National Health Investors Inc

NYSE:NHI

Earnings Call Transcript 2022-Q4

[Operator]

Greetings, and thank you for standing by. Welcome to the National Health Investors Fourth Quarter 2022 Conference Call. During the presentation, all participants will be in a listen-only mode and afterwards, we will conduct question-and-answer session. [Operator Instructions].

And now I'd like to turn the conference over to Dana Hambly. Please go ahead.

[Dana Hambly, Director of Investor Relations]

Thank you, and welcome to the National Health Investors Conference Call to review the company's results for the fourth quarter of 2022. On the call today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer.

The results as well as notice of the accessibility of this conference call on a listen-only basis were released after the market close yesterday in a press release that's been covered by the financial media.

As a reminder, any statements in this conference call, which are not historical facts, are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance. Forward-looking statements represent NHI's judgment as of 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, 2022. Copies of these filings are available on the SEC's website at sec.gov. or on NHI's website at 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 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 our CEO, Eric Mendelsohn.

[Eric Mendelsohn, President and Chief Executive Officer]

Thank you, Dana. Hello, and thanks for joining us today. We're pleased to report that our fourth quarter funds available for distribution, or FAD, was in line with our expectations. As expected, fourth quarter FAD declined from the third quarter, primarily from lower collections from two need-driven tenants, which have now been placed on cash basis accounting and a third tenant whose lease we restructured during the quarter.

We're also pleased to report that we achieved our full-year 2022 FAD guidance despite all the moving parts involved in our portfolio optimization in addition to industry headwinds and capital market disruptions. While we will continue to make dispositions and provide limited financial assistance to certain operators, the execution of our portfolio optimization is largely complete.

We decided in early 2021 to divest a significant portion of underperforming properties. We were fortunate that the market was so accommodating at the time as we sold 32 senior housing properties for $296 million with low single-digit implied cash yields and average coverage below 0.5x. We also strategically sold seven noncore former NHC buildings for $44 million with minimal rent impact this year.

The benefits of our considerable efforts are evident through steady improvements in the need-driven senior housing coverage ratios, stronger collection rates and declining rent concessions. The entrance fee and skilled nursing businesses from which we generate over 60% of our NOI have been steady performers throughout the pandemic, and we expect that to continue in 2023.

As we transition back to growth, we see several internal and external drivers. We have total deferral balances and notes payable of approximately $53 million, which we expect to collect or creatively use to generate shareholder value. For example, fourth quarter repayments from four tenants totaled approximately $420,000, including $183,000 from Bickford. We also used $3 million of the Bickford deferral balance in lieu of cash as part of the acquisition of a newly developed property in Virginia Beach in the fourth quarter. And we just announced a similar transaction using $2.5 million of the deferral balance in lieu of cash for a property in Chesapeake, Virginia. Both properties are over 90% occupied.

Fair market value rent resets on restructured leases and transition properties are also expected to incrementally enhance organic growth over the next few years as operations stabilize and tenant margins improve. The largest internal growth opportunity is in our SHOP portfolio, which was just formed in the second quarter of 2022 and transition to new operators after several years of neglect.

We're not satisfied with the fourth quarter results, but continue to see a path towards significant margin improvements as we get the right personnel in place and invest more substantially in the properties. Our expectation has not changed on SHOP's upside potential as we continue to target incremental annual NOI from that portfolio of $6 million to $8 million in the next couple of years.

The greatest growth opportunity continues to be externally through acquisitions and new loan originations. Throughout the portfolio optimization process, we've been laser focused on maintaining a strong financial profile understanding that disjointed markets typically revert to the mean and that discipline in patients are eventually rewarded. We believe that we've reached that point, and we are well positioned to take advantage of what is increasingly becoming a buyer's market.

We've succeeded in keeping our leverage within our stated financial policies. We also repurchased $152 million of our stock, which added approximately $0.05 per share to our 2022 NFFO and should have a greater per share impact this year. We made $101.5 million in 2022 investments and have already announced investments of $54.8 million in the first quarter of 2023. We still have approximately $135 million in available capacity to deploy without new equity while maintaining our target leverage goals.

Of course, we also have additional capacity on the revolver and ATM should the right opportunity present itself. Despite the headwinds we faced in 2022, we still felt it was important to signal that we have command of our business, which is why we issued full-year guidance early in the second quarter. We are once again issuing full guidance this year with a view that there is less noise versus last year.

Obviously, we face a more difficult interest rate environment and industry challenges are likely to persist, but overall, our visibility has improved. We believe our fourth quarter 2022 FAD results provide a good baseline from which we can start growing again. Based on an annualized fourth quarter FAD, our full-year guidance implies growth of 3.5% to 5%, and this excludes any unannounced investments.

I'll now turn the call over to John to discuss our financial results and guidance in more detail. John?

[John Spaid, Chief Financial Officer]

Thank you, Eric, and hello, everyone. As Eric mentioned, we were able to achieve the top end of our funds available for distribution guidance. For the year ended December 31, 2022, our net income, NAREIT FFO and normalized FFO per diluted common share were $1.48, $3.55 and $4.30 per share respectively.

For the fourth quarter and year ended December 31, 2022, our FAD was $44.7 million and $201 million, respectively. When we reiterated our guidance during the third quarter earnings call, we were confident in our FAD guidance, but we also knew our continuing portfolio optimization efforts were likely to result in further fourth quarter impairments, write-offs and reserves. Our Chief Accounting Officer, David Travis, will discuss in greater detail the significant items affecting our fourth quarter results in a moment.

One item I wish to mention is that our $4.30 per share normalized FFO includes the fourth quarter $8.7 million or approximately $0.20 per share credit loss reserve. Fourth quarter net operating income for our SHOP segment was a disappointing $1.9 million, down from $2.8 million in the third quarter. Offsetting the lower-than-expected SHOP NOI performance in the fourth quarter were fewer than forecasted new rent concessions and the collection of 420,000 in rent deferrals from four operators.

Kevin will discuss this more in a moment, but our pipeline investment volume has recently increased. As Eric mentioned, for the fourth quarter, plus the recently announced 2023 acquisitions, we have closed over $114 million in investments at an average initial first year yield of 7.6%. After redeploying the retired mortgage investment capital and the utilization of $5.5 million in Bickford rent deferrals, new capital used in these investments was approximately $80.8 million.

Since the third quarter, through the date of our earnings release, we've not closed any additional dispositions. Assets held for sale ended the year at $43.3 million on 13 properties. Kevin will discuss the -- our expectations and timing for future dispositions in a moment.

Last night, we provided you a full-year 2023 guidance. Our guidance includes continuing asset dispositions, rent concessions and loan repayments throughout 2023. Our guidance includes $55 million in recently announced investments plus the continuing fulfillment of our commitments.

Our guidance does not include any additional unidentified investments for repayment of outstanding deferral balances. During the fourth quarter, we did not purchase any of our stock and ended the year with $88 million in available share buyback authorization under our 2022 share repurchase program, which was set to expire in April of this year.

So in light of the pending expiration last night, we announced a replacement $160 million or one-year share repurchase program. At the end of January, we had $202 million on our revolver after recent acquisitions in the January retirement of a $125 million private placement loan.

Our next debt maturity is our $240 million term loan due to -- due in September. Our leverage ratio was where we expected it to be for the fourth quarter at 4.7x net debt-to-adjusted EBITDA. Current automatic shelf registration and ATM prospectus supplement expires in March. So we will be working towards replacing these facilities in the first quarter.

At the end of January, we had ample liquidity with over $500 million in cash and revolver availability. Having said that, we continue to evaluate our debt and equity capital market options so that we're sure to continue to maintain appropriate liquidity levels as our investments rise.

Finally, our fourth quarter FAD payout ratio was in line with our expectations at a well-covered 87.3%. As we announced last night, our Board of Directors declared our first quarter dividend at $0.90 per share for shareholders of record March 31, 2023, and payable on May 5, 2023.

With that, I'll now turn the call over to Dave. David?

[David Travis, Chief Accounting Officer]

Thank you, John. Our results for the fourth quarter include three discrete items. Our rental income for the fourth quarter included $3 million for Bickford's pandemic-related deferrals. The purchase price for the company's acquisition of the Virginia Beach community included this $3 million in reduction of outstanding deferrals. The fair value of the real estate received necessitated recognition of these deferrals is revenue.

Given the nature of this item, we've removed it from the determination of normalized FFO and FAD consistent with our policies for non-GAAP measures. We expect a similar item in the first quarter for the recent acquisition of the Chesapeake, Virginia community, but the accounting for that acquisition is not complete.

As Eric noted in his comments, we converted two tenants to cash basis of accounting for their leasing arrangements requiring an aggregate $8 million write-off of straight-line rents receivable. This item reduced net income and NAREIT-defined FFO by approximately $0.18 per diluted share, but is included as a normalizing adjustment in the determination of normalized FFO and FAD again, consistent with our policies and past practice.

The company also has two loans totaling $24.5 million with one of the tenants converted to cash basis that were designated as nonperforming during the fourth quarter. We recorded additional credit loss reserves of $8.7 million, primarily related to these two loans. Our total reserve for these loans is approximately $11.4 million as of December 31, 2022.

We will continue to evaluate these loans in future periods and make any necessary adjustments to the reserves, whether positive or negative, should the circumstances change. The credit loss reserve is adjusted in the determination of FAD consistent with our policies. Therefore, this additional expense has negatively impacted our net income and FFO metrics by approximately $0.20 per diluted share but had no effect on FAD.

I will now turn the call over to Kevin.

[Kevin Pascoe, Chief Investment Officer]

Thank you, David. I'll concentrate my comments on investment and disposition activity as well as the performance of our major asset classes and operators. We did not sell any properties in the fourth quarter as the market slowed, primarily due to the rapid rise in interest rates, which is making buyer financing more difficult to secure.

We currently have 13 properties and assets held for sale with a net book value of $43.3 million and fourth quarter cash rent of $1 million before any consideration of rent concessions. We do have a few closing scheduled, but beyond that, it's difficult to predict the timing of future sales in this market. Fortunately, we completed the majority of our dispositions prior to the recent downturn and have more resources focused on acquisitions again.

As Eric and John described, we are in great financial shape and eager to deploy capital at a time when capital is increasingly scarce. We made investments of approximately $60 million in the fourth quarter at an average yield of 7.5%. We are off to a good start this year with $54.8 million in investments at a weighted average yield of 7.7%. This includes the $37.5 million acquisition of two newly developed memory care communities operated by Silverado Senior Living, which is a new relationship for NHI.

The pipeline is active with what we believe are more actionable deals than we have seen relative to the last couple of years. That said, we have learned valuable lessons which have improved our underwriting process, and we are willing to be patient as the market shifts in favor of buyers, creating more shareholder value over the long-term.

Shifting to asset management. As Eric noted, the portfolio optimization is largely complete, and we started to see positive results. Overall, fourth quarter collections of contractual cash due was strong at 98.1% with deferrals of $1.2 million, which compares to 97.9% and $1.4 million in the third quarter. The optimization efforts have been mostly focused on senior housing need-driven portfolio, which accounts for approximately 27% of adjusted NOI.

Coverage trends continue to be positive. Trailing 12-month EBITDARM coverage through September improved sequentially for the third straight quarter to 1.02x and is the highest since the third quarter of 2020. The improvement was driven in large part by Bickford at 1.09x for the trailing 12 period. Bickford's pro forma coverage, which fully accounts for the April 1 rent reset was 1.31x.

As outlined in our earnings press release, Bickford's occupancy declined in the fourth quarter and again in January. Leads and sales have actually been strong, but just have not kept pace recently with move-outs, which have been predominantly and unfortunately due to debt.

Bickford implemented a high single-digit price increase in December, which is offsetting some of the occupancy decline. One of our high-priority strategic goals has been to strengthen our Bickford portfolio to withstand these types of fluctuations.

Aside from Bickford, coverage is improving across the other 47 need-driven properties where we reported coverage at 0.96x, which is a material improvement from a low of 0.76x in 2021. Coverage should benefit in future periods as we complete remaining asset sales and rent restructurings are fully factored in.

During the quarter, we placed two operators on cash-based accounting, and we restructured the lease of another operator. These three accounted for 4.6% of the fourth quarter cash collections, which should decline as we are working on selling several properties associated with the cash-based tenants. Continuing with our discretionary senior housing portfolio, this group accounts for 30% of adjusted NOI, including 27% from CCRC entrance fee communities. The entrance fee portfolio continues to perform well as it has throughout the pandemic. SLC, our largest tenant, had EBITDARM coverage of 1.22x, SLC's occupancy improved throughout the fourth quarter and again into January at 84%, up 230 basis points year-over-year.

Our senior housing discretionary coverage, excluding SLC, which largely reflects the performance of the entrance fee communities was very comfortable at 1.69x. We are mindful that entrance free properties are more correlated to the housing market to have been monitoring our CCRC geographies and have not experienced any meaningful impact at this point. Remember that the average length of stay in our interest-free communities is six to 10 years, so we believe this somewhat insulates the properties from short-term housing moves. SNF portfolio, which represents 36% of annualized adjusted NOI continues to have solid EBITDARM coverage of 2.41x, including 2.98x at NHC and 2.03x for other SNF operators in our specialty hospital.

The year-over-year and sequential decline in the coverage is primarily by NHC whose corporate fixed charge coverage ratio has been impacted by a decline in revenue from federal government stimulus programs. At the NHC property level, coverage benefits from the sale of the seven non-core SNFs in the Northeast during the third quarter. NHC remains an excellent credit along with the Ensign Group anchors the SNF portfolio. Our five other SNF operators have received minimal rent concessions and repayment on this nominal amount began in the fourth quarter.

Lastly, in our SHOP portfolio, which represents 3% of adjusted NOI, occupancy decreased 110 basis points sequentially to 75.8%, while RevPOR again declined slightly as we continue to use price is one tool to drive lead volumes and move-ins.

Operating expenses continue to show significant inflationary pressures, which contributed to the NOI margin to decline to 16.5% in the fourth quarter. While the 2022 results were below our expectations, we still see significant NOI upside over the longer-term. Our operating partners have repositioned the management teams of the local communities over the last six to nine months. And in conjunction with capital projects planned for 2023, we are expecting fundamentals to improve over the course of 2023.

I'll hand the call back to Eric for his closing remarks.

[Eric Mendelsohn, President and Chief Executive Officer]

Thank you, Kevin. With the conclusion of our asset dispositions and tenant repositioning activities at hand, NHI is in a great position to capitalize on the significant growth opportunities both organically and through accretive acquisitions. Industry fundamentals and capital markets should continue to present challenges this year, but we've demonstrated our ability to anticipate and incorporate these issues into our guidance.

The outlook for 2023 is much more promising in our view, and we look forward to demonstrating our progress as we return to growth.

Operator, please open the line for questions.

[Operator]

Thank you. [Operator Instructions]. And we'll get to our first question on the line is from John Kim with BMO Capital Markets. Please go ahead.

[John Kim, BMO Capital Markets]

Thank you. I wanted to ask about shop occupancy. You noted the disappointing performance and occupancy going down over the last six months. Can you just provide any more color on why you think that's happening versus your peers in the benchmark performing better?

[Eric Mendelsohn, President and Chief Executive Officer]

Hey, John, this is Eric. We're not happy with the SHOP performance either. But I would just say that we took over these buildings in April of last year, you heard about our litigation with Welltower, you can imagine that Welltower was not treating these buildings as well as their other buildings. So we had a lot of making up to do when we got the buildings. We're making good progress as we do that. We're putting a lot of new CapEx in the buildings. We've hired some new sales people and we have a lot of confidence in Discovery and Merrill Gardens, our two operating partners, but it's going to take some time.

[John Kim, BMO Capital Markets]

And so on the $6 million to $8 million of NOI upside that you reiterated, what do you think the time frame is for that?

[Kevin Pascoe, Chief Investment Officer]

Hey, John, this is Kevin. I mean what we alluded to in our comments is that it's going to be over the next two years or so. It's going to take a little bit of time to continue to stabilize the buildings. As Eric mentioned, we're still -- we're seeing the funnel rebuild in terms of lead volume and move-ins. We've had a fair amount of move-outs kind of like what we've experienced elsewhere in the portfolio through the winter, so some element of seasonality there, but also some -- frankly, some declining length of stay.

So it's a matter of getting the buildings stabilize, getting the teams where we want them. We do think that we're there from a team perspective and getting where we want to be from a rebuilding the funnel lead volume perspective. And we are seeing move-ins. I think the momentum is there. It's really matching and exceeding the move-outs, which we believe you'll see over the course of this year.

[John Kim, BMO Capital Markets]

Okay. I wanted to also ask about Bickford. You acquired two assets with them. Any commentary on your comfort level with growing with them as an operator I realize the coverage has improved over the last three quarters, but you've also given some of the deferrals. So any commentary on how you see growing the fixed going forward?

[Eric Mendelsohn, President and Chief Executive Officer]

The growth will be muted and cautious. We look at the portfolio size that we have now as the optimal size. We're still planning to sell two or three buildings in the portfolio. You can see those in the properties held for sale. The buildings that we're buying are ones that we funded using construction loans, and we're very happy with the markets. We're very happy with the quality of the build. And for example, the one in Virginia Beach filled up during the pandemic to 95% occupancy. So these new buildings are doing a lot better than the ones that we're selling.

[John Kim, BMO Capital Markets]

Appreciate it. Thank you.

[Eric Mendelsohn, President and Chief Executive Officer]

Thank you, John.

[Operator]

[Operator Instructions]. And we'll get to our next question on the line is from Omotayo Okusanya with Credit Suisse. Please go ahead.

[Omotayo Okusanya, Credit Suisse]

Yes, good afternoon everyone. The two tenants that you moved to cash basis, could you talk a little bit about what the contractual rents were for those tenants? And actually, how much cash we see you got during the fourth quarter and what kind of cash which we got built into your 2023 guidance?

[John Spaid, Chief Financial Officer]

So Omotayo, we did end up deferring some of that. I think you'll see in the deferral section, right? We might have to get back to you on your question on the cash rent on those two tenants. What we did in our guidance, though, was we did several things. One is we looked at some of the assets held for sale when they would be disposed of. We took a look at what they are able to pay on a cash basis and then filter into the guidance, some concession needs for those tenants.

And we haven't really been able to give you a lot of in-depth detail on what we're going to do there for a lot of reasons. One is we don't want to give you too much detail on that particular tenant that you might be able to drill down on and identify. We're always very, very sensitive to that and very careful. But let us look at your question in a little bit more detail and see if we can get you a better answer off-line.

[Omotayo Okusanya, Credit Suisse]

Okay. That's helpful.

[Dana Hambly, Director of Investor Relations]

Omotayo, I can help you out a little bit. As Kevin mentioned in his prepared remarks, it was the two that went on cash-based accounting and then another lease that we restructured was about 4.6% in the fourth quarter. That was about $2.7 million between the those three, and then we can follow-up with you on the two cash-based accounting tenants.

[Omotayo Okusanya, Credit Suisse]

Okay. That's helpful. And then the non-performing loans in the quarter as well. Could you talk a little bit about did you actually record any interest income on those loans in 4Q? And what's the expectation going forward?

[David Travis, Chief Accounting Officer]

Hi, Omotayo, this is David Travis. So we would have recorded the interest that they would have paid. So I think there was potentially a timing issue since they were delayed in some of the payment of interest. But for the most part, we'll recognize those as they pay it. So there could be a little bit of timing issues quarter-to-quarter since they're now on an effectively cash basis or non-performing status as well.

[Omotayo Okusanya, Credit Suisse]

Got you. Okay. That's helpful. And then last one for Kevin. In regards to, again, some of these potential rent reset that could happen going forward and create upside to your numbers. Could you just kind of walk us through like the two or three biggest potential rental effect in the portfolio and when the rents themselves are eligible for reset?

[Kevin Pascoe, Chief Investment Officer]

Sure. There's three customers really that have that feature that would probably be more of a meaningful impact to the business. The biggest, of course, being Bickford. That would not happen until April of '24. So we've got another year and a few months before we would see that happen. That is a minimum of a yield on our invested capital. I believe that's 8%. So you'll see some sort of step-up from where we were. The $28 million that we have in place currently represents about a 7% yield. So there's a reasonably sized pick up on it.

There's another portfolio that we've not really talked about the specific customer, but it's -- that one is a sizable number as well. It's probably a rent reset to the baseline where we were is another $2 million to $3 million. I think what we need to do is just proactive asset managers here is to make sure that we continue to monitor the portfolio and cultivate it, decide if there's going to be others that we would look to sell or move away from. So there is some potential step-ups that we would expect in the portfolio.

But that said, if we're not seeing the potential out of them, the good stewards that we would need to be is to try and move away from some of those properties, which may impact the rent that we would collect off of them.

[Omotayo Okusanya, Credit Suisse]

That's helpful. Thank you.

[Operator]

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

[Richard Anderson, SMBC]

Sorry about that. I was on mute. Good morning everybody on there. So if we could sort of get sort of into the cadence of how things may go. Your guidance has come in well below Street consensus. I think it's 452 or thereabouts. I think there might be a few fraudulent estimates in there, but still kind of below expectations. So if we could sort of reset, if you did $0.85 in the fourth quarter, what would be kind of -- if you move all the things around that happened in the fourth quarter, what would be kind of the run rate from there? Is it like a dollar and change and then you kind of multiply it by four, you get to something like four 20-ish or something like that. Is that the way to think about it? And then anything more that you might do from acquisitions and so on is the way to sort of formulate our thought process for this year?

[John Spaid, Chief Financial Officer]

Yes. No, Rich, this is John. You're right. You're absolutely right. We had a lot of one-time irregular events impact FFO in the fourth quarter. So FFO would have been closer to say, mid single-digit $1.05 or somewhere in that range had we not had those adjustments. So we're starting from that base roughly. We worked hard.

And I want to just remind everyone that in the third quarter when we gave you some information about what -- how we thought about guidance, I identified we couldn't narrow our guidance going into the fourth quarter, because we knew there was some more work that needed to be done around asset held for sale and some other things. I just had no idea how big an impact those are going to affect us in the fourth quarter.

So those are non-cash items. David can talk a little bit more about what the CECL reserve means, I mean it's a reserve, but from there moving forward, we do expect the SHOP portfolio to improve. We have organic cash flows that will materialize in 2023 from normal escalators. We've made a number of recent investments, which will impact our earnings as we move forward. And we will continue to kind of execute around the things that we see as organic opportunities, because our guidance does not include any deferrals. It also does not include any additional unidentified investments.

And I think that's where the average analyst numbers are sort of differing from our numbers. They're making some assumptions about what might happen in terms of improvements that could show up in our numbers later this year. I just don't have a lot of visibility to be able to incorporate those into guidance today.

[Richard Anderson, SMBC]

Okay. So this is sort of a base performance for the year that should hopefully trend up. You're not saying that now, but hopefully, it will trend up as the time passes -- sort of establishing a…

[John Spaid, Chief Financial Officer]

That's exactly right. And we've moved to FAD, and I want to reemphasize that our FAD came in at the top end of our guidance for the year. So we've given you guidance regarding our credibility carefully. We want to under promise and over deliver like we did last year. So we're really working on that. We know we have work to do on the SHOP portfolio. We have work to do on some of these other things, including dispositions.

Our guidance does continue to include some level of concessions for the year. So you'll see that as we move forward. But we feel good about where we are at the end of the fourth quarter, and the improvements we'll see, you can call it, sort of the baseline moving forward. And then any upside that we can uncover through the year will just be accretive and help us allow us to move that guidance upward. That's our goal.

[Richard Anderson, SMBC]

Okay. Second question from me is the $53 million of sort of the deferred balance that you have right now today. Is the sort of the timeline to sort of recording that back into income through to sort of 2025-ish. Is that what you're thinking? Or is it quicker or longer than that in your mind?

[Kevin Pascoe, Chief Investment Officer]

This is Kevin. I would tell you that, I mean, the way we've restructured the leases is to give the next 12 to 24 months, the best opportunity for them to get their [indiscernible] so to speak, and start to repay those balances. And then after the resets, it doesn't mean the rent goes away, but the base rent does go up, so the ability to repay on those balances is going to be lower amounts after that.

So as we would probably look at it, it would be over the next two years or so. So I think you're right to kind of the 2025 mark is where we should see the most inflow from some of those deferred balances. But again, that doesn't mean they necessarily would go to zero after that.

[Richard Anderson, SMBC]

Right. So do you think $53 million is a bigger or smaller number halfway through this year? In other words, you mentioned that you might be more in the way of deferrals, but maybe you get some payback too. Do you see it trending up or down from here that $53 million number?

[Kevin Pascoe, Chief Investment Officer]

Well, so this is Kevin again. I would say that we've allowed for a certain amount in our thought process as we approach the year, knowing that we're not a 100% beyond some of our sales processes and whatnot that we mentioned.

That said, you've also seen the run rate of deferrals go down over time. So I think we're on a much better path. I think you're going to continue to see some level of payments towards those deferred amounts. So while we're not expecting at least huge dollars over the next few months, but you are starting to see some progress there, and we should start to see that pick up as the operators continue to heal. So I mean, I would like to think that the balance would go down over time, not up.

We do need to get some of these sales completed and finish with a couple of these customers just from some minor restructurings. We mentioned a couple of cash-based tenants that we have. But again, as Dana pointed out, those represent less than 5%. So we're kind of back to where Eric used to talk about 5% of the portfolio as always has some work to do.

[Richard Anderson, SMBC]

Okay. Good. Thanks. Good color.

[Eric Mendelsohn, President and Chief Executive Officer]

Thanks Rich.

[Operator]

Thank you very much. And Mr. Mendelsohn, there are no further questions at this time. I'll now turn the call back to you for any closing remarks.

[Eric Mendelsohn, President and Chief Executive Officer]

All right. Thank you, and I look forward to seeing many of you at the NIC Conference week after next. Thank you.

[Operator]

Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation, and ask you disconnect your lines. Have a good day, everyone.