National Health Investors, Inc. (NYSE:NHI) Q1 2023 Earnings Call Transcript

National Health Investors, Inc. (NYSE:NHI) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings. And welcome to the First Quarter 2023 Conference Call. During the presentation, all participants will be in a listen-only mode, afterwards, we will conduct question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded on Wednesday May 10, 2023. I’d now like to turn the conference to now Dana Hambly. Please go ahead.

Dana Hambly: Thank you, and welcome to the National Health Investors Conference Call to review the company’s results for the first quarter of 2023. On the call today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer. The results as well as notice of the accessibility of this conference call on a listen-only basis were released after the market close yesterday in a press release that’s been covered by the financial media. As a reminder, 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 and 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 year ended March 31, 2023. Copies of these filings are available on the SEC’s website at sec.gov or on NHI’s website at 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 our CEO, Eric Mendelsohn.

Eric Mendelsohn: Thank you, Dana. Hello, and thanks for joining us today. We’re off to a great start in 2023, with first quarter results coming in ahead of our expectations, driven by strong cash collections at over 98%, limited rent concessions and deferral payments from four tenants. We announced new investments of $54.8 million during the quarter. And we’re able to utilize $2.5 million of the Bickford deferral balance in lieu of cash to create incremental value on a newly constructed community in Chesapeake, Virginia. We also benefited from $1.3 million and discrete items that were only impacting the first quarter demonstrate the value of triple net leases and preserving NOI and the resilience of our tenants as operating fundamentals continue to improve.

Our portfolio optimization has resulted in the sale of five more buildings year-to-date, with low single digit NOI yields and coverage below one times. We continue to see the results of the optimization through significantly improved EBITDARM coverage, particularly for our need-driven senior housing tenants. The coverage improved year-over-year by 31% and sequentially by 9% to 1.11 times. This is the highest reported coverage since our first quarter of 2020, reflecting hard work our asset management team and our partner tenant says the pandemic effects move further away. We have more work to do, but the improving trends are encouraging. As we’ve talked about throughout the pandemic, the entrance fee and skilled nursing portfolios, which account for 60% of our NOI continue to anchor the portfolio with industry leaders including NHC, SLC, ENSIGN, Watermark, and LCS.

One area of disappointment for the quarter was the performance of SHOP which is 3% of our NOI, but a clear strategic focus for the company. Our longer term view on the upside potential of that portfolio has not changed, though the timeline is taking longer. We are working closely with our experienced partners Merrill Gardens and Discovery and expect better results. As we outlined in our press release last night and following our strong first quarter results, we are increasing our guidance for the year. We continue to expect strong cash collections, minimal rent concessions and deferral payments. There are still a handful of tenants on our worry list that we are monitoring closely. And we have factored in some level of financial support. But this is a little more difficult to forecast and a potential source of variability.

We expect incremental quarterly improvement in SHOP, but given the soft first quarter results, our expectation for the full year contribution has been lowered. Fortunately, the balance sheet and our financial profile continue to be pillars of strength, with leverage at just 4.6 times over $5 million of liquidity and an FAD payout ratio at 81.8%. We still have some capital we expect to recycle as we conclude our disposition activities and are well positioned to return to our historical investment trends, when market conditions improve. We are content to be patient and believe we are in the enviable position of having significant capital to deploy at a time when capital seems increasingly scarce. I’ll now turn the call over to John to discuss our financial results and guidance in more detail.

John?

John Spaid: Thank you, Eric. Hello, everyone. As Eric mentioned, we had a better than forecasted first quarter. For the quarter ended March 31, 2023, our net income, NAREIT FFO and normalized FFO per diluted common share are $0.79, $1.16 and $1.11 per share respectively. For the first quarter, our FAD was $47.7 million. The first quarter results for our real estate investment segments included two discrete beneficial items totaling approximately $1.3 million. First, we recognized approximately $700,000 in cash collections from two tenants on cash basis accounting for amounts that were due in the fourth quarter of 2022. Second, we recognized approximately $600,000 from NHC for fiscal year 2022 rents related to the annual true-up adjustment of their percentage rent, which is the lease provision unique to NHC.

The provision also increase NHCs 2023 rent approximately $160,000 per quarter. The segment’s first quarter results also benefited from the collection of approximately $500,000 in rent deferrals from four operators, plus lower than forecasted new rent concessions. The better than expected performance in the real estate investment segment more than offset the lower than expected SHOP segments $1.9 million net operating income results. Interest expense in the first quarter, compared to the prior year’s fourth quarter increased $1.6 million, which was largely attributable to new investments and commitments funded using proceeds from our revolver, plus a January $125 million private placement maturity, they carried a 4% coupon which we use higher interest rate proceeds from our revolver to fund.

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The cash interest rate on our revolver is currently 6.25%. As Eric mentioned, we closed $54.8 million in investments in the first quarter, at an average initial first year yield of 7.7%. After reinvesting both retired mortgage investment capital and the $2.5 million, and Bickford rent deferral, additional new capital deployed in the first quarter was approximately $38 million for these investments. In addition, we continue to fund commitments totaling approximately $9.4 million, as well as funded $10 million earn out as part of our Timber Ridge joint venture. They are not being paid to the Timber Ridge OpCo, which we own 25% and after the PropCo goes lease basis, increasing the rent and an incremental initial yield of 7.2%. Last night, we updated our full year 2023 guidance to reflect our strong first quarter results and other guidance modification.

Our guidance includes continuing asset dispositions, rent concessions, and loan repayments throughout 2023. Our guidance includes $56.4 million in recently announced investments plus a continuing fulfillment of our commitment. Our updated guidance still does not include any additional unidentified investments. However, we are now including additional modest repayment of outstanding deferral balances consistent with levels experienced in the last two quarters. We increase the range of our normalized FFO per share the $4.37 to $4.42 from range of $4.24 to $4.30. One notable reason for the significant FFO increase is a change in non-cash stock based compensation. We reduce this item by approximately $3.4 million or $0.08 per share. We also increased our FAD guidance to a range of $186.3 million to $188.9 million.

During the first quarter, we did not purchase any of our stock under our existing $160 million authorization, which expires in February 2024. For the first quarter, our leverage ratio was better than expected at 4.6 times net-debt-to adjusted EBITDA driven largely by the reduction in the accrual for stock-based compensation discussed earlier. During the quarter, we renewed our automatic shelf registration, the ATM perspective supplement, which we have not used, so we have $500 million available under the program. At the end of April, we had $201 million on our $700 million revolver, and ample liquidity with over $500 million in cash and revolver availability. Having said that, we continue to evaluate our debt and equity capital market options so that we’re sure to continue to maintain appropriate liquidity levels as maturities occur and our investments, rise.

Our next debt maturity is our $220 million term loan due in September, followed by a $50 million private placement maturity in November. Although the debt market is very challenging, we’re working with our bank syndicate group. And we expect to provide more information to you on our strategy, right debt maturities in the second quarter. Finally, our first quarter FAD payout ratio was in line with our expectations and are well covered at 81.8%. As we announced last night, our Board of Directors declared a $0.90 per share dividend for shareholders a record June 30 2023 and payable on August 4 2023. With that, I’ll turn the call over to Kevin. Kevin?

Kevin Pascoe: Thank you, John. I’ll concentrate my comments on investment and disposition activity as well as the performance of our major asset classes and operators. We closed on the sale of two properties for net proceeds of $10 million during the first quarter, and we sold an additional three properties for net cash proceeds of $5.7 million so far second quarter. We currently have seven properties held for sale with a net book value of approximately $21 million. Of this total, approximately $19 million relate to the two tenants placed on cash basis accounting last quarter. Similar to our other dispositions, these properties have low single digit NOI yield and sub-one lease coverage, so the sales should immediately improve our tenants financial position.

The current market conditions make it difficult to predict the timing of these dispositions. But our expectation is that the majority will close in the second and third quarters. While there are plenty of pipeline discussions, markets have not been accommodating, so we are not seeing many deals that reflect the reality of changes the cost of capital. Fortunately, we’re in a position where we can be patient and ultimately think well capitalized REITs will be beneficiaries, as lenders with less industry expertise reduce their exposure. Shifting to asset management, overall, first quarter contractual cash collections were strong and 98.4%. Total coverage for the company improved sequentially to 1.7 times from 1.63 times. This was driven by gains in both senior housing and skilled nursing.

Remember that the coverage metrics represent trailing 12 results and do not reflect the full impact of the portfolio optimization, improving fundamentals or the strong first quarter results. So we are optimistic we’ll continue to see favorable trends. In an effort to provide more transparency for analysts and investors, we now include occupancy information for our different asset classes in the supplemental report. Total occupancy improved year-over-year by 400 basis points to 81.3% on a 440 basis point increase in senior housing and a 350 basis point increase in skilled nursing. Reviewing the need driven platform, which is 29% of annualized cash NOI and where most of the optimization is targeted. We again saw positive coverage trends with sequential growth for the fourth straight quarter.

EBITDARM coverage through December improved to 1.11 time and it’s the highest since the first quarter of 2020. The increase was driven in large part by Bickford at 1.26 times. Bickford’s pro forma coverage which fully accounts for the April 2022 rent lease that was 1.39 times. An improvement from 1.31 Times reported last quarter. This was driven by the addition of newly acquired properties and a high single digit rate increase, which is helping to offset occupancy pressure. We received 200,000 of deferral payments from Bickford in the first quarter, and we have received over 300,000 in the second quarter. Our Bickford portfolio experienced a slight uptick in March occupancy, and they’re starting to see some momentum built in the sales pipeline lead conversions and move in.

As I mentioned, we add a new occupancy information to our supplemental including a comparison of the Bickford occupancy versus NICMAP Metro Market. Although there’s room for improvement in the occupancy trend, Bickford’s NICMAP occupancy is 81.3%. And it’s still about 90 basis points higher than the competition. And we estimate monthly RevPOR to approximately $500 higher. Aside from Bickford, coverage is increasing across our other RevPOR need driven properties. We reported coverage at one time, which is a gain of 23% year-over-year and the fifth straight quarter of sequential improvement. While the improvement is encouraging one-times coverage still implies that these operators are struggling. We are incorporating some level of unidentified rent concessions into the guide, which is based on the ongoing conversations we’re having with a small number of indeed driven tenants, in addition to tenants already on cash basis accounting.

Continuing with our discretionary senior housing portfolio, this group accounts for 29% of adjusted NOI, including 26% from entrance fee communities, which continue to perform well. SLC our largest tenant that coverage of 1.17 times which was down from 1.22 times last quarter. Fortunately, first quarter entrance fees still the strong, agency utilization was down and occupancy trends remained above pre pandemic levels. Our senior housing discretionary coverage excluding SLC, which largely reflects the performance of our other entrance fee communities improves sequentially to 1.75 times from 1.69 times. The SNF and specialty hospital portfolio which represents 36% of annualized adjusted NOI, continues to have solid coverage at 2.48 time, which was up sequentially from 2.42 times on improvement at both NHC and the other operators.

We are monitoring Medicaid rates in our 10 SNF state as a public health emergency ends this week in the SMAP [ph] add on is phased out during 2023. We expect to hear more about Texas and Florida our two largest SNF state by revenue in the coming weeks. We also expect that CMS will soon released a proposed staffing mandate. So we will communicate with our operators and trade groups as those details emerge. Our SNF portfolio is anchored by NHC and Ensign which are best-in-class operators. So we have great confidence that they will be able to adapt staffing requirements and any other regulatory changes as they have done so many times in the past. Lastly, in our SHOP portfolio, which represents 3% of adjusted NOI, we experienced continued pressure on the margins with declined slightly to 16.2% on weak occupancy and higher expenses.

We had anticipated that the repositioning of the assets under new management would have been showing better progress. So SHOP is a relatively small piece of our total portfolio. It is strategically significant as a source of both internal and external growth for our company. While we have tempered our near term expectations, the long term outlook has not changed. And we are committed to employing the resources necessary to achieve that goal. That concludes our prepared remarks. Operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question is from the line of John Kim with BMO Capital Markets. Please go ahead.

Operator: Our next question is from the line of Austin Wurschmidt with KeyBanc Capital Markets, please go ahead.

Operator:

O:

Operator: There are no further questions on the phone lines at this time. I’ll turn the presentation back to the speakers for any closing remarks.

Eric Mendelsohn : Thanks, everyone for joining today. And we’ll look forward to seeing you in person at NAREIT in New York next month.

Operator: Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.