National Health Investors Inc (NHI) 2016 Q2 法說會逐字稿

Hello everyone. This is Colleen Sullivan, Director of Investor Relations. Welcome to the National Health Investors conference call to review the company's results for the second quarter of 2016.

On the call with me today is Eric Mendelsohn, President and CEO; Roger Hopkins, Chief Accounting Officer; John Spaid, Executive Vice President of Finance; and Kevin Pascoe, Executive Vice President of Investments. The results as well as notice of the accessibility of this conference call on a listen only basis over the Internet will release this morning before market opened and a press release has been covered by the financial media.

As we start let me remind you that any statements in this conference call which are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI 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 June 30, 2016.

Copies of these filings are available on the SEC's website at www.SEC.gov or on NHI's website at www.NHIREIT.com. In addition certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the 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 will now turn the call over to Eric Mendelsohn.

Thank you, Colleen, and welcome everyone.

It's hard to believe it's been a year since the CEO management change at NHI. For those of you who purchased stock on August 12 of last year, the day after the change was announced, your return on investment has been over 30% based on yesterday's closing price.

During that same period NHI has purchased 18 buildings, gained two new operating partners and has executed nearly 350 million of investments. We haven't missed a beat over the past year and continue to stay focused on creating value for our shareholders.

I'm extremely pleased with the growth profile NHI offers investors. We've outpaced the peer group consistently over the past six years in growth of normalized FFO per share and dividends per share. Over the past 10 years we have consecutively raised the dividend with an average annual increase over 5% while keeping our dividend payout ratio low and outperforming both the S&P's total return index and the MSCI US REIT Index.

The results for this quarter once again are representative of a strong growing company. Our normalized FFO increased 6.1% per share and normalized AFFO increased 8.9% per share when compared to the second quarter of 2015.

Our investment volume continues right on track with over $337 million of new investments year to date and we continue to position the company for growth and value creation. A prime example of creating shareholder value can be seen in our recent announcement to restructure our RIDEA portfolio with Bickford to a triple net lease. The new structure and the financial impacts of this change will better position the company for predictable cash flows and maintaining an active development pipeline as we will discuss later in the call.

I will now turn the call over to Roger Hopkins to discuss the financial results for the quarter. Roger.

Thanks, Eric. Hello everyone.

For the second quarter of 2016, normalized FFO was $1.22 per diluted share, while normalized AFFO was $1.10 per diluted share, which represents a 6.1% and 8.9% increase respectively over the second quarter of 2015. Normalized FAD for the second quarter increased to $1.11 per diluted share, which is an 8.8% increase over the second quarter of 2015.

These results reflect the timing and volume of investments made in 2015 and 2016, including $195 million in new investments since our last investor call on May 6. We expect to fund our existing construction loans and development activity each month throughout 2016 into 2017.

Our investments and commitments made in 2016 are listed in our Form 10-Q, and listed also in our supplemental data report. Our revenues for the second quarter increased 8.7% over the same period in 2015. Our interest expense increased to $10.7 million in the second quarter, due mainly to terming out $100 million of borrowings on our revolving credit facility to higher fixed rate private placement debt in November 2015.

Our general and administrative expenses for the quarter were $2.1 million, or 3.5% of revenue, compared to $2.5 million, or 4.5% of revenue one year ago. Our non-cash compensation expense was $251,000 during the second quarter and is expected to be the same amount for each of the next two quarters. We currently expect our general and administrative expenses will remain in the range of $2 million to $2.5 million for each of the next two quarters.

Our net income for the second quarter reflects the sale in May of two skilled nursing facilities to our tenant, The Ensign Group for a gain of $2.8 million. Likewise our net income for the second quarter includes a gain of $23.5 million on the sale of a portion of our investment in LPC common shares, which we have held for over 15 years. These gains are expected to be offset for tax purposes in 2016 by our current dividend return of capital. These gains are excluded in our normalized non-GAAP financial metrics.

As described in our first-quarter conference call concerning the transition in May of our lease of 15 skilled nursing facilities from Legend to The Ensign Group, we were required for accounting purposes to write-off accumulated straight-line rent receivables of $8.3 million and intangible assets of $6.4 million related to the termination of the purchase option previously held by Legend. There is no purchase option in the current lease with The Ensign Group. Our normalized non-GAAP financial metrics reflect these unusual and infrequent transactions.

For the first six months of 2016, normalized FFO was $2.38 per diluted share, while normalized AFFO was $2.15 per diluted share, which represents a 4.4% and 7.5% increase respectively over the same period in 2015. Normalized FAD for the first six months of 2016 was $2.18 per diluted share, which is a 6.9% increase over the same period in 2015. These normalized results primarily exclude transactions previously described concerning gains on sales of real estate and marketable securities and non-cash write-offs related to our lease transition to The Ensign Group.

Yesterday afternoon we announced the signing of a letter of understanding with our joint venture partner and affiliate of Bickford Senior Living to convert our 32-property RIDEA senior housing portfolio to a triple net lease structure. NHI will acquire Bickford's 15% interest in the property company for approximately $25.1 million and Bickford will acquire NHI's 85% interest in the operating company for $8.1 million.

In a few minutes Kevin Pascoe will discuss the rationale for the planned transaction and the associated benefits to both NHI and Bickford. A more complete disclosure of the transaction will be made to coincide with the closing of the transaction, estimated by the end of this year.

In addition putting this large portfolio on a steady and predictable course of lease income without the large fluctuations that often occur in underlying facility operations is important to our shareholders. Our historical investment in real estate covered by the joint venture is over $281 million, yielding current year contractual rent of $25.4 million, or 9% plus 3% annual escalators.

This income stream will continue under the new triple net structure. After the closing of the transaction, NHI will no longer make partnership distributions to Bickford. In 2015 we distributed $2.3 million in cash to Bickford.

As for our construction loans and real estate development activity, we continue to fund our mortgage and construction loans to an affiliate of Life Care Services for the expansion of its entrance-fee community in Issaquah, Washington, named Timber Ridge. We have funded $112.7 million thus far and estimate we will fully fund our $154.5 million commitment by the end of this year. As we have previously disclosed, we estimate that we will receive repayment on our construction loan in 2017, leaving a mortgage loan balance of $60 million for which we have scheduled a 10 year maturity.

In our $55 million development program with Bickford to construct five new assisted living and memory care facilities, we have funded $34.5 million as of June 30, with approximately $15 million to be funded by the end of 2016 with the remainder in 2017.

This morning we announced that our third quarter dividend will be issued at $0.90 per share for shareholders of record on September 30, 2016. We currently estimate our total dividends for 2016 will result in a normalized FFO payout ratio in the low 70% range and a normalized AFFO payout ratio in the low 80% range.

Moving on to guidance for 2016, we have increased and tightened our guidance ranges based upon the successful execution of new investments made during the second quarter and the expectation of additional investments for the remainder of 2016 and the financing arrangements by which to fund them. We currently estimate normalized FFO in the range of $4.84 to $4.88 per share and normalized AFFO in the range of $4.36 to $4.38 per share.

We do not include an estimate of investment volume in our guidance range. Furthermore our guidance range does not include the accretive impact of the planned transaction announced yesterday with Bickford, as we cannot estimate the closing date of the transaction, though it is expected to occur by the end of 2016.

I will now turn the call over to John Spaid who will discuss the capital plan and balance sheet metrics.

Thank you, Roger.

We continue to successfully execute our 2016 capital plan. Our balance sheet metrics for the quarter ending June 30, 2016, were net debt to annualized adjusted EBITDA at 4.4 times, weighted average debt maturity at 6.8 years, weighted average cost of debt at 3.51%, and a fixed charge coverage ratio at 5.8 times.

Turning to our revolver, as of June 30 we had $191 million outstanding with an available capacity of $359 million. Proceeds from our revolver since year end 2015 were used to fund our investment pipeline through Q2 2016.

Looking at our marketable securities. During the second quarter we continued to sell our position LTC common stock. In Q2 we sold 834,660 shares, leaving us with a balance of 459,140 shares as of June 30. During the second quarter we made use of NHI's ATM registration and issued 714,666 shares at an average price of $71.30 per share, providing the company with $50.2 million in net proceeds. Proceeds from our ATM and LTC common stock sales were used to pay down the revolver.

In July, we rate locked with a private placement lender for $75 million an eight-year term debt at a 3.93% interest rate. We expect to close on the loan in the third quarter. As we move forward on our 2016 capital plan we will continue to evaluate our capital source options, including further revolver use, private placement debt, bank term loans, convertible debt, and additional ATM equity issuances.

We view our ATM program as an effective way to match fund our smaller acquisitions by exercising control over the timing and size of equity proceeds. We believe the ATM provides NHI with a more favorable cost to equity as compared to larger follow-on offerings.

With that I will now turn the call over to Kevin Pascoe, who will cover portfolio details and new investments.

Think you, John.

Looking at our portfolio the EBITDARM coverage ratio is 1.92 times. Our skilled nursing coverage is a strong 2.97 times and our senior housing portfolio remains steady at 1.23 times. National HealthCare Corporation continues to be a strong performer with a 3.8 times corporate cash coverage and is currently 16% of our cash revenue.

Our relationship with Holiday Retirement accounts for 15% of our cash revenue. Occupancy for the quarter was 91.4% and the EBITDARM coverage ratio was 1.19 at quarter end. The occupancy trend for the second quarter remained positive and the portfolio close of the quarter with average occupancy of 92.5%.

The Bickford relationship accounts for 15% of NHI's cash revenue. The same-store portfolio EBITDARM had solid improvement over the prior quarter in the same quarter in 2015 as expense pressures leveled off.

One of the five new development projects opened during the third quarter and received strong reception in the market. Two more developments are expected to open by the end of the year and the remaining two are expected to open in the second and third quarters of 2017.

We continue to be very happy with our relationship with Bickford. They excel in their respective markets and we look forward to continuing to grow with them. Converting the RIDEA to triple net helps Bickford cleanup their balance sheet, making them a stronger partner, solidifies NHI's returns, eliminating the variability of operational cash flows and still provides growth for both NHI and Bickford through construction opportunities.

To that end we have also agreed to a new development project with Bickford under a loan structure where NHI has a favorable purchase option of stabilization. This structure will preserve solid returns for NHI similar to what it had under the RIDEA and also incentivize Bickford for the value creation and the developments.

Senior Living Communities represents 14% of our cash revenue, the EBITDARM coverage for SLC is 1.16 times on a trailing 12-month basis as of first quarter end. Second quarter saw improved entry fee cash flow in July with a strong sales month as well.

As discussed last quarter we signed a new lease with Ensign on 15 skilled nursing facilities formerly operated by Legend Healthcare. These communities transitioned to Ensign effective May 1. This relationship represents 9% of NHI's cash revenue and is bolstered by Ensign's corporate fixed charge coverage ratio in excess of two times.

Moving on to new investments, in June we announced the acquisition and lease of two entrance fee CCRC's from affiliates of East Lake Capital Management for $56.3 million. The communities are subleased to Watermark Retirement who operates 40 senior housing communities in 21 states, and is an established operator of CCRCs. The lease has a term of 15 years with initial yield to NHI of 7%, with annual escalators of 3.5% in years two through four and 3% thereafter. The communities have an EBITDARM lease coverage ratio in excess of two times.

NHI has committed up to an additional $10 million for capital improvements and potential expansion of the communities over the next two years. Also during the quarter we announced the exercise of our purchase option to acquire five assisted living and memory care facilities owned and operated by Bickford Senior Living for $87.5 million. The acquired facilities have a total of 277 units, a combined average occupancy of 92%, and have EBITDARM lease coverage of 1.35 times based on an initial annual lease rate of 7.25%.

NHI has committed $2.4 million for capital expenditures and expansion of the existing facilities, the funding of which will be added to the new lease base. The lease has an initial lease term of 15 years plus two five-year renewal options. The annual lease escalator is 3% and NHI's purchase option on the sixth Bickford facility was relinquished.

Subsequent to the quarter NHI expanded its relationship with Senior Living Management with a mortgage loan and corporate loan totaling $24.5 million to fund SLMs purchase of five communities in Florida. NHI will receive an 8.25% coupon on the loans and get a participating interest in the properties. This gives NHI upside in the value of the communities and positions NHI to purchase the communities should SLM elect to sell. Our pipeline remains very active with a healthy level of opportunities under review from various asset classes, and we continue to receive off market opportunities from our existing client base and referral sources.

With that I will hand the call back over to Eric.

Thank you, Kevin.

We continue to stay focused on positioning the Company for high-quality growth and ultimately for creating shareholder value.

With that we will now open the line for questions.

Thank you.

(Operator Instructions).

Chad Vanacore, Stifel Nicholas.

A good morning. I was actually hoping that you could give us a little more color on the RIDEA to triple net lease conversion. What are the mechanics involved there, and is there a market to market somewhere?

Chad, this is Kevin, good morning.

As I mentioned in the prepared remarks this is just an opportunity for us to stabilize our cash flows with Bickford through the triple net lease. I would tell you that we looked at market comps in terms of valuing the portfolio and would be consistent with how we've underwritten portfolios in the past and consistent with the deals that we've announced recently.

All right. What about on the new triple net lease? What kind of coverage are those leases underwritten to?

Again it would be similar to what you see in our senior housing portfolio. If you look at our supplemental, which is, I believe was 1.23 times on the EBITDARM coverage. It will be consistent with that.

All right. And then does this change your pipeline, your development pipeline at all?

No, it doesn't. We are still full speed ahead with Bickford as I mentioned. We are very happy with them as a partner and continue to -- we will continue to grow with them. As I mentioned, we are doing -- the next project is a loan that we're doing to them where we have a purchase option. So we are going to continue to add to the relationship over time. They continue to look for high quality opportunities to develop, and it's definitely something we intend to be a big part of.

All right. Then with the thought process on converting now, just trying to stabilize future rent flow volatility, or was there something else that drove you to do this now?

Chad, this is Eric.

Frankly when you look at the history of our RIDEA, the returns that we were getting were very similar to a traditional lease. So we think we have figured out a way to get to a hybrid where we have a traditional lease in place and then we have a development program that provides us ups and the types of returns that people look for when they think of RIDEA.

All right that's good color. I will hop back in the queue. Thanks.

Thank you.

Jordan Sadler, KeyBanc Capital Markets.

Thanks. Good morning or afternoon.

Good morning.

So I'm trying to understand the same thing on Bickford. I think the way that the Bickford joint venture was structured originally by prior management was intended to somewhat follow the fundamental elements of a triple net lease, right, so it was performing similarly somewhat, I think, somewhat by design. But what was it -- what you would assume is that the expectation was that the joint venture would ultimately allow for permit upside in the event of a stronger upturn and potentially maybe align yourselves with your partner to a little bit of a greater extent. So what part of that were you looking to change? Or, was misstated previously?

Jordan this is Eric. I don't know that anything was misstated previously.

I think your characterization of the RIDEA is accurate. And I can tell you from my perspective coming from an operations background that operations and the revenue from operations is lumpy and episodic, and as a REIT what we've done is we've traded some of that upside for stability uncertainty. And frankly we've also helped our partner the Bickford's by strengthening their balance sheet. With this transaction they will be able to pay off some Legacy debt and coinvest to a greater extent in some of the new developments that we are doing.

So economically they're going to come out of this stronger and better positioned and we like that. Whether you're a tenant or a joint venture partner, it's always good to have strong partners.

I get that. And especially in a partnership to better capitalize your partner makes some sense. But it's partly coming at the expense of your shareholders. Right? And your shareholders' capital on some level. And you could look at it the other way and say well your shareholders have a better partner and better credit. So I recognize that they are somewhat closely tied.

Jordan (multiple speakers).

I'm not sure what the shareholders are getting out of it, in that the Bickford's end up being better capitalized.

Jordan, this is Roger. I do want to point out that we distributed $2.3 million to Bickford last year and the unpredictability really comes on the OpCo side of things.

Now by design we have been reinvesting the income in the OpCo in newer buildings, and those newer buildings are doing great. So if we take out the variability of the OpCo bottom line, which affects our FFO and AFFO and really focus 100% on a triple net structure and still have the development pipeline and the ability to make loans and have purchase options and set rents that is truly the best of both worlds. So there is really no detriment to our shareholders. In fact it's a very accretive transaction based upon the numbers I just gave you.

And you will see more specifically that accretion as we close this transaction and we provide some pro forma information as if the transaction had occurred previously. So it's a very positive for NHI and its shareholders, and it is positive for Bickford. So -- [more than one speaker - inaudible]

Hey, Roger. That helps.

Can you give me the 2.5 million. Thank you for pointing that out. Is there a net cash flow impact to NHI that you can give us a little color on? The nest cash out the door is $25 million minus the $8 million, right? So you are paying incrementally $17 million.

That's right.

And your cash flow, is it just the $2.5 million goes away? But you have to --

We have to -- Yes. As you can see in our 10K last year December 31 we paid almost $2.3 million in cash distributions. So that was their share. Of course we paid NHI it's share out of the PropCo. And we have been very clear, we've been reinvesting excess cash flows from OpCo into newer facilities, which have startup losses and lease up related losses of up to stabilization. There's nothing unexpected about that.

So the pro formas that we will eventually supply, pro forma implies, as if. As if we had paid $25 -- approximately $25 million for the PropCo and had associated interest expense and that short of thing. So, really once we get beyond the acquisition of their share of PropCo and their purchase of our share of OpCo this is still a very accretive.

We just wanted to be able to point to something that you might be able to latch onto and that was the cash that we paid that they were entitled to. Now certainly that's not a predictor of 2016 or 2017 or years after, but this is a very profitable portfolio and this adequately incentivizes Bickford over and above their lease payment to be able to retain their income as they are entitled to as the tenant. So this is a bit of a variation --

Can you remind us of the management fee? Is a management fee 5%?

This is Kevin. It was a flat 5%.

Okay. Thank you for that. Eric, is this transition -- shall we take away from this that you are a little bit more cautious near-term, or maybe more than a little bit more cautious on RIDEA, or at least on the Ops in the outlook?

I wouldn't read too much into this. You know RIDEA is a very case-by-case type of structure in the universe of structures.

We would be open to future RIDEAs under the right circumstances with the right partner. And frankly a lot of people that approach us for RIDEA really would prefer to do a joint venture on real estate. So you may see JVs on the real estate, but not on the operations going forward. We have these types of conversations with clients all the time.

Okay. That's helpful. And then the last one with -- Roger, back to you on the guidance. In that small bump was there some portion related to an acquisition that wasn't already contemplated? Or what was not previously contemplated?

As we have described, our initial guidance, as well as our adjustment now, are based upon circumstances that exist and that we feel confident about. We feel confident about our investment pipeline, but also the means by which to finance that. So we want to give the best picture we possibly can updated through today excluding the impact yesterday of the announcement regarding the RIDEA which is accretive. We just don't know when that will close, but we expect it will by the end of the year.

I guess what I was asking -- what's coming in a little bit better that caused you to tweak it higher. Is it the financing assumptions you are saying?

It's really a mixture of the volume and timing of what we have been able to close and what we expect to close and the associated financing. We have been using our ATM this year to help pay down our revolver as we close acquisitions. So, it's a very straightforward way in which we are able to take down acquisitions at that time and then refinance them on a more long-term basis afterwards.

Okay thanks for all the color.

Juan Sanabria with Bank of America Merrill Lynch.

Thanks for the time. Just on -- I think you mentioned a sort of in-line coverage of a mid-one/two to one/three on an EBITDARM basis. My understanding is most of the deals in the market are at that level post management fee. So I'm just wondering, were you comfortable having the lower coverage relative to market, or is there any renegotiation of rents and just why haven't you been able to quantify the accretion? The deal is announced, I get the timing could be later in the year, but there's just a lot of confusion as to the rationale without knowing the impacts. It's just a little confusing.

Juan, this is Kevin. I will start with the rent question.

There is no renegotiation on rent. The rent that we have in place between the operating company and that property company is staying in place. We are just buying out Bickford's portion of the property company. So there's no we renegotiation there. Is just one where the rents have been set. They are growing into those rents with the new developments, so we would expect to see that improve over time.

And, Juan, this is Eric. In terms of quantifying the returns, we have modeled the returns and they are certainly accretive. Roger has pointed to a number -- of the rent number that we received last year that's likely very similar to what we are modeling. But there is HUD debt on these properties. There is Fannie debt. Those lenders can take many many months to approve a transaction of this nature.

So we are not comfortable publishing any type of financial impacts at this point until we have a date certain for closing. And again you know my policy; being the new guy, I would rather under promise than over deliver. So we want to be cautious about broadcasting what the impacts would be.

How should we think about how you thought about the valuations implied for the OpCo -- I'm sorry for the PropCo relative to the trailing 12-month EBITDAR. I'm not sure how those values were arrived at?

Juan, this is Kevin again.

Briefly mentioned before, I would just point you to other transactions that we have done recently. In terms of a Cap rate on the lease payment and that was a basis point for negotiation with Bickford to reach agreement on both the operating side and the property side.

What is the lease payment relative to -- how does that compare to the EBITDARM that you have been generating on the RIDEA pool. Maybe I missed it that Roger mentioned it earlier.

You are talking about the existing current lease payment?

Yes, I am trying to get a sense of what was the NOI that was Capped to arrive at the valuation and how does that differ from the EBITDARM that the property is regenerating that you disclosed?

Well, the -- Let's see, Juan. I will give you a number.

The current contractual rent is $25.4 million from the OpCo to the PropCo. And so what Kevin is saying is we valued that PropCo based upon what we've done similar recent deals and obviously this is a large portfolio. And so, what is falling out is really the value of the equity in that particular PropCo and in the OpCo. And that is roughly how the numbers are falling out. Their pro rata share.

That's not telling you exactly what that cap rate is, but I can tell you we are using a similar cap rate and we just recently hit a deal with Bickford on five option properties. You've seen that deal. We have a lease rate of 7.25% on that one. So there's not a whole lot of difference in the valuation of this large portfolio compared to the five we just did.

Okay. I will leave it at that. Thank you.

Thank you.

Rich Anderson, Mizuho Securities.

Thank you.

You didn't expect to create such a controversy today with this, but I'm going to say that this is the quarter of the REITs giving a big bear hug to their tenants given Genesis and now this. We'll figure it all out in the end. But Eric, the question for you is, does this just come down to basically derisking and simplifying the arrangement with Bickford. Isn't that really the value that you are contemplating longer term?

That's one way to look at it, so to speak. We could put the rid in RIDEA. But it does lower the risk profile, and gives us more certainty going forward, and we still get to keep the goodies which are the development pipeline and the pops that we will get along the way from that.

Right.

But when you inherited this as CEO did you always look at the arrangement with Bickford and think it was just a little bit too confusing for people to understand with the whole preferred payment and all that stuff?

Well, as you know I had a cheat sheet prepared for people when I explained it, and you are right, it was a bit complex. But coming from Emeritus, where we had complex joint venture arrangements with Blackstone and others, and in the universe of structures this was not unusual to me.

Okay. And then, if I could just switch gears to Ensign Group. They did report a reduction in their Medicare census this quarter. I'm wondering if that resonated with you at all, and if that is maybe a negative signal for everything that's going on with value-based payments and the like? If you can comment on their fortunes this quarter.

Rich, this is Kevin.

Definitely something we are cognizant of and we will continue to make sure we are watching what's going on in that space. We are still very happy with them as our new tenant there in our Texas buildings that they took over from Legend. It is something that we will be mindful of, but feel like we have a very strong partner there and very happy to have them as a partner.

So, Kevin, is there -- there is no holdup, no hesitation from you at all when it comes to Ensign, or does this give you any level of pause for the short term as you figure this all out?

Again we feel they are a very strong partner and very happy to have them and think there may be some seasonality involved, as well. But it is something we are mindful of and will continue to watch. Not only with Ensign, but just in the skilled space, generally.

Right. Okay. Thanks very much.

Thank you, Rich.

John Kim, BMO Capital Markets.

Thank you. Eric, congratulations on your first full year.

Thank you, John.

Had a question on Senior Living. So you said the EBITDARM coverage declined to 1.16, and you said in the past that the EBITDAR coverage would be 10 to 20 basis points lower than that. So given that they are probably barely covering rent with cash flow, how sustainable is this before you need to address it?

John, this is Kevin. I just want to be clear. You are talking about Senior Living Communities?

Yes.

Yes. So as we've discussed on prior calls, there is a little bit of seasonality with entry fees and you know they are lumpy if you will. So there has been a little bit of that.

They had a huge sales month last year, which rolled out of the trend. And then they are having more consistent entry fee volume this year. So you are seeing a little bit of an aberration on large sum rolling out and more consistent sums rolling in.

What I can tell you is that the second quarter was really strong, third quarter is shaping up really nice and we are very happy with the relationship there and they continue to develop on the campuses that they have. Those units are selling through and we are seeing again very good entry fee volumes and a little bit more consistent so far. That is not something I can sit here and say is going to -- it will continue to be consistent because we know the nature of them is lumpy. But they are covering the lease payments and there is no -- we are very happy with the position they are in.

Okay.

And then looking at your total portfolio coverage, it's 1.92. How important is it to maintain a high one coverage, or maybe above two times coverage? Given you made comments about having more predictable cash flows going forward?

Well I would say that we find a lot of comfort in the coverage that we have within our portfolio. I think it's very strong, very happy with the relationships we have and the coverages they have, so is clearly a focus for us and something that we are mindful of in the underlying coverages in the portfolio. I would say that it is -- to be above 2 is not a number that is -- if it goes below that as any way detrimental, that is still very strong coverage and something that we are very pleased to have.

Okay. Question on the Bickford transaction. Can you just discuss the price paid for the management platform and how you determined that price?

For OpCo?

Yes.

For OpCo.

EBITDA multiple.

We could probably back into it, but I'm trying to figure it out from your side how you valued it.

Yes. What we looked at was a valuation on the enterprise, and then backed into a property multiple, based on the rent we have in place, and the remainder fell to the operating company. Again there is negotiation involved with our partner there. But that is the general way that we approached it.

And what does that translate into as far as EBITDA multiple?

We haven't disclosed the multiple.

Would it be --

Bigger than a bread box.

Would it be similar to the Cap rate you are paying for the assets, or a lower multiple, I would imagine?

Well I guess what I would want to make sure we don't do is mix up cap and multiple. But if you are just talking the multiple for the operating company would be a higher multiple than the property.

Okay. I would've thought it would've been lower.

You're right. Now I'm the one who is switched up. The cap rate and the multiple. Yes, the multiple for the property would be higher than the multiple for the OpCo. The cap rate for the OpCo would be higher than the cap rate for the property.

And, John, one of the peculiarities of that valuation is that OpCo for the past several years has had losses by design because we have plowed all the profits back into new developments, which are bearing fruit now. So there was some degree of modeling and some degree of backing out those losses in order to arrive at a valuation. So if you were to drill down into that it would probably be a head scratcher, but that was our approach.

Okay and then finally on your tenant purchase options they've now increased to 12.9% of your annualized rent. And I know this is exercisable over many years. But can you remind us how you determine the price paid by the operator when they exercise the option?

Well usually the purchase option is embedded in the lease and they come in all shapes and sizes. So for example Brookdale's purchase option that they have on their properties is different then the Legend purchase option, which we dealt with earlier in the year, which is different than the NHC purchase option, which is years in the future.

So I wouldn't say -- you would have to review each of the leases, which some of them are publicly filed and others are not. But they are all different.

I can tell you based on my experience with Emeritus where we were exercising purchase options with landlords that typically there is a fair market value criteria that it is paid for the lease basis based on the original purchase price of the lease plus the rent bumps and that's usually your baseline. And then there might be some sort of profit-sharing if there is a large difference between that basis and fair market value, and whether or not that profit-sharing occurs, and at what split is subject to negotiation. And I can tell you further that there is a big difference in leverage of that negotiation when an operator brings the buildings to a REIT or vice versa. So those are the type of factors that affect purchase options.

And this is Roger.

I will just add that you know aside from these fair market value purchase options, where there may be a split of the upside between the tenant and NHI, there are the fixed-price purchase options that he also referred to, and so we have a few of those. So all together we don't have that many options. But generally those two models would be the dominant type.

So the market-based options, is that taking into account where interest rates and cap rates are at that time? If cap rates compressed 200 basis points five years from now does it take that into account, or is it based on what you said more of it was about the income.

Well it's going to be based upon the fair market value at that time. And there's generally a process which could involve multiple independent valuations if there is disagreement on value. But that would take into account all the factors at that time. And so in our schedule, which we provide in the supplemental data report, those first option windows don't open for several years to come. And it's a very low percentage of our revenue.

And so what's the difference between the market-based options and the fixed-price options? (multiple speakers) As far as the percentage of your total for just option.

We don't break that down and I wish I could remember. Eric mentioned NHC. We do have a portfolio of seven buildings in the Northeast where there is a fixed price option on those. And I believe the small portfolio that we have formally with Emeritus now with Brookdale had a fixed price on that. But ironically, John, I negotiated that purchase option when I was at Emeritus. So now I'm on the other side of my own purchase option.

Were you a negotiator?

Yes.

Okay. Thank you.

Our next question comes from Todd Stender, Wells Fargo.

Thanks. Just as a reminder, did the original Bickford RIDEA structure have an out like this or it could be converted to triple net lease by either party?

Todd, this is Kevin. No. It did not. There wasn't an end date or any kind of option like that. This was just a negotiation between the partners.

And is that something you will probably look at going forward if you do consider RIDEA? Maybe have some type of clause in it where it could be converted by either party?

I would just say that it is too soon to tell. As Eric mentioned, we haven't written off any structure going forward so it would just be taken on a case-by-case basis and see what the merits are of that opportunity at that time.

Sure. And then just looking at the broad picture, just want to get a sense are there broader implications for the company if we layer in the balance sheet. You know you went from zero debt to call it moderate debt.

Is the board looking at everything now? Are they considering little more derisking, not that you have a high risk portfolio or balance sheet. But are there more implications just beyond this Bickford change that we could see?

No. I wouldn't read too much into this. This is -- one deal does not a new direction make, and you know I would just say that this is some internal housekeeping that probably makes a lot of people's lives easier.

I'm looking at Roger. [Laughter] Because the RIDEA was getting to the point where we would need to make a decision about consolidating it on our books. So there were some selfish workload considerations in the background, as well. So we're still open to RIDEA under the right circumstances.

Todd, this is Roger. You know you have been following us for many years, and it's interesting that we started this relationship with Bickford with the purchase of five buildings. And now we have 32 in the RIDEA. We have five that we bought recently outside the RIDEA and five under development.

So it's been a tremendous relationship that we've had over the past five or six years. And it has just grown and grown and we have the mechanism now to continue that growth through the structure of construction loans and purchase options and resets of rents. And so it's just perfecting what we've been doing over the past five or six years in this relationship. And as Eric said in his press release yesterday, the close relationship here cannot be overstated. It's really been a great vehicle and a great relationship.

Thanks, Roger.

Can I stick with you, when we see that Ensign write-off. It is up around $15 million, but the bulk of which is non-cash. What is the cash portion? How much cash is being written off.

It was all non-cash and we had allocated with our specialist, not just us internally, but using outside valuation experts, there had been a value of $6.4 million assigned to their purchase option, which went away. You recall that we bought eight buildings from them in April. The purchase options went away.

In May we transitioned those leases to Ensign. So in the same quarter we were writing off that allocation $6.4 million and a straight-line rent receivable. And so both of those were required by GAAP. So we showed those on the P&L and obviously normalized those in our non-GAAP metrics.

That's very helpful. And just finally, I don't know if I missed this. Did you give an update on Holiday? Any coverage occupancy, or any current feelings about the independent living portfolio?

Hey, Todd, this is Kevin. Yes. We discussed it briefly. We mentioned that the occupancy for the quarter improved, and that the coverage on the portfolio is steady.

Great. Thank you.

We do have a follow-up question from Juan Sanabria with Bank of America Merrill Lynch.

Hi guys.

Just a quick follow-up question. When you talk about the deal being accretive, is that on an FFO basis or on a FAD or free cash flow after CapEx and after straight-line basis where -- I'm just wondering if there is any -- if the deal is just accretive because of some straight-line renting of the rents now with Bickford?

No. When I point to the cash distribution -- this is Roger. When I point to the cash distributions that our partner Bickford was entitled to, I would have you to think more in terms of AFFO and FAD. There was a straight-line component to their lease which impacts FFO, but that's really not our focal point. It's more on AFFO and FAD.

And we will give more details certainly when we provide the proformas as if this transaction had occurred January 1, 2015, because we show, obviously, comparative financial statements in our 10Qs, and you will be able to see what that pro forma accretion would have been. Again we don't make predictions of the future and it is a little bit more difficult than if we were just entering a new lease and we could look at the spread over cost of capital to pay for it and we could be more precise about accretion.

It's not like that simple. But we are trying to provide all the information and tools that we can to project it for ourselves and that you can do it as well in your model. And we will do that later.

And just a follow-up question on how you valued the PropCo. If you take the $25 million and the 15% it implies, $167 million for the entire asset base. But yet you are generating rents of $25 million.

It seems like the cap rate is double 15%, of what a normal market transaction is and so I'm just confused as to how you are saying that is a market cap rate or a market value. (multiple speakers)

Juan, this is Kevin. What I would direct you to there, is we have debt on the portfolio: both NHI allocated debt and agency debt, so that $25 million represents their equity in the PropCo.

How much debt is there?

We haven't disclosed that. We don't disclose PropCo on an individual basis in any of our filings. So --

Was it on the call?

No. But in our models we value the entire RIDEA and then we have debt to HUD, Fannie and PropCo has inner company debt within NHI corporate. And so Kevin said it exactly right. That their pro rata equity we believe currently would be valued at around $25 million.

Okay.

There are no further questions registered.

Thank you everyone and we will look forward to seeing you at the various conferences we all meet at and on the next conference call.

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