National Health Investors, Inc. (NHI) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the National Health Investors Second Quarter 2019 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, August 8, 2019.I would now like to turn the conference over to Dana Hambly. Please go ahead.

Thank you, operator. Hello everyone. This is Dana Hambly, Director of Investor Relations. Welcome to the National Health Investors conference call to review the company's results for the second quarter of 2019. On the call with me today is Eric Mendelsohn, President and CEO; Roger Hopkins, Chief Accounting Officer; Kevin Pascoe, Chief Investment Officer; and John Spaid, Executive Vice President of Finance.The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were released this morning before market opened in a press release that's been covered by the financial media.As we start, let me remind you that 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 in 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, 2019. Copies of these filings are available on the SEC's website at www.sec.gov or on NHI's website at www.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 Eric Mendelsohn.

Thank you, Dana. Hello, everyone. I'm glad you could join us today. Before we get started, I'd like to welcome Dana Hambly to our team. He is joining us as our new Director of Investor Relations. Welcome, Dana.It's been a busy second quarter. We've been adding to our portfolio with $295 million of accretive acquisitions year-to-date and working on our portfolio of 9 transition buildings to improve their positioning for future cash flow. We've also been spending a lot of time with our friends at the Bickford organization. NHI and Bickford are working together to improve their operational and financial performance. You can see what we are seeing in terms of improved performance in our 10-Q, which details recent occupancy trends with Bickford. Our efforts are bearing fruit. Kevin will give you the details on that shortly.The acquisition activity has been fast and furious: $295 million representing seven different transactions, three of them with new customers. In addition, our guidance includes line of sight to $45 million and new and existing commitments before year-end. All these is to say that we've been working hard to get back to even on a per share basis, back to where we were before we restructured the Holiday portfolio and transition nine properties to new operators in the first quarter. While we aren't happy about having to backfill the lost revenue, we believe having done so sets us up well for 2020.We've made significant progress with our nine transition buildings, which bodes well for organic growth. Here are a few details on what's been happening with them, and Kevin will have more details in his remarks.On our Charlotte building, Senior Living Communities has completed extensive renovations and the result is fantastic. We signed a traditional lease with SLC, and you will see the straight line rent show up in the next quarter.In Indianapolis, we just signed a new lease with Discovery as part of a larger transaction. The new lease is an NOI-based lease with incentives.Turning to the five LaSalle Group properties formerly operated by Autumn Leaves, Chancellor has rebranded the buildings and they are paying us NOI rent as scheduled out in our 10-Q. Please see our disclosures regarding these transition buildings. The 10-Q updates the cash flow we've received thus far from each property.With that, I'll now turn the call over to Roger.

Thanks, Eric. Hello, everyone. We are having a great 2019 in terms of new investment volume, and this revenue has now fully offset the negative effects of the temporary loss of revenue from the transition properties that Eric spoke about a moment ago. And it's also offset the effect on our revenue of the restructuring of our master lease with Holiday retirement that we have previously disclosed.So far this year, we've announced $295 million in accretive purchase leasebacks and mortgage note investments, almost all in senior housing. We have approximately $136 million in previously announced commitments that we expect to fund over the next 12 to 18 months as listed in our Form 10-Q filed this morning with the SEC. NHI's management remains focused on making accretive new investments in our priority pipeline that Kevin will describe later.For the second quarter of 2019, normalized FFO per diluted share was $1.37 compared to $1.38 in the same period 1 year ago, due primarily to lower straight line rent income for GAAP purposes of $528,000. Normalized FFO for the 6 months ended June 30, 2019 was $2.67 versus $2.72 for the same period 1 year ago due to lower straight line rent income of $1,262,000 and an additional 1,629,000 weighted average fully-diluted common shares.For the second quarter, normalized AFFO was $1.26 per diluted share, and for the 6 months ended June 30, 2019, it was $2.48; both metrics matching exactly our results in the prior year despite the challenges we faced with lost revenue from Holiday and the transition properties described earlier. NHI has always been focused on AFFO growth, in particular, as it has been the best quarterly and annual indicator of our consistent ability to generate free cash flow to make new investments and to increase our dividends annually to our shareholders.NHI's total revenues for the second quarter were $78.1 million, which was a 7% increase over the same period 1 year ago. For the 6 months ended June 30, 2019, revenue increased 5.8% to $154.2 million. These increases reflect good investment volume in both new lease and mortgage deals and in the utilization of our capital to accomplish sizable renovation and expansion projects for our tenants, the funding of which automatically boosts our lease revenues. John will explain in a few minutes how we fund our new acquisitions and construction projects by deploying a careful mix of debt and equity capital.Our interest expense increased $1,526,000 in the second quarter of 2019 when compared to the same period 1 year ago and a corresponding increase of $3,430,000 in interest expense for the 6 months ended June 30, 2019 compared to the same period 1 year ago and is reflective of our investment volume and our interest rate swap agreements entered into during the most recent quarter to fix the interest rates on $200 million of variable rate debt.Our increase in depreciation expense of $1,226,000 in the second quarter of 2019 and an increase of $2,382,000 for the first 6 months of 2019 compared to the same periods in 2018 are reflective of our growing real estate portfolio. Our tax expenses have more than doubled for both the 3 months and 6 months ended June 30, 2019 when compared to the same period 1 year ago as we have been required to pay the property taxes on the 9 troubled assets that we transitioned to new operators described earlier.Our general and administrative expenses increased $216,000 during the second quarter, due primarily to higher noncash share-based compensation expense computed by the Black-Scholes pricing model. This expense is expected to be $477,000 for each of the next 2 quarters and is helpful information for our research analysts and investors.Property taxes and insurance expenses on our lease properties was $1,506,000 for the second quarter and $2,597,000 for the first 6 months of 2019 and was paid out from our tenant escrow deposits made each month to us according to the terms of our leases. There is a new accounting standard that requires companies to show that amount separately on its income statement. However, the same amount is included in our lease revenue, so there is no effect to our bottom line. However, we included in our franchise, excise and other taxes the property taxes paid by us related to our transition properties, which were $528,000 for the 3 months and $828,000 for the 6 months ended June 30.Moving on to our dividends. This morning, we announced a quarterly dividend of $1.05 per outstanding share for the upcoming third quarter ended September 30. We currently estimate our normalized FFO payout ratio for 2019 will be in the mid-70% range, and our normalized AFFO payout ratio will be in the low to mid-80% range. These ratios may fluctuate throughout the year as we manage through our properties in transition.As for our updated guidance for 2019, we currently estimate there is $45 million in actionable new and existing commitments that will close before the end of 2019, though we are diligently working to obtain binding commitments for even more. We currently estimate normalized FFO will be in a range of $5.44 to $5.50 per diluted share for 2019. We are revising our estimate for normalized AFFO by increasing the bottom end of the range by $0.02 to a range of $5.06 to $5.10 per diluted share. These estimates include our expected new investments, the funding each month of our ongoing commitments mentioned earlier and the composition of new debt and equity capital to properly align our capital resources for growth and maintaining low leverage. We will adjust our guidance as we are able to estimate with more certainty the volume and timing of our completed investments for the remainder of 2019 and the mix of new capital with which to fund them.I'll now turn the call over to John Spaid, who will discuss our use of debt and equity capital. John?

Thank you, Roger. As we have discussed in our last 2 earnings calls, we anticipated a rise in our leverage this year as we continue to reposition the 3 transition leases. It's our continuing expectation that the EBITDA from the transition properties will return to us over the coming quarters. Additionally, 2020 will be a transformative year for NHI's balance sheet as we manage proceeds from our expected tenant purchase options, redeem our $120 million convertible bond using at our discretion either stock or cash or a combination of both, manage our interest rate risk with $210 million in LIBOR swaps to mature in June of 2020, and term off revolver debt into a new longer-dated debt instrument.It is not our intention to alter our stated financial policies, and we intend to stay within our net debt-to-adjusted EBITDA ratio range of 4x to 5x. We will continue to conservatively manage our balance sheet as we judiciously use equity proceeds to fund our growth.Our debt capital metrics for the quarter ending June 30 were: net debt-to-annualized EBITDA at 4.8x, weighted average debt maturity of 4.4 years and fixed charge coverage ratio of 5.4x. For the quarter ended June 30, our weighted average cost of debt was 3.6%, which is seeing benefits from our recent interest rate swaps. At the end of the second quarter, while the interest rate yield curve was favorably inverted, NHI entered into $200 million in variable to fixed-rate swap transactions with 2 of our existing lenders. These swaps are in addition to the $200 million in swaps NHI entered into at the end of the first quarter. The new Q2 swaps further fixed $200 million of our LIBOR-based debt at 1.62% before credit charges through December 31, 2021.During the second quarter, we sold 155,729 shares of our common stock. The shares were sold at an average price of $78.23 per share before fees, resulting in net proceeds after commissions of $12 million. Proceeds were used to reduce our revolver debt. After our second quarter ATM activity, we have approximately $143.6 million in capacity remaining under our shelf facility.Turning to our liquidity. NHI ended the second quarter with $273 million outstanding on our revolver, leaving us with $277 million in available revolver capacity.I'll now turn the call over to Kevin Pascoe to discuss the portfolio. Kevin?

Thank you, John. As Eric mentioned, we have been working hard to reposition our transition communities and put them on a better path. While much of the heavy lifting is completed for NHI, the operators and partners in the portfolio are working diligently to improve the buildings every day, and we continue to try to find ways to make improvements not only to the transition communities but also on the larger portfolio.Looking at the overall portfolio at the end of the first quarter, EBITDARM coverage ratio was a steady 1.65x for the total portfolio, senior housing was 1.15x, and our skilled portfolio is 2.76x. I would like to note the improvement in the SNF coverage, and while we would certainly like to see coverage at a higher level in senior housing, during the second quarter of this year we started seeing positive leading indicators in the portfolio.Turning to our largest operator by revenue. Bickford Senior Living, which represents 18% of our cash revenue, had an EBITDARM coverage ratio of 1.07x for the trailing 12 months ended March 31. As a reminder, this EBITDARM calculation excludes 2 smaller properties held for sale. This coverage was sequentially down from the fourth quarter, but occupancy for the quarter started to turn positive especially later in the second quarter.Same-store occupancy for the second quarter ended June 30 was up to 85.9% versus 84.1% for the first quarter this year, and June averaged 87.2% for the month. The effect of this positive momentum will take a couple of quarters to flow through to performance, but the improved occupancy is a good step in the right direction. We've added a 5-quarter chart in the 10-Q which shows the recent progress.Furthermore, the portfolio we purchased in mid-2018 in Ohio and Pennsylvania seems to finally have some better footing with all but 1 leadership position filled and the vast majority of agency labor and overtime expense out of the buildings. The 2 Bickford developments continue to lease up nicely on or ahead of schedule and add additional cash flow to the Bickford portfolio. These developments, excluding from both same-store and the total Bickford portfolio results, have a trailing 12 EBITDARM coverage of 1.51x as of Q1 2019.We continue to work with Bickford to find ways to optimize the relationship. In addition to the held for sale assets and new developments, we continue to explore avenues to improve cash flow over time. This may include opportunistically selling a few assets and transitioning some buildings to other operators. In addition, Bickford is making meaningful progress improving their balance sheet and financial performance by refinancing non-NHI assets in the third quarter.Our relationship with Senior Living Communities represent 16% of our cash revenue. Including net entry fee income, their EBITDARM coverage ratio is 1.14x on a trailing 12-month basis. This ratio is down quarter-over-quarter due to some lower entry fees during the winter months as we discussed on the call last quarter. The spring and summer months are back in line with historical levels. Due to some solid entry fee quarters rolling off the calculation and the 1 quarter lag in reporting, it will likely be a few more quarters before the portfolio shows improvement due to this variability in their income. I'd like to note SLC has continued to invest in the buildings by purchasing and renovating available entry fee units as well as in its operations to best position these communities in their respective markets, and we are very pleased with the focus of the team there. This additional CapEx and investment in unit inventory will bear fruit once the renovated entry fee units are sold.SLC formerly launched the Charlotte, which is one of the transition properties, in July and is beginning to move in residents. SLC did a great job with the buildout of this community and feel it is well positioned for the future. The building, which has an aside as a rental community, is less than 5 miles from the SLC headquarters and will benefit from direct supervision by SLC leadership. Rent under the lease is $50,000 for the balance of 2019; $250,000 for 2020; and $1.3 million for 2021. SLC rent will then increase to $1.55 million in 2022, with 3% escalators thereafter. The lease is coterminous with the master lease, which has 10.5 years remaining.We also added to the relationship by providing a senior loan to SLC to acquire a community in Columbia, South Carolina. This 248-unit CCRC fits well into their geographic footprint and is a good value add opportunity for the company. The senior loan of $32.7 million carries an interest rate at 7.25%, and NHI has a purchase option on the community once it stabilizes.Looking at National HealthCare Corporation. Our partnership with NHC accounts for 13% of our cash revenue and has a corporate fixed charge coverage of 3.91x.Holiday retirement, which represents 12% of our cash revenue, had an EBITDARM coverage ratio of 1.2x. Trailing 12 EBITDARM coverage on the Holiday portfolio would be 1.26x as of first quarter end, adjusting for the impact of the recent lease amendment. This improvement in coverage demonstrates what is possible when an operator and capital partners's interests are aligned.Moving on to new investments. We are pleased to say we once again expanded our relationship with Comfort Care Senior Living. In May, we announced the acquisition of a 73-unit assisted living and memory care property for a total commitment of $13.5 million. This recently opened community, Brighton Manor, is located in the town of Brighton, Michigan and is leased to an affiliate of Comfort Care Senior Living. The 10-year lease has a lease rate of 7.75% plus the annual escalator starting in year 3. This acquisition brings the total number of buildings leased to Comfort Care to 4 and demonstrates NHI's commitment to high quality, local operators that understand their respective markets.In June, we announced the funding of a $10.8 million construction loan for a 66-bed assisted living and memory care community located in Oshkosh, Wisconsin. Construction on the property has begun and is expected to be completed in the second quarter of 2020. The 5-year loan has an annual interest rate of 8.5% with 2 one-year renewals. The new community will be managed by 41 Management, LLC, a growing Midwest operator owned by Tom Ostrom, which currently manages 28 buildings and has 2 more in development.Also in June, we announced NHI had entered into a property company joint venture with affiliates of Discovery Senior Living. This joint venture consists of 6 properties located in Pennsylvania, Maryland and Indiana and was purchased for $128.35 million including $1.5 million in closing costs and expenses, which translates to about $215,000 per unit. The properties consist of 145 independent units, 356 assisted living units, 95 memory care units and will be leased to affiliates of Discovery in a 10-year lease with a 6.5% initial annual cash yield with annual escalators. NHI, the managing member, owns 97.5% of the joint venture equity, and Discovery owns 2.5%. Furthermore, the tenant will have a $5 million earnout available to them as additional incentive based on performance of the portfolio. In conjunction with the joint venture, NHI will make a senior mortgage loan of $6 million at 7% annual interest extended to affiliates of Discovery for an additional property in Indiana for which the joint venture will have an option to purchase after stabilization. The community consists of 52 assisted living units and 22 memory care units. The loan is scheduled to be closed later this month.NHI also transitioned the last of the former Regency buildings to Discovery in July. This property located in Indianapolis is leased to affiliates of Discovery and fits nicely into the portfolio of properties we've recently acquired with them. NHI has provided a $900,000 CapEx allowance and $750,000 of working capital loan to the tenant to get the property back on its feet. The lease will be cash flow based until 2022, at which time there will be a fair market value reset with a floor of $1.4 million, and the lease has an overall term of 5 years. Discovery will be eligible for incentive payment based on increasing the value of the community.Lastly, our latest addition to the portfolio in July was with a new operating partner in Cappella Living Solutions. NHI funded $7.6 million for a 51-unit assisted living and memory care community located in Pueblo, Colorado. NHI will lease this community at an initial rate of 7.25%. Capella fits our target profile of a local operator that is mission driven with a good growth profile.Turning to our pipeline. We've had an incredibly busy first half of the year, making new investments with both new and existing customers. We continue to see additional opportunity as we survey the market and are committed to adding high-quality operators and communities to the portfolio like the Timber Ridge purchase option we continue to evaluate. We will have an update on this and any additional transactions as we have firm commitments or closings.With that, I'll hand the call back over to Eric.

Thank you, Kevin. Before turning the call over to Q&A, I'd like to add by saying how pleased I am with the progress NHI has made in 2019. No question, we had a difficult setup with the restructuring of the Holiday lease late last year and the headwinds from the transition portfolio, but we feel like we're now in a position to say that most of the hard decisions have been made on those properties and that we expect that they will contribute nicely to our organic growth in 2020 and beyond. And it has been no small feat that we have already announced $295 million in year-to-date investments, which will further add to growth in 2020. We have accomplished these investments while maintaining a disciplined balance sheet which puts us in a position to continue adding to growth. And we hope to have more to share with you on that front over the next several months.With that, operator, we will now turn the line over for questions.

[Operator Instructions] Our first question is from Chad Vanacore with Stifel.

So team, you've tightened guidance. What factors have become clearer since we last spoke? And then how much of that stabilization situation is due to the transition assets and then the Holiday lease?

Chad, this is Roger. We had been able to tighten our guidance a bit this quarter. We feel very good that our acquisition pace is going to bear out the estimates that we've provided, and we have been able to raise the low end of our guidance. So we feel very good about where we are at this stage and the timing of the investments that we've made.

All right. Just on that, any other factors we could think that would swing guidance from the high end to the low end?

Well, we obviously target the high end, and we've been fortunate in the past to be able to do that. There's obviously any number of things that can happen, but we feel that we've adequately provided for contingencies and that we're going to keep adding investments as Eric described in his remarks.

All right. You started out giving us a fit for occupancy which appears to be on positive trend after a dip in the first quarter. What's driving that occupancy improvement right now?

This is Kevin. Largely, it's been a -- not a new focus, which is the focus by the team there, adding new programs to really focus on driving leads and sales in the communities. Some of the project that they have internally, they call it -- they've dubbed it Project Elevate, they went out and they selected somebody that was a high-caliber individual in the organization, and they went to 8 different branches. And they were able to have that 1 person focus on 8 buildings at a time and really focus on getting them back on the next track. And once they are able to get where they want them to be, they move somebody else in. So that's 1 example of the types of things that they're working on to help improve. They've done a really nice job of being able to optimize some of their lead generation and their Internet searches and then also being able to again install certain programs like that and have upgraded CRM. So they've done a lot of things, invest in the company and into kind of the sales infrastructure to make sure they're capturing the leads and then converting them to sales.

Our next question is from Jordan Sadler with KeyBanc Capital Markets.

I wanted to just follow up a little bit on the guidance line of questioning. I think coming into the call in sort of post NAREIT and given sort of some of the good news on the investment front, I was probably expecting that the tweak to guidance would have been more upward rather than downward. Roger, you mentioned targeting the high end of the range, but the high end of the range also came down. And so given sort of the investment activity that's sort of accelerated in 2Q, it got you guys to nearly 300 year-to-date already and the fact that interest rate, I'm sure at the end -- beginning of the year, you weren't underwriting or you may have been, but a reduction in interest rates this year, I'm just kind of curious what sort of the 1 or 2 headwinds that are sort of offsetting these benefits?

Jordan, this is Roger. Obviously, there is a lot of things that go into that guidance and all the different pieces and parts, particularly with these transition properties. I would say that compared to earlier in the year, the transitioning took a little bit longer than we expected, although we think we've now got things lined out as Eric described in the third quarter and definitely heading in the right direction. We also had to incur some expense that I mentioned in my prepared remarks, just for property taxes in respect to those transition properties. So we spent $828,000 in the first 6 months. It's just little things like that that have caused us to tweak the top line normalized FFO. Our normalized AFFO, we feel very solid on the top end of that at $5.10. But clearly, we have more clarity now in August for the remainder of the year than we did 3 months ago.

Okay. Along those lines, Roger, the 9 properties I think we spoke of last quarter, it was really hard for you guys to forecast what the ramp might look like, particularly for the LaSalle and Regency properties. Can you offer any better insight now for what 3Q and 4Q might look like from a contribution margin perspective or overall contribution perspective from those?

Jordan, it's Eric. There should be a schedule in the 10-Q that shows you what the rent has been from the LaSalle properties. I want to say it's been $150,000 a month. And then Kevin gave you the specifics on the Charlotte property. We get $50,000 this year, and that starts really ramping up in 2020 and 2021. And for those of you who like straight line rent, that will also result in straight line rent next quarter. And then finally, Indianapolis, we've just signed a lease with Discovery. That's going to take some time. So we don't have -- sadly, we don't have any concrete numbers for you yet. We are going to renovate the building. It's an NOI lease, so that's a question mark still. And then our Nashville building, we've got that cash flowing at around $35,000 a month of NOI rent. And all of that should be in schedule. Like I said, we'll get more information on Indianapolis. That's probably going to take 2 quarters to sort that one out.

Jordan, this is John Spaid. So just to highlight that, you've got 6 months of view in all the properties in the 10-Q. You'll also see a lot of expenses in the 10-Q as well associated with these transition properties. We'd like to signal that we think for the most part, those expenses are over. So you'll get a sense from there how you might be able to kind of carry those numbers forward. And Kevin in his remarks gave you very clear numbers on the SLC transaction, and we'll give you all the exact details in our Q3 earnings guidance. And then Page 37 of the 10-Q talks about the Discovery subsequent event. So that's cash flow that I think there's some occupancy in that building that should materialize this year as well as next year. It's just very difficult for us to give you better guidance on that.

That's helpful. The franchise and the property taxes that you guys were incurring, that those will basically be gone next quarter?

Yes. That's correct.

Okay. That's helpful. And then I guess lastly, you did -- Kevin, in your commentary, I think, talked about sort of the relationship with Bickford a little bit and optimizing the relationship. Anything else you can sort of offer? I mean it sounds like we should expect -- I don't know if this is a second half event but maybe a couple of additional asset transitions and/or maybe some sales?

Definitely is something that's on the table as we continue to discuss options with Bickford. As we've talked about, we're feeling better about where they're at. They've been able to add some occupancy. We'll continue to look at the portfolio, see where it makes sense to sell assets, if it does make sense. And that could be a combination of things, whether that's an outright sale or maybe even selling them back to the company where it may make sense to have a more stable long-term loan on the building for them where we can build the balance sheet and build cash flow for them but still be able to get some proceeds for making that sale. There's definitely some different things that we're evaluating with them, but first and foremost, we want to communicate that they're making progress. We really, really like the trajectory in the way of occupancy, so it's something we'll continue to watch closely. They are not out of the woods, so to speak, but making progress. And we'll continue to trim and do things that are helpful to the overall relationship there.

Okay. My last quick one is just on the watchlist. Anybody else sort of popped up sequentially onto the watchlist this quarter? I know you've made some nice improvements: Holiday, for example, and Bickford you're talking about. But just anybody else here concerned about the margin?

Jordan, it's Eric. I think you're referring to my worry list. At any given time, you've heard this before, 5% of our portfolio is in need of attention and some sort of fixing. There are a couple of smaller operators that are on the fringes that we're watching and worried about but nothing that's material and everybody's paying rents. So we're not at the point where we're taking any type of surgical action.

And our next question is from Todd Stender with Wells Fargo.

And just to kind of build off that with, I guess, just diversifying away from Bickford to some degree. You've got a couple of new names that have popped up like 41 Management and Capella. The Capella looks to be -- is it a nonprofit, Christian Living services? Maybe just expand on these 2 new relationships, please.

Sure. Capella is owned -- the management company is owned by a not-for-profit. The manager themselves is a for-profit entity. So it's just, in effect, a different arm of Christian Living that would allow them to get management contracts and be able to do things like we did with them, have more of a for-profit mentality but still continue their mission as they operate properties. So that's one that I mentioned. It's something that we definitely appreciate about them. They have the right -- they get out of bed really energized about caring about seniors each day. But they do have the mission and the margin mentality about them. So that's a relationship that we definitely would like to foster and build off of. 41 Management is a Midwest operator. They have, as I mentioned, a building -- an assisted and memory care building in Wisconsin with them. They have some other relationships as well. A group like that that's got 20-plus buildings, looking to grow and doing some development, doing some acquisition, that's definitely a good fit for us. It fits really well into the geography that we typically participate in, able to get some new buildings and add over time. Those are groups that as we continue to build on our operator base, we will try and get them some more opportunities to see how we can expand those relationships.

And that is how you get your foot in the door, right? I mean you probably can start with this construction loan, provided it's a good outcome. That's how you start to get maybe them as a tenant and maybe purchase options, that kind of stuff?

Yes, that's exactly right. We're happy to take a flyer for a good group where we think we can do additional business. It's great to get a $10 million deal done, but at the end of the day, we always want to do more. And that's kind of the eye that we have as we look at some of these new relationships even if they do start kind of a smaller initial investment.

Okay. And then just to kind of drill into the Pueblo, Colorado property just because it's so current. In light of new supply, in light of labor costs rising and have been rising, just give us a sense of the current environment and how you underwrite a 15-year triple-net lease? Maybe if you can get granular and just maybe express what do you think the top line is going to grow at? What do you assume operating costs and labor costs to grow at to have that confidence to underwrite it over such a long time period?

Sure. First and foremost, we're looking at the most recent and historical operations to make sure we understand where the building is coming from and then work with the operator to see where they think it's going. I think a big part, or at least a big question mark, as of late has been what's the right escalator? Because if there's ever been kind of an issue so to speak or a question about those things that you mentioned, growing revenue, growing expenses, you don't want the expense to grow that much faster. So, in this instance, we have a fee-based escalator with a foreign cap, so it helps moderate that expense increase over time. This is kind of a market-type community, so we're not expecting outsized growth. This is going to be just kind of a [indiscernible] building that we bought with coverage where they have the ability to earn the management fee, earn some income off the property and be able to reinvest in it to also grow their business. In this instance, anyway, it is kind of -- more of a stable steady property where we're looking at very modest revenue and expense growth over time. On the 15-year lease, we work with each of our operators to make sure that we've got the right term. In some instances, it's been 10; in some years, it's been 15. But this is one where we want to have that long term relationship. And given their mission, what they wanted, they wanted to have that long term access to the property.

Okay. And maybe just my last one to stick with you, Kevin. For the loan made to Senior Living Communities, so the coupon looks to be about equivalent to an initial lease yield, so call it -- if it's 7.25%, is that going to grow? What's the LTV, kind of how you look at that, and do you look at it side-by-side with how you'd underwrite a property?

Well, this one, we looked at it, as I mentioned, kind of a value add opportunity for them. They want to co-invest in the building, and rather than trying to do some sort of property joint venture on this, we already have a lease relationship set up there, so give an opportunity for them to come in to essentially co-invest under a loan structure, get the property where they want it from a lease coverage standpoint on a stabilized basis, make a little bit of money for the company and then put it into more of a long-term structure where we have that purchase option. I'm not sure if I'm getting to your loan-to-value question, but ultimately give them the ability to make a little bit of money. Essentially, our LTV is going to go down over time, and then at such point that it does, that's when we'll have that purchase ability.

And our next question is from Rich Anderson with SMBC.

Can you go through what's the total loss revenue when you combine the transitions -- the 9 transitions and the Holiday restructure? Like what's the starting point from a revenue perspective?

Well, I'll tell you, from the Holiday transaction, we had scheduled rent for 2019 of approximately $39 million. The restructured rent plus the addition of the Vero Beach property in January of this year brought that cash rent up to about $34 million. So there was a gap there. On a financial statement level, with straight line rent now projected over the new lease, it's just about $1.5 million for the current year. So it was really a good outcome all the way around. And remember, we got $65 million worth of cash and assets like Vero Beach in that transaction.

Right. Okay. And then on the 9 restructured, that sort of looks like, at least if you do the math second quarter versus second quarter, it's like down $10 million. That's recapture that you're looking for on an annualized basis?

For those transition properties, we basically started from around $11 million worth of rent last year, and now we're building each quarter. Those properties have transitioned. We'll be really in a fill up-type mode with them. One property starting absolutely brand new after a major renovation in Charlotte. So it's going to take several years. These are like taking new buildings. We had new operators. And as Kevin can describe much better than I, it's going to take a few years to get back to where we were.

Okay. So tell me if this is too kind of basic to look at it this way, but I'm looking back. In 2017, you produced $5.50 of FFO and the top end of your guidance is $5.50, not a whole lot of material difference in the denominator in terms of the share count. So why wouldn't that not suggest that you've kind of -- you've gotten back to where you were by the end of this year if you're able to sort of meet the top end of your guidance range? Is that a reasonable way to think about it?

You're just talking about FFO, is that correct?

Yes, that's right. Yes, yes.

Well, we think we're certainly back as I said in my prepared remarks. Compared to a year ago, we're back on FFO and, very importantly for us, we are back on AFFO. So we're just adding from this point. And as Eric said, the volume of our investment so far this year is going to begin to really kick in for the remainder of this year and next year.

So that's a multiyear process with these transitions, but as a company overall, you feel like you're already beyond the trough position that you got yourself into?

Yes.

Okay. Okay. All right. Eric, or anyone in the queue, and by the way, I'd like to call out to the important parts of the 10-Q that was helpful. There was a mention that you might take -- you might be required to consolidate the operations of these 9 assets, not all of them but some of them or maybe none of them, if the operators that are going in to replace aren't able to kind of keep up. Is that another way of saying - of maintaining every day of restructure or is this like taking on everything whereby you'd have to have them housed in the TRS including all the management business and everything? I'm just curious what you meant by that statement.

I think what we're trying to do is let the Street know that insofar as the buildings that we haven't signed traditional leases with, Indianapolis, the 5 Autumn Leaves buildings, and Wisconsin, they are still in a fragile, unstable state. We think we have good operators. We think they're on a good trajectory. But we have to give you some safe harbor language, right? That means that we could end up in the operations business if everything goes poorly. And you're right, it would be deposited into a TRS vehicle and it would be what I would call an accidental idea.

Okay. Even more so though because you wouldn't really have a management payment, right? It would be all in.

Well, you wouldn't have Eric and Kevin cooking meals, and John and Roger doing housekeeping. We would come up -- we would actually come up with a manager that you know...

Okay, I got you. Are there any more ATM draws dialed into guidance beyond what you've done?

So this is John, Rich. I can't afford to comment on what we might do on the capital markets. I tried to lay out as clearly as I could that we have no intention of letting our leverage get beyond our stated policies. So that's best I can do for you there. Can I just build on one more thing that Kevin -- that Eric said just because I think you asked kind of a hard technical question, do these NOI-based leases give rise to that income? Yes, so that for the time being, it will flow through our TRS. And we do have net operating losses in the TRS that we can utilize there. The intent though is to improve the assets and then transition them. They're in a lease now. They're in a lease structure right now, which includes a management fee being paid to these operators. But we get a little bit down the road, 1 year or 2 years, our intent is to transition them to triple-net lease.

Yes, got you. Last question, this is just for my own information. When you do the construction loan commitments, how quickly are you actually getting cash interests on those investments?

This is Kevin. Usually, we'll get something out the door at closing. So whenever we get a development deal like the ones we've announced, usually if it's a deal that's ready to go, it's been fully entitled and they're ready to put the shovel on the ground, so I would say within 60 days, if not sooner, or after closing we've made some sort of outlay and then we'll start getting accrued interest on that outlay, and of course, that will happen over the next 12 months or so from there.

Right. So you make -- you accrue the interest and then perhaps when the property is cash flowing and whatnot, that's when you turn accrual into cash, call it 24 months or so?

That's very usual. We'll have an interest reserve built into the budget that we are accruing each month as they draw.

And the last question comes from Daniel Bernstein with Capital One.

I wanted to go back to Bickford. Appreciate you providing your occupancy trends there. Given -- what other leading indicators might you be able to provide for us that give us comfort that Bickford is on the right trajectory? Are they reducing rent concessions? Are they doing something else on the expense side? It's a good sign that occupancy is going up, but where might -- are there any winning indicators that might indicate margin and again eventually lease coverage will go back up?

Daniel, this is Kevin. What I'll just echo is what I mentioned on the call, is that not only for the Ohio and Pennsylvania portfolio but kind of throughout the organization. They've done a really nice job of reducing overtime and agency labor, getting kind of that wage pressure aspect that we've talked about. I would say enhanced, so to speak, or manageable. There's still wage pressure. That's not going away. But they've done a really good job limiting those aspects. So that is a really good indicator as we look at the portfolio. And then this is something I think we've talked about on the call before, but Bickford is really -- they don't do a lot of discounting in the first place. So we look at the markets that they are in versus the competition. Their rents are higher than the competition. They haven't bought occupancy, so to speak, and reduced a bunch of rates to get these move-ins. They've really stuck to their knitting and been able to sell the value of what the services they provide. So we're looking at a lot of different things with them. We're on regular contact. At least, those are hopefully a couple of data points for you that'll help you kind of see where they're going.

Okay. Is there any change in the outlook for supply within their markets as well?

You mean new deliveries?

New deliveries, correct.

Yes. They've had -- again, they've not been immune to the new competition coming in. We are not seeing a new wave of competition. They're just kind of managing through the deliveries that a lot of the other markets that we've seen have been. So not seeing a big increase in new deliveries coming, but again, that's not to say that there isn't any.

But the pressure is not -- would you characterize it as supply pressure might reduce going forward relative to where it's been the last year or 2. That has put pressure on them, stable or could get worse? If you could put it in that kind of context.

I guess I would put it more in the stable category. There's always going to be some markets where it's going to add some more pressure. The fact of the matter is that competition has been definitely under the radar. Again, not to say that there has not been any, but new competition has not really been the biggest issue for them. There has been some. They've dealt with. We feel like a lot of that is -- they've been able to sell the value and, in the remarks as we pointed to, increased occupancy back to a level that is much better than where they were. So, again, I would kind of characterize that as flat, I guess, so to speak. On deliveries, there's going to be some but not a big wave that we see coming.

Okay. And then 1 last question from me regarding the pipeline and the kind of investments you're doing, particularly in senior housing but it could refer to skilled nursing. Your peers have seemed to have picked up the pace in terms of value add or a little bit of, what you said, risk. You're doing that a little bit as well, such as the new one with Discovery. How would you characterize -- this could be for you or anybody else, but how would you characterize what's available out there from an opportunity standpoint? You know, stabilized assets versus the value add or taking a little bit more risk. You're seeing a lot of opportunities where the pricing is right. I'm just trying to understand how you're thinking about where your pipeline may move from a stabilized versus value add-risk standpoint?

Sure. I would just say we're looking at everything that we can see in the market, and see what makes sense. At the end of the day, everything we do starts with the operator. We're trying to figure out who are the people that we want to work with, what are the opportunities set, what are they good at? What are the buildings in their geographies that make sense to partner with them on and then try and matchmake with the opportunities we see with those operators. We're still going to continue to look at the value add. At the end of the day, we prefer -- I think our preference is going to be stable coupon-clipper type of investments. That's where we're going to air, so to speak. But we also have to go where the opportunity is and what our operators are looking at and be able to make sure we're doing a good job of balancing those new investments. I'd say we're going to continue to look at the stable lease-type investments. But in order to do some interesting things with good operators, we're going to have to take a look at value add or development or some of these other avenues.

Is the pricing not attractive on stabilized assets right now?

Again, it just kind of depends on the market. If you go to kind of top 100 mid-markets or even go to really more like the coastal high-end markets, to try to fire there is going to be below our cost of capital which makes it really difficult for us to invest there. I think you'll see more of what you're seeing, and that's looking at good quality operators, secondary markets, getting good values and trying to find some interesting ways to grow the company.

And gentlemen, those are all the questions we have. I'll turn the call back over to you for any closing remarks.

Thanks to everyone for your time and attention, and we hope to see you at NIC or NAREIT soon.

And ladies and gentlemen, that concludes our conference today. We thank you for your participation. Have a great rest of your day, and you may disconnect your line.