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National Health Investors Inc
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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 2018. 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. 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 NHI's 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 in NHI's Form 10-K for the year ended December 31, 2018. 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 NHI's earnings release and related tables and schedules, which have been filed in 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.
Thank you, Colleen. Today, I'll talk about the opportunities and challenges NHI will execute on through 2019. Since our Q3 earnings release, we've closed a number of new investments and completed the holiday restructure, including the acquisition of the Vero Beach building. Our pipeline is as active as I've ever seen it with some distressed product as well as a stabilized. Our focus on operator relationships and our low cost of capital are significant contributors to our activity. Our challenges this year come from the 5% of troubled operators that you've heard me speak about in the past. Let me first say that the operator that we entered into a forbearance agreement with in 2017 is doing great, and we recently ended the forbearance agreement with them. We're delighted with their progress and are looking forward to growing with them in the future.
During Q4, we took possession of the 3 communities that were part of the litigation we continue to have with the affiliates of East Lake Capital. We've entered into transition and management agreements on 2 of the communities, and an interim Manager has been placed on the third. We continue to have security deposits in place to offset the ongoing transition costs and expect to show positive momentum on the community as the year progresses. At this time, the trauma inflicted by the previous operator was severe, and we cannot give you a firm assessment on how quickly these properties will return to the former cash flow, but we expect to have a much better picture to share with you during our Q1 call.
We also previously mentioned, there are 2 other operators that we're having difficulties with. The first one is a single property operator in Wisconsin that we expect to transition during Q1. This property is financially supported with the deposits and the operator guarantee, mitigating the impacts as the property has transitioned. The second operator situation is more uncertain at this time and more difficult for us to give you a definitive outcome. It consists of 5 memory care buildings run by Autumn Leaves. We are in talks to forebear their defaults, which includes failure to pay rent, but their continued ability to operate this community is not certain. We're giving them some time, during which, they will either perform or we will move on to Plan B.
Moving on to our opportunities. We're extremely excited to enter into a new investment with LCS on a project very similar to our Timber Ridge project in Issaquah, Washington. LCS and their entrance paying product continues to experience very robust demand. The new LCS Sage Woods phase 2 development is substantially presold. We also announced 2 new relationships with Ignite and Wingate, both have interesting strategies around skilled nursing, which Kevin will talk about more in a moment.
As we gave guidance for 2019, we reflected on the challenges and the opportunities in front of us. It's my strong desire to continue to under promise and over deliver, and this year is no exception. The entire NHI team is committed to making that happen by executing on our opportunities and by quickly addressing the challenges I previously mentioned. We will keep you well informed over the coming quarters on how we're doing.
With that, I'll turn the call over to Roger. Roger?
Thanks, Eric. Hello, everyone. Eric has just described the challenges we faced late in the fourth quarter with 3 tenants, which collectively accounted for 3.6% of our total revenues in 2018. With payment defaults on our lease agreements occurred, we engaged outside counsel to assert and protect the interest of our shareholders. We charged the escrow accounts of these tenants a total of $2.5 million at year-end for payment of delinquent property taxes and our legal expenses, including $135,000 for a portion of unpaid December rent associated with the repossession of 3 facilities leased to SH Regency Leasing, an affiliate of East Lake Capital. We will pursue all measures to maximize the collection of originally scheduled cash rents of $10.6 million in 2019 plus the recovery of all expenses we incurred in the process of ensuring compliance with our lease agreements. We will also exercise our rights under our agreements with personal guarantors who cover expenses and unpaid rent to us. Finally, we will transition leased operations to new tenants or third-party managers when we believe it is advisable.
The situations we have described did not have a material impact on our planned financial results for the fourth quarter and full year. In December, we announced $205.3 million in mortgage and construction financing with 2 operators, bringing the total announced investments in 2018 to $364.4 million. Last month, we announced $90.2 million in purchase lease packs. So 2019 is off to a great start. We also have nearly $160 million in loan and development commitments described in our 10-K, which will be funded primarily in 2019.
NHI's management is focused on resolving the disruptions caused by the 3 tenants in default and on executing accretive new investments in our priority pipeline. For the fourth quarter 2018, normalized FFO per diluted share declined to $1.35 from $1.37 in the same period 1 year ago because of the recognition of straight line rents for GAAP purposes, which was $4.2 million in the fourth quarter of 2018 compared to $7.1 million in the same period last year. Normalized AFFO increased 4% to $1.27 per diluted share compared to $1.22 in the fourth quarter 1 year ago. For the full year, normalized FFO increased 3.2% to $5.46 while normalized AFFO increased 6.1% to $5.04 per diluted share. As I described on previous calls, at NHI, we are more focused on the growth of AFFO because we exclude the accounting convention of straight line rents, which tends to make the comparability from period-to-period less useful. Furthermore, we believe AFFO is the best quarterly and annual indicator of growth in our portfolio and demonstrates our ability to increase quarterly dividends to shareholders.
NHI's total revenues for the fourth quarter and full year were $74 million and $294.6 million, which were 4.2% and 5.1% increases, respectively, over the same periods in 2017. These increases reflect good investment volume in both new deals and in the utilization of our capital to accomplish sizable renovation projects for tenants at our facilities, which automatically boost our lease revenues. Whether we are purchasing new buildings for our portfolio or renovating existing ones, we encourage our operators to maintain facilities which are up-to-date and with appearances and finishes that today's seniors expect. We make acquisitions and provide funding for new construction and renovations by deploying a careful mix of debt and equity to maintain our low leverage profile, as John will explain shortly. This approach has allowed NHI to access new debt and equity capital from both public and private sources.
Our 2018 increases in interest expense and depreciation expense are reflective of our growing portfolio. Our general and administrative expenses declined 8.3% to $2.8 million in the fourth quarter compared to $3.1 million in the prior year and increased only 2.5% for the full year to $12.5 million. These increases were only 4.3% of total revenues for 2018 and compared to 4.4% for the prior year.
Our noncash share-based compensation was $359,000 for the fourth quarter and $2.5 million for the full year. Approximately 60% of our annual noncash compensation expense occurs in the first quarter due to vesting schedules.
Moving on to our dividends. This morning, we announced a 5% increase in our quarterly dividend to $1.05 per outstanding share. We currently estimate our normalized FFO payout ratio for 2019 will be in the mid-70% range, and our normalized AFFO payout range will be in the low to mid-80% range. These ratios may fluctuate throughout the year as we manage through our properties in transition.
As for our guidance in 2019, while we have significant new business and a robust schedule of funding commitments for 2019, the uncertainty over the 3 tenants in default described earlier makes us very cautious to estimate the expected growth in our non-GAAP financial metrics for 2019 as shown in our earnings press release this morning. We currently estimate normalized FFO will be in a range of $5.43 to $5.53 per diluted share for 2019, while we estimate normalized AFFO will be in a range of $5.04 to $5.10 per diluted share. These estimates include our expected new investments, the funding of our ongoing commitments mentioned earlier and the composition of new debt and equity capital to properly align our capital resources for growth and maintaining more leverage. We will adjust our guidance as we are able to estimate with more certainty the resolution of defaults among those tenants described earlier.
I'll now turn the call over to John Spaid, who will discuss our uses of debt and equity capital. John?
Thank you, Roger. For the quarter ended December 31, our debt capital metrics were net debt to annualized EBITDA at 4.5x, weighted average debt maturity at 5.3 years and fixed charge coverage ratio at 5.6x. For the year ended December 31, our weighted average cost of debt was 3.9%. NHI ended the fourth quarter with $84 million outstanding on our revolver, leaving us with $466 million in available revolver capacity.
Turning to our ATM program. During the fourth quarter, we sold 444,291 shares of our common stock. The shares were sold at an average price of $77.69 per share, resulting in net proceeds after commissions of $34 million. Proceeds were used to reduce our revolver debt. After our fourth quarter ATM activity, we have approximately $192.4 million in capacity remaining under our shelf facility. With our leverage currently at the midpoint of our 4 to 5x net debt-to-EBITDA ratio, NHI continues to be well positioned for future accretive investments.
I'll now turn the call over to Kevin Pascoe to discuss the portfolio. Kevin?
Thank you, John. Looking at the overall portfolio, at the end of the third quarter, the EBITDARM coverage ratio was 1.64x. Senior housing was 1.19x, and our skilled portfolio was 2.58x. Taking a look at our larger operating leases. Bickford Senior Living represents 18% of our cash revenue and had an EBITDARM coverage ratio of 1.1x for the trailing 12 months ended September 30. This EBITDARM calculation now excludes two smaller properties held for sale, which will be a net positive for Bickford once sold. The 4 remaining developments continue to lease up nicely on or ahead of schedule and adds additional cash flow to the Bickford portfolio. Each development property excluded from same-store have a T 12 EBITDARM coverage of 1.4x as of the third quarter ending 2018.
It is anticipated 2 of the 4 development properties will be rolling into the same-store coverage calculation next quarter. The portfolio we purchased in mid-2018 in Ohio and Pennsylvania continues its transition into the portfolio. The capital improvements are nearly complete, and Bickford will be well positioned to compete with these properties going into the spring selling months.
Our relationship with Senior Living Communities represents 15% of our cash revenue. Including net entry fee income, their EBITDARM coverage ratio was 1.28x on a trailing 12-month basis as of third quarter end. We have agreed with SLC to take over the Charlotte property we took back from East Lake. And we'll be working with SLC to reposition the asset, which is currently nonoperational. We expect to reopen the building in late second quarter as a Class A asset similar to the high-end assets we have in our SLC portfolio.
Looking at the National HealthCare Corporation. Our partnership with NHC accounts for 14% of our cash revenue and had a corporate fixed charge coverage of 3.66x. Holiday Retirement, which represents 14% of our cash revenue, had an EBITDARM coverage ratio of 1.17x. The third quarter saw net positive move ins, and occupancy for the quarter averaged 89.2%. Earlier this month, we announced the purchase of the Isles of Vero Beach, a senior living community in Florida owned by an affiliate of Holiday Retirement. The community consists of 157 independent living units and 75 assisted living units. We have acquired for $38 million as part of our lease restructure and will be leased back to an affiliate of Holiday for $2.6 million annually and added to the amended master lease announced in November of last year. The annual lease escalators began in November 1, 2020, and vary between 2% and 3% of current rent based on an average revenue growth on our Holiday portfolio. This purchase was accomplished as part of the restructuring and extension of the Holiday amended mass release. As a result of this purchase and a consideration of the terms of the amended mass release, Holiday has made a cash payment to NHI of $17.1 million and relinquished $10.6 million in a cash security deposit. Beginning February 1, 2019, annual cash rent for the portfolio was $34.1 million. Trailing 12 EBITDARM coverage on the Holiday portfolio would be 1.25x as of third quarter end, adjusting for the impact of the recent lease amendment.
Moving on to other investments. We are delighted to expand our relationship with Life Care Services. In December, NHI committed up to $180 million to recapitalize and finance the expansion of Sage Wood, a 567-unit continuing care retirement community in Scottsdale, Arizona. At closing, NHI funded $86.8 million of this commitment. The Class A CCRC currently consists of 316 independent living units, 44 assisted living units, 28 memory care units and 78 skilled nursing beds. And the project will fund the completion of a 101-unit independent living expansion.
Serving the greater Phoenix, Scottsdale area, the existing independent units have approached 100% occupancy in 2018 and the expansion is 96% presold. The borrower is a joint venture between Westminster Capital and LCS. The financing includes a $118.8 million senior loan and a $61.2 million construction loan with proceeds from the entrance fees of the new expansion to be applied to the construction loan balance. The senior loans had a 10-year maturity and a 7.25% interest rate that escalates 10 basis points per year after the third year of loan. The construction loan had a 5-year maturity and an 8.5% interest rate.
Also in December, we announced a commitment to finance the development of a 144-bed skilled nursing facility in Oak Creek, Wisconsin, near Milwaukee for a commitment of $25.4 million with a 9.5% initial yield. The yield earned during construction will be capitalized into NHI's investment. The initial funding under the commitment totaled $4.7 million. Construction is underway and expected to be completed in the second quarter of 2020. The 12-year lease term began post construction with 2 10-year renewals and a 2% annual escalator. In addition, there is a $2 million earnout based on the operator meeting certain metrics in 2024 and 2025. The facility, Ignite Medical Resorts Oak Creek, will be operated by a tenant entity owned by affiliates of Villa Health Care and Ignite Medical Resorts. We are excited about owning new skilled nursing product. And also, Ignite hospitality focus operating strategy will be taking on medically complex patients.
In January, we announced the purchase and lease back of a senior living campus, Wingate at Silver Lake in Massachusetts, for a total investment of $50.3 million. The lease has a 10-year maturity with 3 5-year renewal options and an initial annual lease rate of 7.5% plus annual fixed escalators. NHI has committed up to $1.9 million for agreed upon capital improvements to the campus over the next 2 years, which we added to the lease space. The campus, located south of Boston in Kingston, consists of 3 separate buildings with 34 independent living units, 69 assisted living units and 164 skilled nursing beds. The operator, an affiliate of Wingate Healthcare, is a family-owned business that has been in operation for over 25 years and currently operates 37 communities predominantly located in the northeast. We like Wingate's campus approach to senior housing.
Turning to our pipeline. We saw an increase in activity during the second half of the year in both senior housing and skilled nursing opportunities, which we are able to turn into accretive transactions with high quality operating partners. As Eric mentioned, the current pipeline is very active and we feel very positive about our ability to continue to make accretive investments.
With that, I'll hand the call back over to Eric.
Thank you, Kevin. And with that, we'll open the line for questions.
[Operator Instructions]. Our first question coming from the line of Chad Vanacore with Stifel.
So how much recovery of the nonperforming REITs is assumed in 2019 guidance? Or have you any additional details on changes in rent assumptions or a rough timeline could help us with modeling?
Sure, Chad. This is Eric. As you noticed, our guidance range is very wide. So we've -- the low end of the guidance assumes very little rents and the high end of the guidance assumes medium amount of rent based on the previous rent amount.
All right. Eric, you had mentioned that one property you're already transitioning, so I assume that you're getting rent from that. That another property is going to be off-line for the while, while you put in some CapEx. Can you give any more details around those?
Sure. This is Kevin. Yes, the Charlotte community where we have what will be leased to [indiscernible] community is currently being repositioned. We're going to provide CapEx dollars and then lease the community to them. So there will be a period of time where there is a lease up for that community and very minimal rent coming off of those through the lease up. But we're going to reopen that as a repositioned asset that will be much improved physical plant from what we took back over.
All right, Kevin. Did you say that, that was off-line right now? And so the building is dark and then you're going to give -- to kind of have SLC go out there and lease it up?
Yes, that's right.
Okay. And then it's going to reopen, did you say, second quarter? I couldn't hear you. Any additional comments?
Yes. It should be later in the second quarter is what we we're expecting at this time.
Okay. And then just thinking about the progression of earnings throughout the year, is it fair to assume that we should expect a dip in the first quarter of '19 before recovering later through the year?
Chad, this is Roger. You should probably foresee a dip in the first quarter and, as you know, that is a period of time where we also issue our annual stock option awards. So there's a natural dip there due to a vesting of a good portion of those in the first quarter. And then we will be continuing to work through the 3 tenant problems that we described.
All right. So one of those issues was with East Lake, I guess, 3 properties that you're moving on. Once resolved this quarter, what's left to be dealt with on that front?
So we've got 2 of the 3 under new arrangements with new operators. We have an interim operator on the third community that we took back. We will have a -- we're working towards finalizing that so we can now -- we'll be able to give an update on that on the next call.
Our next question coming from the line of Jordan Sadler with KeyBanc Capital Markets.
I wanted to just come back to the guidance a little bit. It seems that there, you've got the year-to-date investment activity baked in. But -- and maybe some additional activity. I just want to clarify what you're guiding us towards in the release here.
This is Roger. We do have line of sight on investment in the first half of this year. We've already announced $90 million so far in January. We had good volume last year, which still will be a spillover effect this year and pay about $160 million of commitments to loans and leases, a majority of which we will fund this year. As mentioned, our first quarter is tempered by the fact that a good number of the stock options that are awarded to our employees each year will vest in the first quarter, and we're working through the 3 tenant problems that we have outlined. And so those are going to take a little while to resolve in the first quarter. And we think we'll have much more clarity on the direction of those 3 portfolios by our May conference call.
But specifically, you're saying there's an incremental $160 million of funding baked into the guide? Or that include the $90 million you've already or...
It does. It does include the incremental investment of $160 million in commitments over the year.
In addition to the $90 million?
Yes. And we have -- we've been very conservative because there's a lot of unknowns with respect to the three portfolios that we described. And we're working very diligently on those portfolios and we expect to have more clarity in May.
Roger, what portion of the $160 million comes from the remaining to be funded amounts under your -- the investments that were made in 2018? That $136 million or $137 million that's remaining?
Well, for example, Kevin described our new investment with LCS -- that's on the Sage Wood property. And we've got approximately $93 million yet to fund on that, the majority of which would occur in 2019. We also have construction commitments to Bickford Senior Living, of which will be funded monthly. We've got several renovation projects. We mentioned the new tenant, Ignite Medical Resorts. We'll be funding construction there this year, remaining of about $20 million.
Okay. So it sounds like the bulk of the $160 million is comprised of your existing funding commitments just having to fund them.
That's exactly right, and the majority of which we believe will occur in calendar 2019.
Okay. And then maybe while I have you, Roger, the -- just taking a little bit of a different angle on Chad's line of questioning there. Can you maybe walk us from 4Q to 1Q in terms of revenue from those three combined tenants? So -- that are troubled as you describe them? So if those three tenants amount to roughly $10 million of total rental income on an annualized basis, how much did you book in 4Q? Is that a $2.5 million number from those few tenants? And then how much will you be booking in 1Q?
Well, let me take just a little bit different approach with it because I examined the revenue that we lost from those 3 tenants. We couldn't expect what would occur that did occur, and so let me just give you little context. In the case of the East Lake portfolio, as we describe in our 10-K, we took possession of 2 buildings on December 7. And then we took possession of the third building on December 14. We had been in litigation for over a year. It was completely unpredictable as to when we would be able to take possession. And then Eric and Kevin had described our strategy with respect to putting new operators in those facilities. So we had a loss of revenue in December related to East Lake. With regard to a small one property operator, we did not...
Can you quantify that? Did you say you just didn't collect rent for December?
Yes. The cash rent and straight-line rent together would be approximately $320,000 that was not collected, which we could not foresee. Okay. The second one was a one property portfolio.
Sorry. And so you would say you collected 6 40 from that tenant in the quarter? Because you got October and November?
I don't have the exact numbers in front of me.
I can follow up with you off-line. It's fine. But I think for the sake of the community, it would be helpful to -- like, because you obviously, I know this is -- and Eric, you described them as a small amount or 5% of your tenants that you have exposure to causing this disruption. But it is disruptive to the earnings, and we're trying to obviously model this. Some of this is known activity as it relates to you guys. I know there's color and decay, but there's not the level of detail that would be helpful to be able to sort of project your earnings throughout the rest of this year. And if we can get a little bit more granularity, it might help. And then my only other question there is do you still have one property left with East Lake? Is that the CCRC? What's the status there?
Sure. This is Kevin. We have two CCRCs that were leased to an affiliate of East Lake that were then subleased to an operator, Watermark Communities, who is a high-quality operator that is doing a good job. Those buildings are doing fine. So they are not the operator of those buildings.
Okay. Those are going to stay in place?
Yes. They are still in place and performing.
Okay. And then my last question for you is what's in the guidance as it relates to Holiday's rent? I think, there was a rent that you -- you talked about the rent cut being to $31 million in cash rent for beginning January 1, '19. But what's the straight-line rent?
Jordan, this is Roger. We may have to discuss that off-line because I don't think I have a number readily available for that. We do have an extensive disclosure. However, that's a cash rent we expect from Holiday, which will be 31 5 this year plus the property in Vero Beach, which were acquired on January 31. That has a first-year rent of $2,550,000.
Yes. No, I get it. Just a very big delta between 2017 and -- sorry, '18 and '19 rent coming from that large tenant and you did recast that lease in the amendment. And that will materially impact that straight-line rent number, which is how we get to the FFO guidance that you provide, which is that 5 43 to 53 every $400,000 moves the needle. And so I'm just curious what's embedded in that guide that you just offered from the tenant. It can't be just $31 million, I'd imagine.
Yes, there would be an impact to straight-line rent definitely.
Our next question coming from the line of Daniel Bernstein with Capital One.
Actually, I wanted to switch gears a little bit to Bickford. Their coverage has been coming down some, so maybe if we can talk about a little bit of that? What's impacting the coverage, their operations? Is it systemic? Or is it just a couple of properties? And maybe let's start there.
Sure. This is Kevin. I guess, what I would start with is a couple of things. First, what you're seeing in the coverage is a little bit of the wage pressure that we've been talking about the last few quarters. There has been some incremental cost that have come into the buildings as we continue to see their markets and continue to try and keep the building staff and keeping up with the wages that are happening there. There's also a little bit of transition that you're seeing there from the Minnesota portfolio that we had transitioned in last year and then also, the Ohio and Pennsylvania portfolio that we added in the middle of last year as well, which is still transitioning in. As I mentioned on the call, we put some CapEx dollars in and the buildings feel like they're going to be in a good position to compete.
They're starting to get the wage situation in those specific buildings figured out, going to the transition of what's over [indiscernible] and the previous operator was soliciting employment from their prior employees. Things that we guarded against, but were -- maybe it was still happening. So they're getting back up to speed. Again, that did put a little bit of pressure on the coverage. But we spent a lot of time with Bickford. We feel good about where the organization is. We continue to invest in the company and then buildings. And the other thing I'd add is if you look at the markets that we have, Bickford building's in, the occupancy is in line with those knick knack markets. But they do a better job of being able to drive revenue and increase revenue over time. So I still feel really good about their ability to compete and do well. And the other thing I'll remind you of is that there are buildings that they have in the portfolio outside of ours and other investments that they have that provide cash flow to the organization. So again, we spent...
Hey, guys, you just cut off. [Technical Difficulty]
[Indiscernible].
Dan, can you hear us?
I can hear you now, yes.
Okay. I'm sorry about that. We feel good about the organization. We spent a lot of time with them, and I feel like they're doing all the right things to be able to compete and do well.
Is there anything in terms of the transition assets that you can cite for occupancy? Or I think you mentioned the labor, getting that under control. Anything else on those transition assets you can cite that make you feel comfortable?
Mainly just that we put the CapEx dollars and those buildings haven't been touched in probably 10 to 15 years. So to bring them back up to the quality that they needed to be and be more in line with what Bickford for them is to the market would be really good for them to go out and be able to sell those buildings and be able to present well to the market. And we've got the spring selling season coming up here where they usually see a good occupancy increase. So we're excited about the opportunity they have.
Okay. And then another. This is a little bit further out, but there are some purchase options in 2020. So you indicate you worked it up meeting $9 million rent. Any insight on how those tenants might react or whether they would exercise those options? And when do they have to notify you if the exercise those options to purchase the assets?
This is Kevin again. Each one is a little bit different. So the notice period that we get is, again, a little bit different and the way the option works is different. We go into it expecting that they're going to, and that's the way we're going to manage that relationship. That said, we're going to be active in trying to see if there's a way to reposition or buy out the option or anything is on the table in terms of being able to recapitalize those buildings to the extent we want to keep them. There are some of those that I would say would be okay if they bought them. So each one's little bit different. But I would -- the way I approach it is expecting them to exercise it because it is in their option, and that's the way that we generally think about it.
Okay. One, switching gears. Just want to ask about the acquisition pipeline. Where do you see cap rates heading? What is the kind of underwriting you're doing in terms of lease coverage? Just trying to get a sense of why there's more opportunity today than there was six months ago. I mean, what are you seeing different in terms of the bid ask spread and what sellers want?
Again, I feel like that varies widely by market. If you're going into what a lot would consider core or core place markets, those cap rates have stayed compressed for some time now. And I haven't really seen that change a lot. I think we have talked about in prior calls that a lot of the areas that we service is more of those secondary type markets. There has been a little bit of cap rate expansion. I don't know that the pool of opportunity has changed that much. I think, what we were trying to communicate is that there is still a fair amount of activity and that we're still able to get accretive transactions done, which we demonstrated for a while now. So again, I feel good about the pipeline. I feel good about what's out there and our ability to make accretive investments. Hopefully, that answers your question.
Almost. But would you say you're looking more at value add and construction loans like what you've been doing? Places where you can put CapEx in, something that's been under managed, maybe underfunded over the last 5, 10 years and tend to one of your better operators and turn those assets around? That's kind of how it sounds to me.
Yes, I think that's fair. We are looking -- we like stable assets and to the extent they can provide cash flow and stability in the portfolio. But the value is going to be in those value add opportunities. When we look at opportunities, each one is a little bit different. We're always trying to price it through the management fee and CapEx to make sure we get an assessment of the cash flow and buying the appropriate cash flow stream. That said, there is a story that go on with some of these. So the asset can be repositioned and create value and coverage down the road, that's definitely something that we're willing to entertain. And to the extent we can have a portfolio that has a little bit of all of that, that's really interesting.
Our next question coming from the line of Todd Stender with Wells Fargo.
Kevin, probably just stick with you. You extended more credit to Life Care looks like in Q4. Can you talk about what Life Care is using the money for? The coupon is a little higher this time, I guess, than your last senior loan to them. Can you just described maybe some of the underwriting and just some of the details around those?
Sure. So this is a Class A CCRC in the greater Scottsdale, Phoenix area of Arizona. The pricing was mainly just because really, it's a large investment. The terms were a little bit different that, again, we're making a large investment with them and it's a small premium over what we had before. In this one, the net is a little bit different as we do not have a true purchase option. We will have the ability to look at it if it's time to sell, but there's definitely value in having that option. So we felt like a premium is warranted if we weren't getting that defined option like we had on Timber Ridge. So that kind of pricing aspect. Just the funds are going to pay for the next expansion, which is 101-unit independent living. So the full dollars were to recap the loan that was in place and then pay for the expansion. It's basically the exact same deal from that perspective as what we did with Timber Ridge. So we'll fund that to the full -- about $180 million commitment. And then as entry fee comes in from that expansion, 100-unit expansion, that will pay down the loan. And that will be wrapped with I think the number is $118 million in the senior loan at the end of the day.
And for how long? What's the duration of something like that?
The term is similar. It's a 10-year term. We do have a lock out for a couple of years, so it will be out there for at least 2 years. And then there's the prepayment fees thereafter. So we would expect to have the loan -- our expectation or at least the way we understand the way they're looking at the loan is they're going to get built, they're going to get filled and then they'll look at the recapitalization events. And at that point, we'll be well positioned to have that looked and to see if it's an additional investment that we want to make.
Is this cash loan? Do they see a coupon? Or does this just accumulate?
This is cash loan. This is cash interest that they have.
Got it. Just a quick one. The Vero Beach asset you just acquired, is that going to the existing master lease? And any coverage on that individual property?
It does go into it the master lease, and then the coverage would be similar to what you've seen in the portfolio. We sized it to be similar to how we resized the Holiday portfolio.
All right. Last one. So with Ignite Medical Resorts, you've got, just in your disclosure, you described it as a development lease. I guess, in your prepared remarks, it just sounds like a standard issue development. It shows up as a 9.5% yield, so I would imagine some of that yield has the loan tucked in there. Just kind of distinguish what a market yield would look like on that property.
Well, the yield to NHI is 9.5%. That is proven through construction that goes into our lease space. The way we think about that is where we've done other skilled nursing is in kind of the 8.5% to -- 8% to 9.5% range, so to speak. So there's a premium role in that development, which is why this is the rate that it has.
Okay. And so they want it fully stabilized. What do you think the yield -- what will be the market yield on that property?
NHI's yield? Or are we talking about cap rate?
I would say NHI's yield -- no, market cap rate. That's fair.
It would be -- yes, cap rate on high quality and skilled nursing has gone up at least the way NHI would look at it would be kind of a low double digit number. Call it 12%, 13% will be in my guess at this point in time if we're looking at stabilized assets.
Our next question coming from the line of John Kim with BMO Capital Markets.
So you have three troubled operators currently. If you put Holiday, that's 4 you've had to deal with just in the past couple of quarters. I'm wondering if your guidance anticipates any other kind of issues for 2019.
This is Roger. No, it does not. Certainly, the impacts of the nonpayment in the fourth quarter and including the other 2 aside from East Lake were impactful to us. The total impact to our FFO was about $0.04 relating to those events. On the plus side, we were able to invest money. And with our ongoing commitments in new business, we were able to actually have a $0.01 higher result in AFFO on the top end than we had even projected. So while we think the year had finish well and we were successful, we certainly are considering how to deal with those three tenants that came up late in the fourth quarter with difficulties.
So it's not in your guidance, but I'm just wondering if on your watch list or keeping a reasonable scenario for this year that there will not be any other tenant issues?
John, this is Eric. You know that our guidance is generally very conservative. Obviously, this year includes the reduced Holiday rents. And I'll remind everyone that if you applied this new rent on their 12-month trailing coverage, it would be roughly 1 25 the lease coverage ratios. So we feel like that's a substantial improvement over where we were last year. So we consider Holiday dealt with and they don't have another lease escalator until next year. So that's the first issue that we've dealt with in terms of a lease amendment and a rent cut. We took a hard look at Bickford. We've got a lot of questions about Bickford, and we know people are concerned about that. We've done a deep dive with them in their operations, in their marketing strategy, in their portfolio. You'll see that two of their properties are held for sale. That will be an accretive sale and help their coverage once those two properties are disposed of. And then we've got new developments coming online later in the year. That will also help their coverage. So we are mindful of the thin coverage on Bickford and consider that when we planned our guidance.
Eric, on the coverage of Bickford, the 1 1 already excludes the 2 transition assets, correct?
Yes, it does.
So where do you think coverage will be by year-end if you -- once you fill those and then you have the developments coming online?
It's a moving target, John. And because of the acquisition we did in Ohio and Pennsylvania, those properties have a lot of upside in terms of improving agency labor costs. Once they start hiring permanent positions and get -- getting rid of the agency, you'll see an immediate improvement there and then some occupancy gains as well. So I'm hesitant to predict how long that will take for those reasons.
Okay. And a follow-up to your answer to Chad's question on what's in your guidance with the care with the transition operators. I know you gave a range in your guidance, but what is the reason as far as what you've seen historically, what you anticipate? Should we expect like a 30% rent cut to get the coverage level to 1 25 over 6 to 9 months of downtime? And then, I guess, as part of that, what kind of coverage do you expect underwriting to -- if you do restructured lease like that?
Well, thinking of the three East Lake properties, we have 1 that's completely dark that's being renovated. So that will take 6 or 8 months. And then you will have the lease up after that, which could take 12 to 15 months being optimistic. So that Charlotte property is probably not going to start producing good NOI until 2020, mid-2020. The national property that we took back is open and is still dealing with the transition trauma of lack of CapEx and lack of funds. So that's probably going to start showing a good recovery by the end of this year. And then the one in Indiana is a question mark. We've got a temporary manager in there. I can tell you that the occupancy is very low. And it's probably not losing money, but it's not making money. So all of these buildings, you'll probably start to see a lift in mid-2020.
[Operator Instructions]. Our next question coming from the line of Eric Fleming with SunTrust Robinson Humphrey.
So I wanted to ask a question from the other side of guidance. You guys have been really great at hitting your incentive targets of more than 5% growth on the AFFO line. Given where you've left the 2019 guidance right now, is there -- what would you need to do to get to a 5% AFFO growth in '19? Or is there a way to get there this year?
This is Eric. There is a way, but we don't have visibility on that right now. The way would be through accelerated acquisitions, and that's something that we don't have control over. We're constantly working on it and constantly trying to wind up acquisitions that are accretive. So that's something that I can't give you clarity on at the moment. We'll probably have an update. Given our guidance this year, it's something we'll be updating everyone every quarter.
Our next question coming is a follow-up question coming from the line of Jordan Sadler with KeyBanc Capital Markets.
I wanted to follow-up on Timber Ridge. Did you mention whether or not you're exercising that option? I believe it expires in this month.
Yes, it doesn't expire. It opens this month. We're actively evaluating.
Okay. And can you remind us? I think the K indicates it's $115 million, a max price of $115 million or an agreed-upon fair market value. Can you remind us sort of what kind of cap rate that would look like if exercised?
So just to clarify, the minimum is $115 million with a fair market. So it's a minimum of $115 million. It's a fair market option. So it's something that again, we're actively negotiating. And finally, your question on the cap rate. That's something where we've been researching here over the last month or so to really hone in on what should the appropriate cap rate for a Class A asset like this. So you'll have to be [indiscernible] on that once we get further down the path. It is something that we're very interested in. It's a fantastic asset, something that we've been very proud to having the portfolio and something that we're taking a really hard look at.
Is that -- go ahead, John.
So I wanted to get back to -- on -- actually, I wanted to get back to you on your straight-line rent question on Holiday because we should have been ready for that. So let's just start with the original Holiday transaction of 25 assets. Cash, $31.5 million. It looks like our straight line will come in for the first 12 months of $6.25 million, so $37.75 million GAAP rent. Vero Beach, that needs to be added into that equation, which looks like it will be $2.55 million for cash and another, say, $0.4 million for straight line, $3 million. So they're doing a little bit more work on Vero Beach and settling on that, but that should be pretty close to it. So that should give you what you need to determine your FFO impacts.
What did you -- what was the $6.25 million, John?
That's a straight-line rent...
That $37.75 million? That's a monthly number?
No.
Not monthly. That's...
That's the annual straight-line number. Yes.
31 plus 6. Got it.
Yes.
That's really helpful. How do I -- just bridging from 4Q to 1Q, do you know what the GAAP rent booked in 4Q was? From the [indiscernible] that will make...
Yes, I think it was $40.5 million, as I recall.
Okay. So it would have been a quarter of that in 4Q.
Yes.
Okay. That's going to make things really easy. I appreciate that very much. And then, Eric, you mentioned the distressed opportunity potentially. Can you maybe offer a little bit of insight in terms of the pipeline?
Sure, sure. We're seeing more sales developments, more broken deals, a couple of developers who've built beautiful buildings and they're 1/3 or a half full. And they want to sell them based on pro forma destabilized occupancy. So more of those deals are starting to be serviced. And then we're also seeing what Kevin calls retreads, which are deals that were marketed widely that are stabilized, but the pricing was so outrageous that nobody took them up on it. So they go back and regroup and come back 6 or 10 months later with new pictures and a new broker and a new pro forma and see if they can get anyone interested.
Okay. That sounds senior housing-esque, then?
Yes, it does. It sounds like 2007 to me. I remember a lot of this stuff happening in 2007.
That's helpful. And then lastly -- well, 2 others. One, just this legal recovery in the quarter, it looks like. Can you just -- I may have missed what the driver of that was. And is that included in the normalized FFO for the quarter?
This is Roger. We did disclose that we charged the tenant escrow accounts for our legal expenses associated with the collection of those rents. That was a portion of it. The other portion that we charged to their escrow accounts was their property taxes, which they have not paid. And that was a substantial amount. So all together, we charged these tenants escrow accounts $2.5 million.
Okay. So you must have -- and so you had $2.1 million of legal expenses in the quarter offsetting that? I'm just looking in the legal line, Roger, that says minus 396 under the expense category in your P&L.
Right. So this is Eric. The legal expense is as you say. That was reimbursed, and then we had some property taxes, which would show up elsewhere.
Okay. So that's just charging them back. But that's actually a recovery of prior expenses, I would imagine? Prior quarter expenses?
Yes.
Okay. Was that in normalized FFO? I don't know if it was backed out. Just curious.
Well, our charge of those tenant escrow accounts would reduce our expenses. So it's in the net income when you start a reconciliation. That reimbursement of those expenses, if you will.
Yes, but you have a gain in the quarter. I'll follow-up. That's fine. And the last one I had for you, Eric, was just on Holiday in general. You made the comment that we should consider Holiday dealt with. And from your perspective, I get that, but it seems like they've got one other creditor out there that just hasn't yet necessarily dealt with them that I know of at least. And I'm kind of curious. Do you think they, as a corporate entity and credit, are stabilized at this point?
That's a fair question, Jordan. When we were negotiating our settlement with them, we modeled what their span of control would look like with and without the Solver buildings and with and without the Ventas buildings to make sure that they were still a viable business and manager and tenant if those buildings would go away. And we determined that they would be. So I know that the Ventas settlement is still out there, and we're waiting to see how that resolves itself.
Okay. Do you know if they had recourse to the entity, to the corporate entity?
They have recourse to the guarantor entity, as we all did.
Mr. Mendelsohn, there are no further questions at this time. I will turn the call back to you.
All right, everyone. Thanks for your time and attention, and we'll see some of you at NIC in San Diego.
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.