National Health Investors Inc. Q1 2023 Earnings Call
Greetings and welcome to the first quarter 2023 conference call.
Presentation, all participants are in a listen only mode.
We will conduct a question and answer session.
At that time, if you have a question.
First one by the four on your telephone.
Our new time during the conference you need to reach the operator my process start for <unk>.
It was a minor this call is being recorded Wednesday may 10th.
23.
I would now like to turn the call over now to Dana Hambly.
Please go right ahead.
Thank you and welcome to the National Health Investors Conference call to review the company's results for the first quarter of 2023.
The call today are Eric Mendelsohn, President and CEO , Kevin Pascoe, Chief Investment Officer, John Spaid, Chief Financial Officer, and David <unk>, 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 conference call investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in Nhi's Form 10-Q for the quarter ended March.
<unk> 31 2023.
Copies of those filings are available on the SEC's website at E C dot Gov or on Nhi's website at NHI REIT Dot 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.
Please.
Now I'll turn the call over to our CEO Eric Mendelsohn.
Thank you Dana Hello, and thanks for joining us today.
We're off to a great start in 2023 with first quarter results coming in ahead of our expectations driven by strong cash collections at over 98% limited rent concessions and deferral of payments from four tenants.
We announced new investments of $54 8 million during the quarter and were able to utilize $2 5 million of the bickford deferral balance in lieu of cash to create incremental value on a newly constructed community in Chesapeake Virginia.
We also benefited from $1 3 million in discrete items that while only impacting the first quarter demonstrates the value of triple net leases and preserving NOI and the resilience of our tenants is operating fundamentals continue to improve.
Our portfolio optimization has resulted in the sale of five more buildings year to date with low single digit NOI yields and coverage below one times.
We continue to see the results of the optimization through significantly improved EBITDAR coverage, particularly for our need driven senior housing tenants.
Coverage improved year over year by 31% and sequentially by 9% to one point 11 times. This is the highest reported coverage since our first quarter of 2020, reflecting the hard work of our asset management team and our partner tenants as the pandemic effects move further.
We're away.
We have more work to do but the improving trends are encouraging.
As we've talked about throughout the pandemic the entrance fee in skilled nursing portfolios, which account for 60% of our NOI continue to anchor the portfolio with industry leaders, including NH C SLC Ensign watermark and Lcs.
One area of disappointment for the quarter was the performance of shop, which is 3% of our NOI, but a clear strategic focus for the company.
Our longer term view on the upside potential of that portfolio has not changed there what the timeline is taking longer.
We are working closely with our experienced partners Merrill gardens in discovery and expect better results as we outlined in our press release last night and following our strong first quarter results, we are increasing our guidance for the year.
We continue to expect strong cash collections minimal rent concessions and deferral payments there are still a handful of tenants on our worry list that we are monitoring closely and we have factored in some level of financial support but this is a little more difficult to forecast and a potential source of variability.
We expect incremental quarterly improvement in shop, but given the soft first quarter results our expectation for the full year contribution has been lowered.
Fortunately the balance sheet and our financial profile continue to be pillars of strength with leverage at just four six times over $5 million of liquidity and an <unk> payout ratio at 81, 8%.
We still have some capital we expect to recycle as we conclude our disposition activities and are well positioned to return to our historical investment trends when market conditions improve.
We are content to be patient and believe we are in the enviable position of having significant capital to deploy at a time when capital seems increasingly scarce.
I'll now turn the call over to John to discuss our financial results and guidance in more detail John .
Thank you, Eric and Hello, everyone.
As mentioned, we had a better than forecast first quarter.
For the quarter ended March 31, 2023, our net income NAREIT <unk> and normalized <unk> per diluted common share were <unk> 79.
$1, 16, and $1 11 per share respectively.
For the first quarter RFID was $47 $7 million.
Our first quarter results for our real estate investments segment included two discrete beneficial items totaling approximately $1 $3 million.
First we recognized approximately.
Approximately $700000 in cash collections from two cash on cash basis accounting for amounts that were due in the fourth quarter of 2022.
Second we recognized approximately $600000 from NFC for fiscal year 2022 rents related to the annual true up adjustment of their percentage rent, which is a lease provision unique to MHC.
Provision also increases Nhcd's 2023 rent approximately $160000 per quarter.
The segment's first quarter results also benefited from the collection of approximately $500000 in rent deferrals from four operators plus lower than forecasted new rent concessions.
Than expected performance in our real estate investments segment more than offset the lower than expected shop segments $1 9 million net operating income results.
Interest expense in the first quarter compared to the prior year's fourth quarter increased $1 $6 million, which was largely attributable to new investments and commitments funded using proceeds from our revolver plus the January $125 million private placement maturity they carried a 4% coupon.
Which we're all used which were which we used higher interest rate proceeds from our revolver to fund.
The cash interest rate on our revolver is currently six 5%.
As Eric mentioned, we closed $54 8 million and investments in the first quarter at an average initial first year first year yield of seven 7%.
After reinvesting both retired mortgage investment capital and the $2 5 million and fixed rent deferral additional new capital deployed in the first quarter was approximately $38 million for these investments.
In addition, we continue to fund commitments totaling approximately $9 $4 million as well as funded $10 million earn out as part of our timber ridge joint venture.
The earn out was paid to determine where edge opco, which we own 25% and add to the prop because lease basis increasingly rent and an incremental initial yield of seven 2%.
Last night, we updated our full year 2023 guidance to reflect our strong first quarter results and other guidance modifications.
Our guidance includes continuing asset dispositions rent concessions and low loan repayments throughout 2023.
Our guidance includes $56 $4 million and recently announced investments also continuing fulfillment of our commitments.
Our updated guidance still does not include any additional on identified investments. However, we are now including additional modest repayment of outstanding deferral balances consistent with levels experienced in the last two quarters.
We increased the range of our normalized <unk> per share to $4 37.
To $4 42 for.
From a range of $4 24 to $4 30.
One notable reason for the significant <unk> increased as a change in noncash stock based compensation.
We reduced this item by approximately $3 4 million.
Our <unk> per share.
We also increased our <unk> guidance.
Guidance to a range of $186 3 million to 189, $888 9 million.
During the first quarter, we did not purchase any of our stock under our existing $160 million authorization, which expires in February 2024.
For the first quarter, our leverage ratio was better than expected at four six times net debt to adjusted EBITDA driven largely by the reduction in an accrual for stock based compensation discussed earlier.
During the quarter, we renewed our automatic shelf registration and ATM prospectus supplement.
Which we have not used so we have $500 million available under the program.
At the end of April , we had $201 million and our $700 million revolver and ample liquidity with over $500 million in cash and revolver availability having.
Having said that we continue to evaluate our debt and equity capital market options. So that we're sure to continue to maintain appropriate liquidity levels as maturities occur and our investments rights.
Our next debt maturity is our $220 million term loan due in September followed by a $50 million private placement charity in November .
Although the debt market is very challenging and we're working with our bank Syndicate group and we expect to provide more information to you on our strategy for our debt maturities in the second quarter.
Finally, our first quarter.
That ratio was in line with our expectations at a well covered 81, 8% as.
As we announced last night.
<unk> of directors declared a <unk> 19 per share dividend for shareholders of record June 32023, and payable on August four 2023.
With that I'll now turn the call over to Kevin Kevin.
Thank you John .
I'll concentrate my comments on investment and disposition activity as well as the performance of our major asset classes operators.
We closed on the sale of two properties for net proceeds of $10 million during the first quarter and we sold an additional three properties for net cash proceeds of $5 7 million so far in the second quarter.
We currently have seven property as held for sale with a net book value of approximately $21 million.
Of this total approximately $19 million relates to the two tenants placed on cash basis accounting last quarter.
Similar to our other dispositions. These properties have low single digit NOI yields and sub one lease coverage. So the sales should immediately improve our tenants' financial position.
The current market conditions make it difficult to predict the timing of these dispositions, but our expectation is that the majority will close in the second and third quarters.
While there are plenty of pipeline discussions markets have not been accommodating. So we are not seeing many deals that reflect the reality of changes in the cost of capital.
Finally, we are in a position, where we can be patient and ultimately think well capitalized Reits will be beneficiaries as lenders with less industry expertise to reduce their exposure.
Shifting to asset management.
Overall first quarter contractual cash collections were strong at 98, 4%.
Total coverage for the company improved sequentially to one seven times from 163 times. This was driven by gains in both senior housing and skilled nursing.
Remember that the coverage metrics represent trailing 12 results and do not reflect.
The full impact of the portfolio optimization, improving fundamentals or the strong first quarter results. So we are optimistic we will continue to see favorable trends.
Okay.
In an effort to provide more transparency for analysts and investors.
Now include occupancy information for our different asset classes in the supplemental report.
Total occupancy improved year over year by 400 basis points to 81, 3% on a 440 basis point increase in senior housing and a 350 basis point increase in skilled nursing.
Reviewing the need driven platform, which is 29% of annualized cash NOI and where most of the optimization of targeted.
We again saw positive coverage trends with sequential growth for the fourth straight quarter.
EBITDAR coverage through December improved to 111 times is the highest since the first quarter of 2020.
The increase was driven in large part by Bickford at one point to two six times.
<unk> pro forma coverage, which fully accounts for the April 2022 rent reset was 139 times.
An improvement from $1 three one times reported last quarter.
This was driven by the addition of newly acquired properties in a high single digit rate increase which is helping to offset occupancy pressure.
We received 200000, a deferral payments from Bickford in the first quarter, but we have received over 300000 in the second quarter.
Our bickford portfolio experienced a slight uptick in March occupancy and they are starting to see some momentum build in the sales pipeline lead conversion to move ins.
As I mentioned, we added new occupancy information to our supplemental including a comparison of the bickford occupancy versus Nic map Metro markets.
While there is room for improvement in the occupancy trend.
Nic map out occupancy at 81, 3% and it's still about 90 basis points higher than the competition.
We estimate monthly Revpar is approximately $500 higher.
Aside from Bickford coverages, increasing across our other 44 need driven properties, we reported coverage at one times, which is a gain of 23% year over year in the fifth straight quarter of sequential improvement.
While the improvement is encouraging one times coverage still implies that these operators are struggling.
We are incorporating some level of unidentified rent concessions into the guidance, which is based on the ongoing conversations we're having with a small number of the need driven tenants. In addition to tenants already on cash basis accounting.
Continuing with our discretionary senior housing portfolio. This group accounts for 29% of adjusted NOI, including 26% from entrance fee communities, which continue to perform well.
SLC, our largest tenant at coverage of one seven times, which was down from one to two times last quarter. Fortunately first quarter entrance fee sales were strong.
Agency utilization was down in occupancy trends remained above pre pandemic levels.
Our senior housing discretionary coverage, excluding SLC, which largely reflects the performance of our other entrance fee communities improved sequentially to 175 times from 169 times.
The sniff and specialty hospital portfolio, which represents 36% of annualized adjusted NOI continues to have solid coverage at 248 times, which was up sequentially from $2 four two times on improvement at both NFC and the other operators.
We are monitoring Medicaid rates in our 10 sniff states as the public health emergency and this week and the App.
Matt add on is phased out during 2023.
We expect to hear more about Texas, and Florida, our two largest states by revenue in the coming weeks.
We also expect that CMS will soon release, a proposed staffing mandate. So we will communicate with our operators and trade groups as those details emerge.
Our sniff portfolio is anchored by an HD and enzyme which are best in class operators. So we have great confidence that they will be able to adapt to staffing requirements and any other regulatory changes as they have done so many times in the past.
Lastly, in our shop portfolio, which represents 3% of adjusted NOI. We experienced continued pressure on the margins with declined slightly to 16, 2% on week occupancy and higher expenses.
We had anticipated that the repositioning of the assets under new management would have been showing better progress at this point.
So shop is a relatively small piece of our total portfolio. It is strategically significant as a source of both internal and external growth for our company.
While we have tempered our near term expectations. The long term outlook has not changed and we are committed to employing the resources necessary to achieve that goal.
That concludes our prepared remarks, operator, please open the line for questions.
Thank you.
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One moment please for the first question.
And our first question is from the line of John Kim with BMO capital markets. Please go ahead.
Thank you.
Eric you gave some.
I think <unk>.
<unk> messages on your shop expectations, I think you were saying longer term your views haven't changed but when you look at your presentation you.
To reiterate the 30 mid 30% margin opportunity you removed the $6 million to $8 million upside.
I just wanted to know.
Ask you about the slight changes you made to your presentation and when do you expect to get to that mid 30% margin level.
Hey, John good.
To hear from you in Europe .
Youre right I think that.
I was hoping that would start showing up this year, but.
<unk>.
It looks like it's going to be more of a next year.
Improvement.
Okay.
Okay.
Okay, but overall, its just and you're you're just a timing related issue in that.
Brian overly concerned about the traction that youre getting on shop.
No no I mean, those those buildings changed operators three times in the past year, so they've been through a lot.
And I've had the opportunity to tour many of those buildings and.
See what needs to be done we also had delayed capex because as I'm sure you're well aware it was hard to get vendors hard to get materials.
This past year, so capex projects that we're going to improve curb appeal and marketability.
Just getting underway now so all of that means that our expectations have to be pushed back.
Okay. My second question is on Bickford the coverage has.
Gotten noticeably improved.
Especially on a pro forma basis.
I just wanted to ask about the occupancy trends because even though it's above Nic map, it's been trending lower I think you mentioned part of that as rates driven but.
When do you think occupancy will improve.
On your fixed rate portfolio.
So John this is Kevin we're starting to see the beginnings of that now.
Lead volume tour volume in move in volume is starting to increase we have seen.
Some seasonally normal move outs, which they clearly havent covered with the with the move ins over the last few months, but again, we're starting to see the key indicators improve our expectation would be that through the spring they'll start to get some more momentum on believes tours and move.
And like I said, we're starting to see that now I think tends to be that.
April May June tend to be the better seasons for move ins. So we're watching that very closely we think they are doing all the right things to try and pull levers put people in the right spot to be successful and get those move ins.
So.
Stay tuned, but like I said, we're starting to see the beginnings of that again.
Okay. One more question if I may on your on your guidance for this year what's.
What's included as far as.
G&A.
And also can you discuss the impetus for the change in your stock based comp.
As part of your guidance.
Hey, John This is John Spaid.
Not sure how I can help you with whats in G&A, we're not expecting that to materially change.
Change from a cash G&A standpoint quarter over quarter, if that helps.
The large reduction in <unk>.
G&A.
Expanse attributable to noncash stock comp, which was just.
The compensation Committee and the board of Directors Post Q4 earnings.
Materially change the comp structure, which resulted in a.
A fairly significant reduction in executive compensation.
And so you can see that clearly in terms of the number of shares awarded.
In our Q, there's also a supplemental proxy filing.
That was filed at the end of April as a part of our proxy process that has some discussion more discussion about the strategy of the board of directors and the compensation Committee.
For noncash stock comp moving forward.
And John that gets reviewed as far as the top.
Matrix that gets reviewed once a year.
Correct.
Okay.
Great. Thank you.
Thanks, John .
Our next question is from the line of Austin, where Smith with Keybanc capital markets. Please go ahead.
Hey, everybody.
Just wanted to revisit the shop question. There. So you say that the sharp recovery is it 2024 event now is that specific to achieving that mid 30% margin that you highlighted in the presentation or related to just seeing some improvement in the annualized run rate of 7% to 8 million you've been at now for the <unk>.
Couple of quarters.
Hey, Austin. This is Kevin our expectation is that we will see incremental improvement quarter over quarter, clearly, there's still work that needs to be done on that.
If we're going to couch, when we'll hit that margin.
My guess would be it would be into 2024 as Eric mentioned.
I'm not ready to say that thats going to be there in the first quarter of 2024, I think thats going to be just again, an incremental improvement quarter over quarter. We do have some expectations of this year that will get improving.
Margins by the end of the year, but again I'm not sure that we're going to be at the.
The mid Thirty's, just yet, but I do think it will be.
Into the Twenty's and at a minimum and then kind of improving from there.
Austin. This is John Spaid I wanted to also follow up on that because the guidance does assume that the shop portfolio continues to improve NOI for the rest of 2023.
We've just had to.
Look our original forecast as a result of the <unk>.
First quarter results.
So the.
The shop NOI is independent living NOI.
And so the majority of the expenses are fixed.
So they are really dependent upon the.
The improvement in NOI at the shop portfolio is really dependent on.
Occupancy growth, so so pay attention to what's happening there as we move forward.
Yes that makes sense and you started to hit on my next follow up which was how much of an impacted the change to your shop outlook have on.
<unk> on your guidance.
Well I can't give you that number specifically, we don't we don't publish that number but it was it was significant it was not.
No.
You can kind of see it when you look at the.
Numbers when you compare how much improvement we had in the first quarter based on our results and then you kind of look forward to the end of the year and the lift we see in the numbers youll see a much more muted lift in the rest of the year.
The largest component of that is the reduction in NOI that we assumed.
For the remainder of the year and shop.
Understood and then just one one more for me it looks like you remove two properties from the held for sale bucket and just curious what the decision there was.
Related to.
For those two thank you.
Sure. This is Kevin we talked a little bit about in our prepared remarks, just that the.
Environment right now is very difficult for financing and a couple of the properties that we had in held for sale were more opportunistic where people came to us with.
Letters of interest that we're we felt it was.
Meaningful to go ahead and pursue it but they werent necessarily properties, we were circling for sale originally.
So again opportunistic and then when the debt markets continue to change they couldnt execute at the price that they are.
Had originally come forth with it.
It wasn't one that we felt like we just had to keep pushing on so we've pulled them back into the portfolio.
So fair to say these are income producing assets with much better coverage than the assets currently held for sale.
Relatively speaking, yes, they're ones that are better than what we have held for sale. They produce some level of income.
It would still be.
An incremental improvement to move them, but not at any price.
Okay got it thanks for the time.
As a reminder to register for a question. Please press the one followed by the four.
Our next question is from the line of Tayo Okusanya with credit Suisse.
Go ahead.
Hi, good afternoon, everyone.
John .
Still trying to understand the kind of what's driving all the changes in the guidance again when I take a look at one queue. Thank you.
I now have the pickup of the lower G&A and things like that.
Is that kind of feels like it's all one time and would you kind of say, it's all one time items that have kind of driven.
The increase in guidance or is there anything in the quarter.
And that's also translating to better earnings growth in future quarters, and if there's any offsets to that that sounds low.
It sounds like low expectations on shop, now and just trying to understand some of the moving pieces that results in this new guidance number.
Yes, sure well it depends on what line Youre talking about so let's just start at the <unk> line the <unk>.
Material changed <unk> was due to the.
Reduction in executive compensation or compensation attributable to noncash stock comp.
So that lifted <unk> considerably.
And that's probably the largest piece of that then there were the one time effects that you've talked about inside those onetime effects, though are our escalations also that will continue to contribute for the rest of the year.
You might have noticed in my prepared remarks, I talked a little bit about for example, the NAC escalator.
That will continue to flow through in the second third and fourth quarters, there are others as well.
That we picked up in those numbers.
As well.
The other the other aspect that you don't see that I can't give you a lot of color on is how we're feeling about concessions. So.
So concessions in our forecast.
Were higher at.
At the beginning of the year, we had literally no concessions unexpected concessions in the first quarter and Thats Great News.
And so we've lowered our outlook for necessary concessions for the rest of the year. So that's helped quite a bit and that flows all the way down to the D line.
The other thing that.
Other piece that caused some movement was a reduction in our expectations for shop NOI.
And so putting all of those major pieces together, there's quite a few other smaller pieces too is kind of how.
Our guidance.
Was adjusted.
Between February guidance and the guidance, we issued today last night.
Okay, that's actually very helpful.
Then.
Kevin.
In your prepared comments you did discuss.
The the needs based coverage is still one time youre still having some conversations with some tenants.
And that group about how to help them again is all of that all kind of built into guidance as well and if not I don't know whether it is a way to kind of quantify what could be the potential outcome there.
So speaking for John for a little bit of this but let's say, we tried to factor that into guidance as much as we could.
We've talked about having some level of unidentified amount in the in our forecast as we think about the portfolio I think the comment is still the same as we talked about last quarter is we're talking about.
Kind of that bottom, 5% of the portfolio people that were working with on a very regular basis, keeping very close tabs on and making sure that we give them.
We have the best chance for success with those relationships. So.
We factored in a bit of that.
Hopefully, we don't need to use it but we wanted to make sure that we were.
Forecasting based on what we're seeing in the environment right now, which people are still are having a little bit of challenge.
On occupancy it depends on their markets and Labour wallets, it's smooth it out to some degree we're seeing less agency and overtime wages are still significantly up. So there is still some pressure on a subset of these operators and we just want to make sure we're mindful of that.
Tayo. This is John again, let me add on another piece and that is our dispositions that we've been strategically.
Making over the last year have been part and parcel with.
Helping our operators improved coverage.
And what you've seen is those coverage ratios have gotten materially better result of our portfolio optimization, we still have a few more to do.
The environment for making those dispositions has gotten more difficult.
Those dispositions.
Whether or not we can actually get them done financings available for the buyers et cetera.
It plays a big part of our thinking around concessions.
The other piece that I want to also emphasize that I forgot to mention is for the first time, we're feeling a little more confident about our ability to collect deferrals. So that deferral collection is now part of our guidance as well.
I don't want to in this conversation without highlighting that once more.
Gotcha, Okay. That's helpful. Thank you.
And there are no further questions on the phone lines at this time I'll turn the presentation back to the speakers for any closing remarks.
Thanks, everyone for joining today and we'll look forward to seeing you in person at NAREIT in New York next month.
Okay.
Thank you that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Right.
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