Greetings and welcome to the National Health Investors Second Quarter 2022 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded today, Tuesday, August 9, 2022. I would now like to turn the conference over to Dana Hambly. Please go ahead.

Thank you. And welcome to the National Health Investors conference call to review the Company's results for the second quarter of 2022. 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 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 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 June 30, 2022. 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.

Hello, and thanks for joining us today. As we communicated on our last quarterly conference call, the portfolio optimization we commenced just over a year ago is largely complete and we are now starting to see some of the benefits. The Bickford lease was reset on April 1, and we're happy to see that their EBITDARM coverage for the second quarter was 1.3x and occupancy improved through the quarter, including another 100 basis point monthly increase in July. We know that we're not out of the woods yet, as Bickford, like the rest of the industry, continues to deal with elevated operating costs. So we will continue to monitor this relationship closely. That said, our Bickford dispositions and rent restructuring puts our company in much better operational and financial health. With our significant deferral balance outstanding and the fair market value reset of the lease in two years, we're providing all the resources necessary to accelerate the recovery, and we're pleased with the early outcomes. While our portfolio is in better shape and siloed, there are other components in the Bickford organization, unrelated to NHI's portfolio, that still need attention. As a result, and with an abundance of caution, we have put them on a cash accounting basis. John will cover more of the details in his comments. We're encouraged by the quarter of our new SHOP operations, which contributed over $3 million of NOI, excluding non-recurring transition costs, which is in line with our forecast for the year. Recall that these properties have transitioned operators twice in less than 12 months, and we had limited visibility in the months leading up to our SHOP transition due to our litigation with Welltower, which was settled effective April 1, of this quarter. This is difficult for residents and employees. So we've been impressed with the diligence of our partners Merrill Gardens and Discovery, in coordination with NHI's internal operations team in stabilizing these properties. We know this will be a lengthy recovery and see significant upside for internal growth. As we gain more confidence in this platform, we see SHOP as another avenue for long-term external growth as well. In addition to the Bickford and SHOP transactions, we've completed many other optimization efforts, which have touched well over half the properties in our portfolio. Since announcing our intention to sell between $250 million and $400 million in assets, we've completed over $356 million, including $288.2 million in senior housing sales that had EBITDARM coverage of just 0.5x. We're starting to see the fruits of this labor. While it is a lagging measure, we're encouraged by the direction that EBITDARM coverage is moving. Our senior housing coverage improved to 1.11x in the first quarter of 2022 versus 0.98x in the fourth quarter of 2021, and total company coverage improved to 1.68x from 1.54x over the same timeframe. See our progress report which was published along with this 10-Q. The balance sheet is in great shape as we reduced debt by over $330 million in the last 12 months and leverage for the quarter at 4.0x is at the low end of our targeted range. We have repurchased $70 million under the share buyback program and still have in excess of $250 million of incremental capital to deploy without the need for issuing additional equity. I'll now turn the call over to John to discuss our financial results and guidance in more detail.

Thank you, Eric. Hello everyone. As Eric mentioned, our second quarter was significant for NHI, and we are pleased with our progress. I will go through some important factors affecting our results and then explain how our updated guidance reflects these changes and our outlook for the rest of the year. Starting with our net income per diluted common share for the second quarter ending June 30, 2022, we reported $0.47, down from $0.85 in the same period last year, though it increased $0.29 from the first quarter of 2022. For the first half of the year, our net income was $0.66 compared to $1.63 for the same period in 2021. The combined write-off this quarter related to the Bickford straight-line rents receivable and lease intangibles was about $0.55 per diluted share, which negatively affected our reported net income and NAREIT FFO per share metrics. Moving forward, we will recognize rental income from Bickford only to the extent of the cash we actually receive from them. In the second quarter, Bickford fulfilled its obligations to us under their master leases and mortgage notes receivable. We recorded pandemic-related concessions of $22.9 million this quarter, compared to $7.8 million last quarter, mainly due to the Bickford lease restructuring that we discussed previously. We are transitioning away from pandemic-related rent concession lease accounting back to standard lease modification accounting, aiming for long-lasting lease modifications that consider prior repayment terms for any deferrals. This accounting requires the inclusion of deferrals into our financials for newly restructured leases, potentially increasing the recognized straight-line rent revenue. However, cash collection of those deferrals is not immediate and may depend on their maturity dates rather than an imminent repayment. Future pandemic lease modification guidance may apply based on specific circumstances. Nonetheless, the pandemic's impact on our results has diminished, and our operations are now more affected by occupancy, inflation, labor constraints, and other factors. The next two significant items are the results from our senior housing operating portfolio, or SHOP, and segmented financial statements. This quarter, we provided results for our 15-property SHOP portfolio, and starting this second quarter, we are accounting for SHOP as a new segment. Consequently, revenues on a GAAP basis for this quarter fell by $14.4 million compared to the same quarter last year. Excluding the impact of the Bickford straight-line rents and intangible lease incentive write-offs, revenues for the second quarter increased by $10.8 million from last year. This growth stems primarily from the inclusion of SHOP segment resident revenues, additional revenue from the Welltower settlement, and new investments, offset by reductions linked to property dispositions, lease restructurings, and other tenant concessions. In our provider results, we've been shifting many of our performance metrics to net operating income (NOI)-based metrics. NOI, which nets total revenue against SHOP operating expenses and excludes revenues from reimbursable tenant expenses, will better align with how we manage our business. For the six months ending June 30, NOI was down around $34 million compared to the same period last year due to the previously mentioned significant items. Adjusted NOI for the second quarter was $70 million, an increase of $2.7 million from the first quarter of 2022. For more details on NOI and adjusted NOI, please refer to our 10-Q and supplemental information report filed recently. In the second quarter, we acquired a 53-unit assisted living facility in Oshkosh, Wisconsin, for about $13.3 million, yielding an initial cash return of 7.25%. This acquisition allowed us to retire a $9 million first mortgage loan to that same customer. During the second quarter, we also received a repayment of $111.3 million on our Sagewood first mortgage loan. Alongside our earnings press release and supplemental information, we've also updated our report on our progress with disposals. In the second quarter, we placed an additional four properties for sale and recorded a related impairment charge of $4 million. Further details on our year-to-date asset disposals and held-for-sale properties can be found in note three of our 10-Q for the quarter ending June 30. Our FFO metrics per diluted common share for the second quarter, compared sequentially to the first quarter, showed NAREIT FFO decreased by $0.34 to $0.71 from $1.05, factoring in the Bickford write-offs. However, normalized FFO, which excludes the impact of those write-offs, increased by $0.16 to $1.26 from $1.10. Sequentially, our normalized funds available for distribution rose by $3.6 million to $56.3 million from the first quarter, largely driven by a SHOP contribution of approximately $2.9 million, net of non-controlling interests and transitional expenses. Additionally, we had a $6.9 million settlement with Welltower and increased income primarily from a $900,000 exit fee earned on the Sagewood payoff, alongside $1.5 million in reduced legal expenses. These were somewhat offset by extra rent concessions, increased interest expenses, and higher administrative costs, excluding non-cash share-based compensation. Detailed reconciliations of our pro forma performance metrics are available in our earnings release and 10-Q filed recently. Our second quarter dividend of $0.90 per share was paid on August 5, 2022, reflecting normalized FFO and FAD total dollar payout ratios of 69.5% and 71.4%, respectively. As announced yesterday, our Board declared a third-quarter dividend of $0.90 per share for shareholders of record on September 30, payable on November 4. Regarding our balance sheet, for the quarter ended June 30, our net debt to annualized EBITDA leverage ratio was at 4.0, which is at the lower end of our targeted range of 4.0 to 5.0. This improvement from the first quarter, which was at 4.9, was driven by a $2.9 million NOI contribution from the SHOP and excluded non-cash write-offs of straight-line rents and lease incentive impacts. The improvement also came from a decrease in non-cash share-based compensation expenses. As of July 31, we had no outstanding amounts under the revolver and $51 million in corporate cash. We did not issue any equity during the second quarter's ATM program and do not plan to issue any equity in the third quarter, with approximately $416 million still available under our ATM program. During the second quarter, we repurchased about 1.2 million shares of our stock for roughly $70 million at an average price of $58.52, including commissions, which will reduce our annual dividends by about $4.3 million. Our remaining share repurchase authorization is $170 million, expiring in April 2023. Along with our second quarter earnings press release, we are updating our annual guidance for 2022. This guidance reflects significant factors discussed earlier, with NAREIT FFO per diluted common share expected to be in the range of $3.86 to $3.92, normalized FFO per share between $4.48 and $4.53, and FAD projected at $200 million to $203 million. Compared to our April guidance, the decline in NAREIT FFO is mainly due to effects from the straight-line and lease incentive intangible write-offs. Our guidance also includes plans to fulfill around $52.6 million in investment commitments this year, reduced from earlier expectations due to anticipated lower mezzanine investments to Montecito. SHOP continues to meet our expectations, and our guidance reflects a slight increase in interest expenses compared to earlier guidance. We are not including any future unannounced acquisitions, repaying outstanding deferral balances, or additional share repurchase activities in this guidance. More assumptions can be found in the guidance portion of this quarter's earnings press release. Now, I will turn the call over to Kevin Pascoe to discuss our portfolio.

Thank you, John. I'll concentrate my comments on our major asset classes and operators as well as business development and pipeline activity. Starting with our senior housing needs-driven portfolio. This group accounts for approximately 26% of adjusted NOI is where most of our optimization efforts have been focused as our second quarter total deferrals of $3.9 million were all related to five needs-driven operators. Since the second quarter of 2021, we have completed the disposition of 31 buildings for $288.2 million, including $73.3 million in the second quarter of this year. As Eric noted, we are starting to see the benefits from the dispositions in our coverage ratios. Specifically, the needs-driven coverage, excluding Bickford, improved by 8 basis points sequentially to 0.87 times through the first quarter of 2022. We have continued to execute our plan with Bickford and their trailing 12-month EBITDARM coverage improved by 10 basis points sequentially to 0.92x through the first quarter of this year, which was calculated using the legacy lease. Adjusting for the rent payments under the new lease, the pro forma coverage was 1.31x through the first quarter and is 1.3x on a trailing three-month basis for the second quarter of 2022. On Page 7 of our progress report, we detail the significant occupancy improvements in our current portfolio of 38 properties by selling just three underperforming buildings. The portfolio has grown average occupancy by 190 basis points to 84.5% since the most recent asset sales in May, which we attribute in part to greater Bickford focus on the core portfolio. We are still working on the sale of a few more Bickford properties, which should also improve the portfolio's health and has no impact on in-place rent. We have a $26 million deferral balance with Bickford and continue to target a minimum deferral repayment of $3 million annually with reductions of up to $6 million continue on Bickford meeting specific performance targets and completing certain property dispositions. First quarter of operations with the 15 SHOP properties, which represents 5% of adjusted NOI included expected disruptions from the operator transition, which was the second transition in less than 12 months. That said, the $3.2 million in NOI for the quarter, excluding transition costs, is in line with our forecast and we continue to expect the first year annualized NOI contribution will be in the low-to-mid teens with future incremental upside of $6 million to $8 million. Detail in the supplemental and in the progress report, with second quarter margin in the mid-20s well below historical performance. Our operational priority right now is to rebuild the sales funnel to drive occupancy. July average occupancy improved at both Merrill Gardens and Discovery with the combined portfolio of 90 basis points from June to 77.1%. 13 entrance-fee communities, which account for 27% of our annualized adjusted NOI continue to have exceptional performance. SLC, our largest tenant, had EBITDARM coverage of 1.22x. Occupancy improved 60 basis points in the second quarter to 82.3%. This is 200 basis points higher than SLC's pre-pandemic occupancy, and the momentum continued into July as occupancy increased by another 130 basis points compared to June. Senior housing discretionary coverage, which largely reflects the performance of the entrance fee communities, improved to 1.39x through the first quarter from 1.16x in the fourth quarter due to strong operating performance, as well as the transition of the legacy Holiday portfolio to SHOP. Skilled nursing portfolio, which represents 34% of annualized adjusted NOI, continued to have solid EBITDARM coverage at 2.7x, including 3.51x in NHC and approximately 1.98x for other operators. The SNF resilience was primarily attributable to NHC and Ensign, which represent approximately 77% of the SNF portfolio. Our other five SNF operators under leases have received minimal rent concessions since the pandemic began, and we did not provide any SNF-related deferrals in the second quarter. The second quarter was quiet from an investment standpoint. The pipeline is definitely more active than it had been in recent quarters, which is encouraging, but we are not seeing pricing change materially at this point despite the significant increase in financing costs this year. On a positive note, we have seen several deals that we had previously passed on come back to the market, which suggests that balance may be tipping back towards buyers. We continue to prioritize deals with immediate real estate ownership or short-term financing structures with a path to ownership. As I noted on our last conference call, we are seeing more RIDEA type opportunities in the pipeline and believe this is a tool for longer-term external growth, but our focus is now on driving operational improvements in the current ventures before looking to expand the platform. With that, I'll hand the call back over to Eric.

Thank you, Kevin. Our second quarter GAAP results were impacted by our conversion of Bickford to cash basis, but were otherwise in line with expectations. We've updated our guidance, which includes a modest revision to FAD as our visibility continues to improve with the portfolio optimization efforts largely concluded. Our focus now is very much on returning to growth. We're in excellent financial health with leverage at the lower-end of our targeted range, which gives us significant capital to deploy without the need to issue equity in the immediate future. Operator, we'll now open the line for questions.

Thank you. Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.

Great, thanks, and good afternoon, everybody. I guess, Eric, given the challenges that you've endured and the recent lease restructuring with Bickford, why wait until now to move them to a cash basis? And maybe what more specifically did you see in their financials that caused you to cash out on that ability to remain a going concern?

Hey, Austin, it was a number of factors. One is they have other loans and other creditors that we have no control over. And they have debt that's coming due that will probably be rolled over and refinanced, but our auditors here are very focused on that. So rather than fight that battle, we just decided that it was the right time to convert them to cash accounting. I feel that we've done a good job creating a silo around our portfolio. We've got a master lease. We've got good coverage. If you look at our progress report, you can see that the last quarter's coverage was really strong, based on the new modified lease payment. So we feel good about our properties and our portfolio.

That's fair. And I guess you've mentioned, out of an abundance of caution, to the extent that Bickford didn't remain a going concern, I guess, what sort of options are you left with? Do you have any replacement operators that you're, in the back of your mind, I guess, trying to line up in the event that there is a change that needs to be made? And do you think you can keep the terms that you recently restructured under the Bickford lease with any new prospective operator?

That's a great question and one that we certainly consider a lot around here. We recently did a transition of properties from Holiday to RIDEA using different managers. When you have a larger portfolio that's geographically diverse the way Holiday was and the way Bickford is, that may be something to consider, meaning that different managers in different geographies would take some properties, but not all of them. The other likelihood is that if Bickford were to restructure, they would just be leaner and meaner and probably want to keep this portfolio. It's a well-performing portfolio of newer buildings and better markets. It's taken us three years to get this portfolio where we want it, and it would be an easy sell to either a retooled Bickford or another operator that wanted to take over a portfolio that had good cash flow.

And then what would that mean for the $26 million of deferred rent under that scenario? And then separately just last one for me, I'm curious if you believe that you're going to be able to sell these three assets that I believe were held-for-sale, kind of in light of this news around Bickford?

Yes. You want me to take the first part of it.

Sure.

This is John, Austin. So in terms of the $26 million, remember we've never said we've put that deferral on our balance sheet. And then, as I mentioned in my call, we feel confident straight-line revenues will begin to pull in those deferral balances elsewhere onto our balance sheet. In the case of Bickford, because they're on a cash basis now, through straight-line receivables or other means, we won't initially be doing that, but we'll always be evaluating Bickford's situation, and in the future, that doesn't mean to say that we couldn't change the accounting on Bickford at a later date.

And then, Austin, to your point about the properties held-for-sale, the properties we've been selling have been older underperforming properties, so some accounting treatment done by us here in Tennessee isn't going to affect how a buyer feels about a building that is of a certain age and of a certain level of performance. That usually isn't something that is a concern to a new buyer, that's going to be putting on their own operating platform and capital structure onto whatever building they're buying.

Our next question comes from Connor Siversky with Berenberg Capital Markets. Please proceed.

Hi, thank you for taking my question. I want to discuss your burdening SHOP portfolio. What are the expectations for RevPOR growth through the end of the year, and how does that compare to the unoccupied rooms being leased in real time?

Sure. Hey, Connor, it's Kevin. As we kind of talked about in the prepared comments, our focus right now is really to get the lease volume up, rebuild the sales funnel, and improve occupancy. As you can see in the progress report, though, historical margins were much better on this portfolio, and we would expect a fair amount of flow-through to drop to the bottom line as occupancy improves. I would tell you that the goalposts have shifted a bit, and we don't expect to get back to a 45% margin, but we do expect margins to improve over time. And then once occupancy gets to a more stabilized level, then we can focus more on improving RevPOR, which I do believe is going to be an opportunity, but that's secondary to the approach right now.

Okay. And then just sticking to the margin outcome in terms of OpEx for the SHOP portfolio, is the SHOP portfolio running at full headcount in terms of employment? And what does the use of agency labor look like in real time?

From a full headcount standpoint, no. It's a challenging environment to hire and retain people right now, so there will always be some level of turnover. The good news is that, since we're not delivering care, there isn't a large need for agency labor in this portfolio. As a result, we aren't incurring significant expenses related to agency staffing, although we may have some overtime and similar costs related to hiring. There is some wage pressure, but it's not as pronounced on the needs-driven side.

Hey, Connor, this is John. Let me also address the guidance and strategy that you're observing. There is some historical SHOP information in our supplemental material that I believe you'll find interesting. It's important to remember that these are independent living communities, which usually have a significant flow-through from revenue to NOI if we can increase occupancy, compared to other higher acuity product lines. So, while you may not see a lot of RevPOR growth right now, our NOI will see much more success with occupancy increases in these portfolios at this time. That's where our focus lies.

We have a question from Sam Choe with Credit Suisse. Please proceed.

Hi, guys. I'm on for Tayo today. Just wanted to just make sure that, I guess, in terms of the SHOP portfolio expectations that low- to mid-teens annualized NOI earnings profile still hold in the near term. And then I guess, just to kind of think about the incremental $6 million to $8 million, like, how should we think about that in terms of timing?

Yes. So this is Kevin again. And yes, we are still targeting kind of a low- to mid-teens run rate, which if you look at our numbers, we're on pace for that now. As we look at what the opportunity is for the portfolio, I would tell you that that's going to unfold over the next probably 18 to 24 months. We don't expect it all to show up next year. This is going to be a process for us to rebuild occupancy, get the operations stabilized. So it's going to be over time, but we do still see that opportunity for this portfolio.

Got it. Got it. That's helpful color. And then on the deferral balance, I know it's been growing. But subsequent to Q2, have you guys announced anything? And I mean, I know that you guys are still working with a smaller operator. So should we assume that the Q2 number that we saw is an appropriate run rate until you guys resolve something with these smaller operators?

That question is quite challenging for us to answer because we are not providing much detail on potential future concessions we may consider. This is one of the main reasons we felt it was important to offer guidance. To be honest, I’m reluctant to address that question directly. However, we will continue to have some deferrals through the end of the year, and there may be some that carry over into 2023. Our goal is to minimize these deferrals. It feels more like business as usual from four or five years ago, which Eric has described in the past as being on our worry list at around 3% to 5%. I believe we are reaching that point now. That's the best response I can provide on that question today.

Got it. And then, I guess, the takeaways based off of what you're saying is that, I mean, you guys are getting close to resolving things with the smaller operators. So you're more optimistic than before. Is that what I should take away right now?

Yes, absolutely. And you can see that in our EBITDARM coverage chart and the progress report, you can see how things are improving. And it's a combination of selling underperforming buildings and the remaining buildings are gaining occupancy and margin.

We have a follow-up from Austin Wurschmidt with KeyBanc Capital Markets.

What was the collection figure for July?

We didn't publish that information, and we won't be doing so. I can tell you that we discussed $3.9 million in rent deferrals during the second quarter. However, as we make adjustments, our collections are significantly higher and differ greatly from what we experienced during the pandemic.

I was trying to understand if we should anticipate an increase in some of these restructurings. Additionally, the April run rate on deferrals remained stable through the quarter, but it appeared to have expanded from three operators to five. Should we expect this to result in higher deferrals in the upcoming months?

So this is Kevin. I would tell you that we continue to work with our operators on a case-by-case basis. We had a couple that popped up this quarter. We'll continue to monitor it. We've given the guidance in terms of where we think that bucket comes in for this year and that's incorporated within them. And we're still working through the portfolio. We've talked about a few other buildings that we're evaluating for sale and may go into that bucket where once we have them sold, we're no longer looking at deferrals. So that's a continued refinement in the portfolio. We've gotten rid of the big drivers. We have a few more to continue to evaluate and decide if they're going to be ones that we stick with or if we dispose of, but that will be kind of the work for the rest of this year.

There are no further questions at this time.

Thank you, everyone, for joining us and your time and attention, and we'll look forward to seeing you at NIC or one of the many conferences we attend.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.