National Health Investors Inc

NYSE:NHI

Earnings Call Transcript 2017-Q4

[Colleen Schaller, IR]

Hello, everyone. This is Colleen Schaller, Director of Investor Relations. Welcome to the National Health Investors Conference Call to review the company's results for the fourth quarter of 2017. 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, 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 the 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 statement may involve risk or uncertainty and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call.

Investors are urged to carefully review various disclosures made by NHI in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31, 2017. Copies of these filings are available on the SEC's website at www.sec.gov or on NHI's website at www.nhireit.com.

In addition, certain terms used in this call are non-GAAP financial measures. Reconciliations of which are provided in the NHI's earnings 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 will now turn the call over to Eric Mendelsohn.

[Eric Mendelsohn, President and CEO]

Thank you, Colleen. Hello, everyone and thank you for joining us today. As announced this morning, we ended the year with a strong fourth quarter. From a financial standpoint, we reported an 8.6% and an 8.2% increase per share in normalized FFO and normalized AFFO respectively year-over-year. We've also raised the dividend, bringing value to our shareholders through a 5.25% increase as Roger will discuss later. From an investment standpoint, we executed nearly 50 million of accretive investments in Q4, bringing the total amount invested in 2017 to 214 million. This is in addition to a lease renewal that took place earlier in the year, resulting in 2.5 million rent increase for the first full year.

Moving to 2018, it seems we're in a period of price discovery as public and private buyers sort out pricing and cost of capital. We're very watchful of rising interest rates this year and if rates do continue to rise, we'll look for cap rates to respond in kind. While new competition from construction is also on our radar, we haven't seen the widespread drops in occupancy that's been reported elsewhere. Kevin will give more detail on the occupancy front later in the call.

In addition, the recent downdraft in REIT equity pricing in our view is a bit overdone. A market that is choppy and uncertain creates opportunity for well-funded and disciplined players who are able to execute. For example, our proactive financial management has positioned us well during this time. We continue to see benefits of amending our credit agreements earlier in the year. And as John will discuss, we've also been buying back our convertible debt. We'll look forward to more acquisitions that come our way in 2018 as a result of all the uncertainty.

Before we dive in the numbers, I'd like to give an update on our operating partner we mentioned last quarter that was working through a technical default. I'm pleased to say that things are trending in the right direction. Rent continues to be paid in full. They've made significant improvement in the terms of their account payable, substantially decreasing their AP since October.

Over the last 90 days, they've increased occupancy 340 basis points for a January ending occupancy of 91.2%. We've seen progress in other areas of the company as well, such as accounts receivable and home office and operational efficiencies. We continue to stay in close communication with the operator and are encouraged by the progress we've seen over the past few months.

I'll now turn the call over to Roger Hopkins to walk through the financial results. Roger?

[Roger Hopkins, CAO]

Thanks, Eric. Hello, everyone. We've had a good fourth quarter, as our results reflect a consistent level of new investments during 2017, including $49.9 million during the quarter. We enjoyed a low cost of debt and equity capital during 2017, although those costs have risen so far in 2018. Our results were $0.03 per diluted share better than expected, as we collected the full amount of monthly rent due from a tenant who is experiencing issues as Eric described a moment ago.

Our additional management focus on assisting this tenant has resulted in a positive trend of performance over the last four months. Normalized FFO per diluted share for the fourth quarter increased 6.3% to $1.35 compared to $1.27 for the same period one year ago. Normalized AFFO increased 5.2% to $1.21 per diluted share compared to $1.15 one year ago. Along with 215 million of announced investments in 2017, we continue to fund our development and loan commitments, totaling $97 million at December 31 as outlined in our Form 10-K.

We deployed a careful mix of debt and equity to maintain our low leverage profile, which is a hallmark of our company. NHI's total revenues for the fourth quarter showed a growth of 9.3% over the same quarter in 2016. This growth has been primarily fueled by our new investments in 2017, and the renewal of a significant lease with one of our skilled nursing operators that added $2.5 million of revenue on an annual basis.

For the fourth quarter of 2017, our general and administrative expenses were $3.1 million and when compared to the same period one year ago, increased from $2.5 million due to additions to our corporate staff incentive compensation and non-cash share-based compensation. Our non-cash share-based compensation expense in the fourth quarter was $342,000. We also opportunistically bought back a portion of our convertible notes due in April 2021. We recognized a loss of 1,624,000 on the note purchases during the fourth quarter.

For the full year 2017, revenues increased 12.2% over 2016 to $278.6 million. Normalized FFO increased 8.6% over the prior year and normalized AFFO increased 8.2% over the prior year. General and administrative expenses have increased approximately $2.4 million when compared to 2016, primarily due to additions to our corporate staff incentive compensation and non-cash share-based compensation expense calculated using the Black-Scholes pricing model.

We recognized a loss during 2017 of $2.2 million on the purchase of a portion of our convertible notes. Investors who have come to know us over the years understand that NHI's management team is incentivized on annual growth and dividends and AFFO on a per share basis, thereby ensuring that we keep our focus on making accretive investment with a careful blend of long term debt and equity capital.

Our AFFO is a non-GAAP measure of performance, which excludes the accounting convention of non-cash straight line rent income and gives credit to our actual lease escalators into our investments for which no straight line rent calculation is required. I'm pleased to report a 5.25% increase in our quarterly dividend for 2018 to $1 per share. We currently estimate our total dividends for 2018 will result in a normalized FFO payout ratio near 70% and a normalized AFFO payout ratio of near 80%, thereby providing NHI with excess cash to be used for new investments.

Moving on to guidance for 2018, we are optimistic for the year ahead as evidenced by the fact we have already closed $28.4 million in new investments in January. Our pipeline is active with new investments we expect to close this year. We currently estimate a 2018 normalized FFO range of $5.45 to $5.51 and a normalized AFFO range of $4.99 to $5.03 per diluted share as shown in our earnings press release. This guidance anticipates approximately 65 million of new investments by midyear at lease rates of approximately 7% and the funding during 2018 of current commitments and other new investments of $80 million, having a blended rate of 8%. As we move forward in the year, we will give more information on the volume of expected new investments that we have included in our guidance ranges.

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

[John Spaid, EVP, Finance]

Thank you, Roger. For the quarter ended December 31, our debt capital metrics were net debt to annualized EBITDA at 4.2 times, weighted average debt maturity at 6.5 years, weighted average cost of debt at 3.61% and fixed charge coverage ratio at 6.8 times. As NHI has mentioned in the past, it is the objective of the company to maintain its net debt to adjusted EBITDA metric between 4 and 5 times.

Looking at the revolver, at the end of the second quarter, we had 221 million outstanding with an available capacity of 329 million. Turning to our ATM, we did not issue any shares through our ATM equity program during the fourth quarter and we continue to have 275.6 million in new equity capacity available to us under our shelf facility. On a final note, during Q4, we engaged in open market purchases of our convertible debt and acquired 40 million in par value notes.

A few comments on this program. NHI's convertible notes are not callable. The notes become really convertible at the holders' option October 1, 2020 and mature April 1, 2021. We view our convertible notes to be our most expensive source of debt, due to the embedded equity conversion feature and our view of NHI's future stock price. Each quarter when NHI declares a dividend above $0.77 per share, the conversion price to redeem our notes into NHI's stock ratchets down.

Because NHI has consistently grown its dividend since issuing the convertible notes, the quarterly reduction to the conversion price has steadily become more impactful. The conversion price is currently $70.25 per NHI share, down from $71.81 at issuance. For the entire year ending December 31, 2017, we acquired approximately 52.4 million in par value notes. We will continue to opportunistically evaluate the acquisition of our convertible debt in the future.

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

[Kevin Pascoe, CIO]

Thank you, John. Looking at the overall portfolio, at the end of the third quarter, the EBITDA on coverage ratio on the portfolio was 1.66 times. Our senior housing portfolio's performance was steady at 1.21 times and our skilled portfolio remains strong at 2.52 times.

Looking at the fourth quarter, occupancy for both skilled nursing and senior housing held steady for the portfolio. Wage pressure still remains the top concern of our operators and is something that has been monitored closely. Fortunately, we are not seeing widespread impacts of the flu or overdevelopment affecting the portfolio at this time.

Taking a look at our larger operating leases, our relationship with senior living communities represent 16% of our cash revenue and has an EBITDA on coverage ratio of 1.21 times on a trailing 12-month basis as of third quarter end. Interest fees for the calendar year 2017 were solid. In early 2018, performance indicators were positive.

Bickford senior living, which represents 15% of our cash revenue has an EBITDA on coverage ratio of 1.22 times for the trailing 12 months ending September 30. In January of 2018, one of the developments structured under a loan agreement where NHI has a favorable purchase option opened and NHI closed on another site in Virginia under the same arrangement. The remaining development is under construction and is expected to open in the late third quarter of this year.

Overall, the development properties continue to perform at or ahead of their respective pro formas and in several have managed to hit 100% occupancy during lease-up. Looking at National Healthcare Corporation, our partnership with NHC accounts for 15% of our cash revenue and has a corporate fixed charge coverage of 3.61 times. Holiday retirement has an EBITDA on coverage of 1.16 times as of third quarter end and represents 14% of our cash revenue.

Occupancy through the fourth quarter continued to improve as the company's average occupancy increased 10 basis points in sequential quarters. Holiday was recently named second in the inaugural JD Power Senior Living Satisfaction Survey. Kudos to the team for their achievement.

Looking at our recent investments, in December, we were delighted to expand our relationship with Discovery Senior Living through the acquisition of the Country Club of Woodland Hills, a 200-unit independent and assisted living community in Tulsa, Oklahoma. NHI's total investment of 35.1 million includes 500,000 for capital improvements, which is expected to be fully funded by the end of 2019. The lease is set for a term of 15 years with renewal options at an initial lease rate of 7% plus annual fixed escalators.

Also in December, we announced that NHI acquired Spring Arbor of Durham, an assisted living and memory care community in Durham, North Carolina. The community was part of a purchase option negotiation with NHI's tenants on senior solutions, when NHI purchased two communities in North Carolina in February of 2017. NHI's investment will include the purchase price of 7.55 million and up to 650,000 for an expansion and improvement to the existing building. The community was added to an existing master lease at a yield of 7.15% with annual escalators and two five-year renewal options.

In January, we announced a $14.4 million acquisition of a 121-bed skilled nursing facility in Waxahachie, Texas that was leased to an affiliate of The Ensign Group. The acquisition is the second of four that NHI has previously committed to and will be added to the existing lease at an initial rate of 8.2% plus annual lease escalator based on inflation. The facility, which opened in November of 2016 joins the current Ensign assets comprised of 16 skilled nursing facilities located in Texas.

Turning to our pipeline, we see opportunities to grow with both new and existing customers. The prospects for new investments remain healthy with a large amount of private pay senior housing opportunities under review.

With that, I will hand the call back over to Eric.

[Eric Mendelsohn, President and CEO]

Thank you, Kevin. With that, we'll now open the line for questions.

[Operator]

[Operator Instructions] Our first question is coming from the line of Chad Vanacore with Stifel.

[Chad Vanacore, Stifel]

So I just want to parse something. Your comments on senior housing, you mentioned occupancy has held up and flu hasn't had a material impact. And that's a different take from other operators that have made statements publicly. Can you parse some details on what your operators are seeing in terms of occupancy and then hazard a guess as to why they wouldn't be as impacted?

[Kevin Pascoe, CIO]

Chad, it's Kevin. As we talk to our operators, there are some changes throughout some of the markets in terms of what they're seeing, whether it was flu and [indiscernible] or what have you, but I think just good fundamentals from their part. They're able to keep the pipeline for their respective building, good to be able to replace residents as - get new move-ins as people pass on or what have you. I can't speak to other people's portfolios, but what we're seeing is things have been stable thus far and happy to see that they've been weathering the storm as other people have been and having a little more choppiness.

[Chad Vanacore, Stifel]

So when you make those comments on occupancy, are you talking about the first quarter or are we talking about lagging occupancy.

[Kevin Pascoe, CIO]

Well, the comments were specific to third quarter and what we're seeing - what we saw in the fourth quarter was that they were stable. I think it's too soon to call it for first quarter, leading indicators or okay at this point. Nothing that we're overly concerned about. As we've talked about or has been disclosed on some of the other calls, there are some things that people are watching as it relates to occupancy. The good news for us is we haven't seen that yet. That's not to say that it won't affect our portfolio at some point, but it hasn't in any widespread manner to date.

[Chad Vanacore, Stifel]

And then, you laid out some investment expectations for 2018, it looks like 7% cap rate in the first half, 8% second half. What changes that number? What's the expected mix of assets for senior housing, skilled nursing, loans or whatever?

[Kevin Pascoe, CIO]

So, it is very based on what we're seeing in our pipeline and what type of investments we have, where we're going to see a little bit higher yields could be, some skilled nursing opportunities. We still do have the two commitments for the legend Ensign buildings, which should be a higher yielding asset, some development, like we've mentioned that we have in our K about doing development with Bickford. That's at a higher yield. So it's just - it's not that we're doing different investments. It just adds those different types of investments. Our cadence is such that like the development, that's at a higher yield and that will come over time as those sites close and as we fund on those developments.

[Operator]

Our next question is from the line of Daniel Bernstein with Capital One Securities.

[Daniel Bernstein, Capital One Securities]

I got a question on holiday. I guess you made some cautious statements in the past on them and the lease coverage is down a bit, not a big deal, maybe picking up some of the noise in 2017, but have you seen any trends there that are stabilizing for that portfolio.

[Kevin Pascoe, CIO]

Dan, this is Kevin again. What we've seen so far is that for the third and fourth quarter that occupancy was up a little bit. They continue to make progress on that front. So it's one where we're still watching very closely how they're doing, but the indicators that they've shown us is that occupancy has improved, very happy with that. They've had some good publicity lately. So, it's one where they continue to make some progress.

[Daniel Bernstein, Capital One Securities]

And you're not making any forecast as to where that coverage will go, but essentially, you're getting more comfortable that the coverage is going to be okay at this point?

[Kevin Pascoe, CIO]

We're comfortable that they're doing what they said they would do, in terms of, they're able to get the lead, get conversations, get people to move in. And that's the basis of their business. It's the hospitality business that's really based on driving occupancy and what we've seen, like what we said from third and fourth quarters that was slightly positive.

[Operator]

Our next question is from the line of Jordan Sadler with KeyBanc Capital Markets.

[Jordan Sadler, KeyBanc Capital Markets]

First, I just wanted to start off with one for you Roger. Sequentially, I noticed that your NOI was a little bit softer relative to the third quarter and given the nature your portfolio and the fact that you guys are making acquisitions, I'm not accustomed to that, so I think which is a good thing I think, but I'm curious is there anything going on in the number there that caused NOI to come down.

[Roger Hopkins, CAO]

Yeah. You're talking about NHI's NOI specifically. We had incentive compensation during the fourth quarter, at the end of the year. We didn't know exactly how much that would be going into the quarter.

[Jordan Sadler, KeyBanc Capital Markets]

But net operating income, I mean, so I'm thinking net rent before G&A?

[Eric Mendelsohn, President and CEO]

Jordan, this is Eric. Recall that we had swapped out an operator up in Minnesota. The White Pines property and so that operator went away and the Bickford organization picked up the building and we gave them, I want to say, three months free rent. So, you saw a blip there and that building might be what you're seeing.

[Operator]

Our next question is from the line of John Kim with BMO Capital Markets.

[John Kim, BMO Capital Markets]

Eric, you mentioned in your prepared remarks price discovery for assets. Can you just provide some more color on what type of assets that senior housing assisted independents or?

[Eric Mendelsohn, President and CEO]

Well if we're discovering, we'll find out together. Won't we? Not to make light of it, but with equity prices for REITs where they are right now and the other headwinds that are in the market, I have to believe that buyers are going to be more selective and more demanding in terms of higher cap rates and just more value. So I think you're starting to see some of that in skilled nursing. There's been so much press around what's going on with skilled nursing that that seems to be impacting pricing. And we're hopeful that we'll see some deals on assisted living independent and memory care.

[John Kim, BMO Capital Markets]

And you mentioned your balance sheet I guess is at 4.2 times and net debt to EBITDA, the goal of 4 to 5. But what's the magic with 5? I mean could you take it up higher if you see something opportunistic and you have capacity that maybe some private buyers don't have?

[Eric Mendelsohn, President and CEO]

So I would say that's been a long standing policy of our company. But, let me say it a different way. We have credit facilities that have some embedded pricing changes in them that once we get past certain leverage ratios, results and keep on changes and we're not going to do that unless that makes great sense for us for some reason.

[John Kim, BMO Capital Markets]

Is that level at 5 times or higher than 5?

[Eric Mendelsohn, President and CEO]

No. It's a different calculation than what we're publishing. You can find it inside of all of our credit facilities as well as the private placement facilities. And so that's always a consideration. And then finally, I'd like to note is that, our board has always historically taken a very conservative view in terms of how are going to manage our balance sheet. So that overrides kind of everything that we've talked about.

[Operator]

Our next question is from the line of Juan Sanabria with Bank of America.

[Juan Sanabria, Bank of America]

Just on the guidance. Is there anything assumed in terms of a rent cut or rent deferral you mentioned that asset White Pines and then Eric, you started the conversation talking about tenant and technical defaults, so I'm just trying to see if there's any delta from the fourth quarter run rate and NOI we should be forecasting and at the same time, is there any rent cuts contemplated given your about one-time EBITDA coverage for both your non-NHC portfolio and your senior housing portfolio?

[Eric Mendelsohn, President and CEO]

No. There's no rent cut modeled in those numbers.

[Juan Sanabria, Bank of America]

And is there anything rolling off or coming back on from the fourth quarter dip that you talked about, that Minnesota asset?

[Eric Mendelsohn, President and CEO]

Well, the Minnesota property is paying rent now. They've fully been transitioned to Bickford and are paying rent in accordance with the new agreement. So there wouldn't be anything in the numbers there.

[Juan Sanabria, Bank of America]

Okay. So they paid a full fourth quarter rent?

[Eric Mendelsohn, President and CEO]

No. Sorry, so we gave them the ability to abate rent for two months with an option for a third, which that was the fourth quarter. And then effective January 1, they're paying full rent at each month going forward.

[Juan Sanabria, Bank of America]

I'd say you're picking up an extra couple of months in the first quarter versus the fourth quarter run rate?

[Kevin Pascoe, CIO]

Well, the way the accounting works, you have straight line rent. Even for the fourth quarter, even though, they didn't have to pay rent until December. So we will have a little pick up in AFFO because we exclude straight line rent.

[Juan Sanabria, Bank of America]

And then just on the balance sheet question, and your comments about a disconnect in the private market sorry, in the public markets despite the fact that you expect cap rates to tick up it sounds like, any thought about using that balance sheet capacity to fund a buyback?

[Eric Mendelsohn, President and CEO]

Well, it's not off the table. It would be something we would discuss with our board and I do want to point to the fact that we are buying back our convertible bond debt. So in a sense, we are buying back NHI's securities already.

[Juan Sanabria, Bank of America]

What's assumed in the guidance for that on buyback, the convertible bond buyback?

[Eric Mendelsohn, President and CEO]

Not much. We're almost finished with the authorization that we have now. So there won't be much more activity.

[Juan Sanabria, Bank of America]

And last one for me, any guidance on G&A for '18?

[John Spaid, EVP, Finance]

Why not? I would recommend modeling 10% increase. We don't know yet what the non-cash comp will be for the year. But I would model about a 10% increase in total. And I'll remind you that due to the vesting of those options, a good number of those, we have higher G&A in the first quarter.

[Operator]

Our next question is from the line of [indiscernible].

[Unidentified Analyst]

Both of your investments thus far in 2018 have been with existing relationships, I realize that it's a small sample size, but was just wondering of the additional 65 million expected to close by midyear or maybe those that you're looking at in general. Do you find yourself scaling more towards familiarity and existing relationships in the current environment? Any change in the philosophy there?

[Kevin Pascoe, CIO]

This is Kevin. From our perspective, I don't think there's any change in the philosophy. We're trying to make new relationships every day and there is something to be said for having familiarity and relationship to be able to have go to operators, but you always want to broaden your base and be able to make sure you have some diversity. So we're seeing a mix of that in our pipeline, still looking to expand some relationships, but we have high quality operators in our portfolio. So to the extent we can continue to build on those, we want to do that as well.

[Unidentified Analyst]

The thing you acquired here in Q1 was the first since Q1 of last year. What are your thoughts on that asset class specifically, given most public and private capital seems to be focused on other asset classes?

[Kevin Pascoe, CIO]

I don't think we're out of business as it relates to skill. We were, the customers we have on the skilled side are top notch and we feel very comfortable with them. So if we can expand those relationships like that, to the extent we can build some new ones, we'd love to, I think, there is a little bit of a disconnect from where the market has been looking at coverage versus where we would like to see it. That said, things have been I think moving our way. So it's something we're still evaluating and we want to make sure we keep a balance of how we do our investments. So it's something we look at, but it has to be a good quality operator, good market, nothing from our underlying criteria would have changed there.

[Unidentified Analyst]

And to your point about top notch operators, your cap rates on your latest acquisition have been in the low 8% range. We typically see closer to 9% or higher. Would you say it's more a function of the quality of the assets specifically or is it a function of differences in your risk tolerance, given that Ensign is the operator?

[Kevin Pascoe, CIO]

I think the distinction I'd like to make is just the lease rate has been there, the cap rate would be much higher because of the cash flow that is at the building. But the quality of the building, the quality of the market, the quality of the operator, all factors into how we look at that lease shield and we're happy to have Ensign as a customer in those buildings for sure.

[Operator]

Our next question is from the line of Rich Anderson with Mizuho Securities.

[Rich Anderson, Mizuho Securities]

So Roger, so the investment pace that you outlined in your guidance, first of all, I appreciate the clarity, as you know, I like that we have something to chew on there a little bit, but if we were to kind of wage a bet on, if you think you'll do more or less and the reason you might do more is because you see rising cap rates, the reason it might do less because your cost of capital has gone up. Where do you think it would bend towards more or less versus what you're saying today?

[Eric Mendelsohn, President and CEO]

I'm going to take that question, Rich. It's Eric. I'm looking at Kevin. I would bet on Kevin that we're going to do more. Never bet against Kevin. So and I'm one of the guys who made it through the wars of the great recession in good shape and I think that if we do have some price discovery and more uncertainty that we're going to see some good opportunities and because of our low leverage and our strong balance sheet, we're going to be ready to pounce if we need to.

[Rich Anderson, Mizuho Securities]

And I think it was Juan who asked the question about a buyback, but maybe I would go the other direction. You're trading kind of right around consensus NAV right now. How does that make you feel about your convertible buyback program, notwithstanding if something really great came along. Would you be willing to use equity at this point or is that discussion completely off the table at the moment?

[Eric Mendelsohn, President and CEO]

Well, we do pay attention to NAV and I would hesitate to sell equity below NAV. And it's funny, isn't it, a lot of the analyst community picked on us and didn't recommend us because we were so high above NAV. So here we are, it's a buying opportunity. But, we were at what 4.2 leverage. We have a lot of headroom on our revolver and our credit that we could draw on so that would probably give us 200 million to 300 million if we needed it.

[Roger Hopkins, CAO]

And additionally, we capture over $40 million a year in cash after we make all of our dividend payments and principal payments, we have to on our HUD.

[Eric Mendelsohn, President and CEO]

And Rich, think about this, one last thought, think about this. There's other equity besides selling our shares in public. There are JVs with private equity, there are foreign investors. So there's other ways to supply equity without selling your shares if they're under NAV.

[Rich Anderson, Mizuho Securities]

But so you believe you're trading under NAV now?

[Eric Mendelsohn, President and CEO]

I haven't checked this morning.

[Roger Hopkins, CAO]

NAV is in the eye of the beholder, right, because you have to assume a cap rate on our various product lines. So everybody's NAV is a little bit different.

[Rich Anderson, Mizuho Securities]

So you're the - in the eye of your - you're the beholder. What do you think? I mean, you're not inclined to suggest if NAV consensus is too higher, you're not?

[Roger Hopkins, CAO]

Right. That's for you guys to decide.

[Rich Anderson, Mizuho Securities]

Last question for me, you mentioned, I think it was Roger, 80% payout on an AFFO basis. I'm curious if that is a policy driven number that you manage to, if it's higher or lower than you've seen in your life cycle, just curious where that number stands? It's clearly not danger zone of course, but just wondering where it is relative to your line of thinking.

[Roger Hopkins, CAO]

Rich, those percentages have been going down as we've been growing. And it's not a board policy, but it is something that we discuss at the board meetings and we sort of have an expectation of using that excess cash and redeploying that in new investments. So, it's just something that has evolved to our favorably.

[Rich Anderson, Mizuho Securities]

Right. So you'd be more likely to see the 80 go to 79, not to 81, is that fair?

[Roger Hopkins, CAO]

That's correct.

[Operator]

[Operator Instructions] Our next question is from Jordan Sadler with KeyBanc Capital Markets.

[Jordan Sadler, KeyBanc Capital Markets]

I think John you said that the convert was your most expensive PC capital. I was trying to get a sense of how you viewed it? Were you looking at the strip yield or the yield to worst on that?

[John Spaid, EVP, Finance]

No. Because that's not doing complete cost of a convert, right? So, the convert isn't something we can really do anything with other than what we have done. We have to wait until basically October 2020 to really find out what its ultimate cost is going to be. So we kind of laid out what's troubling us about the instrument.

[Jordan Sadler, KeyBanc Capital Markets]

More expensive as you ratchet up your dividend it sounds like? I am trying to understand what you paid relative to par?

[John Spaid, EVP, Finance]

Well, I'm not going to tell you, because we've got a program ongoing, but I mean if you go back and look at it, it's a very thinly traded instrument and you can go on Bloomberg and kind of see what the trades have looked like for the last couple of quarters and get some sense.

[Jordan Sadler, KeyBanc Capital Markets]

And ultimately, so I'm not sure how big this program is, but you would buy back another 50 or you take out the whole thing eventually? What's sort of the appetite?

[John Spaid, EVP, Finance]

Well, the problem with doing it this way is what we have a undefined tender offer rule out there that we have to be very careful about as we do this program. So, we just need to be kind of careful about what we say. And we just wanted to let you know that we're very optimistic about our future and if you think about it that way, then you can see that this is a pretty expensive piece of paper.

[Jordan Sadler, KeyBanc Capital Markets]

I guess my other question is, also harking back to Eric, your comment regarding the volatility and potential opportunity. Are there good opportunities for assets in the private market these days? Obviously, we're seeing the volatility in your stock price in the capital markets, but I'm just curious what you're seeing on the asset pricing side?

[Eric Mendelsohn, President and CEO]

I'm going to let Kevin take that one.

[Kevin Pascoe, CIO]

Sure. We feel like the market has been and there is some discovery going on, still trying to piece through what we see out there, but I do feel like there is some good opportunity for private pay, senior housing assets. We're turning over rocks and talking to people every day to see what's available, but we do feel like there are some good buildings, some good operators and I think it still plays to our strength, which we've been cultivating relationships, playing more on smaller portfolios or type transactions and that's still meaningful for us and we can be able to put those in with existing relationships or create some new ones, but we just got to keep chopped wood every day to make sure we're seeing everything that's in the market, not feel like we're able to do that.

[Operator]

There are no further questions at this time. I will now turn the call back to the presenters for closing remarks.

[Eric Mendelsohn, President and CEO]

All right. Thanks everyone for your time and attention today and we'll look forward to seeing you all at NYC for NAREIT.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.