National Health Investors - Q2 2023

Transcript

Operator (participant)

Greetings, and welcome to the National Health Investors second quarter 2023 earnings call. At the start of the presentation, all lines will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference, you need to reach an operator, please press star zero. As a reminder, today's call is being recorded Wednesday, August 9, 2023. I would now like to hand the conference over to Dana Hambly. Please go ahead.

Dana Hambly (VP of Finance and Investor Relations)

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.

Eric Mendelsohn (CEO)

Thank you. Hello, thanks to everyone for joining us today. We're 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 experienced 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 1.22x.

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 from $1.9 million in the first quarter of 2023. While still performing below initial expectations, the move-in trends have improved recently, generating a sizable 170 basis point gain in July occupancy. We are midway through our CapEx campaign with encouraging results. Kevin will provide more details in just a moment. We anticipate improving SHOP NOI in the second half of 2023. Our longer-term view of the upside potential remains unchanged. The balance sheet and our financial profile are in great shape, with leverage at just 4.6x and more than $500 million of revolver capacity.

We're very focused on external growth opportunities, which are starting to look more attractive as capital becomes increasingly scarce. We are seeing the direct impacts of higher interest rates in the form of more financing opportunities and second tries at deals that fell through for lack of equity financing. As outlined in last night's press release, we adjusted our guidance, which reflects this quarter's higher-than-expected concessions. John will discuss the updated guidance in more detail during his prepared remarks. I want to assure investors that we have taken immediate action to address this quarter's shortfall, therefore, expect better results in the third and fourth quarters. Our long-term view of the industry remains incredibly optimistic, we have plenty of dry powder to support our internal and external growth opportunities. I'll now turn the call over to Kevin to provide more details on our operations. Kevin?

Kevin Pascoe (Chief Investment Officer)

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 7 properties for net proceeds of $42 million since the end of the first quarter, leaving just 4 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, 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 2 senior housing tenants. This included approximately $800,000 in rent concessions to 1 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 this 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 quarters results will improve.

EBITDA coverage for the company increased sequentially to 1.75x from 1.7x, driven by gains in senior housing. Remember that the coverage metrics represent trailing twelve-month results and do not reflect better occupancy and margin trends we generally experience in the second quarter of 2023. Total occupancy improved year-over-year by 280 basis points to 81.7% on a 240 basis point increase in senior housing and a 330 basis point increase in skilled nursing. Reviewing the need-driven platform, which is 26% of annualized cash NOI, we again saw positive trends with coverage at 1.22x, representing the 5th straight quarter of sequential growth.

The increase was driven in large part by Bickford at 1.41x, which now reflects the full impact of the April 2022 rent reset. Bickford's 2nd quarter occupancy improved by 40 basis points to 82% compared to 1st quarter of 2023, and average monthly occupancy improved throughout the quarter, with June at 82.7%. The strong net move-ins continued into the 3rd quarter, and spot occupancy at the end of last week was 83.7%. Bickford repaid over $350,000 in deferrals during the 2nd quarter, with a similar amount or higher expected in the 3rd quarter. Aside from Bickford, coverage is increasing across the other 40 need-driven properties, which account for approximately 13% of annualized NOI.

We reported coverage at 1.07 times, which is the highest reported coverage since the second quarter of 2020, and the 6th straight quarter of sequential improvement. While the trend is encouraging at just over 1 times coverage, the environment for these operators remains difficult, even with reported occupancy at 87%. This asset class is where most of our optimization efforts have been focused. The progress has been slow but steady, and we think improving financial, improving industry fundamentals, coupled with our direct actions, will result in fewer rent concessions. Continuing with our discretionary senior housing portfolio, this group accounts for 30% of adjusted NOI, including 27% from entrance fee communities.

SLC, our largest tenant, improved coverage sequentially to 1.28 times from 1.17 times, driven by excellent entrance fee sales in the first quarter, which continued into the second. Our senior housing discretionary coverage, excluding SLC, which largely reflects the performance of our other entrance fee communities, declined sequentially to 1.34 times from 1.75 times. This was driven by higher entrance fee refunds at a couple of properties in the first quarter. We know this business can be bumpy from quarter to quarter due to the variable nature of entrance fee, sales, and refunds, but this is certainly not on our worry list. The SNF and specialty hospital portfolio, which represents 37% of annualized adjusted NOI, reported solid coverage at 2.48 times, which is unchanged sequentially.

SNF occupancy improved by 330 basis points year-over-year to 79%. Since the start of the pandemic, NHI has provided a rent deferral to only one SNF operator in late 2021 and early 2022. This operator started repaying the balance in the second half of 2022. Thus far has repaid more than 50% of the deferral amount. NHC and Ensign obviously anchor our SNF portfolio, but we've been happy with the performance of all the operators, which gives us confidence in their ability to adapt to any new rule change, including a potential staffing mandate. Lastly, in our SHOP portfolio, which represents 3% of adjusted NOI, we are still experiencing margin pressure, and the performance is below our initial projections. We are making progress, and the portfolio did generate a $200,000 sequential NOI improvement.

The margin improved 170 basis points from the first quarter to 17.9%, and monthly occupancy increased for a fourth straight month through June to 75.6%. The sales pipeline has been building gradually throughout the year, June proved to easily be our strongest move-in and net move-in month of the year. This bodes well for July, as preliminary results indicate that monthly occupancy increased another 170 basis points to 77.3%. The recent trends give us conviction in our longer-term view that this portfolio can generate NOI dollars in the high teens and margins in the mid-30% range. This provides an excellent source of internal growth while building a platform with a long runway for external growth. I'll now turn the call over to John to discuss our financial results and guidance.

John Spaid (CFO)

Thank you, Kevin, and hello, everyone. For the quarter ended 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. Recall, as we noted in our Q1 remarks, the first quarter results for our real estate investment 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 2 operators. These sequential impacts to FAD were partially offset by an increase of approximately $200,000 in the collection of rent deferrals from 5 operators, lower recurring SHOP CapEx, and rent increases from annual rent escalators. As Eric mentioned, the SHOP 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 6 properties, 5 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 the repayment of prior deferral balances, consistent with levels experienced in the first and second quarters. It includes continuing asset dispositions and loan repayments, additional rent concessions, higher lease incentive amortization expense attributable to the Timber Ridge earn-out paid in February, and higher interest rates for the remainder of 2023.

Our guidance includes $60.6 million in recently announced investments, plus the continuing fulfillment of our commitments, it does not include any additional unidentified investments. We adjusted our FAD guidance to a range of $185 million-$186.8 million. This slight reduction is driven primarily by higher than expected second quarter concessions, which includes lower than expected cash-based, cash-basis customer collections and incremental assets sold in Q2, not previously in our guidance, and higher interest expense, all offset by better than guided deferral collections. We also adjusted the range for our normalized FFO to a range of $107.1 million-$188.8 million. On a per share basis, this equates to a midpoint of $4.33, down 1.4% from $4.39.

The updated normalized FFO guidance reflects the changes to FAD, as well as changes to our non-cash rental revenue, which includes straight-line rent and amortization of lease incentives. For the second quarter, our leverage ratio was unchanged from the first quarter at 4.6x net debt to adjusted EBITDA. At the end of July, we had $186 million outstanding on our $700 million revolver, providing ample liquidity of over $500 million in cash and revolver availability. We also have the full $500 million available under our ATM program. As previously announced, we entered into a new two-year, $200 million term loan during the second quarter. The proceeds were used to pay off a term loan maturing in September 2023.

The new term loan bears a variable interest at the same credit spread over SOFR as the now paid off term loan. We're grateful to the participating syndicate of nine banks for their strong show of support at a time of increasingly scarce capital. We believe this validates our decision early in the pandemic to optimize our real estate portfolio while preserving a strong balance sheet, which now creates a strategic advantage as we execute on external growth. Finally, our second quarter FAD payout ratio was 87.6%. As we announced last night, our board of directors declared a $0.90 per share dividend for shareholders of record, September 29, 2023, and payable on November 3, 2023. Once again, thank you all for joining the call today. This concludes our prepared remarks. Operator, please open the lines for questions.

Kevin Pascoe (Chief Investment Officer)

Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You'll hear a three-tone prompt to acknowledge your request. If the question has been answered, you may withdraw your registration as the one followed by three. Once again, on the phones, it is the one, four for any questions or comments. One moment, please, for our first question. We'll get to our first question on the line from Juan Sanabria of BMO Capital Markets. Go right ahead.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Hi, good morning. Just a question on the deferrals. I recognize that you guys talked about it being a bumpy kind of road, but generally trending upwards. 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 that aren't held for sale, but may be looked at as a disposition candidate going forward, given the still kind of choppy recovery?

Eric Mendelsohn (CEO)

Hey, Juan, it's Eric. You had a couple questions there. One was, lumpy, about lumpy deferrals and then any other assets. The answer is no. We've got four smallish assets and assets held for sale. I think the total value, we estimate it slightly over $10 million. Insofar as deferrals are concerned, you know, 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. We took advantage of that.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

I, I guess, why wasn't that one building already on the, on the target disposition list? Would be the follow-up, yeah.

Eric Mendelsohn (CEO)

Because it was a good building and a good market, that if it was run well, would make money. 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. A well-funded operator presented themselves at just the right time. It was an opportunistic transaction that helped us lower our exposure to this one tenant.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Thank you. Just as a follow-up, hoping you could maybe expand on the investments pipeline, the, 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?

Kevin Pascoe (Chief Investment Officer)

Sure. Hey, 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. We have seen a little more action on, 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, most 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, 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, it's a good opportunity for the portfolio. 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, the pipeline for us to be able to execute, whether that's to buy the real estate today or set it up for, for a future acquisition.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Thank you.

Kevin Pascoe (Chief Investment Officer)

Thank you very much. Once again, on the phones, if you'd like to ask any questions or have any comments, you may do so now by pressing the 1, 4 on your telephone keypad. We'll get to our next question on the line from Austin Wurschmidt with KeyBanc Capital Markets.

Operator (participant)

Go right ahead.

Austin Wurschmidt (Senior Equity Research Analyst)

Great, perfect. Thank you. 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, you know, your expectation for that figure moving forward?

John Spaid (CFO)

Austin, this is John Spaid. I'll do my best. Concessions are still in guidance, you know, we're trying to move as quickly as we can to put an end to them. That was part of our strategy in the second quarter. You know, one of the things that's, that is happening to us is we have cash-basis tenants that, you know, slow payoffs during a quarter, and we're trying to recover those rents in subsequent quarters, and we're trying to get them back on a even payment stream as quickly as we can.

That's the upside to our, our guidance that, you know, 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. Then the risk is, is that, you know, the senior housing industry continues to, you know, have some bumps, and they're not able to do that. We're working as hard as we can to, to achieve that.

Austin Wurschmidt (Senior Equity Research Analyst)

No, got it. That's, that's helpful. Then I wanted to hit on Bickford for a moment. You know, occupancy, I think, was stable. Coverage continues to improve, and now been over a year since you, you added the language about, you know, doubting they can remain a going concern. I guess, do you feel like they're, 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, latest update there?

Kevin Pascoe (Chief Investment Officer)

Sure. Hey, Austin, this is Kevin. I think NHI is through what it needed to do, which you're seeing the portfolio continue to heal, occupancy improving, coverage improving. We've done the work that we needed to. I think as any, you know, good steward of the portfolio, there's always some element of reviewing and seeing if there's some property that makes sense to continue to hold. For now, you know, Bickford is in, in decent shape. We think that there's still some opportunity for them to maximize their business, they can work with their other financial partners on that, whether it makes sense for them to sell some properties or, or maybe move some, some debt around. I wouldn't couch them as completely done with what they're doing as a business.

As it relates to NHI, our structure and our relationship, I feel like we're on pretty good footing. As I said, you continue to see them improve quarter-over-quarter.

Austin Wurschmidt (Senior Equity Research Analyst)

Appreciate the comments. Thank you.

Kevin Pascoe (Chief Investment Officer)

Thanks, Austin.

Operator (participant)

Thank you very much. We'll proceed with our next question on the line, another follow-up from Juan Sanabria with BMO Capital Markets. Go right ahead.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Hi, tag team, I guess.

Kevin Pascoe (Chief Investment Officer)

Yeah.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Just, 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, you know, stay solvent, I guess, given other debt. Is, is that now those, 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.

John Spaid (CFO)

That's a fair question, Juan. Look, our portfolio is doing great, and it, it would be, it would be very simple for them if they only had our buildings and their home health and their, their pharmacy. It would be a, 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. All of that is ongoing, and we're monitoring that closely. And, you know, I, I would say that based on what they're doing with our portfolio, things are getting slightly better.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Okay. Thank you for that. Then just, you mentioned dispositions, were higher than you'd expected, and that drove a little bit of a tweak down in the guidance. That was one of the drivers. Just curious on the yields on those dispositions in terms of rent that flowed through the PNL associated with those, those dispositions in the second quarter?

John Spaid (CFO)

Juan, I think in our business update, right, Dana? There's a table that you can refer to that'll give you that, that information regarding yield. Remember, one reason why we're making these dispositions is they're leading to concessions. That yield isn't really a true yield, considering concessions that are resulting from them. You know, that's been a big part of our strategy. Is to make sure we maintain a strong balance sheet when we have invested capital that isn't delivering the returns that we need.

The, you know, I would say that one property got accelerated a little bit this year because there were some changes in, in the law in one of the states, in the state that it was operating, and it, it became more problematic to move the license if we waited too long. We, we sort of weighed the risk of that disposition against the changes in law in that state and moved that along a little bit faster, you know, 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. 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.

That operator just became. There was just too much risk associated with that operator to not move it out.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

No, that's helpful. Then just a final comment, or question, I should say. What are you guys seeing broadly between independent living and assisted? It's, it's been a topic, obviously, through earnings season. 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 seniors housing more broadly, either with your operators or the competitor set?

Kevin Pascoe (Chief Investment Officer)

Sure. This is Kevin again. I would say that we've seen the more need-driven side 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 that's associated with having a couple manager changes over the last, you know, 12 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 in those sales funnels. We're thinking, or we believe that that should continue. You know, I do think that there's an element of, of concessions going on on both assisted and independent.

I think as we look at some of the, the NIC MAP data, 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. 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. Even as it relates to our independent buildings, trying to get occupancy has been the priority. There's, 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.

Juan Sanabria (Managing Director and Senior U.S. Real Estate Analyst)

Thank you. Very helpful. Appreciate it.

Operator (participant)

Thank you. I'll get to our next question on the line, another follow-up from Austin Wierschmidt with KeyBanc Capital Markets. Go right ahead.

Austin Wurschmidt (Senior Equity Research Analyst)

Great. Thanks for, for taking the follow-up and get, get around the horn here twice. 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. I'm just wondering, are we talking about a significant amount of debt? Is there any sense around the timeline of when they could receive the HUD financing?

Kevin Pascoe (Chief Investment Officer)

This is Kevin again. I think they're working with their banks to extend the current debt that they have, try and get better to a better capital environment. The ability to source debt right now, I think we can all agree, is very difficult. The HUD takeouts as it relates to those specific buildings, they've got to be stable on their operations for the HUD to be able to, to take it out 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 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 stable, financial position as it relates to their debt. I think it's something... Their plan is something that's executable, but it's gonna take a little bit more time.

Austin Wurschmidt (Senior Equity Research Analyst)

Got it. No, that's, that's helpful. Then just 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, it's 2026 NHC leases?

John Spaid (CFO)

Just that their discussions are ongoing.

Austin Wurschmidt (Senior Equity Research Analyst)

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

John Spaid (CFO)

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

Austin Wurschmidt (Senior Equity Research Analyst)

Appreciate the time. Thank you.

Operator (participant)

Thank you very much. We'll get to our next question on the line. It is from Connor Siversky with Wells Fargo. Go right ahead.

Speaker 7

Hey, good afternoon. Hey, Sue's on for Connor today. Thanks for taking the question. Apologies in advance if you guys touched on some of these topics, as I was dropped from a portion of the Q&A here. 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 NHI would like to allocate capital to at the present? Are there better opportunities that exist within assisted living or skilled nursing from your perspective?

Kevin Pascoe (Chief Investment Officer)

This is Kevin. As it currently stands, I think the, the yields are gonna be slightly better on the more the needs-driven product, which is where a lot of our attention's been as of late. I think there could be some opportunities on the independent side. First and foremost, though, we wanna make sure we get our portfolio on, you know, something closer to stable before we do a lot more investment there. That said, if, whether it's with our current operating partners or with an existing operating partner that, or 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. You know, that's probably closer to where we see some implied cost to capital still.

If there's not a, a creative margin, we're tending to focus our efforts elsewhere.

Speaker 7

That's great, Kevin. sticking with capital allocation, talk a little bit more about your plans for 2H 2023 over here. Specifically, do you anticipate paying down any additional debt or any activity on the equity side?

John Spaid (CFO)

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. I think, you know, what we're trying to do is get back to that growth and demonstrate that, you know, the noise has eliminated from our name, the growth is back. That would then improve the equity and lower our total cost to capital. Then once we get into a steady stream of investments, we would then start entertaining tapping equity again. 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.

Speaker 7

Fantastic color. Thanks, guys.

Operator (participant)

Thank you very much, and we have no further questions on the line. Please continue with the presentation or any closing remarks.

John Spaid (CFO)

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

Operator (participant)

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