National Health Investors Inc (NHI) 2015 Q1 法說會逐字稿

Hello, everyone. 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 first quarter of 2015. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were released yesterday after market close 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 10-Q for the quarter ended March 31, 2015. 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, reconciliation to which are provided in the Company's earnings release and the accompanying 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 Justin Hutchens.

Thank you, Colleen. Hello, everyone, and thank you for joining us. I'm excited to showcase today a new format for our earnings calls. We've made changes based on a wide variety of feedback solicited from shareholders and analysts.

Following my commentary, Roger Hopkins, Chief Accounting Officer, will summarize the Company's performance for the quarter. Eric Mendelsohn, who I'm very pleased joined our team earlier this year as the Executive Vice President of Corporate Finance, will review our capital plan and balance sheet metrics. Kevin Pascoe, Executive Vice President of Investments, will cover our portfolio of performance and new investments. I encourage everyone to review details regarding our portfolio and Company performance metrics provided in our refreshed and updated supplemental materials that are available in the investor relations page of NHI's website.

I am thrilled to report to 2015 is off to a great start with solid first quarter results. We reported a 7.6% increase in normalized FFO per share and a 6.5% increase in normalized AFFO per share year-over-year. We pride ourselves on being exceedingly focused on delivering value to our shareholders. For example, our compounded annual growth rate for normalized FFO per share is leading the peer group on a two-, three-, four-, five- and six-year basis. Normalized FFO on a two-year basis is 13.2% compared to the peer group average of 6.3%, while dividend growth is 8.3% compared to the peer group average of 5.1%. Our dividend payout ratio remains low at 75%.

These industry-leading results are attributed to our talented Management team, accomplished operating partners, pristine balance sheet and our reputation as a trustworthy capital partner. NHI offers shareholders a strong balance sheet that rivals that of a large cap company combined with the growth profile of a smaller company where each investment yields a more meaningful impact. Year to date, we have had $209.5 million of investment activity and our pipeline remains very active with leaseback and development opportunities.

I will now turn the call over to Roger to provide some color on the quarterly results.

Thanks, Justin. Hello, everyone. NHI continues to deliver excellent performance trends. For instance, with a total return on the 426% over the past 10 years, we are proud of the fact that we have performed among the top 5% of all publicly traded REITs. Turning to the first-quarter results, I'm very pleased to report excellent financial performance for the first quarter of 2015. Normalized FFO increased to $1.13 per diluted share while normalized AFFO increased to $0.99 per diluted share, which represents a 7.6% and 6.5% increase, respectively, over the first quarter of 2014.

Normalized FAD for the first quarter increased to $1.03 per diluted share, a 6.2% increase over the prior-year. These increases are reflective of the results of our investment program focused on acquiring market-leading senior housing assets. Our first-quarter results each year include the impact of non-cash compensation expense related to the immediate vesting of certain stock option grants. A total of $1.231 million or $0.03 per share was expensed in the first quarter, which will not recur in the second through fourth quarters. We expect non-cash compensation expense to be $233,000 for each of those quarters.

Looking at our investments for the quarter we announced that our NHI Bickford Senior Living joint venture will develop five premier senior housing communities in Illinois and Virginia. Construction will take place throughout 2015 with openings planned for 2016. The total estimated project cost is $55 million. During the first quarter, $941,000 in capital was deployed for these new developments.

Also in the first quarter, we closed on a $154.4 million loan commitment to recapitalize and finance the expansion of Timber Ridge at Talus, the best-in-class entrance fee senior living community in Issaquah, Washington. The borrower is a joint venture between an affiliate of Life Care Services and Westminster Capital.

The loan is divided into two notes under one master credit agreement. The $60 million senior loan, Note A, has a 10-year maturity at 6.75% interest rate that escalates 10 basis points per year after the third year of the loan. The $94.5 million construction loan, Note B, has a five-year maturity and an 8% interest rate. NHI funded $28 million on Note A and $11.3 million on Note B. The remaining loan commitment is expected to be funded over the next 18 months. We have funded the loans with borrowings on our revolving credit facility.

We had no dispositions during the quarter. We had one $2.5 million mezz loan payoff related to one assisted-living property.

Moving on to our dividend. Yesterday we announced a second-quarter dividend of $0.85 per common share, which is 10.4% above the same quarter in 2014. The FFO dividend payout ratio was 75.2% for the first quarter.

Turning to guidance. Our estimates for the full year have not changed. The range for normalized FFO is $4.52 to $4.58 per share and the normalized AFFO range is $4 to $4.04 per share. Our guidance range includes the impact of previously announced investments and the refinancing during the first quarter of $303 million of borrowings on our revolver to long-term debt at higher fixed interest rates. Our guidance range allows for the uncertainty in the structure and timing of the financing to fund our previously announced investments.

I'd now like to turn the call over to Eric Mendelsohn to discuss the capital plan and balance sheet metrics.

Thanks, Roger. Hello, everyone. I'm happy to report on NHI's conservatively managed capital plan. We're committed to being one of the most bankable companies during any business cycle. To achieve this goal we practice discipline by terming out debt with staggered maturities and maintaining low leverage over time. We target a blend of 60% equity with our long-term debt financings as we grow the Company, resulting in a conservatively leveraged balance sheet.

Our balance sheet metrics lead the industry and include the following: net debt to EBITDA was 4.3% for the quarter, our weighted average debt maturity is 7.5 years, our weighted average debt cost of capital is 3.54%, and our fixed-charge coverage remains a very solid 6.5 times. Debt and equity markets remain active and liquid and NHI is well-positioned to access these markets as needed.

Regarding debt, during the quarter we financed $78 million with Fannie Mae through KeyBanc. The debt financing consists of interest-only payments at 3.79% with a 10-year maturity. The mortgages are secured by 13 properties and NHI's joint venture with Bickford Senior Living. Proceeds were used to reduce borrowings on NHI's revolving credit facility.

As we mentioned in our previous earnings call in January, we issued $225 million in unsecured notes to Prudential Capital Group. We used the proceeds to reduce borrowings on our revolving credit facility. The notes consist of Series A notes in the amount of $125 million due in January of 2023, with a fixed annual rate of 3.99% payable quarterly with principal due at maturity; Series B notes in the amount of $100 million due January 2027 with a fixed rate of 4.51% payable quarterly with the principal due at maturity. Terms of the new financing are similar to those under the credit facility with the exception of prepayment restrictions.

Also during the quarter we established an at-the-market equity distribution program under which we can offer to sell shares of our common stock having an aggregate sales price of up to $300 million. This was done through KeyBanc Capital Markets, BMO Capital Markets, Goldman Sachs and Stifel Nicolas. We intend to use the net proceeds from the equity distribution program for general corporate purposes, which may include future acquisitions and repayment of debt including borrowings under the Company's revolving credit facility.

Turning to the revolver, at March 31 we have $107.5 million outstanding with an availability capacity of $342.5 million and we are currently reviewing the most effective way to manage this outstanding balance of variable rate debt.

I'll now turn the call over to Kevin Pascoe who will cover our portfolio details and new investments. Kevin.

Thank you, Eric. NHI's diversified portfolio of senior housing and medical properties enjoys industry-leading coverage ratios and performance led by some of the nation's most experienced operators.

I'll start with our portfolio performance. We are pleased with the performance of our portfolio. The EBITDARM coverage ratio is 2.17 times. Our skilled nursing coverage remains strong at 2.94 times, while our senior housing portfolio is 1.31 times.

Our relationship with Holiday Retirement Corporation accounts for 16.8% of our cash revenue. The Holiday Retirement portfolio of independent-living communities continues to improve occupancy ending the quarter with 91.6%. Notably the portfolio ended the month of April at 92.3% occupancy. The Holiday portfolio has a lease service coverage ratio of 1.24 times.

Our new investment with Senior Living Communities is performing as expected. 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. SLC accounts for 15.8% of our cash revenue. The SLC portfolio has lease service coverage of 1.15 times versus 1.03 for the prior year.

National Healthcare Corporation, which represents 18.6% of our cash revenue and over half of our skilled nursing revenue, continues to perform consistently and enjoys a 3.85 times corporate cash coverage. The Bickford joint venture, which accounts for 12% of NHI's cash revenue, continues to deliver strong performance and growth opportunities. This contribution to NHI's revenue has grown 8.4% when comparing the total revenue from Q1 2015 to the same period in 2014.

Same-store EBITDARM is up 6.9% comparing Q1 2015 to Q1 2014 and excluding a favorable workers' comp insurance adjustment that occurred during Q1 2014. The current occupancy on the total portfolio is improving year to date. The three development properties continue to lease up as planned and the two focus properties are stable. Occupancy improved over the fourth quarter when including the developments but is down slightly on same-store due to increased resident turnover during the flu season. EBITDARM was essentially flat sequentially due to Bickford managing through the increased resident turnover at the communities in addition to focusing on leasing up the development properties and onboarding our Middletown acquisition.

Expenses were elevated during the quarter due to higher utility costs in the winter months and higher payroll costs associated with competitive wage pressure. The total Bickford portfolio, including the developments, continues to tout margin in excess of 36% and the margin is over 40% on the same-store group.

As for future growth in the portfolio, the NHI Bickford joint venture will develop five senior housing communities in Illinois and Virginia. Construction is slated to start over the course of 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 and stabilization.

These five communities are part of the previously announced agreement between NHI and Bickford Senior Living to construct the eight communities. The first three, all in Indiana, opened over the prior 18 months. 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.

Moving on to new investments. Year to date we have announced $209.5 million of investments, starting with the previously disclosed $154.5 million lending agreement to recapitalize and refinance 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 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 2019 or two consecutive quarters of phase 2 averaging 90% or higher occupancy and ends 120 days later.

Turning to our pipeline, we are in the midst of a very competitive environment but have a healthy level of investments under review. Our pipeline is very active with senior housing properties as well as medical properties. We've remained very interested in growing the Company with high-quality properties and relationships. We remain both selective and opportunistic. With that, I'll hand the call back over to Justin.

Thank you, Kevin. NHI is a uniquely positioned Company when considering our outstanding credit metrics, industry-leading growth profile, exceptionally experienced operating partners and top-notch properties. For example, since the start of our growth plan six years ago, we have added 117 properties with an average age of 12 years. The overall age of our portfolio dropped during this time from 28 years to 22 years. A large majority of the acquisitions have been private pay senior housing properties.

I couldn't be more excited about the value we have delivered to our shareholders over time and our ongoing potential to continue to deliver outstanding performance. Operator, we are ready for questions.

Thank you.

(Operator Instructions)

Juan Sanabria with Bank of America.

Good afternoon, guys. Just hoping you could give us a little bit more color on the pipeline. The mix of assets.

You mentioned medical properties; not sure if that's MOBs or another asset type. Is that comprised largely of single assets or portfolios and any thoughts on cap rates would be helpful.

Juan, this is Justin. I'm going to reiterate part of what Kevin said and that is the pipeline -- I would characterize it in terms of volume as being as big as it's been since I've been at NHI. It's a very active marketplace.

Obviously, based on deal volume throughout the industry, you can see that there's a pretty good connection between bid and ask. In our case, we remain very selective.

We are encouraged by opportunities that we do have in our pipeline that are a potential very good fit. Those include both private pay senior housing and newer skilled nursing facilities.

When Kevin said medical, we characterize a larger group called medical. That would include skilled nursing and hospitals and especially hospitals.

But at this time it would be skilled nursing. But altogether I feel very good about our potential to grow and the looks we're getting from the market.

And any color on cap rates? Do those continue to trend down from the last couple of quarters?

I would say the cap rates, in my view, are pretty consistent from prior quarter. You may see -- I will stay away from all the specific examples, but I think cap rates are relatively flat at this time.

Okay. And do you guys have any sense of supply on the RIDEA assets? I think the latest [mik] data showed a bit of an acceleration in secondary markets. Any thoughts or color you could provide would be great.

For the most part our markets have been isolated from new supply threat. There's been one market that was hit fairly hard, which was Kansas City.

Outside of that market, there's been a little bit of new supply added but nothing that's been very impactful. Nothing that we're concerned about.

Next question?

Daniel Bernstein, Stifel Nicholas.

Hi, good afternoon. Actually I was going to go back to the pipeline a little bit. There's been some debate out there about whether the market's frothy or not.

And so I wanted to get your thoughts on -- maybe not, you won't want to spot talk specific cap rates, but how you're thinking about the value of assets today? And then does that impact whether you want to make acquisitions versus, say, some more of those construction loans that you're doing or loan-to-own type of investments?

Sure. Well, I can give you an example in terms of how we're looking at things.

There was a portfolio that we bought at the end of 2013 from Holiday Retirement Corporation. Performing portfolio had some upside in occupancy. We bought it with a one-to-one cover on a trailing 9% at a 6.5% cap. And it remains one of the top performing portfolios for that company.

There's been other portfolios that have been sold that are selling in the high [$500 millions] and mid [$500 millions] we've noticed. We're not a buyer at that price. However, if you get down into some smaller deal sizes, we actually think we can see a 6.5% or better in private pay assets. We can see an 8% or better in high-quality skilled nursing properties.

Those opportunities are under review. But if you start getting into the very, very large portfolios, $500 million or more, that premium you are paying for the large transaction is a little more than we're willing to pay at this time.

Okay. And has been the competition -- we think like in the MOB space there's been a lot of competition coming from foreign investors. Is that the same for senior housing? And have you maybe seen any of that on other asset classes like skilled nursing or hospitals?

The competition would include increased interest from private equity now that makes our offering higher leverage. Non-listed REITs are still very active and loaded with capital. But then, of course, just the other healthcare REITs.

There's an enormous amount of capital. I've even heard of some life company capital making direct asset investments. So I'd say if you're an operator, you have an enormous access to capital today which has made it pretty competitive.

But I also would like to remind everybody that's a good indicator of the health of the industry. And we're pleased to continue to review high-quality opportunities and thrilled that we have our share to review.

Okay. And then on the RIDEA portfolio, can you walk us through a little bit in terms of the timing of the occupancy losses I guess in the stabilized portfolio? We heard from a lot of other REITs and operators during this earnings season that some of those losses stretched into April, maybe troughed in January on the moveouts. But some of the occupancy losses stretched into April. So I'm just trying to understand how your RIDEA portfolio performed through the quarter, and maybe if you have any data on what it did during April so far?

This is Kevin. So what I would say to that is it's been consistent with what you said in that there was a trough earlier in the year. It's been going back over time; to some degree it's stretched into April, but the portfolio is stable and we're looking forward to some good growth opportunities later this year.

Okay. And one more quick question, if you don't mind. You have the RIDEA portfolio -- you only have one partner in the RIDEA portfolio and it's really centered in the middle of the country. Is there a strategy not to do the Coast or are you just waiting for the right operator to move right RIDEA onto the Coast?

This is Justin again. Really, if you recall that there is kind of a special circumstance with the one operator, Bickford Senior Living, that led to us to do the RIDEA structure to begin with. They had some equity built up in their operations and a way for them to monetize that was for us to effectively purchase the operations which led to the joint venture structure.

Bickford is a Midwest-focused Company. Has been for 20 years and they've done very well in the Midwest markets. So we're supporting their desire to continue to grow in the Midwest.

In terms of Coastal markets, certainly we have some triple net lease opportunities on the Coast. We really haven't had an operator request that structure that has a Coastal presence yet.

Okay. That's all I have. Thanks for the color.

Thanks, Dan.

John Kim, BMO Capital Markets.

Thank you. I was wondering if you could share maybe some of the metrics on the entrance fee portfolio, including occupancy and cash flow coverage.

This is Justin. The cash flow coverage is consistent with where it was underwritten, which was a one-to-one cover.

However, you might recall that there's some units that are under construction that will be open later this year that's going to add to cash flow coverage. Plus there has been some occupancy improvement that's going to continue to contribute to cash flow which will improve coverage over time. We had projected a 1.2 cover for the year and more potential then proved beyond, and so far I don't have any indications that that won't be the case.

Great. Okay. And what about the occupancy?

The occupancy has continued to improve within the portfolio. And as Justin mentioned, there's going to be some additional opportunities later this year as the construction units come online and will contribute to the cash flow.

We actually don't report occupancies of individual portfolios.

Okay. Got it.

I know at acquisition it was 85.4%. I just wanted to know --

I can tell you it's improved since then.

Okay. And the G&A expense went up 31 % this quarter. I know some of that was compensation-based, but what is the good run rate going forward and are you looking to expand the team?

John, this is Roger. We did increase G& A over the same quarter in 2014. We've increased the team beginning in the first quarter with two people, including Eric that we heard from earlier.

We had certain payroll taxes and employee benefit costs relating to some stock option exercises during the first quarter. We had marketing expense that is very typical for the first quarter.

Also, as mentioned in my previous remarks, due to the vesting schedule of our stock option grants, the first quarter is loaded with non-cash compensation expense which amounted to $1.231 million in the first quarter. So as far as a run rate's concerned, it should roughly be about two- thirds of the first quarter. That being for the second quarter coming.

Okay. That's helpful. Thanks, Roger.

And then my final question is on your development activity. You provided some additional disclosure which was great on your developments and I just wanted to know how you calculated the yield on your renovations? Is this expansion space or is it just taking older space and renovating it and you're going to get a higher rent that's equating to the field?

How we calculated the yield? I'm not sure I understand the question.

Yes, just --

First of all, this is Justin. That is a cash yield that is reflected. And what you'll have, it usually will agree to use the existing lease rate in the lease, which may -- if you start with a 7% and it escalates, for instance, that may wind up with kind of an awkward yield number, if that 7.72% is jumping out at you.

And then in the case of the Kentucky renovation, that was just a negotiated rate on the front end. When we renewed the lease, we agreed to finance their renovation at 9%. And then, same with the skilled nursing yield. But those are cash yields.

Are any of these additives to the existing space or is it just a pure renovation?

This is Kevin. It would be a mix of the two. There are some where we've added some additional space and some where we've just improved the existing physical plane.

Okay. Got it. Thank you.

Thank you.

Todd Stender, Wells Fargo.

Hello, thanks. We're seeing more lending from you guys lately to operators. I just wanted to hear a little more color on the mezz loan?

Roger mentioned this in his prepared remarks, it was paid off in the quarter. Can you guys give us some details around that loan? How long was it outstanding? And maybe an IRR, if you guys look at it that way?

On that specific loan that was paid off?

Yes, I think Roger mentioned that there was a mezz loan that was paid off in Q1?

This is Kevin. That was for a construction project -- on a project in Florida, assisted living and memory-care community that paid off. We typically don't do an IRR on that, but that had a coupon of 13% and was paid in full when it transitioned to a new or refinanced us out.

In that case -- this is Justin again. Strategically it put us in a position where we could potentially own the asset. We had a right of first refusal.

In this case we decided not to pursue that route. We took our payoff and we moved on.

Any specifics around why you passed? Anything you can share?

Yes. I don't mind sharing that fill-up was a little slower than expected, although their credit was satisfactory to refinance and pay us off. It's just -- the overall strength of the project was good enough to get our capital back, but maybe not strong enough for us to want to pursue deploying more capital. So we went ahead and took the payoff.

Okay. Thanks, Justin. And then just -- I'm sorry, did I cut you off?

No, I said you're welcome.

When you look at the ATM program that you guys now have, your stock obviously trades a lot more liquid. Can you kind of just share how you look at the valuation metrics to know when to issue stock?

Is it just ultimately to evaluate your cost of equity? So when to pull the trigger? How do you look at where your stock trades?

This is Eric. We look at the ATM as dry powder and it's an acquisition-driven decision.

And so how do you valuate the cost of that equity? At what price? Is there a valuation metric that you're tethered to?

No. It depends on where we're trading at the time. It depends on what our dividend is and it depends on what the yield is of the potential investment.

Got it. Thank you.

Rich Anderson, Mizuho Securities.

Thank you. So just further on to that question from Todd.

Do you have in mind a cost -- if your debt cost to capital is 3.5%, I think you said, and your future investments go on a 60%/40% equity to debt ratio. What do you think of as your cost of capital when you add in the equity cost of capital? The blended cost of capital?

This is Justin. I'm not trying to avoid the question, but obviously that's going to depend on the price at the time. And also we're going to consider our cost of equity, our cost of debt from a long-term perspective. And then we're going to consider the investment.

So what you'll find from us when we make investment announcements that will -- they will coincide with the capital sources, which will include both debt and equity. And then the market will have clarity on the margin that we'll have when we make the investments.

But to project, it's hard to do, because both the cost of debt and equity tend to move around a bit. And so the cap rates, depending on the exact opportunity when we make an investment, so there's a lot of variability in there.

Well, I guess what I'm saying is, not to get overly theoretical here, it's Friday after all, but you could do an AFFO yield and that's your cost of equity or -- and that, I just did it quickly, it's 6.2% based on consensus. Or you could have a longer-term cost of equity, what do people expect to get out of your stock and maybe that's a 8% or 10%. When you think of investment, which do you apply? The kind of short-term view on that cost of equity or the longer-term view cost of equity?

We apply the cash point of view. So it would be the short-term point of view on cost of equity.

Okay.

And then we'll factor in the dividend growth over time. But then we'll utilize the escalators or any other potential growth we have on the investment as well.

Okay.

Clearly the debt is the fixed component and we've been terming out between seven and 12 years, and in some cases longer, when we have a limited amount of secured debt that we have used. And we do understand clearly that the equity, in fact, becomes more expensive over time, but at the time we make the investment, we're looking at the cash side of it.

Okay. Fair enough.

You mentioned at the beginning, which I thought was a good way to put it, that you're small enough to grow but big enough -- like a balance sheet like a large cap healthcare REIT. So do have an attempt at what your cost of capital is? How more expensive it is relative to maybe the Big Three in your space?

Our cost of debt capital, I think, is, in fact, the lowest in the space. And the reason for that is because back in 2009 when we started our growth spurt, we had no legacy debt.

We literally had zero debt. We had cash. So we've been able to really manage the balance sheet to our liking and have, I think, done a pretty good job of utilizing low-cost sources of debt and have kept that number below the peer group.

Okay. Fair enough.

I think it was Kevin that said the focused assets -- the six in the same-store portfolio you said are stable; is that right? So the occupancy is not growing? Is that what you meant by stable?

Sorry. No, the occupancy is improving and expected to improve on the six. It's just saying that they're not going backwards.

They're not going backwards. Okay. New definition of stable.

Justin, maybe a big picture, another theoretical-type question for you. Some might say that operators are willing to sell off the risk of their operations and just take on a management role as a view like they're trying -- they see something that maybe the REITs don't in terms of taking on that risk. Not sure if you heard that theory before.

But do you think there's any truth to that? That a guy coming from the operations background, that why would operators be willing to engage a RIDEA structure with the REITs at this point if there's apparently so much value in that structure from your perspective?

Okay. Good question. It might take a while to answer, because I do have some opinions on this matter.

I would say this -- let's start with, from NHI's perspective, our top five customers' combined experience operating is over 28 years average -- the combined average. We've partnered with those companies and many others that have a very long-term point of view from a business plan perspective. They've been doing it for a long time and they plan to continue to operate.

And when you're dealing with customers that have a long-term business plan and they're operators, our experience is they're going to want to own as much of that future cash flow as possible. So I think our structure, if you look at our portfolio, reflects that. We have one RIDEA relationship and the reason we have that was because there was a need to monetize some operating equity by the operator. And they had a strong desire to develop new assets and they had a capital source in NHI that could fulfill that need.

So they were willing to trade some of that upside for the ease of raising capital for the development priority. So when you look at transactions where the operator is giving up their future potential that, to me, reads to me like a short-term business plan. I also think it's a signal that the market is feeling as though they're selling assets at a valuation that's peaking.

I'm not saying I have the perfect crystal ball to say who is on the right side of that transaction. But I can say that in NHI's case, we're on the lookout for operators that want to retain as much of their upside as possible, retain as much of their operating cash flow as possible because that's an indicator of an operator that has a long-term business plan.

Okay. That's a very interesting perspective. So there is, in your view, some of that out there then? Not to name names but in some cases you feel like it's topped out and that's the reason for the, quote, unquote, sale of the operations.

Yes, I do think so. And I will also point to this, that in the case that there is a private equity seller, that's absolutely going to be the driver of their priority.

So you are going to have a case where you'll see them trying to extract as much value out of the real estate and the operations and may leave a management company in place. I think over the years we've seen many transactions like that. But, in all fairness, we've seen transactions where private equity has exited, realized a nice price, but we've seen those operations grow as well.

So that's why I say I'm not -- I don't pretend to have a crystal ball to know who is on the right side of the trade. But certainly there's been some sales where it's evident that they are trying to get as much out of -- squeeze as much out of it as they can today in a very short-term point of view and leaving a very small operating company or management company to manage the operations on a go-forward basis without a lot of skin in the game.

Interesting. Okay. And then a quick one for Roger.

Are the two loans that you are in the process of funding, are they currently yielding? Or in the case of the construction loan, is there some sort of accrual that you're earning or is it real cash coming in the door?

It's real cash coming in each month.

Okay. Great. Thank you.

Thanks, Rich

(Operator Instructions)

Jordan Sadler, KeyBanc Capital Markets.

Thank you. Quick one on the appetite to sell assets here at these prices. Is there anything else within the portfolio worth culling at this point and/or could you remind us if there's any remaining repurchase options?

Sure. This is Justin.

It certainly isn't a bad time to consider selling. But if you look at NHI's portfolio, a majority of it we've acquired over the past six years. And along those six years, we did do some selling as well. So we been able to shed some older assets.

We are continually looking at our portfolio to see if there may be something that we want to sell to take advantage of market timing. There is nothing in cement at this time, but that's absolutely always part of our line of thinking, because the goal is to make sure that the asset pool we have is of the highest quality and will have long-term relevance. And I can say that most of our portfolio, an overwhelming majority of our portfolio, qualifies in that regard but we will continue to look at opportunities to prune over time.

Okay. Then switching to RIDEA for a second, can you maybe give us a sense for what the overall appetite for RIDEA might be relative to the overall portfolio? Would you go up to 20%?

This is Justin again. The appetite -- I'm going to back up for a second. NHI's appetite has to do with partnering with experienced operators that have an immediate capital need and also have a desire to continue to grow. We've had operators pursue mezz financing with us; we've had them pursue leaseback transactions, construction financing, and the RIDEA structure.

We leave it pretty open-ended in terms of what structure we might consider, depending on the operator's needs and our comfort level from a credit risk standpoint. Specifically to the RIDEA question, we really don't have a goal to grow that at all at this point, except organically through our existing RIDEA partner, Bickford Senior Living. It doesn't mean we'd rule out other opportunities, though, and we really have not set a target number in terms of exposure at this time.

Last one is on the leverage of capital structure. I'm looking at slide 9 from the supplemental.

And it's been referenced, the 60%/40% debt equity funding mix. When I'm also looking at the lower right, the net debt-to-EBITDA and how that factors in, because you're still quite low, obviously, on that metric, although, of course, it's risen as you've finally started to employ some leverage over the last few years.

So how do you think about it on debt-to-EBITDA basis, because obviously, if you are acquiring assets at cap rates in the 6%s and 7%s, your debt-to-EBITDA, just technically on a 60%/40% funding basis, would migrate closer to the sort of 6% to 7% range itself, right, just simple math, right? Your debt component, 40% of a 6% cap is 6.6 times. How do you think about entity level leverage on a debt-to-EBITDA basis or is it just more that you are focused on that 60%/40% number?

This is Justin. I'll make a comment, and then if Eric wants to add anything or Roger they can.

I would say that starting with just the overall metric, we like where our current leverage level is, which is in that low 4%s. We don't mind letting that drift up at times, depending on the market timing and the cost of equity so that we can pursue opportunities.

However our goal is to be among the lowest levered companies over time, so that as we move through various cycles, NHI is one of the most bankable companies at any given time. And we believe by keeping the leverage low and the balance sheet where it is today, that we will be in a position to be more competitive if and when interest rates. In fact, do go up, we think we're in a tremendously good position to take advantage, given our leverage level versus the peer group.

And so from an entity standpoint, you'll notice that we are going to use a majority equity moving forward to continually keep the leverage low.

I would just add to that that certain acquisitions come with debt placed upon them, like the Bickford acquisition. So there are times when that target can't be met because of the current state of the capital stack.

Thanks for the time.

Thank you.

Rich Anderson, Mizuho Securities.

I actually don't have anymore questions. I feel to give you credit for the improvement on the quarterly disclosure and the structure of the call. I think it was excellent.

I particularly like page 13 the most. So thank you very much. That's where all the pictures are.

(Laughter) Thanks, Rich. I appreciate it.

There are presently no further questions at this time. I'll turn the call back to you for your closing remarks.

I would like to thank everybody for joining the call. We look toward to speaking again next quarter. Thank you.

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