Q3 2019 Earnings Call
Ladies and gentlemen, please stand by your conference call began shortly we thank you for picks up to the Maryland. Your conference call began just a moment.
Greetings and welcome to the National Health Investors third quarter 2019 conference call.
During the presentation, all participants will be in listen only mode. Afterwards, we'll 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, this conference is being recorded Thursday.
November 7th 2019 I.
I would now like to turn the conference over to director of Investor Relations Dana Hambly. Please go ahead.
Thank you and welcome everyone to the National help investors conference call to review the company's results for the third quarter 2019 on the call with me today, our Eric Mendelsohn, President and CEO , Roger Hopkins, Chief Accounting Officer, Kevin Pascoe, Chief Investment Officer, and John Spaid Executive Vice President.
In the finance.
The results as well as notice of the accessibility of this conference call conference call and I'll listen only basis over the Internet were released this morning before market open 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 state.
And H.I. cautions investors that any forward looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward looking statements represent an H.I. judgment as of the date of this conference call investors are urged to carefully review various disclosures made by an H.I. and.
It's periodic reports filed with the Securities and Exchange Commission.
Including the risk factors and other information disclosed in NHL. Its Form 10-Q for the quarter ended September Thirtyth 20, Nike copies of these filings are available on the Fccs website at Www Dot FCC doesn't go.
We're on energize website at Www Dot and H. I read Dot com.
In addition, certain terms used in this call our non-GAAP financial measures reconciliations, which are provided in NHL <unk> earnings release and related tables, and schedules, which have been filed on form 8-K with the FCC 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.
Hello, everyone. Thanks for joining us today.
Investors recently heard from others in our industry that the senior housing market continues to see challenges from new supply and wages.
We know many of you were concerned with the health of the senior housing industry.
We are cautiously encouraged by the Nic data, which has shown a general slowdown a new starts and healthy absorption rates, which appear to be helping to stabilize occupancy.
This supports our continued long term bullish outlook on the industry.
New deliveries and wage inflation remain as top industry challenges and concerns for us and as I've mentioned on our previous calls we don't see these dynamics changing in a meaningful way for the next several quarters.
But we're still optimistic and our outlook as our triple net strategy helped to mitigate the ship cyclical downturns, which we're currently seeing and the industry.
We've worked hard to keep our investors updated on the good and the bad.
Our approaches to balance our commitment to our shareholders with our desire to see our operators succeed.
Let me say that I'm also proud of our team here this year, because we've accomplished a great deal and today, we're reporting a number of improvements as a result of our operator focused strategy.
During the last 12 months, we work hard to anticipate areas that need attention and proactively address them in a transparent manner.
We've restructured our holiday lease rehabilitated an operator that stumbled in 2017, who by the way is succeeding today.
Weve transition nine properties out of three leases quickly unsuccessfully we've closed over 315 million and new accretive investments this year and as Kevin will talk about more we're seeing better occupancy and other green shoots and blossoms from our initiatives with Bickford.
The challenges in this industry cannot be neatly boiled down to a al versus IL or primary markets versus secondary markets. It isn't that simple.
And any tries committed to succeeding in all the senior housing markets and products and which we invest.
Well, we plan to provide detailed 2020 guidance with our fourth quarter results. Our expectation today is that an h. I will resume growth and 2020 that more closely resembles our historic performance in the mid single digit range.
With that I will turn call over to Roger.
Thanks, Eric Hello, everyone.
So far this year, we have announced over $315 million and accretive purchase lease backs and mortgage note investments all in seniors housing.
We have approximately $117 million and previously announced commitments that we expect to fund over the next 12 to 18 months as shown in our Form 10-Q filed this morning, what the FCC.
Given the full year impact of our new investments. The year ahead is shaping up to be a good growth here in terms of our net income and our non-GAAP metrics.
For the third quarter of 2019 normalized FFO per diluted share was $1.42 cents compared to $1.39 cents and the same period, one year ago due to the growth in our new investments.
Normalized FFO for the nine months ended September 32019 was $4.09 versus $4.12 for the same period, one year ago.
Due primarily to 1.561 million additional weighted average fully diluted common shares outstanding.
For the third quarter normalized FFO was $1.32 cents per diluted share and for the nine months ended September 30, 20, not change was $3.80 per diluted share both metrics, increasing core sense when compared to the same period and the prior year.
Despite the challenges we face this year in transitioning three leases to new operators.
So far in 20 not came there have been no adjustments between our nitrate FFO and our normalized AFFO.
And I tried to total revenues for the third quarter were $81.7 million, which was a 9.3% increase over the same period one year ago.
For the nine months ended September 30.
Revenue increased 6.9% to $235.9 million.
These increases reflect good investment volume in both new lease and mortgage deals.
We have utilized a careful mix of debt and equity capital with which to fund the.
John stable explain in a few minutes, how we have funded this significant significant volume of new investments in 2019.
While protecting our low leveraged balance sheet.
Our interest expense increased $2.287 million in the third quarter of 2019, when compared to the same period one year ago.
And a corresponding increase of $5.718 million for the nine months ended September 30, compared to the same period one year ago.
This increase is reflective of our new investment volume.
Our increase in depreciation expense of $1.542 million in the third quarter of 29 team and $3.924 million for the first nine months of 2019 compared to the same periods in 2018 are reflective of our growing real estate portfolio.
Yeah.
Our tax expenses increased $584000 for the nine months ended September thirtyth when compared to the same period, one year ago. As we were required in some cases to pay the property taxes on the portfolios in transition as described earlier.
Our general and administrative expenses increased only $7000 during the third quarter from the same period one year ago.
Our noncash share based compensation expense is computed by the black Shoals pricing model almost $477000 in the third quarter and is expected to be the same for the fourth quarter.
Property taxes and insurance expenses on air lease properties was 1 billion $608000 for the third quarter and $4.205 million for the first nine months of 29 Kane and.
I must paid out from our tenant escrow deposits made each month to us according to the terms of our leases.
Do accounting standard requires companies to show this caption separately on income statement. However, the same amount is included in our lease revenue. So there is no effect where net income.
Moving onto our dividend.
This morning, we announced a quarterly dividend of one dollar five cents per outstanding share for the upcoming fourth quarter ended December 31 to be paid on January 31 2020.
The fourth quarter dividend is taxable to investors and 29 chain.
We currently estimate our normalized FFO payout ratio for 2019, well be in the mid 70% range and our normalized FFO payout ratio well be given the low to mid 80% range.
As for our updated guidance for the remainder of 29 chain.
We are increasing the midpoint of our full your estimate of normalized FFO to be in a range of $5.47 to $5.50 per diluted share for 29 team.
We are increasing the midpoint of our full year estimate for normalized FFO to be in a range of $5.08 to $5.10 per diluted share.
These estimates include new investments planned near the end of the year the funding each month of our ongoing loan and lease commitments and the composition of new debt and equity capital to properly align our capital resources for growth it for maintaining low leverage.
Our guidance allows for the uncertainty and the results of operations to the transition properties.
From which we derive current income from the net operating income of the facilities.
I'll now turn the call over to John Spaid, who will discuss our uses of debt and equity capital.
Thank you Roger.
Earlier this week, we announced that S&P global assign any CCI triple B minus investment grade issuer credit ready and Fitch affirmed its triple B minus investment grade rating.
For these investment grade credit ratings will enhance our ability to grow our real estate portfolio through diversity of funding sources.
The two ratings will also provide the company with the ability to toggle. Our 2017 2018 bank facilities to credit based margin pricing grid from their current leverage based pricing grades, which we are currently evaluating.
As we mentioned in prior earnings calls.
We view 2020, as a transformative balance sheet here for any <unk> as we look to term off revolver debt and position the company to refinance its upcoming 2021 convertible bond maturity.
Going public to their credit ratings supports our long term debt strategy, but more importantly, the investment grade ratings exemplify energized strong balance sheet and our stated financial policies.
Turning to our ATM equity program during the third quarter, we sold 590868 shares of our common stock.
The shares were sold at an average price $82.47 per share before fees, resulting in net proceeds after commissions and $48 million.
Proceeds were used to reduce our revolver debt.
And after a third quarter ATM activity, we have approximately 94.9 million capacity remaining under our shelf facility.
Turning to our debt capital metrics for the quarter ending September 30 of net that annualized EBITDA improved to 4.5 times from 4.8 times in the prior core.
The weighted average debt maturity was 4.2 years and our fixed charge coverage ratio was 5.2 times.
For the quarter ended September Thirtyth, our weighted average cost of debt was 3.6%.
Turning to our liquidity and each I ended the third quarter 250 million outstanding on the revolver, leaving us with 300 million in available revolver capacity.
With that I'll now turn the call over to Kevin Pascoe to discuss the portfolio Kevin.
Hey, John as Eric mentioned the team has accomplished a great deal this year and we're pleased with the overall trends in our coverage.
The operating environment remains challenging so we know that we need to continue to find creative ways to help our operating partners, while also protecting our shareholders.
Looking at the overall portfolio at the end of the second quarter. The EBITDARM coverage ratio improved to 1.69 times for the total portfolio compared to 1.64 times in the year earlier period, and 1.65 times in the prior quarter.
Senior housing coverage decline year over year as expected, but was steady with the March 2019 quarter at 1.15 times and our skilled portfolio at 2.8 times improved from 2.49 times last year and 2.76 times in the March quarter.
I do want to caveat the sequential comparison as they are not apples to apples, but we're comfortable with the trend we're seeing.
Our ample SNF coverage is a testament to the hard work of our best in class operators.
While it is too early to gauge the impact PDP him.
The feedback has generally been neutral to slightly positive.
The senior housing industry continues to be challenged by new supply and wage rate growth, we have not seen a meaningful shift and operating trends in the secondary markets.
Where the lions share of our portfolio resides.
We are seeing trends improved throughout our needs driven assisted living operators.
While our independent living operators have been stable.
We remain diligent in our asset management efforts and do see positive leading indicators that these efforts are bearing fruit.
Turning to our largest operator by revenue.
Bickford senior living which represents 18% of our cash revenue hadn't EBITDARM coverage ratio of 1.07 times for the trailing 12 months ended June thirtyth.
On a same store basis, the big for EBITDARM coverage was 1.12 times.
Including two development properties, which are leasing up nicely and have coverage of 1.63 times.
The big for total and same store coverage is one point.
1.15 times, respectively.
As we highlighted last quarter occupancy started to turn positive in the second quarter, which continued through the third quarter.
Same store occupancy for our big bird portfolio improved by 60 basis points year over year, and by 200 basis points sequentially to 87.9% in the third quarter.
Big Bird same store occupancy was 88.2% in September and improve through October which sets up well for the year end push.
Importantly, bickford has maintained price discipline, while showing this improved occupancy.
For example, in the Nic map covered markets, which covers 32 of our Bickford buildings Bickford average occupancy during the third quarter improved 146 basis points sequentially compared to 50 basis points for those markets.
Bickford average rent increase slightly over this period and remained significantly above the comparable market average.
Yes.
We continue to work with bickford to find ways to optimize the relationship we outlined some of these efforts in our 10-Q.
This is a level of detail that we do not normally go into on a specific operator, but feel that the additional transparency is important in this situation.
In sum, we believe the actions, we're taking with Bickford put them in an improved financial and operating position, while having a de minimis impact on our cash flow.
We estimate the collective impact of these efforts amount the less than one of the half percent over 2020 big for revenue.
We will continue to proactively monitor this relationship and hope to share more good news in the coming quarters.
Our relationship with senior living communities represent.
But none of our cash revenue.
Including net entry fee income.
EBITDARM coverage ratio was 1.1 times on a trailing 12 month basis.
This compares to 1.27 times in the year earlier period at 1.14 times for the March quarter.
This ratio was down quarter over quarter due to some lower entry fees during the winter months as we discussed on the prior to quarterly calls.
The summer months were back in line with historical levels and the entrance fee sales were better year over year end quarter over quarter for the third quarter of 2019.
Due to some solid entry few quarters rolling off the calculation in the one quarter lag and reporting you will likely be a couple of more quarters before the portfolio show shows improvement due to this variability in their income.
As we've discussed on prior calls SLC has been opportunistically purchasing and renovating available entry fee units. So we expect this additional capex and investment in unit inventory will lead to improved coverage as the renovated entry fee units are sold.
To put this in some perspective, that's Lcs current entrance fee inventory with no additional refund do amounts to 50% to 60% of their annual net entrance fee cash flow.
While the entrance fee model does introduce more variability into the operators quarterly coverage due to the timing of these entry fee sales, we like the long term prospects of the industry.
Which include limited new CCRC supply.
Lower average resident move and age and an average length of stay that is significantly longer that island AOL.
Yes.
Looking at National Healthcare Corporation, our partnership with NFC accounts for 30.
It had a corporate fixed charge coverage of 3.95 times, which improved from 3.59 times in the same period last year and 3.91 times in the March quarter.
Holiday retirement, which represents 12% of our cash revenue had an EBITDAR coverage ratio of 1.2 times, which is consistent with coverage.
Q1 19.
Trailing 12 EBITDARM coverage.
On the holiday portfolio would be 1.24 times as a as of second quarter end adjusting for the impact of the recent lease amendment.
This was down slightly from 1.26 times in the March quarter.
As I mentioned earlier, we are seeing improvement from our a all operators.
Our Iowa portfolio, including holiday is stable and we commend the team for their hard work in this environment.
Moving on the new investments, we continue to build our relationship with discovery senior living during the third quarter with a new $6.4 million senior mortgage on a 74 unit assisted living property in Indianapolis, Indiana.
This is the 10th property and the NHS discovery relationship, which now represents 4% of NHS cash revenue.
We exercised our purchase option on the big for journey property during the third quarter for 15.1 million at an initial yield of 8%.
Recall that we previously provided a $14 million construction loan for this property. So we're pleased to turn this into a long term triple net lease.
On a building that is over 80% occupied and steadily improving.
We have a similar option on the Bickford Shelby property, which we expect to exercise in the coming months.
The pace of deal closing slowed in the third quarter.
Well, we have still had an active year with over 315 million and investments in our pipeline is keeping us busy.
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 are closing.
With that I'll hand, the call back over to Eric.
Thank you Kevin.
We're constantly reviewing our portfolio to identify opportunities that we can proactively address we do this through a number of methods and our preference is always to do it in unison with our operators and through a triple net lease structure, which leads to stability in our cash flow. We're proud of our accomplishments in 29.
And as we move into 2020.
We expect that our growth will return to a more normalized level driven by better than usual organic growth the full year impact from over $315 million invested year to date and future contributions as we close on deals in the pipeline.
All of this notwithstanding some purchase option headwinds, we look forward to updating everyone on our progress operator, we'll now open the line for questions.
This is Roger Hopkins.
I just wanted to make one note. This morning, one of our research analysts pointed out a computational error in our schedule of Bickford rental income on page 13 of our Form 10-Q .
It was inconsistent with the description in the paragraph that fault.
We have filed a form 8-K to show a 2019 contractual rent a $48.618 million and straight line rent of $4.986 million for a total of $53.604 million, we apologize for this oversight.
And now we'll open for questions operator, thank you.
Certainly thank you if you would like to register question just pressed to one followed by the four on your telephone you hear three tone prompt technology request. If your question has been answered like to draw. Your restoration is the one for Buddy.
One moment please for our first question.
And we'll proceed with our first question on the life from Jordan.
Keybanc capital markets. Please go ahead.
Thank you.
Good morning.
Good morning.
Just wanted to look at us to afternoon already here.
So.
Question on sort of the transitions and not specific per se.
To bickford.
But not to exclude them.
As you look at the pipeline, where do you feel.
You are sort of inning wise in this in this game of continuing to issue would have to reset and adjust relative to in place rents.
Are there additional.
Watchlist type tenants or other.
Leases that feel like they are at risk as you sort of we should have made our way through these.
Last couple of months.
Hey, Jordan this is Eric sticking with your inning analogy.
I'd say, we're in a seventh inning.
I have an eighth inning game and.
We've given a lot of information on what we've been up to with Bickford I know, we've been talking about it all year, but things are really starting to happen.
And we published better occupancy numbers a lot of the financial engineering that we've been working on behind the scenes and that they've been working on behind the scenes with buildings outside our portfolio. So.
That is seven eight inning or with the transition properties that we took back from.
Regency.
Others.
Everyone has a permanent home now so I would say therein overtime.
And with.
With the Minnesota.
Matthews to 41 management 41 management, we took a building from bickford that wasn't doing well and gave it to a new operator that is local.
So that that was also something that happened this quarter and I'd say, that's an overtime.
That was that for four properties.
Yes, yes, yes for property and that rent oriented.
I'm sorry go ahead.
Yes.
Nick I know, you're going that rent was it a reduced rates well for the new manager it will be reduced from where it was that the aggregate read that in H. I will receive is unchanged through a negotiation with bickford theyre going to support it through the balance of this year in 2020, so our income.
As it relates to those properties is again unchanged.
Yeah, and then the new operators rent will ramp up as the Bickford.
Subsidy goes away.
So it's not quite.
Seamless, but it's close.
So the so the 1.56 million that was on the repurchase.
Purchase option schedule last quarter.
Well I assumingly related to these properties.
Is that and maybe I'm, making a mistake here mixing apples and oranges, but.
Is that the total rent that you're getting or you're just getting the 906000. So is it or is it additive. This.
Amount that's coming from Bickford, just in terms of rent support plus the 906000 or is the total.
Yes, Jordan, you're correct, it's additive so.
Yes.
700.
Okay, Okay, but.
And your Q.
You just get an escalator.
Two and half percent, but you have a fair market rent reset at some point as well.
Correct.
How does that work.
The Red River.
It will be based on the performance of the communities at that point in time, and just again resetting it to fair market value. So if there if they are doing well, we should get a little bit of a step up.
If there.
Performing as they currently are only slightly better than we would get an escalator. So.
We're still expecting to get an increase in income it just depends on how much at that point in time.
Did you did you give us the pro forma coverage for Bickford.
We gave the the same store and.
The total portfolio coverage on a trailing.
What does it look like if you.
Yes.
If we build out.
Minnesota.
It would be slightly improved we didnt give a pro forma coverage, but again, it's a small percentage of the total so it's not going to move the needle more than.
A basis 0.4 too.
So it would be a small impact to overall coverage, but it is additive to their cash flow.
As an organization.
Okay. My last one for you is just on the acquisition pipeline sounds like there's.
A little bit included and Rogers updated guide.
Do you have a.
Pencil.
Circle around that amount yet.
What's in the guide at least.
He's asking about guidance so.
We have a number of things that we're working on it.
Yeah.
Determined internally that.
The acquisitions, we make it would be late in the year end, probably wouldn't be that impactful.
To to the guidance that we've given.
And.
And it certainly would be additive to 2020.
Probably probably not to 20 not too but Jordan. This is John in our guidance does include continuing to sort of fulfill our commitments you remember we have a number of.
Construction loans out there that way.
That are being drawn upon as we speak.
Okay I'll hop back in the queue. Thank you.
Thanks to our.
Thank you very much we're proceeds for our next question on the line from Chad Vanacore with Stifel. Please go ahead.
Hi, Good morning, this is Todd Scholl for Chad.
Hello.
Hi, My first question is regarding the coverage trend. So the coverage Io portfolio at the end up the quarter was pretty stable from a one Q and you mentioned a volatile economic condition in your press release as we have also seen this quarter from your peers since some of the senior housing operators Theres some intensifying shallow.
And just things start to market, leading the quarter had a pretty meaningfully worse than what suggested by the Nic data.
Are you seeing any similar trends in any particular operate all market portfolio and how should we.
Expect courage to try and given the market. Some of the changes you may was big part and when you report next quarter.
So this is Kevin.
As it relates to the market that we're looking at we have not seen and I think we talked about this at our are opening remarks, not seen a meaningful shift we do believe that it is.
There are some challenging components to what our operators are working on we talked about wage rate. We did talk about some new supply although that we've seen that abate to some degree as that's consistent with the nics data. So we've not seen a shift in our markets from what we've talked about previously.
To the opposite we've seen at least good traction on the occupancy that's.
Little bit of a leading indicator we would expect.
Improved performance to go along with it but they are still fighting. These other headwinds that we talked about like the wage rate. So those are things that we're looking to as well.
We will we expect to see that improve over time as occupancy continues to season, but it's going to be another.
Few quarters before you really see that really roll through.
Portfolio.
That's helpful. My second question is regarding kind of the market volatility so given the no rapid correctional to restock in general.
So far this month.
Do you say that you are kind of taking a temporary pause on investments or delay equity funding on this point, how does that affect the your plan near term.
Well, it's Kevin again, I'll take the at least the investment partner and we're not we're not looking too.
Delay investments as a sara-lee, we're still very active we have an active pipeline we're still looking at.
We continue to make investments and we're looking for accretive opportunities, which.
As a little bit of a function of what weve.
Where our cost of capital is at any given moment, but we're by no means pushing pause on our investment pipeline.
Yes. This is John with respect to equity.
I can't say that.
As volatility are seeing right now in our stock prices.
Prevent us from doing accretive transactions.
What we're just going to continue to be focused on.
Making sure that we grow and ROI.
We are hopeful at that.
Street will begin to see that.
We've got pretty good 2020, teed up for ourselves next year.
We've had a lot of.
You know investments this year, what you're seeing partial year effects next year, you'll see the full year effects of wells.
Yes, there's there's there's things that we're talking about the we're monitoring that we're working on regarding our coverage ratios.
But.
No I would also point you to our credit ratings.
And our credit ratings have a lot of great things to say about our business model and and just the benefits of triple that right now is there any sort of.
Down periods so.
Business as usual in our from our book.
All right just a final one are there any dispositions to you a planning for the fourth quarter.
So this is Kevin again, we have the held for sale assets.
Which are the two smaller big for communities, we would expect those to sell in the near term say fourth quarter will that close in the fourth quarter, maybe vital to first we will see just from a timing perspective.
We didnt I think we classify the brookdale assets as held for sale. This quarter. So we'd expect those to be exercised early next year. So those are the ones that were contemplating at this point as we continue to evaluate our portfolios and just just normal asset management, we continue to talk about where it makes sense for us to do.
Do some dispositions, but nothing else planned at this time.
Alright, Thats if ami thanks for taking my question. Thank.
Thank you.
Thank you very much proceeds our next question on the line from Rich Anderson from MBC. Please go ahead.
Thanks good.
Morning.
Good morning show.
Tougher question at all day.
So on the on the Bickford disclosure in the Q.
You you gave a new for the 14, you have a new escalator what did that come down from.
It was a fixed 3% before now we have a.
CVI base escalator that is really on about half of the income as it relates to big for so two leases have the new.
CPI escalator with a floor of 2% at a cap of three so we'll get a minimum of too but up to three at any given year.
Okay, and so the other one that you.
Happened on October Onest, you don't give the the floor and feeling what is the same two and 3%.
It is.
Okay Alright.
And.
Is there is so will you now have to report those on a cash basis because of the CPI component.
This is Kevin seven and so let me know from overstepping, but theres still a theres still a straight line component because theres a minimal that's correct. Okay. Okay, just double checking on that.
Now would you say.
Reducing escalators.
As we always say the fortunes of your operators accrued to the right and so I've always thought that many read Scott over their skis bye.
Announcing these huge escalators, which you know it was perhaps a short sighted phenomenon do you think you will see more this in a way of sort of stepping back on your escalators is this the are you done with it as it relates to bickford or anywhere else in your portfolio as you see it today.
Hey, rich it's Eric.
I would say that we're done with bickford in terms of amending escalators, but in terms of new business, 2% is the new 3% we agree that.
It's hard to stay ahead of 3% escalators, and our low inflation environment or dare I say disinflationary environment. So I think.
Escalators that RCP based.
And have callers are a much more equitable arrangement between.
Landlord and tenant.
Okay.
Agreed.
And.
With regard to the ratings upgrade congratulations on that first.
Would you say when S&P was going through its process. It was mostly looking at your balance sheet or was it identifying also some of these other things that are going on around your portfolio, whether it's the nine assets that youve transitioned or bickford or anything else how much would that did that play a role in their thought process. There was.
Mostly a balance sheet serve observation.
Well.
Thats really a question for them, but I can tell you. This.
They got to see a lot more than what we typically publicly disclose.
We also went on property tours with them.
And.
We definitely.
Touched on a lot of points very deeply with respect to our portfolio.
But how that played into their thinking I'm not 100% certain I think you just have to ask them or read the report.
Okay.
And then.
Yes, Eric in the beginning of the call you said by the way holiday is getting better.
How much of that that comment is a function of the restructuring that you did to improve upon coverage and how much of it is stuff that they're doing to improve upon their revenue.
I'd say a little bit of both.
Keep in mind to that.
We're really the only read that came through the restructuring with a lease that price credit credit intact, Sabra and new senior both went to ride Dee Ann.
And Ventas is still a work in progress.
And I can tell you that Lilly and her team have done amazing things that their new headquarters in terms of adding systems, creating culture, all the stuff that that works well in senior housing and in particular independent living so.
Mike, we're really happy for them and glad to be a part of their their success.
Okay, and then last for me.
Kind of the disclaimer text around your guidance is almost cut and paste from the second quarter.
Which is perhaps the good thing no news, good news or something but.
I Wonder if you have.
Any beyond what was said in the in the release any more visibility on the time line about some of the.
Our the nine transitioned assets and.
When they might get back up to sort of a full full pace of of operations.
Hey, Rich this is Eric again, I would say, there's still a work in progress Indianapolis building just found its permanent home once discovery.
The Charlotte in Charlotte, Justin just opened after a massive remodel.
So we would expect 2020 to show good progress, but I wouldn't expect those billings to be stabilized.
We're back anywhere close to our former rent until 2021.
Okay got to.
Draw granted so so so no no change in terms of your future perspective of the of the nine assets in total.
No.
Okay.
No I think what we said before that it was going to be varies by community, but realistically in 18 to 24 months rebuild so to speak of why that was associated with those communities.
From the time, which they got their new home. So again, it's going to be staged in.
And just take some time to get back there. Yes. So this is John again, we just come back to our 2020.
Thoughts that Eric mentioned in the beginning of his remarks and that is.
We feel we feel pretty good about we've got a lot of.
And a growth in our.
Process that we don't usually see and transition properties are part of that.
We have a lot of.
Partial year effects from our investments that will be full year effects next year.
And then also includes our the mortgage loans or were making as well.
A lot lot of those investments we announced in 2018.
Being drawn upon this year.
We'll have better effects from those next year and something a lot of people tend to overlook is we have this really.
Terrific project up in Wisconsin.
With ignite that's under construction, so a little different project than we typically do because it's a it's a lease construction project.
But it slated to be open end of first quarter, beginning the second quarter on when it does all the sudden we'll have.
Nice renshaw immediately from that.
So.
There is there there's a lot green shoots out there for our 2020, and we're kind of giving you that narrative also knowing that we have these purchase options out there as well.
With that we've got overcome so we're trying not to.
You know give you guidance here that we don't really firmly believe and.
Okay fair enough thanks very much.
Thanks Rich.
Thank you will get to our next question on the line from John Kim with BMO capital markets. Please go ahead.
Thanks, Good morning.
On the big foot occupancy improvement, which was certainly a.
Positive an encouraging this quarter.
Can you comment on how that translates to EBITDA or.
Third.
It sounds like.
The rate growth was lower and I'm not sure if that was on a gross or net basis.
After incentive.
And also.
Any commentary on expenses.
Sure Kevin.
As it relates to the the rate growth. We again, we saw modest growth over the quarter versus the peer group.
But they still remain one of the leaders in those respective markets as it relates to rate and they've kept their discipline on price, which we're very happy to see on the occupancy I guess, the what I would say that is.
These communities.
Particularly being smaller in nature.
There's a certain amount of fixed costs that resides in.
In there so they to build the occupancy backup.
You are still paying some of those fixed costs along the way once you crest.
And this isn't hard and fast, but generally speaking once you press about 85% occupancy each next resident will add a fair amount to the bottom line. So what I would say they built occupancy backup they've gotten back kind of above.
The the area, where they need to actually start building in Hawaii, and as each quarter or marketing quarter that clips by we should start to see that cash flow improve again, they've still got to mitigate some of the things that we talked about like wage pressure, but we should start to see that improvement flow through.
But it's still going to be a couple of quarters before that really translate to what we are able to display in our public filings.
Okay, but when you quote the rate growth for for big versus that on a like on a gross basis like the way the Nick.
Reports it or.
Is that like a net effective rent basis.
It is a we look at it from a revenue proxy tied to unit, which is pretty close to the way Nick displays that.
I haven't given the number because it is not exactly the same so I don't want to give data presented as if it is the same.
But it's really close but it is a net revenue number.
Of the revenue and all revenues that they receive from residence Thats how we.
That's how we think about it.
Okay.
On the early indication of earnings growth next year Eric.
Im assuming that assumes no rent restructurings or transition.
Next year and I'm, just wondering how much visibility do have on that.
For next year at this time today.
Correct It assumes no rent restructurings or.
Dumpster fires.
But.
And in terms of visibility.
I always have my worry list like I say and.
Also always say that in any given time, 5% of our portfolio is experiencing difficulty in every year, it's a different 5% so.
Right now my worry list is pretty short and as I was saying that Jordan.
Bickford worries are in late innings.
They seem to be really on the men's.
And we have a couple of non material.
Worries, but right now things look pretty stable.
And you also mentioned in your prepared remarks.
We expect better organic growth next year can you just provide more color on what this means just given some of the escalators are being modified.
Certainly.
As John was pointing out earlier, we have this unique.
Development lease which.
You don't see a lot of in this business, where we're putting out money. This year and then once the building opens in February March of next year rent will begin in April . So that's a great example of organic growth.
The.
Total amount will be.
Roughly a $25 million commitment at a nine of the have yield jump in.
So there's.
On the yes are there some organic growth we have the Sage Woods and this is all detailed on page six of the supplemental we have the sage would alone that.
We're funding on up.
Almost continual basis, and that's a huge number and that'll be.
Paying interest in full next year. So those two things alone our upper a pretty big part of my comfort level.
Yes, and John .
We had a lot of investments this year and those those investments.
Full year effects this year will get fully or effects next year.
So then in addition to our normal organic escalator growth.
In addition to that.
I just feel pretty confident about next year.
Finally transition properties.
Those they're now ill re they've got all got new homes.
They're all in different stages of.
Rebuilding and so we do expect them to provide some organic growth organic lift next year.
The improved organic growth and no dumpster fired got it.
That's right exactly I.
I can see the headline now John .
Thanks, a lot.
Yep.
Thank you very much.
Turning next question on the line from Daniel Bernstein with capital One go right ahead.
Hi.
Good afternoon.
I just wanted to understand the process.
Leases, where there's a purchase option and I guess.
Yes, its has been moved to held for sale and.
You marketing news assets for sale and.
I guess.
Related question is Brookdale reported some pretty good numbers in the quarter Im wondering if there's anything in terms of the performance of those assets has changed at all.
This is Eric Dan.
So the purchase option gives brookdale the right to buy the buildings directly.
And that's.
Those are the discussions, we're having with them rather than selling them to the market.
So I can't speak for Brookdale, but we're we're modeling.
Mid January late January closing on those buildings.
I think we've been pretty clear that.
The purchase price the proceeds will be in.
Hi high Thirtys low Fortys area.
And the way to purchase option works is there is a base amount.
In the lease and then I think that basis 36 million.
37 million and then there is a fair market value component.
So, let's just say the fair market value was 42 million and then there's a 50% sharing of the value. The upside between 30 742 were 5 million. So they would basically be able to buy this portfolio at a 2.5 million dollar disk.
Those were the numbers.
Okay.
And then senior living communities.
Sounds like the entrance fee sales season for them has been.
Pretty solid is there anything indication that you can give in terms of weathered the entrance fees. They're charging this year are higher than last year as well not just the unit sales are up but.
Actual pricing.
Pricing has been pretty consistent form theyre not ones I believe in discounting either they'll do it in certain instances if there's a unit thats been sitting there for a while it makes sense to make a big deal so to speak on a specific unit, but generally speaking they've been trying to move pricing.
Upwards, frankly, just been modest because they do want to trying to continue to improve occupancy and get some of these sales of the.
Accumulated inventory that they have.
Okay.
We haven't really talk much on the call about pipeline.
Seems like there's been some fairly aggressive.
Deals with private equity equity out there cap rates, a little lower than I would've expected. So.
Are you seeing.
Any pressure on cap rates could come in and investment spreads would that seniors housing are skilled nursing.
I guess, how confident are you there.
You know acquisitions will be there are 2020 and investment spreads that you like.
Well I think your observations correct there has been some.
More at least more aggressive money than where in HIV has transacted in the past.
Feel like we've kept our discipline, though as we look at new investments and we're not going to chase people to the bottom I still feel good about our prospects in our ability to bring in business.
Not just.
Saying, we do really focus on trying to make inroads with operators and establish that relationship I feel like we still get a tremendous amount of direct referrals. So when you go to a brokered process or something thats going to be a big splashy headline yes, we see all that stuff, but we're not the ones that are generally participating in those.
Auctions, and we've really rely on our relationships with the operators and being able to do.
Direct deals to continue to drive business and I still feel like we have a good team here great relationships with other operators and be able to perform.
As Eric said, we'll be able to we should we expect to be able to do what we've done in the past that hasn't changed.
Never say never on a portfolio, but.
The pricing might be.
Right well.
[laughter].
So I have.
Well, so you guys.
Thanks, Dan.
Thank you very much.
Your next question on the line, it's not a follow up question Jordan Sadler with Keybanc capital markets. Please go ahead.
Hi, So just a follow up on Bickford you guys gave some good color I'm just curious.
Did.
You guys can you give us a sensitive when they push through their increases you. They also sort of typically January 1st.
Escalations are they do anniversary.
This is an absolute but generally it's in the first quarter normally in February when they do their escalations.
Because it's a month exactly right, yes, that's the rest of the story. There is it's a 28 day month, they bill on a per day basis. So they pass it through in the shorter small.
Okay.
You know notice it as much.
Right exactly the right, but yet they have had good success with that there's other operators that we work with them that we see that do that pricing model on a daily basis and they have a similar tactic that they would do it in in February at worst gender generally speaking works well for.
Okay and then.
The escalators in your portfolio.
You're pushing through two bickford, what's the timing on those.
Then the Escalations for the two amended leases our January onest.
And the third.
I'd have to get back to you on the exact timing there.
There are throughout I believe there throughout the year, but we can we can get that information, but those two happened to be January one.
And now and they will see an increase of SCPA or but with the floor to present. This January .
Correct.
Okay.
And then.
In terms of.
The investment grade ratings for John .
You touched on it but im curious.
What see what's the impact here as you're thinking about it. So if you if you switched over to the credit facility to toggle based and credit what would the impact be right away on the credit facility and then also how it is.
This inform your view on permanent financing for the balance sheet and extending the weighted average maturity.
Sure. Thanks for the question Jordan, So there's a slight increase in interest expense when we toggle.
That results from.
The facility fee on our revolver going up.
Partially offset by some of the spreads on our term loans going down, but it's not it's not it's not a complete offset.
Terms of moving forward we.
We have.
Probably.
Say mid year need to term off some of our debt into something that's on our revolver. So Paulo bonds will be on on the table as part of that assessment and these ratings allow us to have a much more.
Definitive conversation about what that might look for looked like for us So thats very helpful.
And.
Finally, I would say in terms our interest rate risk, we don't have a lot of interest rate risk except for part of our revolver through 2021.
And so we've got our eyes set on 2021 as part of LIBOR discontinuation to do some modification of these bank facilities anyways.
Address the index changes so that's kind of our plan next year and then long term.
Okay. Thank you.
You're welcome.
Thank you very much and we have no further questions.
Please continue with any closing remarks.
Thank you everyone for attending our call today, and we'll see many of you at May read in Los Angeles next week.
Thank you very much and that does conclude the conference call for today. We thank you for your participation tested disconnect your lines have a great davlin.