National Health Investors, Inc. (NHI) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors fourth quarter 2012 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, February 15, 2013. I would now like to turn the conference over to Tripp Sullivan with Corporate Communications. Please go ahead.

Thank you, good afternoon. Welcome to the National Health Investors conference call to review the company's results for the fourth quarter of 2012. On the call today would be Justin Hutchens, President and Chief Executive Officer, and Roger Hopkins, Chief Accounting Officer. The results as well as notice of the accessibility in this conference call on a listen-only basis over the internet were released earlier in a press release that's been covered by the financial media. As we start, let me remind you that statements in this conference call that are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the quarter ended December 31, 2012. Copies of these filings are available on SEC's website at www.sec.gov or at NHI's website at www.nhireit.com. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables and schedules, which has been filed on Form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release, together with all other information provided in that release. I'll now turn the call over to Justin Hutchens. Please go ahead.

Thank you Tripp. Good afternoon everyone, and thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer. It's been quite a strong quarter for NHI and completed a year that helped us reach over $500 million in investment volume over the past three and a half years. We posted a 9% increase in normalized FFO and announced a special dividend of $0.22. In recognition of this growth, the board has elected to increase our dividend for the first quarter to an annualized $2.78 per diluted share which is a 5% annual increase over 2012. We are excited about our success and the continued growth of the company. We have a lot to update you on for the coming year so let me first turn it over to Roger to offer our financial results. Roger?

Thanks, Justin. Good afternoon, everyone. My comments this afternoon are consistent with our disclosures in Form 10-K, our earnings press release and our supplemental data report filed this morning with the SEC. I'm very pleased to report strong, normalized FFO growth for the fourth quarter and the full year. Normalized FFO for the fourth quarter of 2012 rose 9% over the same period in 2011 primarily as a result of revenues from our new investments funded at $82,372,000 in 2011 and $146,092,000 in 2012, including debt assumed and RIDEA structured transaction with Bickford Senior Living. Comparing our lease revenue from 2012 to 2011, our revenue from our tenant Bickford increased $925,000 and revenue from Legend Healthcare increased $788,000 and our revenue from Polaris Hospital Company increased $619,000 due to the timing of our new investments with these tenants in 2011 and 2012. Normalized FFO for the fourth quarter of 2012, was $23,369,000 or $0.84 per diluted share, compared with normalized FFO of $21,448,000, or $0.77 per diluted share the fourth quarter of 2011. Normalized FAD for the fourth quarter of 2012 was $22,771,000 or $0.82 per diluted share compared with $20,908,000 or $0.75 per diluted share for the same year in 2011. Normalized FFO and normalized FAD for the fourth quarter of 2012 excluded the impact on net income of adjustments totaling $9,513,000. During the last week of December, we received a payment from our borrower in full settlement of our mortgage note receivable and recognized a recovery of a previous write-down of $4,495,000 and a gain of $4,650,000 related to an equity participation formula in the note. Net income attributable to common stockholders for the fourth quarter of 2012 is $41,105,000 or $1.48 per diluted share compared with net income of $18,114,000 or $0.65 per diluted share for the…

Thank you, Roger. We had one of our more active quarters in recent memory with a number of investments funding commitments and disposition. November we funded another 10 million to Capital Funding Group which fully funded the $15 million credit facility we established with them last year. This facility matures in 2015. In December we closed on a purchase and lease back transaction on three assisted living facilities, two in Oregon and one in Idaho for a total of 9 million and an initial lease rate of 7.75%. Milestone operates these facilities and has a strong presence on the West Coast. We also completed a purchase and lease back transaction on an assist to living and memory care facility in Wisconsin with Landmark Senior Living for 20.2 million and an initial lease rate of 7.75%. Both of these transactions have strong sponsorship and private paid demographics. In the area of portfolio management we announced in December that our tenant Sunrise Senior Living exercised their purchase option to acquire our senior living campus in New Jersey for 23 million. We also extended our lease with National Healthcare Corporation, our largest tenant through 2026; the lease represents 38 skilled nursing facilities and three independent living facilities. Separately we agreed to sell six older skilled nursing facilities to NHC for 21 million. NHC has one of the stronger credits in the senior care industry and represents approximately 34 % of our revenues today, compared with over 70% a few years ago. This activity in the fourth quarter brought us to $179 million and new investments and commitments in 2012. 82% of that was directed towards private pay assisted living in assisted living campuses. We have averaged a $128 million per year over the past four years. The timing is always tricky; however we…

(Operator Instructions). And our first question comes from the line of Karin Ford with KeyBanc. Please proceed with your question.

Hi, good afternoon. First question is just on Bickford, can you just give us some operating stats on how the portfolio did in the fourth quarter, just with regards to the occupancy, rent growth and NOI growth?

Well, I have occupancy. They ticked up a little bit. The portfolio is 90% occupied in Q4 and continuing that run rate would lend support to the top end of that NOI growth range I gave which is 6%. So we feel really good about the portfolio performance. It's improved since we made the acquisition. Occupancy is up. NOI growth rate is on pace for the top end of that range, but we've got a whole year ahead of us, so we'll see how it plays out.

On the lease, can you just talk about your thoughts on why doing that, what do you think it does for NHI, what the coverage is on the new lease terms and how close you think the rent on that new lease is to market levels today?

Okay let me start with why did we do it. I think your question was related to the National Healthcare Corporation lease extension and asset sale, right?

Correct.

So for starters as you know, it's a big relationship and national healthcare has phenomenally strong credit. So it has been a priority of mine really since I've arrived here four years ago to be sure that we could lock in a lease income stream in long term with them. They've had priorities in their markets and had some particular assets that they identified that if they were to purchase them I think on their side if they would be putting a lower cost of capital in place and for us it would give us an opportunity to take proceeds and recycle into newer assets and as you know, diversification has been a big part of our overall strategy and so this was a way to reduce some skilled nursing concentration and particularly in older asset while meanwhile extending the lease with the phenomenally good credit. So we can sleep real easy until 2026 I think on that relationship. In regards to is it a market lease? I can tell you that that portfolio has been the best return in our portfolio. if there was an increase in base rent that occurred back in '07. There's a revenue escalator that only gets better as time goes on. So I feel really good about the relationship for NHI, the returns we get on it and I don't plan on shopping it in the open market. But I do look forward to the ongoing relationship with them.

And does the coverage level on the lease change at all?

Their coverage is four times, which includes that’s a fixed charge cover and remember they don’t have any debt, we're their only landmark, so their fix charge cover is effectively our coverage ratio. I don’t see that changing much at all. Actually it will get a little better because they are going to apply a lower cost of capital to the assets that they are purchasing. But really the decision wasn’t, didn’t have anything to do with the credit. The credit was strong, it was more around this diversification and extending the relationship of the 2026.

Great, and last question just on the guidance; can you just characterize the acquisitions with their underlying, the higher end of the range, is it sort of your typical, what you’ve got visible today or would you say it’s characterized more by what you said earlier in the comments that you are looking to do roughly the same volume as you have done the last figures.

Let me try to give you as much color as I can without giving you an investment guidance because we try to avoid that. I can tell you this. Our pipeline is very, very active, has not been this active. It's also becoming evident that the broader investment community has realized that the senior care space is a great place to invest so that there is a lot of competition in the space. We do have visibility on investments and we do intend to keep the same investment pace that we had, which has been about $128 million a year over the past four years and, you know, depending on the timing it could impact the top end of the range and so I'll just leave it at that, but I'm optimistic about our investment activity and can assure you that we have plenty in our pipeline to consider and we'll remain selective and strategic when we make investments. So I always like to temper that when I say we're busy because we're always looking for the right fit as well.

Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed.

So, Roger and you might have both said this it’s plenty balance sheet is fine and plenty of room to make your acquisitions, investments, but can you give a sense of I don't know say something really big came along. How big would that thing have to be for you to have to consider or want to consider, the equity capital markets considering, your stock has done well, trades at a premium and all the rest? Just curious what your thoughts are on that.

Well, Rich we don’t have any plans at all for equity, we believe that if we continue our selective growth approach that we’ve had over the past three years that will continue to access sources of debt but still remaining low levered over that period of time, it would take a very sizable almost transformational type transaction for us to consider equity.

Is there anything potentially transformational out there?

If you have something to refer to us, we're happy to look at it. Rich, we're just staying with our game plan which has been smaller portfolios and one off opportunities and relationship driven opportunities and there's plenty of those to keep us busy. companies.

Turning to Bickford and RIDEA generally and again I apologize if you referenced this in your opening remark, I don’t think you did though, do you a number in mind in terms of what the risk premium you required in return on a RIDEA transaction versus an equivalent triple net execution?

We try to just look at every investment as a standalone opportunity and in this case we had some circumstances that gave us about 100 basis points or better I think premium.

Okay.

And I liked the opportunity when we made it because in my view that priced in some of the potential downside operating risks that we could have, but with all the confidence that the portfolio was going to grow and it was poised to grow and we had an operator that has a track record of creating value over many, many years operating. So I would, just remind you, too, that there's -- when you see these real estate retirements that are reported, there's always cash flow above and beyond that and so, for instance, when we did the leaseback fills in December, we reported 7.75 cap rate, but there's some cash flow coverage of beyond that and in that cash flow coverage be above and beyond our lease rate that goes to the operator, they're getting double-digit returns on that. And there is more volatility that cash flow stream and so, when we look at RIDEA, we look at it two parts in mind and one is, the price of a real estate and then the other is the volatility of the cash flow portion of the operator's cash flow portion of the whole portfolio. So in my view help support a little bit higher going in yield if you're going to be an owner of both the operations and the real estate.

Okay, when you look at those to say, 100 million of acquisitions in 2013, not that you're saying that's what it is but what percentage of that do you think would be kind of in RIDEA camp.

I don't know the answer to that. We are pursuing some potential RIDEA partners outside of the Bickford relationship. Just the Bickford relationship alone as I mentioned is adding three new projects that are in construction. Those should open towards the end of the year at the beginning of 14, but in my crystal ball today I would say conservatively none of the 100 million would have a new idea partner but I reserve the right, we do to change our mind about that.

Okay. You're allowed. And then the last question, I just was curious if you could give us anything on this elder trust situation, the lawsuit, you know. Is there any comment you can make about how much we should be worried about that?

Well, I can say this, that there's two nonprofit portfolios, elder trust and senior trust, they're both paying interest payments to us. They're current on their interest payments. We're in litigation over both portfolios and our public filings are up to date. We had an updated disclosure in our 10-K, but besides that it's probably not appropriate to comment any further.

(Operator Instructions) Your next question comes from the line of Rob Mains with Stifel Nicolaus please proceed

I have a couple of accounting questions for you; Bickford, their share goes out by the minority interest line, I assume. what's the equity income line?

What is which line, Rob?

Equity income, on the income statement.

On the income statement you have got the out equity in the net income of the operating company and for the fourth quarter our 85% equity interest in that operating company's net income was $45,000.

Okay that is not unconsolidated.

The operating company is not consolidated.

Right okay, I think so there is no, that's effectively your share of the NOI?

Well that would be their GAAP net income.

So you don't book revenues for their tenant? Tentatively this is nor whether than operating expenses?

That is correct, in the structure that parties agreed to; we don't have control of the operating company. We have a joint financial interest but not control.

The next question, may I correct that rental revenues to not include revenues from the health for sale NHC assets?

That's correct, those six buildings that we agreed to sell during the last week of December, those will be classified as held to sale and any revenues and depreciation that we would have normally had in continuing operations for all periods presented, gets reclassified down to discontinued operations.

Right. So in the fourth quarter since third quarter, it was consolidate fourth quarter wasn’t and you're as reported, third quarter and fourth quarter numbers, what was the document, the top line that you are effectively well over coming there.

The number for the year Rob was $3,368,000. There will be reclassified there from continuing operation to discontinued operations.

And that relates ratably, kind of accrued over the course of the year?

That’s correct.

Okay. And then one last NHC question, is it too early to get an idea what the revenue escalator might be this year given that 2012 was kind of a tough year for the industry, I know NHC fared better than most?

It’s still too early. During the first, no by the end of the first quarter, we’ll true up the percentage revenue calculation as we always do at that time of the year. We don’t know what that number is yet.

The last question, Justin in your comments, you sighted more aggressive pricing and you have talked a little bit about that in the acquisition environment from whom you will receive it, is that you said that there is people getting interested in senior housing, is that other REITS or is it private equities, is it real estate investors kind of, where are you seeing the price pressure emanating from?

The answer is yes. There are smaller REITS in the market place, we don’t tend to run into, you know the obvious peers which will be DTC and we don't run directly into them all that often although it does happen from time to time I think bigger contender is really just the low cost or debt capital that’s available to operators, to outstanding and local bank financing combined with the friends and family equity or institutional private equity and so there is often a consideration that the operators making whenever they use that form of financing or whether they in fact want to sell the real estate or the case of an open market transaction allow us to purchase it and resell to them. And so there is always an option that the operators have and fortunately we've been able to find many very good fits. So like I have turned about the competition, but primarily because of the volume is up out of control, with potential opportunity with more or less just encourages that, and just more signals about regarding the health of the industry.

And the next question is a follow up question from the line of Karin Ford with KeyBanc, please proceed.

Just following up on Rob’s last question. Just then how much do you think cap rates are compressing this turn what you are seeing today?

I think cap rate, again that, well you are probably referring to the private bank assets?

Yes.

I will figure it first, skilled nursing has been very-very flat, very predictable, has a high quality lease cap rate, have a lease cap rate and a very high quality skilled nursing asset. You can get by percent and we have been able to do that. It even drifts up higher than that, and in some places but that the higher quality assets, 9% is good and you are buying it at 12% to 13% cap rate on your net operating income which is about a 1.5 times cover. And then invest it to living, there has been a weak drift to down below 8% for that first quarter, just in this fourth quarter. There is a little bit of compression but it hasn’t been a dramatic move and no sign in the market that look smaller portfolios and the one-off assets that are getting attractive pricing that the large right deal did from the large cap peer group.

Just a question for Roger. You mentioned a few different potential sources for the terming out of the line. Can you just talk about what types of indicative rates you've been seeing for longer term debt today?

I suppose that would depend up on the credit profile of the company, but I would say placement rate from 10 to 12 years would be 4% to 5% HUD rates sub 4% and agency probably in 5% range something like there.

What's the timing on the sale of the skilled nursing facilities to NHC and am I calculating it right, that's a 14 cap on those deals?

That’s a great question, it was – it think was a full cap on our at least income that was the purchase price and the purchase was occurred either the very last day of this year or the first day of 2014, so we have a whole other year just continuing full least payment from NHC and then obviously they'll write us a check for 21 million when that sale occurs and then we’ll have a reduction at least on income moving forward.

Mr. Hutchens, there are no further question at this time. I will turn the call back to you. Please continue with you presentation or closing remark.

Okay I would just like to reiterate our excitement about our progress and our optimism for 2013 and beyond. We appreciate your participation on our call today and we look forward to speaking with you on the first quarter call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.