National Health Investors Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 11 speakers on the call.

Operator

Greetings, and welcome to the National Health Investors Third Quarter 2024 Earnings Webcast and Conference Call. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Dana Hambly, Vice President of Finance and Investor Relations. Sir, the floor is yours.

Speaker 1

Thank you, and welcome to the National Health Investors conference call to review results of the Q3 of 2024. On the call today are Eric Mendelson, President and CEO Kevin Pascoe, Chief Investment Officer John Spade, 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.

Speaker 1

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 ks for the year ended December 31, 2023 and Form 10 Q for the quarter ended September 30, 2024. Copies of these filings are available on the SEC's website atsec.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 ks to the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.

Speaker 1

I'll now turn the call over to our CEO, Eric Mendelson.

Speaker 2

Thank you, Dana. Hello, and thanks to everyone for joining us today. The 3rd quarter results largely reflected continued strong fundamentals through much of the portfolio with occupancy and EBITDARM coverage improving sequentially from the Q2 across all our major asset classes. Our shop occupancy continues to show strong growth and at 88.6% for the quarter is approaching levels at which we believe we can start to drive more rate growth with significant margin upside likely to follow. As Kevin will discuss in more detail, Senior Living Management, one of our cash basis tenants, notified us late in September of their inability to pay their lease and interest obligations.

Speaker 2

I'm proud of our team's quick response in securing new management for each of the leased properties and transitioning within days to ensure no adverse impacts to the residents. On a more positive note, we're very excited about recent investment activity in our growing pipeline. Year to date, we've closed on investments totaling over $205,000,000 at an average initial yield of approximately 8.4%. This includes $121,000,000 acquisition of the Spring Arbor portfolio of 10 senior living communities in North Carolina, our largest acquisition since 2020. We have sourced opportunities of more than $1,900,000,000 Of this amount, we have Board approved signed LOI investment opportunities of $59,800,000 that we expect to close this year and or early next year.

Speaker 2

In addition, we're evaluating an incremental pipeline of approximately $350,000,000 We are also pursuing several large portfolios, including SHOP and skilled nursing deals, which are not included in our pipeline numbers. Frankly, I've not seen this level of actionable investment opportunities in my entire career. And while nobody can ever be certain how long this window stays open, I see several factors supporting years of exceptional growth. Just a few of these factors include: 1, our cost of capital has improved significantly over the last 12 months as industry fundamentals improved and the noise from the multi year portfolio optimization has been reduced. As evidenced, we completed the successful offering of 2,760,000 shares on a forward basis in a deal that was significantly oversubscribed and allowed us to upsize the offering by 20%.

Speaker 2

2, traditional capital providers to the senior housing sector include banks and private equity have either scaled back their exposure or have exited the industry completely. While we expect that they'll be back at some point or replaced by other participants, we still believe well capitalized REITs such as ourselves are best positioned given the cost of capital advantage and ready access to debt and equity. And 3, the industry has tremendous tailwinds as inventory growth at approximately 1% is at historic lows and new starts are at the lowest level since 2010, and of course, the major demographic tailwind currently underway. We're as excited about the future as we have ever been. Our growth profile is multifaceted both internally and externally and is supported by a strong financial position.

Speaker 2

We believe that we have positioned the company to succeed through all stages of the business cycle and have added depth in preparation for expanding the SHOP platform. As I said this last quarter and it remains the case that we are convinced that we are in the early days of exceptional growth for many years to come. Before turning the call over, I have a couple of items to address. First, I want to acknowledge all of the operators and their employees that were impacted by the recent hurricanes. Your efforts to keep residents and patients safe have been nothing short of heroic and we deeply thank you.

Speaker 2

2nd, as many of you have seen, we recently filed an 8 ks announcing that our Chairman, Andy Adams, will be retiring from his role effective December 31. Andy has been with us from the beginning, serving as the founding Chairman and CEO of NHI from its inception in 1991. He is a visionary pioneer in the industry and we are incredibly grateful for his leadership and mentorship. He will be missed, but we look forward to staying in touch and wish him the very best in a long and productive retirement. I'll now turn the call over to Kevin to provide more details on our operations.

Speaker 2

Kevin?

Speaker 3

Thank you, Eric. I'll focus my comments on acquisitions and the pipeline as well as an asset management overview of our major asset classes. Since our last call in August, we have closed $149,000,000 of investments in 2 deals. In August, we originated a construction loan to fund up to $27,700,000 for the development of an inpatient rehab facility in Lake City, Florida. This is a 4 year loan with 2 1 year extension options and carries a rate of 9%.

Speaker 3

The lone party is a new relationship for NHI, but a group that has plenty of experience developing healthcare properties with over $2,000,000,000 in projects completed. NHI has a purchase option on the property after certain licensing and coverage requirements have been met. We also recently announced the acquisition of a 10 property portfolio of senior housing communities in North Carolina for $121,300,000 including transaction costs at an initial yield of 8.23% with 2% fixed escalators. The properties continue to be managed by Spring Arbor, which is also a new relationship for NHI. The coverage is well above our average coverage for needs driven properties and the lease includes a $10,000,000 earn out incentive, which will be added to the base if and when it is funded.

Speaker 3

The coverage is still full and we have $59,800,000 in board approved deals with an average yield of 8.8%. We are also evaluating an actionable pipeline of $350,000,000 investments, which have a reasonable chance of closing within the next 12 months. Not included in the pipeline are multiple portfolio deals, including SHOP and Skilled Nursing that are in various stages of negotiations. Turning to Asset Management. With the exception of SLM, we had another good quarter with improving EBITDARM coverage and occupancy deferral collections and SHOP growth.

Speaker 3

The need driven operators again had positive coverage trends with EBITDARM at 1.41 times representing the 10th straight period of sequential growth. The improvement was driven primarily by Bickford at 1.72 times. Adjusting for the April 1 rent increase, the Bickford coverage would have been a healthy 1.61 times, up from 1.45 times when we reported in the 2nd quarter. Bayford's quarterly occupancy improved by 80 basis points sequentially to 86.2%. They repaid $1,100,000 in deferrals and they recently implemented a mid single digit price increase.

Speaker 3

All told, we're very happy with the operational focus and resulting performance. The knee driven coverage excluding Bickford was flat at 1.15 times. As we noted last quarter, this was the function of a change in assets and we see upside potential in the recently added properties. Regarding SLM, this is an operator we have been reducing our exposure to for multiple years as we had already sold 7 properties since 2021 leaving 4 remaining leased properties and 2 loans. Prior to their action to cease payments to NHI, we were in the process of selling another underperforming property as well as transitioning a property to a new operator.

Speaker 3

The property held for sale is expected to close later this year or early next with NHI providing seller financing. The transition property occurred as expected to the William James Group on October 1st. The 2 other lease properties had healthy EBITDARM coverage and we are pleased to have transitioned them to a more capable operator. We are evaluating multiple scenarios for the 2 loans and we'll provide more details when available. We expect to incur some transition expenses in 2024, but should start to recapture a significant portion of the lost NOI next year.

Speaker 3

In November and separate from SLM, we transitioned a second senior living community to William James Group. This is a new relationship for NHI, but we have worked closely with the management team in the past and are already looking at other opportunities to grow this group. Our entrance fee and skilled nursing portfolios, which together generate approximately 58% of our NOI continue to show great performance. The discretionary senior housing portfolio, which includes our entrance fee portfolio had coverage of 1.64 times compared to 1.6 times in the sequential period. The SNF portfolio reported solid coverage of 3.04 times, which improved sequentially from 2.97 times.

Speaker 3

This includes an improvement in NHC's fixed charge coverage ratio of 4.12 times from 3.96 times. Lastly, in SHOP, momentum continues to build throughout the portfolio. 3rd quarter NOI increased 30.4% year over year and 2.5% sequentially to 3,000,000 dollars Resident fees increased by 11.4% year over year driven by occupancy improvement to 88.6% from 79% and contributed to 3 20 basis points of margin expansion to 22%. Compared to the Q2 of 2024, occupancy improved by 160 basis points, while the margin declined slightly by 10 basis points. The margin was below our expectation, but occupancy continued to improve throughout the 3rd quarter ending on a high note at 89.1 percent in September.

Speaker 3

As occupancy gets closer to 90%, we expect to start reducing move in incentives, which should lead to an improvement in margin given the significant operating leverage in the independent living model. We are starting to see evidence of this in particular in buildings that have reached or eclipsed the 90% occupancy mark. We tightened our current guidance for annual SHOP NOI growth to the high end of the range from 25% to 30% to 28 percent to 30%. I'll now turn the call over to John to discuss our financial results and guidance. John?

Speaker 4

Thank you, Kevin, and hello everyone. I'll talk about our recent capital activity in a moment, but first our results. Our net income per diluted common share for the quarter ended September 30, 2024 was $0.65 compared to $0.68 for the same period last year. Our NAREIT and normalized FFO results per diluted common share decreased 4.6 percent to $1.03 for the quarter ended September 30 compared to the prior year's Q3. FAD for the quarter increased 2.5 percent to $49,400,000 from $48,200,000 in the prior year's Q3.

Speaker 4

Our FAD results for the 9 month period ended September 30, 2024 are up 8.3% compared to the same period last year. Compared to the Q2 in 2024, cash rent and interest income recognized for the Q3 was down approximately $2,900,000 The decline was primarily due to a non recurring $2,500,000 deferral payment made last quarter by a cash basis tenant as well as $1,000,000 in lower lease and interest payments from SLM, offset by new transaction rent and interest income of $600,000 Normalized FFO was sequentially down $5,700,000

Speaker 5

due to the

Speaker 4

$2,900,000 sequential reduction in cash revenue and also the $3,000,000 in sequentially higher credit loss expense net of other changes totaling approximately $200,000 NOI from our SHOP portfolio increased 2.5% for the 3rd quarter compared to the 2nd quarter and is a 30.4% improvement compared to the prior year quarter. Year to date, SHOP NOI has increased by 40.9%. Net fab contribution after recurring capital expenditures and other SHOP adjustments was sequentially down 2.6% for the 3rd quarter. Let me turn to our recent capital activity. In mid August, we completed an overnight equity offering structured with a forward equity component.

Speaker 4

We're very pleased with the investor participation. At execution, we escrowed approximately $189,000,000 in proceeds, which net of customary forward adjustments, we can access in exchange for 2,760,000 common NHI shares. In October, following the Spring Arbor closing, we delivered 1,800,000 shares for approximately $122,400,000 in equity proceeds, leaving over $65,000,000 in future proceeds available in exchange for the remaining shares. Also in October, we closed on the amendment restatement of our $700,000,000 revolving credit facility, which reset the maturity date to October 2028 and provides for 2 6 month options to extend. This transaction improved our weighted average debt maturities to 3.7 years at the end of October.

Speaker 4

We also have the right to extend our $200,000,000 term loan due June 2025, an additional year at our option. Since our revolver is our primary source of liquidity and we're always mindful of our investment grade liquidity requirements, we'll be more closely monitoring the long term bond market in 2025. At the end of October, we had $350,000,000 drawn on the revolver. Our balance sheet ended the quarter in great shape. Our net debt to adjusted EBITDA ratio was 4.4 times, while within our stated 4 to 5 times leverage policy.

Speaker 4

We ended the quarter with $500,000,000 in available ATM capacity. And as I mentioned, we continue to have the remaining equity forward proceeds available to us. We repaid a $75,000,000 private placement loan due at the end of September with revolver proceeds and as a result our variable interest rate debt stood at approximately 45% at September 30. As we announced last night, our Board of Directors declared a $0.90 per share dividend for shareholders of record December 31, 2024 and payable on January 29, 2025. So let me now turn to our full year 2024 guidance.

Speaker 4

Our updated guidance today as compared to our August 2024 full year guidance reflects midpoints for NAREIT FFO and normalized FFO per diluted common share of $4.40 $4.44 respectively. FAD increased at the midpoint $1,200,000 and weighted average diluted shares reflects the impacts from the shares issued in October for the equity forward proceeds received. 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.

Operator

Thank you. At this time, we will be conducting our question and answer Thank you. Our first question is coming from Juan Sanabria with BMO. Your line is live.

Speaker 6

Hi, this is Robin Hanlon sitting here for Juan. Just curious on PACS, what is your preliminary thoughts around PACS today? And can you comment on NHI's coverage post the proceed transition?

Speaker 3

Good morning. This is Kevin. As it relates to PACS, they're a smaller customer of ours. They're less than 3% and of which about half of the revenue we receive is related to assisted living, not skilled. Furthermore, as we look at the underlying performance of the properties, our coverage is over 2 times on an EBITDARM level on those buildings and that's based on the prior operator.

Speaker 3

As you probably know, these recently transitioned. So we don't have a full suite of financials from them. But even through our underwriting, we weren't seeing any massive revenue changes or big changes to the existing business as related to our communities. So currently, we see those as stable. We need to get some more information.

Speaker 3

We'll definitely have some more questions around some of the information that's come out. We have some we already had some meetings planned with them coming up in the next couple of weeks. So we'll be interested to find out more from them. But as it relates to our portfolio, we haven't seen anything that would cause concern to date, but we'll definitely be monitoring it closely.

Speaker 6

And for your portfolio, do you see PACS having any outsized or unusual skill mix revenue versus the peers in your portfolio?

Speaker 3

Again, it's been a recent transition. So we don't have a long run rate on the current financials

Speaker 4

from them. It's probably a month or 2 of experience really

Speaker 3

at this point. Huge discrepancies on expected payments or payors or anything like that that presented the numbers to us. So we don't have anything on that end to dig more into just yet. But again, we'll be focused on it.

Speaker 6

Got it. Just wanted to touch on the pipeline as well. What are the expected yields there? What's the mix between fleet simple and how much is SHOP related?

Speaker 3

So on the pipeline, we're looking at a range of investment opportunities. Some of it's debt, some of it's triple net lease, some of it's shop as we disclosed. So it's really going to depend on the mix of deals that we end up securing. Generally speaking, what we've seen is 8% or more from us. We're still looking at similar yields in that range, again, risk based and product based.

Speaker 3

So that's still going to be our target as we start to do more shop and we enter into a more of a competitive market, maybe some of those yields get compressed a bit, but still feel good about where we're at and that the investments we have in front of us.

Speaker 6

And last one for me. On the Spring Arbor portfolio, I could say, Sharon, can you comment on the assets RevPAR and the portfolio's breakeven occupancy just given the sizes are smaller sub-fifty units in most cases?

Speaker 3

Yes. So we went to each of the buildings and have done a fair amount of underwriting on each one. Some of them are a little more in secondary markets, some are more primary markets. So there's going to be a range of revenue and revenue for residents in each one dependent on the local market fundamentals. We see them as having strong RevPAR for their again for their local markets.

Speaker 3

Some of them do much better, particularly if you're looking at the Raleigh type Raleigh area markets, which we would expect. They are, as you mentioned, a little bit on the smaller side. There's some that have they're a little bit bigger again in some of the bigger markets. But we generally look at breakeven occupancy on buildings of this size and call it the 80% to 85% range. They're trending ahead of that and with room to run, which is also why we offered a earn out because we think that there's value creation that they can continue on this portfolio.

Speaker 4

Thank you.

Operator

Thank you. Our next question is coming from Rich Anderson with Wedbush. Your line is live.

Speaker 7

Hey, thanks. Good morning. So on SLM, just so I got this right. So 3 year transition, 1 sold, 2 loans TBD on that. You were they're paying you $3,400,000 in rent, dollars 1,600,000 in interest.

Speaker 7

I think I have that right. The new what's the expectation in terms of recovery of that whatever that is $6,000,000 or $5,000,000 of NOI in 2025? How would you describe your expectation there? And will the new 3 transitioned properties be on a cash basis as well for the interim period?

Speaker 3

Well, Rich, this is Kevin. I'll address kind of the operational piece and then I can let John or David weigh in on how we treat that from an accounting perspective. But what I'm proposing to our operators be that we're getting back to normal rent levels or income levels in the second half of twenty twenty five. A lot of that depends on how fast we move on this. I think we as it relates to the loans, we have a range of options that we can do that include taking back the properties, foreclosing on some, but not all, selling the loans, allowing for a sale process to happen.

Speaker 3

So that's all stuff that we're working on right now. So we'll need a little bit of time to sort through it and what the best option for NHI is going to be. I do think that there's value in these properties and it's something that we're going to make sure we move quickly, but take the appropriate amount of time to figure out whether or not we're just going to sell or try and move on with all our portion of the communities that are on the loan. On the rent side, 2 of the buildings, we're cash flowing. We expect those to come back online, so to speak, sooner rather than later.

Speaker 3

I'd say 1st part of 2025 and paying something closer to full rent. That's also something that we're working through with them now, making sure that we have CapEx scheduled for the buildings and are getting to where we're not putting them in a negative position with current rent amounts. So we're just mindful of that until we can get them a bridge to a stabilized run rate on NOI. But the 2 of those are doing well. And then the other 2 that we transitioned, 1, we expect it to sell.

Speaker 3

So then we'll be accruing interest of current pay on that once it does sell, which we would expect in the next 30 to 60 days. And then the last one, one other asset in Georgia that we transitioned was already planned to transition as part of our plan to the Wayne James Group. They have a turnaround track record. We did give them a couple of quarters of free rent in order to get the building stabilized. We have they have adequate working capital to get the building back online.

Speaker 3

So if there's a hole that's really the one that we're focused on and why it wouldn't come back quicker in 2025. So it's really just the one building. That said, I think we've got a good management team in place. They have a good track record on getting buildings turned back around, which is why we put them in there. I think that's kind of the quick overview of each one.

Speaker 7

On the 2 that are cash flowing, why is there a free rent offer there as well despite that? Or why is it taking time into 2025 to start seeing cash flow from those 2?

Speaker 3

Well, I wouldn't characterize it as free rent, but it's minimal to moderate amount of rent. The reason for that is a couple of things. We took these buildings very quickly from the previous operator. We've got the transition done in less than 2 weeks. There in doing so, there's PTO that has to be paid out.

Speaker 3

There's payrolls that has been made. There's deposits that have to be made for your utilities. There's CapEx that or certain immediate repair items that the prior operator wasn't mining the store on. So we're allowing them time to make sure that they have stable transition before we start charging the rent. They have made some very small rent amounts to date.

Speaker 3

I expect something more over the next really even 30 days because there is cash flow. But before again, we instituted a fixed rent stream, I wanted to make sure that we understood where they were from an operation standpoint and then we can size it appropriately.

Speaker 4

Okay.

Speaker 7

Any timeline of when you think you might be announcing who the new Chairman will be?

Speaker 2

I'll take that one. This is Eric. Hi, Rich. Well, it will probably be after Andy's retirement the end of the year. So stay tuned.

Speaker 7

Okay. And then last for me, with the election last night, healthcare generally down, any concerns from your seat in terms of potential changes to the ACA or anything that could come back and bite your business specifically? Or do you feel like you're somewhat insulated

Speaker 4

at

Speaker 7

this point from potential changes?

Speaker 2

Well, it's still early days, but there's definitely some pluses and some minuses. There were some Elizabeth Warren, Senator Markey letters circulating that were pretty threatening to our industry. So I'm assuming the impacts of those will lessen. And if you recall, the head of CMS under the previous administration was Seema. She was actually very industry friendly.

Speaker 2

So I'm cautiously optimistic.

Speaker 7

Okay. And I guess one last thing. How far along are you in the discussions with NHC? Is it already on the table in terms of talking about that expiration or still also too early to talk about?

Speaker 2

We have discussions with them periodically. As you know, we engage Blueprint to help advise us about marketability and market pricing and dynamics. So the discussions are ongoing.

Speaker 7

Okay, wonderful. Thanks very much.

Speaker 2

Thanks, Rich.

Operator

Thank you. Our next question is coming from Joshua Dennerlein with Bank of America. Your line is live. Hi. This is Farrell Granath on behalf of Josh Dennerlein.

Operator

I was curious in terms of your same store shop occupancy having a sizable sequential jump, how are you thinking about occupancy levels going forward and your ability to push rates?

Speaker 3

Sure. This is Kevin. Again, the goal here is really to get to 90 plus percent. That's really been the push. We've held revenue fairly flat from a RevPAR standpoint to make sure we get that occupancy and then using incentives strategically to get there.

Speaker 3

We've seen almost half of the buildings strategically to get there. We've seen almost half of the building get to 90%. So we should see those incentives start to burn off the short term ones, start to be lessened as particularly as those communities stabilize. So we think we should see some additional margin expansion as it relates to those buildings. A lot of those have really gotten there in the last, call it 30 to 60 days.

Speaker 3

So we want to make sure they're staying there before we really take our foot off the gas in terms of the incentives. But again, I think we're on a pretty good run rate. The operators are doing well with getting the occupancy where we want to go. Frankly, it's taken us a little longer than we would like to see, but we're getting there. From there, what are we going to see?

Speaker 3

We're looking at a mid single digit revenue increase as it relates to street rates this year. And then as we start to continue to see occupancy stabilize, we should see that flow through to the bottom line as well.

Speaker 8

Hey guys, it's Josh with Farrell. I had another question too. Just like how should we think about labor cost across like the SNF and Senior Housing Industries, maybe under the new administration? I'm assuming a lot of the jobs are kind of lower income, maybe some of the policies that could be enacted. Like how do we think about that versus maybe like the better regulatory environment from a SNF perspective?

Speaker 3

Well, this is Kevin again. From just a straight labor standpoint and just across the asset classes, we had seen a stabilization on the growth rate of labor expense. So I don't think we're looking at a retrenchment of employment rates. I think we're looking at how that stabilizes going into the future. As it relates to SNF, we do have the minimum staffing requirement that will be out there.

Speaker 3

Maybe that gets modified or goes away. So that could be a good thing, particularly on the skill side. On the senior housing and as we're looking at SHOP, labor has been pretty steady there. Again, I don't see employment the pay rates going down, but we don't see them spiking and would like to think that that will continue. Thanks for the time guys.

Speaker 3

Thank you.

Operator

Thank you. Our next question is coming from Amatayo Okusanya with Deutsche Bank. Your line is live.

Speaker 9

Yes. Good morning, everyone. Congrats on the solid quarter. I wanted to talk about the Board a little bit. With Andy retiring, does that mean there's another opening for another Board member?

Speaker 9

And could we also get an update on the search for the current independent board member that's also ongoing?

Speaker 2

Hey, Tayo. This is Eric. Right, as you know, on our supplemental proxy last year, we said that we would add a new board member, an independent board member. That search has been conducted. We're down to a small group of finalists.

Speaker 2

And my anticipation is that, that finalist will be presented for the next proxy season. So, shareholders will have a chance to vote on them. Whether or not Andy's seat gets replaced is a good question and one that hasn't been discussed yet. As you know, the new board member was an addition to 8 person board making it 9. So, we'll probably wait and see on that one.

Speaker 9

Okay. That's helpful. And then just sticking to the theme of the election, I think again, anything at the state level through this election cycle that you guys are keeping an eye on or that we should be we should have been aware of? I know we've kind of talked at the federal level about ACA and minimum staffing, but anything at the state level that was on your radar?

Speaker 2

There's lots of interesting subsidy programs for skilled nursing operators. When you peel back the onion on a lot of operations in states, there's lots of supplemental payments that have been made since COVID. And it's not a given that these payments will continue from year to year. So it's very local legislature driven and very lobbyist driven. So those are some things that we're watching closely.

Speaker 9

Got you. All right. Thank you.

Speaker 2

Thank you, Tayo.

Operator

Thank you. Our next question is coming from Austin Wurschmidt with KeyBanc Capital Markets. Your line is live.

Speaker 10

Great. Thank you and good morning everybody. Do any of the skilled nursing or other investments that you discussed in the prepared remarks either in the $350,000,000 of investment pipeline or beyond that amount include any deals with PACS?

Speaker 3

This is Kevin. Not currently. No, we're just getting to know them as a new customer in our portfolio. So we haven't talked in detail of any new ventures just yet.

Speaker 10

And then Eric, your prepared remarks, I mean, you remain upbeat about the prospect for new investments. I think last quarter you had referenced a funnel of $1,800,000,000 dollars So I guess how quickly are you able to close the current pipeline, backfill it? And as we think about the right pace of investments, I guess is there any need to add additional overhead at this time?

Speaker 2

Good question. I've always said that a good annual run rate for us is between $200,000,000 $400,000,000 I would consider this year a partial year. We're at $200,000,000 and we'll probably squeeze in a closing or 2 before the end of the year. As for the larger pipeline, that's probably 2025 either 1st or second quarter timing thing. As you know, especially with senior housing, these are licensed buildings and a lot of the states take a long time to do their inspections and then issue licenses to the new operators.

Speaker 10

Do you think that there's a possibility that you could start to see that investment pace ramp? I mean, we've seen some peers really kind of exceed that annual amount pretty significantly. And I'm just wondering if you feel like the opportunity is there to even exceed that amount to the extent that the cost of capital remains attractive?

Speaker 2

I do. I do. We have a habit around here of under promising and over delivering. So there could be some of that going on. And frankly, a lot of us still have PTSD from the pandemic.

Speaker 2

So, closings and new business are new muscles that haven't been used for a while. You asked about overhead as well. We did recently hire a Senior Vice President of Legal Affairs. So, we are beefing up our capability in terms of staffing and closings.

Speaker 10

Helpful. And then just last one for me on SHOP. I mean guidance the updated guidance implies fairly significant moderation in year over year growth in the Q4, but you have seen some recent momentum as you highlighted in occupancy and see more upbeat about your ability to push on rate. I guess, how do we kind of think about the cadence in NOI growth? Should we expect some level this deceleration into year end and then a reacceleration from there?

Speaker 10

I guess how quickly do you think that you can implement rate increases and really see reacceleration in NOI? Thanks.

Speaker 3

Sure. This is Kevin. On that, I think we're just being mindful of the incentives being used, want to make sure that the buildings are stabilizing at their the targeted occupancy of greater than 90%. As I mentioned, there's nearly half of them are there. But again, it's getting to that 90% mark and making sure that we can stop using the incentives before we start to forecast that there's going to be additional growth.

Speaker 3

We expect to see that follow the bottom line. I think it's going to be we're looking at that being kind of a mid-twenty 25, but it could if we get through winter and we're able to hold occupancy and have to and not use incentives to do it, I mean, there's a chance we see that sooner, but we don't want to forecast that it happens until we start to see it where we want it to be.

Operator

Our next question is coming from John Kielczynski with Wells Fargo. Your line is live.

Speaker 5

Thank you. If we could start back on SHOP, I know we were just discussing this and Kevin went through in the opening remarks. But as we're thinking about Rev 4 and I understand that we're using incentives to drive occupancy growth. But based on what your peers are saying, the operating leverage of the business sort of accelerating past, call it, low 80s occupancy, What's the difference there when I think about your properties versus theirs in terms of why you need to pursue the strategy? Or is this purely just a difference in strategy that you think will help you get to that occupancy number that you need to be at and then allow you to really drive rent growth.

Speaker 5

I'm just curious if residents were not receptive to it and it's forced you to pursue this policy or if this is something that just made the most sense that you've run with?

Speaker 3

Well, I think it's a combination of a couple of things.

Speaker 7

1, just want to

Speaker 3

make sure we're talking about the same product type. This being not only an independent level model, but it's a mid price point model. So something where they are priced, it's a price sensitive customer anyway. Furthermore, we chose the strategy of using price to get full and we've stuck to it. Could we have played with pricing along the way to see if it would test out a little bit sooner?

Speaker 3

Perhaps, but changing course midstream just didn't make sense to us when we were starting to see the acceleration on occupancy. Again, as we see these incentives burn off, we'll see that fall to the bottom line. We've just, again, seen the strategy through to make sure that we got the occupancy we wanted the residents in the community. And one thing I'll remind you of is the previous operator left us in a trough with where we picked up occupancy and operations and we had to climb out of it and try and do so on an expedited basis. So that's one big reason why we did it.

Speaker 3

It's stuck to this, use pricing as our mode to get to where we want to go on our pricing.

Speaker 5

Got it. And then on the I think we discussed this last time, but length of stay had been shortening. Are you still seeing that? And is that still part of the equation here that's sort of limiting Rev 4? And maybe what do you think changes that or what's driving that?

Speaker 3

Well, length of stay is, I would say, is a little lighter than where we would like it to be, but it has been at a stable level and is on par with where we're seeing length of stay in the broader industry. Under prior management, 2 before Atria and really is what under the holiday days, they had a longer length of stay than we're seeing now. But I think that's a fundamental shift that we've seen across property types. We started to see it ticked down anyway and then coming out of the pandemic, it's really shifted on both independent and assisted. So they're holding serve, but we're seeing that stay fairly steady now, but again, just below where we were.

Speaker 3

So that's also one reason why we want to make sure we have occupancy and a cadence of move ins to where we're holding at that 90% level before we pull back too much from an incentive standpoint. So it's weighted into our decision on pricing. Definitely, there's a lot more churn than what we were seeing before, but I think that's just where we're at in the industry.

Speaker 5

Got it. And then maybe just one on the election, with given your SNF exposure, Medicare Advantage, do you think that a Republican sweep does anything to sort of expand that mix within your exposure there? Or do you think that just keeps it from maybe shrinking if there were a Democrat in office? Curious how you think that impacts you there?

Speaker 2

I'll take that one. As I was saying earlier, the only read through we have on that is the previous administration had a very capable head of CMS, Seema was her name. And I was particularly impressed with the rate increases and the regulatory climate. So I'm cautiously optimistic that there will be someone similar to her in the new administration.

Speaker 5

All right. Thank you.

Speaker 2

Thank you.

Operator

Thank you, ladies and gentlemen. As we have no further questions in queue at this time, I'd like to turn the call back over to management for closing remarks.

Speaker 2

Thanks everyone for attending and for your time and attention today. And we'll look forward to seeing you at NAREIT or some other investor conference.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. And you may disconnect your lines at this time. And we thank you for your participation.

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Earnings Conference Call
National Health Investors Q3 2024
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