National Health Investors Inc (NHI) 2021 Q3 法說會逐字稿

Greetings, and thank you for standing by. Welcome to the National Health Investors Third Quarter 2021 Conference Call. (Operator Instructions) This conference is being recorded Monday, November 8, 2021. And now I'd like to turn the conference over to Dana Hambly. Please go ahead.

Thank you, and welcome to the National Health Investors conference call to review the company's results for the third quarter of 2021.

On the call today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; John Spaid, Executive Vice President and 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 closed today 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. 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-Q for the quarter ended September 30, 2021. 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.

Hello, everyone. Thanks for joining us today. We've been working this year to transition NHI into a stronger company entering 2022, and we have accomplished a great deal. Our portfolio optimization efforts, including dispositions, tenant transitions and rent restructuring will have touched more than 120 of our senior housing properties or more than 50% of our entire portfolio. We expect these efforts to be largely concluded by the end of the first quarter of 2022.

While there are many Is to be dotted and Ts to be crossed, we are pleased that we have established frameworks that fundamentally transform our partnerships with Bickford and our Holiday -- legacy Holiday portfolio. The completed and pending dispositions greatly improved the health of the Bickford and Holiday portfolios, which are well positioned to participate in the recovery of senior housing that is currently underway.

Starting with Bickford. We are making progress on the disposition of another subset of buildings, which will reduce the size of a lease portfolio to 35 or 36 properties compared to the 48 at the beginning of the year. Following the dispositions, we plan to reset Bickford's annual cash rent to a lease coverage level that makes them a much healthier tenant financially and allows repayment of deferred rent.

From an operations standpoint, we've been encouraged by the rebound in Bickford's occupancy, which increased by 280 basis points from the second quarter to the third and is up 520 basis points from the first quarter. That's more than double the industry growth rate of 210 basis points for comparable assets. Labor issues should start to subside driven by accelerating rate growth and Bickford's margins should recover some of the more than 800 basis points loss due to the pandemic. That is why our agreement includes resetting the lease to a fair market value after 2 years with a minimum floor. Kevin will provide more details in his comments.

Shifting to the legacy Holiday portfolio. We have disposed of 9 underperforming properties and are evaluating the sale of 2 others. These properties have been earmarked as possible sales prior to the start of the pandemic. In fact, the pre-pandemic margins on the 11 properties were more than 1,000 basis points below the remaining 15 we continue to own, and that gap widened to over 1,500 basis points during the pandemic. With the remaining Holiday properties, we are forming 2 separate joint ventures in RIDEA-like structures with 2 excellent managers that have extensive experience operating middle-market independent living communities.

We are excited to start a new relationship with Merrill Gardens, a well-established operator based in Seattle that will manage our 6 West Coast properties. We're also pleased to expand our relationship with Discovery Senior Living through the formation of a joint venture to own and operate 8 to 9 communities with an East Coast footprint. We are also transitioning the Vero Beach assisted living community to the Discovery master lease.

The ventures will be similarly structured with equity contributions from both operators and include value creation and operating cash flow promotes, which we think best align interest as operating performance improves. There is plenty of potential in the legacy portfolio as the pre-pandemic margins were more than 900 basis points higher than current margins, and we're glad to be in a position to capture that upside.

In addition to participating in the operating recovery of these independent living communities, we believe that by entering into these operating joint ventures, we are better positioned strategically to grow our senior housing business with this new product offering. Our progress so far is showing results. We've completed the disposition of 16 underperforming senior housing assets for approximately $173 million. The cap rate on these sales was 3.1% and lease coverage was 0.33x. We have targeted another 21 underperforming senior housing assets for disposition, which we estimate will generate gross proceeds of approximately $150 million to $155 million with a combined NOI yield in the low single digits and very little lease coverage.

We are transforming NHI into a high coverage, high-quality portfolio, in other words, a jewel box.

Our balance sheet is in great health as we reduced debt by $150 million during the quarter and currently have full capacity available revolver. Considering the cap rates for many of the senior housing asset sales we are contemplating are in the low single digits, we see a nice arbitrage opportunity as we replace them with investments at yields in the mid- to high single digits. With nothing drawn on the revolver, additional proceeds coming from dispositions and low leverage, we see little need to issue equity as we resume our external growth.

Our current position reminds me of a point in time in our company's history in 2009 when we had no debt on the balance sheet and $100 million in cash. We are eager to turn the page on this chapter of our story and get back to growth with new and existing partners.

While we spend most of our time talking about our assisted living and independent living operators, we want to point out the exceptional performance of our entrance fee and skilled nursing segments, which represent close to 60% of our annualized cash revenue net of deferrals. We're fortunate to be in line with these best-in-class operators and they serve as a blueprint for the long-term stability and growth that we are pivoting back to as a company.

I'll now turn the call over to John.

Thank you, Eric, and good afternoon, everyone. Beginning with our net income per diluted common share for the third quarter ended September 30, 2021, we achieved $0.67 compared to $0.95 for the same period in 2020. The year-over-year decline in net income is largely due to: $6.6 million in lower rent received from Holiday; $5.2 million of additional quarterly rent deferrals provided to other operators; $22.4 million in real estate impairment charges; and the revenue reductions due to dispositions and mortgage repayments since the prior year's third quarter. These declines to net income were partially offset by $19.9 million in gains from the sale of real estate and revenue increases attributable to $142.2 million of investments and commitment fundings made since the third quarter of 2020.

For our FFO metrics per diluted common share for the quarter ended September 30, 2021 compared to the prior year, NAREIT FFO decreased $0.26 to $1.16 from $1.42, and normalized FFO decreased $0.27 to $1.15 per share from $1.42. For the quarter ended September 30, 2021, our normalized FAD declined $9.1 million year-over-year and by $1.7 million sequentially to $51.2 million.

As I previously detailed, the year-over-year and sequential quarterly decline was driven by lower Holiday rent, additional rent deferrals, dispositions and mortgage repayments offset by investments made over the prior 12 months. Reconciliations for our pro forma performance metrics can be found in our earnings release and 10-Q filed this afternoon at sec.gov.

Our third quarter dividend of $0.90 per share was paid on November 5, 2021 and represents normalized FFO and FAD total dollar payout ratios of 78.6% and 80.6%, respectively. As announced this afternoon, our Board declared our fourth quarter dividend of $0.90 per share for shareholders of record on December 31 and payable on January 31.

Turning to the balance sheet. For the quarter ended September 30, our net debt to annualized EBITDA leverage ratio improved sequentially to 4.8x from 5.1x. This improvement in leverage was purposeful as the company disposed of low-yielding assets, but is additionally reflective of the unexpected reduction in Holiday rents. Our purposeful strategy means that as we enter 2022 and the clouds clear around Holiday, Bickford and other distressed relationships, we'll be in a position to quickly and accretively redeploy capital.

As detailed in our cash flow statement for the 9-month period ended September 30, the $163.4 million in net cash flow from investing activities, [this capital], which in large part, will allow us to accretively redeploy into new investments without the need for additional equity while still staying comfortably within our stated leverage policy. Having said that, we're still not done selling old yielding assets, which we believe we can further redeploy into additional higher-yielding investments in a relatively short period of time over the coming quarters. That's extremely good news for NHI as we enter 2022, and we look forward to next year.

On October 31, we had no amounts outstanding under our $550 million revolver and a $74 million in cash. We did not issue any equity through our ATM program during the third quarter and do not expect to issue equity during the fourth quarter. We continue to have approximately $417 million in capacity available to us under our ATM program. Our 2017 $800 million revolver and term loan credit facility mature in August of next year. We're in the process of engaging our banking relationships for the re-syndication of our credit facility, and we are targeting closing the facility in the first quarter of 2022.

Regarding the fourth quarter, we want to point out a few items that will impact the results. First, we sold 2 properties in September that contributed approximately $1 million to our third quarter cash revenue. Second, we expect that the Bickford deferrals will be $1 million higher in the fourth quarter compared to the third quarter.

Last, we received approximately $2.3 million of rent payments from Holiday during the third quarter, but as of today's call, we have yet to receive any payments in the fourth quarter. We continue to hold an $8.8 million Holiday security deposit and the final recognition of the deposit will coincide with the termination of the legacy Holiday lease by foreclosure or agreement. We have made no determination as to how or if any of the deposit will be applied, but we expect a resolution on the deposit in early 2022.

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

Thank you, John. The last 2 years have obviously been challenging, but we have learned quite a bit about what it takes to be successful even in the most difficult business environments. We are using past experience of lessons learned to reposition NHI this year so that we are set up to grow with the very best partners going forward.

Our needs-driven senior housing portfolio, which accounts for approximately 31% of our annualized cash revenue net of deferrals, generally experienced solid occupancy gains throughout the quarter. However, margin growth has not advanced in line with historical trends in occupancy growth due primarily to increased wages for hourly staff as well as increased use of agency staffing.

On a positive note, residents and their families have been sympathetic to the labor issues and, in multiple instances, have been receptive to increase rents to offset the wage growth. We expect that this trend, coupled with the scheduled 5.9% increase in the social security COLA will lead to much stronger rate growth in 2022.

Bickford, our largest assisted living operator, representing 14% of annualized cash revenue net of deferrals, increased quarterly occupancy by 280 basis points sequentially, but labor expenses have been a major hurdle, so we deferred $3.5 million in the third quarter. As Eric discussed, we have reached a preliminary agreement that transforms our Bickford relationship. As we work to complete several more asset sales, we have agreed to defer $4.5 million in fourth quarter rent and up to an additional $4 million in the first quarter of 2022. We are also working to restructure the leases, which we currently estimate results in annual rents of approximately $28 million. For reference, we collected approximately $7.8 million of rent from Bickford in the third quarter, and we expect to collect approximately $6.8 million in the fourth.

Based on recent operating performance, this reset would improve Bickford's lease coverage after management fee and capital expenditures of $500 per unit to 1.21x from 0.91x. We think this cushion allows for some further near-term margin deterioration as well as potential incremental CapEx.

Following the rent reset, Bickford will use 85% of the leased portfolios free cash flow to service a deferral balance of approximately $26 million. There are milestones and performance incentives included in the agreement that would reduce this balance, which we view as a strong alignment of interest. After 2 years, Bickford rent will be increased based on fair market value but not be below a floor, which is based on an 8% yield on the portfolio's original purchase price.

We greatly value our long-standing relationship with Bickford and are hopeful these actions restore stability to this relationship for many years to come.

Turning to our independent living communities. This group accounted for only 5% of our annualized cash revenue net of deferrals as we sold 9 Holiday properties for $120 million which had an annualized contractual rent of approximately $9 million. We have targeted 2 more Holiday properties for sale, which have annualized rent of approximately $1.8 million. In aggregate, we estimate that these 11 properties have lease coverage below 0.5x and margins that are approximately 1,500 basis points below the remaining portfolio.

As Eric noted, we are in the process of transitioning the remaining properties to Merrill Gardens and Discovery, which we expect to happen in early 2022. We are excited to be partnering with these well-established operators and believe this will open up a new path of growth for NHI that supplements our triple-net strategy and allows us to participate in the upside as performance recovers from historic lows.

Our entrance fee communities which account for 27% of our annualized cash revenue net of deferrals continue to outperform the other senior housing asset classes. EBITDARM coverage, excluding senior living communities, increased sequentially to 1.76x from 1.65x. Senior Living Communities, which represents 19% of our cash revenue, had third quarter average occupancy of 80.4%, which was up 190 basis points from the second quarter and was actually higher than the prepandemic first quarter of 2022 at 80.3%. The DARM coverage through the second quarter and excluding grant funds was 1.09x, which was down sequentially from 1.13x.

The skilled nursing portfolio, which represents 32% of annualized cash revenue, net of deferrals, is anchored by NHC and the Ensign Group, who contributed 15% and 9% of annualized cash revenue, respectively. SNF EBITDARM coverage for the trailing 12 months ended June 30 was 2.8x, including 3.82x at NHC and 2.1x at our other medical properties.

Turning to our business development activities. Year-to-date, we have announced over $120 million of investments at a weighted average yield of nearly 9%. We did not make any new investments during the third quarter but activity with our partners at Montecito has picked up recently, so we expect to fund multiple projects before the year-end and still estimate that the fund will be fully invested within 2 years from inception.

The pipeline remains active across multiple asset classes and product types, but it has been a better sellers' market, which has certainly worked to our advantage this year. As we conclude our disposition program, we expect to be more active rebuilding the pipeline in 2022.

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

Thank you, Kevin. We have repositioned NHI to emerge as a stronger company going into 2022. We are making steady headway and expect that our portfolio optimization activities will be complete by the end of the first quarter of 2022. We believe that repositioning is in the best long-term interest of our stakeholders and are very optimistic about the future for several reasons.

First, we fully expect that senior housing fundamentals will recover driven in the near term by easing compensation pressure and unprecedented rent growth. Over the longer term, as the supply and demand dynamics start to tilt in our favor, we see years of consistent growth ahead in the industry. Second, we are set up for strong long-term organic growth. We expect deferral balances to start repaying in 2022 and our new joint ventures position NHI to participate directly in the upside of the senior housing recovery. Third, our low-levered balance sheet will only improve as cash flow stabilizes and with plenty of access to capital, we are able to drive strong acquisitive growth, which is made more accretive as we have limited need to issue equity.

Operator, we'll now turn the line over for questions.

(Operator Instructions) And we do have a question from the line of Jordan Sadler with KeyBanc Capital Markets.

I wanted to dig in a little bit. There's a little bit more going on this quarter than I anticipated, particularly as it related to Bickford and the rent cuts. And I was kind of curious if you could maybe walk us through how you arrived at the -- what looks to be about an 18% rent cut for Bickford and, correct me if I'm wrong there, at this point in time and when that sort of goes into effect exactly?

Sure. Jordan, it's Kevin. I would tell you that we looked at the portfolio as currently constructed, but then also looking at the dispositions that we're evaluating here over the next 3 to 6 months and the underlying NOI for those buildings and what they can support both now and then with those buildings removed. And then from there, looking at, again, what they could support now and projecting forward on some occupancy improvement over time, where we think they would have a reasonable amount of cash flow above and beyond that to continue to service the deferred rent amounts.

So we're looking at, as a starting point, in place cash flow for the buildings and what we think they can support, subtracting out the buildings that we're looking to move away from and then, ultimately, what does that new portfolio look like and then still being able to service that rent payment along the way. To the extent maybe some of those buildings take a little longer to sell or there's some new ones that come in or go out, so to speak. So we think we have a good strategy in terms of which ones are moving. Again, those can move maybe 1 or 2 different buildings here and there. But by and large, the underlying portfolio can support the rent number based on current performance. So that -- again, that was kind of the starting point and then looking for them to continue to grow occupancy margins to settle out a little bit where we have seen some wage pressure here and there across the portfolio, not only with Bickford. But if that continues or if that starts to settle out, then they should be able to start to service that deferred rent.

Okay. And then just how did you arrive at the degree of the rent cut? Was it just -- was it based on pro forma lease service coverage ratio or -- I'm trying to just understand the delta between the $46 million on Page 4 of the deck here, $46 million to the $37.7 million.

Right. Yes. So the $37.7 million that you mentioned is the portfolio minus the 7 buildings that we're looking at disposition currently. And then furthermore, the rent cut to $28 million is, again, what we believe the portfolio can service today based on current NOI. So we're expecting that step down from the $46 million, really the $37 million, to the $28 million beginning next year. And then after 24 months, that rent will then be reset to what we believe should be a more stabilized portfolio at that time.

It's a minimum of an 8, right, on the basis in those assets?

Correct. Yes. On the original basis, not the depreciated basis.

Do you know what that is off hand?

Well, I can give you some goalposts. Based on the disposition of the 7, that number would be between $32 million and $33 million. Again, if there's some additional sales along the way or if a building turned and we elect not to sell it, that number will change a little bit. But ultimately, according to the plan that we have right now, it would be in that $32 million to $33 million.

That's the 8% floor.

Correct.

Okay. And then just on the JV agreements, what is the base management fee or in place and/or the in-place NOI from these assets? I tried to sort of back into it based on sort of the lease coverage, the LSCR and what the prior rent was. And I get to like a $15 million number for NOI, but I could use maybe a little bit of help trying to understand how we get -- we were at $21 million for these 14, 15 assets that are going to the JV. Where does that go kind of Jan. 1?

You're asking what's the management fee for the...

Plus the NOI, yes. And there was the structure of the JV, I mean, what the percentages are? I'm just trying to understand what these numbers are going to look like compared to the previous in-place rent.

Yes. Well, I guess I would say to that end, we're -- with most companies in most management agreements we're seeing, there's a 5% management fee, but there's also incentives that get put in there along the way for certain performance hurdles. And we want to make sure that the managers are properly incentivized. But the base fee would be that around that 5%.

And am I about right on the in-place NOI, that $15 million?

You're looking at for the remaining 15 buildings?

Yes. Yes. Page 6, you've got the pro forma LSCR of 0.73x, and I'm basically assuming that you're using the 0.73 lease service coverage ratio off of a rent of combined $21 million -- $21.4 million on the 2 portfolios combined.

Yes. We'd be looking at an NOI a little bit higher than that [in midyear].

Jordan, we don't mean to be cagey, but we're going to go through a little bit of a transition with the properties. We'll give you -- this is John. We want to give the Street a good set of guidance in February. But keep in mind, there's going to be some transition. And then in addition to that, we gave you some idea that, in the past, the numbers we have given you represented roughly the NOI from these properties based upon the net deferrals before the properties were transferred to Welltower and Atria. But there's $6 million to $8 million of NOI upside in these properties that we can get to pre-pandemic levels, but there'll be a little bit of movement on that as we get there.

When would the transition date be effective essentially for these 2 portfolios?

So this is Kevin again. We're going to target the first of the year in transition. There's movement, but at the end of the day, that's what our goal is.

Our next question is from Juan Sanabria with BMO.

Just on the -- on Jordan -- it's been a long day. On Jordan's question on Holiday, could you just talk a little bit about the structure in terms of the upside? Should we think of it as similar to the way you guys -- Bickford was more of a triple net (inaudible) shop structure? And what's the ownership split between you and Merrill Gardens and Discovery on that venture?

Sure. This is Kevin. So this one is going to be different than Bickford in that, well, NHI will still be the large majority owner. There's not going to be a lease in place like there was with Bickford. There, we had a separate opco/propco split. Here, we're anticipating what we'd refer to as a back-to-back management agreement. So we're partners with them on the real estate and really the whole venture together.

The ownership between Discovery and Merrill is a little bit different. We're not yet at a place where we're ready to talk about specific numbers. But suffice it to say, it will be a meaningful amount to each one of those organizations that they're putting in and we're going to have appropriate incentives in carrots for these properties to perform, but we would cage it as -- or couch it, I should say, as a meaningful amount to each one of them and feel like it provides a good alignment for the venture we're doing. And a point of clarity is that they are both cutting a check to come into the venture with us.

Okay. Can you comment on your...

I was going to just add these will be shop portfolios. They will -- we'll structure them with some synthetic debt, and then they'll each own some portion of the equity. We think we know what those numbers are. We're not yet ready to share that with you. But the vast majority, over 90%, of the capital will still be provided by us.

Okay. And can you comment on your confidence or lack thereof an ability to get to deferred -- or sorry, the unpaid rents by Holiday and the credit behind that lease with Welltower?

Juan, this is Eric. That is obviously a sensitive legal topic, so I hesitate to speculate on an earnings call. But just know that we are focused on recovering that and that the balance sheet information we receive from Atria indicates that those funds are accruing on the building's balance sheets.

Okay. Okay. And then just on the -- going back to Bickford. Is it right to think that you -- it sounds to me that you have decided to cut rents based on current performance and cash flows despite visibility and the upside for these next 2 years with maybe the offset that you get repaid the amount that's been deferred rather than giving them a lower coverage day 1 and kind of maybe sacrificing that repayment of deferrals, but not giving kind of a 2-year rent cut. Is that the right way to think about it?

That's a way to think about it. The reason we did that is because the repayment of the deferrals will most likely be lumpy and dependent on the recovery of the buildings, the margins from the labor expenses and we wanted a rent number that we could depend on that was backed up by coverage. We think it's important to show investors that our leases have good coverage and that the rents are solid.

And then finally, as John said, we're endeavoring to give you guidance in our February earnings call. So all of that went into the thinking on how we structure this.

And just last question for me. Can you give us any sense of -- I know that there's still a lot of moving pieces about what the pro forma dividend coverage will be -- kind of come, I guess, at the end of the first quarter '22 when this is all kind of washed out and the comfort level there?

I'd say -- this is John, Juan. I'd say we have a very high degree of confidence in our payout ratio being where we think it will be, which is, say, low 80s to even below 80%. A lot of that's going to have to do with getting these joint ventures closed and temporarily maybe some transition costs that show up in the first quarter. And we just can't give you guidance on that just yet. The fourth quarter, though, you'll note that we've talked a little bit about little heavier deferrals in the fourth quarter, so you should expect some increase in the payout ratio as a result of that. So don't be surprised by that. But we have a high degree of confidence that it's going to be very short-lived.

Our next question is from Rich Anderson with SMBC.

So listening to other calls this earnings season, particularly from your larger cap peers, there's a lot more enthusiasm about the future in the senior housing space. And I'm curious if you would be having similar undertones to your tone and if it's -- if we're really specifically talking about very company-specific issues that you perhaps missed in the underwriting or whatever. But why -- what do you think happened to have this -- have such a -- have been such a tough path and it's been tough for everybody, but there's a lot more enthusiasm away from you today from other REITs. What do you think it is (inaudible) specific [position]?

Good marketing and good voice coaches.

Is that really your final answer?

Rich, it's not lost on us that there's a lot of cheer leaders in this business. I think if you read the transcripts from our prepared remarks, you'll see optimism there. You'll see the way that we structured the restructuring of Bickford and of Holiday that it allows us to participate in the upside. All of that, we believe, will bode well for 2022 and beyond. So there's optimism there.

And I would also point with a yellow highlighter to the part in our prepared remarks, where Bickford is knocking it out of the park. They are leading in terms of occupancy way ahead of NIC, way ahead of other REIT shop portfolios. They're in the 80s. A lot of portfolios are still in the 70s. So don't let my monotone voice convince you that I'm not enthusiastic. I am. And we're trying to signal to the market and to the analyst communities that we have increased confidence in 2022. We declared a dividend this quarter. We didn't wait as we have been. We've signaled we want to give guidance for 2022 in February, where we didn't give guidance this year. Our payout ratio is adjusted, and we think we got that right. We think that the amount that we cut is -- gives us the breathing room to do these dispositions and writes the ship, if you will, for future dividend growth. So there's a lot of good, optimistic signals in our prepared remarks and in the progress report that we also distributed this morning as part of our release. We feel like we've made good progress on restructuring all of the things that needed to be restructured.

Okay. I appreciate the candor for sure, so don't take the question the wrong way. Now the other thing is rate growth, and you said it yourself, unprecedented rate growth. Does a lot of that or most of that hit in the very early part, maybe January 1 of next year? I'm just curious if you can outline the timing of when offers start going out and when we could start seeing some of that.

Sure. Rich, it's Kevin. I would say that it will be over the course of the year. But yes, most operators target the beginning of the year. Some do it on the anniversary date of the resident, but that's probably the exception more so than the rule. Most of what we're seeing will be more first quarter. We've heard along the -- we've heard a range anywhere from 5% to 10% even. I would say, most of our operating partners are going to be asking more in that 5% to 6% range, which, again, that's going to step up rents to try and cover the labor that's going out.

We've also heard that there's going to be some groups that are looking at more of almost like a labor surcharge to help cut down on the amount of overhead that's continuing to build here. So there is some -- we think that there's a good possibility that there will be a good rate growth for the year. There's an effort to mitigate the expenses. We do think also that as -- if they can get people to come back to the workforce and they can mitigate some of the agency and over time, that will help. But the fact of the matter is wages are up. So that's going to be a little bit of a headwind still, but the rate should help keep that abated to some degree.

Is it true that residents are like saying, yes, I'll pay you more to cover your labor cost? I mean it just seems like such a nice thing to do. But is that really happening? Or is that almost -- that's the market and so they're just having to pay it or going to have to pay it?

Well, I'd say it's probably a blend of the 2. It's people aren't signing up to get charged more. At the same time, when you have these resident council meetings and they understand and they talk to family members, they understand what's going on. They see it elsewhere. They understand that prices are going up. So they're not cheerleading you, but they understand it. And it is the market. So to the extent that there are some people that are doing the 8%, 9%, 10%, to the extent you're doing 5%, 6%, 7%, which would still be considered exceptional, that's perhaps a little more palatable.

Kevin, when -- and my last question is when you came up with the Bickford restructuring after -- versus the sales and then rightsized the coverage and (inaudible) all the steps that you went through, what did you assume in rate growth in underwriting that decision?

Yes. They're going to be in line with what we just told you that the 5% or 6% is what we're expecting. As we've talked about, the wage pressure is still very real. So we also said that we expect -- not expect, but we allowed for some near-term margin compression as we go through the winter months and get into the first quarter. So they're going to be in line with what we're seeing from our other operating partners, but we're also trying to give them some wiggle room, so to speak, to start paying back these deferred balances. So that's going to be the upside that we capture. To the extent we did cut a little low, it just means we get paid back a little faster.

I'm sorry, one more. I know the deferred balance for Bickford is $26 million, I think, is right. What's the total deferred balance?

The $26 million is going to be the anticipated total, so that includes the first quarter.

Rich, we're well over $40 million, including some other notes that we've not taken into income such as the second mortgage on the 6 properties that we sold to Bickford earlier this year. So -- and as Kevin mentioned, that includes what we expect to defer in the next -- in the fourth and the first quarter of next year. So what we're doing is we're using some of those deferrals as a performance incentive as well. They hit certain hurdles and we'll forgive a portion of those deferrals. But when you look at those coverage ratios that we also displayed in our forecast to you, in our presentation to you today also, we're -- keep in mind, we're using $500 per unit CapEx. We think their actuals will be a little heavier. And we don't want to have to come back and talk to you again about another rent cut. And so that was part and parcel of our discussion and where we settled on. But when they do have excess cash flow, we do expect to be able to collect it and collect it through these deferrals.

Okay. And then when you start reporting FFO in 2023 and so, I mean, you could have big, big growth numbers. You have to be careful on how you communicate that, I guess, right? That's a (inaudible).

Yes. We'll have to be very careful about that. We'll have to help you with bridging through that. We'll have other things that will make its way down to the FAD line, including $8.8 million in deposits that we hold on Holiday. And we fully expect to be able to collect rent on Holiday.

So I don't want you to think that we're sitting here and saying that that's not going to happen. So we're going to have some discussions about that coming up. So once we get through this period of time when we get into those discussions, that's another spot where you'll see some lumpiness. So yes, we'll have to help you bridge all that, get to a stabilized number.

Our next question is from Daniel Bernstein with Capital One.

I just wanted to go back to the Holiday JVs and just kind of understand how much deferred CapEx might be there. And I'm sure you're still figuring this out, but kind of how we should think about your CapEx obligations as part of those JVs.

Sure. Dan, it's Kevin. I would tell you that, generally speaking, the billings have been maintained. That said, as we've seen in the portfolio, not unique to this group, that CapEx has been a little -- or say maintenance has been a little deferred, just maybe some carpets need to be replaced or walls painted and so on and so forth. We are, as a part of our capitalization though, for each 1 of these joint ventures, allowing for a pretty sizable amount of CapEx to be put into each of the 2 portfolios. So we'll capture that on the front end to make sure that these are up to speed in terms of making good first impressions and for the new operating partners to be able to sell into the market.

Okay. And then I wanted to kind of understand on Holiday, how much rent was actually booked in 3Q. I thought it was -- I saw $600,000, but I just wanted to make sure I understood what was being booked in FFO and FAD given that you didn't use any of that $8.8 million or didn't draw down much of that $8.8 million deposit.

Yes. So Dan, we originally had $10.6 million on deposit. $600,000 of that was used in the third quarter. FAD that was recognized was $2.3 million in the third quarter. So that [includes] a little piece of the deposit that I just mentioned to you.

Right. And then just going back to the JVs and the pipeline and kind of the expectations for investments in 2022, do you -- almost -- I mean, you've done some kind of shop like JVs before on a small scale, but this seems like you're much more positive about the recovery in the space and maybe would use these JVs as a, I guess, a platform to increase the amount of RIDEA-like assets in your portfolio. So outside of the assets that you're donating to these JVs, are there other assets that you've identified within your portfolio you might donate to those JVs? And then are you thinking about, in 2022, expanding the JVs through acquisitions?

Good question, Dan. This is Eric. You're right. We're excited about this, and it does have potential as a new platform. Most of our other properties are still in triple net leases, so it might not be possible to put them into the JV. The current operators have something to say about that. But it certainly could be a platform for growth and for new acquisitions, and we're hopeful that will be the case.

And we have a question from Tayo Okusanya with Credit Suisse.

I just wanted to follow up on Rich's question about Bickford. So Kevin, I think you gave some general guidelines around assumptions that were made about the portfolio recovery as it pertains to OpEx, labor, possibly also kind of rental growth. Could you talk a little bit more about just other assumptions you may be making that led you to get -- feel confident that the way this is being structured that they will be able to pay the newly established rent rates and as well as all the deferrals?

Sure. Yes, this is Kevin. Well, we mentioned in our prepared remarks what our collections from Bickford were for last -- for the second quarter -- or sorry, third quarter and what we expect for the fourth quarter, which, again, triangulate that $28 million run rate that we went through. Over the last few months, we've seen them be at the highest level that they've been in history in terms of the amount of agency and overtime usage in their labor costs. So even if they hold steady, we feel reasonably good about their ability to continue to service the rent going forward into next year. So based on current occupancy, current rates without additional rate growth, we believe they should be able to service the rent, $28 million rent number. So getting rid of the buildings, then their ability to execute on limiting agency and over time getting labor under control, the number of things that we've mentioned will contribute to them being able to increase their NOI over time.

Historical to date, we've seen them increase occupancy between 50 and 100 basis points a month. So we use that as also a signal in terms of how we are looking at the next 12 to 24 months and how we are looking at the opportunity to increase their NOI. So they have a lot of factors going on. But again, I think the key here is that based on the current trailing information that we have and even where we're seeing labor and rates today, we believe they should be able to service that rent payment. And then assuming they can get the labor piece under control and have occupancy and rate growth, then that's what's going to be able to help the deferral component.

Got you. Okay. That's helpful. And then, again, pardon me because I'm a little rusty, I've been out of the game for a couple of months. But the smaller tenants you used to have in your portfolio that were kind of in transition, they were in lease-up. There was a small handful of them, smaller RIDEA-type transactions, I think some of them may even have been tripling that transaction. Could you just kind of talk about what's happening with those names because, again, prepandemic, occupancies were still in lease-up mode? They've obviously gone down since then. Like that small pool of tenants, is there anything there that we should be thinking about that may continue -- that may be a potential drag to earnings going forward, just kind of given the prolonged pandemic?

That's a great question, Tayo. This is Eric, and welcome back to the game.

Thank you.

The way -- we took a hard look at some of those properties and the way we thought about it is, here's a nugget of value that isn't generating any NOI. Is it going to generate NOI in the near future? Because if it's not, we happen to have this unique situation where the disposition market is very robust, and you can turn that underperforming building into cash and either pay down debt or reinvest it in something that is going to give you immediate NOI and returns.

So several of those buildings ended up on our disposition list, and you can see what that looks like on Page 7 of the slide deck that we added to our web page. And granted after we did that underwriting and reunderwriting, there were a couple of buildings that we believe in, in markets that we believe in, that we're going to be patient and hold on to them to experience the recovery. But there's some that they weren't doing well before the pandemic. They're not doing well during the pandemic, but they can fetch a very good price. So that's our approach to those buildings.

Tayo, this is John. There's a -- on Slide 7, you'll see there are 21 assets, yes, in that line there, in the progress line. So those 21 assets include, say, 2 Holiday assets not yet disposed, 7 Bickford assets that we talked about on other slides and then approximately 12 of these other assets that we've been talking about. That gets to your question regarding smaller tenants.

And there are no further questions at this time.

Thank you, everyone, for your time and attention today, and we'll see some of you tomorrow at NAREIT.

That concludes the call for today. We thank you for your participation and ask that you please disconnect your lines.