National Healthcare Properties, Inc. ($NHP)

Hello, everyone. Thank you for joining us, and welcome to National Healthcare Properties' First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Michael Ozuna, Director of Investor Relations. Michael, please go ahead.

Welcome to the First Quarter 2026 webcast for National Healthcare Properties. [Operator Instructions] Please note, this event is being recorded. Also note that certain statements and assumptions in this webcast, which are not historical facts, will be forward-looking and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain assumptions and risk factors, which could cause the company's actual results to differ materially from the forward-looking statements. The company refers you to its SEC filings, including its most recent Form 10-K for a detailed discussion of the risk factors that could cause these differences and impacts in its business. During today's call, the company will also discuss certain non-GAAP financial measures. These measures should not be considered in isolation or as a substitution for the financial results prepared in accordance with GAAP. The company will provide a reconciliation of these measures to the most directly comparable GAAP measures as part of its first quarter 2026 earnings supplemental on its website at www.nhpreit.com. A question-and-answer session will follow the prepared remarks. Also, please note that a replay of the webcast will be available on the company's website later today. I would now like to turn it over to the company's executive management team. Please go ahead, Michael.

Thank you, Michael. Good afternoon, and welcome to National Healthcare Properties' first quarterly earnings call as a publicly traded company. I'm Michael Anderson, Chief Executive Officer of NHP, and I'm joined today by Drew Babin, our Chief Financial Officer, who will speak to our financial results and outlook in greater detail following my remarks. Before reviewing our first quarter results, I would like to acknowledge what represents a defining moment in the history of this company. In April 2026, NHP completed its initial public offering and listing on NASDAQ under the ticker symbol NHP. The offering raised gross proceeds of approximately $531 million. Proceeds were used to repay approximately $186 million of outstanding borrowings on our revolving credit facility, materially strengthening the balance sheet at the outset of our tenure as a public company. This milestone reflects the culmination of substantial work to build a differentiated health care real estate platform, one grounded in institutional quality senior housing and outpatient medical assets, managed in partnership with best-in-class operators and positioned to capitalize on the compelling demographic demand for health care in the United States. We are grateful for the confidence extended by our investors and the hard work of the deal team and remain fully committed to executing the strategy that underpins our public market listing. The senior housing operating properties or SHOP segment delivered exceptional results in the first quarter, and I'm pleased to report that the portfolio's momentum is continuing across the occupancy, rate and margin expansion fronts thus far in 2026. Our 3 operating partners, Senior Lifestyle Corporation, Discovery Senior Living and AgeWell Senior Living collectively manage our 37 SHOP properties comprising 3,615 units. Each partner has demonstrated a sustained commitment to resident care quality and operational discipline, and we're proud of the results that they and our differentiated asset management team continue to deliver on behalf of our shareholders. Our OMF portfolio produced solid organic growth of its own during the quarter at 5.5% year-over-year. The tenant base remains comprised of high credit tenants with anchor relationships, including University of Pittsburgh Medical Center, Advocate Aurora Healthcare, CommonSpirit Health and Trinity Health, among others. And the 5.4-year weighted average lease term remaining across the portfolio provides meaningful near-term cash flow visibility. Turning to our investment pipeline. NHP has assembled a transactions team with deep relationships across the senior housing landscape. And the first quarter provided further evidence of our capacity to source and structure compelling transactions. During the quarter, the company entered into a definitive purchase and sale agreement to acquire a portfolio of 13 senior living communities for $64 million, structured through a joint venture with Discovery Senior Living in which the company expects to hold an approximately 98.5% ownership interest. This transaction is consistent with our strategy of partnering with established high-performing operators at scale. Notably, the agreement also includes a right of first refusal and a purchase option on an additional 13 senior living communities managed by Discovery Senior Living, providing the company with a meaningful and defined pathway for continued portfolio growth through this partnership. Subsequent to quarter end, in April and May 2026, the company executed a definitive purchase and sale agreement to acquire an 88-unit assisted living community in Oregon for $26.5 million and the 130-unit assisted living and memory care community in Florida for $35 million. These transactions are expected to close in the second or third quarter of 2026, subject to customary closing conditions and applicable regulatory approvals. We currently have an additional $40.3 million of SHOP transactions under letters of intent. These transactions target stabilized yields between 8% and 9% and reflect the quality of our origination capabilities and the discipline with which we underwrite investments. Our pipeline of prospective acquisitions remains active, and we will continue to evaluate opportunities against rigorous return thresholds as we allocate capital towards our stated strategic objectives. Notwithstanding the portfolio's continued operational performance, the company has taken a decisive step in its strategic evolution. In May 2026, we entered into a definitive purchase and sale agreement to divest the portfolio of 86 outpatient medical facilities for aggregate consideration of approximately $528.2 million, inclusive of approximately $278 million of secured indebtedness to be defeased or assumed by the prospective purchaser. This transaction, if consummated, represents an intentional reorientation of the company's capital towards senior housing, the asset class in which we have the strongest conviction, the most differentiated operational infrastructure, and we believe the greatest long-term growth opportunity. It is important to emphasize that this disposition is not a reflection of any deterioration in the quality or performance of the OMF portfolio. Rather, it reflects a deliberate strategic decision based on the belief that concentration in senior housing can generate superior long-term risk-adjusted returns for our shareholders. Completion of the transaction remains subject to the purchaser's due diligence, lender consent for loan assumption and other customary closing conditions as specified in the purchase and sale agreement. We will provide further updates as the process advances. I'll now hand the call over to Drew Babin, our Chief Financial Officer.

Thank you, Michael. Before I get into the details of the quarter and our outlook, I would like to echo Michael's appreciation to our investors and all of those involved in the IPO process. First quarter normalized FFO was approximately $7.5 million or $0.26 per share, both of which represented an approximate doubling of last year's first quarter results. Normalized FFO for the first quarter of this year excludes a $1.5 million or $0.05 per share offset to interest expense resulting from the noncash amortization of swap termination gains. Within the SHOP segment, same-store cash net operating income increased 24% on a year-over-year basis, driven by a combination of occupancy recovery, rate growth and improving operating leverage. Same-store average occupancy reached 83.8% for the quarter, a 280 basis point improvement relative to the first quarter of 2025. Occupancy gains were broad-based across all care levels, led by assisted living, which improved 490 basis points to 85.1% and memory care leading the segment and advancing 630 basis points to 85.1%, underscoring the strong demand environment for higher acuity care. Same-store RevPOR increased 4.4% to $6,340 despite above-average concessions offered to new residents in January due to a tough flu season and multiple winter weather events. These concessions impact revenue only in the periods they are applied and have now fully run their course. The combination of occupancy growth and rate improvement reflects the pricing power our operators continue to demonstrate in their respective markets. Importantly, approximately 96% of SHOP revenues are derived from private payers, providing stability and insulation from government reimbursement variability. Same-store cash NOI margin expanded 270 basis points year-over-year to 22.1%, a result of disciplined expense management and the inherent operating leverage of the shop model and rising occupancy levels. Growth in compensation costs continues to moderate, and we are encouraged by the overall health of labor markets across our operator footprint. Looking to our outpatient medical facilities or OMF segment, the portfolio performed in line with expectations during the first quarter. Same-store cash NOI increased 5.5% year-over-year to $20.3 million, a reflection of a 50 basis point year-over-year increase in occupancy to 94%, contractual rent escalators and flattish operating expenses resulting from internalized property management. Recurring capital expenditures for our portfolio as a whole declined sharply sequentially and year-over-year as several projects were proactively addressed during the fourth quarter of 2025 and as 2026 spending is forecasted to be generally weighted towards the second and third quarters of the year. I'll speak to our full year outlook for recurring capital expenditures momentarily. Net debt to annualized further adjusted EBITDA was 8.6x in the first quarter of '26 versus 9x in the fourth quarter of '25. Inclusive of the estimated impact of signed acquisitions and dispositions as well as our IPO transaction, first quarter leverage would have only been 0.6x. While additional acquisitions will increase this ratio by the end of this year, we plan to maintain leverage consistent with our goal of pursuing an unsecured investment-grade balance sheet. Our only 2026 debt maturity is approximately $333 million of Fannie Mae secured loans, which we expect to be able to partially refinance at an accretive spread if we choose to do so. Materially, all remaining secured debt on our balance sheet consists of CMBS loans encumbering portions of our OMF portfolio, all but less than $100 million of which come off our books with expected 2026 dispositions. It's also worth mentioning that we are evaluating strategies to reduce our $182 million of preferred stock outstanding at reasonable premiums to current market pricing, given the positive impact this would have on fixed charge coverage with minimal earnings dilution or execution risk. Now I'll provide some metrics, which we believe are most relevant in the context of our rapidly evolving portfolio and balance sheet. For the full year 2026, we currently expect SHOP same-store cash NOI to increase by 13% to 16% to $50.7 million to $52 million and OMF same-store cash NOI to increase by 2.5% to 3.5% to $81.2 million to $82 million. Further, we expect to acquire $375 million to $425 million of SHOP properties and to dispose of $528 million of OMF properties. Total G&A is expected to be $26 million to $27 million, inclusive of $5 million to $6 million of noncash equity-based compensation. Finally, recurring CapEx for the portfolio we own as of today is expected to be $22 million to $25 million. We note that the OMF assets we are under contract to sell had recurring CapEx obligations of approximately $10 million on a trailing 12-month basis. Finally, given our strategy to address CapEx needs and opportunities at new SHOP properties immediately upon acquisition, we do not believe that our recurring CapEx cadence will be meaningfully impacted by the addition of new SHOP properties throughout the year. Our per share metrics are expected to vary significantly based on the month-to-month or even week-to-week timing of expected portfolio transactions in the second half of this year, regardless of the long-term cash flow accretion we believe they will generate. For this reason, we plan to begin providing per share NFFO guidance beginning in 2027 with a portfolio and balance sheet much more reflective of our long-term vision. Now I'll hand it back to Michael for closing remarks before proceeding to Q&A.

Thanks, Drew. The first quarter demonstrated the operational strength of our portfolio and the strategic clarity with which we are managing this company's evolution. Our SHOP segment continues to deliver industry-leading growth metrics. Our transactions team is executing on an active and disciplined pipeline. Our announced OMF disposition, if completed, is expected to substantially concentrate our portfolio in senior housing and provide the financial flexibility to accelerate our growth strategy and our April IPO, combined with the associated debt repayment has materially improved our capital structure at the outset of our public market journey. We are well positioned to execute on the opportunities ahead of us as a SHOP-led publicly traded health care REIT with a strengthened balance sheet, a proven operating model and a transaction platform capable of building long-term value. We look forward to updating our shareholders on continued progress in the quarters ahead. With that, I will turn the call back to the operator for the question-and-answer session.

[Operator Instructions] Your first question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Just wanted to first touch on the SHOP same-store NOI growth achieved for the first quarter relative to what you provided for 2026 SHOP same-store NOI guidance. Clearly, some deceleration implied in that in the math. I guess what would cause that level of decel? And anything last year from a onetime perspective we should be aware of as you comp out over the next several quarters?

Austin, it's Drew here. On the occupancy side, in recent quarters, we've seen year-over-year occupancy gains of anywhere between 3%, 4%, 5%. I think as our portfolio matures, and we have truly kind of -- we don't have these truly under-managed assets in our portfolio like we had maybe 1.5 years ago. There's less low-hanging fruit available on the occupancy side. And so I think the year-over-year gains will look a little more reasonable or maybe a little more like the industry. Now as we get more occupied, typically, you would see that benefit rate growth, you would see it benefit margin, and we're seeing those things. I'll just say at this point in time, sitting here in May, I think we're just kind of looking at what we're seeing right now and feel comfortable with the range we put out.

Can you just remind us what -- for this portfolio of same-store assets, kind of where you consider stabilized occupancy to be? And at what point you might become a little more aggressive, I guess, on pushing rate within the context of where you kind of think things could stabilize at?

Yes. Austin, it's Michael. Thanks for the questions this afternoon. As we think about the portfolio and as we underwrite future acquisition opportunities as well, we generally look at fully occupied somewhere between 93% and 95%, just given the unpredictability around move-outs and tending to focus on a higher level of acuity. Our move-outs tend to be on shorter notice, primarily driven by death. So from that perspective, that's where we see kind of that fully stabilized view. As it relates to the ability to push rate further, I think we're right on the cusp of that. Our view is that 85% occupancy is really where margin starts to unlock. We stop adding meaningful headcount to communities. We're able to push rate a little more than in the low 80s, high 70s. And so ending the quarter with spot occupancy just north of 85%, I think, gives us gives us some confidence that we can start pushing rate a little harder.

And then one more, and I'll yield the floor here. When do you expect to close the 13 assets, the 13 SHOP assets operated by Discovery? I'm not sure if you put that timing on that? Or I guess, what should we be thinking about in terms of when that closes?

Yes. There's -- it's a Q2 closing down to just 1 or 2 final regulatory approvals. But as soon as we have those in hand, we'll proceed with closing.

[Operator Instructions] Your next question comes from the line of Rob Stevenson with Huntington.

Assuming everything proceeds as planned, when is the expected closing on the OMF sale?

Rob, thanks for the question. Closing, we currently expect to happen in Q3. Obviously, signed purchase agreement was a big step towards moving along in that process. They're undertaking diligence now, and we'll work to close that transaction in the third quarter.

Okay. And do you need to match any substantial portion of that against acquisitions for 1031 purposes?

Yes, Rob, it's Drew. From a tax standpoint, we don't expect there to be large gains resulting from that. If there were, we certainly -- any time you have assets both coming in and going out of the portfolio, you have the ability to 1031 or reverse 1031. So we have the ability to do that if necessary. But in this case, we don't believe that will be necessary.

Okay. And then when you look at the OMF portfolio stats in the supplemental and the first quarter same-store cash NOI growth of 5.5% year-over-year, how does the portfolio that you're selling compared to the residual portfolio that you have post sale?

Yes. I'll say generally, the portfolio that will be remaining has a lot less multi-tenant and a CapEx profile that's more maybe a mid-teens percentage of NOI rather than higher. You'll also see a less encumbered portfolio, call it, 15% to 20% LTV, lower coupon debt. Our occupancy goes up when our portfolio orients that way. Our health system exposure goes up, our weighted average lease term goes up. So from an overall portfolio quality standpoint, the sales will be accretive in that sense once they close.

Okay. And just to be clear, Drew, the 2.5% to 3.5% same-store guidance is the full portfolio, not just the residual that you guys will have after sale?

That's correct.

Okay. And then last one on me on the balance sheet. Drew, where are you able to access the debt markets rate-wise today, looking ahead to the Fannie stuff and anything else that you would need to do in the back half of the year?

Yes, sure. I think as you know, we have a debt maturity coming up in the third quarter -- or I'm sorry, the fourth quarter that's Fannie. We'll look to deal with that early. That could consist of a Fannie component, which we think would price at rates in, call it, the lower half of the 5s. So accretive relative to the debt we're refinancing. I think we're also in discussions with our banks kind of post IPO about kind of borrowing in general and potentially changes to the line of credit. And so with that, there could also be kind of liquidity coming in that direction or term loan type options, not dissimilar from what you've seen some of our peers do. So lots of options on the table right now. But in any case, our secured debt is going to decrease substantially, mostly due to the OMF sales, but also just a partial refinance most likely of the Fannie.

Okay. And then I guess, related on the balance sheet, how should we be thinking about the timing of anything that you guys do with the preferred on a wholesale basis? Is that likely to be sort of matched using some of the OMF sale funds? Or is there a likelihood that you would do something ahead of that?

Yes. I think the answer is kind of all of the above. We're sitting on some cash right now following the IPO. Obviously, we're working on our pipeline and there'll be acquisitions closing. But with sources of liquidity beyond just cash and knowing that we'll have more proceeds coming in, in the third quarter from the OMF sales, lots of options are on the table there. And to my earlier remarks, there's a major benefit to fixed charge coverage by just reducing the preferred outstanding. And so I think that you'll see us take some action, but the timing of it we'll have liquidity to do something now, but also later in the year. It's a rolling conversation.

We have reached the end of the Q&A session. I will now turn the call back to Michael Anderson for closing remarks.

Thank you, and thank you, everyone, for joining us this afternoon. I'm pleased to share the results and happy to continue to update you as we make progress on the various acquisitions and dispositions that we have underway, and we're excited about what the year holds for us. Thanks.

This concludes today's call. Thank you for attending. You may now disconnect.