Greetings, and welcome to the National Health Investors Third Quarter 2023 Earnings Call. At the start of the presentation, all lines will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, we are recording the call today, Wednesday, November 8, 2023. I would now like to turn the conference over to Dana Hambly. Please go ahead.

Thank you, and welcome to the National Health Investors conference call to review the results for the third quarter of 2023. On the call today are Eric Mendelsohn, President and CEO; and Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer. The results as well as notice of the accessibility of this conference call were released after the market closed yesterday in a press release that's been covered by the financial media. Any statements in this conference call which are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended September 30, 2023. The Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireit.com In addition, certain terms used in this call are non-GAAP financial measures. Reconciliations of which are provided in NHI's earnings release and related tables and schedules, which have been furnished on Form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release, together with all other information provided in that release. I'll now turn the call over to our CEO, Eric Mendelsohn.

Hello, and thanks for joining us today. We're pleased to report a very strong quarter with our funds available for distribution or FAD exceeding our expectations by increasing 2% year-over-year and 8% sequentially. These quarterly results were driven by a number of factors, including a stable cash collection rate, record deferral repayments of $2.3 million, discrete catch-up payments of $1 million from two cash basis tenants for past due rent and no unexpected rent concessions. Operating metrics in the real estate investment and Shop segments continue to trend higher, which bolsters our confidence in the organic growth opportunities. Given the outperformance in the third quarter and current visibility into the fourth quarter, we are increasing our FAD guidance for the year. John will provide more details in a few minutes. The foundation for the higher results this quarter is the hard work of our operating partners who continue to make steady improvement in operating fundamentals. EBITDARM coverage increased sequentially across all asset classes and largest tenants. Bickford, for instance, has pushed trailing 12 month rent coverage to 1.45x and we're happy to see that their sales focus continue to drive average occupancy gains through the third quarter, including 85.2% in September, the highest it's been since the start of the pandemic. Bickford repaid over $750,000 in deferrals during the quarter and we expect a similar or higher amount in the fourth quarter. The portfolio's optimization particularly within our needs-driven senior housing portfolio excluding, Bickford, continues to bear fruit with coverage improving for the seventh straight quarter to 1.09 times on a trailing 12 basis. While this coverage is below our comfort level, we're generally encouraged by the trends. These operators repaid deferrals of approximately $1.4 million in the third quarter, which we believe is a good indication that operations continue…

Thank you, Eric. I'll concentrate my comments on investment and disposition activity, as well as the performance of our major asset classes and operators. We closed on the sale of four properties for net proceeds of $8.3 million plus $1.6 million in seller financing in the third quarter and to date in the fourth quarter. These underperforming properties were formally leased by two cash basis tenants, which now puts them in better financial health thereby improving coverage, limiting future rent concessions and accelerating deferral repayment. We currently have one property held-for-sale, which we expect to sell by the end of 2023 or early 2024. During the third quarter, we amended a loan with CFG that increased the balance from $8.1 million to $25 million and increased the rate from 9% to 10%. We are reviewing several new and recycled pipeline deals that would be immediately accretive. As Eric noted though, the interest rate environment has added more friction to the process. Fortunately, we have buyers today with plenty of capital to deploy and expect that our patients will be rewarded. Shifting to asset management. Overall, we had a very successful third quarter with strong cash collections, driven primarily by record deferral repayments, continued occupancy and margin gains across the Real Estate Investments segment and encouraging SHOP performance. With industry trends steadily improving, we are seeing fewer tenant issues, which is allowing our team to shift more resources to the few remaining challenges. This is evident in the significant sequential improvement from the second quarter. Reviewing the need-driven platform, which is 29% of annualized cash NOI, we again saw positive trends with coverage at 1.26 times, representing the sixth straight quarter of sequential growth. Occupancy has been improving year-over-year and sequentially and our operators expect resident rate growth to remain above…

Thank you, Kevin, and hello everyone. For the quarter ended September 30, 2023 our net income, NAREIT FFO and normalized FFO per diluted common share were $0.68, $1.08 and $1.08 per share respectively. For the third quarter, our FAD was $48.2 million. Our third quarter FAD increased by $3.6 million compared to the second quarter of 2023. When compared to the second quarter of 2023, third quarter FAD included $2.3 million of deferral repayments, which was an increase of $1.6 million. The third quarter also benefited from the receipt of $1 million of discrete payments from two tenants on the cash basis of accounting. $800,000 in lower rent concessions and $300,000 in higher interest income. The SHOP portfolio NOI improved modestly to $2.3 million in the third quarter from $2.1 million in the second quarter of 2023. The SHOP CapEx increased by approximately $450,000 so the impact to FAD was a decrease of $200,000. We also benefited from lower expected franchise tax expense, which was $250,000 lower in Q3 compared to Q2 and will continue to benefit our results through the end of the year. I want to mention two items today, which we'll be talking more about as we end the year and issue our 2024 guidance in February. First, we recognize rents from cash basis tenants as received, which include any repayments of deferrals and which impact net income, FFO and FAD when collected. For all other tenants, rental income including any outstanding deferrals collected is recognized on a straight-line basis. That means any repayment of deferrals collected in advance of one contractually owned will positively impact FAD in the period received, but have no effect on our net income or FFO metrics. Remember GAAP rental income generally remains consistent from period to period. So the increased cash…

Thank you. [Operator Instructions] First question comes from Juan Sanabria with BMO Capital Markets. Please proceed.

Good morning guys. Just wanted to ask about Discovery. Kevin gave some parameters on the potential decrease in rent. But just curious how large the contractual in-place rents are today, is the least and a couple of assets being discussed represent all of your triple-net exposure to Discovery that's outlined in the pie? And part two of this question is, can you quantify the potential other tenants in terms of size of rents that are being discussed as the last draft of dealing with some of the COVID adjustments?

Sure. Hey, Juan this is Kevin. Just to make sure I understand your question. I mean, so as we said we have eight buildings with them. They represent about 4% of revenues. We're looking at a modest reduction on the cash pay side with some upside on revenues to -- as they continue to improve. And one thing I would highlight is they have been able to improve both occupancy on our triple net and our SHOP side. Again, I want to make sure I'm answering more specifically the question you had in order of magnitude was what again?

No. I just wanted to make sure that the 10% to 12% reduction you highlighted was applicable to the full 4% of revenues that Discovery represents not a subset. So that answers it. I guess the part B was -- I think there was an illusion to maybe some other smaller tenants that may need to have some production whether temporary or permanent, how big that potentially could be? Just to quantify the potential net impact from the third quarter run rate?

I guess, the way I would characterize that is more around looking at the coverage that was in place being at the 1.09 times exclusive of Bickford. While things have improved quarter-over-quarter, it's not exactly where we want things to be. So while I would say that there's not one specifically that we're overly concerned about. It's more of, I'd call an allowance for doubtful accounts where you have a little bit of a reserve. We've seen that number come down significantly. As we talked about this quarter, we didn't have any unscheduled concessions. So we're -- I think we're on the right trajectory. We're also just being cautious in the way we're managing the portfolio and communicating with the Street.

And then on the SHOP business, just curious if you could talk about the rate environment to drive the new customer volumes and the occupancy really ramp up, and how the two operator discovery in Merrill Gardens you're thinking about annual rate increases versus last year? Just to give us a sense of again, how pricing is changing?

Sure. I mean as we've highlighted the priority has really been to get occupancy. So if you look at our published materials you see that the RevPOR is up slightly, but fairly flat. So it's been a push to get the occupancy. I would characterize the pricing that's been in place as more one-time concessions to get those. So we'll still have our normal increases, we're in our budgeting process. Now I would expect on the whole that you'll see something along the lines of what I mentioned in my prepared remarks in terms of in-place increases. But the fact of the matter is that we're still, again, trying to push that occupancy and using some one-time incentives to get occupancy up which will -- I would think we'll keep RevPOR a little bit flattish for the near term.

Okay. Great. And then just one last one, if you wouldn't mind. Bickford, we've talked about in the past with regards to their credit profile outside of NHI and stress they've had. Any latest thoughts on how that stands and risk to the OpCo, given again, outside of the NHI lease?

Sure. This is Kevin again. I think as we've articulated in prior calls, they do have some owned properties that have bank financing on them. So, again, as we've acknowledged the banking environment is difficult right now. Rates are going up. That does put a little bit of pressure on the cash flow. But we've worked really hard to effectively silo off our portfolio from those effects. There are some things that they're still working on in terms of some maturities they have over the next year or so. They'll need to work with their banking partners to extend and modify those loans. I know they're in those discussions right now. So stay tuned. That said, I feel like as we can show in our information. They're on much better footing now and they're headed in the right direction.

Thank you very much.

Our next question comes from Richard Anderson with Wedbush. Please proceed.

Thanks. Good morning. The situation was -- I'm getting some feedback here. Let me turn it off. Okay. The situation on the discovery both in the SHOP and the Triple Net categories, would you be able to draw a parallel in terms of how they're performing and sort of the reasons why you're kind of giving some rent in the Triple Net space? And also how SHOP is sort of not quite keeping up with the growth profile that you were hoping? Is it sort of a common knitting with Discovery and specifically how they're operating their asset?

Sure. Hey Richard. This is Kevin. So one thing for Discovery I will note is they've seen occupancy improvement on both the Triple Net and the SHOP side. We've seen more velocity on the SHOP side so far this year than we have on Triple Net. That -- we also had one of our first amendments that we made during the pandemic was in this portfolio, where we allowed for a reset, we needed a little more velocity to get to where that rent step-up was going to be. And frankly, the portfolio -- the Triple Net portfolio just hadn't made it yet. So we're looking to just push out that step up for a period of time allow the momentum to continue to build on the occupancy front and then we can reprice. But in the interim, like we did with Bickford, which has worked well, we'll be able to have some revenue participation over a threshold where we start to get some additional deferral repayments. So, not what we wanted to see. The fact of the matter is I think some of it is timing, some of it is just local markets. We have seen a lot more occupancy improvement out of the SHOP portfolio. I would say furthermore I mean I think Merrill and Discovery are doing a good job on SHOP. Merrill had similar challenges on the front end in terms of gaining occupancy within the -- that portfolio. So, there are some things we're focused on within that relationship. I don't think at least as it relates to SHOP they're an outlier in terms of their improvement when just benchmarking them against the other operating partner we have there. I think those properties needed a lot of time and attention to get going in the right direction and we're finally getting there.

Okay. Good enough. So maybe an accounting question for John. You mentioned SLC negative straight-line rent during the second half of their lease term. But is that did you make any comment about negative straight-line rent for all of the portfolio when you net it all together or just for SLC maybe a few others?

No, I was making a broader comment. And I just wanted to mention that there's been maybe an assumption that straight-line revenue is always positive. So, the expectation going forward you should see it flip to negative.

Okay, that's good to know for modeling purposes. And then just so I can recall correctly you mentioned the $34 million outstanding deferred balance that remains after everything that's happened this past quarter. I recall when you guys were going through this that you were not recognizing deferred rent in current period quarterly results and leaving the opportunities that you might actually have like a doubling up scenario when you start to get deferred rents paid back in say third quarter of this year on top of what present tense rent payments. Is that what's going on? Or did you flip that accounting treatment at some point along the way where you're not going to have a doubling up scenario on a go-forward basis?

So, we transitioned from the pandemic relief provisions provided to us to typical lease amendment under 842. And so during 2022 at the very beginning of the year we started talking about how some of those modifications to the leases would mean that the deferrals are going to be brought on to our balance sheet through straight-line revenues. Now, we had a lot of things happened at the very beginning of 2022 including the transition of Bickford to cash basis. So we didn't get an opportunity to more publicly sort of pronounced what was happening there. But I think given the results today we wanted to come back and talk about that again and basically make sure you understand that we have two groups of deferrals. We have deferrals that we collect from our cash basis tenants the ones that are sort of variable in nature. Those flow through everything from net income to FAD. But we have the deferrals that are a part of our GAAP revenues that are being brought into our straight-line revenues that when we early received them have no impact on net income or FFO metrics. So we felt like given our results this is a great time to come back and readdress this situation and highlight it.

And so that's the $1 million that you got early, right?

That's right.

Okay. And then finally for anyone in the room just a broad question. You've had some success about occupancy lift in senior housing. But if you were to recall, how you were feeling 1.5 years ago, would you agree that the low-hanging fruit of occupancy recovery has happened, but it's been really difficult to sort of get back to where we were pre pandemic. I know everyone talks about this high 80s occupancy level for senior housing. I don't know if there's anything magical about that except for the fact that it happened to be the number pre-pandemic. But do you think that the path to get back to some sort of stabilized number whatever it is, is taking longer than you thought or any one thought? Or is it sort of tracking the way you expected it was going to track a year or two ago? Thanks.

Hey Rick, this is Eric. Good question. I agree there was kind of a head fake last December. When we were talking to our operators, they were sure that there would be a steady drumbeat of increased occupancy all year. And if you recall, there was another variant, more flu and the occupancy kind of lost steam. However, this past quarter has made me a believer that there is pent-up demand. If you would have told me that we would have over 300 basis points of improvement in our SHOP portfolio and four or five points of improvement in Bickford in one quarter, I would have bet against that. So I would urge you to suspend your disbelief for another quarter and see what happens if this is a trend.

Okay. Suspend it. Thanks very much.

You’re welcome.

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.

Great. Thanks. Good morning everyone. On the $34 million deferral balance, does that include the balance from tenants on a cash and GAAP basis or just on a cash basis?

So it was Austin, right? Yes. Austin, this is John again. It's everything.

That's everything. Can you give us the breakdown of what percentage that is between cash and GAAP-based tenants?

Let's work on that. We've been talking about doing just exactly that. But I'm not prepared yet to do that on the call.

That's fair. And then just wanted to check the math. So the 10% to 12% decrease in adjusted rent -- in the rent for discovery, is that about a $1 million decrease and then offset by any future deferral repayments? And then can you also share, what the contractual increase was on the master lease with Discovery that you intend to push out to a later period?

Sure. Hey Austin, this is Kevin. Your math is in the right ballpark there. And then the step-up was significantly more, hence why we're having to push it out for a period of time. Their original lease payment on the master lease portfolio was around I believe is about $3 million more. So, I mean there's a step-up that would have to -- that was looming that frankly the properties just weren't ready for and we want to make sure that they get healed and we're working with our operating partners in an appropriate fashion to get there. So, we're looking to move that out for a period of time and let these continue to move on the occupancy front.

No, that's helpful. And then just Eric you highlighted the SHOP segment kind of serves as a platform for external opportunities and you're now a believer. And I guess, I'm just curious as you talk with the Board I guess, how close do you think you are to executing on SHOP acquisitions? And do you feel like you're able to compete in the market for senior housing deals as kind of your existing cost of capital?

I think if we can have one more quarter of positive momentum like we've demonstrated that we can get the Board there. They're very, very excited about what's been happening and some of them have even been visiting buildings. So there's an intense level of interest in this as a new growth avenue.

And then can you just kind of comment on your ability to compete today? And then also would you look at new operators to the platform or just expanding with your existing partners?

Both, there's a lot of good operators out there that don't want to sign a lease and we're well aware of that. So if we can partner with them or joint venture with them on better product and better markets. I think that's an exciting way to grow.

Our next question comes from Connor Siversky with Wells Fargo. Please proceed.

Hey, good morning, guys. This is [indiscernible] on for Connor this morning. Thanks for taking the question. So just on the asset acquisition side activity for real asset acquisitions and developments has been muted over the past couple of quarters here. So just talk about the more recent trends. I think before you guys kind of highlighted that there was difficulties in the supply chain kind of getting stuff moving. So, just -- is that still kind of creating obstacles? And just how should we think about you guys stepping the foot on the gas pedal here into fourth quarter and 2024?

Sure. This is Kevin. The issue has just been as Eric kind of highlighted the sellers coming to grips with the new cap rate environment. Furthermore operations still frankly healing as people -- as groups have continued to improve occupancy NOI has followed, but I don't I wouldn't think where there's not as much NOI dropping to the bottom line with those incremental residents. So there's a little bit of a pro forma impact that I think a lot of people are wrestling with when they think about what is community look like on a stabilized basis. So there's a lot of back and forth, between buyer and seller about what the real value is in prospective value. I think we've effectively disabuse people of looking back to 2019 at this point which is good. But there's still just some underwriting back and forth. One thing that we've looked at is maybe using some more debt as a vehicle to get it into the building or into the deal so to speak and let it season a little bit. That way we have our foot in the door when they are ready to truly sell. So we're looking at some different ways to try and get in with some operating partners both new and existing working on different structures that might be appealing to them. But, yeah, there is still that push pull, I think operator or operators are starting – or sellers are starting to come around to what the new dynamics are. But we're also as Eric alluded to just being cautious on our underwriting and what the operating fundamentals are going forward.

Appreciate the color there. And just kind of switching focus to the SNF on the – there was a big lift on the coverage side. You guys are approaching 80% occupancy, although it's reported one quarter lag. Any moving parts or tenant specific situations that led such a healthy sequential improvement there? And what's the latest you're hearing from your operators in the skilled side of the portfolio overall?

Sure. This is Kevin, again. The biggest lift is going to be attributable in HC just because of their concentration in the portfolio and their – how that factors into coverage. Good to see their coverage has been down a little bit for them anyway but still very strong. Seen occupancy improvements, seeing labor start to level out a little bit. That's kind of been across the spectrum on both assisted or on senior housing and skilled nursing. So also very good news. So I think those are the bright spots. There's been a few states that were – we have communities in that have seen some rate increases on both the federal and state levels. So again good news there. I think the overhang and we addressed it a little bit in the comments is just what's going to happen with the staffing mandates. Think our operators are devising plans and prepared for it making comments during this common period to make sure their voices are heard. So if there's again an overhang, it would be just how do they prepare for that. But given the coverages we have with particularly our two main operating partners we're not overly concerned but we are staying in touch with them and making sure we understand what they're seeing.

Appreciate the color. Thanks, guys.

[Operator Instructions] Our next question comes from Joe Dickstein with Jefferies. Please proceed.

Great. Thank you for taking my question. Maybe just switch gears to SHOP OpEx. It looks like it accelerated a bit this quarter to roughly 9%. Maybe if you could just touch on labor costs and your operators, agency labor exposure. Would be great.

Sure. This is Kevin, again. So you're asking specifically about the SHOP and labor there?

Yes, correct.

Yeah. Unfortunately for us in the independent living model, we don't have a ton of agency needs. We have seen a little bit of labor pressure in terms of having to pay some higher wages across the Board in most positions. But given that there's not a level of care component, we're not having, to hire nurses or if somebody calls out of a shift there's ways to kind of reorganize the labor pool that you have instead of having to get that agency labor. So it's a pretty small number for us there. And not really been a big headwind. The headwind if there is one is really just, having to pay a little bit higher pay rate. But that said, I think, our operating partners have done a good job of filling the open roles, making sure they have enough staff, revamping the teams where they need to be which I think is what you're seeing in the occupancy improvement is that they've gotten their sea legs and have the teams set. So I feel like we're in a pretty good place there.

Hey Joe, this is John Spaid. Maybe I can tee up a better question here, for Kevin, on your behalf. We've seen some dramatic improvements in labor elsewhere and that's -- and evidence of that is through the coverage ratios that you're seeing improved for Bickford. So maybe Kevin, can talk more specifically there.

Sure. One specific item I guess, I can mention, as it relates to Bickford there was a point in time where we were looking at 1,500 hours a week or so of agency labor. That's down to like a couple of hundred. Now I believe in the most recent period where we look at it almost every week with them so we understand what's going on in their business. So, dramatic improvement on the agency side there. One week does not make a trend. But the overall trend is very positive. And I think that's a good proxy for what we've seen with some of our other operating partners is that agency usage has come way down. They're actually able to start recruiting caregivers from the agencies instead of vice versa which was a problem for a lot of our operators there for a while. So it's seemingly settling down quite a bit.

Great. And then just one more for me, deferral repayments increased to $2.3 million from $700,000 last quarter, how should we be thinking about this on a go-forward basis should be closer to that $2 million number or kind of moderating lower?

So I gave you a number in my prepared remarks for the fourth quarter of approximately $1 million. We're going to try to over deliver on that number, but that was in my prepared remarks.

Okay. Thank you.

There are no further questions at this time.

Thanks everyone for joining us today. And we'll see many of you at NAREIT next week.

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