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National Health Investors Inc
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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, 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 and a press release has been covered by the financial media.
As we start, let me remind you that any statements in this conference call, which are not historical facts, are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risk or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call.
Investors are urged to carefully review various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended March 31, 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 has 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 will now turn the call over to Eric Mendelsohn.
Thank you, Colleen. Hello, everyone and we are 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 are 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; cross currents 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, that recent QCP transaction and we are gratified to see Ensign’s quarterly results which were highly favorable. Our take away is that skilled nursing still has a place on the senior housing spectrum. We continue to see interesting opportunities for well-funded lower leveraged REITs like NHI.
I will now turn the call over the Roger Hopkins to walk through the financials. Roger.
Thanks, Eric. Hello everyone. We had a great first quarter as our results reflect the impacts 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 one year ago. Normalized AFFO also increased 8% to $1.22 per diluted share compared to $1.30 one year ago.
We continue to fund and develop loan commitments totaling $89 million as outlined in our Form 10-Q. Several of our tenants are actively renovating or expanding the facilities to make meet the [indiscernible] needs of a growing demographic of senior adults. Whether in an acquisition or in construction, we deploy a careful mix of debt 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, an increase less than $70,000 when compared to the same period one year ago. Our non-cash 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 a loss of $738,000 related to these transactions. NHI’s [indiscernible] is incentivized on annual growth of dividends and AFFO on a per share basis.
Our AFFO is a non-GAAP measure of performance, which excludes the accounting convention of non-cash 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 29th, 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 review to be used for making new investments.
Moving onto 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 it.
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 will now turn the call over to John Spaid, who will discuss further uses of debt and equity capital.
Thank you, Roger. For the quarter ended March 31st, our debt capital metrics were net debt to annualized EBITDA at 4.3 times, weighted average debt maturity at 6.5 years, weighted average cost of debt at 3.6% and fixed charge coverage ratio of 6.3 times.
NHI ended the first quarter with $262 million outstanding on our revolver, leaving us with $288 million on available revolver capacity. During Q1 we did not make use of our aftermarket equity program, but we did acquire $27.6 million in NHI’s high value convertible note [bond] (Ph).
After adjusting for NHI’s first quarter dividend, the convertible bonds conversion price now stands at $70.01 down $0.24 from $70.25 at the end of 2017. As we declared dividends of $0.77 per share, the bonds conversion price will continue to ratchet down, increasing the cost of the convertible debt instrument when it matures in April of 2021.
We have now purchased a total of $80 million in par value convertible bonds allowing us to reduce our future exposure to the bonds conversion feature. With our leverage currently at the lower end of our four to five time net debt to EBITDA ratio, NHI continues to be well positioned for future accretive investments.
I will now turn the call over to Kevin Pascoe to discuss the portfolio.
Thank you, John. Looking at the overall portfolio, at the end of fourth quarter the EBITDARM coverage ratio was 1.66 times. Our senior housing portfolio’s performance was slightly up at 1.23 times and our skilled portfolio remains steady at 2.52 times.
As we look into the first quarter, typically we see the seasonal effects of winter that included 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 as out 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 1.22 times for the trailing 12 months ending December 31st. As Eric mentioned, we are happy to once again expand our relationship with Bickford.
Last week, we announced the acquisition of five 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 6.5% with annual fixed escalators and a 15 year maturity. NHI also has a fair market rent reset opportunity in years three through five. 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 is 1.3 times 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 3.6 times. Holiday Retirement represents 14% of our cash revenue and has an EBITDARM coverage ratio of 1.16 times 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 two Ensign development projects this month. We have seen some slight cap rate expansion for senior housing assets in 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 will now open the line for questions.
[Operator Instructions] And our first question comes from the line of Chad Vanacore with Stifel. Please proceed.
Hi there. So, I missed what Roger had said. Straight line rents it looks like sequentially it was up a bit or 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, to develop your schedules for straight line rent upon a new investment is going to be highest, in the beginning. So as these assets age in our portfolio you are going to have less and less straight line of 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 are building spreadsheets for every investment.
Roger shouldn’t that add push straight line up or am I not thinking about this right?
Straight line income will be the highest in the beginning of a lease term.
But it looks it declined sequentially?
So, Chad, this is John. Maybe I can take a shot at it. So eventually what happens for the portfolio for all our rents that have set escalators is they flip from positive to negative. So if they add to rent in the beginning of the year lease, as a 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 book that have no escalators like with Ensign Group, this is CPI, they don’t get to book straight line rent for them. So, I think that’s why you are seeing that effect.
So largely over time straight line rents should decline as these leases mature. What I’m saying is there is a sequential decrease here, but you are saying that you sign new leases which should make straight line rent grow. am I thinking about that right?
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 contribution.
Okay that’s what I needed to know there. And then just your expansion in relationship with Bickford, its running around 16% over the total NOI, is that pro forma and that were right and then how are you getting comfortable with expanding that relationship beyond where you already are?
Hey Chad its Kevin. So that’s right on a pro forma basis including the new acquisition that would be at 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 see the relationship we have with Bickford.
I think we value the relationships we have and to the extent we can find a good solid opportunities for them. We want to foster that. So I think we are going to be mindful of the concentration we have, but I think the challenge for us is just to continue to grow our other relationships, so we can continue to do that.
Alright. So, you could look for further expansion there Kevin?
With Bickford?
Yes.
Well we have got the developments that are still ongoing, so that relationship is going to get added to overtime by the nature of those. And then the rest from there would just be more opportunistic in nature, similar to the deal we have recently closed. You know the perfect fit for them that’s the unit size, the type of market. When we looked around and talked to various operators it just became very clear that they were the right choice for these building.
Alright and then just remind me, you can correct me if I’m wrong on this. I thought last quarter you might have mentioned operator a technical default. But it was continuing to pay rents. How is that situation progressing?
So there continue to make progress, rents still remains current, they have not missed a payment this entire time. We've been talking about them. So they continue to make progress on occupancy, we are very happy with their progress. I wouldn’t say that they are back to stabilization, but they are on the right trajectory.
Alright, well thanks for taking the questions. I will hop back into queue.
Thanks Chad.
[Operator Instructions] The next question comes from the line of Daniel Bernstein with Capital One. Please proceed.
Hi good morning. I just want to actually go over how you are thinking about the investment level for this year, the pipeline and review kind of the cap rates or yields that you are seeing for both Senior Housing and Skilled Nursing. Obviously you did some Senior Housing here in 1Q, 2Q, but you made some nice comments about Skilled. So just trying to get offensive of where your pipeline is scaling and what kind of investments you are looking at.
Sure Dan its Kevin. I think as I mentioned in my comments, we expect to close on the two Ensign development projects later this month. 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 would continue to be looking at new opportunities on kind of the full gamut if you will in terms of opportunities whether its Senior Housing, some Skilled Nursing, some Behavioral Health or maybe more like what we have in the portfolio a few psychiatric hospital type opportunities.
So seeing a wide range of opportunity 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 are working with and the other asset classes, we are still kind of in discovery period to see what makes sense and what the right yields would be for those. So we are trying to take in as much as information as we can at this point and figure out what the right mix of investment and yield is, but again I feel like we have got some pretty good opportunities and a few things that we will have under our belt here shortly this month.
The assets that you bought and leads a bit further, I guess you are not turning around, but you are probably under managed, are you seeing more value in those type of assets, more value add than say stabilized. So I’m just trying to understand where are you going out on the risk spectrum in terms of again those acquisitions?
I think it’s important to keep balanced there, I mean this is definitely value add opportunity, it is not a turn around, 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 are looking at. Stabilized is still very interesting to us and something that we are 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 stabilized or development for that matter. So, I think again it’s just kind of a mixed bag in terms of what is out there. But all of it is on the table for us and something we are actively pursuing.
And Dan this is Eric. We are still on the hunt for new broke and new developments or deep discounted buildings, a lot like what we did in New Hampshire a couple quarters back where we did a loan on a building, a new development that was in receivership.
Okay that makes sense. 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 we stand on that issue and then have you talked to the rating 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 their on the capital side?
Sure Dan this is John. What I would say is twofold. One is, we are constantly monitoring that and I would like to think we are well positioned to do that at any moment, if we chose. The threshold to issue public bond is now 300 million and we think that the property size in our role will probably be closer to 400 million in terms of new debt.
So, kind of think about that and think about that in terms of where interest rates are particularly sent in [indiscernible] are usually issued around the 10 year term. So that’s all on the table and really is. And eventually we will have to term off some debt as we make investments on our revolver. So that’s something we are [indiscernible].
Alright, it sounds good. I will hop off and talk to you guys later.
Thanks Dan.
[Operator Instructions] The next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.
Thank you and good morning good afternoon rather. So it’s like you 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 1.22 times 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 are 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 any way it will be along the lines of what we are seeing in the portfolio from a coverage standpoint is what we are expecting. And then as they get into kind of year two and beyond, I feel like there is really some good opportunity for them to improve operations.
And so we 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 are making sure we have a market rent at the buildings but at the same time we will still be in addition to coverage for them. Roger would you like to add?
Yes. We could consider the impact of the fixed escalators in our GAAP yield, it’s going to north of 8%.
What are the escalators Roger?
3%. - 2.5%.
They are fixed to 2.5% and then that’s in addition we have the rent reset which would not be factored into that GAAP yield. So there is an opportunity for it to be a little bit better.
Okay. Now Kevin, 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 just if there is 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 is 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 bit more efficient on the expense side, and one where I felt like they could see some savings sooner rather than later as it related to some of the cost that were pass through to the buildings. That said, you know Bickford used to operating 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 pass through to buildings that feel like there is 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 will continue to improve overtime.
Okay. And when you say passed on to the buildings, you mean to the tenants directly?
Well just through the facility P&L, just corporate allocations, things of that nature, that 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 recognize that quarter. I’m curious regarding that option and when the window opens for you guys, how that property is trending towards stabilization?
Sure. So the [indiscernible] if you will paid off and that was just construction component, we still have the layout in place which has 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 are watching it closely in close contact with the operator, something we are prepared to engage in discussions with them. But they still have a little bit of progress to make on really the occupancy side before it’s the right time to engage in those conversations.
Can you speak to where the occupancy is or it needs to be for the window to open?
Well the first phase has performed beautifully the whole time through and that was the 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 the phase two piece that’s continuing to lease and we added around 200 units to the building. So it’s just going to take a little bit of time for to get there.
So I don’t want to paint a picture that occupancy has struggled, because it is not by any stretch, it’s really like I said the first phase is going 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 the units, so we are very positive on their progress.
Okay. I thought it might be coming up early that they were at an accelerated rate, because they paid it off, so I felt maybe they were coming in. I know your window didn’t open technically in for five years or something like that, so you have got some time relative to that portion of the option, but I thought maybe it was coming on faster. Okay and last one maybe for Roger, is the coverage calculation Roger, what were you saying there, I noticed the change in how its calculated, there is an allocated management fee that wasn’t previously included in the EBITDARM coverage for the show portfolio?
Sure, this is Kevin, I will take that. So we have actually had those - it’s really the only financials that we have published for Senior Living Communities. We have 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 that double accounting portion of the math - management fee that that gets allocated to the communities. So to be consistent with our other EBITDARM coverage, we added that portion back so it’s a consistent calculation across the board.
That was just for SLC?
That’s correct.
Okay. I guess on SLC, I guess I have follow-up there is, I mean and the question I assume you have been getting there as it 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 have gotten.
Any commentary on sort of why those would be included. So I mean when I look at SLC’s financial, it seems to me on an operating basis that they have got significantly negative operating cash flow. And like let's say $20 million something last year. And then it’s made up on the financings side, I guess the difference is made up on the financing side of which NHI seems to be a party or at least to participant in terms of helping to fund some of those, correct me if I’m wrong with the line of credit. But why is it appropriate to include those fees in the 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 CTRC and so those purchases are regular recurring event year-in, year-out that is lumpy. I will 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 is a very small balance on that and 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 to build a single family home and then once the entry fee gets paid, it goes to payoff that credit line. So we are adding to our asset base without adding any basis additional basis to the building. So that’s not a funding source for them to payout rent. It’s really just to add new inventory to the communities.
Okay. I will follow-up with you off-line. I just thought the occupancy fees were refundable. So that's where I was coming form, but we can follow-up, you can explain to me offline.
Okay. There is a portion that is refundable, but they are still making good money off the portion that isn’t refundable.
The net amount you guys…
Yes.
Okay. Thank you.
Thanks Jordan.
The next question comes from the line of Eric Fleming with SunTrust. Please proceed.
Hey. Just a follow-up on the pipeline question. So obviously it sounds like you are still looking at the core Senior Housing, Skilled Nursing opportunities, can you deeper in terms of what you are looking at in terms of other property types. I know you have moved away from [indiscernible] but I guess more what I’m asking is Behavior Health, is that still an opportunity?
Yes, Eric this is Kevin. Yes, it is still an opportunity something that we are still looking for, still see available. I think as we have kind of talked about before, there is still an element of discovery if you will in terms of what is the right coverage, what is the right yield, there is just not a lot of comps in the market, in terms of what that should look like.
So similar to what we have on our Skilled and Senior Housing side, we are making sure we are 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 are evaluating, but there is a little bit more discovery component to it.
Alright. Thanks a lot.
And there appear to be no further questions. I will turn the call back over to Eric Mendelsohn. Please go ahead.
Thank you operator and we will 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 thanks for your participation and ask that you please disconnect your lines.