Greetings, and welcome to the National Health Investors Second Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, today's call is being recorded, Wednesday, August 9, 2023. I would now like to turn the conference over to Dana Hambly. Please go ahead.

Thank you, and welcome to the National Health Investors conference call to review the company's results for the second 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 on a listen-only basis were released after the market closed yesterday in a press release that's been covered by the financial media. As a reminder, any statements in this conference call, which are not historical facts, are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended June 30, 2023. Copies of these findings 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 filed 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.

Thank you. Hello, and thanks, everyone, for joining us today. We are making progress on our return to growth through our portfolio optimization, improvements in SHOP operations and strategic positioning of the balance sheet. Our second quarter results generally experience stable cash collections as well as increased deferral repayments. However, the quarter was impacted by one-time concessions specific to two senior housing operators, totaling approximately $1.9 million or $0.04 per share when compared to the first quarter of 2023. As we often discuss, some of our senior housing tenants are struggling in this post-pandemic era, which introduces variability to our quarterly results. Our long-term outlook has not changed as fundamentals improve in the need-driven senior housing and SHOP portfolios, while our CCRC and SNF platforms remain pillars of stability. Since the end of the first quarter, we completed the sale of seven properties, including one property for $23.7 million that was not previously held for sale and was sold for a substantial gain. This was an opportunistic disposition of a property that needed significant CapEx and was cash flow negative to our tenant, which would have likely led to future rent concessions. We currently have just four properties held for sale, which allows us to shift more of our attention and energy to growth initiatives. We see the benefits from the dispositions and other portfolio optimization efforts through significantly improved EBITDARM coverage. This is particularly evident for our need-driven senior housing tenants where coverage, which reflects the impact of our portfolio optimization, improved year-over-year by 37% and sequentially by 10% to 1.22 times. This is the highest ever reported since separately breaking out this category. Favorable occupancy trends and moderating wage inflation give us optimism that coverage will continue to move higher. The SHOP portfolio improved NOI to $2.1 million…

Thank you, Eric. I'll concentrate my comments on investment and disposition activity as well as the performance of our major asset classes and operators. We closed on the sale of seven properties for net proceeds of $42 million since the end of the first quarter, leaving just four properties held for sale. Since the second quarter of 2021, we completed the sale of 48 senior housing and skilled nursing properties for net proceeds of $392 million. These properties generated low single-digit NOI yields with very thin lease coverage. With this process effectively complete, we are in a great position to deploy capital, given our low leverage and an acquisition environment that seems to be moving towards a buyer's market. The pipeline is starting to reflect the changes in our cost of capital. We have multiple LOIs in process, so we are confident we'll announce new investment activity before the end of the year. Shifting to asset management. Overall, second quarter contractual cash collections were approximately 97%. Relative to the first quarter and excluding the impact of discrete items, we collected approximately $1.9 million less from two senior housing tenants. This included approximately $800,000 in rent concessions to one operator and approximately $1.1 million in lower collections from a tenant on cash basis accounting. As Eric noted, we have taken action to address the shortfall, including allocating additional asset management resources and selling negative cash flow properties. We are already benefiting from these actions, which gives us confidence that our third and fourth quarter results will improve. EBITDARM coverage for the company increased sequentially to 1.75 times from 1.7 times, driven by gains in senior housing. Remember that the coverage metrics represent trailing 12-month results and do not reflect better occupancy and margin trends we generally experienced in the second quarter…

Thank you, Kevin, and hello, everyone. For the quarter ended July -- June 30, 2023, our net income, NAREIT FFO and normalized FFO per diluted common share were $0.92, $1.05, and $1.06 per share, respectively. In the second quarter, our FAD was $44.6 million. Our second quarter results were mixed with both improving SHOP performance and better deferral collections but higher than forecasted concessions. Our second quarter FAD declined by $3.2 million compared to the first quarter of 2023. But recall, as we noted in our Q1 remarks, the first quarter results for our Real Estate Investments segment included two discrete beneficial items totaling approximately $1.3 million. When compared to the first quarter of 2023, second quarter FAD was further impacted by approximately $1.9 million in lower cash collections and higher rent concessions to two operators. These sequential impacts to FAD were partially offset by an increase of approximately $200,000 in the collection of rent defaults from five operators, lower recurring SHOP capital expenditures, and rent increases from annual rent escalators. As Eric mentioned, the SHOPS's portfolio NOI improved modestly to $2.1 million in the second quarter from $1.9 million in the first quarter of 2023. During the second quarter, we sold six properties, five of which were previously in assets held for sale for $39.1 million in proceeds and net gains of $11.3 million. Subsequent to the end of the second quarter, we closed on one additional property for $2.9 million in net proceeds, leaving four properties and assets held for sale with approximately $10.9 million in net book value. Interest expense in the second quarter compared to the first quarter was flat, largely attributable to lower total debt, offset by higher average interest rates. Last night, we updated our full-year 2023 guidance. Our guidance reflects additional improvement in…

[Operator Instructions]. And we'll get to our first question on the line from Juan Sanabria from BMO Capital Markets. Go ahead.

Hi, good morning. Just a question on deferrals. I recognize that you guys talked about it being a bumpy kind of road, but generally trending upwards. So just curious kind of what happened to surprise sequentially? And Eric, I think you mentioned that an incremental asset was sold that had negative coverage that should improve the situation going forward. I guess, are there any other assets like that aren't held for sale, but may be looked at as a disposition candidate going forward, given the still kind of choppy recovery.

Juan, it's Eric. You had a couple of questions there. One was lumpy, about lumpy deferrals and any other assets. The answer is no. We've got four smallish assets and assets held for sale. I think the total value we estimated slightly over $10 million. And so far as deferrals are concerned, we're very over granting deferrals. We don't want to do it. In this case, there was a building that had a negative cash flow and was heading towards more deferrals, and we had an opportunity to sell it at a gain and frankly, lowering our exposure to this tenant seemed very prudent since they were a major user of deferrals. So, we took advantage of that.

I guess why wasn't that one building already on the target disposition list would be default?

Because it was a good building and a good market that if it was run well, would make money. I really -- we hated to sell that building, but we didn't have an operator in that market and the operator we had wasn't running it well. So -- and a well-funded operator presented themselves at just the right time. So, it was an opportunistic transaction that helped us lower our exposure to this one tenant.

And then just as a follow-up, hoping you could maybe expand on the investments pipeline. The mix of assets you're looking at or the mix between traditional fee simple and loans as well as kind of just the size overall of the opportunity set?

Sure. Juan, this is Kevin. We're looking at kind of anything and everything right now that said it's more focused on the needs-driven senior housing side. Skilled nursing is absolutely still in play as well as our other asset classes that we have in the portfolio. But we have seen a little more action on the senior housing side. Some more basis-type plays, which traditionally haven't been a fit for us. But with the right operator, right market and the right structure is -- have been interesting. On the structure side, we absolutely still want to own the real estate. So, it's the -- what we've been working towards is to develop that pipeline. And you will see more likely than not some element of lending where we can have a pipeline to be able to acquire assets that may not always be true. There are some instances out there where we think there's some good lending opportunities to afford us good yield that we may not want to have as assets long term. But for now, it's a good opportunity for the portfolio. So, it's going to be a mix, which is kind of what you've seen from us before, but still with an eye towards acquisitions as much as possible. It's just finding the right opportunity. And then, again, kind of rebuilding the pipeline for us to be able to execute, whether that's to buy the real estate today or set it up for a future acquisition.

Thank you.

[Operator Instructions]. We'll get to our next question on the line from Austin Wurschmidt with KeyBanc Capital Markets. Go ahead.

So, based on July results and kind of some of the sales you've completed, do you expect deferrals going forward to return to a 1Q run rate or even improve based on the additional sales that you have in the pipeline? Can you just give some direction around that, your expectation for that figure moving forward?

Austin, this is John Spaid. I'll do my best. Concessions are still in guidance, but we're trying to move as quickly as we can to put an end to them. And that was part of our strategy in the second quarter. So, one of the things that is happening to us is we have cash basis tenants that slow payoffs during the quarter, and we're trying to recover those rents in subsequent quarters. And we're trying to get them back on even payment stream as quickly as we can. So that's the upside to our guidance that we can recover the rents owed to us that weren't paid in the second quarter that were part of our missing NOI and then get them to pay what they owe us consistently on time moving forward. And then the risk is that the senior housing industry continues to have some bumps, and they're not able to do that. So, we're working as hard as we can to achieve that.

Got it. That's helpful. And then I wanted to hit on Bickford for a moment. Occupancy, I think, was stable. Coverage continues to improve, and it's now been over a year since you added the language about doubting they can remain a going concern. But I guess do you feel like they're through the worst of it at this point? Or are there other hurdles that they still need to climb? What's sort of the latest update there?

Sure. Austin, this is Kevin. I think NHI is through what it needed to do. What you're seeing the portfolio continue to heal, occupancy improving, and coverage improving. So, we've done the work that we needed to. I think as any good steward of the portfolio, there's always some element of reviewing and seeing if there's some properties that make sense to continue to hold. But for now, Bickford is in We think that there's still some opportunity for them to maximize their business and they can work with their other financial partners on that, whether it makes sense for them to sell some properties or maybe move some debt net around. So, they're not -- I wouldn't couch them as completely done with what they're doing as a business. But as it relates to NHI, our structure, and our relationship, I feel like we're on pretty good footing. And as I said, you continue to see them improve quarter-over-quarter.

Appreciate the comment. Thank you.

Thanks, Austin.

We'll proceed with our next question on the line other follow-up from Juan Sanabria with BMO Capital Markets. Please go ahead.

Eric, I was just curious if you could expand a little bit on those Bickford comments. I mean you sounded a little bit more cautious about their ability to pay solvent, I guess, given other debt. Is that -- now those risks are those waning? Just curious on whether or not there may eventually be an element of transitions because the operator is no longer profitable if they lose other assets outside of your relationship with them.

That's a fair question, Juan. Look, our portfolio is doing great, and it would be very simple for them if they only had our buildings and their home health, and their pharmacy. It would be a money-making venture. They do have other buildings that have variable rate debt. And through no fault of their own, that debt has ratcheted up. So, they have unforeseen expenses due to that debt, and they're working with their banks to either refinance them to HUD or sell them or run them better. So, all of that is ongoing, and we're monitoring that closely. And I would say that based on what they're doing with our portfolio, things are getting slightly better.

Okay. Thank you for that. And then just -- you mentioned dispositions were higher than you had expected, and that drove a little bit of a tweak down in the guidance. So, that was one of the drivers. Just curious, I guess, on the yields on those dispositions in terms of rent that flow through the P&L associated with those dispositions in the second quarter.

Juan, I think in our business update, right, Dana, there's a table that you can refer to, to give you that information regarding yield. But remember, one reason why we're making these dispositions is they're leading to concessions. So, that yield is really a true yield considering concessions that are resulting from them. And so that's been a big part of our strategy is to make sure we maintain a strong balance sheet when things are -- when we have invested capital that isn't delivering the returns we need. I would say that one property got accelerated a little bit this year because there are some changes in the law in one of the states -- in the state that it was operating. And it became more problematic to move the license if we waited too long. So, we sort of weigh the risk of that disposition against the changes in law in that state and move that along a little bit faster because we're really working hard, Juan, to put an end to all this noise this year right now as soon as we possibly can. And there was some element of this particular asset moving our guidance down a little bit because we were thinking it had some opportunity to be a contributor to FAD this year. But that operator just became -- there was just too much risk associated with that operator to not move it out.

That's helpful. And then just a final comment or question, I should say. What are you guys seeing broadly between independent living and assisted? It's been a topic, obviously, through earnings season. And as part of that or more broadly, I guess, are you seeing any price competition, either discounting, waiving of fees, et cetera, given some of the distress we've seen in senior's housing more broadly either with your operators or the competitor set?

Sure. This is Kevin again. I would say that we've seen the more need-driven FAD rebound faster. I think we've both seen that in macro, but also within our portfolio. As we've talked about our independent communities have been slower to respond on occupancy, but you also think that's associated with having a couple of manager changes over the last 12 months to 24 months, which has not been helpful for them rebuilding their pipeline. More recently, we've seen some gains in independent living, as we noted in our prepared comments, and feel like the operating partners have done a good job of rebuilding the teams and those sales funnels. So, we're thinking, we believe that should continue. I do think that there's an element of concessions going on, on both assisted and independent. I think as we look at some of the NICMAP, it would suggest that there's increases in Street rates, but then or at least, and in addition to the customers that are already in the communities, but we know full well through looking at the markets in our buildings and looking at some of the other data that there absolutely are concessions going on. And even as it relates to our independent building, trying to get occupancy has been the priority. So, there are concessions going on there to make sure that we're getting net move-ins, which, again, is starting to happen. So, we've been pleased with that piece. But it is challenging to increase rates as you're trying to fill communities.

Thank you, very helpful.

Thank you.

And we'll get to our next question on the line other follow-up from Austin Wurschmidt with KeyBanc Capital Markets.

You kind of commented on the Bickford debt refinancing. So, I had a follow-up. I mean it's been in the works now for a little while now, it feels like. And I'm just wondering, are we talking about a significant amount of debt? And is there any sense around the time-line of when they could receive the HUD financing?

So, this is Kevin again. There -- I think there were other banks to extend the current debt that they have trying to get a better capital environment. The ability to source debt right now, I think we can all agree, it's very difficult. The HUD takeout, as it relates to those specific buildings, they've got to be stable on their operations for the HUD to be able to take it out at a level that makes sense, which is what Bickford is very focused on. They've had several executions on it so far. They've got a couple more that are underway. My belief is that they can get that done, but there is some execution that they need to accomplish to ultimately get those closed. Once it does, that will help them be in a much better or more stable financial position as it relates to their debt. So, I think it's something -- their plan is something that's executable, but it's going to take a little bit more time.

Got it. That's helpful. And then just the last one for me. I mean Eric, is there anything you can share as far as the negotiations and plan to renew or early renewal on the -- I believe the 2026 NHC leases?

Just that their discussions are ongoing.

Would you expect anything that could get announced or completed before the end of this year?

That's probably not by the end of the year. It's probably a next-year type of thing.

Appreciated thank you.

We'll get to our next question on the line is from Connor Siversky with Wells Fargo. Please go ahead.

It's for Connor today. And apologies in advance if you guys touched on some of these topics as I was dropped from a portion of the Q&A here. So, in the midst of some of the weakness we've seen in independent living throughout this earnings cycle and some of the commentary from NAREIT, is this an area of senior housing where any would like to allocate capital to at the present? Or are there better opportunities that exist within assisted living or skilled nursing from your perspective?

This is Kevin. As it currently stands, I think the yields are going to be slightly better on the more the needs-driven product, which is where a lot of our attention has been as it is late. I think there could be some opportunities on the independent side. First and foremost, though, we want to make sure we get our portfolio something closer to stable before we do a lot more investment there. That said whether it's with our current operating partners or with an existing operating partner that -- sorry, a new operating partner that could bring some communities and a new relationship to us, we would absolutely explore that. To date, though, we haven't seen the yields be very enticing on independent living. That's probably closer to where we see some implied cost of capital still. So, there's not an accretive margin. We're tending to focus our efforts elsewhere.

That's great, Kevin. And sticking with capital allocation, it sounds a little bit more about your plans for 2H '23 over here. Specifically, do you anticipate paying down any additional debt or any activity on the equity side?

So, right now, we're in great shape in terms of our leverage so that we could deploy a little more leverage towards acquisitions. That would be our initial plan. And I think what we're trying to do is get back to that growth and demonstrate that the noise has eliminated from our name, the growth is back, that would then improve the equity and lower our total cost of capital. And then once we get into a steady stream of investments, we would then start entertaining tapping equity again. And I would remind you that we do have a $160 million authorization to repurchase our stock. So, that's always on the table, particularly given since we have some leverage to be able to do just that.

That’s very helpful thank you, guys.

And we have no further questions on the line. Please continue with the presentation or any closing remarks.

Thanks, everyone, for your time and interest today, and we'll see many of you at NAREIT.

Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation and ask you to disconnect your lines. Have a good day, everyone.