Q4 2019 Earnings Call
Greetings and welcome to the 2019 National Health Investors Conference call. During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one full.
By the fourth on your telephone.
But anytime during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Wednesday February 19th 2020, I would now like to turn our conference over to Dana Hambly. Please go ahead.
Thank you and welcome everyone to the National Health Investors Conference call to review the company's results for the fourth quarter of 2019 on the call with me today or Eric Mendelsohn, President and CEO, Kevin Pascoe, Chief Investment Officer, and John stayed executive Vice President and Chief Financial Officer, the results as well as the notice.
The accessibility of this conference call and I'll listen only basis over the Internet were released this morning before the market open in a press release, it'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 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 data This conference call.
Investors are urged to carefully review various disclosures made by NHL and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHL. Its form 10-K for the year ended December 30, Onest 2019.
Happy the these filings are available on the Fccs website at Www Dot FCC Dot Gov. We're on NH eyes website at Www Dot and age I read Dot Com. In addition, certain terms used in this call our non-GAAP financial measures reconciliations of which are provided in NHL phase.
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 relief I'll now turn the call over to Eric Mendelsohn.
Thank you Dana Hello, everyone and thanks for joining us today.
We're pleased to report our fourth quarter and full year results for 2019, which were at the top end of our guidance range. Despite the many headwinds that we faced last year.
We started 20 910, a much more defensive posture than as usual for any try and we experienced good momentum throughout the year.
We are much better shape as we enter 2020.
We're not out of the woods by any means says the senior housing industry continues to be challenged by new deliveries and labor issues, which we do not expect to improve for at least the next several quarters, but we're generally encouraged by slowing inventory growth and very strong net absorb.
Uh Huh, which in 2019 showed the highest level of demands a 13 years since Nick has been collecting that data.
Furthermore, our skilled nursing portfolio continues to show very strong coverage and we expect that the new PDP m. reimbursement system will moderately improve on a coverage.
We have remained optimistic despite some of the headwinds and announced 329 million in acquisitions in 2019, primarily with existing partners. We also added three new partners with whom we are excited to grow with for many years to come.
In 2020, we've already announced 115 million, including 135 million for timber Ridge, which is a class a CCRC just outside of Seattle.
And we're thrilled to partner with Lcs on this deal Kevin will share more details later.
With the timber Ridge acquisition, we are dipping our toes back into right D. A with a 25% interest in Opco.
But unlike other ideas structures more common with health care reads, we've done so within embedded triple net lease that mitigates volatility of the underlying operation so any charge shareholders.
We're always open to create a financing solutions with premier operators like Lcs and investors should inspect that our focus will continue to be on the triple Matt strategy.
We recently announced a 5% increase in our dividend, which marks the 11th straight year, we have increased the quarterly dividend by 5% or more while maintaining our coverage ratio below 80% of normalized FFO for the last seven years.
This makes us a dividend achiever, if you keep track of such things.
We're not satisfied with the limited per share growth that we experienced in 2019, NRG M&A reflects that and the form of reduced executive compensation. This year.
This demonstrates accountability to shareholders.
We worked hard to anticipate areas that need attention and proactively address issues in a transparent manner as we talked about on our third quarter call. We expect that we will return to mid single digit growth. This year, John will discuss the guidance in more detail, but I will add that we have.
Good visibility on our outlook on that our desire is always to under promise and over deliver.
With that I'll turn the call over to John.
Thank you, Eric and good morning, everyone.
I'm pleased to report a solid quarter in year end to 2019 as well as 2020 guidance more representative of historic and HIV growth.
Beginning with our three episode performance metrics on a diluted common share basis.
For the fourth quarter ending December 31st 2019.
They read FFO increased 6.9% to $1.39 normalized FFO increased 4.4% to $1.41 and adjusted FFO increased 2.4% to $1.30.
On a full year basis married FFO per diluted common share increased 2.4% to $5.49 normalized FFO increased 0.7% to $5.50 and adjusted FFO increased 1.2% to $5.10, which as far as previously mentioned was that.
The top end of our guidance range.
Reconciliations for our pro forma performance metrics can be found in our earnings release in 10-K filed this morning at FCC back up.
I want to now talk about our cash NOI.
Cash NOI as a metric we used to measure our performance, we define cash NOI as GAAP revenue excluding straight line rent.
Excluding escrow funds received from tenants and excluding lease incentive and commitment fee amortization.
For the year ending December 30, Onest 2019, cash NOI increased 7% to 290.5 million compared to 271.5 million in the prior year.
Our increase in 2019 cash NOI, most reflective of our organic in Hawaii growth from lease escalators are partial your contributions from newly announced 2019 investments.
I continue fulfillment in 2019 of the prior years announced investments.
Offsets by impacts due to the holiday master lease restructuring and finding new homes for the nine transition properties.
A reconciliation to cash in where I can be found on page 17 of our Q4 2019 FCC filed supplemental.
Gee next Gionee expense for the 2019 fourth quarter increased 28% over the prior year fourth quarter and for the entire year increased 6.8% over 2018 to 13.4 million.
Including the fourth quarter and full year 2019, Gina DNA expense was approximately 716000 severance.
Excluding the severance expense DNA increased 2.7% in the fourth quarter over the prior years fourth quarter and 1.1% for the full year compared to 2018.
As Eric mentioned in his opening remarks, the flat year over year DNA expense growth is reflective of our muted executive compensation franchise 2019 performance.
Turning to the balance sheet, we ended the year with $1.44 billion total debt, which a little over 90% was unsecured.
At December 31st we had 250 million capacity on our $550 million revolver.
During December and each I entered into privately negotiated agreements with certain holders of our three in a quarter percent convertible senior notes.
Under which we issued 300 626397 shares of any CCI common stock.
Plus cash consideration and payment of fees totaling $22.1 million to redeem 60 million in aggregate principal amount of our outstanding convertible notes.
As a result of the redemption at year end and HIV market balance of convertible notes is now $60 million, which will mature in April of 2021.
Our debt capital metrics for the quarter, ending December 30, Onest, where net debt net debt to annualized adjusted EBITDA at 4.7 times weighted average debt maturity at four years and our fixed charge coverage ratio at 5.7 times.
For the quarter ended December 31st our weighted average cost of debt was 3.54%.
We've mentioned in prior calls that we expect 20 to 20 to be a transformative year for NHS balance sheet and the interest rate is currently favorable.
Our announced public credit ratings allow us to consider the public debt markets.
Our current shelf registration is expiring and we'll be filing the new shelf registration in coming weeks.
Stay tuned up more to come in the forthcoming quarters as we look to term off our revolver balance I make room for future growth.
This morning, we issued our 2020 guidance.
We expect an AFFO to be in a range of $5.67 to $5.71 per diluted share or an increase of 3.5% at the midpoint.
We also expect AFFO to be in a range of $5.31 to $5.35, earning increase of 4.5% at the midpoint.
Our guidance continues to reflect management's intent to under promise and over deliver.
Our guidance issued today includes effects from the recently announced Brookdale purchase option.
Expected contributions from the recently announced timber ridge joint venture.
Thank you fulfillment of our commitments as detailed in our 10-K.
In line of sight on announced investments under Ela wise totaling approximately $50 million.
Our guidance also reflects our views on our transition properties.
While we don't expect to cash NOI in the nine transition properties to return to 2018 levels. This year, we do expect them to get to between 40 and 45% of the way back to 2018 levels.
We do believe low after straight line rent the GAAP revenues for the transition properties will get to between 60 and 65% of the way back to the 2018 levels.
Our guidance. This year includes assumptions for terming off our revolver debt and further assumes that we will continue to make additional investments on a leverage neutral basis.
In addition to our per share guidance. You wanted to also gave you give guidance on several items that many of you used to evaluate our Fady performance. In addition, a noncash stock compensation, which you will see referenced in our reconciliation table as part of this morning's earnings release moving forward. When it's also provide you with pro forma routine.
Manager and nonrefundable interest free cash flows are attributable to our 25% share in the timber ridge opco.
Together our earnings release this morning.
We also announced our first quarter dividend.
We increased our quarterly dividend, 5% or five in a quarter sense to one dollar in a quarter to $1.10 in the quarter per common share.
First quarter dividend is payable made to shareholders of record March 30, Onest 2020.
As soon as Eric mentioned in his opening remarks, we started 2019 off on defense, but ended the year back on offense and 2020 is shaping up to be a good year for any CCI.
With that I'll now turn the call over to Kevin Pascoe to discuss our portfolio Kevin.
Thank you job.
Looking at the overall portfolio at the end of the third quarter. The EBITDARM coverage ratio was 1.66 times for the total portfolio compared to 1.65 times in the year earlier period, and 1.69 times in the prior quarter.
Senior housing coverage decline year over year is expected to 1.14 times compared to 1.23 times last year and 1.15 times in the prior quarter.
And our skilled portfolio at 2.73 times improved from 2.55 times last year, but declined from 2.8 times in the June quarter.
The sequential decline is attributable to NHC as the non NHC SNF coverage improved to 1.92 times from 1.87 times in the June quarter.
And we are still very comfortable with DNA see coverage, which was 3.69 times in the third quarter.
Our ample SNF coverage is a testament to the hard work of our best in class operators and while the senior housing industry continues to be challenged by supply and labor issues, we have not seen a meaningful shift in operating trends and feel our operating partners are doing a good job of competing in their respective markets.
According to recent Nic data properties with an average age of tend to 17 years have the highest occupancy followed by properties with an average age of 25 plus years.
Interestingly the lowest occupied.
Occupancy was reported for properties with an average age of two to 10 years.
This tells us that performance as operator, driven consistent with our philosophy.
And that the newest billings will not always guar the most market share.
Turning to our operators by revenue.
Bickford senior living represents 18% of our cash revenue and had an EBITDAR coverage ratio of 1.07 times for the trailing 12 months ended September thirtyth.
On a same store basis, the big for EBITDARM coverage was 1.12 times.
Including a development property, which will roll into the coverage calculation in the fourth quarter.
The big for total on same store coverage was 1.09 times and 1.14 times respectively.
Due to lagging nature of EBITDARM coverage and in an effort to provide more transparency, we have continued to disclose big towards occupancy.
Thanks for documents you started to turn positive in the second quarter, which continued through the third quarter.
We're pleased to report that big towards fourth quarter occupancy remained steady on a sequential basis and showed significant improvement year over year.
The average total and same store leased portfolio occupancy improved by 160 basis points in 230 basis points, respectively. In the fourth quarter of 2019 compared to the same quarter in 2018.
Importantly, bickford has maintained price discipline, while showing this improved occupancy.
Lastly, in HIV exercises purchase option on the Bickford Shelby property for 15.1 million at an initial yield of 8% during the first quarter 2020.
This transaction is similar to the big for journey deal and that it replaces a $14 million construction loan we had in place previously.
We have similar agreements on two other different properties, which we believe will help stabilize and improve our coverage with this operator.
Developing new assets with Bickford will help us continue to evaluate additional asset sales, while maintaining our relationship with bickford and upgrading the portfolio.
Moving the senior living communities.
Our relationship with SLC represent 16% of our annualized cash revenue.
Including that entry fee income there EBITDARM coverage ratio was 1.1 times on a trailing 12 month basis.
This compares to 1.28 times in the year earlier period, and 1.1 times for the June quarter.
As discussed on prior calls we're watching entry fee sales closely and leading sales indicators have started to turn positive where SLC has purchased additional unit inventory.
The benefit of entry fee sales will take some time to roll through the coverage calculation as the quarters with those inventory repurchases roll out of the calculation.
Our next largest partnership is with NFC, which accounts for 14% of our annualized cash revenue.
As previously mentioned NHC had a corporate fixed charge coverage of 3.69 times in the September quarter.
Lastly, holiday retirement, which represents 12% of our cash revenue had an EBITDARM coverage ratio of 1.21 times, which is a slight improvement on both a year over year sequential basis.
Recall that we restructured the master lease with holiday at the beginning of 2019, which required some difficult decisions at the time.
But the goal was always to put holiday in a better position operationally and financially while acting in the best interest of our shareholders.
While the story continues to play out we are encouraged by the outcome just over a year later.
Moving on the new investments.
In the fourth quarter, we continue to expand our relationship with 41 management with the acquisition of a 48 unit assisted living and memory care community in the same Paul Minnesota, Aereo for 9.34 million at an initial cash yield of 7.23%.
We also extended a second mortgage loan of $3.87 million at a rate of 13% on an assisted living community in Bellevue, Wisconsin.
This is a one year loan with extension options and the nature has a purchase option on the community upon stabilization.
We also exercised our purchase option and formed a joint venture with LCFS to own and operate the 401 unit timber ridge CCRC for 135 million effective January 31.
As Eric mentioned earlier. This deal includes a reduced structure whereby in HIV holes and 80% interest on the propco.
And a 25% interest and the Opco.
Propco as leasing the community to Opco under a seven year Triple net lease at initial yield of 6.75%.
In a child's also for bank financing of 81 million to propco or approximately 60% of the purchase price.
This is a class a property at a high barrier to entry and affluent market outside of Seattle with one of the Premier CCRC operators in the country.
Regarding the acquisition environment and pipelines, we announced $329 million in acquisitions during 2019, and we're off to a bit starting 2020 with announced deals already totaling 150 million.
We look forward to our Newbuilding opening in Milwaukee with ignite medical resorts are 25 million dollar investment has a yield of 9.5% and we expect rent to commence when it opens in the second quarter.
Valuations are still very competitive but through a relationship driven approach. We continue to see additional opportunity as we survey the market and are committed to adding high quality operators and communities to the portfolio yields comparable to what we've done in the last few years.
With that I'll hand, the call back over to Eric.
Thank you Kevin.
The challenges in this industry cannot simply be lumped into general categories like al versus IL or primary versus secondary.
And at Shire has committed to succeeding in all of the markets and products in which we invest.
We are constantly reviewing our portfolio to identify opportunities that we can proactively address we do this through a number of methods and our preference is to always do it and unison with our operators and through our financial structure, which leads to stability in our cash flow.
As I mentioned earlier, we have good visibility and our outlook. This year and we look forward to updating you on our progress throughout the year.
With that operator, we'll now open the line for questions.
Thank you if you would like to read your question. Please press. The one followed by the four on your telephone you will hear three told promised to acknowledge your request. If your question has been answered any which with Jive registration. Please press star one followed by the three one moment for the first question.
And our first question comes line of Chad Vanacore with Stifel. Please proceed with your question.
Hey, good morning, Mrs. Seth Canetto on for Chad.
Hey, Seth.
Hey, So John mentioned in his opening remarks about the strong cash NOI, 7% in 2019, how should we be thinking about that in 2020 and do you guys have any guidance on that metric.
So let's see.
This is John.
How should you be thinking about that.
So obviously.
It's going to come up Thats easy answer.
So no we don't have guidance on it.
I think that the best way to explain it as we have to grow our cash NOI.
No in the 7% or greater range, which then you know after we issue additional shares is diluted back.
To the growth metrics that we need to get to our 5% target.
And our 5% target on a AFFO is roughly 26 cents silver over 2019, so theres a lot of ins and outs that goes through all of our.
Our forecasts.
And you know we've had some out soon this year, which includes some of our.
Purchase options.
So thats why gets a little bit tricky, but at the end of the day, we're trying to grow the company or trying to grow the company through cash NOI, which.
Eventually funnels down to what how we're able to cover our dividend and also pay for all of our capital.
Our other capital.
So.
Yeah, it's a it's a little bit tricky.
All right.
Thanks, that's helpful and then just.
Looking at the timber Ridge acquisition, you guys did with that right. They have structure is that how we should think about you guys dipping your toe into the REIT structure going forward do you think there'll be more deal structure like that.
Hey set this is Eric.
I think so.
Thats a structure that we have.
Spend a lot of time and energy vetting with.
Our legal advisors and tax advisors to make sure it works and make sure that its appealing.
From joint venture partner perspective as well.
And.
Obviously now that it's in place we'll have some time to experience it as a joint venture partner and see how it works, but but we think it's a winning combination of.
Exposing us too right.
Limited.
Sense, so that the operating performance, which is generally lumpy.
We will not interfere with our.
Our guidance and.
Giving us some upside that the same time.
Alright, Great and then Eric you mentioned that when we think about senior housing or not other woods, yet theres still new deliveries and labor issues affecting the industry and we really don't see a lot of improvement 2020, but how should we think about this show total portfolio coverage thing it deteriorated from.
123 last year. So one one for I understand those are trailing numbers, but how should we just think about that coverage metric moving forward.
Sure I'll keep in mind, our reporting on coverage is.
But theres a two quarter lag for one quarter lag. So we're always looking in the rear view mirror.
And I think we've been very transparent about what's going on with Bickford.
And we're starting to see the benefits of all of the.
All of the work that we're doing with them.
Just to reiterate were publishing.
Our current occupancy in our 10-K.
We've adjusted their ranch, we've sold were about to sell underperforming buildings, we transitioned and underperforming building in Minnesota to another operator.
And while there is still supporting that rent this year.
That will lessen.
Next year.
And then they have new developments that are coming onboard that are improving.
There are immediate coverage, which does not show up in same store for two years. So.
That's that's one way to think about the coverage and then the other is.
Senior living communities.
And they have invested heavily in.
In new product that was available for sale when they're buying community.
And that weighs on their coverage. So generally we're optimistic and what we're seeing is an improving trend.
Alright, great Thats. It for me thanks for taking my questions.
Sure.
And our next question comes line of Daniel Bernstein with capital. One. Please proceed with your question.
Hi, good afternoon.
Again.
Okay.
Just wanted to make sure do you or your response for Capex in the JV structure.
Lcs.
So because we own we're part owners in the Opco and because we're trying to understand the cash flows that we might recognize from the Opco, we're giving you a little bit.
Guidance on what what might help you sort of get to a performance metric on the opco as we move forward. So when we at the end a day make a decision about distributions opco.
You will see you will see the.
Earnings loss on our profit last statement.
So and you won't see some of the other sort of items.
That will will have to sort of take care of before we make distributions.
And we're trying to give you some help on that we're also trying to give you some help on how we're going to.
Report ourselves moving forward, we haven't made final decisions on all that but I think you're going to see components of all of these numbers.
In our first quarter results and then finally, one of things I want to make sure you I point out to you is that we might actually be able to distribute to ourselves.
More than our performance metrics indicate because lot of things, we're not really talking about is the refundable entrance fee portion of the cash flow streams that the Opco, we'll also see.
So.
That's more of a liquidity measures so as we try to stay away from alternative measures.
But.
Even talk more about that.
As we progress forward on the timber ridge joint venture.
Okay.
Now on skilled nursing I mean.
It seems like do you have some positive comments on PD pm and.
We've seen some positive comments cross space from other reach and operators as they report so.
When you think about your pipeline going forward you most of what you've done has been seniors housing.
Do you think you part pipeline might shift a little bit more balanced between skilled and.
Seniors are you really more focused on seniors at this point.
Hey, Dan if Kevin I think.
Our focus has never gone away from skilled nursing is really just been flooding the market come back to where we.
I want to transact on that in terms of just coverage and yield felt like we've seen that happened. So we've been an active participant so to speak in terms of reviewing meals and trying to do some more investment there.
I don't know that changes the way we.
Move forward again, I think we are still actively looking at skilled nursing I don't think yet we're saying we're going to do more just because of that but I do think you'll see us make investments in the skills space. We're just going to remain selective on what we go after.
What would be the holdup would be good competition on cap rates.
Lack of operator quality and what would be but we'll give you more excited about skilled nursing.
Virtually all of our today, where youre last year.
Sure.
Operator quality all is going to be first and foremost I think we've got vintage is definitely something that weighs heavily on an investment decision decision how old buildings or.
That said, if you've got a good operator in a good plan to invest some capital.
We would definitely evaluate that so.
The things that have held about us up before we're really more where the market was pricing lease coverage on those types of.
Assets and it's just not.
There was an interesting at those levels, but again I feel like we're starting to see more deal flow at levels, where we would be interested so stay tune there, but it's definitely on our radar.
Okay. One last question if I could when it comes to.
Supply growth within say Bickford, and SLC holiday markets.
It seems like if you look at the Nic map data starts are coming down supply growth is slowing.
Within those markets that you're in are you seeing that same type trend.
Maybe maybe you'll see all that benefit this year, but over the next couple of years, if supply growth is going to slow down.
You probably get some improvement in lease coverage so.
What does the supply outlook.
Within the markets.
Your invested.
It really depends on the market and so within big for.
Those general markets, we've seen some new supply, but it really supply, but so has hampered them.
All that Roger Thank you mentioned SLC, there's been a couple markets there.
That where there has been new deliveries that has impacted them.
So it is it varies market to market very widely.
We are as you mentioned see those deliveries happening.
Option happening so it's going to take some time to get there to soak up the inventory, where there was new inventory, but it's not been.
Ramp and.
Cost you're like the big front markets.
And there has been as I mentioned, a select few there and then some and some of the SLC market. So we're watching those but we feel like they're able to compete well the buildings look to maintain them and they're able to show well and so.
Yes, good sales get people move in want to be a part of those communities.
Okay.
I'll hop off thank you.
Thanks, Dan.
As a reminder to register for a question. Please press star one followed by the floor on your telephone and our next question comes I know John Kim with BMO Capital. Please proceed with your question.
Thank you I was wondering if you could provide.
Some insight on what you're seeing as far as CCRC than the average as well as the range of nonperforming, we fundable portion of veteran fees.
Either new or existing portfolio with your underwriting a timber ridge.
He's asking about nonrefundable.
Yes. So again this is one that changes or varies widely based on the community in the incidence of timber ridge the.
The entry fee component is much larger because it is of the asset quality in the what theyre able to charge was entrance fees. So it is a bigger proportion of entry fee.
Income or in Q entry fee receipts that they would be than say we are with.
By senior living communities.
At least in some areas in the south where the entry fees would be lower.
In terms of a percentage.
Your question the percentage of entry fee.
That is not refundable.
Yes, I mean residents have different options right and what they could shoot.
So in that regard if we're talking about timber ridge, there's really only one contract than 80%.
Our capital contracts, so 20% plus the increase in value.
That unit over the turn over time is what would be.
The non refundable portion.
And is that pretty typical with your existing CCRC portfolio.
No actually varies quite a bit some have so SLC has 90% return of capital or 90 60 in zero. So theres several different selections there at a couple of our Connecticut communities. There is even more different options than that.
I would say and then within SLC, it's probably split almost 50 50 between the sixties and the nineties.
In terms of or to.
Plan that the resident would choose so on average I would say youre going to be 75%, so a little bit different number, but just different contract types that are available.
So there is nuance between.
The return of capital components and Theres also nuance between.
The type of building that it is so.
Timber ridge as the type a community.
SLC of the type C community or market rate. So some of that some of those things will drive what they can charge what the service fees are for each line of service that they are getting so there's a lot of components that go into.
Entry fee, how it gets calculated and ultimately what their.
Return will be.
And can you remind us how are you accounting for this as far as the normalized FFO impact then on it.
The cash base salary amortizing the nonrefundable portion.
So.
Depending on what line you're talking about so the net income line will have a recognition.
The.
Nonrefundable piece that and you're talking about with respect to timber ridge only.
That.
Is a function of.
The average residents expected stay in the community.
And.
From there we will at the AFFO line.
Adjust out the noncash amortization of the nonrefundable entrance fees.
But we intend to give you a picture of what the actual cash flows.
Well look like below the AFFO line for F. I'd purposes, I'll, let you choose to use that information as you as you deem appropriate and you'll see some irregularity in that cash flow as we move forward.
And.
What you won't see is the cash flows from the refundable entrance fees.
So the adjustments made to answer the phone.
Main in the normalized.
Correct.
Yes, so normalized FFO sort of pains all of those sort of revenue items like straight line rent in this case it will contain the amortization of the nonrefundable entrance fees at the NFL line that will back it out to get flow closer to the cash flow at the full line and give you the actual cash.
And this is just on the nonrefundable entrance fee component.
Right Okay.
Eric you mentioned.
In your prepared remarks that you remain committed to the triple net lease structure.
It seems like a structure that increasingly not working for a lot of operators just given the capex and the rising rents.
So I'm wondering.
Is there anything you're doing as far as altering your leases be more operator friendly I know you've done this joint venture with Lcs and the Opco, but is there anything else that you're doing on the triple net leases.
Two.
Resonate with operators.
Yes.
We have done things like made to our escalators CPI based.
So they don't get too far ahead of resident rent increases.
We have done things like.
Paid for renovations of buildings and added them to the lease basis. So even though we are contributing to capex. Those dollars out are getting us an investment return.
And generally that's a formula that works and then finally, John I think you've noticed we are very careful about our investments and underwriting that we do and we are constantly making sure that there is coverage.
That allows the the 10 into a make money and make a profit on their efforts and the have enough left over for Capex and the buildings and when when that coverage is not there we pay close attention to that and I would.
I would point to Bickford as an example of that.
Okay. Thank you.
And our next question comes online and on what Tayo Okusanya with Mizuho. Please proceed with your question.
Hi, good afternoon, everyone.
Hey, Scott well the guidance number I just had two clarifying questions.
First of all and big investments slots acquisition activity that built into guidance and just what I think on from that that is.
The loan commitments, you still have out there, which kind of lay out in the 10-K.
The 150 million that you've done year to date I know you also mentioned about 50 million also built in but deals that are in line of sight is that correct.
That's correct Thats, correct and don't forget though.
150 million that are sort of subsequent event items.
You might think of it as sort of recycling capital.
We transitioned bickford loan to a lease and we transitioned a lcs mortgage to a lease so.
Those aren't totally new dollars going out right.
Yep Yep.
Got you Tonight. So so all in all that kind of add up all those dollars that total investment up how much built into guidance.
So you're talking about new dollars going out is that your question yes.
It's it's roughly in the $200 million range.
Okay, that's a lot so on and.
So thats helped yes.
That's that's fulfilling like you said thats fulfilling our development and loan commitments.
But not completely right, we're not going to get them all filled this year. So it's.
Roughly 60, 60% to 70% of those being fulfilled this year.
And of course timing is a big part of that right. So timing is.
As a function of.
It it basically how many how much of the year are we going to get as those numbers get built into our yep into our forecast.
So that helpful. Then second I will just wanted to also kind of clarify around the transition portfolio itself in kind of discuss built into guidance was this idea of kind of get back to about 60% of the NOI.
From two years ago from 28 team.
Could you just clarify again exactly how much annualized that's built in to guidance then be based on that based on not assumption.
Well I gave you a range right for two components cash and GAAP gap. So in 2018, we at 9.6 million in cash.
Recognize in the approximately 10.7 million and GAAP revenues.
So, we're we're saying 40% to 45% occassion, 60% to 65% a gap.
And then in there and the reason for that is we've signed some longer term leases with discovery and senior living communities.
The the cash components of those really really.
Come about more in 2021 than they do in 2020.
Gotcha Okay.
Okay Thats helpful from that perspective, Okay and then.
Just one more assuming that the good indulge me on your most recent disclosure about tenant purchase option, though that kind of a new.
Purchase option that fall and insight on hospital that could be exercised early 2021, just kind of curious just like is this a new purchase option and then just kind of seems like it sprung in there this quarter on wasnt in prior disclosures.
Yes. So this is Kevin so it's not a new option. What it is we have a agreement with the operator there to extend the option into the first part of 2021.
So where they're just not going to exercise their option. This year. So that's the change.
And just kind of add onto that we've been working with we feel like we have good relationships with each of these operators and were.
Talking through scenarios in which we can do more things like that.
Things done yet, but we feel like we have the ability to.
Hopefully make some changes to be able to improve some of these options and in any event, we do feel like where the options do get exercised its.
Capital that will get back to be able to redeploy so we have.
We'll be able to to overcome in time, but we do recognize some of these like the hospitals those are high yielding returns and.
So those are ones that were definitely focused on and trying to do things like this where we can.
Them around if at all possible.
Gotcha, Okay. That's helpful. Thank you.
And our next question comes fine of Connor, So mirsky with Baron brick. Please proceed.
Hi on thanks for having on the call today quick follow up to tie. It was first question looking at some of these loan commitments in development commitments can you provide any color as to the timing maybe if some of the completion of the the bigger projects.
So the bigger projects, where you say joint right.
So.
Obviously else that's it is controlled by the developer there and.
We do expect that to open towards the end of this year.
So.
Most of the Lcs Sage would commitments will <unk>.
Not all not all but most will be funded this year.
You will see some other items in there.
They tend to be sort of front end, a little bit heavy and then they kind of.
Maybe maybe.
Mitigate a little bit and then towards the back end be a little bit heavy.
For the other sort of construction commitments ignite medical resources is something we do expect too.
Hoping here pretty pretty soon and.
So thats something that you should see get fully funded between now and the ended the second quarter.
Does that help.
Yes, thanks for that and then maybe a little bit more of a high level question just looking at the external acquisition pipeline.
Given pretty strong performance of your portfolio could be considered secondary markets. I mean are you seeing any meaningful pricing pressures develop there or are you being kind of pushed out of then you any deals you're looking at or is the competitive environment relatively stable.
Kevin I feel like the environment is definitely still competitive that said those secondary markets have really been where weve built of a good a lot of good relationships and are able to find new deals where we can find either.
Repeat business, which is kind of been our bread and butter or find new growing operators, which we've also done a good good job over the last few years. So as it stands a feel like we're seeing the market pretty well, we're able to be competitive for some of those and the key for us is to get there before it goes too.
A broker really if we can continue to make those in roads and.
Yes kind of stay out of that competitive process I mean, thats really we're going to be successful and like a set of feel like we have really good relationships there.
Can continue to make investments.
Okay, and then I mean, how would that how would that kind of very for the different asset classes, I mean, CCRC is versus iOS or Alex.
Well.
We just took down a lot on the CCRC side. So thats something were going to monitor very closely from exposure standpoint, I think if we continue to invest in the various asset classes that we have on a.
Relative or proportional basis, we.
Yes, Thats a good place for us to move the question came up earlier about doing some additional skilled nursing that's always been on the table for us we'd love to do it at the same time.
We got to find the right operator in the right opportunities so.
We're we're open for business on really all asset classes.
It's just really finding the right operator, operator, right opportunity and fit I think thats really been what in HIV has been as well as opportunistic. So we'll we'll continue to look at senior housing skilled nursing, we've said for a while we were looking at behavioral that's still on the table. So it's just a matter of where we can make.
Those relationships and continue to build them.
Alright, Thats all from me. Thank you.
And the next question comes line of Jordan Sadler with Keybanc. Please proceed with your question.
Thank you.
Just.
Clarifying somewhat on the pipeline the yellow wise. The 50 million you mentioned John is mix and pricing what are we looking out there.
Yes make some pricing.
So.
I guess, what I would say it's above our average.
How is how does that help.
Does that held up better than better than average cap rates.
Better than average lease rates, if you look at our commitments page I mean, I'm sorry, our history on our.
On prior investments, Okay, then acquisition.
Got it function mix is that yes, just mixing types and yeah.
Right variety of things yeah.
So is it like sniffs or more development deals so.
Again, it varies I would say, it's still in the proportion that we just talked about where its.
The majority of senior housing.
But some of it might be whereas secondary market or.
Might be where it's still leasing up things like that where it deserves a little bit higher yield.
So that those are the kinds of things that we're we're looking at but where they have good track records in our.
Turning to build or have already established a good report in those markets.
Okay, and then let's get it on guidance come back to John I guess.
We talked about the purchase options, but are you assuming the exercise of the one open purchase option this year and the guide.
Actually I don't mean.
The ammo B. I mean, the hospital that opened this year.
Yes, maybe you could speak to either or both.
[laughter] Jimmy Imobile.
Your expectation there is that it's not going to repurchase.
It's not that impactful either so either way.
But the.
The yes, the hospitals in there and in other words in other words were expecting it to be exercise in our forecast.
And Jordan, if I could make a plug for kevin's ability to turn.
Lemons into lemonade remember that we had a huge purchase option with legends and 2016 and that ended up being transformed into a new deal with and sign.
So we I've said before that the purchase options and lease maturities are things that were hyper focused on.
And spend a lot of time on here.
Working on so.
We'll give you more color as we get closer but.
We've we view them as opportunities and conversations starters and not necessarily the end of transaction or relationship.
Okay. That's helpful.
So so how does that foot with Johns comment that you're assuming.
It's being we well we have to be realistic and.
No problem, we like to under promise and over deliver so we're assuming the worst and the moment we have.
With different.
Update for you will we'll let you know.
I'd worse right assume it doesn't go away and then all the sudden you know it goes away.
Not sure sure good outcome for us.
And we wouldn't expect or that you guys.
And I can't remember because you had the two hospitals and there is just the one that had the the fourth quarter.
Opening.
Okay. One that was in the fourth quarter got pushed to the one one of 21, okay warmer than March has been there for some time now again as I mentioned, a moment ago. I mean, we have good relationships with them. There is an open dialogue.
It's still the right, which is why we assume that it.
And with good.
Option.
Okay.
And then.
Just one other clarification on the.
Timber ridge and rest did you say so did you see 80 per se I mean only 20%.
His refundable.
No no non or 80%, 80% as refundable.
80% refined okay.
Yep, though.
Got it.
Thank you.
Thank you John.
And our next question comes fine if rich Anderson with NBC. Please proceed your question.
Thanks good.
Afternoon.
Hi.
How you doing so.
I guess can you just give an order of magnitude should spend like a 10 cap on these purchase options for 20, and 21 and call today or.
You know or you're not willing to sort of.
Provide that level of color coverage or color yeah.
I'd be cautious because we are still there negotiations.
Okay on price and thanks.
Okay.
The.
Lost my train of thought here Oh, yes, so you've talked about all Kevin you withdraw your individual larger relationships bickford still running at a.
Almost parity on the on a darn basis in terms of coverage I know theres some adjustments there with development and so on.
But on a dollar basis, which I would argue should be really the number you should lead with but we can talk about that another time.
It gets pretty close to one I'm wondering if if bickford ever becomes a part of your line of thinking the way did with holiday and you have to think about restructuring. So you can get yourselves into a more comfortable covered zone and not kind of put this this matter to rest.
Well I think we think a big for it as a different scenario than holiday with holiday you have a financial owner Bickford. This is a cultivated relationships overtime and frankly, they don't have.
Billions of dollars sitting around me.
See that and their numbers that said.
We've actually I think we've talked about already we've been very active with bickford in terms of our discussions with them how we.
Optimize this relationship over time and I just think it's a very different approach. We have we've done some things around the edges, whether its sell a couple of buildings do continue with the development.
We've worked with them on escalators we've.
Worked with them on some of smaller pieces on the rent. So it's going to be something that plays out over time and we can continue to do.
We can continue to make.
Adjustments around the edges, plus all of that factored into what we're seeing on the occupancy side they've put in the time that put in the effort there, making strides on improving their business there.
As a.
Whole company.
You're right, they're running better than we'd like them to be but that fixed charge that they have the company has improved each quarter over the course of the year, So something that were.
Keeping a very close eye on but but they are dedicated to this business and.
There I think they're doing all the right thing so.
As Eric said in his comments just about the kind of.
Yes.
In HIV in total, but I think this would apply to victory as well, we're not out of the woods yet we're doing a lot of work. They are working very hard to feel like we're making progress, but it's going to be a different.
A different way to get there than like a holiday scenario.
All right.
I'm a believer in ripping the bandaid off but I suppose.
Every situation calls for different.
Approaches.
And then you don't want to get back also to the cause I RIDEA structure with.
Timber ridge so.
Would you how would you describe the economics of this you so in a conventional right. They are you on the real estate and the operations and you pay a fee to a manager here you know, it's sort of grey area is 80% of real estate, 25% of the operations.
You know for you guys do you have what do you think of that sort of economically are you kind of splitting it in half between right day and Triple net in this case is it like a 50 50 split or is it or is it something leaning more towards like a REIT structure or more towards like a triple net structured way, though the numbers are going to play out.
If that makes any sense at all yeah, well, let me try to answer it and then ran we back in if I'm not getting where you want to go but.
I think just from the propco side clearly that is a more like a triple net structure, they pay rent and they share in that rent.
On the operating side it was very important for our partner to have a real partner in the Opco with that said we are not operators we feel like.
Thats their business, we're happy to be their partner, we feel like there of premier operator in this in certain circumstances and this is one of them we're willing to take that.
Ill take that risks as speaker really have that opportunity with them, but we're not the day to day owners and I think thats really been our position to date on RIDEA anyway is what we do his help with financial solutions and bring capital we're not the day to day operators and we don't feel like we should have a disproportionate risk so.
In this case Weve set it up through a triple net lease where the property will look a lot like what you've seen from us in the past and then there's an opportunity on the opco side, where they have the care to come to work every day and make a better return for themselves will share.
In some of that but it really it was just aligning what each party does best and.
Being willing to be a partner with them, but only to a certain level because that's just not our that's not who we are.
So is 25% the maximum you can invest in an operator.
So this is John.
No it is not.
I think that because of the nature of the.
On.
Refundable entrance fee liabilities in this case it kinda is.
It is you know even though we don't recall, we're planning on we don't know how we're going to book that's for sure yet, but right now we're not planning on fully consolidating the opco.
Even though we don't reflect those liabilities on our balance sheet doesn't mean that we're not having to in our compliance certificates with our bank lenders and.
Complacent lenders.
Show them the effects of our pro rata share of ownership. So we want to be a low levered right and that's that's sort of the situation in this case in in other cases, we could go higher we did and Bickford for example.
Just a little different operator.
Okay well.
Got it thanks very much.
Thanks Rich.
And our next question kind of Daniel Bernstein with capital one. Please proceed to question.
Really everything.
I had on follow up was answered, but I'll just ask something real quick on the CCRC is which is there some changes come perhaps to the provider taxes.
Is that offering how you underwrite CCRC fees and did you underwrite that at all into the timber ridge purchase.
So Kevin.
It'll we're monitoring that I don't think we have enough information today to say, how it would impact so.
Frankly wasn't anything at the time to model into this that said the skilled components in these in particular timber ridge is small compared to the rest of the building. So don't feel like it's going to be overly impactful, but where there are larger skilled units.
It's definitely something that will be thinking about.
Good.
That's all I have thanks.
Thanks, Dan.
Next question comes line of Omotayo Okusanya with Mizuho. Please proceed with your question.
Yes, just one quick follow up we talked quite a bit about uses of capital.
And I just wanted to focus on sources of capital a little bit going forward.
What's the remaining balance on the ATM.
Do you intend to kind of use that before it expires.
And then decide deal kind of terming out the line of credit when you think that could happen and is that likely.
Unsecured debt offering.
So this is John again, I would say our leverage is pretty pretty good shape as it as it stands right now the shelf expires in February so.
The current shelf I would say no. We really don't have a lot of capacity. If we had 90 94 point.
95 million in capacity left.
But we did this convertible bond.
Demolition in December and the way, we did it wasn't a way kind of a de leveraging transaction because we.
Took care of $60 million of debt on our balance sheet using a lot of our equity.
So.
Well get the new shelf filed here and you'll see a new number on there and.
At that point kind of moving forward, what more to say about that.
I think I mentioned in my prepared remarks, when when you think about our investments moving forward thinking about amount of leverage neutral basis.
So you know.
We'll be back into the equity markets.
Later this year as we make new investments on terms of the term loan and terminate the revolver mid year.
We really do want to get something done here. This year, we're going after.
We have some capacity for growth without using too much of our liquidity, we don't like to do that we'd like to try to target about 50% of that revolver and in free liquidity on average so thats kind of what we're thinking.
Great. Thank you.
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And Mr. Hambly I'll turn the call back over to you for any closing remarks.
Alright, Thank you everyone and we'll look forward to seeing you at name right.
Thank you that does conclude the call for today, we thank you for your participation and ask the please disconnect your lines have a great. Thanks.
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