National Health Investors Inc (NHI) 2014 Q4 法說會逐字稿

Good afternoon. My name is Colleen Sullivan, Director of Investor Relations, and I welcome you to the National Health Investors Conference Call to review the Company's results for the fourth quarter of 2014.

On the call today will be Justin Hutchens, President and Chief Executive Officer and Roger Hopkins, Chief Accounting Officer. 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 in a press release that's been covered by the financial media.

As we start, let me remind you the statements in this Conference Call that 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 in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10K for the year ended December 31, 2014. Copies of these filings are available on the SEC's website at www.sec.gov or at NHI's website at www.nhireit.com.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company's Earnings Release and accompanying tables and schedules, which has been filed in Form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the Earnings Release together with all information provided in that release.

I'll now turn the call over to Justin Hutchens.

Thank you, Colleen. Good afternoon, everyone, and thank you for joining us.

I am pleased to report outstanding year-end results. We reported a 15.4% increase in normalized FFO per share and a 9.3% increase in normalized AFFO per share year-over-year. 2014 was a successful year with over $571 million of investment activity.

Roger will provide some color on the quarterly and year-end results.

Thanks, Justin. Good afternoon, everyone.

I am very pleased to report strong financial results for the fourth quarter and the full year of 2014. Normalized FFO for the fourth quarter was $36.341 million, or $1.06 per diluted share compared with $27.414 million, or $0.92 per diluted share for the same period in 2013, an increase of 15.2%.

Normalized AFFO for the fourth quarter was $32.451 million, or $0.94 per diluted share compared with $25.399 million, or $0.85 per diluted share for the same period in 2013, an increase of 10.6%, and includes adjustments to exclude our straight-line rental income and amortization of bond discount and debt issuance costs. Normalized FAD for the fourth quarter was $32.675 million, or $0.95 per diluted share compared with $25.652 million, or $0.86 per diluted share for the same period in 2013, an increase of 10.5% and includes an adjustment for our non-cash stock-based compensation expense.

Our results for the fourth quarter of 2014 are reflective of the volume and timing of our new investments made in late 2013 and throughout 2014. Net income attributable to common stockholders for the fourth quarter of 2014 was $27.530 million or $0.80 per diluted share compared with net income of $27.776 million, or $0.93 per diluted share for the same period in 2013, as the prior year included investment gains of $3.256 million and other income from discontinued operations of $3.659 million.

Our revenues for the fourth quarter were up $12.933 million, or 39% compared to the same period in 2013 due to the volume of our new investments during 2014, but also due to the timing of our acquisition of the Holiday portfolio in late December 2013. Our lease of 25 independent living facilities to Holiday generated $10.954 million of rental income in the fourth quarter or 24% of our total revenues from continuing operations, of which $7.979 million was billed rent and $2.975 million was straight-line rent for accounting purposes.

The revenues from our RIDEA structured joint venture with an affiliate of Bickford Senior Living amounted to $5.672 million in the fourth quarter and represented 12% of our total revenues from continuing operations. Our RIDEA joint venture currently owns 31 assisted living and memory care facilities, of which two opened in late 2013 and one in late 2014 and are not yet stabilized. On October 31, the RIDEA joint venture acquired one facility in Ohio from a third party for cash and assumption of HUD debt of $9.535 million, with an interest rate of 2.9% and final maturity in 2047.

We control the daily activities of the property company in our joint venture and record in our income statement the property company's lease revenue from the operating company. We record in our income statement our 85% equity share of the net income or loss of the joint venture operating company whose daily activities are controlled by Bickford. For accounting purposes, the operating company is required to expense all startup expenses of new developments and their operating losses during stabilization, which altogether amounted to approximately $1 million in 2014 and was expected by us.

Rental income from our owned assets represented nearly 94% of our fourth-quarter revenue. Interest income on our notes represented 4% and investment income represented just over 2%. Depreciation expense increased $3.808 million in the fourth quarter of 2014 compared to the same period in 2013 as a result of the volume and timing of our new real estate investments since 2013.

Our interest expense and amortization of our note discount and issuance costs increased $2.434 million during the fourth quarter compared to the same period in 2013, primarily as a result of additional borrowings during 2014 to fund our new real estate investments. Interest expense for the fourth quarter included amortization of $520,000 related to debt issuance costs and $269,000 of bond discount.

Our general and administrative expenses for the fourth quarter of 2014 increased only $75,000 compared to the same period in 2013. In January 2015, we added a new member to our Management team, Eric Mendelson, as an Executive Vice President Corporate Finance. Our non-cash share-based compensation expense was $223,000 for the fourth quarter.

We estimate the market value of our stock options granted each year using the Black Scholes pricing model. Expenses recorded for accounting purposes over the vesting schedule of the stock options granted. As a reminder, approximately two-thirds of our annual non-cash share-based compensation expense is recorded in the first quarter of the year.

Our financial results for the full year 2014 are also reflective of our strong acquisition volumes since late 2013. Normalized FFO for 2014 was $140.196 million, or $4.20 per diluted share, compared with $103.293 million, or $3.64 per diluted share in 2013, an increase of 15.4%. Normalized AFFO for 2014 was $125.452 million or $3.75 per diluted share compared with $97.451 million, or $3.43 per diluted share in 2013, an increase of 9.3%.

Normalized FAD for 2014 was $127.472 million, or $3.81 per diluted share compared with $99.790, or $3.51 per diluted share in 2013, an increase of 8.5%. Our revenues for 2014 increased 51% over 2013. At December 31, we had ongoing construction commitments with seven tenants totaling $32.700 million. The total funds advanced so far on these projects for land and construction amounted to $25.293 million.

We ended the year with cash and investments and marketable securities of $18.790 million. On December 5, we completed an offering of 4,427,500 shares of our Common Stock for the purpose of acquiring seven entrance fee communities and one senior living campus from Senior Living Communities. The net proceeds of the offering were approximately $270 million after deducting underwriting discounts and commissions and other offering expenses. We funded the remainder of this $476 million acquisition with borrowings on our revolving credit facility.

On December 31, we repaid Fannie Mae mortgage loans of approximately $77 million having a blended interest rate of 6.89% with borrowings on our revolving credit facility. As a result of these transactions in late 2014, we had borrowings of $374 million outstanding on our revolver at year end.

On January 15, 2015, we paid down our revolver with the issuance of $225 million of unsecured fixed-rate term debt in a private placement. We issued $125 million of eight-year notes with a coupon of 3.99% and $100 million of 12-year notes with a coupon of 4.51%. The notes require quarterly payments of interest only until maturity. As a result of this refinancing and our recent announcement, today we have $200 million outstanding on our revolver and available capacity of $250 million.

As shown in our supplemental data report, we calculate our adjusted EBITDA coverage of our fixed charges to be 6.8 to 1. We calculate our consolidated debt to adjusted EBITDA to be 4.1 to 1, after annualizing the impact of the SLC lease revenue because of its significance. We believe these debt metrics are important to maintaining a low- leverage profile for NHI.

We have managed our debt capital in order to extend our debt maturities so that our revolving credit facility with extension does not mature until 2019 and our fixed-rate debt does not mature until 2020 and beyond. We structured the financing of the SLC transaction in December with new equity of 57% in order to maintain our low leverage profile. We took the same approach one year ago when we raised approximately 60% of the acquisition price of the Holiday portfolio with new equity.

In the near term, we plan to selectively issue our common shares by entering into an at-the-market equity program. An ATM program offers us an effective way to match fund our smaller acquisitions by exercising control over the timing and size of an equity transaction at a favorable cost. For large acquisitions, we would again expect to enter the equity market with a follow-on offering. In 2015, we believe making measured increments of debt and equity will maintain our low leverage balance sheet, will continue to support our record of annual dividend growth, and will increase overall shareholder value.

I'd now like to turn the call back over to Justin with comments about our investment portfolio and our 2015 guidance.

Thank you, Roger.

I'll start with our portfolio performance. Our total portfolio lease service coverage ratio was 2.15 times. Our skilled nursing coverage remains very strong at 2.94 times, while our senior housing portfolio is 1.31 times.

The Bickford joint venture, which accounts for 12% of NHI's revenue, continues to deliver strong performance and growth opportunities. EBITDARM in Q4 was up 9.1% sequentially, while occupancy grew to 90.5% versus 88.2% in the prior quarter. Same-store EBITDARM is up 4.8% when comparing the trailing 12-month performance to the prior trailing 12 months. The three development properties continue to lease-up as planned and the two focus properties are stable.

As a reminder, our RIDEA structure is designed to follow the fundamental elements of the triple-net lease. With the RIDEA, we continue to foresee organic growth potential from improving operations, but our agreements with Bickford also enforce growth through a hybrid feature providing preferred payment streams subject to 3% escalation and payable first to NHI.

The NHI Bickford joint venture has the right to purchase six properties from an affiliate of Bickford for $97 million. NHI extended a loan to Bickford to help finance their original purchase of these properties. The loan is an interest-only $9 million loan with a 12% coupon. The performance of these properties remains strong and it is summarized in the supplemental.

NHI has agreed to extend the purchase-option window, which gives us three more years to consider purchasing these properties. We have no imminent plans to exercise the purchase option.

Our relationship with Holiday Retirement Corporation accounts for 16.5% of our revenue. The Holiday retirement portfolio of independent living communities continues to improve occupancy, ending the year with 90.8%. The Holiday portfolio had the least service coverage ratio of 1.24 times.

National Healthcare Corporation, which represents 18.9% of our revenue and over half of our skilled nursing revenue, continues to perform consistently and enjoys a four times corporate cash coverage. Senior living communities accounts for 16.1% of our revenue.

This relationship started in mid-December when we closed the $476 million acquisition and extended a $15 million line of credit to finance expansions on our existing campuses. The portfolio is performing as expected in the early going.

In light of the Brookdale senior living merger integration, I would like to highlight that NHI leases nine assisted living properties to Brookdale. Our Brookdale communities are performing very well with 92% occupancy and a lease service coverage ratio of 1.4 times.

Moving on to new investments, we had a successful year in 2014 with $571 million of investments. Thus far in 2015, we have announced $209.5 million of investments, all involving the development of senior housing properties. I'll walk through our year-to-date announced investments, starting with the previously disclosed $154.5 million lending agreement to recapitalize and finance the expansion of Timber Ridge at Talus, a continuing care retirement community serving the Greater Seattle area and located in Issaquah, Washington.

As a reminder, NHI would have the option to purchase the community upon the achievement of certain occupancy requirements, which would indicate stabilized performance and support a purchase price of $115 million or greater. The purchase option window will begin at the earlier of February of 2019, or two consecutive quarters of Phase II, which is the construction phase, averaging 90% or higher occupancy and ends 15 months later.

The NHI Bickford Senior Living joint venture will develop five senior housing communities in Illinois and Virginia. Construction is slated to start in early 2015 with openings planned for 2016. The total estimated project cost is $55 million.

Each community will consist of 60 private pay assisted living and memory care units managed by Bickford Senior Living. The communities are expected to yield double digit returns at stabilization.

These five communities are part of the previously announced agreement between NHI and Bickford Senior Living to construct eight communities. The first three, all in Indiana, opened in 2014. Once completed, the NHI Bickford joint venture will be comprised of 36 communities in eight states. Construction will be funded with borrowings on NHI's revolving credit facility.

Our pipeline is very active with need-driven and discretionary senior housing properties, in addition to medical properties. We remain very interested in growing the Company with high-quality properties and relationships.

Turning to guidance, the normalized FFO range is $4.52 to $4.58 per share and the normalized AFFO range is $4 to $4.04 per share. The strong operating results that I have discussed don't occur without the collective efforts of our very talented Management team.

For example, Roger is starting his ninth year with the Company. I'm starting my sixth year. Seven of our 12 employees have a master's degree and the average tenure is six years. Christy Gains, our Chief Credit Officer, is our longest tenured employee, with 17 years at NHI. Kevin Pasco has recently been promoted to Executive Vice President of Investments in recognition of his contribution to the Company over the past five years.

Eric Mendelson recently joined our team as the Executive Vice President of Corporate Finance. Eric is a very experienced attorney specializing in real estate finance. He spent eight years working for one of the nation's largest senior housing operators. His background adds to NHI's long history of approaching the business from the perspective of an operator.

We will continue to have resources as needed to support financial planning, accounting, asset management, and business development. I am proud of the accomplishments of this small team, coupled with the fact that I am expecting the Company to achieve G & A expense as a percentage of revenue below 5% this year for the first time.

I am very pleased to report a 10.4% increase in our quarterly dividend to $0.85 per share. I am extremely excited about the prospects for value creation in 2015 and beyond. And with that, we'll take questions.

Operator, we are ready for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Juan Sanabria of Bank of America.

Good afternoon, guys. Justin, I was hoping you could comment strategically on the investment pipeline going forward and what you'd like to add. You have seemingly a better mix between the private pay and some of the assets with a more reimbursed risk. Are you looking to add any skilled nursing exposure? And if you wouldn't mind just commenting on cap rates for the different asset classes you're seeing in today's market?

Sure. Hi, Juan. I'm going to start with the strategic part of the question and then I'll end with our outlook and the cap rates. I'm going to repeat something I've talked about on the previous call and that is the investment strategy as it relates to diversification. And if you look in our supplemental and our 10-K, you'll see a lot of description around three groupings of assets.

One is need-driven senior housing, which includes assisted living and senior living campuses. The other is discretionary senior housing which includes independent living and entrance-fee communities. And then the other is medical, which would include skilled nursing and hospitals and MOBs.

We like each of these asset classes. They all serve an important role in healthcare and senior housing. Each of them have their own set of risks and weaknesses, as well as strengths, and the fact that they're diversified the way they are. So we have need-driven senior housing in 25% of our portfolio; discretionary senior housing 33%. Those two categories are both primarily private-pay driven. And then 40% is in the medical category.

So if you look at the pie graph of our portfolio, we've achieved, to the point of your question, I think the diversification that we've been seeking over the past several years through our investment strategy. So considering that, we do feel comfortable entertaining investments in each category, whether it's the need-driven category or discretionary or medical.

To the cap rate question, the independent living asset class tends to attract a lower cap rate. I would put that on a portfolio basis around 6% to 6.5%; on a one-off basis 6.5% to 7%. Assisted living would be next in line. I would say on a portfolio basis that that's roughly 6.5% to 7% and then on a one-off basis I'd say 7% to 8%. And then skilled nursing has a little bit more of a wide range, depending on the quality mix of the asset.

Certainly the market has supported as low as 7.5% for our portfolio. There's, I'd say, a high quality one-off asset might be in the low to mid 8%s, and then something that might be older or more of a traditional skilled nursing property would start at 9% and be a little higher. The returns in each asset class we think are pretty good considering our cost of capital, and we're comfortable underwriting each of them. And given our diversification, we have room to add any of those types moving forward, so I would say that we're well-positioned to grow in any of those categories.

Great, thanks. And just a quick modeling question with regards to the G&A. Do you mind giving a cash number that is incorporated in the 2015 guidance? Maybe for Roger?

I don't have a cash number. I did mention the growth in G&A because of the addition to our Management team and then what would be normal G&A increases, so there will be an increase next year.

Okay. Is there like a ballpark? Is it like a 3% to 5% number or what should we be generally thinking?

I would say based upon the addition and based upon the number this year, you would probably be in the 5% range.

Great. Thanks. I'll yield the floor, thank you.

Thanks, Juan.

Our next question comes from the line of Daniel Bernstein of Stifel.

Hi, good afternoon. I wanted to just review the focus properties, the occupancy, and it was a little less. I just wanted to see, is there any -- and you put new properties in there recently, so just wanted to see if some of the focus properties are doing better than others? And how should I think about the progress you expect to see in 2015?

Sure. You're looking at the schedule in our supplemental, the highlights of the Bickford joint venture properties. The focus properties category which focuses on sequential quarter includes the four developments that are up and running. And then we've got a couple of focus properties that were Kansas City-based properties included in that as well.

You can't really see it here. It's not highlighted in detail, but in that sequential-quarter category, the focus properties were basically flat. And then there was a little bit of expense associated with the development properties and that's where you see the quarter-to-quarter performance. But the occupancies in the development properties continue to grow, so I would say that kind of points back to the remarks I made that were prepared that focus properties are stable, or in other words flat, and the development properties are growing.

Okay. And then you just announced new five-year developments here in early 2015 and so if you could talk a little bit about the buy versus build opportunities you see? Given where cap rates have gone, are you a little bit more inclined to start funding more development of assets or are you still seeing a lot of opportunities on the acquisition side as well?

You know, we've always been interested both. We've been more cautious when it comes to financing development. I'll give you a couple metrics just to keep in mind. If you look at from the start of our growth plan, we started in the middle of 2009 to today, just over 12% of our total volume has been dedicated to new development. And if you want to take the recent activity that we announced, if you take the last 12 months investment volume, about 25% is focused on development, so we do have a little bit of an uptick.

Most of that is need driven. It's not necessarily an indication of our comfort level with [stabilized] cash flow versus development. We do see opportunities, obviously, in the markets that we've selected, the finance development, to be able to enter a market with a product that will not necessarily be the price leader, but will most certainly be the best physical plant. And with an operator that has 20 years of experience opening buildings and managing them successfully with Bickford, we feel comfortable entering markets.

The market in Seattle where we're financing, we'll refinance the existing campus and then we're financing the expansion of the entry- fee campus as 80% pre-sold. So relatively easy underwriting when you already have the demand at the doorstep. So I would say we're always going to be very particular when it comes to development and focused on the operating partner, the local market dynamics and be mindful of how much development risk there is relative to our overall investment volume.

I take it then that you don't feel there's a lot of development risk out there, at least in the geographies that you're building in? Is that the way I should think about it?

Yes, I think that's fair. There's certainly some markets that we would prefer to avoid from a new-development standpoint. Those would be Houston, Dallas, Kansas City, various parts of Florida all have a lot of development volumes. Certainly that's a consideration when we're entering a market.

Okay, and then one last question. I think you mentioned on the call that at this time you're not really interested in exercising the purchase options on those facilities with Bickford for $97 million. If you can, if you are at liberty to talk about it, could you discuss a little bit the rationale for not buying those assets now? They look stable, at least from when I see in the supplement.

Sure, I'm happy to talk about that. So if you look at the purchase we would be buying it, the joint venture would be buying it somewhere around low 8% cap which, given the quality and performance of the assets, would, I think, be considered to be a very fair price. We're financing a $97 million purchase price. $9 million of it is effectively financed already with our $9 million loan that we're collecting 12% coupon. We would put debt in place probably of 75% loan to value.

There's an interest expense associated with that, probably around 4% or so. Cost of equity, at least on a cash basis, is probably in the high 4%s and then you have the income loss of the loan being used to finance the purchase. And so the net cash flow, it is accretive because your net cash flow is around $3 million, but you are replacing $1 million of existing income. So the way I look at it is we have 9% of the purchase price deployed currently and we're collecting 35% of the net cash flow that we would collect if we, in fact, purchased the properties and brought them on balance sheet.

So when you look at kind of the risk-reward scenario, I feel very comfortable with our existing investment. The other side of this is we have a joint venture partner that is relying on the cash flow stream from those assets. It's great to have a healthy joint venture partner. They're not in any hurry to pull them into the joint venture either, so we mutually agreed to extend the window. I think -- like I said, I think we're in a good place with the assets. I think our joint venture partner in Bickford is also in a good place with the assets, so we'll just let them sit for a while.

Okay, just wanted to hear the explanation. I'll hop off. Thank you.

Thanks, Dan.

Our next question comes from the line of Todd Stender of Wells Fargo.

Hi, guys.

Hi, Todd.

Good morning.

Morning. Just to stick on the Bickford theme, are all five projects breaking ground in early 2015 with openings in 2016? Did I get that right?

Some of them will be early 2015 and they will be sprinkled throughout the year. And as we get more certainty on the groundbreaking dates, we'll make sure that we disclose that. But I would picture that the five of them will all open -- will all break ground in 2015 and they will all open in 2016, but they will be spread out throughout both years.

Okay. Were you guys able to quantify what the drag is on FFO this year? Is that included in your guidance and kind of your timing expectations for next year?

No. We've really not considered this as part of our guidance, given the uncertainty with when the projects will start. We do collect rent on the development projects, and we disclosed that in the past, so we would not expect a drag on income or FFO during the construction this year.

Okay, that's helpful. And then, Justin, I think you gave some return targets for the development. How long does it take to get to a stabilized occupancy? How many leasing periods or how do you look at that?

Well, I can tell you that we pro forma two years. Of the existing three that are already up and running, one is going to take close to two years; one took 12 months; and the other is going to be right in between the two. So I'd say safely around 18 months is going to be your typical average and usually that's what the industry uses as a standard when they underwrite new developments.

Thanks, Justin. And then just looking on funding side, you guys were able to tap the unsecured debt market from an insurance company recently. Can you just comment in general on debt availability outside of banks, especially for unsecured paper? Just what's the comfort level, I guess, with healthcare lenders right now?

Todd, I think this is a very interesting industry to be in, a growth industry. The indications that we have from capital providers is that capital is available to us. We have several options which we will be looking at in 2015. In our own case, we look to continually term out borrowings on our revolver. We will continue to look to unsecured term loans, both bank and non-bank. We will also look to term out our revolver with Fannie. We have previously disclosed that as part of our equity offering in December and we're in discussions with Fannie about that, so we believe that there is still a very good market for NHI to access capital this year.

And then, Roger, just sticking on that theme finally, you mentioned tapping an ATM this year. Have you guys obtained the program yet or that hasn't been approved?

We expect to shortly enter the program. As I've said in my prepared remarks, we'll be selective. We will be looking primarily to match fund our smaller acquisitions and continually keeping an eye on our debt metrics, which are very important to us. So as we fund these construction projects and the large loan that we disclosed and Justin talked about, I think that in 2015 there will be a mixture, certainly, of debt and equity and that will be important to our leverage metrics.

Great, thank you.

Thanks, Todd.

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

Hi, thanks. How you doing? So on the dividend, if I'm doing this right, the increase gets you to about an 85% payout on AFFO, is that what you see?

Sounds about right on AFFO, sure.

Okay, so that's not as wildly attractive as it is now without the increase, of course, but I'm curious what drove the decision? Is 85% your kind of payout target or do you think you'll kind of grow into a better payout over the course of the year?

Actually, the way we're seeing it is if you pull forward all of the pro forma performance, like fully baking in our Q4 numbers, we think the payout ratios are actually pretty flat for both FFO and AFFO.

Okay.

You should have AFFO in probably the low 80%s, 83% or 84% or so and then FFO will be in the mid to mid-high 70%s. And we think -- because don't forget also our AFFO metric is equivalent to most other company's FAD, so it's truly our cash flow. And so from that standpoint, we think that we're striking a pretty good balance of leaving enough cushion to support any unexpected events that would impact our income. And meanwhile, passing along to our shareholders the benefit of the value that's been created through our growth.

Okay. Regarding Bickford, understanding the preferred payment setup, is there -- right now, because of that zero CapEx that you're responsible for? And then the second part of that question is when do you think you start to cross over into the operating world of that RIDEA joint venture in terms of what you'll book into income?

Let me start with the CapEx piece. Actually let me do this. I'm going to have Roger explain the portion that hits our books from Op Co and then I'll follow up with kind of my view on the risk associated with that.

Okay.

Rich, as Justin has pointed out and as we show in our supplemental data report, on a same-store basis, we've had good growth this year in 25 same-store operations. We have the focus properties. And as I mentioned in my remarks, when we look at those new developments and the fact that they have to expense their start-up costs and expense their operating losses after opening, that cost about $1 million in 2014 on the entire Op Co of 31 buildings.

So that was expected. And so the good news is the Op Co has been able to support the development of new facilities, and so we're real pleased about that. So whereas it's not showing income on a GAAP basis, the operations are supporting the new developments, which we're very pleased about.

Okay. And, Justin, were you going to add something to that?

Yes, I think that captures it and that is that the excess cash flow that NHI may otherwise be seeing from the Op Co portion of the joint venture is being reinvested to finance development, working of the development, so in a sense we are realizing the benefit. It's just you're not seeing it because it's being expensed in financing a development.

When do you think we'll see it? That's my question?

Well, you'll see the best benefit probably middle of next year when we start to probably the middle of 2017 when all of the developments reach stabilization, you should see hopefully substantial excess cash flow above and beyond the rent payment and the preferred payment and the escalators that we otherwise count on.

Got you. Is the start for 2015 guidance, is the normalized FFO equal to NAREIT FFO?

Our FFO we believe matches NAREIT's FFO.

Okay. At this point you might have some normalizing factors over the course of the year, but for now, the way your guidance is set up, it's the same thing?

Yes, we believe so.

Okay, and then last question to Justin or whomever. You started 2014 with guidance of $3.92 to $4, and you ended the year with $4.20, so that's a 6% increase from the mid point, so that's good. I'm curious, is that all just investment activity impacting that or were there -- I don't remember where you were leverage-wise, if there was some other inputs and outputs that created that upside to your initial guidance.

It is primarily driven by investment activity. We actually termed out a little more debt than we probably needed to last year because our growth was strong. So that's why we're able to term our debt out and get our revolver balance down lower but still enjoy the growth that you mentioned. And then the way we look at guidance, we don't factor in any investment activity into our guidance range, as you know. We will go with kind of a baseline outlook and then the reason we give the range is because of refinancings. So we want to leave a little room on the low end if there's a refinancing we pursue that's a little more expensive than expected or there's a loan pay-off that maybe wasn't expected, then we left some room with that range.

Okay, I'm sorry, can you say how much you ate out of the 2014 performance from terming out debt? Do you think you could have done how many cents better or is that too tough of a calculation on the spot like this?

I don't recall at this point in time exactly how much we left on the table terming out. But good question.

It was something. It was something.

Yes.

Okay, thank you.

Thanks, Rich.

We do have a question from the line of Karin Ford of KeyBanc Capital Markets.

Good afternoon. Just a question on the decision to extend the Bickford option and not exercise it currently. So if I'm doing my math right, if you assume about 500 basis points of negative spread on the reinvestment of the loan investment, looks like it hits the yield about 50 basis points or so? The yield on the exercise would go from, you said it was in the low to mid 8%s down into the mid to high 7%s. So should we read into that, that you think you have alternative investment options at better returns than that?

I'd approach it differently. So the way I approach it is this way. There's a balance sheet impact as well and it's a fairly significant pickup in leverage to bring on this portfolio, where right now we have $9 million invested getting 12%. We could have $97 million invested and getting 8%. The difference in cash flow between the two is only $2 million because we're getting $1 million currently. We get about $3 million net on the $97 million, so the return on our existing investment and the risk associated with it from a balance sheet perspective is better than purchasing the properties.

This purchase option has been open for over a year and I think since it's been open, we've deployed about $500 million or $600 million of capital. And so we have chosen alternative investments over time. And the reason I highlight it on this call is I just want to eliminate in anyone's mind the idea we might exercise this purchase option in the near future. We're just going to push it off and revisit it another time and if and when we do that, we'll certainly have disclosures about that.

Okay, thanks for the color. My next question is just on Timber Ridge. It looked like there was a bit of a delay in the funding on that. I think you'd originally thought it would close in November and I think it just recently closed. Can you just talk about what the delay was in that?

Sure. There was competing priorities on both sides. There were three parties involved. There was ourself, the operator, Life Care Services, and then their partner, Westminster. NHI, we announced the Timber Ridge loan and then we started work on our $476 million acquisition, closed that and then ended up closing Timber Ridge after that, so that was our competing priority. Life Care Services had some competing priorities as well, so we just ended up landing on a slightly later, couple months later, closing date, but now we're off and running.

Okay that's helpful. And then my last question is just on the acquisition pipeline. I know in past few years, you sort of talked about having $100 million to $200 million kind of regular business with additional portfolios that have come pretty regularly at the end of the year. Should we continue to think about that as the playbook or as the Company's now almost doubled in size here over the last few years, should we be thinking about a larger level of sort of regular investment activity from NHI?

Good question. Our investment thesis is to invest in diversified assets, which I've discussed earlier. We're doing so with what we call high-quality relationships, which are operators that have track records in the business and established balance sheets and the properties themselves are in relevant markets and are high quality in general from a physical plant standpoint, or at minimum will have relevance for years to come.

To the extent all of that lines up, we don't really have a limit at the top end in terms of how much we will do. We've already announced this year $200 million. Last year we did $570 million. The year before that we did $752 million. Having said that, there's no goal or desire to grow for growth sake or to become bigger. It's really going to be opportunity driven. We've had years before those. These past three years I just mentioned, our investment volume range was from anywhere from $87 million all the way up to around $190 million per year and, again, that was all opportunity driven.

I will say this, though. If you look at where NHI is positioned in today's market, I have never felt more comfortable with our ability to grow and compete in the marketplace and that's because we've established many new customers that have priorities to grow, so there's more of a potential organic pipeline. We're certainly more on the radar externally, we're seeing more volume coming through our pipeline than we've ever seen in our history. And then the team is more experienced and the team is growing. As I mentioned earlier, we've been adding resources, so I love how we're positioned to grow and we're going to continue to focus on growth so long as it meets our quality standards.

Thanks for the color. Do you care to comment on the dollar volume of opportunities that you guys are currently looking at today?

Let's see. I'd say the smallest that I can think of -- put it this way, there's one-off opportunities in our portfolio that have always been part of our growth plan. That's in part why the ATM that Roger mentioned will be a good fit as part of our capital planning, but there continues to be large portfolios being presented to us as well. So the range is quite wide and we're happy to entertain both large and small opportunities and we're going to underwrite them and make considerations based on all of the factors I mentioned a minute ago.

Thanks very much.

You bet.

Okay, there are no further questions at this time.

Okay, well, we certainly appreciate everyone's interest in NHI, and we look forward to talking to you again on our next call.