Q3 2022 National Health Investors Inc Earnings Call
Okay.
Greetings and welcome to the National Health Investors third quarter 2022 conference call.
Starting the presentation all lines will be in a listen only mode.
Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
If I didn't count during the conference you need to reach an operator, Please press star zero.
I'm sorry, my interest in this call is being recorded Wednesday November nine 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 third 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.
This conference call on a listen only basis were released after the market closed yesterday in a press release thats 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.
Forward looking statements represent Nhi's judgment as of the date of this conference call and 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 September 32.
Thousand 22.
Copies of these filings are available on the SEC's website at SEC Gov or on Nhi's website at NHI read Dot Com. In addition, certain items 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 <unk>.
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 our CEO Eric Mendelsohn.
Hello, and thanks for joining us today.
We continue to make progress on our portfolio optimization and it showed in our strong third quarter results, which were ahead of our internal expectations are.
Our collection rate improved as tenant deferrals declined to $1 4 million versus $3 9 million in the second quarter.
Since we announced our optimization plans in the second quarter of 2021, we have completed the sale of 32 senior housing properties for net proceeds of 296 million.
And had a cash NOI yield of just two 7% and EBITDAR coverage of only four seven times.
We're seeing the positive impact of the dispositions on our senior housing coverage ratios trailing 12 EBITDAR coverage for the senior housing portfolio again showed improvement and has increased from <unk> 98 times to 114 times over the last two reporting periods.
Over the same timeframe bickford coverage increased from eight two times to 1.0 times and our other needs driven tenants improved from <unk>.
Seven nine times to nine one times adjusting.
Adjusting for Bickford to April 1st rent reset their coverage was one <unk>.
Three two times.
Please reference our business update published yesterday afternoon for more details.
While the third quarter results exceeded our expectations the operating environment for our tenants in the shop portfolio remains challenging with labor and other inflationary pressures weighing on margins.
As announced yesterday, we're maintaining our annual guidance for the year, which implies a sequential decrease in F E D.
We feel that this is prudent given the increasing interest rates as well as industry stress, which may lead to further dispositions deferrals rent restructurings or tenant transitions in the fourth quarter.
As noted in our business update we're targeting additional asset sales with proceeds in a range of $50 million to $60 million.
This includes 10 properties currently held for sale and certain other properties that are expected to be sold or moved into held for sale.
Fortunately, our conservative financial policies, and early and decisive actions to dispose of underperforming assets and a seller's market benefited us and has kept our balance sheet in excellent health.
We ended the quarter with leverage in the middle of our targeted range at four five times and we've completed share repurchases totaling $152 million.
The acquisition market still strikes us is dislocated there were pipeline discussions have been more actionable lately. So we expect that we will be able to announce some investment activity before the end of the year.
We remain optimistic that outstanding deferral balances rent restructuring and tenant transitions should all contribute to better internal growth over the next few years as deferral balances are repaid and the restructured and transition and leases move back towards market rates later in <unk>.
First year and into 2024.
We also continued to see significant NOI upside in the shop portfolio as margins start to rebound from historically low levels.
We are focused on concluding our optimization efforts in returning to growth.
We continue to be bullish on the long term industry fundamentals for senior housing and skilled nursing and are fortunate to be in a position of considerable financial strength to navigate through the near term macro headwinds and capitalize as these industries recover.
As always we will continue to provide transparency to the market on our progress along the way.
I'll now turn the call over to John to discuss our financial results and guidance in more detail John .
Thank you, Eric and Hello, everyone.
I want to highlight our 2022 accomplishments with all our capital provider some punctuate our commitment to utilizing our capital effectively.
This year will be a record year for returning capital to our shareholders, while maintaining an industry leading strong balance sheet.
For the year to date, including our just declared fourth quarter dividend.
NHI has returned $312 million to our shareholders.
Year end 2020, we've also reduced that $377 million.
Turning to talk more about our 2023 maturities in a moment.
We remain committed to the senior housing industry. However, our continuing financial strategy. This year is to position ourselves to be opportunistic as we move through the dramatic macro changes, which are unfolding in real time before us, namely increased inflation higher interest rates and cap rates.
We believe that when cap rates materially rise, which we believe must happen in this rising inflationary and interest rate environment.
We're very well positioned to be responsible and responsive to our rising cost of capital and to deploy accretive investments.
If during 2023 the economy cools.
Inflation subsides and interest rates rollover on cap rates don't rise or even compress.
And we are equally well positioned.
The theme for US this year is to be well positioned either way.
I'll now turn to our third quarter results before talking a little bit more about our guidance for the remainder of the year.
For the third quarter ended September 32022, net income attributable to common stockholders per diluted common share was <unk> 78.
NAREIT <unk> and normalized <unk> per diluted common share were $1 four and $1 six respectively.
Adjusted NOI.
D were $62, one and $47 $4 million respectively.
Our new shop segments, adjusted NOI was steady at $2 8 million as compared to the second quarter is $2 9 million.
But slightly less than we forecasted for the quarter.
All in all we are on track to meet our updated our August guidance, which we are reiterating today.
At the end of October we had the full amount available on our revolver.
We have three upcoming maturities in 2023 totaling $415 million Youll.
Youll see us initially retire the first $125 million note due in January using proceeds from our revolver.
But we will be working toward a new debt facility in 2023 and will keep you apprised of our strategy and progress.
Our lender and credit agency relationships relationships continue continued to be supportive in fact in October Moody's improved their outlook on us up to stable.
Our three investment grade credit ratings recognized that we continue to be committed to our financial policies.
At September 30, our total debt was $1 1 billion of which 78% was fixed rate debt.
More than likely that this percentage will decline as we move into and through 2023.
However, some of the increase in variable rate debt that will be offset by additional asset sales.
As we've previously mentioned.
Yeah.
At four five times, our net debt to adjusted EBITDA ratio was in line with our expectations and our four to five times leverage ratio policy.
With Nash achieved this conservative ratio, while at the same time repurchased almost $2 5 million shares of NHI stock this year.
As a result of our stock repurchase activity using our current dividend rate of <unk> 90 per share.
Annually distributing approximately $8 $9 million less in aggregate dividends and our dividend payout ratio based on normalized Fad as September 30 is that a comfortable 82, 4%.
Turning now to our guidance a few items made it difficult to narrow our guidance for you this quarter.
The timing of some of our dispositions and the recognition of any gains or additional impairments as one variable.
Another variable is the identification of additional dispositions, which may result in additional impairments straight line receivable write offs and changes to straight line rent revenues.
These items are all noncash items and a normalized differently between NAREIT <unk> and <unk>.
Finally, compared to the third quarter, we do expect to see slightly higher fourth quarter rent concessions and higher Q4 interest expense.
We can continue to be comfortable with our guidance range for all of these metrics.
With that I'll now turn the call over to Kevin Kevin.
Thank you John .
Ill concentrate my comments on the pipeline activity as well as our major asset classes and operators.
Starting with an update on our pipeline in the third quarter was quiet from an investment standpoint.
Pipeline is definitely more active than it had been in recent quarters, which is encouraging and we expect to announce some investment activity. This year.
But more generally we have yet to see material pricing changes despite the significant increase in financing costs.
As John noted, we expect the cap rates must increase.
And that we are in a strong position to deploy capital as that happens.
Moving on to our senior housing need driven portfolio.
This group accounts for approximately 28% of adjusted NOI and is where most of our optimization efforts have been focused and will continue to be focused in 2023.
As Eric mentioned, we are seeing results from the optimization and our coverage ratios EBITDAR coverage for this group improved from a low of <unk> eight times in the fourth quarter period to <unk> 96 times and the most recent period.
This was driven in large part by improvements at Bickford, but we also had better coverage across the balance of the knee driven portfolio.
While the Bickford enterprise copes with the current industry operating challenges NHI has worked diligently to better position our lease portfolio through strategic asset sales and rent restructuring, which has improved the pro forma EBITDAR coverage to 132 times.
We are working on the sale of certain other bickford properties, which should further improve coverage and does not impact our in place rent of approximately $28 million annually.
As for our discretionary senior housing portfolio. This group accounts for 29% of adjusted NOI, including 26% from our entrance fee communities.
The entrance fee portfolio continues to perform well as it has throughout the pandemic.
<unk> our largest tenant at.
That EBITDAR coverage of 125 times, which improved from one to two times in a sequential period.
Occupancy improved 100 basis points in the third quarter to 83, 3% and is 280 basis points higher than pre pandemic levels.
Our senior housing discretionary coverage, excluding SLC declined sequentially from one eight times to one seven times, but we are comfortable with operator performance and the underlying tenant credit strength.
We are mindful that entrance fee properties are more correlated to the housing market than other senior housing products. So we've been monitoring these markets and our entry fee geographies.
And then have not experienced any meaningful impact at this point.
Continuing with skilled nursing.
<unk> portfolio, which represents 33% of annualized adjusted NOI continues to have solid EBITDAR coverage at 247 times, including three to four times that in HCC and 197 times for other sniff operators in our specialty hospital.
The year over year and sequential decline in the coverage is driven primarily by NAC who's corporate level fixed charge coverage ratio has been impacted by a decline in revenue from federal government stimulus programs.
<unk> remains an excellent credit and along with the Ensign group anchors our sniff portfolio.
Our five other sniff operators, which represent approximately 7% of adjusted at ally.
<unk> have received minimal rent concessions since the pandemic began and we did not provide any sniff related deferrals in either the second or third quarter.
As previously announced we sold 7% HC properties for $43 $7 million and amended our master lease on the remaining 35% and HC buildings.
And then it shifts a substantial portion of the rent from the seven sold properties to the remaining lease.
The dispositions were cash flow negative to NAC are not core to their portfolio. So we viewed this as an attractive IRR opportunity that assist our tenants provides immediate capital NHI at an attractive price and preserves a significant percentage of rental income from NH see through the maturity of their lease.
Lastly, our shop portfolio, which represents 5% of adjusted NOI. So occupancy increased 40 basis points sequentially to 76, 9%, while revpar declined slightly.
The lack of Revpar growth is by design as we've been using price as one tool to drive census growth.
Operating expenses experienced similar inflationary pressures as the rest of the industry and caused NOI margin to decline from 24% in the second quarter to 23, 1% in the third.
While the third quarter results were slightly below our expectations, we still see significant NOI upside over the longer term driven by occupancy and margin improvement from historically low levels.
As I've noted in previous calls many of the external growth opportunities in senior housing RIDEA type deals. So we want to make sure we have our infrastructure in place before we start growing the strategically important platform.
With that I'll hand, the call back over to the operator to open the line for questions.
Thank you.
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One moment please for the first question.
Our first question comes from the line of John Kim with BMO capital markets. Please go ahead.
Thanks, Good morning.
On the 10 assets held for sale can you just.
Sure anymore characteristics as far as what type of asset.
And if it's concentrated in a particular operator.
And also if you can confirm what the capex would be because it looks like on book value, it's about 8%, but on that $50 million to $60 million I think.
Eric mentioned, it's closer to 5%.
Hey, John Kevin just wanted to get that.
So John .
The thing to focus on here is that.
One they're going to be mostly senior housing.
Assets more than the need driven side.
And.
They're going to be one that are just not really working for the operator right now it's across several of our other operating partners.
Primarily where we're doing some of our deferrals and what you saw in the third quarter. So these are not yielding.
What the contractual rent is and we don't really think that theyre going to.
Recover I think the profile I think of them as more.
Bob smaller markets.
Geographies, where the labor is going to be a little more challenged and ones where.
Again, we just don't feel like Theyre going to recover quite quickly. So we think it's in our best interest to move on from them.
So I'm just trying to get a sense of how much of an impact it would have on earnings.
On the sales.
Well.
This is John let me take that one so what we've been doing is.
Managing down the deferrals, we keep having to talk about the concessions, we keep bringing up.
And we're succeeding at that.
And at the same time, we're thinking about these as sort of trapped investment dollars. So we get the proceeds and you see the yield that.
We talk about for example in our business update Youll see a yield thats going out at two 7% or something like that very low.
And we're paying off debt and doing other things with it.
Which turns out to be very accretive.
So.
We're we're entering into these sort of transactions.
To improve ourselves and to get growth back.
You mentioned selling <unk>.
This year and its a sellers market can you just describe the environment today and also.
The buyer competition looks like today for asset sales, whether it's TCE operators over.
Our other types of buyers.
Kevin do you want to get that sure.
So I would say, it's still mostly <unk>.
Smaller.
Smaller groups PE.
Firms, where they are investing their own capital.
It is a little more challenging now than it had been earlier this year, so getting deals across the finish line is taking a little more time and we're seeing that anyway, just because some of these buildings or.
Turnarounds in a little more challenged to get some financing in place financing now is even more difficult to come by so we're seeing the horizon move a little bit in terms of getting closed.
But they're also having to bring more equity too.
To close the deal so.
And that's going to be a slower pace to get these.
Out of the portfolio, but they still are ones, where we're seeing offers come in we're seeing people.
We're seeing groups that have capital come to the table.
It takes a little overtime and get them out.
Okay and then my final question is on your shop NOI, which.
Declined sequentially.
But youre talking about margins at low levels and Thats rebounding.
Maybe pushing rents a little bit harder when you.
But I was wondering how you see the next few quarters progress just given the continued expense pressure.
The recent decline in occupancy levels.
So this is Kevin again.
The key here is to really rebuild the funnel that is what the our operating partners are focused on to get more leads dry believes the building and get them close which again is why we mentioned that youre not seeing that increase in revpar.
The expense growth is something that we're mindful of but again the real opportunity here is to get move ins and move the occupancy needle and then we will be able to see more revpar growth.
Feel like over the last six months they've done a really good job of getting into the building assessing talent.
There is still some some things we're doing inside the communities to make sure that they're getting the right talent in place and hiring some more leadership and instilling the culture. So.
We're seeing that tide turn and seeing more inquiry volume. So good leading indicators clearly they need to get the move ins and move occupancy, but that is really the focus here.
Thank you.
Once again to queue up for a question. Please press one four on your telephone keypad.
Our next question is from the line of Stephen <unk> with Credit Suisse. Please go ahead.
Hi, This is Sam Choe and Steven on for Tayo today.
So my question is I think Kevin mentioned that there were some additional big for properties that you guys identified for disposition just curious if that was part of the I guess so.
Original portfolio optimization plan.
If it hasn't if it wasn't then I'm just curious.
Just on the overall state of Bickford, and I guess, how you guys feel about collecting on the deferrals balance overtime.
Hey, Kevin I will take this one this is Eric.
The two buildings were not in the original plan, but we got an unsolicited offer for them and it made sense to take advantage of that.
And speaking.
Speaking of deferrals, we got our first payment on our deferral balance from Bickford.
This month, so it's not a third quarter event, but it is a fourth quarter event. So we're starting to see funds from that trickle in.
And we're very pleased by that.
And I think you can see that the pro forma coverage for.
For our Bickford portfolio was very strong at 132.
Got it and if I I mean.
When I look at the occupancy trend I mean, it seems like it's in good standing, but I guess during third quarter. It has been declining or are there any concerns on that front.
We pay very close attention to that obviously and an hour.
Business update we show you a comparison of the bickford occupancy versus the Nic map occupancy, which is all other competition blended together and Bickford compares favorably.
And I would also point you towards Brookdale.
Our recent earnings release that showed they had a plateau of occupancy this past quarter. So what's happening with Bickford is an industry wide event.
Looking for an occupancy pickup typically that happens around Thanksgiving when people go home and see their parents and realize.
They need to do something quickly.
So stay tuned.
Got it and my last one I just wanted to revert back to the shop portfolio.
I guess how are you guys.
What are you guys seeing on the agency labor side and.
What are you guys trying to do to mitigate those pressures going forward.
Kevin you want to take that.
Well the Lucky thing for us as it relates to agency labor that we're not delivering health care in these communities. So we're not having to go out and get.
<unk> or <unk> or caregivers. So the agency pressure is much less in this portfolio that would be an seo.
Bickford type community so were.
There is still agency, but we're not seeing that as a major factor in our expenses.
Thanks, guys for the color.
Thank you.
We appear to have no further questions on the phone lines.
Alright, thanks for joining us today, and we'll look forward to seeing everyone at NAREIT next week in San Francisco.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.
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