National Health Investors, Inc.

Welcome to the first quarter 2023 conference call. During the presentation, our participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, please press the 1 by the 4 on your telephone. If at any time during the conference you need to reach an operator, you may press the star or by the zero. As a reminder, this conference is being recorded Wednesday, May 10, 2023. I would now like to turn the call for now to Dana Hamley. Please go right ahead.

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 Spade, 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 closed 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 quarter ended March 31, 2023. Copies of those filings are available on the SEC's website at sec.gov or on NHI's website at nhireet.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 8K 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.

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 were 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 in discrete items that, while only impacting the first quarter, demonstrate the value of triple net leases in 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 EPIDARM coverage, particularly for our need-driven senior housing tenants. 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 the hard work of our asset management team and our partner tenants as the pandemic effects move further away. We have more work to do, but the improving trends are encouraging. As we have 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.

Thank you, Eric. Hello, everyone. As Eric mentioned, we had a better than forecast first quarter. For the quarter ended March 31st, 2023, our net income, NAREIT FFO, and normalized FFO per diluted common share were 79 cents, $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 segment 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 a lease provision unique to NHC. The provision also increases NHC's 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 segment's 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, the January $125 million private placement maturity that carried a 4% coupon, which we used higher interest rate proceeds from our revolver to fund. 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 the retired mortgage investment capital and the $2.5 million in 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. The earn out was paid to the Timber Ridge OpCo, which we own 25%, and adds to the PropCo's 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 modifications. Our guidance includes continuing asset dispositions, rent concessions, and loan repayments throughout 2023. Our guidance includes $56.4 million in recently announced investments, plus the 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 increased the range of our normalized FFO per share to $4.37 to $4.42 from a 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 reduced 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 accrual for stock-based compensation discussed earlier. During the quarter, we renewed our automatic shelf registration and ATM prospective 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 for our debt maturities in the second quarter. Finally, our first quarter FAD payout ratio was in line with our expectations at a well-covered 81.8%. As we announced last night, our Board of Directors declared a 90-cent-per-share dividend for shareholders of record June 30, 2023, and payable on August 4, 2023. With that, I'll now turn the call over to Kevin.

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 in the 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 relates to the two tenants placed on cash basis accounting last quarter. Similar to our other dispositions, these properties have low single-digit NOI yields and sub-1 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 in 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 at 98.4%. Total coverage for the company improves 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 our 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 in OI 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 times and is the highest since the first quarter of 2020. The increase was driven in large part by Bigford at 1.26 times. Bigford's pro forma coverage, which fully accounts for the April 2022 rent reset, 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 pressures. We received $200,000 in 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 build in the sales pipeline, lead conversions, and move-ins. As I mentioned, we added new occupancy information to our supplemental, including a comparison of the Bickford occupancy versus NICMAP metro markets. While there is room for improvement in the occupancy trend, Bickford's NICMAP occupancy is 81.3% and is still about 90 basis points higher than the competition, and we estimate monthly REV4 is approximately $500 higher. Aside from Bickford, coverage is increasing across our other 44 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 improvements. 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 guidance, 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, had coverage of 1.17 times, which was down from 1.22 times last quarter. Fortunately, first quarter entrance fee sales were 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 times, 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 states as the public health emergency ends this week and the FMAP add-on is phased out during 2023. We expect to hear more about Texas and Florida, our two largest SNF states, by revenue in the coming weeks. We also expect that CMS will soon release the 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 to 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, which 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 at this point. Though 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.

Thank you. And at this time, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. Once again, to register for a question, please press the 1 followed by the 4. One moment please for the first question. And our first question is from the line of John Kim with BMO Capital Markets. Please go ahead.

Thank you. Eric, you gave some, I think, mixed messages on your shop expectations. I think you were saying longer term your views haven't changed. But when you look at your presentation, You reiterate the mid-30% margin opportunity. You remove the $68 million upside. So I just wanted to ask you about the slight changes you made to your presentation, and when do you expect to get to that mid-30% margin level?

Hey, John. Good to hear from you. And you're right. I think that I was hoping that would start showing up this year, but it didn't. It looks like it's going to be more of a next year improvement.

Okay, but overall, it's just, in your view, just a timing-related issue and not overly concerned about the traction that you're getting on shop?

No, no. I mean, those buildings changed operators three times in the past year. So they've been through a lot. And I've had the opportunity to tour many of those buildings and see what needs to be done. We also had delayed CapEx because, as I'm sure you're well aware, it was hard to get vendors, hard to get materials this past year. So CapEx projects that were going to improve curb appeal and marketability are just getting underway now. So all of that means that our expectations had to be pushed back.

Okay. My second question is on Bickford. The coverage has gotten noticeably improved, especially on a pro forma basis. I just wanted to ask about the occupancy trend, because even though it's above the NIC map, it's been trending lower. I think you mentioned part of that is rate-driven, but when do you think the occupancy will improve on your fixed-rate portfolio?

John, this is Kevin. We're starting to see the beginning of that now. Lead volume, tour volume, and move-in volume has started to increase. We have seen kind of some seasonally normal move-outs, which they clearly haven't covered with the move-ins over the last few months, but again, we're starting to see the key indicators improve. Our expectation would be that through the spring, they'll start to get some more momentum on the lead tourism move-ins. Like I said, we're starting to see that now. I think it tends to be that April, May, June tend to be the better seasons for move-ins, so we're watching that very closely. We think they're doing all the right things to try and pull levers, put people in the right spots to be successful and get those move-ins. So, you know, stay tuned, but like I said, we're starting to see the beginnings of that again.

Okay, one more question, if I may, on your guidance for this year. What's included as far as G&A? And also, can you discuss the impetus for the change in your stock-based comp as part of your guidance?

Hey, John, this is John Spade. I'm not sure how I can help you with what's in GNA. We're not expecting it to materially change from a cash GNA standpoint quarter over quarter, if that helps. The large reduction in GNA... expense attributable to non-cash stock comp was just the compensation committee and the board of directors post Q4 earnings materially changed the comp structure, which resulted in a fairly significant reduction in executive compensation. And so you can see that clearly in terms of the number of shares awarded in our queue. There's also a supplemental proxy filing that was filed at the end of April as a part of our proxy process that has some discussion, more discussion in it about the strategy of the Board of Directors and the Compensation Committee for non-cast stock comp moving forward.

And, John, that gets reviewed as far as the comp metrics. That gets reviewed once a year?

That's correct.

Okay. Great. Thank you.

Thanks, John. Our next question is from the line of Austin or Smith with KeyBank Capital Markets. Please go ahead.

Hey, everybody. Just wanted to revisit the shop question there. So you say that the shop recovery is a 2024 event now. Is that specific to achieving that mid-30% margin that you highlighted in the presentation, or are related to just seeing some improvement in the annualized run rate of seven to eight million you've been at now for the past couple of quarters.

Hey, Austin. This is Kevin. Our expectation is that we'll see incremental improvement quarter over quarter. Clearly, there's still work that needs to be done on that. If we're going to couch when we'll hit that margin, my guess would be it would be into 2024, as Eric mentioned. I'm not ready to say that that's going to be there in the first quarter of 2024. I think that's going to be just, again, an incremental improvement quarter over quarter. We do have some expectations of this year that we'll get improving margins by the end of the year. But, again, I'm not sure that we're going to be at the mid-30s just yet, but I do think we'll be into the 20s at a minimum and then kind of improving from there.

Austin, this is John Spade. I want to also follow up on that because the guidance does assume that the SHOP portfolio continues to improve NOI for the rest of 2023. We've just had to, you know, lower our original forecast as a result of the first quarter result. So, you know, the SHOP NOI is independent living NOI And so the majority of the expenses are fixed. And so they're really dependent upon the improvement in NOI at the shop portfolio is really dependent on occupancy growth. So pay attention to what's happening there as we move forward.

Yeah, that makes sense. And you started to hit on my next follow-up, which was how much of an impact did the change to your shop outlook have on your guidance?

Well, I can't give you that number specifically. We don't publish that number, but it was significant. It was not, you know, you can kind of see it when you look at the FAD numbers when you compare, you know, how much improvement we had in the first quarter based on our results, and then you kind of look forward to the end of the year and the lift we see in the FAD numbers. You'll see a much more muted lift in the rest of the year in the FAD. And the largest component of that is the reduction in NOI that we assumed for the remainder of the year in shop.

Understood. And then just one more for me. It looks like you removed two properties from the held for sale bucket. I'm just curious what the decision there was related to for those two. Thank you.

Sure, this is Kevin. We had talked a little bit about in our prepared remarks just that the environment right now is very difficult for financing. And a couple of the properties that we had and held for sale were more opportunistic where people came to us with letters of interest that we felt it was meaningful to go ahead and pursue it, but they weren't necessarily properties we were circling for sale originally. So again, opportunistic. And then when the debt markets continue to change, they couldn't execute at the price that they had originally come forth with. It wasn't one that we felt like we just had to keep pushing on. So we pulled them back into the portfolio.

So fair to say these are income-producing assets with much better coverage than the assets currently held for sale?

Relatively speaking, yes. I mean, they're ones that are better than what we have held for sale. They produce some level of income. It would still be an incremental improvement to move them, but not at any price. Okay, got it. Thanks for the time.

As a reminder, to register for a question, please press the 1 followed by the 4. Our next question is from the line of Teo Okusana with Credit Suisse. Please go ahead.

Hi, yes. Good afternoon, everyone. John, I'm still trying to understand the kind of what's driving all the changes and the guidance. Again, when I take a look at 1Q, you kind of have the pickup of the lower DNA and things like that. That kind of feels like it's all one-time. Would you kind of say it's all one-time items that have kind of driven the increase in guidance? Or is there anything in the quarter that's also translating to better earnings growth in future quarters? And if there's any offsets to that, such as the lower expectations on shop now? And just trying to understand some of the moving pieces that result in this new guidance number.

Yeah, sure. Well, it depends on what line you're talking about. So let's just start at the FFO line. The most material change to FFO was due to the reduction in executive compensation or compensation attributable to non-cash stock comp. So that lifted FFO considerably. And, you know, that's probably the largest piece of that. Then there were the one-time effects that you talked about. Inside those one-time effects, though, are are escalations also that will continue to contribute for the rest of the year. You might have noticed in my prepared remarks I talked a little bit about, for example, the NHC escalator that will continue to flow through in the second, third, and fourth quarters. There are others as well that we picked up in those numbers as well. The other aspect that you don't see that I can't give you a lot of color on is how we're feeling about concessions. The concessions in our forecast were higher at the beginning of the year. We had literally no concessions, unexpected concessions in the first quarter, and that's great news. And so we've lowered our outlook for necessary concessions for the rest of the year. So that's helped quite a bit, and that flows all the way down to the FAD line. The other thing that, you know, the other piece that caused some movement was our reduction in our expectations for SHOP NOI. And so putting all those major pieces together, there's quite a few other smaller pieces too, is kind of how, you know, our guidance was adjusted between February's guidance and the guidance we issued today, last night.

Okay. That's actually very helpful. Kevin, you know, in your prepared comments, you did discuss, again, the needs-based coverage is still one time. You're still having some conversations with some tenants in that group about how to help them. Again, is all that all kind of built into guidance as well? And if not, I don't know whether there's a way to kind of quantify what could be the potential outcome there.

Well, speaking for John for a little bit of this, but, I mean, I would say we tried to factor that into guidance as much as we could. You know, that we talked about having some level of unidentified amount in our forecast. As we think about the portfolio, I think the comment is still the same as we talked about last quarter. We're talking about, you know, kind of that bottom 5% of the portfolio, people that we're working with on a very regular basis, keeping very close tabs on and making sure that We have the best chance for success with those relationships. We factored in a bit of that. Hopefully, we don't need to use it, but we wanted to make sure that we were forecasting based on what we're seeing in the environment right now, which people still are having a little bit of challenge on occupancy, it depends on their markets, and labor, while it's smoothed out to some degree, we're seeing less agency in overtime. Wages are still significantly up, so there's still some pressure on a subset of these operators, and we just want to make sure we're mindful of that.

Ty, this is John again. Let me add on another piece, and that is our dispositions that we've been strategically making over the last year have been part and parcel with, you know, helping our operators improve coverage. And what you've seen is those coverage ratios have gotten materially better as a result of our portfolio optimization. We still have a few more to do. The environment for making those dispositions has gotten more difficult. So, those dispositions, you know, and whether or not we can actually get them done, financing is available for the buyers, et cetera, you know, plays a big part of, you know, our thinking around concessions. The other piece that I want to also emphasize that I forgot to mention is for the first time, we're feeling a little more confident about our ability to collect deferrals. So that deferral collection is now part of our guidance as well. So I don't want to end this conversation without highlighting that once more.

Gotcha. Okay. That's helpful. Thank you.

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.

Thanks, everyone, for joining today, and we'll look forward to seeing you in person at NAREIT in New York next month.

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