Q4 2024 National Health Investors Inc Earnings Call
Speaker Change: Good day, everyone, and welcome to the National Health Investor's 4th Quarter 2024 Earnings Webcast and Conference Call.
Speaker Change: At this time, all participants have been placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star 1 on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation.
Speaker Change: It is now my pleasure to turn the floor over to your host, Dana Hambly. Sir, the floor is yours.
Speaker Change: Thank you and welcome to the National Health Investors Conference call to review results for the fourth quarter of 2024. On the call today are Eric Mendelson, President and CEO, Kevin Pascoe, Chief Investment Officer, John Spaid, Chief Financial Officer, and David Travis, Chief Accounting Officer.
Speaker Change: The results as well as notice of the accessibility of this conference call were released after the market closed yesterday in a press release That's been covered by the financial media
Speaker Change: 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.
Speaker Change: All forward-looking statements represent NHI's judgment as of the date of this conference call.
Speaker Change: 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-K for the year ended December 31, 2024.
Speaker Change: Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhiread.com.
Speaker Change: 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 furnished on Form 8K to the SEC.
Speaker Change: Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.
Speaker Change: I'll now turn the call over to our CEO, Eric Mendelson.
Eric Mendelson: Hello and thanks to everyone for joining us today. We ended the year on a strong note as the fourth quarter results exceeded our expectations with contributions from across the portfolio.
Eric Mendelson: Are cash rent increased by nearly 9% year-over-year on solid organic growth from rent step-ups and deferral repayments as well as increased investment activity?
Eric Mendelson: while our balance sheet leverage ticked down to 4.1 times from 4.4 times in the third quarter.
Eric Mendelson: Our hard work performed during the portfolio optimization contributed meaningfully to 2024. This included over $11 million in total deferral repayments and approximately 17% growth in Bickford's cash rental income.
Eric Mendelson: CHOP NOI increased by approximately 32%, which was above the high end of our guidance, driven mainly by improved occupancy and 350 basis points of margin improvement.
Eric Mendelson: From a capital allocation perspective, we announced over $235 million at an average yield of approximately 8.6%. This was our most active year since 2019, and the momentum is clearly building.
Eric Mendelson: As a result, the company delivered growth in annual NARIT FFO, Normalized FFO, and FAD for the first time since 2020.
Eric Mendelson: And while that growth is not linear, we exceeded the high end of our original February guidance for the full year. John will provide more details in his comments.
Eric Mendelson: Looking forward to 2025, we expect growth to continue as reflected in guidance.
Eric Mendelson: As noted a moment ago, our 2024 results were bolstered by rent step-ups and deferral repayments resulting from the effects of COVID-era restructuring.
Eric Mendelson: While we still expect some benefit to accrue from the 2025 financial results, we are looking for other avenues to support internal growth.
Eric Mendelson: Specifically, we're considering select opportunities to transition triple net senior housing assets to shop structures where we see excellent long-term potential with existing or new operators.
Eric Mendelson: The senior housing industry has exceptional tailwinds, so we believe this strategy is a capital-efficient way to improve shareholder value by increasing our overall exposure to senior housing operations and working with strong partners to generate greater cash flow and higher real estate valuations.
Eric Mendelson: We also continue to see significant organic upside in our existing shop platform. With the portfolio operating at close to 90%, we plan to strategically increase REV4 to further drive margin expansion.
Eric Mendelson: After 32% NOI growth in 2024, we're guiding to 12% to 15% in 2025.
Eric Mendelson: As John will detail in his comments, we are including $225 million of incremental investments in our guidance reflecting our high conviction in the near-term outlook.
Eric Mendelson: While we're not including any investments beyond that, I think it's safe to say that we'd be disappointed if we did not surpass last year's total of $237.5 million.
Eric Mendelson: We're off to a good start in 2025. We closed 21.2 million sale lease back in January, have 152.3 million under signed LOIs, and in addition, we have an active pipeline of approximately 190 million.
Eric Mendelson: In closing, I'm pleased with the execution in 2024, and I'm very optimistic that 2025 will be an even more productive year.
Eric Mendelson: While the interest rate environment has weighed recently on the cost of capital, we still have the capacity and ability to move more quickly than other capital providers to the senior housing sector who have either scaled back their exposure or exited the industry entirely.
Eric Mendelson: As operators rush to take advantage of the most favorable industry fundamentals in the history of senior housing, NHI is competitively positioned as the partner of choice, which convinces us that we're in the early days of multiple years of exceptional growth.
Eric Mendelson: Before I turn the call over, I wanna briefly comment on the recent filing in which Land and Buildings has nominated two candidates for election to our board of directors at the upcoming annual shareholder meeting.
Eric Mendelson: The company and the board take information received from shareholders very seriously.
Eric Mendelson: As such, the Board has made significant changes over the last several years which reflect its commitment to its fiduciary responsibility and in direct response to shareholder concerns.
Eric Mendelson: We appreciate everyone's interest and hope that you'll understand that we have no further comment on this matter.
Eric Mendelson: I'll now turn the call over to Kevin to provide more details on our operations. Kevin.
Kevin Pascoe: We have $152.3 million in board-approved deals with an average yield of 8.2% that are expected to close in the first half of this year.
Eric Mendelson: This includes a mix of senior housing sale leaseback and real estate acquisitions, as well as mortgage and construction loans with purchase options.
Kevin Pascoe: We also have an actionable pipeline of approximately $190 million in investments which have a reasonable chance of closing within the next 12 months.
Kevin Pascoe: Not included in this figure are portfolio deals, including shop deals.
Kevin Pascoe: Turning to asset management, I wanted to comment specifically on a mass release on six properties in a partnership with Discovery Senior Living.
Kevin Pascoe: As you will recall, we amended this lease in November of 2023 with a scheduled May 1st, 2025 reset to a minimum of a 5% yield on gross investment.
Kevin Pascoe: While we have seen NOI growth, the buildings have not performed as expected, so we are evaluating several options, including transitioning the properties to another operator. These properties generated $4.5 million in 2024 base rent and approximately $1.2 million in deferral repayments.
Kevin Pascoe: While no final decisions have been made, we currently model a slight increase in the base rent, but not the levels contemplated in the 2023 amendment.
Kevin Pascoe: We expect to provide a more detailed update on this portfolio as we continue our evaluation.
Kevin Pascoe: Now turning to the results, we have another good quarter with improving EPDARM coverage and cash collections, as well as solid contributions from acquisitions and shop growth.
Kevin Pascoe: The need-driven operators again had positive coverage trends with EBITDARM at 1.41 times. McPherson's coverage adjusted for the April 2024 rent reset was 1.63 times.
Kevin Pascoe: while the other needs driven and its coverage improved sequentially to 1.22 times from 1.15 times.
Kevin Pascoe: We made good progress on repositioning the SLM portfolio and expect that we will have recaptured a significant portion of that NOI by the end of 2025.
Kevin Pascoe: Of the four lease properties, one was transitioned to the William James Group in October, with cash rent commencing April 1st.
Kevin Pascoe: Two properties in Louisiana are now under triple net lease effective in January of this year And the remaining property was sold for 9.7 million in net proceeds of which NHI provided 9.4 million in financing at 8.5 percent during the full quarter
Kevin Pascoe: Earlier this month we took ownership of the Florida property that secured our $10 million mortgage note and are leasing it to Mainstay. We are still evaluating options on the $14.5 million mezzanine loans on which we carry a substantial reserve and will provide more details when available.
Kevin Pascoe: Our entrance fee and skilled nursing portfolios continue to show great performance.
Kevin Pascoe: The discretionary senior housing portfolio, which includes our entrance fee portfolio, has coverage of 1.7 times compared to 1.6 times in the sequential period.
Kevin Pascoe: The SNF portfolio reported solid coverage at 3.05 times, which improved sequentially from 3.04 times. Recall that the SNF coverage is largely driven by NHC, which is calculated using a fixed charge coverage at the corporate level as opposed to a facility level EBITDARM.
Kevin Pascoe: Lastly, in SHOP, the momentum we saw throughout the year continued through the fourth quarter.
Kevin Pascoe: NOI increased 12.5% year-over-year to 3.2 million. Resident fees increased by 8.1% year-over-year, driven by occupancy improvement of 620 basis points to 89.4%.
Kevin Pascoe: The margin improved 90 basis points to 23.2 percent, which was the strongest result since the second quarter of 2022.
Kevin Pascoe: With the portfolio occupancy approaching 90%, we are starting to strategically target REV4 growth as the primary driver to margin expansion. For the quarter, REV4 increased 60 basis points.
Kevin Pascoe: While small, this was actually the largest REV4 increase since we started operating the shop platform. We see plenty of runway for organic upside in shop and target NOI growth of 12-15% this year.
Kevin Pascoe: And with the expectations for several hundred basis points of margin improvement over the long term, we expect elevated NOI growth for the foreseeable future.
Kevin Pascoe: The portfolio is expected to show normal seasonal patterns with occupancy and NLI dipping in the first quarter and improving throughout the year.
Kevin Pascoe: I'll now turn the call over to John to discuss our financial results and guidance. John? Thank you, Kevin, and hello, everyone. For the year ended December 31st, 2024, our net income per daily common share was $3.13, unchanged from the prior year.
Kevin Pascoe: Our NERI FFO results per diluted common share for the year and quarter ended December 31st, 2024, compared to the prior year periods, increased 3.6% and 13.8% to $4.55 and $1.24, respectively.
Kevin Pascoe: In the fourth quarter, we recognized a non-cash, non-operating gain of $6.3 million related to our forward ATM equity activity that is reflected in net income and NARIT FFO.
I'll talk more about this item in a moment.
Kevin Pascoe: Our normalized FFO results per diluted common share for the year and quarter ended December 31st increased 2.5% and 2.8% to $4.44 and $1.12 respectively as compared to the prior year periods.
Kevin Pascoe: Sequentially, compared to the third quarter, cash rent for the fourth quarter increased $2.6 million, largely attributable to $2.3 million in new rent associated with the Spring Harbor Portfolio acquisition, but also due to higher sequential deferred rent collections.
Kevin Pascoe: Those increases were partially offset by other changes, including $300,000 in lower cash rents attributable to the SLM default.
Kevin Pascoe: NOI from our SHOP portfolio for the year and quarter ended December 31st, increased 32% and 12.5% to $12.2 million and $3.2 million, respectively, compared to the prior year periods.
Kevin Pascoe: Loan and realty losses for the year increased $3.9 million compared to the prior year. The increase was primarily due to the increased reserves on the mortgage and loans related to the SLM default.
Kevin Pascoe: For the year, we made investments of approximately $237.5 million and an average initial yield of 8.6%.
Kevin Pascoe: Our financing activities included forward overnight and equity transactions totaling approximately $272 million in gross proceeds on 3.7 million common shares at a price of $72.54 before fees.
Kevin Pascoe: We also retired $75 million in senior notes utilizing proceeds from our revolver.
Kevin Pascoe: As we previously mentioned in our third quarter earnings call, after closing the Spring Arbor investment we delivered 1.8 million shares under our August forward overnight equity offering for approximately $122.4 million in proceeds.
Kevin Pascoe: As we previously mentioned, our investment activity continues to be very active.
Kevin Pascoe: Subsequent to the Spring Arbor closing through January of this year, we closed an additional $53 million in investments and an average yield of 9%.
Kevin Pascoe: As a result of our investment pipeline during the fourth quarter, we activated our ATM and sold on a forward basis 989,000 common shares at an average price before fees of $76.14 per share.
Kevin Pascoe: As we close the additional investment activity just mentioned, at the end of the year, we settled 266,000 common shares of the ATM forward equity at an adjusted forward price of $75.22 per share after fees for proceeds of approximately $20 million.
Kevin Pascoe: including the remaining escrowed August overnight equity forward proceeds. At the end of the year we had total escrow forward equity proceeds or approximately 118.7 million dollars available to us in exchange for the future delivery of 1.68 million common shares and an average price of $70.53 per share.
Kevin Pascoe: I mentioned in my summary of operating results the $6.3 million gain on forward equity sale agreement recognized in the fourth quarter associated with our ATM equity activity.
Kevin Pascoe: This game was recognized because our forward equity arrangement was deemed not to satisfy all the accounting requirements for equity classification during the time we were raising equity during the quarter.
Kevin Pascoe: The accounting treatment moves some of the equity from paid-in capital to retained earnings via the income statement, so it's more presentation than substance and should be viewed through that lens.
Kevin Pascoe: Our balance sheet ended the fourth quarter and you're in great shape. Our net debt to adjusted EBITDA ratio was 4.1 times for the fourth quarter, well within our stated four to five times leverage policy.
Kevin Pascoe: We ended the year with approximately $425 million in available ATM capacity, and as I mentioned, we continue to have approximately $119 million in remaining Equity Forward proceeds available to us.
Kevin Pascoe: At the end of January, we had $327 million of availability on our revolver.
Kevin Pascoe: For 2025, we're focused on the company's liquidity needs as we continue to make investments and plan for the retirement of our maturing debt.
Kevin Pascoe: We intend to exercise our right to extend our $200 million term loans maturity date into 2026.
Kevin Pascoe: And we will retire our other maturing 2025 debt totaling $125.8 million.
Kevin Pascoe: We are monitoring long-term bond rates and continue to expect to tap the public bond market in 2025 to further improve our liquidity.
Let me now turn to our dividend and guidance.
Kevin Pascoe: As we announced last night, our Board of Directors declared a 90 cent per share dividend for shareholders of record March 31st, 2025 and payable May 2nd, 2025.
Last night we also issued our full year 2025 guidance.
Kevin Pascoe: Our guidance for NAREAD FFO and normalized FFO per diluted common share at the midpoint says $4.63 for 1.8% and 4.3% increases respectively over 2024.
Kevin Pascoe: Our guidance for FAD at the midpoint is $221.7 million, or an 8.6% increase over 2024.
Kevin Pascoe: Our guidance this year includes the impacts from escrowed forward equity proceeds during the year. So, because our confidence in our pipeline has led us to raise significant forward equity, today we are including in guidance our view on our future 2025 Unidentified Investment Activity.
Kevin Pascoe: Our 2025 guidance includes $225 million in new investments and an average yield of 8.1%.
Kevin Pascoe: The timing for the investments is generally assumed to occur relatively over the year.
Kevin Pascoe: In the future, we may discontinue giving guidance for unidentified investments should we discontinue obtaining equity on a forward basis.
Kevin Pascoe: Our guidance includes shop NOI growth in the range of 12 to 15 percent over 2024.
Kevin Pascoe: Our guidance includes the continued collection of deferred rents and the fulfillment of our existing commitments.
Kevin Pascoe: It also includes our preliminary assumptions for the annual NHC percentage revenue rent increase and the Discovery PropCo May 1, 2025 rent step-up.
Kevin Pascoe: The anticipated discovery lease modification will likely result in change of the portfolio's GAAP revenues.
Kevin Pascoe: Finally, guidance continues to include assumptions for additional costs and concessions related to normal asset management transitions, dispositions, and loan repayments.
Kevin Pascoe: So once again, thank you all for joining our call today. That concludes our prepared remarks. So with that, Operator, please open the lines for questions.
Kevin Pascoe: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time.
Speaker Change: We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.
Kevin Pascoe: Once again, if you have any questions or comments, please press star 1 on your phone.
Speaker Change: Your first question is coming from Rich Anderson from Wedbush. Your line is live.
Rich Anderson: Thanks. Good, good morning. So on the SLM, if you could just sort of triangulate that for me, John, how much rent and interest income did you generate in 2024 and how much are you expected?
to generate in 2025 inside the framework of your guidance.
Rich Anderson: So, you know, rent and interest, including our mezzanine loan, would be probably closer to 55%.
2025 versus 2024.
Rich Anderson: on a, you know, say, full year, full quarter over full quarter basis when we get to the end of the year?
Okay, so run right by the fourth quarter.
Rich Anderson: Yeah, but the mezzanine loan, and Kevin can talk more about this, is still in a state of flux. That could improve materially.
Rich Anderson: Well, before Kevin jimes in, what about on just rent? Would it be... Yeah, so it would be about 70% of rent.
Right, I was trying to get to that.
Rich Anderson: Can you guys comment on the Mez piece? I know it's a TBD at the moment, but any more color there? 14.5 million?
This is Kevin.
Rich Anderson: As you said, it's TBD, but we're looking at several alternatives. We know that the company, SLM, is going through a sale process. We're negotiating with them on what a recovery would look like, assuming that they execute the sale.
Rich Anderson: Financing right now is still not terribly easy to come by, particularly on distressed properties, but there are a few in there that are producing NOI, so we expect to...
Rich Anderson: My expectation is that we have some element of a recovery. We're still, in terms of dollar size, don't know. We're looking at alternatives in terms of, you know, what can we do? Is there a buy opportunity or for us to step in and help a prospective buyer if it's somebody that we want to work with? So we've got a lot of options on the table. So it's still...
Rich Anderson: As you think about it, what we're trying to do is collect our principle.
on the mezzanine load.
Rich Anderson: You know and then of course we would redeploy it, but if we can collect that principal You know depending on how much we collect We could you know recoup some of our credit loss reserve and then redeploy the proceeds at the very least you know It would go to pay down or right now or five and a half percent cost revolver
Good.
Speaker Change: Second question, you're not talking about land and buildings, so I understand that, but on NHC, that expires in 2026. I know it's not too soon to be...
Speaker Change: talking about that. You know, over three times on a corporate level, I guess at the property level, it's got a two-handle on it. You may not comment on that, maybe you will, but what's the market in your mind for those assets in their markets?
Speaker Change: in terms of what would be appropriate market coverage should you get, you know, a fair deal out of that lease expiration.
Speaker Change: Hey Rich, this is Eric. The market is very robust for these buildings. They're in good markets. A market coverage, in my opinion, would be 1.3, 1.4.
Speaker Change: publicly listed lease, NHC does have the right to retain personal property, so you'd have some CapEx or FF&E costs on a transition.
Speaker Change: But, you know, there's room to maneuver there and, you know, we're having active discussions now with NHC and other interested parties.
Okay, sounds good. Thanks very much. Thanks, Rich.
Speaker Change: Thank you. Your next question is coming from Juan Sanabria from BMO Capital Markets. Your line is live.
Juan Sanabria: Hi, good morning. Just with regards to SHOP, I'm hoping you could talk about the piece parts to guidance with regards to assumptions behind occupancy and rate behind the 12 to 15 percent. And then maybe as part of that, if you could expound upon
Juan Sanabria: the comments made by Eric at the top of the call about considering some transitions that sounded like of existing operators from TripleNet to SHOP.
Juan Sanabria: Hey Juan, this is Kevin. In terms of how we're looking at performance for SHOP over the year, we had good momentum throughout 2024.
Juan Sanabria: feel like we ended the year on a high note. As we also talked about in our prepared remarks, you know, we have some seasonality in the first quarter and then we're looking back at getting momentum on occupancy throughout the month.
Juan Sanabria: balance of the year and being able to push REV4 over that period. So, when we take in those pieces, we think that we can continue to grow it. Again, the 12 to 15 percent that we mentioned on a year-over-year basis, there might be some opportunity there, where we're evaluating some more
Juan Sanabria: Operational structures and how there might be some cost savings here and there. Overall though it is going to be more of a revenue play and a lot of it is just reducing the incentives and as they continue to burn off we'll see the REV4 climb a little bit higher. We talked about it going up.
Juan Sanabria: a bit, quarter over quarter, and we're looking to see that continue to improve throughout the year. So, I think we've pushed our operating partners to, you know,
Juan Sanabria: be able to continue to deliver better performance. We're still continuing to put CapEx into these buildings, which the delivery of that will also help as we look at REV4 and performance. We've got some more work to do on that.
Juan Sanabria: I mean, I think that's just how we were building the forecast for the year and thinking about where we can go with this portfolio.
Speaker Change: Great. And then I was just hoping you could comment on Bickford, it looks like.
the second half of the year from the late summer.
Speaker Change: I saw a deterioration in the occupancy from the same pool that you disclosed in the press release. Just...
Speaker Change: What's driving that? Any pause or thoughts or concerns around that loss of momentum?
Speaker Change: NOI look at the portfolio. And then you have some some seasonality as well that I think started creeping in there in some of the winter months.
Speaker Change: So, I think they can still be successful throughout the year. They are known for delivering, you know, higher acuity care. It's going to be at a higher price point, so some of the people that moved in that were maybe on the edge in terms of affordability.
Speaker Change: decided to move out, but they've done a really nice job or continue to do a really nice job of selling the care that they deliver.
But I think that's part of the
the occupancy piece that you're seeing there.
Thank you.
Speaker Change: Thank you. Your next question is coming from Amocha Okusanya from Deutsche Bank.
Your line is live.
Amocha Okusanya: Yes, good morning everyone. Kevin, hopefully you can help me understand the acquisition guidance a little bit better.
225 million bills in.
Amocha Okusanya: But it sounds like you have 150 plus or so already in LOIs and a pipeline of 190 So could you help us reconcile a little bit that 340 versus guidance of 225 Especially when you still have another kind of 10 months to go in the year
Amocha Okusanya: Sure, this is John Tayo. How are you doing? Let me take that one. Yeah, so in our guidance is our expectation to close a number of those
Amocha Okusanya: properties in the LOI. But, you know, they're under LOI, so they're not definitive agreements just yet. So we have high degree of confidence that we're gonna be able to hit the number in our guidance.
Amocha Okusanya: Our guidance is a combination of sale leasebacks as well as additional mortgage loans.
Amocha Okusanya: That's how we got to the weighted average yield. We expect to under-promise and over-deliver on that number. And you're right. We have quite a bit more in our pipeline than in our guidance. So there's some upside there, clearly.
Speaker Change: Okay, that's helpful. And then second question also on deferred rent collection.
Amocha Okusanya: I think it would help us do that as well. You know, the balance is $21 million or so. You collected about $11 million in 2024. Just help us understand what's kind of baked into 2025 and if there's any potential upside there as well.
Amocha Okusanya: Yes, there is upside. Recall though that some of the equations on that $21 million include some deferral credits that if the operators perform or exceed performance, they might get some credits. But generally, our guidance is still in line with what you saw in the fourth quarter for the collection of deferrals.
Amocha Okusanya: and are primarily Bickford. Let me back up a minute. Actually, they're approximately a million, a little over a million dollars a quarter. The fourth quarter was a little ahead of what we forecasted.
Amocha Okusanya: So you have about $4 million baked in for 2025 relative to the $11 million from 2024? That's right.
And the reason for the big slowdown is...
Amocha Okusanya: Well, it depends on the source of the deferrals, right? And there was quite a few extraordinary collections in 2024 that looks very difficult to repeat in 2025.
Amocha Okusanya: You know, for example, Chancellor, you know, paid a $2.5 million number. There were some others, including some from Discovery, that we don't think that are going to be repeatable in 2025. So that's just our guidance right now.
Amocha Okusanya: That's helpful. Then one more for the road. Discovery, how ultimately do you expect that to play out?
Amocha Okusanya: go through kind of different scenarios for that, just kind of giving some of the earlier comments about the profitability not quite getting to where you need to kind of get the work we said you were expecting.
Amocha Okusanya: This is Eric. Is your question regarding the future of the collectability of deferral payments?
Amocha Okusanya: It's a combination of both things. It's the future of the deferrals and also, you know, if you couldn't, you couldn't get the, or you're not going to get the direct reset you were expecting at the reset date.
Amocha Okusanya: I think there was some conversation of you are expecting to step up and rent anyway, but
Speaker Change: Right, okay, so your question is deferrals and then rent resets and then operators who aren't able to make the rent reset.
hurdles
Speaker Change: Yeah, so at that point, you know, we would investigate either re-tenanting the building. Sometimes it's one building in a group of buildings that's the problem. Maybe you sell that one building or re-tenant that one building.
Speaker Change: And as we said in our prepared remarks, we're also doing an analysis to see if converting it to SHOP or RIDEA would result in greater NOI. So everything's on the table in that instance.
Sounds good. Thank you.
Thanks, Troyel.
Speaker Change: Thank you. Your next question is coming from Austin Warschmidt from KeyBank Capital Markets. Your line is live.
Great, thanks, and good morning everyone
Eric, commentary continues to be very positive around investments.
Speaker Change: But I guess when you kind of break out the investment pipeline from the $350 million last quarter and then kind of what's under LOI and in that future pipeline, it's really unchanged. So just curious what your confidence level is that you can continue to backfill that pipeline and what kind of the right size that we should be thinking about on a future pipeline basis, where the right level is.
Kevin Pascoe: Hey Austin, this is Kevin. I would tell you that when we're looking at the 350 million that you quoted, you're right it's a similar size but it's a different opportunity set. We continue to look at
a bunch of different opportunities, I can tell you that
If we looked at the total funnel, it's...
Kevin Pascoe: you know, a couple billion dollars in terms of what we're looking at at any given time, which again continues to churn, you know, week over week and month over month. So I feel pretty good about the opportunities that we're seeing in front of us. It's really just whittling it down to the ones that we think
Kevin Pascoe: are executable, and then moving on from those that are not. So it may look like a stagnant number, but I can tell you with certainty that it's a pretty new opportunity set each week to month. And we just kind of...
Kevin Pascoe: whittle it down to the ones that we think are actionable. So, as the market sits today, I feel pretty good about our outlook.
Kevin Pascoe: Well, I don't know that I can say anything different than other what we talked about in the preparing remarks, which is.
Kevin Pascoe: Our portfolio deals or shop deals are not included in what we talk about from our investment pipeline. As I just mentioned, we're looking at...
Kevin Pascoe: a pretty meaningful change to the company. So, you know, we're holding back on that. Hey, Austin, this is John. Let me add another two cents to that. You know, in the fourth quarter.
Speaker Change: and a little bit recently, you know, there's been a lot of movement in everybody's cost of capital and we're very sensitive to deploying capital that's accretive.
Speaker Change: So, if you think about it, you know, we're always, you know, looking at the opportunity set and then the long-term interest rates and our stock price. And so, despite, you know, some of the...
Speaker Change: you know, increased cost of capital that we've seen here recently, you know, that opportunity set is still still penciling out well on an accretive basis.
Speaker Change: And then just the last one for me, this I think got asked,
Speaker Change: The presentation last night did highlight potential shop conversion opportunities, and I'm just wondering if you could size up, you know, how big that could be from a gross investment or, you know, in-place NOI perspective, and whether or not the discovery
Speaker Change: TripleNet assets are a consideration for, you know, conversion with a new operator.
Hey Austin, this is Eric.
Austin: Yes, Discovery Portfolio is definitely a possibility, and so are others. You know, we have other operators that
Austin: are currently running RIDEA portfolios for other REITs, have a strong back office, which is one of the criteria we're looking at, and would be a good partner for us to start our RIDEA journey.
Understood. Thanks for all the comments.
Speaker Change: Thank you. Your next question is coming from John Kielichowski from Wells Fargo. Your line is live.
Thank you. Good morning.
Speaker Change: Maybe just, you know, going back to that last question and talking about sizing the opportunity, how about the earnings impact of any shop transitions here? I know that there's probably some elevated CapEx and some transition time associated with those, so I'm not sure if there's, you know, maybe upside to 25 guide or if this will likely roll through to 26.
Speaker Change: Hey, John, this is John Spaid. Yeah, we're very sensitive to that, as a matter of fact, and it ultimately comes down to, you know, earnings growth, NOI growth, transition trauma, and like you said, CapEx requirements.
Speaker Change: So, you know, the opportunities sets vary depending upon the current coverage ratios over the current rent.
So, obviously, if we convert something that's well-covered...
Speaker Change: You know, suddenly all that EBITDAR, if there's no transition trauma, could be very accretive.
Speaker Change: But there's you know whenever there's a transition to a new operator There's going to be some trauma, so we'll have to you know work through that and communicate that properly to you And then of course you know we'll also communicate to you What our expectations are for the you know capex requirements as well, so every opportunity sets a little different
Speaker Change: OK, and then how about when, you know, when might you all start including, you know, shop?
Speaker Change: acquisitions in your pipeline guide and then maybe help us understand what the total opportunity set, what does the end of 25 look like in terms of total shop exposure in your portfolio?
This is Eric. I could see it being...
Speaker Change: 5-10% of our portfolio by end of this year, early next year.
Okay, great. Thank you.
Speaker Change: Thank you. Your next question is coming from Farrell Granath from Bank of America. Your line is live.
Farrell Granath: Thank you for taking my question. I was curious, just in terms of your acquisition pipeline, are you looking to at all expand your skilled nursing portfolio?
Farrell Granath: Hey there, this is Kevin. We're absolutely looking. It's just a matter of getting an opportunity at the right price with the right operator. We have very good skilled nursing operators now.
Farrell Granath: We would love to do more with them. That said, the market's been pretty frothy, we think, from a pricing perspective, and we've been pretty rigorous around our underwriting criteria in terms of our expectations of
Farrell Granath: credit and coverage. So we haven't seen anything lately that we were ready to act on, but we continue to look. We'd love to see that percentage of investment in our
Farrell Granath: portfolio tick up a little bit if we could get something of reasonable size to to add but you know right now again it's just we haven't seen those opportunities but we would absolutely take a look.
Speaker Change: Great and I was hoping to get a few comments just with current news, the House passing their budget through a vote and then with the Senate having their own budget outlined with possible cuts to Medicaid. Any thoughts on how maybe that would impact your business or going forward in your negotiations?
Speaker Change: Sure, this is Kevin again. It's something we're watching, but it's I think too soon to tell. You know, it seems to be teed up that it may affect those programs. That said, from what I've seen so far, it's not explicitly outlined in the in the bill. So...
Speaker Change: We'll be working with our operators to make sure we understand and our other resources that have...
Speaker Change: Closer Intel to what's going on in Washington Anecdotally though what we've heard from our other resources is that it has not cooled the market in terms of skilled nursing and buyers interest or pricing so we'll see where that goes but to date
It still remains a pretty robust market.
Speaker Change: Sorry, one more from me about within your guidance, do you have any bad debt or credit loss assumptions baked in?
Speaker Change: We do, we do, and you got to keep in mind, we're the last...
Speaker Change: Say two years, you're in 2022 to 2024 our mortgage and loan receivables have grown you know right at 8% and and as that grows there's always going to be a certain level of credit loss reserve.
Speaker Change: taken against that growth. And so, you know, our guidance continues to assume growth, which includes growth in mortgage and loans.
Speaker Change: Sorry, is there a sort of base play associated with that?
Speaker Change: No, sorry, I don't have that for you. There is in there, but you know there's a little bit of squishiness to that number depending on we're talking about mezzanine loans or mortgage loans.
Speaker Change: So it's basically an average number. I think what you should do is just use...
2024 was an unusual year because of the SLM reserves.
Speaker Change: But if you were to go back a couple of years and look at the, you know, average CECL reserve on our mortgage and loan portfolio then.
Speaker Change: and then sort of make an assumption of what our growth might look like, you'll get a pretty good number. Okay, I appreciate it. Thank you so much.
Speaker Change: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Juan Sanabria from BMO Capital Markets. Your line is live.
Thank you.
Juan Sanabria: Hi. Thanks for the follow-up, Tom. Just going back to SHOP and incremental investments,
Speaker Change: I think, John, you made an allusion to kind of be a transformative potential transaction. So does that mean that you're looking at potentially buying a platform, so to speak, where you'd have a bigger asset management capability as part of that to oversee?
Speaker Change: a shop investment? I'm just trying to tease out kind of what what you implied by that.
Speaker Change: I don't think I made that implication. You know, one thing I would point out in Kevin's remarks, and Eric's remarks too, is we are looking at some fairly large portfolio transactions that are not included in our pipeline numbers.
And those are so difficult. They're so material.
Speaker Change: You know, they're so difficult to really determine whether or not they're real yet that, you know, it's hard for us to talk about those. But no, in my guidance was not really any transformative.
Um, shop. Sorry, now I've got it.
Speaker Change: I wasn't necessarily talking about what's in guidance, but just what's being contemplated as strategically for the business. Is it a platform or is it more assets that are under a shop structure, I guess is the question.
Hey Juan, this is Eric.
Juan Sanabria: I would say that it's more, you know, smaller portfolios, maybe threes or fours. We definitely would add to our asset management talent pool.
Juan Sanabria: We're almost at that point now anyway, just the pace of acquisitions we've been doing last year and this year.
Juan Sanabria: You know we'll make appropriate overhead and headcount adjustments along the way
Juan Sanabria: And you know our usual cadence before the pandemic was two to 400 million a year. That's a lot of twos and threes and four portfolio deals. That's our sweet spot.
Speaker Change: Great and then just as a follow-up to a prior question about
Speaker Change: any potential dilution from triple net to shop conversions. I guess, are those contemplated conversions being done out of a position of strength or weakness? Meaning, are the conversations or strategies around
leases without great coverage.
Speaker Change: I just am confused why a tenant under a lease would choose to give up that upside if they're quote unquote in the money with the rent covers that they're, that they have.
Juan Sanabria: That's a fair question, Juan. You're absolutely right. If there is coverage on a lease and we wanted to convert it to shop, there would definitely have to be a conversation about.
Juan Sanabria: you know, profit sharing and promotes or bonuses and management fee. The reason though that people would be interested in having that conversation is they probably have personal guarantees or other strong credit in place.
Juan Sanabria: that is meaningful to them, and converting to shop would mean less of that.
Juan Sanabria: And whether or not it's from a position of strength or weakness, you're right about that as well. I mean, it's a conversation that we would have in both instances if a lease isn't working out or the coverage is just above average.
Juan Sanabria: you know, break even, then we need to have a conversation about changing operators, what the CapEx looks like, what a new joint venture partner might do for us, and whether the operations can improve based on all of that.
Juan Sanabria: Okay, and thank you for that. And just one last quick one for me, the guidance...
Juan Sanabria: has like a shop CapEx number. Is there anything over and above that for kind of deferred CapEx or more redevelopment type CapEx that has been spent or is intended to be spent to help the pricing power of the asset?
Juan Sanabria: There is. There is. You know, the number that's in our guidance is a recurring CapEx number. The number that we're continuing to deploy in our current shop portfolio is, you know, closer to ten million dollars.
Juan Sanabria: and we're, you know, repositioning those assets to, you know, get at that NOI improvement.
Great, thank you. You're welcome. Thanks a lot.
Juan Sanabria: Thank you. That concludes our Q&A session. I will now hand the conference back to Chief Executive Officer Eric Mendelson for closing remarks. Please go ahead.
Juan Sanabria: Thanks everyone for your time and attention today and we'll look forward to seeing you at NIC or other investor conferences.