National Health Investors Inc

NYSE:NHI

Earnings Call Transcript 2019-Q3

[Operator]

Greetings and welcome to the National Health Investors Third Quarter 2019 Conference Call. [Operator Instructions] As a reminder this conference is being recorded Thursday November 7 2019.

I would now like to turn the conference over to Director of Investor Relations, Dana Hambly. Please go ahead.

[Dana Hambly, Director, IR]

Thank you and welcome everyone to the National Health Investors conference call to review the company's results for the third quarter of 2019. On the call with me today are Eric Mendelsohn President and CEO; Roger Hopkins, Chief Accounting Officer; Kevin Pascoe, Chief Investment Officer; and John Spaid, Executive Vice President of Finance.

The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were released this morning before market opened in a press release that's been covered by the financial media. As we start let me remind you that any statements in this conference call which are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance.

All forward-looking statements represent NHS judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI. And its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed and NH is form 10-Q for the quarter ended September 30 2019. Copies of these filings are available on the FTC, his [e-mail] or on NHS [e-mail].

In addition, certain terms used in this call or non-GAAP financial measures, reconciliations which are provided in NHS earning through release and related tables and schedules, which has been filed on form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.

I'll now turn the call over to Eric Mendelsohn.

[Eric Mendelsohn, President and CEO]

Hello, everyone. Thanks for joining us today. Investors recently heard from others in our industry that the senior housing market continues to see challenges from new supply and wages. We know many of you are concerned with the health of the senior housing industry. But we are cautiously encouraged by the net data, which has shown a general slowdown in New Start and healthy absorption rates, which appear to be helping to stabilize occupancy.

This supports our continued long term bullish outlook on the industry. New deliveries and wage inflation remain as top industry challenges and concerns for us. And as I've mentioned on our previous calls, we don't see these dynamics changing in a meaningful way for the next several quarters. But we are still optimistic in our outlook. As our triple net strategy helps to mitigate the cyclical downs, which we're currently seeing in the industry. We've worked hard to keep our investors updated on the good and the bad. Our approach is to balance our commitment to our shareholders with our desire to see our operators succeed.

Let me say that I'm also proud of our team here this year because we've accomplished a great deal and today we're reporting a number of improvements as a result of our operator-focused strategy. During the last 12 months we worked hard to anticipate areas that need attention and proactively addressed them in a transparent manner. We've restructured our Holiday lease rehabilitated an operator that stumbled in 2017 who by the way is succeeding today. We've transitioned 9 properties out of 3 leases quickly and successfully. We've closed over $315 million in new accretive investments this year. And as Kevin will talk about more we are seeing better occupancy and other green shoots and blossoms from our initiatives with Bickford. The challenges in this industry cannot be neatly boiled down to AL versus IL or primary markets versus secondary markets. It isn't that simple. And NHI is committed to succeeding in all the senior housing markets and products in which we invest. While we plan to provide detailed 2020 guidance with our fourth quarter results our expectation today is that NHI will resume growth in 2020 that more closely resembles our historic performance in the mid-single-digit range.

With that I will turn the call over to Roger.

[Roger Hopkins, Chief Accounting Officer]

Thanks Eric. Hello everyone. So far this year we have announced over $315 million in accretive purchase leasebacks and mortgage note investments all in seniors housing. We have approximately $117 million in previously announced commitments that we expect to fund over the next 12 to 18 months as shown in our Form 10-Q filed this morning with the SEC. Given the full year impact of our new investments the year ahead is shaping up to be a good growth year in terms of our net income and our non-GAAP metrics. For the third quarter of 2019 normalized FFO per diluted share was $1.42 compared to $1.39 in the same period one year ago due to the growth in our new investments.

Normalized FFO for the nine months ended September 30 2019 was $4.09 versus $4.12 for the same period one year ago due primarily to 1561000 additional weighted average fully diluted common shares outstanding. For the third quarter normalized AFFO was $1.32 per diluted share and for the nine months ended September 30 2019 was $3.80 per diluted share both metrics increasing $0.04 when compared to the same periods in the prior year despite the challenges we faced this year in transitioning 3 leases to new operators.

So far in 2019 there have been no adjustments between our NAREIT FFO and our normalized FFO. NHI's total revenues for the third quarter were $81.7 million which was a 9.3% increase over the same period one year ago. For the nine months ended September 30 revenue increased 6.9% to $235.9 million. These increases reflect good investment volume in both new lease and mortgage deals. We have utilized a careful mix of debt and equity capital with which to fund them. John Spaid will explain in a few minutes how we have funded the significant volume of new investments in 2019 while protecting our low leveraged balance sheet. Our interest expense increased $2,287,000 in the third quarter of 2019 when compared to the same period one year ago and a corresponding increase of $5,718,000 for the nine months ended September 30 compared to the same period one year ago. This increase is reflective of our new investment volume. Our increase in depreciation expense of $1,542,000 in the third quarter of 2019 and $3,924,000 for the first nine months of 2019, compared to the same periods in 2018 are reflective of our growing real estate portfolio. Our tax expenses increased $5,840,000 for the nine months ended September 30 when compared to the same period one year ago as we were required in some cases to pay the property taxes on the portfolios in transition as described earlier. Our general and administrative expenses increased only $7000 during the third quarter from the same period one year ago.

Our non-cash share-based compensation expense is computed by the Black-Scholes pricing model and was $477,000 in the third quarter and is expected to be the same for the fourth quarter. Property taxes and insurance expenses on our leased properties was $1,608,000 for the third quarter and $4,205,000 for the first nine months of 2019 and was paid out from our tenant escrow deposits made each month to us according to the terms of our leases. A new accounting standard requires companies to show this caption separately on an income statement. However the same amount is included in our lease revenue so there is no effect to our net income.

Moving on to our dividend. This morning we announced a quarterly dividend of $1.05 per outstanding share for the upcoming fourth quarter ended December 31 to be paid on January 3,1 2020.

The fourth quarter dividend is taxable to investors in 2019. We currently estimate our normalized FFO payout ratio for 2019 will be in the mid-70% range and our normalized AFFO payout ratio will be in the low to mid-80% range. As for our updated guidance for the remainder of 2019 we are increasing the midpoint of our full year estimate of normalized FFO to be in a range of $5.47 to $5.50 per diluted share for 2019. We are increasing the midpoint of our full year estimate for normalized AFFO to be in a range of $5.08 to $5.10 per diluted share. These estimates include new investments planned near the end of the year, the funding each month of our ongoing loan and lease commitments and the composition of new debt and equity capital to properly align our capital resources for growth and for maintaining low leverage.

Our guidance allows for the uncertainty and the results of operations in the transition properties from which we derive current income from the net operating income of the facilities.

I'll now turn the call over to John Spaid who will discuss our uses of debt and equity capital.

[John Spaid, EVP, Finance]

Thank you Roger. Earlier this week we announced that S&P Global assigned NHI a BBB- investment-grade issuer credit rating and Fitch affirmed its BBB- investment-grade rating. Moving forward, these investment-grade credit ratings will enhance our ability to grow our real estate portfolio through adversity of funding sources. The 2 ratings will also provide the company with the ability to toggle our 2017 and 2018 bank facilities to credit-based margin pricing grids from their current leverage-based pricing grids which we are currently evaluating. As we mentioned in prior earnings calls we view 2020 as a transformative balance sheet year for NHI as we look to term off revolver debt and position the company to refinance its upcoming 2021 convertible bond maturity. Going public with our credit rating supports our long-term debt strategy but more importantly the investment-grade ratings exemplify NHI's strong balance sheet and our stated financial policies.

Turning to our ATM equity program. During the third quarter we sold 590868 shares of our common stock. The shares were sold at an average price of $82.47 per share before fees resulting in net proceeds after commissions of $48 million. Proceeds were used to reduce our revolver debt. And after our third quarter ATM activity we have approximately $94.9 million in capacity remaining under our shelf facility. Turning to our debt capital metrics for the quarter ending September 30. Net debt to annualized EBITDA improved to 4.5 times from 4.8 times in the prior quarter. Weighted average debt maturity was 4.2 years and our fixed charge coverage ratio was 5.2 times. For the quarter ended September 30 our weighted average cost of debt was 3.6%. Turning to our liquidity. NHI ended the third quarter with $250 million outstanding on the revolver leaving us with $300 million in available revolver capacity.

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

[Kevin Pascoe, Chief Investment Officer]

Thank you, John. As Eric mentioned the team has accomplished a great deal this year and we are pleased with the overall trends in our coverage. The operating environment remains challenging so we know that we need to continue to find creative ways to help our operating partners while also protecting our shareholders. Looking at the overall portfolio. At the end of the second quarter the EBITDARM coverage ratio improved to 1.69 times for the total portfolio compared to 1.64 times in the year-earlier period and 1.65 times in the prior quarter. Senior housing coverage declined year-over-year as expected but was steady with the March 2019 quarter at 1.15 times and our skilled portfolio at 2.8 times improved from 2.49 times last year and 2.76 times in the March quarter. I do want to caveat the sequential comparison as they are not apples-to-apples but we are comfortable with the trend we are seeing. Our ample SNF coverage is a testament to the hard work of our best-in-class operators. While it is too early to gauge the impact of PDPM the feedback has generally been neutral to slightly positive.

The senior housing industry continues to be challenged by new supply and wage rate growth but we have not seen a meaningful shift in operating trends in the secondary markets where the lion's share of our portfolio resides. We are seeing trends improve throughout our needs-driven assisted living operators while our independent living operators have been stable. We remain diligent in our asset management efforts and do see positive leading indicators that these efforts are bearing fruit. Turning to our largest operator by revenue. Bickford Senior Living which represents 18% of our cash revenue had an EBITDARM leverage ratio of 1.07 times for the trailing 12 months ended June 30. On a same-store basis the Bickford EBITDARM coverage was 1.12 times. Including 2 development properties which are leasing up nicely and have coverage of 1.63 times the Bickford total and same-store coverage is 1.5 times respectively.

As we highlighted last quarter occupancy started to turn positive in the second quarter which continued through the third quarter. Same-store occupancy for our Bickford portfolio improved by 60 basis points year-over-year and by 200 basis points sequentially to 87.9% in the third quarter.

Bickford's same-store occupancy was 88.2% in September and improved through October which sets up well for the year-end push. Importantly Bickford has maintained price discipline while showing this improved occupancy. For example in the NIC MAP covered markets which covers 32 of our Bickford buildings Bickford's average occupancy during the third quarter improved 146 basis points sequentially compared to 50 basis points for those markets. Bickford's average rent increased slightly over this period and remains significantly above the comparable market average.

We continue to work with Bickford to find ways to optimize the relationship and we outlined some of these efforts in our 10-Q. This is a level of detail that we do not normally go into on a specific operator but feel that the additional transparency is important in this situation. In sum we believe the actions we are taking with Bickford put them in an improved financial and operating position while having a de minimis impact on our cash flow. We estimate the collective impact of these efforts amount to less than 1.5% of our 2020 Bickford revenue.

We will continue to proactively monitor this relationship and hope to share more good news in the coming quarters. Our relationship with Senior Living Communities represents 10 of our cash revenue. Including net entry fee income their EBITDARM coverage ratio was 1.1 times on a trailing 12-month basis. This compares to 1.27 times in the year-earlier period and 1.14 times for the March quarter. This ratio is down quarter-over-quarter due to some lower entry fees during the winter months as we discussed on the prior 2 quarterly calls.

The summer months were back in line with historical levels and net entrance fee sales were better year-over-year and quarter-over-quarter for the third quarter of 2019. Due to some solid entry fee quarters rolling off the calculation and the 1-quarter lag in reporting it will likely be a couple more quarters before the portfolio shows improvement due to this variability in their income.

As we've discussed on prior calls, SLC has been opportunistically purchasing and renovating available entry fee units. So we expect this additional CapEx and investment in unit inventory will lead to improved coverage as the renovated entry fee units are sold. To put this in some perspective SLC's current entrance fee inventory with no additional refund due amounts to 50% to 60% of their annual net entrance fee cash flow.

While the entrance fee model does introduce more variability into the operator's quarterly coverage due to the timing of these entry fee sales, we like the long-term prospects of the industry which include limited new CCRC supply lower average resident move-in age and an average length of stay that is significantly longer than IL and AL.

Looking at National HealthCare Corporation. Our partnership with NHC accounts [Technical Difficulty] had a corporate fixed charge coverage of 3.95times which improved from 3.59 times in the same period last year and 3.91 times in the March quarter. Holiday retirement which represents 12% of our cash revenue had an EBITDARM coverage ratio of 1.2 times which is consistent with the coverage in 1Q '19. Trailing-12 EBITDARM coverage on the Holiday portfolio would be 1.24 times as of second quarter end adjusting for the impact of the recent lease amendment. This was down slightly from 1.26 times in the March quarter. As I mentioned earlier we are seeing improvement from our AL operators and our IL portfolio including Holiday is stable. And we commend the team for their hard work in this environment. Moving on to new investments.

We continue to build our relationship with Discovery Senior Living during the third quarter with a new $6.4 million senior mortgage on a 74-unit assisted living property in Indianapolis Indiana. This is the tenth property in the NHI Discovery relationship which now represents 4% of NHI's cash revenue. We exercised our purchase option on the Bickford Gurnee property during the third quarter for $15.1 million at an initial yield of 8%. Recall that we previously provided a $14 million construction loan for this property. So we are pleased to turn this into a long-term triple-net lease on a building that is over 80% occupied and still improving.

We have a similar option on the Bickford Shelby property which we expect to exercise in the coming months. The pace of deal closings slowed in the third quarter but we have still had an active year with over $315 million in investments and our pipeline is keeping us busy. We continue to see additional opportunity as we survey the market and are committed to adding high-quality operators and communities to the portfolio like the Timber Ridge purchase option we continue to evaluate. We will have an update on this and any additional transactions as we have firm commitments or closings.

With that I'll hand the call back over to Eric.

[Eric Mendelsohn, President and CEO]

Thank you, Kevin. We're constantly reviewing our portfolio to identify opportunities that we can proactively address. We do this through a number of methods and our preference is always to do it in unison with our operators and through a triple net lease structure which leads to stability in our cash flow. We're proud of our accomplishments in 2019. As we move into 2020, we expect that our growth will return to a more normalized level. Driven by better than usual organic growth, the full year impact from over 315 million invested here today and future contributions as we close on deals in the pipeline. All of this notwithstanding some purchase option headwinds. We look forward to updating everyone on our progress.

Operator we'll now open the line for questions.

[Roger Hopkins, Chief Accounting Officer]

This is Roger Hopkins. I just wanted to make one note. This morning one of our research analysts pointed out a computational error in our schedule of Bickford rental income on Page 13 of our Form 10-Q as it was inconsistent with the description in the paragraph that followed. We have filed a Form 8-K to show a 2019 contractual rent of $48,618,000 and straight-line rent of $4,986,000 for a total of $53,604,000. We apologize for this oversight.

[Eric Mendelsohn, President and CEO]

And now we'll open for questions operator. Thank you.

[Operator]

[Operator Instructions] And we'll proceed with our first question on the line from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler, KeyBanc Capital Markets]

Thank you. Good morning. Just wanted to look at -- it's afternoon already here. So a question on sort of the transitions and not specific per se to Bickford but not to exclude them. As you look at the pipeline where do you feel you are sort of inning-wise in this game of continuing to sort of have to reset and adjust relative to in-place rents? Are there additional watch list-type tenants or other leases that feel like they're at risk as you sort of -- we sort of made our way through these last couple of months?

[Eric Mendelsohn, President and CEO]

Jordan this is Eric. Sticking with your inning analogy I would say we're in the seventh inning of an 8-inning game. And we've given a lot of information on what we've been up to with Bickford. I know we've been talking about it all year but things are really starting to happen. And we published better occupancy numbers a lot of the financial engineering that we've been working on behind the scenes and that they've been working on behind the scenes with buildings outside our portfolio. So that is seventh eighth inning. With the transition properties that we took back from Regency and others everyone has a permanent home now. So I would say they're in overtime. And with the Minnesota the Matthews...

[Kevin Pascoe, Chief Investment Officer]

Yes. It's a 41 Management.

[Eric Mendelsohn, President and CEO]

41 Management. We took a building from Bickford that wasn't doing well and gave it to a new operator that is local. So that was also something that happened this quarter and I say that's an overtime.

[Jordan Sadler, KeyBanc Capital Markets]

Was that 4 properties though, the Minnesota?

[Eric Mendelsohn, President and CEO]

Yes.

[Jordan Sadler, KeyBanc Capital Markets]

4 properties. And that rent -- I'm sorry, go ahead.

[Eric Mendelsohn, President and CEO]

I think I know where you're going. That rent was at a reduced rate.

[Kevin Pascoe, Chief Investment Officer]

Well for the new manager it will be reduced from where it was. The aggregate rent that NHI will receive is unchanged. Through a negotiation with Bickford they're going to support it through the balance of this year and 2020. So our income as it relates to those properties is again unchanged.

[Eric Mendelsohn, President and CEO]

Yes. And then the new operator's rent will ramp up as the Bickford subsidy goes away. So it's not quite seamless but it's close.

[Jordan Sadler, KeyBanc Capital Markets]

So the $1.56 million that was on the repurchase -- the purchase option schedule last quarter assumingly related to these properties is that -- and maybe I'm making a mistake here mixing apples and oranges. But is that the total rent that you're getting? Or are you just getting the $906,000? So is it -- or is it additive the amount that's coming from Bickford just in terms of rent support plus the $906,000 or it's the total?

[Kevin Pascoe, Chief Investment Officer]

Yes. Jordan you're correct. It's additive. So it's 900 plus the 700.

[Jordan Sadler, KeyBanc Capital Markets]

But in year two you just get an escalator of 2.5% but you have a fair market rent reset at some point as well?

[Kevin Pascoe, Chief Investment Officer]

Correct.

[Jordan Sadler, KeyBanc Capital Markets]

And how does that work the rent reset?

[Kevin Pascoe, Chief Investment Officer]

It will be based on the performance of the communities at that point in time and just again resetting it to fair market value. So if they're doing well we should get a little bit of a step-up. If they're performing as they currently are only slightly better than we would get an escalator. So we're still expecting to get an increase in income. It just depends on how much at that point in time.

[Jordan Sadler, KeyBanc Capital Markets]

Did you give us the pro forma coverage for Bickford?

[Kevin Pascoe, Chief Investment Officer]

We gave the same-store and the total portfolio coverage.

[Eric Mendelsohn, President and CEO]

On a trailing.

[Jordan Sadler, KeyBanc Capital Markets]

Yes. What does it look like if you get, if we boot out Minnesota?

[Kevin Pascoe, Chief Investment Officer]

It would be slightly improved. We didn't give a pro forma coverage but again it's a small percentage of the total. So it's not going to move the needle more than 1 basis point or 2. So it would be a small impact to overall coverage but it is additive to their cash flow as an organization.

[Jordan Sadler, KeyBanc Capital Markets]

My last one for you is just on the acquisition pipeline. It sounds like there's a little bit included in Roger's updated guide. Do you have a pencil or a circle around that amount yet of what's in the guide at least?

[Eric Mendelsohn, President and CEO]

Roger he's asking about guidance.

[Roger Hopkins, Chief Accounting Officer]

We have a number of things that we're working on. And we've determined internally that any acquisitions we make would be late in the year and probably wouldn't be that impactful to the guidance that we've given. And it certainly would be additive to 2020 but probably not to 2019.

[John Spaid, EVP, Finance]

But Jordan this is John. And our guidance does include continuing to sort of fill our commitments. If you remember we have a number of construction loans out there that were, that are being drawn upon as we speak.

[Operator]

We'll proceed to our next question on the line from Chad Vanacore with Stifel. Please go ahead

[Tao Qiu, Stifel]

Hi, good morning. This is Tao Qiu on for Chad. My first question is regarding the coverage trend. So the coverage on your portfolio at the end of the quarter was pretty stable from 1Q and you mentioned volatile economic condition in your press release as we have also seen this quarter from your peers and some of the senior housing operators. There's some intensifying challenges in certain markets late in the quarter at a pretty meaningfully worse and what's suggested by the NIC data. Are you seeing a similar trend in any particular operator or market in your portfolio? And how should we expect coverage to trend given the market and some of the changes you made with Bickford when you report next quarter?

[Kevin Pascoe, Chief Investment Officer]

So this is Kevin. As it relates to the markets that we're looking at we have not seen, and I think we talked about this in our opening remarks, not seen a meaningful shift. We do believe that it is, there are some challenging components to what our operators are working on. We talked about wage rate. We did talk about some new supply although that, we've seen that abate to some degree as that's consistent with the NIC data. So we've not seen a shift in our markets from what we've talked about previously. And I think to the opposite we've seen at least good traction on the occupancy. That's a little bit of a leading indicator. We would expect improved performance to go along with it. But they are still fighting these other headwinds that we talked about like the wage rate. So those are things that we're looking to as well. We would expect to see that improve over time as occupancy continues to season but it's going to be another few quarters before you really see that really roll through the portfolio.

[Tao Qiu, Stifel]

That's helpful. My second question is regarding kind of the market volatility. So given the no rapid correction of the restock in general for this month would you say that you are kind of taking a temporary pause on investments or kind of delayed equity funding at this point? How does that affect your plan near term?

[Kevin Pascoe, Chief Investment Officer]

Well this is Kevin again. I'll take at least the investment part. We're not looking to delay investments necessarily. We're still very active. We have an active pipeline. We're still looking at continuing to make investments. And we're looking for accretive opportunities which is a little bit of a function of what we -- where our cost of capital is at any given month. But we're by no means pushing pause on our investment pipeline.

[John Spaid, EVP, Finance]

Yes. I mean -- this is John. With respect to equity I can't say that this volatility we're seeing right now in our stock price is going to prevent us from doing accretive transactions. We're just going to continue to be focused on making sure that we grow NOI. We're hopeful that the street will begin to see that we're -- we've got a pretty good 2020 teed up for ourselves next year. We've had a lot of investments this year of which you're seeing partial year effects. Next year you'll see the full year effects of those. Yes there's things that we're talking about that we're monitoring that we're working on regarding our coverage ratios. But I would also point you to our credit ratings. And our credit ratings have a lot of great things to say about our business model and just the benefits of triple net right now during these sort of down periods. So business as usual in our -- from our book.

[Tao Qiu, Stifel]

All right. Just a final one. Are there any dispositions that you are planning for the fourth quarter?

[Kevin Pascoe, Chief Investment Officer]

So this is Kevin again. We have the held-for-sale assets which are the 2 smaller Bickford communities. We would expect those to sell in the near term say fourth quarter. Will that close in the fourth quarter? Maybe. Not with the first. We'll see just from a timing perspective. We didn't -- I think we classified the Brookdale asset as held for sale this quarter so we'd expect those to be exercised early next year. So those are the ones that we're contemplating at this point as we continue to evaluate our portfolio as just normal asset management. We continue to talk about where it makes sense for us to do some dispositions but nothing else planned at this time.

[Tao Qiu, Stifel]

All right, and that's it for me. Thank you for taking my question.

[Kevin Pascoe, Chief Investment Officer]

Thank you.

[Operator]

Thank you. We'll proceed to our next question on the line from Rich Anderson from SMBC. Please go ahead.

[Rich Anderson, SMBC]

So, toughest question I had all day. So on the Bickford disclosure in the Q you gave a new, for the 14 you have a new escalator. What did that come down from?

[Kevin Pascoe, Chief Investment Officer]

It was a fixed 3% before. Now we have a CPI-based escalator that is really on about half of the income as it relates to Bickford. So 2 leases have the new CPI escalator with a floor of 2% and a cap of 3%. So we'll get a minimum of 2% but up to 3% in any given year.

[Rich Anderson, SMBC]

Okay. And so the other one that you, that happened on October 1 you don't give the floor and ceiling but it's the same 2% and 3%?

[Kevin Pascoe, Chief Investment Officer]

It is yes.

[Rich Anderson, SMBC]

And is there, will you now have to report those on a cash basis because of the CPI component?

[Kevin Pascoe, Chief Investment Officer]

This is Kevin stepping in so let me know if I'm overstepping. But there's still a straight line component because there's a minimum.

[John Spaid, EVP, Finance]

That's correct.

[Rich Anderson, SMBC]

Just double checking on that. Now would you say reducing escalators as we always say the fortunes of your operators accrue to the REIT. And so I've always thought that many REITs got over their skis by announcing these huge escalators which was perhaps a shortsighted phenomenon. Do you think you will see more of this in a way of sort of stepping back on your escalators? Is it, are you done with it as it relates to Bickford or anywhere else in your portfolio as you see it today?

[Eric Mendelsohn, President and CEO]

Rich it's Eric. I would say that we're done with Bickford in terms of amending escalators. But in terms of new business 2% is the new 3%. We agree that it's hard to stay ahead of 3% escalators in a low-inflation environment or dare I say disinflationary environment. So I think escalators that are CPI-based and have collars are a much more equitable arrangement between landlord and tenant.

[Rich Anderson, SMBC]

Okay. Agreed. And with regard to the ratings upgrade congratulations on that first. Would you say when S&P was going through its process it was mostly looking at your balance sheet? Or was it identifying also some of these other things that are going on around your portfolio whether it's the 9 assets that you've transitioned or Bickford or anything else? How much was that, did that play a role in their thought process? Or was it mostly a balance sheet sort of observation?

[Roger Hopkins, Chief Accounting Officer]

Well that's really a question for them. But I can tell you this. They got to see a lot more than what we typically publicly disclosed. We also went on property tours with them. And we definitely touched on a lot of points very deeply with respect to our portfolio. But how that would have played into their thinking I'm not 100% certain. I think you just have to ask them or read their report.

[Rich Anderson, SMBC]

Okay. And then Eric in the beginning of the call you said by the way Holiday's getting better. How much of that comment is a function of the restructuring that you did to improve on coverage? And how much of it is stuff that they're doing to improve upon their revenue?

[Eric Mendelsohn, President and CEO]

I'd say a little bit of both. Keep in mind that we're really the only REIT that came through the restructuring with a lease that has a credit intact. Sabra and New Senior both went to RIDEA and Ventas is still a work in progress. And I can tell you that Lily and her team have done amazing things at their new headquarters in terms of adding systems creating culture all the stuff that works well in senior housing and in particular independent living. So we're really happy for them and glad to be a part of their success.

[Rich Anderson, SMBC]

Okay. And then last for me the kind of disclaimer text around your guidance is almost a cut and paste from the second quarter which is perhaps a good thing. No news good news or something. But I wonder if you have any -- beyond what was said in the release any more visibility on the time line about some of the -- or the 9 transitioned assets and when they might get back up to sort of a full pace of operations.

[Eric Mendelsohn, President and CEO]

Rich this is Eric again. I would say they're still a work in progress. The Indianapolis building just found its permanent home with Discovery. The Charlotte in Charlotte just opened after a massive remodel. So we would expect 2020 to show good progress but I wouldn't expect those buildings to be stabilized or back anywhere close to our former rent until 2021 if I had to draw a graph...

[Rich Anderson, SMBC]

Okay. So no change in terms of your future perspective of the 9 assets in total?

[Eric Mendelsohn, President and CEO]

No.

[Kevin Pascoe, Chief Investment Officer]

No. I think what we said before is that it was going to be -- it varies by community but realistically an 18- to 24-month rebuild so to speak of why that was associated with those communities from the time in which they got their new home. So again it's going to be staged in and just take some time to get back there.

[John Spaid, EVP, Finance]

Yes. So -- this is John again. Let me just come back to our 2020 thoughts that Eric mentioned in the beginning of his remarks and that is we feel pretty good about it. We've got a lot of organic growth in our thought process that we don't usually see and transitioned properties are a part of that. We have a lot of partial year effects from our investments that will be full year effects next year. And that also includes our -- the mortgage loans that we're making as well. A lot of those investments we announced in 2018 are being drawn upon this year so we'll have better effects from those next year. And something a lot of people tend to overlook is we have this really terrific project up in Wisconsin with Ignite that's under construction. It's a little different project than we typically do because it's a lease construction project. But it's slated to be open in end of first quarter beginning of the second quarter. And when it does all of a sudden we'll have some nice rent show up immediately from that. So there's a lot of green shoots out there for our 2020. And we're kind of giving you that narrative also knowing that we have these purchase options out there as well that we've got to overcome. So we're trying not to give you guidance here that we don't really firmly believe in.

[Operator]

We'll get to our next question on the line from John Kim with BMO Capital Markets.

[John Kim, BMO Capital Markets]

Thanks the morning. On the Bickford occupancy improvement which was certainly positive and encouraging this quarter can you comment on how this translates to EBITDA for Bickford? It sounds like the rate growth was lower. I'm not sure if that was on a gross or net basis after incentives. And also any commentary on expenses?

[Kevin Pascoe, Chief Investment Officer]

Sure. This is Kevin. As it relates to the rate growth again we saw a modest growth over the quarter versus the peer group. But they still remain one of the leaders in those respective markets as it relates to rate and they've kept their discipline on price which we're very happy to see. On the occupancy I guess what I would say to that is these communities particularly being smaller in nature there's a certain amount of fixed cost that resides in there. So they, to build the occupancy back up you're still paying some of those fixed costs along the way. Once you crest, and this isn't hard and fast but generally speaking once you crest about 85% occupancy each next resident will add a fair amount to the bottom line.

So what I would say is they build occupancy back up. They've gotten back kind of above the area where they need to actually start building NOI. And as each quarter, month and quarter that clips by we should start to see that cash flow improve. Again they've still got to mitigate some of the things that we talked about like wage pressure but we should start to see that improvement flow through. But it's still going to be a couple of quarters before that really translates to what we are able to display in our public filings.

[John Kim, BMO Capital Markets]

Okay. But when you quote the rate growth for Bickford is that on like a gross basis like the way the NIC reports it? Or is that a net effective rent basis?

[Kevin Pascoe, Chief Investment Officer]

It is a, we look at it from a revenue per occupied unit which is pretty close to the way NIC displays it. I haven't given the number because it is not exactly the same. So I don't want to give data and present it as if it is the same but it's really close. But it is a net revenue number of the revenue and all revenues that they receive from residents. That's how we think about it.

[John Kim, BMO Capital Markets]

Okay. On the early indication of earnings growth next year Eric I'm assuming that assumes no rent restructurings or transition next year. And I'm just wondering how much visibility do you have on that for next year at this time today.

[Eric Mendelsohn, President and CEO]

Correct. It assumes no rent restructurings or dumpster fires. But, and in terms of visibility I always have my worry list like I say. And I also always say that at any given time 5% of our portfolio is experiencing difficulty and every year it's a different 5%. So right now my worry list is pretty short. And as I was saying to Jordan the Bickford worries are in late innings. They seem to be really on the mend. And we had a couple of nonmaterial worries but right now things look pretty stable.

[John Kim, BMO Capital Markets]

And you also mentioned in your prepared remarks you expect better organic growth next year. Can you just provide some more color on what this means just given some of the escalators that are being modified?

[Eric Mendelsohn, President and CEO]

Certainly. As John was pointing out earlier we have this unique development lease which you don't see a lot of in this business where we're putting out money this year. And then once the building opens in February March of next year rent will begin in April. So that's a great example of organic growth. The total amount will be...

[Kevin Pascoe, Chief Investment Officer]

Well it's -- roughly it's a $25 million commitment at a 9.5% yield.

[Eric Mendelsohn, President and CEO]

Yes. So there's...

[Kevin Pascoe, Chief Investment Officer]

The rough math on that.

[Eric Mendelsohn, President and CEO]

Yes. So there's some organic growth. We have the Sagewood -- and this is all detailed on page six of the supplemental. We have the Sagewood loan that we're funding on an almost continual basis. And that's a huge number and that will be paying interest in full next year. So those 2 things alone are a pretty big part of my comfort level.

[John Spaid, EVP, Finance]

Yes. And then John we have a lot of investments this year and those investments are partial year effects this year. It will get full year effects next year. So -- and then in addition to our normal organic escalator growth in addition to that it makes us feel pretty confident about next year. Finally transition properties those -- they're now -- they all got new homes. They're all in different stages of rebuilding. And so we do expect them to provide some organic growth organic lift next year.

[John Kim, BMO Capital Markets]

Organic growth and no dumpster fires. Got it.

[John Spaid, EVP, Finance]

Yes. That's right.

[Eric Mendelsohn, President and CEO]

Exactly. I can see the headline now John.

[John Kim, BMO Capital Markets]

Thanks a lot.

[Operator]

Thank you very much. We'll get to our next question on the line from Daniel Bernstein with Capital One. Please go ahead.

[Daniel Bernstein, Capital One]

Hi. Good afternoon. I just wanted to understand the process with the Brookdale leases where there's a purchase option. I guess those assets have been moved right to held for sale. And are you marketing those assets for sale? And I guess a related question is Brookdale reported some pretty good numbers in the quarter. I wonder if there's anything in terms of the performance of those assets that has changed at all.

[Eric Mendelsohn, President and CEO]

This is Eric, Dan. So the purchase option gives Brookdale the right to buy the buildings directly. And that's -- those are the discussions we're having with them rather than selling them to the market. So I can't speak for Brookdale but we're modeling a mid-January late-January closing on those buildings. And I think we've been pretty clear that the purchase price the proceeds will be in the high-30s low-40s area. And the way the purchase option works is there's a base amount in the lease. And then I think that base is $36 million...

[Kevin Pascoe, Chief Investment Officer]

$37 million.

[Eric Mendelsohn, President and CEO]

$37 million. And then there is a fair market value component. So let's just say the fair market value is $42 million and then there's a 50% sharing of the value. The upside between $37 million and $42 million were $5 million. So they would basically be able to buy this portfolio at a $2.5 million discount if those were the numbers.

[Daniel Bernstein, Capital One]

And then Senior Living Communities sounds like the entrance fee sales season for them has been pretty solid. Is there anything indication that you can give in terms of whether the entrance fees they're charging this year are higher than last year as well not just the, the unit sales are up but the actual pricing?

[Kevin Pascoe, Chief Investment Officer]

Pricing has been pretty consistent for them. They're not ones that believe in discounting either. They'll do it in certain instances. If there's a unit that's been sitting there for a while it makes sense to make a deal so to speak on a specific unit. But generally speaking they've been trying to move pricing upwards. It's frankly just been modest because they do want to try to continue to improve occupancy and get some of these sales of the accumulated inventory that they have.

[Daniel Bernstein, Capital One]

We haven't really talked much on the call about pipeline. It seems like there's been some fairly aggressive deals with private equity out there. Cap rate is a little lower than I would have expected. So are you seeing any pressure on cap rates could come in and investment spreads whether that's senior housing or skilled nursing? I guess how confident are you that acquisitions will be there in 2020 at investment spreads that you like?

[Kevin Pascoe, Chief Investment Officer]

Well I think your observation is correct. There has been some more, at least more aggressive money than where NHI has transacted in the past. I feel like we've kept our discipline though as we look at new investments and we're not going to chase people to the bottom. I still feel good about our prospects and our ability to bring in business. It's not just saying we do really focus on trying to make inroads with operators and establish that relationship. I feel like we still get a tremendous amount of direct referrals.

So when you go to a brokered process or something that's going to be a big splashy headline yes we see all that stuff but we're not the ones that are generally participating in those auctions. And we really rely on our relationships with the operators and being able to do direct deals to continue to drive business. And I still feel like we have a good team here great relationships with our operators and be able to perform. As Eric said we'll be able to, we should, we expect to be able to do what we've done in the past. That hasn't changed.

[Daniel Bernstein, Capital One]

Never say never on a portfolio but the pricing might be?

[Kevin Pascoe, Chief Investment Officer]

Right.

[Operator]

We'll proceed to our next question on the line. It's another follow-up question from Jordan Sadler with KeyBanc Capital Markets.

[Jordan Sadler, KeyBanc Capital Markets]

So I just had a follow-up on Bickford. You guys gave some good color. I'm just curious did you guys -- can you give us a sense of when they push through their increases, do they also sort of typically January 1 escalations or they do anniversary?

[Kevin Pascoe, Chief Investment Officer]

This isn't absolute but generally it's in the first quarter normally in February when they do their escalations.

[Eric Mendelsohn, President and CEO]

Because it's a short month.

[Kevin Pascoe, Chief Investment Officer]

Exactly right. Yes that's -- the rest of the story there is it's a 28-day month. They bill on a per day basis so they pass it through in the shortest month.

[Jordan Sadler, KeyBanc Capital Markets]

Okay. So you don't notice it as much?

[Kevin Pascoe, Chief Investment Officer]

Right. That's exactly right but yes they've had good success with that. There's other operators that we work with and that we see that do that pricing model on a daily basis. And they have a similar tactic that they would do it in February and it works. Generally speaking it works well for them.

[Jordan Sadler, KeyBanc Capital Markets]

Okay. And then the escalators in your portfolio that you're pushing through to Bickford what's the timing on those?

[Kevin Pascoe, Chief Investment Officer]

The escalations for the 2 amended leases are January 1.

[Jordan Sadler, KeyBanc Capital Markets]

And the third?

[Kevin Pascoe, Chief Investment Officer]

I'd have to get back to you on the exact timing. They're throughout -- I believe they're throughout the year but we can get that information. But those 2 happen to be January 1.

[Jordan Sadler, KeyBanc Capital Markets]

And they will see an increase of CPI or with a floor of 2% this January?

[Kevin Pascoe, Chief Investment Officer]

Correct.

[Jordan Sadler, KeyBanc Capital Markets]

To amend it? Okay. And then in terms of the investment-grade ratings for John. You touched on it but I'm curious. What's the impact here as you're thinking about it? So if you switched over to the credit facility to toggle based on credit what would the impact be right away on the credit facility? And then also how does this inform your view on permanent financing for the balance sheet and extending the weighted average maturity?

[John Spaid, EVP, Finance]

Sure. Thanks for the question Jordan. So there's a slight increase in interest expense when we toggle. And that results from the facility fee on our revolver going up partially offset by some of the spreads on our term loans going down but it's not a complete offset. In terms of moving forward we have probably say a midyear need to term off some of our debt into something that's on our revolver. So, you know, power bonds will be on the table as part of that assessment. And these ratings allow us to have a much more definitive conversation about what that might look like for us. So that's very helpful.

And -- but finally I would say in terms of our interest rate risk we don't have a lot of interest rate risk except for part of our revolver through 2021. And so we've got our eyes set on 2021 as part of LIBOR discontinuation to do some modification of these bank facilities anyways to address the index changes. So that's kind of our plan next year and then the long term.

[Jordan Sadler, KeyBanc Capital Markets]

Okay, thank you

[Kevin Pascoe, Chief Investment Officer]

You're welcome

[Operator]

Thank you very much. And we have no further questions on the line. Please continue with any closing remarks.

[Eric Mendelsohn, President and CEO]

Thank you everyone for attending our call today. And we'll see many of you at NAREIT in Los Angeles next week.

[Operator]

Thanks very much. That concludes our conference today. We thank you for your participation. I ask you to disconnect your line. Have a great day everyone.