Q2 2019 Earnings Call

Greetings and welcome to the National Health Investors second quarter 2019 conference call. During the presentation, all participants will be in a listen only mode.

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 should you require operator assistance at any time. Please press Star Zero as a reminder, this conference is being recorded today Thursday August eight 2019, I would now like to turn the conference over to Dana Hambly. Please go ahead.

Thank you operator, Hello, everyone. This is Dana Hambly director of Investor Relations.

Welcome to the National Health Investors Conference call to review the company's results for the second quarter of 2019 on the call with me today is Eric Mendelsohn, President and CEO , Roger Hopkins, Chief Accounting Officer, Kevin Pascoe, Chief Investment Officer, and John Spaid Executive Vice President of Finance the results as well as notice of the accessibility of this conference call on a listen only basis over the Internet were released this morning before market opened in a press release, that's been covered by the financial media as we start let me remind you that any statements in this conference call, which are not historical facts are forward looking statements and <unk> cautions investors that any forward looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward looking statements represent an H.I. judgment as of the date of this conference call.

Investors are urged to carefully review various disclosures made by any and they buy in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in <unk> Form 10-Q for the quarter ended June Thirtyth 2019.

Copies of these filings are available on the Fccs website at Www Dot FCC Dot Gov. We're on an H. eyes website at Www Dot and H. I read Dot com.

In addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are provided in NHL its earnings release and related tables and schedules, which have been filed on form 8-K with the FCC.

Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.

Ill now turn the call over to Eric Mendelsohn.

Thank you Dana Hello, everyone I'm glad you could join us today.

Before we get started I'd like to welcome Dana Hambly to our team.

He is joining us as our new director of Investor Relations Welcome Dana.

It's been a busy second quarter, we've been adding to our portfolio with 295 million of accretive acquisitions year to date and working on our portfolio of nine transition buildings to improve their positioning for future cash flow.

We've also been spending a lot of time with our friends at the Bickford organization and they try and Bickford are working together to improve their operational and financial performance. You can see what we are seeing in terms of improved performance in our 10-Q, which details recent occupancy trends with bickford.

Our efforts are bearing fruit, Kevin will give you the details on that shortly.

The acquisition activity has been fast and furious 295 million, representing seven different transactions three of them with new customers.

In addition, our guidance includes a line of sight to 45 million and new and existing commitments before year end.

All this is to say that we've been working hard to get back to even on a per share basis back to where we were before we restructured the holiday portfolio and transition nine properties to new operators in the first quarter.

Well, we aren't happy about having to backfill the lost revenue, we believe having done so sets us up well for 2020.

We've made significant progress with our nine transition buildings, which bodes well for organic growth.

Here are a few details on what's been happening with them and Kevin will have more details in his remarks.

On our Charlotte building senior living communities has completed extensive renovations and the result is fantastic.

We signed a traditional lease with SLC and you will see the straight line rent show up in next quarter.

In Indianapolis, we just signed a new lease with discovery as part of a larger transaction the new lease isn't an ROI based lease with incentives.

Turning to the five north South route properties, formerly operated by autumn leaves Chancellor has rebranded the buildings and they are paying us and Hawaii rent as scheduled out in our 10-Q.

[noise]. Please see our disclosures regarding these transition buildings. The 10-Q updates the cash why weve received thus far from each property.

With that I'll now turn the call over to Roger.

Thanks, Eric Hello, everyone.

We're having a great 2019 in terms of new investment volume.

And this revenue has now fully offset the negative effects of the temporary loss of revenue from the transition properties said, Eric spoke about a moment ago.

And it's also offset the effect on our revenue of the restructuring of our master lease with holiday retirement.

We have previously disclosed.

So far this year, we've announced $295 million and accretive purchase leasebacks.

And mortgage note investments almost all seniors housing.

We have approximately $136 million and previously announced commitments that we expect to fund over the next 12 to 18 months as listed in our Form 10-Q filed this morning with the FCC.

In a child's management remains focused on making accretive new investments and our priority pipeline that Kevin will describe later.

For the second quarter of 2019 normalized FFO per diluted share was $1.37 cents compared to $1.38 cents in the same period, one year ago, due primarily to lower straight line rent income for GAAP purposes.

$528000.

Normalized FFO for the six months ended June 32019 was $2.67 versus $2.72 for the same period, one year ago due to lower straight line rent income of $1.262 million and an additional 1.629 million weighted average fully diluted common shares.

For the second quarter normalized FFO was $1.26 cents per diluted share for the six months ended June 32019 was $2.48 both metrics matching exactly our results in the prior year. Despite the challenges we faced with lost revenue for holiday and the transition properties described earlier.

And I try has always been focused on a AFFO growth in particular as it has been the best quarterly and annual indicator of our consistent ability to generate free cash flow to make new investments and to increase our dividends annually to our shareholders.

[noise] antitrust total revenues for the second quarter were $78.1 million, which was a 7% increase over the same period one year ago.

For the six months ended June 32019 revenue increased 5.8% to $154.2 million.

These increases reflect good investment volume in both new lease and mortgage deals and in the utilization of our capital to accomplish sizable renovation and expansion projects for our tenants that funding of which automatically boost our lease revenues.

John will explain in a few minutes, how we fund our new acquisitions and construction projects by deploying a careful mix of debt and equity capital.

Our interest expense increased $1.526 million in the second quarter of 2019.

When compared to the same period.

You, one year ago, and a corresponding increase of $3.430 million interest expense for the six months ended June 32019, compared to the same period one year ago.

And is reflective of their investment volume and our interest rate swap agreements entered into during the most recent quarter to fix the interest rates on 200 million a variable rate debt.

Our increase in depreciation expense of $1.226 million in the second quarter of 2019.

And an increase of $2.382 million.

For the first six months of 2019 compared to the same periods in 2018 are reflective of our growing real estate portfolio.

Our tax expenses have more than doubled for both the three months and six months ended June 32019, when compared to the same period, one year ago as we have been required to pay the property taxes on the nine troubled assets that we transitioned to new operators described earlier.

Our general and administrative expenses increased $216000 during the second quarter due primarily to higher non cash share based compensation expense.

Computed by the Black Shoals pricing model.

This expense is expected to be $477000 for each of the next two quarters and it's helpful information for our research analysts and investors.

Property taxes and insurance expenses on our leased properties was $1.506 million for the second quarter and $2.597 million for the first six months of 29 came and was paid out from our cannot escrow deposits made each month to us. According to the terms of our leases.

There is a new accounting standard that requires companies to show that amount separately on its income statement. However, the same amount is included in our lease revenue. So there is no effect to our bottom line.

However, we included in our franchise excise and other taxes property taxes paid by us related to our transition properties, which were $528000 for the three months and $828000 for the six months ended June 30.

Moving on to our dividends. This morning, we announced a quarterly dividend of one dollar five cents per outstanding share for the upcoming third quarter ended September 30.

We currently estimate our normalized FFO payout ratio for 2019, well be in the mid 70% range and our normalized FFO payout ratio will be in the low to mid 80% range.

These ratios might fluctuate throughout the year as we manage to our properties and transition.

As for our updated guidance for 2019.

We currently estimate there is 45 million in action of all new and existing commitments that will close before the end up 2019.

So we are diligently working to obtain binding commitments for even more.

We currently estimate normalized FFO will be in a range of $5.44 to $5.50 per diluted share for 29 chain.

We are revising our estimate for normalized FFO by increasing the bottom end of the range by two cents to a range of $5.06 the $5.10 per diluted share.

These estimates include our expected new investments.

Funding each month of our ongoing spending mentioned earlier.

And the composition of new debt and equity capital properly align our capital resources for growth and maintaining low leverage.

We will adjust our guidance as we are able to estimate with more certainty the volume and timing of our completed investments for the remainder of 2019 and the mix of new capital with which to fund.

I will now turn the call over to John Spaid, who will discuss our use of debt and equity capital shop.

Thank you Roger.

As we have discussed in our last two earnings calls we anticipated a rise in our leveraged this year as we continue to reposition the three transition leases.

It is our continued expectation that the EBITDA for no transition properties will return to us over the coming quarters.

Additionally, 2028 will be a transformative year for any tries balance sheet.

As we manage proceeds from our expected tenant purchase options.

Redeem our $120 million convertible bonds using at our discretion, either stock or cash or a combination of both.

Manage our interest rate risk, it's $210 million in LIBOR swaps mature June 2020.

And term off revolver debt into a new longer dated debt instrument.

It's not our intention to alter our stated financial policies.

We intend to stay within our net debt to adjusted EBITDA ratio range of four times to five times.

We will continue to conservatively manage our balance sheet as we judiciously used equity proceeds to fund our growth.

Our debt capital metrics for the quarter ending June thirtyth for net debt to annualized EBITDA at 4.8 times.

Weighted average debt maturity at 4.4 years.

And fixed charge coverage ratio of 5.4 times.

For the quarter ended June 30, <unk> weighted average cost of debt was 3.6%, which is seen benefits from our recent interest rate swaps.

At the end of the second quarter, well the interest rate yield curve was favorably inverted.

And each I entered into $200 million and variable to fixed rate swap transactions with two of our existing lenders.

These swaps are in addition to the $200 million swaps and each I entered into at the end of the first quarter.

The new Q2 swaps further fixed $200 million of our LIBOR based debt and 1.62% before credit charges through December 31 2021.

During the second quarter, we sold 155729 shares of our common stock.

The shares were sold at an average price of $78.23 per share before fees, resulting in net proceeds after commissions of $12 million.

Proceeds were used to reduce our revolver debt.

After our second quarter ATM activity, we have approximately 143.6 million capacity remaining under our shelf facility.

Turning to our liquidity.

And each I ended the second quarter were $273 million outstanding revolver, leaving us with 277 million available revolver capacity.

I'll now turn the call over to Kevin Pascoe to discuss the portfolio Kevin.

Thank you John .

As Eric mentioned, we have been working hard to reposition our transition communities and put them on a better path.

While much of the heavy lifting lifting is completed for an HIV.

The operators, we partnered with in the portfolio are working diligently to improve the buildings everyday and we continue to try to find ways to make improvements not only to the transition communities.

But also on the larger portfolio.

Looking at the overall portfolio at the end of the first quarter EBITDARM coverage ratio was a steady 1.65 times for the total portfolio.

Senior housing was 1.15 times.

And our skilled portfolio is 2.76 times.

I would like to note the improvement in the SNF coverage and why we would certainly like to see coverage at a higher level of senior housing.

During the second quarter of this year, we started seeing positive leading indicators in the portfolio.

Turning to our largest operator by revenue.

Bickford senior living which represents 18% of our cash revenue had an EBITDARM coverage ratio of 1.07 times for the trailing 12 months ended March 30 Onest.

As a reminder, this EBITDARM calculation excludes two smaller properties held for sale.

This coverage was sequentially down from the fourth quarter, but occupancy for the quarter started to turn positive, especially later in the second quarter.

Same store occupancy for the second quarter ended June 30 was up to 85.9% versus 84.1% for the first quarter of this year and June averaged 87.2% for the month.

The effects of this positive momentum will take a couple of quarters to flow through to performance.

But the improved occupancy is a good step in the right direction.

We've added a five quarter chart, and the 10-Q, which shows the recent progress.

Furthermore, the portfolio, we purchased in mid 2018 in Ohio, and Pennsylvania seems to finally have some better footing.

With all but one leadership position filled in the vast majority of agency labor and overtime expense out of the buildings.

The too big for developments continue to lease up nicely on or ahead of schedule and add additional cash flow to the big for portfolio.

These developments excluded from both same store and the total big bird portfolio results have a trailing 12 EBITDARM coverage of 1.51 times as of Q1 2019.

We continue to work with bickford to find ways to optimize the relationship.

In addition to the held for sale assets and new developments, we continue to explore avenues to improve cash flow over time.

This may include Opportunistically, selling a few assets and transitioning some buildings to other operators.

In addition, bickford is making meaningful progress improving their balance sheet and financial performance by refinancing non NHC assets in the third quarter.

Our relationship with senior living communities represent 16% of our cash revenue.

Including net entry fee income there EBITDARM coverage ratio was 1.14 times on a trailing 12 month basis.

This ratio was down quarter over quarter due to some lower entry fees during the winter months as we discussed on the call last quarter.

The spring and summer months are back in line with historical levels.

Due to some solid entry fee quarters rolling off the calculation.

And the one quarter lag in reporting it will likely be a few more quarters before the portfolio shows improvement due to this variability in their income.

I'd like to note southeast continue to invest in the buildings by purchasing and renovating available entry fee units as well as its operations to best position. These communities in their respective markets and we're very pleased with the focus of the team there.

This additional capex and investment and unit inventory will bear fruit once the renovated entry fee units or so.

SLC formally launched the Charlotte, which is one of the transition properties in July and is beginning to move and residents.

Thats LC did a great job with the build out of this community and feel it is well positioned for the future.

The building, which as an aside as a rental community is less than five miles from the SLC headquarters.

And we'll benefit from direct supervision.

By SLC leadership.

Rent under the lease is 50000 for the balance of 2019 250000 for 2020 $1.3 million for 2021.

Esselte Wrench will then increased 1.55 million in 2022 with 3% escalators thereafter.

The leases coterminous with the master lease, which has 10 and a half years remaining.

We also added to the relationship by providing a senior loan to SLC to acquire community in Columbia South Carolina.

This 248 unit CCRC fits well into their geographic footprint as a good value add opportunity for the company.

The senior loan of 32.7 million carries an interest rate of 7.25% and then Shai has a purchase option on the community what stabilizes.

Looking at National Healthcare Corporation, or partnership with NHC accounts for 13% of our cash revenue.

It had a corporate fixed charge coverage of 3.91 times.

Holiday retirement, which represents 12% of our cash revenue had an EBITDARM coverage ratio of 1.2 times.

Trailing 12 EBITDARM coverage on the holiday portfolio would be 1.26 times as of first quarter and adjusting for the impact of the recent lease amendment.

This improvement in coverage demonstrates what is possible when an operator and capital partners interests are aligned.

Moving on to new investments.

We are pleased to say, we once again expanded our relationship with comfort care senior living.

In May we announced the acquisition of a 73 unit assisted living and memory care property for a total commitment of 13.5 million.

This recently opened community right manner is located in the town of Brighton, Michigan is leased to an affiliate of comfort care senior living.

The 10 year lease has a lease rate of 7.75% plus annual escalators starting in year three.

This acquisition brings the total number of buildings leased to comfort care to four and demonstrate NHS commitment to high quality local operators that understand their respective markets.

In June we announced the funding of a $10.8 million construction loan for a 66 bed assisted living memory care community located in the Oshkosh, Wisconsin.

Construction on the property has begun and is expected to be completed in the second quarter of 2020.

The five year loan has an annual interest rate of 8.5% with two one year renewals.

The new community will be managed by 41 management LLC, a growing Midwest operator owned by Tom Aastrom.

Which currently manages 28 buildings that has two more in development.

Also in June we announced in H. I headed into a property company joint venture with affiliates of discovery senior living.

This joint venture consists of six properties located in Pennsylvania, Maryland, Indiana and was purchased for $128.35 million, including 1.5 million and closing costs and expenses, which translates to about 215000 per unit.

The properties consist of 145 independent units 356 assisted living units 95 memory care units.

It will be leased to decide to affiliates of discovery and a 10 year lease with a 6.5% initial annual cash yield with annual escalators.

In HIV, the managing member owns 97.5% of the joint venture equity and discovery of 2.5%.

Furthermore, the tenant will have a 5 million dollar amount available to them as additional incentive based on performance of the portfolio.

In conjunction with the joint venture in which I will make a senior mortgage loan of $6 million at 7% annual interest.

Extended to affiliates of discovery for an additional property in Indiana for which the joint venture will have an option to purchase stabilization.

The community consist of 52 assisted living units and 22 memory care units. The loan is scheduled to be closed later this month.

In H. I also transitioned the last of the former regency buildings to discovery in July . This property located in Indianapolis is leased to affiliates of discovery and fits nicely into the portfolio of properties, we recently acquired with them.

In Asia has provided a $900000 capex allowance and a 750000 dollar working capital loan to the tenant to get the property back on its feet.

The lease will be cash flow based until 2022, which time, there will be a fair market value reset with a floor of 1.4 million.

And the lease has an overall term of five years discovery will be eligible for incentive payments based on increasing the value of the community.

Lastly, our latest addition to the portfolio in July was with a new operating partner at Capella living solutions.

NHF funded $7.6 million for 51 unit assisted living and memory care community located in Pueblo, Colorado.

Hi will lease this community an initial rate of 7.25%.

Capello fits our target profile of a local operator that his mission driven.

With a good growth profile.

Turning to our pipeline, we've had an incredibly busy first half of the year, making new investments with both new and existing customers.

We continue to see additional opportunity as we survey the market and are committed to adding high quality operators and communities to the portfolio like the timber ridge purchase option, we continue to evaluate.

We will have an update on this and any additional transactions as we have firm commitments or closings with that I'll hand, the call back over to Eric.

Thank you Kevin before turning the call over to Q and eight I'd like to add by saying how pleased I am with the progress and HR has made in 2019.

No question, we had difficult set up with the restructuring of the holiday lease late last year and the headwinds from the transition portfolio.

But we feel like we are now in a position to say that most of the hard decisions have been made on those properties and that we expect that they will contribute nicely to our organic growth in 2020 and beyond.

And it has been no small feat that we have already announced $295 million and year to date investments.

Which will further add to growth in 2020.

We have accomplished these investments while maintaining a disciplined balance sheet, which puts us in a position to continue adding to growth and we hope to have more to share with you on that front over the next several months.

With that operator, we'll now turn the line over for questions.

Thank you very much if you would like to register a question. Please press. The one followed by the four on your telephone you will hear a three time prompt to acknowledge your request.

If your question has been answered then youd like to withdraw you May press. The one followed by the three once again for follow up questions. Please press. The one followed by the four one moment for the first.

Our first question is from Chad Vanacore with Stifel. Please go ahead.

All right. Thanks.

So team you tighten guidance what factors have become clearer since we last spoke and then how much of that stabilization situation is due to transaction transition to assets and then the holiday lease.

Chad this Roger.

We have been able to tighten your guidance.

A bit this quarter.

We feel very good that.

Our acquisition pace is going to bear out.

The estimates that we provided.

And we have been able to raise the low end of our guidance.

And.

And so we feel very good about where we are at this stage and the timing of the investments that we've made.

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

Well we.

We obviously target the high end and we've been fortunate in the past to be able to do that.

There's obviously any number of things that could happen, but we we feel that we've.

Adequate adequately provided for contingencies and that.

We're going to keep adding.

Investments as soon as Erik described in his remarks.

All right then you started.

Given that the Pittsburgh occupancy, which appears to be on a positive trend after a dip in the first quarter, what's being what's driving that occupancy improvement right now.

Hi, Kevin.

Largely been a.

New focus which is the focus by the team, they're adding new programs to really.

Focus on driving leads and sales in the communities and some of the.

Project that they have internally they call dubbed it project elevate they went out and they selected somebody that was a high caliber individual in the organization and they went to a different branches.

And they are able to have that one first focused on eight buildings at a time and really focus on getting them back on the Nextraq and once they are able to get where they want them to be they move somebody else and so that's one example of the types of things that they are working on to help improve.

They've done a really nice job of being able to optimize some of their lead generation and their internet searches and then also.

Being able to again install certain programs like that and have upgraded CRM. So they've done a lot of things to invest in the company and into kind of the sales infrastructure to make sure they're captured in those leads and converting them to sales.

All right thanks for taking the questions.

Thank you.

Thanks, Travis there. Our next question is from Jordan Sadler with Keybanc capital markets. Please go ahead.

Hi, guys.

And Jordan.

Hi, I wanted to just follow up a little bit on the.

On the guidance.

Line of questioning.

I think.

Coming into the call and sort of post snam rete given sort of some of the the good news on the investment front.

I was probably expecting that the that the tweak to guidance would have been.

More upward rather than downward.

Roger you mentioned targeting the high end of the range at the high end of the range.

Also came down and so.

Given sort of the investment activity that sorta.

Celebrated in Twoq you guys got you guys to nearly 300.

Year to date already.

And the fact that interest rates.

I'm sure at the beginning of the year you were in underwriting.

You may have been a reduction in interest rates this year.

Im just kind of curious what sort.

The one or two headwinds that are sort of offsetting these benefits.

Jordan. This is Roger obviously, there is a lot of things that go into that guidance and.

All the different pieces and parts, particularly with these transition properties.

I would say that compared.

To earlier in the year.

The transitioning took a little bit longer than we expected. Although we think we've now got things lined out as they are described in the third quarter and definitely heading in the right direction.

So we also had to incur some expense that I mentioned in my prepared remarks.

Just for property taxes.

We.

With respect to those transition properties.

We spent $828000 in the first six months.

And and so it's just little things like that.

That have caused us to tweak.

The topline normalized FFO.

Our normalized FFO, we feel very solid.

On the top end of that $5 to 10 cents.

But.

Clearly we have more clarity now in August .

For the remainder of the year than we did three months ago.

Okay.

Along those lines Roger.

The nine properties I think we spoke of last quarter. It was really hard for you guys to to forecast what the ramp might look like.

Particularly for the.

Eat Lasalle in Regency properties.

Do you can you offer any better insight now for what Threeq and Fourq you might look like from a contribution margin perspective, or overall contribution perspective from those.

Hey, Jordan, it's Eric.

There should be a schedule and the 10-Q that shows you what the rent has been from the Lasalle properties I want to say, it's been a 150000 a month.

And then.

Kevin gave you the specifics on the Charlotte property, we get 50000, this year and that starts really ramping up.

In 2020 in 2021.

And for those of you who like straight line rent that will also result in straight line rent.

Next quarter.

And then finally Indianapolis, we just signed a lease with.

Discovery.

That's going to take some time, so we don't have.

Sadly, we don't have any.

Concrete.

Numbers for you yet we're going to renovate the building, it's an ROI lease.

So that's a question Mark still and then our Nashville building.

We've got that cash flowing at around 35000 a month.

And on why ranch and all of that should be in.

Schedule.

And we.

Like I said, we'll get more information on Indianapolis, Thats, probably going to take two quarters to sort that one out.

Okay.

Okay, and then shortly Jordan this John Spaid.

So just just to highlight that you've got six months of view in all the properties in the 10-Q.

You will also see a lot of expenses in the 10-Q as well associated with these transition properties.

We'd like to signal that we think for the most part those expenses are over.

So you'll get a sense from there how you might be able to.

Kind of carry those numbers forward then Kevin in his remarks gave you a very clear numbers on.

The.

SLC transaction and we'll give you all the exact details and our Q3 earnings guidance and then page 37 to 10-Q talks about the discovery subsequent events. So that's cash flow that I think there is some occupancy in that building.

That should should materialize.

This year as well as next year.

Just it's just very difficult for us to give you better guidance on that so thats helpful. So the franchise the franchise and.

Property taxes that you guys were incurring that those are basically beyond next quarter.

Yes, that's correct.

Okay.

That's helpful. Thanks, guys.

And then I guess lastly, you did do Kevin in your commentary I think talk about sort of the relationship with Bickford a little bit.

And optimizing the relationship.

Anything else you can sorta offer I mean, it sounds like we should expect and I don't know if this is a second half event.

Well, maybe a couple of additional asset transitions and or.

Maybe some sales.

That's definitely something that's on the table as we continue to discuss options with big for you as we talked about feeling better about.

Where theyre at they've been able to add some occupancy will continue to look at the portfolio, we'll see where it makes sense to sell assets. If it does make sense and that could be a combination of things whether thats, an outright sale or maybe even sell them back to the company, where it may make sense to have.

More stable long term.

Loan on the building for them, where we can build the balance sheet cash flow forum, but still be able to.

Get some proceeds for making that sale. So there's definitely some different things that we're evaluating with them, but the firm.

First and foremost we want to communicate that they're making progress.

We really are really like the trajectory anyway of occupancy so.

Something we're continuing to watch closely theyre not out of the woods, so to speak, but making progress and will continue to trim and do things that are helpful to the overall relationship there.

Okay. Let my last quick one is just on the watch list any body else sort of pop up sequentially.

Onto the watch list this quarter I know you've made some nice improvements holiday for example, mic for you're talking about but just anybody else you're concerned about at the margin.

Hey, Jordan, it's Eric.

I think you're referring to in my worry list and.

At any given time.

You've heard this before 5% of our portfolio is in need of attention and.

Some sort of fixing so there are a couple smaller operators that are on the fringes that we're watching and worried about but nothing thats material and everybody's paying rent.

So we're not at the point, where we're taking any type of surgical action.

Okay. Thank you guys.

Thanks Jordan.

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

Hi, Thanks, and just to kind of build off that with.

I guess, just diversifying away from Bickford to some degree you've got a couple of new names that have topped up like 41 management and capella.

The capella.

Looks to be.

Is it a nonprofit Christian living services, maybe just to expand on these two new relationships. Please.

Sure.

Capella is owned the management company is owned by not for profit the manager themselves as a for profit entity. So it's just.

It affected different arm of.

Christian living that where they can go out and get management contracts and be able to do things like we did with them have more of a for profit.

Mentality, but still continue their mission as a.

Operating properties. So that's one as I mentioned, that's something that we definitely appreciate about them. They have the right. They get out of bed really energized about caring about seniors each day, but they do have.

The mission and the margin.

Mentality about them. So that's a relationship that we definitely would like to foster and build off of.

A 41 management the Midwest operator.

They have we're as I mentioned to building a.

Assisted and memory care building in.

Wisconsin with them they have some other relationships as well, but group like that.

Got 20, plus buildings looking to grow and doing some development doing some acquisition yeah. That's definitely a good fit for us it fits really well into the geography that we typically participate and able to get some new buildings and add over time so.

Yes, those are groups that as we continue to build our operator base, we want to try and give us more opportunities to and see how we can expand those relationships.

And that's how you get your foot in the door right. I mean, you probably can start with this construction loans.

Right, it's a good outcome.

That's how you start to get maybe then as a tenant and maybe purchase options that kind of stuff.

Yes, that's exactly right. So we're happy to say.

A flyer.

For a good group, where we think we can do additional business.

Great to get a 10 million dollar deal done, but at the end of the day, we always want to do more and Thats kind of the guy that we have as we look at some of these new relationships, even if they do start at kind of a smaller initial investment.

Okay.

And then just to kind of drill into the the Pablo Colorado property.

Just 'cause it so current.

In light of.

New supply light of labor costs, rising and have been rising just give us a sense of the current environment. How you underwrite a 15 year Triple net lease maybe if you can get granular and just maybe express what do you think that the top line is going to grow at what do you assume operating cost and labor cost grow at to have that confidence to underwrite over such a long time period.

Sure.

Well my first and foremost we're looking at most recent historical operations make sure we understand where the building is coming from and then work with the operator to see where they think it's going I think a big part or at least as big.

Question, Mark anyway as of late has been what the right escalator.

Because if theres ever been.

Kind of an issue so to speak or question about.

Those things that you mentioned growing revenue growing expenses, you don't want the expense to grow that much faster. So in this instance, we have a seat.

Based escalator with a Florida cap so it helps moderate that expense increase overtime.

This is kind of middle market type communities. So we're not expecting outsize growth. This is going to be just kind of a steady Eddy building that we bought with coverage where they have the ability to.

Management fee earned some income off the property and be able to reinvest and it also grow their business. So.

In this instance, anyway. It is kind of more of a stable steady property, where we're looking at very modest.

Revenue and expense growth.

Overtime.

And on a 15 year lease.

We work with each of our operators to make sure that we've got the right term in some instances been 10. Some years. It's been 15, but this is one where we want to have that.

Long term.

That long term relationship and given their mission what they wanted they wanted to have that long term access to the property.

Okay, and maybe just my last one just stick with you Kevin.

For the loan.

Need to senior living communities, so that coupon looks to be a bad equivalent to an initial lease yield so call. It if it said in a quarter percent is that going to grow.

What's the LTV kind of how you look at that and do you look at it side by side with how you underwrite a property.

Well. This one we looked at it as I mentioned kind of as a value add opportunity for them. They wanted to co invest in the building and rather than trying to do some sort of.

Property joint venture on this we already have a lease our relationship set up there is an opportunity for them to come in.

Essentially co invest or loan structure to get the property, where they want it from a lease coverage standpoint on a stabilized basis.

Maybe a little bit of money for the company and then put it into more of a long term structure, where we have that purchase option.

So.

Yes, I'm not sure if I'm getting to your loan to value question, but ultimately it gives them the ability to.

Make a little bit of money essentially our LTV is going to go down overtime and as such point that it does that's where we'll have that purchase ability.

Okay got it thank you.

Thanks Scott.

And our next question is from Rich Anderson with SMBC. Please go ahead.

Hey, thanks.

Good.

Afternoon.

I can't I can't figure out where you guys are first second.

So.

Can you can you go through what's the total loss revenue when you combine the transition to nine transition than the.

And the holiday restructure like like what's the what's the starting point from a revenue perspective.

Well I'll tell you.

From.

From the holiday the holiday transaction.

We had scheduled rent.

For 2019.

Of approximately $39 million.

The restructured rent plus the addition of the Bureau Beach property in January of this year.

Brought that.

Brought that cash rent up to about $34 million. So there was a gap there.

On on a financial statement.

Level with straight line rent now projected over the new lease.

It's just about a million five.

For the current year so.

So it is really a good out of all the way around and remember we got we got $65 million worth of cash, yes assets like Vero Beach.

And that transaction.

Right, Okay, and then on the nine restructured.

That's sort of looks like at least if you do the math versus second quarter versus second quarter, it's like down 10 million Bucks.

Thats the recapture that you're looking for.

On an annualized basis.

Well the.

For those transition properties.

We basically started.

From around $11 million worth of ramp last year and now we're building each quarter.

And those those properties have transition.

It will be really ignite hey, fill up tight mode with them one property, starting absolutely brand new F. for a major renovation in Charlotte. So it's going to take several years. These are like taking.

Newbuildings.

We have new operators and.

It's Kevin can describe much better than I.

It's going to take a few years to get back to where we were.

Okay.

So.

Tell me if this is too kind of basic to look at it this way, but I'm looking back in 2017, you produced $5.50 of FFO and the top end of your guidance.

Is $5.50 you know not a whole lot of material difference and the denominator in terms of the share count.

So why wouldn't that not suggest that you've kind of you've gotten back to where you were by the end of this year, if you're able to sort of meet the top end of your of your guidance range is that is that a reasonable way to think about it.

Well and you're just talking about FFO is that correct, yes, that's right yeah, yeah yeah.

Yes, well.

We think we are certainly back as I said in my.

Prepared remarks compared to a year ago, we are back on Fo very importantly to US we're back on Hey, Fo.

And.

And so we're just adding from this point and.

As Eric as Eric said, the volume of our investments. So far this year is going to begin to really kick in for the remainder of this year and next year.

So that's a multi year process with these transitions, but as a company overall you feel like you're already beyond.

You know the the trough.

Position that you that you got yourself into.

Yes.

Okay.

Okay.

Alright.

Eric or anyone in the queue and by the way like the call out to the important parts of the 10-Q that was helpful.

The.

There was a mention that you might take you might be required to consolidate it.

The operations of these nine assets not all of them, but some of them or maybe none of them. If the operators that are going into replace aren't able to kind of keep up.

Is that is that another way of saying of maintaining a day a structure or is this like taking on everything whereby you would have to have them how is the trs and including all the management business and everything I'm just curious what you meant by that statement.

I think what we're trying to do is let the street know that.

And so far as the buildings that we havent signed traditional leases with Indianapolis.

The five autumn leaves buildings.

And.

Wisconsin.

Yes, there is still in a fragile unstable state and.

We think we have good operators, we think they are on a good trajectory, but we have to give you some safe harbor language right and that that that means that we could end up.

In the operations business, if everything goes.

Poorly and you're right it would be deposited into a trs vehicle and it would be what I would call an accidental right.

Okay.

Even more so because you wouldn't really have a management management.

Payment right there will be all it would be all in.

Well you wouldn't have.

Eric and Kevin.

Cooking meals, and John and Roger doing housekeeping, we would we would come up we would actually come up with a manager the again okay.

Yes, I got you.

Were there any more are there any more ATM draws dialed into guidance beyond what you've done.

So this is John rich.

Okay forward comment on what we might do on the capital markets.

I tried to lay out as clearly as I could that.

We have no intention of.

Leaving our leverage get beyond.

Our stated our stated policies so.

I can do for you there.

Can I just build on one more thing that Kevin that Eric said just.

Yes, because I think you asked kind of a hard technical question is these NOI based leases give give rise to bad income so yes.

Some of that for the time being will flow through our Trs and we do have net operating losses in.

Trs that we can utilize there.

The intent though is to.

Improve the assets and then transition them, they're in a lease now there are at least structure right now.

Which includes a management fee being paid to these operators.

But.

We get a little bit down the road a year two years, though bill our intent is to transition into a triple net lease.

Yes got you last question. This is just for my own information when you. When you do the construction loan commitments are you. How quickly are you actually getting cash interest on those investments.

This is Kevin usually will get something.

It's something out the door at closing so whenever we get a.

A development deal like the ones we've announced.

Usually it's a deal that is ready to go it's been fully entitled and they're ready to put a shovel in the ground. So I would say within.

60 days, if not sooner after closing we've made some sort of outlay and then we'll start getting accrued interest on that outlay and of course that will.

Happened over the next.

12 months or so from there.

Right. So you make you accrue the interest and then.

Yes, perhaps when the port.

The propertys cash flowing and whatnot, that's when you.

Turn accrual into cash.

Call It 24 months or so.

Thats fair usual, we'll have an interest reserve built into the budget that we were accruing.

Each month as they draw.

Okay great.

So I got it thank you.

Thank you rich.

And our last question comes from Daniel Bernstein with capital one. Please go ahead.

Hi.

Good morning. Thanks.

Almost afternoon now.

I wanted to go back to Bickford.

Appreciate you providing occupancy trends there.

Given what other leading indicators might you be able to provide for us. It gives us comfort that the big efforts on the right trajectory or are they.

Reducing.

Rent concessions are they doing something else on the expense side.

It's a good sign that occupancy is going up but.

Where Mike whereby are there any leading indicators that might indicate margin and again eventually lease coverage will go back up.

Yes, Hey, dad, Kevin I mean, what I would just echo is what I mentioned on the call of the.

Not only for the Ohio, Pennsylvania portfolio, but kind of throughout the organization they've done a really nice job of reducing overtime and agency labor getting kind of that wage pressure aspect that we've talked about.

Yes, I would say in hand, so to speak or manageable.

Theres still wage pressure, that's not going away, but they've done a really good job limiting those aspects. So that is a really good indicator as we've looked at the portfolio and then this is something I think we've talked about on calls before but bickford is really they don't do a lot of discounting in the first place as we look at the markets that their end versus.

The competition there rents are higher than the competition they have.

Bought occupancy so to speak and reduced a bunch of rates to get these move and they've really stuck to their knitting.

And been able to sell the value of what the services. They provide so we're looking at a lot of different things with them were regular contacts but at least those are hopefully a couple of data points for you that.

Help you kind of see where they are known.

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

You mean, new delivering new deliveries correct.

Yes.

Yes, Theyve had.

Yes, again, they've not been immune to new competition coming in.

We're not seeing a new wave of competition, there just kind of in managing through the deliveries that.

A lot of the other markets that we've seen have been so not seeing a.

Big increase in new deliveries coming, but again thats not to say that there there isn't any.

But the pressure is not good.

I would characterize is that supply pressure might.

Reduce going forward relative to where its been the last year or two that has put pressure on them.

Stable or.

Or could get worse. It just it's put if you could put it in that kind of.

I guess I would put it more in the stable category. There is always going to be some markets, where it's going to add some more pressure.

The fact, the matter as competition has been.

Definitely on the radar again say that theres not been any button new competition not really been.

The biggest issue for them.

Yes, there has been some dealt with it feel like.

A lot of that is needed.

Been able to sell the value and.

And as we pointed to increase occupancy back to a level that is.

Much better than where they were so.

Again, I would kind of characterize that as.

Yes flat I guess, so to speak on deliveries is going to be some but not a big wave that we see coming.

Okay and then one last question for me.

Regarding the pipeline in the kind of investments you're doing when seniors housing, but it could referred skilled nursing.

Your pure ships have seem to have picked up the pace in terms of value add or a little bit of lease up risk you're doing that a little bit as well.

Yes, so just to deal with discovery.

Is there.

How would you characterize this could be for you. This.

Or anybody else.

But how would you characterize.

Yeah, what's available out there from an opportunity standpoint, it stabilized assets versus the value add or taking a little bit more risk and whether that's you're seeing a lot of opportunities where the pricing is right just trying to understand how.

You're thinking about where your pipeline make move from a stabilized versus value add.

We're standpoint.

Sure Yeah, I would just say we look we're looking at.

Everything that we can see in the market see what makes sense at the end of the day everything we do starts with the operator and we're trying to figure out who are the people that we want to work with one of the opportunity set what are they good at one of the buildings and their geography that makes sense to partner with them on and then try and match make you the opportunities we see with those operators. So we're still going to continue to look at the value add at the end of the day. We prefer I think we had preference is going to be stable.

Coupon Clipper type investments, that's where we're going to err so to speak but we also have to go with where the opportunity is and what our operators are looking at and be able to make sure. We're doing a good job of balancing those new investments, but I'd say.

We're going to continue to look at.

The stable.

At least type.

Investments, but.

In order to do some interesting things are good operators, we're going to have to take a look at value added development or some of these other avenues.

It's a pricing not attractive on stabilized.

Assets right now.

Yes, again, it just kind of depends on the margin. If you go there kind of the.

Top.

Top.

100.

Nick markets or even go to.

Really more like the coastal.

High end market is just.

To try and acquire there it is going to be below our cost of capital. The banks is really difficult for us to.

Invest there so.

I think you'll see more of what you've seen in that looking at good quality operators secondary markets is getting good values and trying to find some interesting ways to grow the company.

Okay sounds good.

All right. That's all I have thank you.

Thank you Dan.

And gentlemen, those are all the questions. We will turn the call back over to you for any closing remarks.

Thanks, everyone for your time and attention and we hope to see you at Nic or nay reach soon.

And ladies and gentlemen that concludes our call for today. We thank you for your participation have a great rest of your day and you may disconnect Your line.