National Health Investors, Inc. (NYSE:NHI) Q4 2023 Earnings Call Transcript
National Health Investors, Inc. (NYSE:NHI) Q4 2023 Earnings Call Transcript February 21, 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: Greetings, and welcome to the NHI Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded Wednesday, February 21, 2024. I would now like to turn the conference over to Dana Hambly. Please go ahead.
Dana Hambly: Thank you, and welcome to the National Health Investors conference call to review results for the fourth quarter of 2023. 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 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 year ended December 31, 2023. 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.
Eric Mendelsohn: Hello, and thanks to everyone for joining us today. We had another good quarter, capping a strong finish to the year with fourth quarter results exceeding our expectations. For the full year, our NAREIT FFO, normalized FFO and FAD were above the midpoint of both our original and improved November guidance. Similar to the third quarter results, we experienced stable cash collections, over $2 million in deferral repayments, and no unexpected rent concessions. The triple-net senior housing portfolio continues to benefit from improved industry fundamentals as EBITDARM coverage has now increased for seven consecutive periods with notable improvement at Bickford and our other need-driven operators. The senior housing portfolio, or SHOP, also contributed to the better-than-expected quarterly results with NOI increasing 48% over the fourth quarter of 2022 and over 24% sequentially.
While SHOP is still a relatively small piece of our overall business, we're excited by improving trends and continue to believe in the significant upside potential that can drive our organic growth profile. Specifically, we expect SHOP NOI to grow in the range of 25% to 30% in 2024. From a portfolio repositioning standpoint, there is much less to discuss this quarter. We structured the Discovery leases, which were in line with the negotiations described in our November press release and guidance. We're making good progress on the Bickford rent reset with an expected increase in cash rent this year. And our other cash basis tenants are current on their monthly base rent. We believe our portfolio is in much better shape and positions NHI for strong organic growth in the foreseeable future.
We're also positioned for external growth with our fortress-like balance sheet. Our leverage profile is one of the lowest of the health care REITs and in the top quartile when measured against all REITs. Given this low leverage, we have over $150 million in capacity to deploy capital without the need to issue equity, while staying at or below 5x net debt to adjusted EBITDA. I commented during our last call that seller and lender expectations were still 100 basis points behind the changes in everyone's cost of capital and that they should be more realistic about the higher for longer rate environment. Higher for longer certainly appears to be the prevailing environment, and we're starting to see sellers and borrowers adjust to this reality. There is an obvious cost of capital disparity with some of our larger peers, but they cannot be the solution for all of the growing illiquidity in the senior housing industry.
We continue to advise customers to carefully choose a partner that will work with them towards their success in the long run. We believe this is starting to resonate, which makes us more optimistic now about the pipeline. So we expect our investment activity to accelerate this year. Turning to our guidance for 2024. The midpoint of our FAD guidance represents 2.6% growth over 2023, with less noise from dispositions and rent concessions, as well as more experience with SHOP, we believe we have much better visibility this year compared to the last two. Also, our guidance does not include any investments, which we expect will improve -- conservative as the pipeline for accretive deals grows. Our guidance represents the third year since the pandemic where we have provided full year guidance and the 2024 result represents the second year in a row where our FAD achieved the top end of our guidance.
Before turning the call over to Kevin, I'll conclude by saying that we accomplished a great deal in 2023, and we're now in a strong position as we return to growth in 2024. Our multipronged organic growth opportunity is as strong as ever, be it SHOP deferral repayments, rent resets or elevated escalators due to higher inflation. The investment and lending environments are very favorable for well-capitalized, low levered capital providers like NHI, and the industry supply/demand balance seems finally to be tilting in our favor. In sum, NHI is poised to capitalize on opportunities in what we expect to be many 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. I'll concentrate my comments on investment and disposition activity, as well as performance of our major asset classes and operators. On the investment pipeline, and as Eric noted, we're starting to see more actionable activity. We're hopeful that we're seeing the tip of the iceberg as volume of new inquiries has significantly increased in the last several months. We're looking at deals across the continuum of senior housing and skilled nursing and across multiple products, which have included loan, lease and joint venture opportunities. Initial yields, depending on the product, are in the high single-digits to low double-digits. In the case of new loan investments, our philosophy has always been to find a path to future real estate ownership, and that view has not changed.
Turning to asset management. As previously disclosed, we sold three buildings in the fourth quarter for net proceeds of $5.4 million and $1.6 million in seller financing. We currently have just one property held for sale. We continue to evaluate opportunities to improve our portfolio, which may include future asset sales, but we have no further material dispositions included in our 2024 outlook. As Eric noted, our fourth quarter results were very strong and largely mimicked our solid third quarter performance. Reviewing the need-driven operators, the positive coverage trends continued with EBITDARM at 1.31x, representing the seventh straight period of sequential growth. The coverage increase was driven in large part by Bickford at 1.51x on a trailing 12-month basis.
The Bickford occupancy trends have been excellent. Fourth quarter average occupancy improved 100 basis points sequentially from the third quarter to 85.2%. While we typically expect some seasonal weakness in the first quarter, January average occupancy increased 70 basis points from December to 85.7%. This occupancy improvement comes after a resident rent increase of 6% in November. With this resident rent increase, coupled with the occupancy gains, we expect that Bickford's coverage continues to move higher. Bickford repaid approximately $1 million of their deferral balance in the fourth quarter. This was their highest quarterly repayment, which reflects the portfolio's strong underlying operating results as repayments are tied to revenue thresholds.
Total cash rent from Bickford, including repayments, was approximately $33 million during 2023. As Eric mentioned, we are close to reaching an agreement with Bickford on terms of their leases, which are scheduled for a reset on April 1. As the discussions are ongoing, we won't comment further, other than to reiterate that we believe cash rent, including repayments, will be higher in 2024. Our other need-driven tenants operating 37 properties continue to show improvement. Reported coverage at 1.13x is the highest since the second quarter of 2020, and the eighth straight period of sequential improvement. Four operators repaid approximately $1 million in deferrals during the fourth quarter. Our discretionary senior housing portfolio primarily includes our entrance fee portfolio, which has performed well above our expectations since the pandemic began, and that continues to be the case.
Coverage improved sequentially to 1.41x from 1.38x driven by a nice 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, declined to 1.38x from 1.5x. This was due to uneven entry fee sales at one well-capitalized tenant, but we're happy to see stronger fourth quarter sales, which is not yet reflected in the calculation. The SNF and specialty hospital portfolio reported solid coverage at 2.74x, which has improved sequentially from 2.62x. Lastly, in our SHOP portfolio, momentum continues to build throughout the portfolio with our partners Discovery and Merrill Gardens. Fourth quarter NOI increased 48.2% year-over-year to $2.9 million.
Resident fees increased by 9.8% year-over-year on a 740 basis point increase in occupancy to 83.2%. Operating expenses increased just 2.2%, leading to a 580 basis point year-over-year margin improvement to 22.3%. As noted in our 2024 guidance, we forecast SHOP NOI growth in the range of 25% to 30%. While we do not give quarterly guidance, we do expect the NOI cadence to move higher throughout the year. January is off to a good start as occupancy averaged 84.7%, up 30 basis points from December. Our longer-term view on this portfolio, that it 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. For the year ended December 31, 2023, our net income, NAREIT FFO and normalized FFO per diluted common share were $3.13, $4.39 and $4.33 per share, respectively, which represents year-over-year improvements of 112%, 24% and 1%, respectively. For the year ended December 31, our FAD was $187.8 million, down 6.6% year-over-year. But recall that during 2022, we recognized significant prior year holiday related revenues as a result of our settlement with Welltower. As Eric mentioned, we're pleased to report that each of our pro forma metrics came in at the high end of our guidance. Net income for the fourth quarter and year ended December 31, when compared to our guidance, reflects the fact that we did not close as expected on the sale of our one property and assets held for sale that did not record the expected gain.
Our fourth quarter 2023 FAD was $47.3 million, which is a 5.9% increase when compared to the fourth quarter of 2022. Sequentially, compared to the third quarter in 2023, FAD was down $825,000. But recall, the third quarter saw discrete payments from two cash basis tenants for amounts previously owed for prior quarters but which were not recurring to the fourth quarter. Our Q4 2023 metrics when compared to Q4 2022 saw further improvements to FAD payout and net debt to adjusted EBITDA ratios of 82.5% and 4.4x, compared to 87.3% and 4.7x, respectively. The fourth quarter also saw a milestone where, for the first time since Q2 2021, we did not record any impairments. As Eric mentioned, the fourth quarter was sequentially the second quarter without any unexpected tenant concessions.
In 2023, we paid or retired approximately $415 million in debt, using proceeds from a new term loan in our revolver. We saw proceeds from loan repayments and dispositions of approximately $70 million and made acquisitions and loan investments of approximately $74 million. During 2023, we did not issue any equity under our $500 million ATM program or buyback any stock under our $160 million stock repurchase authority. Last night, we issued our full year guidance for 2024. Our 2024 guidance for normalized FFO is in the range of $187.2 million to $189.7 million, or a range of $4.31 to $4.37 per share. We are forecasting FAD to be in the range of $191.3 million to $194.1 million, representing year-over-year growth of 2.6% at the midpoint and 3.4% at the high point.
As Eric mentioned, our guidance includes SHOP NOI growth of up to 30% year-over-year and no incremental new investment. While we are telling you that our guidance includes the collection of deferrals, remember that the majority of deferred rent that we collect is attributable to Bickford. As Eric and Kevin mentioned, we are close to finalizing the step-up rent negotiations with Bickford, which will have an impact on the additional deferred rent we will be able to collect in 2024, but not on our estimate for the Bickford NOI, which is included in our guidance. Our balance sheet continues to be a source of strength for us. And this year, our focus will be on our weighted average debt maturities, variable interest rate debt levels, and liquidity.
At the end of January, we had $273 million outstanding on our $700 million revolver, and only a single debt maturity this year for $75 million at the end of September. As Eric mentioned, our leverage ratio continues to trend favorably, ending 2023 at 4.4x net debt to adjusted EBITDA. At the end of January, we have ample liquidity of over $425 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, at NHI's option, the ability to extend the loan for up to one year. At December 31, the percentage of variable interest rate to our total debt was just under 39%.
In the next two years, we'll retire an additional $201 million in fixed rate debt. Our strategy for this year will be to look at our debt options for improving our average debt maturities and for keeping our variable interest rate risk at comfortable levels. At current interest rates, our long-term interest rates are only 40 to 50 basis points higher than our variable interest rates. So we don't expect any meaningful impacts to our 2024 guidance as a result of any new significant debt facility. As we announced last night, our Board of Directors declared a $0.90 per share dividend for shareholders of record March 28, 2024, and payable on May 3, 2024. Our Board also reauthorized our $160 million stock repurchase plan, which is effective for one year.
That concludes our prepared remarks. So once again, thank you for joining our call today. With that, operator, please open the lines for questions.
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