Q3 2021 National Health Investors Inc Earnings Call
Greetings and thank you for standing by welcome to the National Health Investors third quarter 2021 conference call. During the presentation. All participants will be in a listen only mode and afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference and each reach an operator. Please press Star Zero. This conference is being recorded Monday November eight 2021, and now I'd like to turn the conference over to Dana Hambly. Please go ahead.
Thank you and welcome to the National Health Investors Conference call to review the company's results for the third quarter of 2021.
On the call today are Eric Mendelsohn, President and CEO, Kevin Pascoe, Chief Investment Officer, John Spaid, Executive Vice President and Chief Financial Officer, and David Travis Chief Accounting Officer, the results as well as notice of the accessibility of this conference call on a listen only basis were released after the market closed today in a press release, that's been covered by the.
Financial media.
As a reminder, any statements in this conference call, which are not historical facts are forward looking statements NHI cautions investors that any forward looking statements may involve risks or uncertainties and are not guarantees of future performance.
Forward looking statements represent Nhi's judgment as of date of this conference call investors are urged to carefully review various disclosures disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in Nhi's Form 10-Q for the quarter ended September 30.
2021.
Copies of these filings are available on the SEC's website at SEC Gov or on Nhi's website at NHI read Dot com.
In addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are provided in nhi's earnings release and related tables and schedules, which have been filed on form 8-K with the SEC.
<unk> are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release I'll now turn the call over to our CEO Eric Mendelsohn.
Hello, and thanks for joining us today.
We've been working this year to transition NHI into a stronger company entering 2022, and we have accomplished a great deal.
Our portfolio optimization efforts, including dispositions tenant transitions and rent restructuring, we will have touched more than a 120 of our senior housing properties or more than 50% of our entire portfolio. We expect these efforts to be largely concluded by the end of the first quarter.
2022.
While there are many is to be dotted and Ts to be crossed we're pleased that we have established frameworks that fundamentally transform our partnerships with bickford and our holiday legacy legacy holiday portfolio.
The completed and pending dispositions greatly improve the health of the Bickford and holiday portfolios, which are well positioned to participate in a recovery of senior housing that is currently underway.
Starting with Bickford, we are making progress on the disposition of another subset of buildings, which will reduce the size of our lease portfolio to $35 to 36 properties compared to the 48 at the beginning of the year.
Following the dispositions, we plan to reset bickford to annual cash rent to a lease coverage level that makes them a much healthier tenant financially and allow us repayment of deferred rent.
From an operation standpoint, we've been encouraged by the rebound in Bickford occupancy, which increased by 280 basis points from the second quarter to the third and is up 520 basis points from the first quarter, that's more than double the industry growth rate of 210.
Basis points for comparable assets.
Labor issues should start to subside driven by accelerating rate growth and bickford margins should recover.
Some of the more than 800 basis points loss due to the pandemic.
That is why our agreement includes resetting the lease to a fair market value after two years with a minimum floor.
Kevin will provide more details in his comments.
Shifting to the legacy holiday portfolio, we have disposed of nine underperforming properties and are evaluating the sale of two others. These properties had been earmarked as possible sales prior to the start of the pandemic in.
In fact, the pre pandemic margins on the 11 properties, where more than 1000 basis points below the remaining 15, we continue to own.
And that gap widened to over 500 basis points during the pandemic.
With the remaining holiday properties, we are forming two separate joint ventures, and <unk> structures with two excellent managers that have extensive experience operating middle market independent living communities.
We are excited to start a new relationship with Merrill Gardens.
Our established operator based in Seattle that we will manage our six west coast properties.
We're also pleased to expand our relationship with discovery senior living through the formation of a joint venture to own and operate eight to nine communities with an east coast footprint.
We are also transitioning the Vero beach assisted living community to the discovery Master lease.
The ventures will be similarly structure with equity contributions from both operators and.
And include value creation in operating cash flow promotes which we think best align interests as operating performance improves.
There is plenty of potential in the legacy portfolio as the pre pandemic margins were more than 900 basis points higher than current margins and we're glad to be in a position to capture that upside.
In addition to participating in the operating and recovery of these independent living communities. We believe that by entering into these operating joint ventures, we are better positioned strategically to grow our senior housing business with this new product offering.
Our progress so far is showing results. We've completed the disposition of 16 underperforming senior housing assets for approximately $173 million.
The cap rate on these sales was three 1% and lease coverage was three three times.
We've targeted another 21 underperforming senior housing assets for disposition, which we estimate will generate gross proceeds of approximately $150 million to $155 million with a combined NOI yield in the low single digits and very little lease coverage.
We are transforming NHI into a high coverage high quality portfolio in other words, a jewel box.
Our balance sheet is in great health as we reduced debt by $150 million during the quarter and currently have full capacity available revolver.
Considering the cap rates for many of the senior housing asset sales, we are contemplating or in the low single digits, we see a nice arbitrage opportunity as we replace them with investments at yields in the mid to high single digits.
With nothing drawn on our revolver additional proceeds coming from dispositions and low leverage we see little need to issue equity as we resume our external growth.
Our current position reminds me of a point in time in our company's history in 2009, when we had no debt on the balance sheet and $100 million in cash.
Eager to turn the page on this chapter of our story and get back to growth with new and existing partners.
While we spend most of our time talking about our assisted living and independent living operators, we want to point out the exceptional performance of our entrance fee and skilled nursing segments, which represent close to 60% of our annualized cash revenue net of deferrals.
We're fortunate to be in line.
With these best in class operators and they serve as a blueprint for the long term stability and growth that we are pivoting back to as a company.
I'll now turn the call over to John.
Thank you Eric and good afternoon, everyone.
Beginning with our net income per diluted common share for the third quarter ended September 32021, we achieved 67.
Compared to <unk> 95 for the same period in 2020.
The year over year decline in net income is largely due to $6 6 million and lower rent received from holiday.
$5 2 million in additional quarterly rent deferrals provided to other operators.
$22 4 million in real estate impairment charges and.
And the revenue reductions due to dispositions <unk> mortgage repayments since the prior year's third quarter.
These declines to net income were partially offset by $19 9 million in gains from the sale of real estate and revenue increases attributable to $142.
$2 million of investments and commitment fundings made since the third quarter of 2020.
For our <unk> metrics per diluted common share for the quarter ended September 32021, compared to the prior year NAREIT <unk> decreased 26 to $1 16 from $1 42, and normalized <unk> decreased 27 to $1 15 per share from $1 42.
For the quarter ended September 32021, our normalized fad declined $9 $1 million year over year and by $1 7 million sequentially to $51 2 million.
As I previously detailed the year over year and sequential quarterly decline was driven by lower holiday rent additional rent deferrals dispositions <unk> mortgage repayments offset by investments made over the prior 12 months.
Reconciliations for our pro forma performance metrics can be found in our earnings release and 10-Q filed this afternoon at SEC Gov.
Our third quarter dividend of <unk> 90 per share was paid on November five 2021 and represents normalized <unk> payout total dollar payout ratios of 78, 6% and 86% respectively.
As announced this afternoon, our board declared our fourth quarter dividend of <unk> 90 per share for shareholders of record on December 31 payable on January 31.
Turning to the balance sheet for the quarter ended September 30.
Our net debt to annualized EBITDA leverage ratio improved sequentially to four eight times from five one times.
The improvement in leverage was purposeful as the company disposed of low yielding assets.
Additionally, reflective of any unexpected reduction in holiday ramps.
Our purposeful strategy means that as we enter 2022 and the clouds clear around holiday Bickford and other distress relationships will be in a position to quickly and accretively redeploy capital.
As detailed in our cash flow statement for the nine months period ended September 30 to $163 4 million in net cash flow from investments from an investing activities as.
This capital, which in large part will allow us to accretively redeploy into new investments without the need for additional equity while still staying comfortably within our stated leverage policy.
Having said that we're still not done selling low yielding assets, which we believe we can further redeploy into additional high higher yielding investments and a relatively short period of time over the coming quarters. That's extremely good news for NHI as we entered 2022 and we look forward to next year.
On October 31, we had no amounts outstanding under our $550 million revolver and $74 million in cash.
We did not issue any equity through our ATM program during the third quarter and do not expect to issue equity during the fourth quarter.
We can continue to have approximately $417 million in capacity available to us under our ATM program.
Our 2017 $800 million revolver and term loan credit facility mature in August of next year.
We're in the process of engaging our banking relationships for the re syndication of our credit facility and we are targeting closing a facility in the first quarter of 2022.
Regarding the fourth quarter, we want to point out a few items that will impact our results.
First we sold two properties census in September that contributed approximately $1 million to our third quarter cash revenue.
Second we expect that the bickford deferrals will be $1 million higher than the fourth quarter compared to the third quarter.
Last we received approximately $2 3 million in rent payments from holiday during the third quarter.
But as of today's call, we have yet to receive any payments in the fourth quarter.
We continue to hold an $8 $8 million holiday security deposit in the final recognition of the deposit will coincide with the termination of the legacy holiday lease by foreclosure agreement.
We've made no determination as to how or if any of the deposit will be applied but we expect a resolution on the positive early 2022.
With that I'll now turn the call over to Kevin Pascoe to discuss our portfolio Kevin.
Thank you Joan.
The last two years have obviously been challenging, but we have learned quite a bit about what it takes to be successful even in the most difficult business environments.
We are using past experience of lessons learned to reposition NHI. This year. So that we are set up to grow with the very best partners going forward.
Our need driven senior housing portfolio, which accounts for approximately 31% of our annualized cash revenue net of deferrals generally experienced solid occupancy gains throughout the quarter.
However margin growth has not advance in line with historical trends and occupancy growth due primarily to increased wages for hourly staff as well as increased use of agency staffing.
On a positive note residents and their families have been sympathetic to the labor issues.
And in multiple instances had been receptive to increase rents to offset the wage growth.
We expect that this trend coupled with the scheduled five 9% increase in the social security Colo will lead to much stronger rate growth in 2022.
Bickford, our largest assisted living operator, representing 14% of annualized cash revenue net of deferrals increased quarterly occupancy by 280 basis points sequentially, but labor expenses have been a major hurdle. So we deferred $3 5 million in the third quarter.
As Eric discussed we have reached a preliminary agreement that transforms our bickford relationship.
As we work to complete several more asset sales, we have agreed to defer a $4 5 million in fourth quarter rent and up to an additional $4 million in the first quarter of 2022.
We are also working to restructure the leases, which we currently estimate results in annual rent of approximately $28 million.
For reference we collected approximately $7 8 million in rent from Bickford in the third quarter, and we expect to collect approximately $6 8 million in the fourth.
Based on recent operating performance this reset would improve bickford <unk> lease coverage after management fee and capital expenditures of 500 per unit to one to one times from <unk> 91 times.
We think this cushion allows for for some further near term margin deterioration.
As well as potential incremental capex.
Following the rent reset Victor will use 85% of the lease portfolio is free cash flow to service a deferral balance of approximately $26 million.
There are milestones and performance incentives included in the agreement that would reduce this balance, which we view as a strong alignment of interest.
Okay.
After two years Bickford rent will be increased based on fair market value, but not be below a floor, which is based on the 8% yield on the portfolio as original purchase price.
We greatly value our long standing relationship with Bickford and are hopeful these actions restore stability to this relationship for many years to come.
Turning to our independent living communities.
This group accounted for only 5% of our annualized cash revenue net of deferrals as we sold nine holiday properties for $120 million, which had annualized contractual rent of approximately $9 million.
We have targeted to more holiday properties for sale, which have annualized rent of approximately $1 8 million.
In aggregate, we estimate that these 11 properties have lease coverage below five times and margins that are approximately 500 basis points below the remaining portfolio.
As Eric noted we are in the process of transitioning the remaining properties to Merrill gardens in discovery, which we expect to happen in early 2022.
We are excited to be partnering with these well established operators and believe this will open up a new path of growth for NHI that supplements, our triple net strategy and allows us to participate in the upside as performance recovers from historic lows.
Yeah.
Our entrance fee communities, which account for 27% of our annualized cash revenue net of deferrals continue to outperform the others senior housing asset classes.
EBITDAR coverage, excluding senior living communities increased sequentially to 176 times from 165 times.
Senior living communities, which represents 19% of our cash revenue had third quarter average occupancy of 84%, which was up 190 basis points from the second quarter and was actually higher than the pre pandemic first quarter of 2022% to 83%.
Yeah.
The dorm coverage through the second quarter and excluding grant funds was one nine times, which was down sequentially from 113 times.
Yes.
The skilled nursing portfolio, which represents 32% of annualized cash revenue net of deferrals is anchored by an agency and the Ensign group, who contributed 15% and 9% of annualized cash revenue respectively.
Snip EBITDAR coverage for the trailing 12 months ended June 30 was two eight times, including 382 times at in HCV and two one times at our other medical properties.
Turning to our business development activities year to date, we have announced over $120 million of investments at a weighted average yield of nearly 9%.
We did not make any new investments during the third quarter, but activity with our partners at Montecito has picked up recently, so we expect to fund multiple projects before the year end and still estimate that the fund will be fully invested within two years from inception.
The pipeline remains active across multiple asset classes and product types, but it has been a better sellers market, which was certainly worked to our advantage this year.
As we conclude our disposition program, we expect to be more active rebuilding the pipeline in 2022.
With that I'll hand, the call back over to Eric.
Thank you Kevin.
We are repositioning and <unk> to emerge as a stronger company going into 2022.
We are making steady headway and expect that our portfolio optimization activities will be complete by the end of the first quarter of 2022.
We believe that repositioning is in the best long term interest of our stakeholders and are very optimistic about the future for several reasons.
We fully expect that senior housing fundamentals will recover driven in the near term by easing compensation pressure and unprecedented ramp right.
Over the longer term as the supply and demand dynamics start to tilt in our favor.
We see years of consistent growth ahead for the industry.
Second we are set up for strong long term organic growth.
We expect deferral balances to start repaying in 2022, and our new joint ventures physician NHI to participate directly in the upside of the senior housing recovery.
Third our low levered balance sheet will only improve as cash flow stabilizes and with plenty of access to capital. We are able to drive strong acquisitive growth, which has made more accretive as we have limited need to issue equity.
Operator, we will now turn the line over for questions.
Thank you just like the rest of your question. Please press the one followed by the four on your telephone.
Sure, it's retold prompt to acknowledge your request.
If your question has been answered and you would like to Australia registration. Please press. The one followed by the three if you are using a speaker phone. Please lift your handset before entering your request.
Once again, that's one for trust or for question one for the first question.
And we do have a question from the line of.
Jordan Saddler with Keybanc capital markets. Please go ahead your line is open.
Thanks, guys.
Could you dig in a little bit a little bit more going on this quarter.
I anticipated, particularly as it related to.
Bickford.
<unk>.
Rent cuts.
Kind of curious if you could maybe walk us through.
How you arrived at the what looks to be about an 18% right.
For Bickford and correct me, if I'm wrong there.
At this point in time and when that sort of.
Goes into effect exactly.
Thank you.
Sure Hey, Jordan. This is Kevin I would tell you that we looked at the portfolio as currently constructed but then also looking at the dispositions that were evaluating here over the next three to six months.
And the underlying NOI for those buildings and what they could support both now and then with those buildings removed.
And then from there.
Looking at again, what they could support now and projecting forward on some.
The improvement over time, where we think they would have a reasonable amount of cash flow above and beyond that to continue to service the.
Deferred rent amounts so we're looking at as a starting point in place cash flow for the buildings and what we think they can support subtracting out the buildings that we're looking to.
Move away from and then ultimately what does that new portfolio look like.
And then still being able to service that debt rent payment along the way to the extent, maybe some of those buildings take a little longer to sell or there are some new ones that come in or go out so to speak. So we think we have a good strategy in terms of which ones are moving again those can move maybe one or two different buildings here and there but by and large.
The underlying portfolio can support the rent number based on current performance.
So again that was kind of a starting point and then looking for them to continue to grow occupancy margins to settle out a little bit where we have seen some wage pressure here and there.
Across the portfolio not only with Bickford.
But if that continues or if that starts to settle out.
Then they should be able to start to service that deferred rent.
Okay and then just.
How did you arrive at the <unk>.
Degree of the rent cut.
Based on.
Pro forma lease service coverage ratio.
<unk>.
I'm trying to just understand the delta between the $46 million.
On page.
Okay.
Page four of the deck here.
46 million to 37 seven.
Yeah.
Right Yeah. So the.
The $37 seven that you mentioned is the portfolio minus the seven buildings that we're looking at.
Disposition currently.
And then Furthermore, the <unk>.
Rent cut to 28 million is what.
Again, what we believe the portfolio can service today based on <unk>.
Current NOI.
So we're expecting.
That step down from.
The 46 really to 37.
To the 28.
Beginning next year.
And then after 24 months that rent will then be reset to a what we believe should be a more stabilized portfolio at that time.
And it's a minimum of eight right.
The basis in those assets.
Correct, yes on the original basis not depreciated basis.
That is off hand.
Well I can give you some goalposts based on.
The disposition of the seven that number would be between 32 and $33 million again, if there is some additional sales along the way or if a building turns and we elect not to sell it that number will change a little bit but ultimately according to the plan that we have right now it would be.
And that $32 million to $33 million.
That's the 8% floor.
Correct.
Okay.
Okay, and then just on the JV agreements.
What is the base management fee.
Place.
And what are the in place NOI from these assets they tried to sort of back into it.
Based on sort of that lease coverage.
The LCR.
And what the prior rent was and I got to like a.
$15 million number for NOI.
But it could use maybe a little bit of help try and understand how we get.
We were at $21 million for these 14 15 assets that are going into the JV.
Where does that go.
Gen one.
Youre asking whats the management fee for the philosophy plus the NOI.
And the way the structure of the JV I mean, what the percentages are I'm just trying to understand what these.
Numbers youre going to look like compared to the previous in place rent.
Well I guess I would say to that end.
With most companies and most management agreements were seeing Theres, a 5% management fee, but theres also incentives that get put in there along the way for certain performance hurdles and we want to make sure that the managers are properly incentivized, but the base fee would be that around.
Around that 5%.
And am I about right on the in place NOI at $15 million.
You are talking you are looking at for the remaining 15, Bill 15 buildings, yes.
Yes page six you've got the pro forma.
CR seven three times basically assuming that you use in the <unk> seven three lease.
Lease service coverage ratio.
Rent, a combined 21 million $21 $4 million on it.
Two portfolios combined.
Yes, we'd be looking at an NOI, a little bit higher than that.
Okay.
Hey, Jordan, we don't mean to be cagey, but we're going to go through a little bit of a transition with the properties will give you.
This is John we want to we want to give the street.
A good set of guidance in February.
But keep in mind, there's going be some transition and then.
In addition to that we gave you some idea that in the past.
The numbers, we have given you represented.
Roughly the NOI from these properties.
Based upon the.
Net deferrals before the properties were transferred to well tower and atria.
But there is six $6 million to $8 million.
NOI upside in these properties, so we can get to pre.
Pre pandemic levels, but there'll be a little bit of.
Movement on that as we get there.
Well move the transition date be.
Essentially for these two portfolios.
So this is Kevin again, we're going to target the first of the year.
Okay and transition.
<unk> movement, but at the end of the day, that's what our goal is.
Okay. Thank you guys.
Thank you thanks Jordan.
Our next question is from Juan Sanabria with BMO. Please go ahead. Your line is open.
Hi.
Good morning, sorry, good afternoon.
On the.
Jordan, it's been a long day on Jordan's question on holiday could you just talk a little bit about the structure.
In terms of.
Okay.
I think.
Think of it similar to the way you guys.
Sure.
The triple net and exclude <unk>.
<unk> structure and what's the ownership split between you and.
Merrill Gardens, and discovery on that venture.
Sure This is Kevin.
So this one is going to be different than bickford in that.
NHI will still be the large majority owner.
Not going to be a lease in place like there was with Bickford. There we had a separate opco propco split here, we're anticipating what we would refer to as a back to back management agreement. So we're partners with them on the real estate and really the whole venture together.
The ownership between.
Discovery, and Merrell is a little bit different or not yet at a place where we're ready to talk about specific numbers, but.
Suffice it to say it'll be a meaningful amount to each one of those organizations that they are putting in and we're going to have.
Appropriate incentives in.
Sure.
Carrots for these properties to perform but we would cage it is for <unk>.
Roger I should say as a meaningful amount to each one of them and feel like it provides good alignment for the venture we're doing.
And a point of clarity as they are both cutting a check to come into the venture with us.
Okay.
One I don't know Tom you are.
Sorry, I was going to just add.
These will be shop portfolios.
They they will we will structure them with.
Some synthetic debt.
And then they will each own.
<unk>.
Some portion of the equity we think we know what those numbers are not yet ready to share that with you.
But the vast majority over 90% of the capital will still be provided by us.
Okay.
Can you comment on your your confidence or lack thereof, and the ability to get to deferred or sorry, the unpaid rents.
By holiday and the credit behind that lease worthwhile tower.
Hey, Juan this is Eric.
That is obviously.
Sensitive legal topic, so I hesitate to speculate on our earnings call, but just know that we are focused on recovering that.
That the.
Balance sheet information, we receive from atria indicates that those funds are accruing.
On the buildings balance sheets.
Okay. Okay.
And then just.
On the going back to Bickford.
Is it right to think that you.
It sounds to me that you have decided to cut rents based on current performance and cash flows.
Site visibility any upside for these next two years.
With maybe the offset that you get repaid debt the amount that's been deferred rather than.
Giving them a lower coverage.
Day, one and then kind of maybe sacrificing that repayment of deferrals.
But not giving kind of a two year rent cut is that.
The right way to think about it.
That's a way to think about it.
The reason, we did that is because the repayment of the deferrals.
We'll most likely be lumpy.
And <unk>.
Dependent on the recovery of the buildings the margins from <unk>.
Labor.
Expenses.
<unk>.
We wanted a rent number that we could depend on that was backed up by coverage. We think it's important.
To show investors that our leases have good coverage and that the rents are solid.
And then finally as John said.
Endeavoring to give you guidance in our February earnings call. So all of that went into the thinking on how we structured this.
And just last question for me can you give us any sense of.
I know that there's still a lot of moving pieces about what the pro forma.
<unk> coverage will be.
I guess at the end of the first quarter 'twenty tier one.
When this is all kind of washed out.
And the comfort level there.
I'd say this is John I would say, we have very high degree of confidence in our payout ratio being where we think it will be which is.
Yeah.
Say low eighty's to even below 80% a lot of that is going to have to do with.
Getting these joint ventures closed and temporarily maybe some transition.
Costs that show up in the first quarter.
We just can't give you guidance on that just yet.
The fourth quarter, though you'll note that we've talked a little bit about little heavier deferrals in the fourth quarter.
So you should expect some increase in the payout ratio as a result of that.
So don't be surprised by that but we have a high degree of confidence that it's going to be very very short lift.
Thank you.
Our next question is from Rich Anderson with SM BC. Please go ahead. Your line is open.
Good afternoon.
So listening to other calls this earnings season.
Particularly from your larger cap peers, you know theres a lot more enthusiasm about the future and in the senior housing space and I'm curious if you would be having similar.
<unk> to your tone and if it's if we're really specifically talking about <unk>.
Very company specific issues that perhaps missed in the underwriting or whatever but why.
What do you think happened.
To have this have such a.
Have been such a tough path and it's been tough for everybody, but theres a lot more enthusiasm away from you.
Today from from from other Reits, what do you think it is.
Good good specific precision good good good marketing and good voice coaches.
Is that really your final answer.
Rich, it's not lost on us that there is a lot of cheer leaders in this business.
I think if you read the transcripts from our prepared remarks, youll see optimism there youll see the way that we structured the restructuring of Bickford end of holiday that it allows us to participate in the upside.
All of that we believe will bode well for 2022 and beyond.
So there is optimism there.
I would also point with yellow high writer to the part in our prepared remarks, we're bickford is knocking it out of the park they are.
Leading in terms of occupancy way ahead of NEC way ahead of other REIT shop portfolios. They are in the Eighty's a lot of portfolios are still in the seventies. So.
Don't don't let my monotone voice.
Convinced you that I'm not enthusiastic I am.
And.
We're trying to signal to the market.
And to the analyst communities that we have increased confidence in 2022, we declared a dividend this quarter. We didn't wait as we have been we've signaled we want to give guidance for 2022 and February where we didnt give guidance this year.
Our payout ratio is adjusted and we think we got that right. We think that the amount that we cut is as gives us the breathing room to do these dispositions.
And right. The ship if you will for future dividend growth. So there's a lot of good optimistic signals.
<unk>.
In our prepared remarks and in the progress report that we also distributed this morning as part of our release.
We feel like we've made good progress on restructuring all of the things that needed to be restructured.
Okay.
I appreciate the candor.
Candor for sure so don't take the question the wrong way.
Now the other the other thing is rate growth and you said it yourself unprecedented rate growth.
There's a lot of that or most of that hit in the very early part maybe January one of next year I'm. Just curious if you can outline the timing of when.
Offer start going out and when we could start seeing some of that.
Sure Hey, rich, it's Kevin I would say that it will be over the course of the year, but yes, most operators target.
The beginning of the year some do it on the anniversary date of the resident but thats, probably the exception more so than the rule.
Most of what we're seeing will be more first quarter.
We've heard along the lines, we've heard a range anywhere from 5% to 10% then I would say most of our operating partners are going to be asking more in that 5% to 6% range, which again thats going to step up rent to try and cover the labor that's going out. We've also heard that theres going to be some groups that are looking at more of a.
Almost like a labor surcharge to help cut.
But.
Cut down on the amount of <unk>.
Overhead that's continuing to build here so.
There is some.
We think there's a good possibility that there will be a good rate growth for the year.
In an effort to mitigate expenses, we do think also that.
As they.
They can get people to come back to the workforce and they can mitigate some of the agency and overtime that will help but the fact the matter is as wages are up so that's going to be a little bit of a headwind still.
But the rates should help keep keep that abated to some degree.
Is it true that residents are like.
Saying, yeah, I'll pay you more.
Cover your labor costs, I mean, it seems like such a nice thing to do but is that really happening or is that.
Almost you know that's the market and so they're just having to pay it are going to have to pay.
I'd say, it's probably a blend of the two.
People arent signing up to get charged more at the same time.
When you have these rather than council meetings, and they understand and they talk to family members. They understand what's going on they see it elsewhere. They understand that prices are going up so they're not cheerleading, your but they understand it.
And it is the market so to the extent that.
There are some people that are doing the eight 9%, 10% to the extent youre doing $5 67, which would still be considered exceptional.
That's perhaps a little more powerful.
Kevin when in my last question is when you came up with the Bickford restructuring after.
First the sales and then the right size to coverage and overseeing all of the steps that you went through what did you assume in rate growth.
And underwriting that that decision.
They're going to be in line with what we just told you that 5% to 6% is what we're expecting.
As we've talked about.
The wage pressure is still very real so we also said that we expect.
Not expect but we allowed for some near term margin compression as we go through the winter months.
Get into the first quarter so.
They're going to be in line with what we're seeing from our other operating partners, but we're also trying to give them some.
Wiggle room, so to speak to start paying back these deferred balance balances, so thats going to be the upside that we captured to the extent, we did cut a little low.
It just means we get paid back a little faster.
I'm, sorry, one more I know the deferred balance for.
For Bickford is $26 million I think is right what's the total.
Deferred balance.
The 26, there's going to be the anticipated.
Total so that includes the first quarter.
Rich, we're well over $40 million, including some some other notes that we've not taken into income such as.
The second mortgage on the six properties that we sold to Bickford.
This year.
So.
And as Kevin mentioned that includes what we expect to defer into next in the fourth and the first quarter of next year.
So what we're doing is we're using some of those deferrals.
Performance incentive as well and they make certainly hit certain hurdles.
And we'll forgive a portion of those deferrals.
But when you look at our coverage ratios that we also displayed in our forecast to you in our presentation to you today also.
Keep in mind, we're using $500 per per unit capex.
We think they are actually there'll be a little heavier.
And we don't want to have to come back and talk to you again about another rent cut and so that was part and parcel of our discussion.
We settled on.
When they do have excess cash flow we.
We do expect to be able to collect it and collected through these deferrals.
Okay, and then when you start reporting <unk> in 2023, and so I mean, you could have big big growth numbers, you have to be careful how you. How you communicate that I guess right. That's a problem now we've got to be very well have to be very careful about that we will have to help you with bridging through that.
We'll have other other things that will make its way down to the <unk> line, including $8 $8 million in.
Deposits that we hold on holiday and we fully expect to be able to collect.
Rent on holiday. So I don't want you to think that we're sitting here, saying that that's not going to happen. So we're going to have some discussions about that coming up.
So once we get through this period of time, when we get into those discussions.
It's another spot where youll see some lumpiness.
So yes, we will have to help you bridge all that okay all right.
Stabilized number well at least it's interesting thanks.
Thanks, guys.
Thanks Rich.
Our next question is from Daniel Bernstein with capital. One. Please go ahead. Your line is open.
Hi, good evening.
I just wanted to go back to the the holiday Jv's and just kind of understand.
Yes, how much deferred capex might be there.
Okay.
And Im sure Youre still figuring this out but kind of how we should think about.
Capex obligations as part of those Jv's.
Sure Hey, Dan It's Kevin I would tell you that generally speaking the buildings have been maintained.
<unk> maintained.
That said as we've seen in the portfolio and not unique to this group.
Capex has been a little.
The maintenance has been deferred.
Just.
Maybe some carpets need to be replaced or wells painted so forth so on and so forth.
We are as a part of our capitalization, though for each one of these joint ventures, allowing for.
Pretty sizable amount of capex to be put into each each of the two portfolios. So we'll capture that on the front and make sure that these are up to.
Speed in terms of making good first impressions and for the new operating partners to be able to sell into the market.
Okay and then.
I wanted to kind of understand on holiday.
How much was actually booked in <unk>.
I thought it was I saw a 600000, but I just wanted to make sure I understood.
What was being booked and SSO and MFA.
Given that you.
You use any of that $8 8 million.
Or how much of that $8 8 million deposit.
Yes, so Dan we we originally had $10 6 million of deposits.
600000 of that was used in the third quarter.
That was recognized was $2 $3 million in the third quarter.
Okay.
So and includes a piece of that little piece of the positive that I just mentioned.
Alright.
And then just going back to the JV is in the pipeline and kind of expectations for investments in 2022.
Okay.
Almost.
You've done some kind of sharply.
<unk> before on a small scale, but it seems like.
You're much more positive about the recovery in the space.
And maybe would use these jv's.
I guess a platform to increase the amount of data like assets.
In your portfolio so outside of the assets that you are donating to these jv's are there other assets that you've identified within your portfolio you might donate to those <unk> and then are you thinking about in 2022 expanded the JV through acquisitions.
Good question, Dan This is Eric.
You're right. We're we're excited about this and it does have potential as a new platform.
Most of our other properties are still in triple net leases so.
It might not be possible to put them into the JV. The current operators have something to say about that.
But it certainly could be a platform for growth and for new acquisitions.
And we're hopeful that will be the case.
Okay Alright.
I'll hop off.
Thanks for taking the questions.
Thanks, Dan.
And we have a question from Tayo Okusanya with credit Suisse. Please go ahead. Your line is open.
Hi, Yes, good evening, everyone I just wanted to follow up on Rich's question about Bickford.
No.
Have I think you gave some general guidelines around.
Assumptions that were made about the portfolio recovery as it pertains.
Opex labor.
Possibly also kind of rental growth.
Could you talk a little bit more about the other assumptions you may be making.
That led you to get feel confident that the way this is being structured.
That there we will be able to pay the newly established rent rates and as well as all the deferrals.
Sure This is Kevin.
Well, we mentioned in our prepared remarks, what our collections from Bickford were four.
<unk> loss for the second quarter, sorry, third quarter, and what we expect for the fourth quarter, which again triangulate that $28 million run rate that we went through.
Over the last few months, we've seen them be at the highest level that <unk> been in history in terms of the amount of agency and overtime usage and their labor costs. So even if they hold steady we feel reasonably.
Good about their ability to.
<unk> to service the rent going forward into next year. So based on current occupancy current rates without additional rate growth. We believe they should be able to service the rent from $28 million rent number so.
Getting rid of the buildings.
<unk> ability to execute on limiting agency and overtime on getting labor under control.
The number of things that we've mentioned will contribute to them being able to increase their NOI.
Over time historic or to date, we've seen them increase occupancy between 50, and 100 basis points a month.
So we use that is also a signal in terms of how we're looking at.
The next.
12 months to 24 months and how we are looking at their opportunity to increase.
Their NOI so they have a lot of factors going on but again I think the key here is that.
Based on.
The current trailing information that we have.
And even where were seeing labor rates today, we believe they should be able to service that rent payment and then assuming they can get the labor piece under control and have occupancy and rate growth then.
And then that's what's going to be able to help the deferral component.
Got you. Okay. That's helpful. And then again pardon me because I'm a little Rusty haven't been out of the game for a couple of months, but the smaller tenants who used to have in your portfolio that we're kind of in transition there we're in lease up.
Mall handful of them.
Smaller <unk> type transactions I think some of them even have been tripling that transaction.
Just kind of talk about what's happening with those names because again pre pandemic.
Occupancies were still in lease up mode. They love this be gone down since then.
Matt small pool of Av.
<unk> there anything there that we should be thinking about.
That knee continent that may be a potential drag to earnings going forward and just kind of given the prolonged pandemic.
That's a great question Tayo this is Eric.
And welcome back to the game.
Thank you.
The way, we took a hard look at some of those properties and the way we thought about it is here's an here's a nugget of value that isn't generating any NOI is it going to generate NOI in the near future because of its not we happen to have.
This unique situation, where the disposition market is very robust and you can turn that underperforming building into cash.
Either pay down debt or <unk>.
Reinvest it and something that is going to give you immediate.
NOI and returns so.
Several of those buildings ended up on our disposition list and you can see what that looks like on page seven of the slide deck that we added to our webpage.
And.
Granted after we did that underwriting and re underwriting there were a couple of buildings that we believe in end markets that we believe in that we're going to be patient and hold on to them to experience the recovery, but there is some that they werent doing well before the pandemic, they're not doing well.
During the pandemic, but they can fetch a very good price so.
That's our approach to those buildings.
Thank you John.
There is.
On slide seven Youll see that our 21 assets.
Yes.
Yes, and that see that line there.
Progress Klein.
So that was the only one assets include.
Say two holiday assets.
Not yet disposed seven.
Bickford assets that we talked about on other slides and then approximately 12 of these other other assets that we've been talking about that gets to your question regarding smaller tenants.
Great. Thank you.
Youre welcome.
And there are no further questions at this time.
Thank you everyone for your time and attention today, and we will see some of you tomorrow at NAREIT.
Yes.
Yeah.
Okay.
That concludes the call for today, we thank you for your participation and ask you. Please disconnect your lines.
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