National Health Investors Inc Q1 FY2021 Earnings Call

Greetings and welcome to the National Health Investors First Quarter 2021 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. This conference is being recorded Tuesday, May 11, 2021. And now I'd like to turn the conference over to Dana Hambly. Please, go ahead.

Thank you and welcome everyone to the National Health Investors conference call to review the company's results for the first quarter of 2021.

Hello, and thanks for joining us today. We hope that everyone is staying healthy. We are grateful for all the efforts of our operating partners and their teams as they have been battling on the front lines of this pandemic for well over a year, with multiple ups and downs along the way. With the successful rollout of the vaccine clinics across our communities, we are now starting to see some light at the end of the tunnel, with lead sales and move-ins picking up. That said, we expect that the path to a more normal operating environment will be uneven and is likely to be a multi-year process, which will make 2021 a difficult year for NHI, as we help our tenants bridge the gap to full occupancy and margin recovery. Fortunately, our prudent balance sheet situation puts us in a position to address and resolve many of our most pressing issues this year and to emerge as a stronger company with a long runway for growth.

Thank you, Eric and hello everyone. Let me first turn to our results. And then, I'll talk more about our dividend and balance sheet. Beginning with our net income per diluted common share for the first quarter ended March 31st 2021, we achieved $0.78 compared to $1.37 for the same period in 2020. The decline in net income between Q1 2021 and Q1 2020 is largely due to three factors. First, in the first quarter last year, we had a $21 million gain on the sale of real estate assets. Second, this year's first quarter includes $4.2 million in rent deferrals and third, this year we experienced a $3.6 million increase in our non-cash stock-based compensation expense. The increase was primarily a result of a significant increase in NHI's stock volatility measurement, used in the calculation of this expense, caused by the pandemic. For our FFO metrics per diluted common share for the quarter ended March 31st 2021, compared to the prior year, NAREIT FFO decreased $0.12 to $1.23 from $1.35 and normalized FFO decreased $0.12 or 9% to $1.24. As you'll notice in our first quarter's earnings release, we are no longer reporting AFFO per share. AFFO per share had included the impact of non-cash stock compensation represents the majority of the adjustment between AFFO and FAD. Our methodology for computing FAD is unchanged from prior periods. As described in our recent proxy, our Board's compensation committee has moved from AFFO to FAD as a metric used to determine executive compensation under the cash performance incentive plan. We consider FAD to be both a measure of operational performance and liquidity. But because it is more closely aligned with liquidity, we are not providing you with per share FAD information in keeping with SEC requirements. For the quarter ended March 31st, 2021, our normalized FAD was essentially flat year-over-year at $59.6 million and up $550,000 sequentially from the fourth quarter. Given the significant impacts many of our operators have experienced over the prior four quarters, we're very pleased with our FAD results, which is a testament to the strength of our triple-net strategy.

Thank you, John. Starting with an update on COVID, which is based on results for our May 4 monthly survey. Active resident cases have declined by 93% in our senior housing portfolio and by 97% in our SNF portfolio since peaking in mid to late December. Active cases increased to 33 in our latest survey from 16 last month, but still represent only 0.1% of total capacity. Anecdotally, the majority of residents testing positive, who have been fully vaccinated are asymptomatic or have experienced only mild symptoms. Turning to the performance of our different asset classes and larger operators, our needs-driven senior housing operators, which account for 32% of our annualized cash revenue, generally experienced the extension of declining occupancy trends that started in the fourth quarter and continued through February before leveling off in March. Bickford, our largest assisted living operator, representing 15% of the annualized cash revenue, experienced a 410 basis point sequential decline in first quarter average occupancy, which followed a 280 basis point decline in the fourth quarter comparison. We're happy to report that average April occupancy increased 180 basis points from March to 76.3%. As Eric mentioned, we're also happy to report that we completed a sale of six properties to Bickford for $52.9 million, which includes a $13 million second mortgage provided by NHI. This will save Bickford approximately $1.8 million in annual cash flow and improves our pro forma EBITDARM coverage with Bickford from 0.97 times to 1.02 times as of the fourth quarter. We are continuing to work proactively with Bickford with all options on the table including further dispositions of underperforming assets and we'll update you as those decisions are finalized. Our entrance fee communities which account for nearly a quarter of our annualized cash revenue have been more resilient driven by factors that we have discussed in the past, including a longer average length of stay and a generally younger, healthier resident population.

Thank you, Kevin. The industry is starting to show green shoots and we expect some recovery in 2021, but the next several months will be difficult. NHI is well positioned to weather the storm with multiple levers at our disposal to preserve our conservative capital structure and set the company up for longer-term growth. While this pandemic has had a disproportionately negative impact on operators caring for the senior population, we do not believe the damage is permanent and we look forward to updating everybody on the progress. With that operator, we'll now open the line for questions.

Thank you. Our first question is from Jordan Sadler with KeyBanc Capital Markets. Please go ahead. Your line is open.

Thanks, guys. First question, I wanted to touch base on the comments on the call, the comments in the release regarding the ability to sort of transform the portfolio through lease restructurings and shedding underperforming assets. Just kind of curious, if you guys could size this need or objective for us somehow? Because I know obviously a lot has gone on and many operators are struggling and you guys have done a good job so far to collect rents with the exception of maybe a handful of small handful of tenants, but it now seems like maybe the need to do something has grown a little bit. So, I don't know, am I sensing that correctly, number one? And number two, can you maybe scale how big the opportunity might need to be?

Jordan, this is Eric. You're absolutely right. In my opinion, this is the year to get things like that done. I feel like the market is in a forgiving mood for companies that are taking their medicine and rightsizing portfolios to come out the other end with healthier metrics on lease coverage and stable NOI. In terms of what that looks like, I mean we just sold a $52 million of Bickford product. It could easily be overall portfolio wide another $250 million to $400 million over the next eight months.

Okay. And this would mostly be senior housing.

Well, yes and no. Keep in mind we have some purchase options occurring in the normal course. We have a specialty hospital. So, that's in there as well. And that's detailed on our supplemental. So…

Does that include the loan repayment potentially coming up from Sage, or is that adding there as well, or would that be incremental?

That would be incremental. I was not including that in my figure.

Okay. But you have the Acadia Hospital in there?

Right.

Okay, understood. Regarding the Holiday, they're paying approximately $10 million in rent each quarter. What would a rent concession need to be? I don't want to interfere with negotiations, but are you confident that the security deposit will cover you in this situation?

It would cover us for a period of time. We're not excited about the idea of using the security deposit, and these discussions are ongoing. So, that's about all I'm going to say on that.

Okay. I will hop back in the queue. Thank you.

Thanks, Jordan.

Our next question is from Todd Stender with Wells Fargo. Please go ahead.

Hi, thanks. Sticking with the rent concession discussion. Typically, you just hear this across the real estate world. If their rents required to be paid back within 12 months, but we're talking about limited visibility on the trajectory and return of senior housing. What are some fair terms for you guys to get your rent paid back? Is it a couple of years? Is that a fair ballpark?

Hey Todd, it's Kevin. Yes, I would tell you that's a fair ballpark. With any of these concessions that we've made it's essentially a loan bearing interest to them. So, they're incentivized to pay it back faster as they have cash flow come back. There are some minimum payment terms that we generally attach to it, where we would expect to start seeing payments made around the end of the year, if not sooner. That said it is going to take some time for them to pay back that amount. So we generally look at it somewhere between 12 and 24 months, but understanding that it's we don't expect it all to come back most likely in the next 12.

Hey Todd, this is John Spaid. We're considering how our portfolio adjustments through asset sales could enhance the cash flows from the remaining assets. If we can achieve that, we might be able to speed up the repayment of those deferrals. This is another factor we're evaluating in our overall strategy.

That's a good point John. So, this leads me to my next question about the Bickford sale. Is Bickford going to continue to operate those properties that were just sold?

It's Kevin again. Yes, they will continue to operate these 6. As we talked about in the prepared remarks, we'll continue to evaluate the portfolio. There are some that we think may be included in more of an outright sale that the discussions and that evaluation is ongoing. But it will be a mixed bag. And I think we've talked about it on prior calls where it's going to be a bit of a surgical effort where we look at which ones make sense for them to stay in the portfolio which ones makes sense potentially for them to move on from and still foster some of the other pieces of the relationship that have made some sense which is the development aspect which has been very successful for them.

All right. That's a good point. And then Eric at the tail end of your prepared remarks you touched on the disposition. I think you mentioned the dividend. What were you referring to in that sense?

Fair question. Obviously, Todd if we're doing dispositions to the point that we're affecting NHI's NOI, we keep a careful eye on our payout ratio. We don't like to go above 85%. So, in the event that these dispositions change our NOI to the point that we're above 85% or some other metric that the Board decides then, we would have to look at our dividend payout.

Understood. Thank you.

We have a question from John Kim with BMO Capital Markets. Please go ahead. Your line is open.

Thank you. Eric, you mentioned it seems like the market would be in a forgiving mood if you took your medicine today. So does that imply that you're inclined to rip the band off sooner rather than later as far as not just asset sales and transfers, but also potentially a rent cut for some of your big operators?

I'm not in favor of reducing rents. Typically, when there's a rent reduction, it involves some form of value exchange. I would refer to our restructuring with Holiday, which would likely resemble what we're doing with Bickford, where we adjusted the tenant's capital structure and costs through methods like divestitures or joint ventures. Stay tuned.

I'm curious if this plan could have a long-term effect on earnings, especially if you're considering one option over another, like a rent deferral that could be challenging for the tenant to repay. I'm trying to connect this with your statement that this is the right time to make these moves without facing too much backlash from the market.

Sure. That's fair. We're going to try and do as much this year as possible. I think that as John was saying earlier and Kevin as well the payback of the deferrals will depend on the conditions and the cash flows of our tenants. And if we can put our tenants into a position to have healthier cash flows well then those deferrals will get paid back faster.

Okay. I know this hasn't happened yet. But if you take the security deposit from Holiday as a form of rent, are you going to include that in rental income, or how are you going to treat that payment?

Yeah. This is John. John. How are you this morning?

Great. How are you?

Good. Yeah. So that's how it works, right? So we have this bucket of money. And if we so chose if that's the best decision and we could apply it towards rent. But you got to remember that we have a private equity company on the other side of the equation here. And while we tried to restructure this transaction so that in the long run, it would work. We have this sort of commercial enterprise that we got to also be thoughtful about as well. And once we use that deposit, it's gone. So if we wanted to transition these properties that's another place where we might rather use the deposit.

Okay. Final question. One of your directors Robert Webb received 39% of the votes against the nomination. Can you provide any color on the background of this? And maybe discuss how you think the Board is going to change going forward?

This is Eric. Yes. We received a lot of calls. Mr. Webb is on the Nomination Committee. And because of his status as a member of the Nomination Committee, he is a target for investors hoping to promote diversity and other ESG issues on the Board and we were told in no uncertain terms that until some of those ESG issues are addressed that these investors would be voting against members of the nominating committee. So we're in discussions with the Board about that and have nothing to report at this time, but we're very aware and very attuned to our investor base's concerns.

Great. Thank you.

Our next question is from Omotayo Okusanya from Mizuho. Please go ahead. Your line is open.

Hi, yes, good morning or good afternoon, everyone. The Montecito transaction, I just wanted to understand the rationale behind it. Again you're lending to them at 9.5%. And they're buying MOB assets at 5.5% cap rate in say 6% cap. So I'm trying to understand their business model? And why you would lend to an entity where it looks like they're acquiring at a negative spread?

In this situation, we are essentially acting as a mezzanine lender. We are part of the capital stack while they pursue a traditional first mortgage for the asset. We contribute to the capital, and they supplement with some equity. The combined cost of capital still represents a spread investment. They have been skilled at identifying and acquiring properties to meet those spread requirements, which is why we decided to invest. Ultimately, they can package and sell these investments for a profit. We are investing in an income stream that yields 9.5%, and we also have potential upside from the recapitalization or sale of those assets, which allows us to earn an additional 2.5% at that time. We believe the spreads from our traditional lending model provide a satisfactory and attractive rate for additional income, particularly since many MOB assets are priced at 5% or below 6%. This creates challenges given our cost of capital. By participating in the capital stack, we add diversification and secure a solid spread, making this a favorable investment for us.

Tayo, this is John Spaid.

Hi, John.

Hey. How are you? So let me add on to that. So you're comparing the total capital stack return to our mezzanine. So the way we're thinking about it too is there is $20 million of investment, equity investment going into this portfolio. In addition, there's additional equity potentially coming in this portfolio through co-investors and they might be the physician groups that are in the facilities. So where we sit in the capital stack, you're right, the total capital stack is in that range that you mentioned, which would include the financing underneath. But we're thinking about where we sit in relation to all the other equity that's being contributed to this fund as well. We sit ahead of it. So keep that in mind.

Got it. Okay. For my follow-up, could you explain the $7.3 million in rent concessions you mentioned for the second quarter? Is that just an impact on FAD, or does it involve tenants where you've switched to a cash basis, making it an FFO impact? I'm trying to clarify which bottom line numbers will be affected.

Let me take the opportunity to explain how we're handling the accounting for the deferrals. There are two methods available, and we've selected the more conservative approach, which is the variable interest method. This means we are not recognizing the deferrals in our revenues, so they do not appear on our balance sheet as receivables. Consequently, they adjust our GAAP revenues. As a result, they affect both FFO and FAD simultaneously. They are not treated as cash basis because we are still recognizing straight-line revenues, which is allowed under GAAP due to the pandemic and the relief measures provided last year. Therefore, while the revenues do adjust, they affect the entire income statement through FFO and FAD.

That’s helpful. Thank you.

Our next question is from Daniel Bernstein with Capital One. Please go ahead. Your lines are open.

Good morning. I wanted to revisit the comment regarding the $130 million pipeline. Can you clarify whether those letters of intent represent actual deals that you expect to close? Additionally, could you provide more details on the nature of those deals?

Sure. It's Kevin. Generally speaking, when we've presented to the Board, it's because we have a deal under a letter of intent that we feel confident about and want to seek approval for. We've likely conducted some due diligence, but it’s not finalized yet. These are deals we feel good about and want to secure the necessary approvals before investing significant resources in further diligence. We are working on the final diligence to ensure we are satisfied with the findings for each deal before we proceed to closing. In terms of our portfolio composition, it remains similar to what you've previously seen, though currently, there is slightly less emphasis on senior housing due to market conditions. However, we are still looking into senior housing, skilled nursing, behavioral health, and specialty hospitals. Additionally, we have some senior loan financings that include purchase options on properties. While Montecito is not likely pursuing medical office acquisitions at this moment, it’s good to remain engaged in that area. Overall, we have a solid mix in our pipeline and continue to evaluate opportunities with a good understanding of the market.

Okay. And in terms of restructuring leases and some of the items you discussed earlier in terms of maybe the options strategic options to right-size the portfolio. I know historically you guys have not been in favor of RIDEA structures or operating structures to capture upside in that way. But given you look at the long-term supply-demand dynamics of senior living housing maybe even skilled nursing, does that change your mind in any way in terms of maybe converting some of these triple net structures to an operating structure and capturing some of the upside, or is it just hopefully we'll recapture the deferrals rather than the upside of the operations?

This is Eric, Dan. Can't we do both?

Both.

No, I get your point. Your point is well taken, and fundamentally, we prefer triple-net leases. We have dabbled in RIDEA in the past as you know and we have two small RIDEA science experiments with LCS, Life Care Services and Discovery. So we're not opposed to some sort of RIDEA hybrid and we would certainly think about that as part of our restructuring discussions.

Yes. I was…

Okay. And then one last one question – okay, go ahead. Sorry.

I would just add what I need to see is, I need to be convinced that RIDEA motivates the operator properly. I'm not sure that's what's happening in the RIDEA world right now. Now the upside is there. But how are you going to get from point A to point B? And how is the RIDEA structure motivating the operator to get there? I'm not sure it's the right alignment.

Okay. And then one last quick question. I just wanted to make sure Holiday is current on its rent at this point?

As of today, yes. Again, we're still working on active discussions with them. So stay tuned there, Dan.

Okay. That's all I had. Thanks.

Thank you, Dan.

And we have a question from the line of Rich Anderson with SMBC. Please go ahead. Your line is open.

Thanks, and I wish you happy holidays. So, John, when you talked about the variable interest sort of approach that you take to deferrals, does straight-line rent also get recalculated by taking the cash rents out that you defer, or does the straight-line rent get calculated still on the same full amount of rent?

Yes. Good question, Rich. Thanks for asking that. At this time, the relief under GAAP is that we didn't modify straight-line revenues. Straight-line revenues start out positive and then, at the midpoint of the lease term, it flips and amortizes itself away. We have not adjusted that. However, at some point in the future, when the pandemic is clearly over, we expect GAAP to come back and revisit that standard. We will then need to determine if the entire lease has to be modified. But at this point, that's not happening. The straight-line revenues have remained unchanged.

I was wondering if there is a pipeline for mezzanine investments that you think could be captured. Could this develop into a recurring business, specifically regarding medical office buildings, even though you mentioned that it doesn't represent a change in strategy at this time?

Yes. Yes. But to be fair Montecito is a co-investor in the fund it's their equity in the fund. So they would initiate a process to sell whatever buildings are in our fund. And given our cost of capital and the cap rates that MOBs go for we would think twice about buying MOBs.

Okay. Regarding deferrals, can the terms deferral and concession be used interchangeably? It seems they might be, but I could be mistaken. Is there a definitional difference between the word concession?

We have some abatements, which means our deferrals earn interest. Recently, all concessions have been categorized as deferrals. Initially, we had $2.1 million related to the Bickford sale that was abated, and we did not earn any interest income from that. This is how we are using the terms in our discussions.

Okay. So there are some small amounts of abatements that you just are gone. Anything else that has an interest rate attached to it we could think of as a deferral concessions being the general term?

Right. That's right. That's right. Exactly.

Okay. Thank you, Dana for that. And then last question. Do you think that there's anything geographical at work here in terms of some of the struggles that you're still having with some of your operators, or has it come down to the asset type? Because it does feel like this is hanging around a little bit longer. We've heard more in the way of optimism from some of your peers not everyone, but some of them. I'm just curious if it's secondary markets or rural areas that is really the epicenter of some of your most difficult challenges?

Hi Rich, it's Kevin. I would say it's a combination of both geography and asset type. We've noticed that the more need-driven aspects have returned sooner. After more than a year of quarantining, people are gaining confidence as they access the vaccine. This is what we've been discussing in previous calls about aiding consumer confidence in their purchasing decisions. As a result, we've observed a quicker rebound in the need-driven component. Regarding the Holiday, as mentioned in our prepared remarks, we've actually seen a couple of positive months over the last two months, which is encouraging, but the recovery has been slower compared to examples like Bickford. Furthermore, there are still some regions where discussions to loosen touring restrictions have just begun. For instance, some communities in Oregon recently returned to full lockdown a week or two ago. So, in various parts of the country, depending on local regulations, it's challenging for them to conduct business, schedule move-ins, and complete their usual operations. Unfortunately, it's a mix of both factors. Overall, our communities are open for business, able to show prospective residents around, and have family visitors, which was essential, but challenges still exist in certain areas.

Are you using this experience to ensure that you make the most of this year and come out stronger, particularly in the regions most affected? Would you say that's accurate?

In May, it's definitely going to be part of the equation. We're going to look at the portfolio and work with our customers to understand, where the major pain points are. And where we think there's a good trade and long-term value for the portfolio. So I think that will be part of the equation.

Yeah. Okay. That's all I got. Thank you.

Thank you.

Thanks, Rich.

And there are no further questions at this time.

Thanks everyone, for participating today. We hope to see you either virtually or in person, at a conference soon.

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