National Health Investors Q4 2024 Earnings Call Transcript

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Operator

Good day, everyone, and welcome to the National Health Investors Fourth Quarter twenty twenty four Earnings Webcast and Conference Call. At this time, all participants have been placed on a listen only mode. If you have any questions or comments during the presentation, you may press star one on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Dana Hambly. Sir, the floor is yours.

Dana Hambly
Dana Hambly
Vice President, Investor Relations at National Health Investors

Thank you, and welcome to the National Health Investors Conference Call to review results for the fourth quarter of twenty twenty four. On the call today are Eric Mendelson, President and CEO Kevin Pascoe, Chief Investment Officer John Spady, 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.

Dana Hambly
Dana Hambly
Vice President, Investor Relations at National Health Investors

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 K for the year ended 12/31/2024. 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 eight 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.

Dana Hambly
Dana Hambly
Vice President, Investor Relations at National Health Investors

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

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Hello, and thanks to everyone for joining us today. We ended the year on a strong note as the fourth quarter results exceeded our expectations with contributions from across the portfolio. Our cash rent increased by nearly 9% year over year on solid organic growth from rent step ups and deferral repayments as well as increased investment activity. Shop occupancy continued to accelerate through the end of the year, which helped to generate 12.5% NOI growth and we announced investments of over $150,000,000 during the quarter at an initial yield of 8.5%, while our balance sheet leverage ticked down to 4.1 times from 4.4 times in the third quarter. Reflecting on the full year's results, we benefited from similar trends.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Our hard work performed during the portfolio optimization contributed meaningfully to 2024. This included over $11,000,000 in total deferral repayments and approximately 17% growth in Bickford's cash rental income. SHOP NOI increased by approximately 32%, which was above the high end of our guidance, driven mainly by improved occupancy and three fifty basis points of margin improvement. From a capital allocation perspective, we announced over $235,000,000 at an average yield of approximately 8.6%. This was our most active year since 2019 and the momentum is clearly building.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

As a result, the company delivered growth in annual NAREIT FFO, normalized FFO and FAD for the first time since 2020. And while that growth is not linear, we exceeded the high end of our original February guidance for the full year. John will provide more details in his comments. Looking forward to 2025, we expect growth to continue as reflected in guidance. As noted a moment ago, our 2024 results were bolstered by rent step ups and deferral repayments resulting from the effects of COVID era restructuring.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

While we still expect some benefit to accrue from the 2025 financial results, we are looking for other avenues to support internal growth. Specifically, we're considering select opportunities to transition triple net senior housing assets to SHOP structures where we see excellent long term potential with existing or new operators. The senior housing industry has exceptional tailwinds, so we believe this strategy is a capital efficient way to improve shareholder value by increasing our overall exposure to senior housing operations and working with strong partners to generate greater cash flow and higher real estate valuations. We also continue to see significant organic upside in our existing SHOP platform. With the portfolio operating at close to 90%, we plan to strategically increase Rev four to further drive margin expansion.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

After 32% NOI growth in 2024, we're guiding to 12% to 15% in 2025. Turning to our outlook on external growth, the balance sheet is in great shape and very supportive of funding significant investment opportunities. We were able to be advantageous in the equity markets last year by raising net proceeds of approximately $262,000,000 on a forward basis of which approximately $119,000,000 remains available to settle. As John will detail in his comments, we are including $225,000,000 of incremental investments in our guidance reflecting our high conviction in the near term outlook. While we're not including any investments beyond that, I think it's safe to say that we'd be disappointed if we did not surpass last year's total of $237,500,000 We're off to a good start in 2025.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

We closed $21,200,000 sale leaseback in January, have $152,300,000 under signed LOIs, and in addition, we have an active pipeline of approximately $190,000,000 dollars In closing, I'm pleased with the execution in 2024 and I'm very optimistic that 2025 will be an even more productive year. While the interest rate environment has weighed recently on the cost of capital, we still have the capacity and ability to move more quickly than other capital providers to the senior housing sector who have either scaled back their exposure or exited the industry entirely. As operators rush to take advantage of the most favorable industry fundamentals in the history of senior housing, NHI is competitively positioned as the partner of choice, which convinces us that we're in the early days of multiple years of exceptional growth. Before I turn the call over, I want to briefly comment on the recent filing in which Land and Buildings has nominated two candidates for election to our Board of Directors at the upcoming annual shareholder meeting. The company and the Board take information received from shareholders very seriously.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

As such, the Board has made significant changes over the last several years, which reflect its commitment to its fiduciary responsibility and in direct response to shareholder concerns. We appreciate everyone's interest and hope that you'll understand that we have no further comment on this matter. I'll now turn the call over to Kevin to provide more details on our operations. Kevin?

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Thank you, Eric. Since our last call in November, we have announced investments of $53,100,000 at an average initial yield of 9%. This included $28,100,000 in real estate acquisitions at an average yield of 8.1% and a $25,000,000 loan at 10%. We have $152,300,000 in board approved deals with an average yield of 8.2% that are expected to close in the first half of this year. This includes a mix of senior housing sale leaseback and real estate acquisitions as well as mortgage and construction loans with purchase options.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

We also have an actionable pipeline of approximately $190,000,000 in investments, which have a reasonable chance of closing within the next twelve months. Not included in this figure are portfolio deals including shop deals. Turning to asset management, I want to comment specifically on a master lease on six properties in a partnership with Discovery Senior Living. As you will recall, we amended this lease in November of twenty twenty three with a scheduled 05/01/2025 reset to a minimum of a 5% yield on gross investment. While we have seen NOI growth, the buildings have not performed as expected, so we are evaluating several options including transitioning the properties another operator.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

These properties generated $4,500,000 in 2024 base rent and approximately $1,200,000 in deferral repayments. While no final decisions have been made, we currently model a slight increase in the base rent, but not to levels contemplated in the 2023 amendment. We expect to provide a more detailed update on this portfolio as we continue our evaluation. Now turning to the results, we had another good quarter with improving EBITDARM coverage and cash collections as well as solid contributions from acquisitions and shop growth. The knee driven operators again had positive coverage trends with EBITDARM at 1.41 times.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Mickford's coverage adjusted for the April 2024 rent reset was 1.63x, while the other needs driven tenants coverage improved sequentially to 1.22x from 1.15x. We made good progress on repositioning the SLM portfolio and expect that we will have recaptured a significant portion of that NOI by the end of twenty twenty five. Of the four leased properties, one was transitioned to the William James Group in October with cash rent commencing April 1. Two properties in Louisiana are now under triple net lease effective in January of this year. And the remaining property was sold for $9,700,000 in net proceeds of which NHI provided $9,400,000 in financing at 8.5% during the fourth quarter.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Earlier this month, we took ownership of the Florida property that secured our $10,000,000 mortgage note and are leasing it to Mainstay. We are still evaluating options on the $14,500,000 mezzanine loans on which we carry a substantial reserve and we'll provide more details when available. Our entrance fee and skilled nursing portfolios continue to show great performance. The discretionary senior housing portfolio, which includes our entrance fee portfolio had coverage of 1.7 times compared to 1.6 times in the sequential period. The Smith portfolio reported solid coverage of 3.05 times, which improved sequentially from 3.04 times.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Recall that the SNF coverage is largely driven by NHC, which is calculated using a fixed charge coverage at the corporate level as opposed to a facility level EBITDARM. Lastly, in SHOP, the momentum we saw throughout the year continued through the fourth quarter. NOI increased 12.5% year over year to $3,200,000 resident fees increased by 8.1% year over year driven by occupancy improvement of six twenty basis points to 89.4%. The margin improved 90 basis points to 23.2%, which was the strongest result since the second quarter of twenty twenty two. With the portfolio occupancy approaching 90%, we are starting to strategically target RevPOR growth as the primary driver to margin expansion.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

For the quarter, RevPOR increased 60 basis points. While small, this was actually the largest RevPOR increase since we started operating the SHOP platform. We see plenty of runway for organic upside in SHOP and target NOI growth of 12% to 15% this year. And with the expectations for several hundred basis points of margin improvement over the long term, we expect elevated NOI growth for the foreseeable future. The portfolio is expected to show normal seasonal patterns with occupancy and NOI dipping in the first quarter and improving throughout the year.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

I'll now turn the call over to John to discuss our financial results and guidance. John?

John Spaid
John Spaid
CFO at National Health Investors

Thank you, Kevin, and hello, everyone. For the year ended 12/31/2024, our net income per diluted common share was $3.13 unchanged from the prior year. Our NAREIT FFO results per diluted common share for the year and quarter ended 12/31/2024 compared to the prior year periods increased 3.613.8% to $4.55 and $1.24 respectively. In the fourth quarter, we recognized a non cash non operating gain of $6,300,000 related to our forward ATM equity activity that is reflected in net income and NAREIT FFO. I'll talk more about this item in a moment.

John Spaid
John Spaid
CFO at National Health Investors

Our normalized FFO results per diluted common share for the year end quarter ended December 31 increased 2.52.8% to $4.44 and $1.12 respectively as compared to the prior year periods. FAD for the year and for the quarter ended December 31 compared to the prior year periods increased 8.710% to $204,200,000 and $52,100,000 respectively. Sequentially compared to the third quarter, cash rent for the fourth quarter increased $2,600,000 largely attributable to $2,300,000 in new rent associated with the Spring Harbor Portfolio acquisition, but also due to higher sequential deferred rent collections. Those increases were partially offset by other changes including $300,000 in lower cash rents attributable to the SLM default. NOI from our shop portfolio for the year and quarter ended December 31 increased 3212.5% to $12,200,000 and $3,200,000 respectively compared to the prior year periods.

John Spaid
John Spaid
CFO at National Health Investors

Loan and Realty losses for the year increased 3,900,000 compared to the prior year. The increase was primarily due to the increased reserves on the mortgage and loans related to the SLM default. During the fourth quarter, we disclosed the two properties that were previously classified in assets held for sale and recognized $5,000,000 in gains on sales of real estate. The company ended the year with no properties classified as held for sale. For the year, we made investments of approximately $237,500,000 and an average initial yield of 8.6%.

John Spaid
John Spaid
CFO at National Health Investors

Our financing activities included forward overnight and equity transactions totaling approximately $272,000,000 in gross proceeds on 3,700,000.0 common shares at a price of $72.54 before fees. We also retired $75,000,000 in senior notes utilizing proceeds from our revolver. We additionally recast our $700,000,000 revolver, extending the facility's maturity date into 2028. As we previously mentioned in our third quarter earnings call, after closing the Spring Arbor investment, we delivered 1,800,000.0 shares under our August forward overnight equity offering for approximately $122,400,000 in proceeds. As we previously mentioned, our investment activity continues to be very active.

John Spaid
John Spaid
CFO at National Health Investors

Subsequent to the Spring Harbor closing through January of this year, we closed an additional $53,000,000 in investments and an average yield of nine percent. As a result of our investment pipeline during the fourth quarter, we activated our ATM and sold on a forward basis 989,000 common shares and an average price before fees of $76.14 per share. As we close the additional investment activity just mentioned at the end of the year, we settled 266,000 common shares of the ATM Forward equity at an adjusted forward price of $75.22 per share after fees for proceeds of approximately $20,000,000 Including the remaining escrowed, August overnight equity forward proceeds, at the end of the year, we had total escrow forward equity proceeds of approximately $118,700,000 available to us in exchange for the future delivery of 1,680,000.00 common shares at an average price of $70.53 per share. I mentioned in my summary of operating results the $6,300,000 gain on forward equity sale agreement recognized in the fourth quarter associated with our ATM equity activity. This gain was recognized because our forward equity arrangement was deemed not to satisfy all the accounting requirements for equity classification during the time we were raising equity during the quarter.

John Spaid
John Spaid
CFO at National Health Investors

The accounting treatment moves some of the equity from paid in capital to retained earnings via the income statement. So it's more presentation than substance and should be viewed through that lens. Our balance sheet ended the fourth quarter and you're in great shape. Our net debt to adjusted EBITDA ratio was 4.1 times for the fourth quarter, well within our stated four to five times leverage policy. We ended the year with approximately four twenty five million dollars in available ATM capacity.

John Spaid
John Spaid
CFO at National Health Investors

And as I mentioned, we continue to have approximately $119,000,000 in remaining equity forward proceeds available to us. At the January, we had $327,000,000 of availability on our revolver. For 2025, we're focused on the company's liquidity needs as we continue to make investments and plan for the retirement of our maturing debt. We intend to exercise our right to extend our $200,000,000 term loans maturity date into 2026, and we will retire our other maturing 2025 debt totaling $125,800,000 We are monitoring long term bond rates and continue to expect to tap the public bond market in 2025 to further improve our liquidity. Let me now turn to our dividend and guidance.

John Spaid
John Spaid
CFO at National Health Investors

As we announced last night, our Board of Directors declared $0.9 per share dividend for shareholders of record 03/31/2025 and payable 05/02/2025. Last night, we also issued our full year 2025 guidance. Our guidance for NAREIT FFO and normalized FFO per diluted common share at the midpoint is $4.63 or 1.84.3% increases respectively over 2024. Our guidance for FAD at the midpoint is $221,700,000 or an 8.6% increase over 2024. Our guidance this year includes the impacts from escrow to forward equity proceeds during the year.

John Spaid
John Spaid
CFO at National Health Investors

So, because our confidence in our pipeline has led us to raise significant forward equity, today we are including in guidance our view on our future 2025 unidentified investment activity. Our 2025 guidance includes $225,000,000 in new investments and an average yield of 8.1%. The timing for the investments is generally assumed to occur ratably over the year. In the future, we may discontinue giving guidance for unidentified investments should we discontinue obtaining equity on a forward basis. Our guidance includes SHOP NOI growth in the range of 12% to 15% over 2024.

John Spaid
John Spaid
CFO at National Health Investors

Our guidance includes the continued collection of deferred rents and the fulfillment of our existing commitments. It also includes our preliminary assumptions for the annual NHC percentage revenue rent increase and the Discovery PropCo 05/01/2025 rent step up. We expect NOI from the Discovery base rent will increase this year, but we do not believe the portfolio will be able to meet the 5% target yield set under the lease. The anticipated Discovery lease modification will likely result in change in the portfolio's GAAP revenues. Finally, guidance continues to include assumptions for additional costs and concessions related to normal asset management transitions, dispositions and loan repayments.

John Spaid
John Spaid
CFO at National Health Investors

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

Your first question is coming from Rich Anderson from Wedbush. Your line is live.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Thanks. Good morning. So on the SLM, if you could just sort of triangulate that for me, John, how much rent and interest income did you generate in 2024? And how much are you expected to generate in 2025 inside the framework of your guidance?

John Spaid
John Spaid
CFO at National Health Investors

So we're talking about rent and interest or just rent?

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Yes. The whole nut, rent and interest.

John Spaid
John Spaid
CFO at National Health Investors

So, rent and interest in including our mezzanine loan would be probably closer to fifty five percent 2025 versus 2024 on a say full year, full quarter over full quarter basis when we get to the end of the year.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay. So run rate by the fourth quarter?

John Spaid
John Spaid
CFO at National Health Investors

Yes. But the mezzanine loan and Kevin can talk more about this is still in a state of flux that can improve materially.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Before Kevin jimes in, what about on just rent? Would it be Yes.

John Spaid
John Spaid
CFO at National Health Investors

So it would be about 70% of rent. Right. I was trying to get to that.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Yes.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay. And can you guys comment on the mezz piece? I know it's a TBD at the moment, but any more color there, $14,500,000

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Rich, this is Kevin. As you said, it's TBD, but but we're looking at several alternatives. We know that the company SLM is going through a sale process. We're negotiating with them on what a recovery would look like assuming that they execute the sale. Financing right now is still not terribly easy to come by, particularly on distressed properties, but there are a few in there that are producing NOI.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

So we expect to my expectation is that we have some element of a recovery. We're still in terms of dollar size, don't know. We're looking at alternatives in terms of what can we do, is there a buy opportunity or for us to step in and help a prospective buyer, if it's somebody that we want to work with. So we've got a lot of options on the table. So it's still to be continued.

John Spaid
John Spaid
CFO at National Health Investors

Hey, Rich, John.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Yes, go ahead.

John Spaid
John Spaid
CFO at National Health Investors

I got one more comment, if I can make on this. It's a little bit of an apples and oranges equation too. As you think about it, what we're trying to do is collect our principal on the mezzanine loan, and then of course we redeploy it. But if we can collect that principal, depending on how much we collect, we could recoup some of our credit loss reserve and then redeploy the proceeds. At the very least, it would go to pay down or right now our 5.5% cost revolver.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay. Second question, you're not talking about land and building, so I understand that. But on NHC, that expires in 2026. I know it's not too soon to be talking about that. It's over three times on a corporate level.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

I guess at the property level, it's got a two handle on it. You may not comment on that, maybe you will. But what's the market in your mind for those assets in their markets in terms of what would be appropriate market coverage should you get a fair deal out of that lease expiration? Thanks.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Hey, Rich, this is Eric. The market is very robust for these buildings. They're in good markets. A market coverage in my opinion would be 1.3, one point four. And with a new operator, you'd have to account for transition trauma and NHC under the lease and this is all publicly in their publicly listed lease.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

NHC does have the right to retain personal property. So you'd have some CapEx or FF and E costs on a transition. But there's room to maneuver there. And we're having active discussions now with NHC and other interested parties.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay, sounds good. Thanks very much.

John Spaid
John Spaid
CFO at National Health Investors

Thanks, Rich.

Operator

Thank you. Your next question is coming from Juan Sanabria from BMO Capital Markets. Your line is live.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Hi, good morning. Just with regards to SHOP, hoping you could talk about the piece parts to guidance with regards to assumptions behind occupancy and rate behind the 12% to 15%? And then maybe as part of that, if you could expound upon the comments made by Eric at the top of the call about considering some transitions, it sounded like of existing operators from triple net to shop.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Hey, Juan, this is Kevin. In terms of how we're looking at performance for SHOP over the year, we had good momentum throughout 2024. Feel like we ended the year on a high note. As we also talked about in our prepared remarks, we have some seasonality in the first quarter. And then we're looking back at getting momentum on occupancy throughout the balance of the year and being able to push Rev four over that period.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

So when we take in those pieces, we think that we can continue to grow it again the 12% to 15% that we mentioned on a year over year basis. There might be some opportunity there where we're evaluating some more operational structures and how there might be some cost savings here and there. Overall, though, it is going to be more of a revenue play and a lot of it is just reducing the incentives. And as they continue to burn off, we'll see the Rev four climb a little bit higher. We've talked about it going up a bit quarter over quarter.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

We'll be looking to see that continue to improve throughout the year. So I think we've pushed our operating partners to be able to continue to deliver better performance. We're still continuing to put CapEx into these buildings, which the delivery of that will also help as we look at Rev four and performance. We've got some more work to do on that. I mean, I think that's just how we were building the forecast for the year and thinking about where we can go with this portfolio.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Great. And then I was just hoping you could comment on Bickford. It looks like the second half of the year from the late summer saw deterioration in the occupancy from the same store pool that you disclosed in the press release. Just what's driving that? Any pause or thoughts or concerns around that loss of momentum?

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Excuse me.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

I think there's a little there's a couple of things in there. One, they pulled forward their rate increases. So you had a little bit of move out just from a price point standpoint. On the whole though, it's still a net positive for Bickford from NOI look at the portfolio. And then you have some seasonality as well that I think started creeping in there in some of the winter months.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

So I think they can still be successful throughout the year. They are known for delivering higher acuity care. It's going to be at a higher price point. So some of the people that moved in that were maybe on the edge in terms of affordability decided to move out, but they've done a really nice job or continue to do a really nice job of selling the care that they deliver. But I think that's part of the occupancy piece that you're seeing there.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Thank you.

Operator

Thank you. Your next question is coming from Amocha Okusanya from Deutsche Bank. Your line is live.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

Yes. Good morning, everyone. Kevin, hoping you can help me understand the acquisition guidance a little bit better. It's $225,000,000 built in, but it sounds like you have $150,000,000 plus or so already in LOIs and a pipeline of 190. So could you just help us reconcile a little bit that $3.40 versus guidance of 02/25, especially when you still have another kind of ten months to go in the year?

John Spaid
John Spaid
CFO at National Health Investors

Sure. This is John Tayo. How are you doing?

John Spaid
John Spaid
CFO at National Health Investors

Let me

John Spaid
John Spaid
CFO at National Health Investors

take that one.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

Hey, John.

John Spaid
John Spaid
CFO at National Health Investors

Yes. So in our guidance is our expectation to close a number of those properties in the LOI, but they're under LOI, so they're not definitive agreements just yet. So we have high degree of confidence that we're going to be able to hit the number in our guidance. Our guidance is a combination of sale leasebacks as well as additional mortgage loans. That's how we got to the weighted average yield.

John Spaid
John Spaid
CFO at National Health Investors

We expect to under promise and over deliver on that number. And you're right, we have quite a bit more in our pipeline than in our guidance. So there's some upside there clearly.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

Okay, that's helpful. And then second question also on deferred rent collection. If you could help us through that as well. The balance is $21,000,000 or so. You collected about $11,000,000 in 2024.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

Just help us understand what's kind of baked into 2025 and if there's any potential upside there as well?

John Spaid
John Spaid
CFO at National Health Investors

Yes, there is upside. Recall though that some of the equations on that $21,000,000 include some deferral credits that if the operators perform or exceed performance, they might get some credits. But generally our guidance is still in line with what you saw in the fourth quarter for the collection of deferrals and are primarily Bickford. Let me back up a minute. Actually, they're approximately a million a little over $1,000,000 a quarter.

John Spaid
John Spaid
CFO at National Health Investors

The fourth quarter was a little ahead of what we forecasted.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

So you have about $4,000,000 baked in for $2,025,000,000 dollars relative to the $11,000,000 from 2024?

John Spaid
John Spaid
CFO at National Health Investors

That's right.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

And the reason for the big slowdown is?

John Spaid
John Spaid
CFO at National Health Investors

Well, it depends on the source of the deferrals, right? And there was quite a few extraordinary collections in 2024 that looks very difficult to repeat in 2025. For example, Chancellor paid a $2,500,000 number. There were some others, including some from Discovery that we don't think that are going to be repeatable in 2025. So that's just our guidance right now.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

Gotcha. That's helpful. Then one more for the road. Discovery, How ultimately do you expect that to play out? If you just kind of help us kind of go through kind of different scenarios for that, just kind of given some of the earlier comments about the profitability not quite getting to where you need to kind of get the direct reset you were expecting?

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Tayo, this is Eric. Is your question regarding the future of the collectability of deferral payments?

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

It's a combination of both things. It's the future of the deferrals and also if you couldn't get the or you're not going to get the direct reset you were expecting at the reset date. I think there was some conversation of you are expecting a step up in rents anyway. But longer term, this idea of where you're going to is there going to continue to be an operator? Do you potentially see you guys transitioning to someone else?

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

What could that look like? Just kind of trying to think about the ultimate scenarios for that portfolio.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Right. Okay. So your question is deferrals and then rent resets and then operators who aren't able to make the rent reset hurdles.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

What do we do at that point?

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Yes. So at that point, we would investigate either re tenanting the building. Sometimes it's one building in a group of buildings that's the problem. Maybe you sell that one building or re tenant that one building. And as we said in our prepared remarks, we're also doing an analysis to see if converting it to SHOP or RIDEA would result in greater NOI.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

So everything's on the table in that instance.

Omotayo Okusanya
Omotayo Okusanya
Managing Director at Deutsche Bank

Sounds good. Thank you.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Thanks, Tayo.

Operator

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

Austin Wurschmidt
Austin Wurschmidt
Senior Equity Research Analyst at KeyBanc Capital Markets

Great. Thanks and good morning everyone. Eric, commentary continues to be very positive around investments. Level is that you can continue to backfill that pipeline and what kind of the right size that we should be thinking about on a future pipeline basis where that where the right level is?

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Hey, Austin, this is Kevin. I would tell you that when we're looking at the $350,000,000 that you quoted, you're right, it's a similar size, but it's a different opportunity set. We continue to look at a bunch of different opportunities. I can tell you that if we looked at the total funnel, it's a couple of billion dollars in terms of what we're looking at at any given time, which again continues to churn week over week and month over month. So I feel pretty good about the opportunities that we're seeing in front of us.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

It's really just whittling it down to the ones that we think are executable and then moving on from those that are not. So it may look like a stagnant number, but I can tell you with certainty that it's a pretty new opportunity set each week to month and we just kind of

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

whittle it

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

down to the ones that we think are actionable. So as the market sits today, I feel pretty good about our outlook.

Austin Wurschmidt
Austin Wurschmidt
Senior Equity Research Analyst at KeyBanc Capital Markets

That's helpful comments. And then with respect to the larger portfolio opportunities outside of that pipeline, I mean, would you care to size up, I guess, the number of opportunities or investment volume that that includes and what your confidence level is that maybe you're able to close one or more of those opportunities?

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Well, I don't know that I can say anything different than other than what we talked about in the prepared remarks, which is our portfolio deals are not or shop deals are not included in what we talk about from our investment pipeline. As I just mentioned, we're looking at a couple of billion dollars worth of stuff at any given time. So I feel good about the opportunity for us to be able to get down the path on some of those, but we're not at a place where we want to give you guidance based on something that it would be a pretty meaningful change to the company. So we're holding back on that.

John Spaid
John Spaid
CFO at National Health Investors

Hey Austin, this is John.

John Spaid
John Spaid
CFO at National Health Investors

Let me add another $0.02

John Spaid
John Spaid
CFO at National Health Investors

to that. In the fourth quarter and a little bit recently, there's been a lot of movement in everybody's cost of capital and we're very sensitive to deploying capital that's accretive. So if you think about it, we're always looking at the opportunity set and then the long term interest rates and our stock price. And so despite some of the increased cost of capital that we've seen here recently, that opportunity set is still penciling out well on an accretive basis.

Austin Wurschmidt
Austin Wurschmidt
Senior Equity Research Analyst at KeyBanc Capital Markets

And that's all helpful. And then just the last one for me. This I think got asked that maybe looked over a little bit from an earlier question, but the presentation last night did highlight potential shop conversion opportunities. And I'm just wondering if you could size up how big that could be from a gross investment or in place NOI perspective and whether or not the Discovery triple net assets are a consideration for conversion with a new operator?

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Hey Austin, this is Eric. Yes, the Discovery portfolio is definitely a possibility and so are others. We have other operators that are currently running RIDEA portfolios for other REITs, have a strong back office, which is one of the criteria we're looking at and

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

would be

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

a

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

good partner for us to start our RIDEA journey.

Austin Wurschmidt
Austin Wurschmidt
Senior Equity Research Analyst at KeyBanc Capital Markets

Understood. Thanks for all the comments.

Operator

Thank you. Your next question is coming from John Kielczynski from Wells Fargo. Your line is live.

John Kilichowski
John Kilichowski
Vice President - Equity Research Analyst at Wells Fargo

Thank you. Good

John Kilichowski
John Kilichowski
Vice President - Equity Research Analyst at Wells Fargo

morning. Maybe just going back to that last question, talk about sizing the opportunity. How about the earnings impact of any SHOP transitions here? I know that there's probably some elevated CapEx and some transition time associated with those. So I'm not sure if there's maybe upside to '25 guide or if this will likely roll through to '26?

John Spaid
John Spaid
CFO at National Health Investors

Hey, John, this is John Spade. Yes, we're very sensitive to that as a matter of fact. And it ultimately comes down earnings growth, NOI growth, transition trauma and like you said, CapEx requirements. So the opportunity sets vary depending upon the current coverage ratios over the current rent. So obviously, if we convert something that's well covered, suddenly all that EBITDAR, if there's no transition trauma, could be very accretive.

John Spaid
John Spaid
CFO at National Health Investors

But there's whenever there's a transition to a new operator, there's going to be some trauma. So we'll have to work through that and communicate that properly to you. And then of course, we'll also communicate to you what our expectations are for the CapEx requirements as well. So every opportunity sets a little different.

John Kilichowski
John Kilichowski
Vice President - Equity Research Analyst at Wells Fargo

Okay.

John Kilichowski
John Kilichowski
Vice President - Equity Research Analyst at Wells Fargo

And then how about when might you all start including SHOP acquisitions in your pipeline guide? And then maybe help us understand what the total opportunity set. What does the end of twenty twenty five look like in terms of total shop exposure in your portfolio?

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

This is Eric. I could see it being 5% to 10% of our portfolio by end of this year, early next year.

John Kilichowski
John Kilichowski
Vice President - Equity Research Analyst at Wells Fargo

Okay, great. Thank you.

Operator

Thank you. Your next question is coming from Farrell Granite from Bank of America. Your line is live.

Farrell Granath
Farrell Granath
Equity Research Associate at Bank of America Merrill Lynch

Thank you for taking my question. I was curious just in terms of your acquisition pipeline, are you looking to expand your skilled nursing portfolio?

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Hey, this is Kevin. We're absolutely looking. It's just a matter of getting an opportunity at the right price with the right operator. We have very good skilled nursing operators now. We would love to do more with them.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

That said, the market's been pretty frothy, we think from a pricing perspective and we've been pretty rigorous around our underwriting criteria in terms of our expectations of credit and coverage. So we haven't seen anything lately that we were ready to act on, but we continue to look, we'd love to see that percentage of investment in our portfolio tick up a little bit if we could get something of reasonable size to add. But right now, again, it's just we haven't seen those opportunities, but we would absolutely take a look.

Farrell Granath
Farrell Granath
Equity Research Associate at Bank of America Merrill Lynch

Great. And I was hoping to get a few comments just with current news, the House passing their budget through a vote, and then with the Senate having their own budget outlined with possible cuts to Medicaid, Any thoughts on how maybe that would impact your business or going forward in your negotiations?

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

Sure. This is Kevin again. It's something we're watching, but it's I think too soon to tell. It seems to be teed up that it may affect those programs. That said, from what I've seen so far, it's not explicitly outlined in the bill.

Kevin Pascoe
Kevin Pascoe
CIO at National Health Investors

So we'll be working with our operators and make sure we understand and our other resources that have closer intel to what's going on in Washington. Anecdotally though, what we've heard from our other resources is that it has not cooled the market in terms of skilled nursing and buyers interest or pricing. So we'll see where that goes. But to date, it still remains pretty robust market.

Farrell Granath
Farrell Granath
Equity Research Associate at Bank of America Merrill Lynch

Great. And sorry, one more from me about within your guidance, do you have any bad debt or credit loss assumptions baked in?

John Spaid
John Spaid
CFO at National Health Investors

We do. We do. And you got to keep in mind, over the last, say, two years, year end 2022 to 2024, our mortgage and loan receivables have grown right at 8%. And as that grows, there's always going to be a certain level of credit loss reserve taken against that growth. And so our guidance continues to assume growth, which includes growth in mortgage and loans.

Farrell Granath
Farrell Granath
Equity Research Associate at Bank of America Merrill Lynch

And sorry, is there a certain base play associated with that?

John Spaid
John Spaid
CFO at National Health Investors

No, sorry, I don't have that for you. There is in there, but there's a little bit of squishiness to that number depending on what we're talking about mezzanine loans or mortgage loans. So it's basically an average number. I think what you should do is just use 2024 was an unusual year because of the SLM reserves. But if you were to go back a couple of years and look at the average CECL reserve on our mortgage and loan portfolio then and then sort of make an assumption of what our growth might look like, you'll get a pretty good number.

Farrell Granath
Farrell Granath
Equity Research Associate at Bank of America Merrill Lynch

Okay. Appreciate it. Thank you so much.

Operator

Your next question is coming from Juan Sanabria from BMO Capital Markets. Your line is live.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Hi, thanks for the follow-up, Tom. Just going back to SHOP and incremental investments, I think John you made an illusion to that be kind of be a transformative potential transaction. So does that mean that you're like you're looking at potentially buying a platform, so to speak, where you'd have a bigger like asset management capability as part of that to oversee a shop investment? Or I'm just trying to tease out kind of what you implied by that?

John Spaid
John Spaid
CFO at National Health Investors

I don't think I made that implication. One thing I would point out in Kevin's remarks and Eric's remarks too is we are looking at some fairly large portfolio transactions that are not included in our pipeline numbers. And those are so difficult, they're so material, they're so difficult to really determine whether or not they're real yet that it's hard for us to talk about those. But no, in my guidance was not really any transformative

John Spaid
John Spaid
CFO at National Health Investors

shop.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Sorry, not

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

in the guidance. I wasn't necessarily talking about what's in guidance, but just what's being contemplated as strategically for the business. Is it a platform or is it more assets that are under a shop structure, I guess is the question?

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Hey, Juan, this is Eric. I would say that it's more smaller portfolios, maybe three's or four's. We definitely would add to our asset management talent pool. We're almost at that point now anyway, just the pace of acquisitions we've been doing last year and this year. So we'll make appropriate overhead and headcount adjustments along the way.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

And our usual cadence before the pandemic was $200,000,000 to $400,000,000 a year. That's a lot of $200,000,000 and $300,000,000 and four portfolio deals. That's our sweet spot.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Great. And then just as a follow-up to a prior question about any potential dilution from triple net to SHOP conversions. I guess, are those contemplated conversions being done out of a position of strength or weakness? Meaning, are the conversations or strategies around leases without great coverage? I just I'm confused why a tenant under a lease would choose to give up that upside if they're in the money with the rent coverage that they have?

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

That's a fair question, Juan. You're absolutely right. If there is coverage on a lease and we wanted to convert it to shop, there would definitely have to be a conversation about profit sharing and promotes or bonuses and management fee. The reason though that people would be interested in having that conversation is they probably have personal guarantees or other strong credit in place that is meaningful to them and converting to shop would mean less of that. So and whether or not it's just from a position of strength or weakness, you're right about that as well.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

I mean, it's a conversation that we would have in both instances if a lease isn't working out or the coverage is just above breakeven, then we need to have a conversation about changing operators, what the CapEx looks like, what a new joint venture partner might do for us and whether the operations can improve based on all of that.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Okay. And thank you for that. And just one last quick word for me. The guidance has like a sharp CapEx number. Is there anything over and above that for kind of deferred CapEx or more redevelopment type CapEx that is has been spent or is intended to be spent to help the pricing power of the asset?

John Spaid
John Spaid
CFO at National Health Investors

There is. There is. The number that's in our guidance is a recurring CapEx number. The number that we're continuing to deploy in our current SHOP portfolio is closer to $10,000,000 and we're repositioning those assets to get at that NOI improvement.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Great.

Juan Sanabria
Juan Sanabria
Managing Director at BMO Capital Markets

Thank you.

John Spaid
John Spaid
CFO at National Health Investors

You're welcome.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Thanks, Lauren.

Operator

Thank you. That concludes our Q and A session. I will now hand the conference back to Chief Executive Officer, Eric Mendelson for closing remarks. Please go ahead.

Eric Mendelsohn
Eric Mendelsohn
President and CEO at National Health Investors

Thanks everyone for your time and attention today and we'll look forward to seeing you at NEC or other investor conferences.

Operator

Thank you. Everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Executives
    • Dana Hambly
      Dana Hambly
      Vice President, Investor Relations
    • Eric Mendelsohn
      Eric Mendelsohn
      President and CEO
    • Kevin Pascoe
      Kevin Pascoe
      CIO
    • John Spaid
      John Spaid
      CFO
Analysts
Earnings Conference Call
National Health Investors Q4 2024
00:00 / 00:00

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