National Health Investors, Inc. (NYSE:NHI) Q1 2024 Earnings Call Transcript May 7, 2024
National Health Investors, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone, and welcome to the National Health Investors First Quarter 2024 Earnings Webcast and Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Dana Hambly. Sir, the floor is yours.
Dana Hambly: Thank you, and welcome to the National Health Investors conference call to review the results for the first quarter of 2024. On the call today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer. The results as well as notice of the accessibility 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 March 31, 2024. The Copies of these filings are available on 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.
Eric Mendelsohn: Hello, and thank you to everyone for joining us today. We’re off to a great start in 2024 as the first quarter results exceeded our expectations and represents the third straight quarter of outperformance. The general theme remains the same and is characterized by stable cash collections, steady deferral repayments, improving operator fundamentals, shop occupancy and revenue growth and no unexpected rent concessions. Our excellent start, coupled with good visibility for the rest of the year, prompted us to raise our full year guidance, which implies over 5% FAD growth at the midpoint. The increased FAD guidance is broad-based with several factors contributing to the improved outlook. John will provide more details in a few minutes.
As a reminder, our guidance does not include any new investment activity. We believe our portfolio is in great shape and positions NHI for strong organic growth through multiple channels including deferral repayments, rent step-ups with select large tenants, significant NOI growth potential in SHOP and capital investment projects concentrated on the existing real estate portfolio. Our Senior Housing EBITDARM coverage moved higher for the eighth consecutive period to 1.45x with particular strength at Bickford and our other need-driven operators. We reached a favorable outcome with Bickford on April 1 rent reset, which increased the base rent by approximately 10% annually while preserving our ability to receive rent deferral repayments based on growing revenue in the Bickford leased portfolio.
Strong revenue growth within our NHC portfolio during 2023 drove an increase in the percentage of rent, which more than offset the scheduled reduction in base rent related to the sale of 7 properties in 2022. As most of you on today’s call are well aware, the NHC lease matures at the end of 2026. So we’re actively working on creating a favorable outcome for our shareholders. For the record, I need to state that the negotiations related to the NHC lease are sensitive. We understand the importance of this lease to shareholders and our unique relationship to NHC, so we do plan to provide relevant information on the process where and when appropriate. Back to our results. The Senior Housing operating portfolio or SHOP increased NOI by 54.8% year-over-year to $2.9 million on over 13% revenue growth and 600 basis points of margin expansion.
Sequentially, NOI increased by approximately 2%, which is encouraging as we typically expect seasonal weakness in the first quarter. Our guidance for 2024 NOI growth remains at 25% to 30%, though continued occupancy improvement, coupled with lower move-in incentives have us optimistic that we’ll be at the high end or above the current guidance range as the year progresses. Also supplementing our organic growth is a $25 million NOI producing CapEx program targeted at our leased real estate portfolio. To date, we have committed $19 million at a weighted average yield of over 8%. We view this program as a low-risk investment into properties with good coverage and returns well above our cost of capital. The balance sheet at just 4.4x net debt to adjusted EBITDA continues to be one of the lowest levered among all REITs and positions us for significant external growth.
We have plenty of dry powder to execute our growth initiatives with over $970 million in capacity right now on the revolver and ATM. We’ve been advising sellers and borrowers for several quarters that the higher for longer rate environment could be a reality. It seems to be a certainty at this point, which has created a more active pipeline for us. Our pipeline is currently over $300 million, and we have submitted LOIs on deals valued at over $100 million with initial yields of more than 8% on average. The improvement in our cost of capital is allowing us to become more competitive to other providers of capital. With seller expectations on cap rates adjusting higher and our cost of capital moving lower, we expect external growth to remain robust for the foreseeable future.
Kevin will provide more details on the makeup of the pipeline. We clearly see the momentum for NHI across several paths, including our multipronged organic growth strategy, significant external growth opportunities and a favorable macro environment driven by slowing supply and growing demand. In sum, NHI is in a great position to capitalize on several initiatives and create a pathway for several years of exceptional growth. I’ll now turn the call to Kevin to provide more details on our operations. Kevin?
Kevin Pascoe : Thank you, Eric. As noted last quarter, we’re starting to see more actual deal activity and the volume of new inquiries has significantly increased in the last several months. We’re looking at opportunities across the continuum of Senior Housing and skilled nursing and across multiple products, including loan, lease and joint venture opportunities. We currently have submitted LOIs on deals valued at more than $100 million with yields of more than 8% on average. These are primarily senior housing focused with an approximate mix of 50-50 in loan to real estate acquisition. In the case of new loan investments, we continue to look for a path to future real estate ownership. As an example, during the first quarter, we funded a $15 million mortgage on an 80-unit assisted living and memory care property operated by Carriage Crossing Senior Living, a well-respected and growing operator of 9 properties in the Midwest and a new relationship for NHI.
The 8.75% loan carries a 5-year maturity and NHI has a purchase option on the property after 2 years. Turning to Asset Management. We had another strong quarter with positive year-over-year adjusted NOI growth from the need-driven and discretionary senior housing operators, skilled nursing and Specialty Hospital and the SHOP portfolio. The need-driven operators again had positive coverage trends with EBITDARM at 1.35x representing the eighth straight period of sequential growth. The improvement was driven by both Bickford at 1.58x and other need-driven operators at 1.16x. On April 1, we reset the Bickford annual base rent to $34.5 million, which is an approximate 10% increase from the prior base rent of $31.4 million. On a pro forma basis, EBITDARM coverage under the increased base rent was 1.37x for the trailing 12 months ended December 31.
This is still very healthy and well above Bickford’s pre-pandemic coverage, so we’re obviously pleased with the results of restructuring this portfolio. The next Bickford reset is scheduled for April 2026 and is based on a defined lease coverage ratio with a floor determined by a range of CPI escalators. At a minimum, the base rent will increase 4% to 6% in 2026 from the current level, but could be higher if Bickford outperforms. As a part of the CapEx program that Eric described we have committed approximately $8 million in NOI producing investments to the Bickford portfolio, which should enhance property cash flow and coverage over the next couple of years. We also adjusted the deferral repayment formula, which we estimate results and quarterly repayments of approximately $1 million going forward while continuing to align us with Bickford’s improving fundamentals and revenue growth.
Bickford’s first quarter 2024 repayment, which is based on the older formula was a record $1.5 million. Through March 31, Bickford has repaid approximately $4 million. Our discretionary senior housing portfolio primarily includes our entrance fee portfolio, which has performed above our expectations since the pandemic began, and that continues to be the case. Coverage improved sequentially to 1.54x from 1.41x driven by an uptick at SLC, our largest tenant on another solid quarter of entrance fee sales. Discretionary coverage, excluding SLC, which largely reflects the performance of our other entrance fee communities improved sequentially to 1.63x from 1.38x. As we have seen, the variability in the CCRC coverage is higher due to the variability in entrance fee sales.
But overall, our operators have delivered steady results over a long period of time, and we do not see that shifting in the foreseeable future. SNF and Specialty Hospital portfolio reported solid coverage at 2.83x, which improved sequentially from 2.74x. The coverage at NHC improved to 3.8x from 3.54x. Remember that NHC’s reported coverage represents corporate fixed charge coverage and is not comparable to the EBITDARM coverage reported for all other asset classes and operators. For a point of reference, NHC operates 91 properties, of which 35 are owned by NHI, and our lease payment represents their only significant fixed payment obligation. As detailed in yesterday’s filings, the NHC first quarter percentage rent increased to $3 million from $1.6 million in the prior year period.
The increase in the percentage rent more than offset the scheduled decline in the base rent of approximately $363,000. Recall that in September 2022, we sold 7 SNFs previously operated by NHC for net proceeds of $43.7 million and amended the mass release on the remaining portfolio, which effectively has NHC continuing to pay rent on the 7 sold properties but at a declining rate through the maturity of the lease. Separately, we are in the process of transitioning 1 SNF in Wisconsin to another operator that has a much greater presence in that state. This resulted in an $800,000 straight-line rent receivable write-off, which should not impact our cash rent this year. Lastly, in SHOP, momentum continues to build throughout the portfolio. First quarter NOI increased 54.8% year-over-year to $2.9 million.
Resident fees increased by 13.3% on an approximate 1,000 basis point increase in occupancy to 85.3%. Operating expenses increased 4.9%, leading to a 600 basis point year-over-year margin improvement to 22.2%. Our strategy continues to rely on using rate to drive occupancy growth, which is evident in the relatively flat quarterly RevPOR. Occupancy improved sequentially by 210 basis points, while the margin declined slightly by 10 basis points. The first quarter is seasonally weak, so we were happy to see occupancy growth throughout the quarter, though our acquisition costs were higher, which weighed on the margin. As we mentioned last quarter, we expect the quarterly NOI cadence to grow throughout the year, which would lead SHOP to be at the high end of the current guidance growth range of 25% to 30%.
We also expect to invest approximately $10 million to $12 million into the SHOP portfolio this year, which should help drive margin growth later in the year. Our longer-term view that this portfolio can generate NOI dollars in the high teens on margins in the mid-30% range remains unchanged. I’ll now turn the call over to John to discuss our financial results and guidance. John?
John Spaid: Thank you, Kevin, and hello, everyone. As Eric and Kevin previously mentioned, our strategy continues to be to execute on our organic opportunities and pivot toward additional NOI growth from accretive investments. Our results today indicate to all of us that our strategy is on track. First quarter results were above our expectations as primarily reflected in the percentage revenue rent results from NHC and Bickford. Our guidance reflects further improvement this year as compared to our February guidance. Kevin previously spoke about our improved pipeline. We believe that we are seeing an inflection point between seller cap rates and our improved cost of capital. I’ll talk more about what this means for our guidance in a moment.
But first, our results. For the quarter ended March 31, 2024, net income, NAREIT FFO and normalized FFO per diluted common share were $0.71, $1.10 and $1.12 per share, respectively. Our FAD was approximately $51 million, which is a 6.8% increase year-over-year. Compared to the prior year quarter, our net income and NAREIT FFO per diluted common share declined by 10.1% and 5.2%, respectively, while NFFO per diluted common share improved by 0.9%. Our results for the first quarter included a year-over-year net increase in NHC rent of $1.1 million, which was comprised of a $1.4 million increase in the percentage revenue rent for NHC, net of a $400,000 base rent decrease attributable to the scheduled Northeast 7 property disposition rent that occurred in 2022.
Also recall that in the prior year first quarter, we recognized $2.5 million in noncash deferred rents associated with the acquisition of a high-performing Bickford property. Excluding those Bickford rents, deferred rent repayments were up $1.6 million year-over-year. Other significant items impacting the year-over-year results included the write-off of straight-line receivables of approximately $0.8 million associated with the planned transition of one property to a new operator, which Kevin previously discussed. Our strategy in our SHOP segment continues to be to increase occupancy which we believe will result in additional NOI improvements. At the end of March, our SHOP occupancy results were ahead of budget, while our NOI is tracking our forecast and guidance.
Our SHOP NOI this quarter when compared to the same period last year was up $1 million. SHOP sequential FAD contribution was essentially flat after including recurring CapEx compared to the fourth quarter. Sequentially from the fourth quarter, FAD improved $3.6 million to which we attribute $3 million of this improvement to cash rents and interest income and $600,000 to changes in cash G&A. The $3 million improvement in cash rents included $1.7 million in net increase in NHC rents. The remaining $1.3 million in cash revenue growth was attributable to annual rent escalators, increased interest income and improved deferred rent collections. During the first quarter, we closed on a new investment mortgage loan for $15 million, yielding 8.75%. Subsequent to the end of the first quarter, we disposed 2 small properties and we continue to have 1 property in assets held for sale.
The impacts from the new investment dispositions and the previously mentioned transition property are all included in our updated guidance. Our Q1 2024 metrics when compared to Q1 2023 saw further improvements. For the period ended March, FAD payout and net debt to adjusted EBITDA ratios improved to 76.6% and 4.4x compared to 81.8% and 4.6x, respectively, in the prior year. Last night, we raised our full year guidance for 2024. Normalized FFO was raised to a range of $190.3 million to $192.5 million or a range of $4.37 to $4.43 per diluted share. This is a $0.06 midpoint raise when compared to our initial February guidance. We also increased our FAD guidance to a range of $196.7 million to $199.2 million, which is a $5.3 million increase at the midpoint compared to February’s guidance.
FAD guidance also represents year-over-year growth of 5.4% at the midpoint and 6% at the high point compared to the full year 2023 results. A few more comments regarding our guidance. Our guidance includes a recent amendment to the Bickford lease, which Kevin previously discussed. Commencing April 1, Bickford’s annual rent was increased to $34.5 million from $31.4 million. And we continue to expect to see increasing Bickford cash rent from the additional collection of Bickford’s remaining deferral balance. Our guidance includes the recent increase in NHC rent from the 2023 percentage revenue rent. And as Eric previously mentioned, our guidance includes SHOP NOI growth of up to 30% year-over-year, which we view to be conservative. Eric mentioned, we have $19 million committed already toward the capital expenditure program.
The timing of this activity is still uncertain, so the future activity from this program is not yet in guidance. We’ll have more to say about this program in future quarters. Finally, our guidance includes a new mortgage investment and the expected fulfillment of our commitments but does not include any unidentified new investments. Our balance sheet continues to be a source of strength for us. At the end of April, we had $228.5 million outstanding on our $700 million revolver and only a single debt maturity this year for $75 million at the end of September. At the end of April, we continue to have ample liquidity of over $470 million in cash and revolver availability and the full $500 million available under our ATM program. Looking towards 2025, we have an additional $326 million in debt maturing, $200 million of this maturing debt is our term loan, which does have an NHI’s option the ability to extend the loan for up to 1 year.
As we announced last night, our Board of Directors declared a $0.90 per share dividend for shareholders of record June 28, 2024, and payable on August 2, 2024. That concludes our prepared remarks today. So once again, thank you for joining our call. With that, operator, please open the lines for questions.
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