we take every measure we can possibly take to safeguard that information.

But nothing's happened, John. Nothing to be concerned about. We're just kind of raising our level of awareness and in our investors' level of awareness about the issue.

Nothing for your company but anything regarding your partners or maybe some of your competitors? Or I guess, as a follow-up to this, are there any additional costs that you foresee spending to alleviate this risk?

No, nothing has happened to anyone that we're aware of. But with all the phishing e-mails we get, we're constantly on our toes.

Okay. And then my second question is, you had a relatively minor increase in what looks like maintenance cutbacks. You guys call it renovations. Do you expect CapEx to increase going forward either as your portfolio ages or potentially as something you work with some of your tenants?

John, it's Kevin. We don't have any CapEx currently that we are spending and not getting a return on. When we've done CapEx, it goes to our -- we would fund it to our tenant. And in return, we would get a lease rate back for that.

And we just want to point out that, that's different than a lot of different REITs that have RIDEA, and their CapEx is actually going into a building that they own and may or may not pay a rate of return.

Have you received any pushback from any of your tenants? I mean, some of the EBITDARM coverage ratios are pretty tight.

Pushback with regard to?

Providing capital for CapEx.

This is Kevin, again. No, we haven't received any pushback per se. We always work with our tenants to make sure we understand what their needs are. And to the extent there is a way for us to help and they have the coverage to support the increased lease payment, that's definitely something we would look at with them. But there's not been any element of them coming to us saying we don't have money to fund our CapEx.

And there are no further questions at this time. Please continue with your closing remarks.

Thank you, everyone, for joining us today. We hope to see you at our Investor Day next month.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.