National Health Investors Inc (NHI) 2018 Q1 法說會逐字稿

Hello, everyone. This is Colleen Schaller, Director of Investor Relations. Welcome to the National Health Investors conference call to review the company's results for the first quarter of 2018. 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 March 31, 2018. 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 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. Hello, everyone and we're glad you could join us today. I'm pleased to report that 2018 is off to a great start with over $95 million of investments executed year-to-date. As Kevin will discuss later, we're delighted to once again expand our relationship with Bickford Senior Living. This recent acquisition is another great example of NHI's ability to facilitate growth for its operating partners.

Looking at our financial results for the first quarter, we reported an 8% increase in both normalized FFO and normalized AFFO per share year-over-year. Roger will give more color on the results momentarily.

A word about the state of senior housing. Crosscurrents of rising interest rates and supply issues remain. In this period of price discovery, we continue to focus on conservative underwriting and accretive acquisitions. We note the recent QCP transaction, and we're gratified to see Ensign's quarterly results, which were highly favorable. Our takeaway is that skilled nursing still has a place on the senior housing spectrum. We continued to see interesting opportunities for well-funded, low-leveraged REITs like NHI.

I'll now turn the call over to Roger Hopkins to walk through the financials. Roger?

Thanks, Eric. Hello, everyone. We had a great first quarter as our results reflect the impact of new investments announced in 2017 and those in the first quarter of 2018. Normalized FFO per diluted share for the first quarter increased 8% to $1.35 compared to $1.25 for the same period 1 year ago. Normalized AFFO also increased 8% to $1.22 per diluted share compared to $1.13 1 year ago.

We continue to fund our development and loan commitments totaling $89 million as outlined in our Form 10-Q. Several of our tenants are actively renovating or expanding their facilities to meet the wants and needs of a growing demographic of senior adults. Whether in an acquisition or in construction, we deploy a careful mix of debt and equity to maintain our low leverage profile and to provide NHI access to new capital in its many forms.

NHI's total revenues for the first quarter showed growth of 9.6% over the same quarter in 2017.

For the first quarter of 2018, our general and administrative expenses were $4.2 million and increased less than $70,000 when compared to the same period 1 year ago.

Our noncash share-based compensation expense in the first quarter was $1.4 million. We also opportunistically bought back a portion of our convertible notes due in April 2021 and recognized the loss of $738,000 related to these transactions.

NHI's management team is incentivized on annual growth and dividends and AFFO on a per-share basis. Our AFFO is a non-GAAP measure of performance, which 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.

This morning, we announced our regular second quarter dividend of $1 per share to shareholders of record on Friday, June 29. We currently estimate our normalized FFO payout ratio will be in the low 70% range, and our normalized AFFO payout ratio will be in the low 80% range, thereby providing NHI with excess cash from its monthly revenue to be used for making new investments.

Moving on to guidance for 2018. Our previously announced guidance remains unchanged. Our guidance allows for likely investments in our active pipeline and the capital with which to fund them. We affirm our previous normalized FFO guidance range of $5.45 to $5.51 and a normalized AFFO range of $4.99 to $5.03 per diluted share as shown in our earnings press release this morning.

When we report our second quarter results in August, we will give more clarity to the investment volume expected by the end of 2018.

I'll now turn the call over to John Spaid, who will discuss further our uses of debt and equity capital.

Thank you, Roger. For the quarter ended March 31, our debt capital metrics were net debt to annualized EBITDA at 4.3x, weighted average debt maturity at 6.5 years, weighted average cost of debt at 3.6% and fixed charge coverage ratio at 6.3x. NHI ended the first quarter with $262 million outstanding on our revolver, leaving us with $288 million in available revolver capacity.

During Q1, we did not make use of our after-market equity program, but we did acquire $27.6 million in NHI's core value convertible bond notes. After adjusting for NHI's first quarter dividend, convertible bonds conversion price now stands at $70.01, down $0.24 from $70.25 at the end of 2017. As we declare our dividends above $0.77 per share, the bond's conversion price will continue to ratchet down, increasing the cost of the convertible debt instrument when it matures April of 2021. We've now purchased a total of $80 million in prior value convertible bonds, allowing us to reduce our future exposure to the bond's conversion feature. With our leverage currently at the lower end of our 4 to 5x net debt-to-EBITDA ratio, NHI continues to be well positioned for future accretive investments.

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

Thank you, John. Looking at the overall portfolio. At the end of the fourth quarter, the EBITDARM coverage ratio was 1.66x. Our senior housing portfolio's performance is slightly up at 1.23x, and our skilled portfolio remains steady at 2.52x. As we look into the first quarter, typically we see the seasonal effects of winter that includes some higher expenses and lower tour and move-in volumes. Moving into the spring, the expenses tend to normalize and lead traffic improves, which is consistent with what we've seen so far this year with the broader portfolio. Despite some of these seasonal effects, our tenant we identified is at compliance continues to improve with occupancy increasing through the winter months and into the month of April. We are still working closely with the operator but feel they continue to be on a positive trajectory.

Taking a look at our larger operating leases. Bickford Senior Living, which represents 16% of our cash revenue, has an EBITDARM coverage ratio of 1.22x for the trailing 12 months ending December 31. As Eric mentioned, we are happy to once again expand our relationship with Bickford. Last week, we announced the acquisition of 5 assisted living and memory care communities totaling 320 units for a total commitment of $69.75 million. This includes $500,000 in capitalized transaction costs and a $1.75 million allowance for capital expenditures. The communities will be leased to an affiliate of Bickford at an initial rate of 6.85% with annual fixed escalators and a 15-year maturity.

NHI also has a fair market rent reset opportunity in years 3 through 5. The acquired assets are located in Columbus and Cleveland, Ohio; and Erie, Pennsylvania. These communities are well located in good markets and were acquired below replacement value if we were to try to rebuild these new today. This is a good value-add opportunity for Bickford once they get through the transition period and can complete the planned capital improvements.

Turning to Senior Living Communities, which represents 16% of our cash revenue, their EBITDARM coverage ratio was 1.3x on a trailing 12-month basis as of fourth quarter end. Entry fees for the calendar year 2017 were solid, and year-to-date 2018 performance has been in line with expectations.

Looking at National HealthCare Corporation. Our partnership with NHC accounts for 14% of our cash revenue and has a corporate fixed charge coverage of 3.6x.

Holiday Retirement represents 14% of our cash revenue and has an EBITDARM coverage ratio of 1.16x as of fourth quarter end. Consistent with my earlier comments on seasonality, occupancy for the first quarter was down versus the fourth quarter but flat to first quarter 2017. April began to see some positive lead and move-in activity, and the portfolio finished April on a positive note.

Turning to our pipeline. It remains very active with various asset classes under review, and we expect to close on the next 2 Ensign development projects this month. We have seen some slight cap rate expansion for senior housing assets and smaller secondary markets, but the marketplace is still very competitive.

We remain focused on strong local market fundamentals, conservative underwriting, experienced operators and ultimately, accretive growth for our shareholders.

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

Thank you, Kevin. 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 I missed what Roger had said. Straight-line rent, it looks like, sequentially, it was up a bit or it -- I'm sorry, decreased a bit. So was there any change there? And how should we think about that on a quarterly basis going forward?

Chad, when you develop your schedules for straight-line rent up on a new investment, it's going to be highest in the beginning. So as these assets age in our portfolio, you're going to have less and less straight-line rent. So it's just a function of math, and it's something that we subtract when we get to AFFO because it's hard to track, unless you're building spreadsheets for every investment.

But Roger, shouldn't that have pushed straight line up? Or am I not thinking about this right?

No. Straight-line income will be the highest in the beginning of a lease term.

But it looks like it declined sequentially.

So Chad, this is John. Maybe I can take a shot at it. So eventually, what happens for the portfolio of all our rents that have set escalators is they flip from positive to negative. So they add to rent in the beginning of the lease. As the lease progresses through its 15-year term, about the midpoint, it then flips to a negative number. So it's actually pulling revenues down because it's basically evenly distributed over the entire period. So when we have leases that we booked that have no escalators like with Ensign Group and CPI, we don't get the book straight-line rent for them. So I think that what you're seeing is just that effect of somewhat a...

Naturally, over time, straight-line rent should decline as these leases mature. What I'm saying is there's a sequential decrease here, but you're saying that you signed new leases, which should make straight-line rent grow. No? Am I not thinking about that the right way?

Yes. Well, unless it has a CPI increase and no escalator.

So we did an Ensign lease, so you wouldn't see it.

So it wouldn't have any straight-line rent contribution.

Got it. Okay. That's what I needed to know there. And then just your expansion of relationship with Bickford, it's running around 16% of the total NOI. Is that pro forma? Is that right? And then how are you getting comfortable with expanding that relationship beyond where you already are?

Chad, it's Kevin. So that's right. On a pro forma basis, including the new acquisition, it would be at that 16% level. We love our relationship with Bickford. We want to try and grow more with them to the extent we can. I think the task that we have then is to continue to grow the portfolio with other customers as well. That way, we can continue to feed the relationship we have with Bickford. I think we value the relationships we have. And to the extent we can find good, solid opportunities for them, we want to foster that. So I think that's -- we're going to be mindful of the concentration we have, but I think the challenge for us then is just to continue to grow our other relationships so we can continue to do that.

All right. So there is -- you'd look for further expansion there, Kevin?

With Bickford?

Yes.

Well, we've got the developments that are still ongoing, so that relationship is going to get added to over time just by the nature of those. And then the rest, from there, would just be more opportunistic in nature, similar to the deal we recently closed. It was a perfect fit for them. It's the unit size, the type of market. It's -- when we looked around and talked to various operators, it just became very clear that they were the right choice for these buildings.

All right. And then just remind me. You can correct me if I'm wrong on this. But the last quarter, you might have mentioned an operator in technical default, so -- but it was continuing to pay rent. How is that situation progressing?

So they continue to make progress. Rent still remains current. They have not missed a payment this entire time. We've been talking about them, so they continue to make progress in occupancy. We're very happy with their progress. Wouldn't say that they're back to stabilization, but they're on the right trajectory.

(Operator Instructions) The next question comes from the line of Daniel Bernstein with Capital One.

I just want to actually go over how you're thinking about the investment level for this year, the pipeline and kind of cap -- review kind of the cap rates or yields that you're seeing for both seniors housing and skilled nursing. And obviously, you did some seniors housing here 1Q, 2Q, but you made some nice comments about skill. So I was just trying to get a sense of where your pipeline is going and what kind of investments you're looking at.

Sure, Dan. This is Kevin. I think, as I mentioned in my comments, we expect to close on the 2 Ensign development projects later this month, so that will add -- well, last quarter, when we talked about it, we identified a level of investment we expect for the year, still have. Feel good about that level of investment. We continue to be looking at new opportunities on kind of the full gamut, if you will, in terms of opportunities, whether it's senior housing, some skilled nursing, some behavioral health or more -- maybe more like what we have in the portfolio, acute psychiatric hospital-type opportunities. So seeing a wide range of opportunities out there for us is just finding the right fit. And then yields, I think we talked about a little bit of cap rate expansion on the senior housing secondary markets. Our investment levels there have been kind of in that 7%-ish or maybe a little bit higher for those on initial yield to us, and then so the cap rate we would expect to be a little bit higher with coverage on those. And then on skilled, it really depends on credit and who we're working with. And then the other asset classes, we're still kind of in discovery period to see what makes sense and what the right yields would be for those. So we're trying to take in as much information as we can at this point and figure out right -- what the right mix of investment and yield is. But again, I feel like we've got some pretty good opportunities and a few things that we'll have under our belt here very shortly this month.

The assets that you bought, at least to Bickford, they're -- I guess they're not turnaround, but they're under managed. Are you seeing more value in those type of assets, more value add than, say, stabilize? So just trying to understand where you're going out on the risk spectrum in terms of, again, those acquisitions.

I think it's important to keep a balance there. This is definitely a value-add opportunity. It is not a turnaround, but I think there is some value that Bickford can add to these buildings. I would say that the opportunity set is definitely a mixed bag in terms of what we're looking at. Stabilize is still very interesting to us and something that we're actively pursuing, so we want to try and make sure we have a good balance in the portfolio of what we have in terms of value add or stabilize or development for that matter. So I think it's -- again, it's just kind of a mixed bag in terms of what's out there, but all of it is on the table for us and something we're actively pursuing.

And Dan, this is Eric. We are still on the hunt for new -- broken new developments or deep discounted buildings, a lot like what we did in New Hampshire a couple of quarters back, where we did alone on a building that was -- a new development that was in receivership.

Okay, okay. That makes sense. And one more question, I guess. You seem to have been heading towards a kind of an investment-grade type of credit rating in public debt. Where will you stand on that issue? And then have you talked to the ratings agencies? Or do you need to get any larger or more diversified by tenants? Want to see if you could add another arrow to the quiver there on the capital side.

Sure, Dan. This is John. What I would say is twofold. One is we're constantly monitoring that, and we want to -- I'd like to think we're well positioned to do that at any moment if we chose. The threshold to issue public bonds is now $300 million, and we think that the properly sized and our role will probably be closer to $400 million in terms of new debt. So you kind of think about that and think about that in terms of where interest rates are, particularly since inaugurals are usually issued around a 10-year term. So that's all on the table. It really is. And eventually, we will have to term off some debt as we make investments on our revolver. So that's something we're noodling.

(Operator Instructions) The next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

So if I could touch base back on the Bickford deal, just curious what the pro forma coverage looks like if that would be, -- I think Bickford is currently at 1.22x EBITDARM, so it was consistent or below based on your underwriting and then what the GAAP yield might be there.

Sure. This is Kevin. So as I kind of mentioned in the call, there is a period of time where we're going to have some transition and some capital improvements going on at the building. So we would expect some kind of transition period expenses and things to be flowing through the P&L for a period of time. Once they get through that, I would say initially anyway, it will be along the lines of what we're seeing in the portfolio from a coverage standpoint is what we're expecting. And then as they get into kind of year 2 and beyond, I feel like there's really some good opportunity for them to improve operations. And so we expect it -- would expect it to be in addition, if you will, to coverage over time, which is why we have the rent reset feature in the lease. So that way, we're making sure we have a market rent at the buildings, and -- but at the same time will still be an addition to coverage for them. Roger, would you like to...

Yes. When you consider the impact of the fixed escalators, our GAAP yield is going to be north of 8%.

What are the escalators, Roger?

3%.

No. 2.5%.

Or 2.5%.

They're fixed at 2.5%. And then that's -- in addition, we have the rent reset, which would not be factored into that GAAP yield. So there's an opportunity for it to be a little bit better.

Okay. Now, Kevin, how do you -- so from what I understand, these were Sunrise-operated assets that LTC owned, and they were presumably not making any money here, which is why they decided not to renew the leases. I'm curious if there's a way you can give us a sense of maybe where the upside or the operating upside is as you guys underwrote it. Obviously, there's a capital component coming in, but anything else you can speak to that were sort of obvious opportunities for like a Bickford?

Sure. I mean, I do think the capital component plays into the overall transaction. But then as it relates to operations, I think Bickford's model is one that is maybe a little more efficient on the expense side and one where felt like they could see some savings sooner rather than later as it related to some of the costs that were passed through to the buildings. That said, Bickford is used to operating a higher care model similar to what Sunrise does. So from an ability to care and take on the residents that are in the building, I think they line up very well. But it was, again, just more of the management style and expenses passed through to the buildings that I feel like there's some median opportunity, really, for cash flow. And then as they season the buildings and can fully implement their systems and procedures, I think that they'll continue to improve over time.

Okay. And when you say passed on to the buildings, you mean to the tenants directly?

To the -- well, it'll just through the facility P&L, is just corporate allocations, things of that nature we wouldn't see with Bickford.

Okay, got you. Right, of course. Okay. That makes sense. And then Timber Ridge, the loan paid off and you had this small fee you recognized in the quarter. I'm curious regarding that option when the window opens for you guys with how that property is trending toward stabilization.

Sure. So the B note, if you will, paid off and that which was just the construction component. We still have the note in place, which has about around $55 million on it. The purchase option is performance based. Once it reaches certain occupancy threshold, they continue to make progress through that. So we're watching it closely in close contact with the operator, something we're prepared to engage in discussions with them. But they still have a little bit of progress to make on the -- on, really, the occupancy side before it's the right time to engage in those conversations.

Can you speak to where the occupancy is, where it needs to be for the window to open?

Well, the first phase has performed beautifully the whole time through, and that was a big part for us to do the investment in the first place. It's been well over 90% this entire time. It's really just a Phase 2 piece that's continuing to lease. And this -- we added around 200 units to the building, so it's just going to take a little bit of time for it to get there. So I don't want to paint the picture that occupancy has struggled because it has not by any stretch. It's really -- like I said, the first phase has done extremely well. It's just leasing up those units on the other side. So that's really where the opportunity is, and they continue to lease units. So we're very positive on their progress.

Okay. No, I guess -- I thought it might be coming up early that they were -- or at an accelerated rate because they paid it off. So I thought maybe they were coming in -- your window didn't open technically for 5 years or something like that, so you got some time relative to that portion of the option, but I thought maybe it was coming on faster. Okay. So -- and last one maybe for Roger is the coverage calculation. Roger, what were you saying there? I noticed the change in how it's calculated. There's an allocated management fee that wasn't previously included in the EBITDARM coverage for the show portfolio.

Sure. This is Kevin. I'll take that. So we've actually had -- because it's really the only financials that we've published was for Senior Living Communities. We had a high level of questions on those financials, so we went back through and did a very deep scrub of them to make sure we were looking at things the right way. And as we did that, we found that we were, in effect, double counting a portion of the management fee that gets allocated to the communities. So to be consistent with our other EBITDARM coverages, we added that portion back so it's a consistent calculation across the board.

And that was just for a sell fee?

That's correct.

Okay. Right. I guess on the sell fee, I guess a follow-up there is -- I mean -- and the question, I assume, you've been getting there is relates to how you calculate the coverage and whether or not that includes the occupancy fees that are received.

Well, yes. And that's definitely one of the questions we've gotten, so we...

Any commentary on sort of why those would be included? So I mean, when I look at SLC's financials, it seems to me on an operating basis that they've got significantly negative operating cash flow. And like, let's say, 20-something million dollars last year, and then it's made up on the financing side. I guess, the difference is made up on the financing side, of which NHI seems to be a party or at least a participant in terms of helping to fund some of those, correct me if I'm wrong, with a line of credit. But is it -- why is it appropriate to include those fees in a coverage calculation for a stabilized property?

Jordan, this is Eric. So just to be clear, what we're talking about is the buy-in portion of a CCRC. And so those purchases are a regular recurring event year in, year out. That is lumpy, I'll give you that. But based on an annualized basis, you're talking anywhere from $8 million to $12 million a year of income that's made from those recurring purchases. So to say that, that is not income, I think, is unfair to us and to the operator. And you mentioned the credit line. Last time I checked, that credit line was almost entirely paid.

Yes. There's a very small balance on that end. That is really only used for development of new units and new cottages on the property. So as they use the credit line, they would fund up, for example, the build of single-family home. And then once the entry fee gets paid, it goes to pay off that credit line. So we're adding to our asset base without adding any basis -- additional basis to the building. So that's not a funding source for them to pay our rent. It's really just to add new inventory to the communities.

Okay. I'll follow up with you offline. I just thought the -- so the sales, I thought the occupancy fees were refundable. And so that's where I was coming from, but I -- we can follow up. You could explain it to me offline.

Okay. There is a portion that is refundable, but they're still making good money off the portion that isn't refundable.

So the net amount that you guys...

Yes.

The next question comes from the line of Eric Fleming with SunTrust.

Just to follow up on the pipeline question. So obviously, it sounds like you're still looking at the quarter senior housing, skilled nursing opportunities. Can you go a little deeper in terms of what you're looking at in terms of other property types? I know you've moved away from the LBs, but I guess more what I'm asking is behavioral health. Is that still an opportunity?

Yes. Eric, this is Kevin. Yes. It is still an opportunity. It's something that we're still looking for, still see available. I think as we've kind of talked about before, there's still an element of discovery, if you will, in terms of what's the right coverage, what's the right yield. There's just not a lot of comps in the market in terms of what that should look like. So we're -- similar to what we have on our skilled and senior housing side, we're making sure we're trying to work with high-quality operators that have good coverage, long-term focus on the business, and then we can figure out how we price that appropriately based on the credit that's available. So it is still something that we're evaluating, but there is a little bit more discovery component to it.

And there being no further questions, I'll turn the call back over to Eric Mendelsohn. Please go ahead.

Thank you, operator, and we look forward to seeing all of you and more at Nareit in New York in June.

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