National Health Investors Inc (NHI) 2016 Q3 法說會逐字稿

Hello, everyone. This is Colleen Sullivan, Director Investor Relations. Welcome to the National Health Investors conference call to review the Company's results for the third 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, were released this morning before market open, and the press release that's 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 risk 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 September 30, 2016. Copies of these filings are available on the SEC website at www.SEC.gov, or on NHI's website at www.NHIREIT.com.

In addition, certain terms used in these call are non-GAAP financial measures, reconciliations of which are provided in NHI's earnings release and related tables and schedules which have been filed on Form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release. I will now turn the call over to Eric Mendelsohn.

Thank you, Colleen, and welcome, everyone. We're glad you could join us today. It's been another great quarter at NHI.

I'm pleased to say that we've completed the conversion of the Bickford RIDEA to a triple net lease structure. This conversion has locked in a stream of predictable cash flows for our shareholders, and has decreased NHI's exposure to operational risk. This accretive transaction has also allowed Bickford to pay off legacy debt unrelated to NHI, strengthening their credit and giving NHI a stronger partner.

We are very proud at NHI of our ability to work with our operating partners to create win-win solutions. This approach leads to growth and repeat business from our operating partners, and ultimately results in creating shareholder value.

Bickford is a great example of that. Beginning in 2009 with the purposes of five properties, the partnership has grown today to a total of 37 stabilized communities, with additional projects in the development pipeline. Being a flexible financial partner makes growth like that possible. Our relationship with Bickford has been very successful, and we look forward to working with them for many years to come.

We were also delighted to recently expand our relationship with Senior Living Communities and Chancellor Healthcare. Last week we announced the acquisition of a CCRC in Connecticut to be leased to Senior Living Communities, bringing our partnership with them to a total of 10 communities.

In September, through the purchase of two senior living communities in Oregon, we've grown our relationship with Chancellor. This partnership started back in 2012 with the purchase of one senior living campus, and has now grown to a total of seven communities. The addition of these properties is another great example of our relationship-based approach, and the growth that it leads to.

I will now hand the call over to Roger Hopkins to walk through financial results for the quarter. Roger?

Thanks, Eric. Hello, everyone. The third quarter of 2016 was a period when our record high average stock price allowed us to opportunistically issue over 680,000 common shares on our ATM program. On the other hand, this quarter we included nearly 275,000 shares to our measure of weighted average diluted shares for accounting purposes related to our existing convertible senior notes.

As expected, the timing of these added shares affected our per-share metrics for the third quarter and year to date. Nevertheless, we are on plan for 2016, and have announced over $110 million in new investments since the last earnings call, plus the accretive conversion of our joint venture with Bickford to a triple net tenancy.

Compared to the third quarter of 2015, normalized FFO increased to $1.23 per diluted share. Normalized AFFO increased to $1.10 per diluted share, and normalized FAD increased to $1.10 per share. We have announced over $447 million in investments in 2016, and have utilized a mixture of debt and equity to finance them, with an intent on maintaining low leverage. Our commitments to fund ongoing construction, expansions, loans, and new acquisitions total over $150 million, as outlined in our Form 10-Q and supplemental data report.

Our revenues for the third quarter increased 8.6% over the same period in 2015. Our interest expense increased to $10.8 million in the third quarter, due mainly to terming out $100 million of borrowings on our revolving credit facility to higher fixed-rate private placement debt in the fourth quarter of 2015, and increased borrowings to fund our investments in 2016.

Our General and Administrative expenses for the third quarter were $2.2 million, or 3.4% of revenue. Our General and Administrative expenses for the same quarter in 2015 were abnormally low, as they included a reversal of accruals for incentive compensation to our former CEO.

We currently expect G&A expenses will remain in the range of $2 million to $2.5 million for the fourth quarter of this year. Our non-cash stock based compensation expense was $251,000 for the third quarter, and is expected to be the same amount for the fourth quarter.

We incurred a loss of $754,000 during the third quarter on our share of the loss of the operating Company and the joint venture with Bickford. The loss includes approximately $290,000 in planned pre-opening and lease-up operations of new facilities in development, plus seasonal factors and wage increases effective July 1 across the 32-property stabilized portfolio.

As we have explained in the past, while the operating Company may show losses for accounting purposes, the actual cash flows have been sufficient to pay the scheduled rent to the property Company, and support the operating deficits of new facilities until they reach stabilization.

Kevin will explain in a few minutes the strategic shift in our business relationship with Bickford. The unwinding of the joint venture on September 30 resulted in a gain of $1.7 million on the sale of our interest in the operating Company, and the utilization and write-off of $1.2 million in deferred tax assets related to net operating loss carry-forwards. These transactions are reflected in our normalized non-GAAP metrics.

Our net income for the third quarter also includes the effect of a $1.1 million non-cash write-off of a straight-line rent receivable resulting from the planned transition of a 126-unit assisted living portfolio. The write-off is also reflected in our normalized non-GAAP metrics.

For the first nine months of 2016, normalized FFO was $3.60 per diluted share, while normalized AFFO was $3.24 per diluted share, which represents a 3.2% and 5.5% increase, respectively, over the same period in 2015. Normalized FAD for the first nine months of 2016 was $3.28 per diluted share, which is a 5.1% increase over the same period in 2015. These normalized results primarily exclude transactions previously described, gains during 2016 on the sales of real estate and marketable securities, and non-cash write-offs related to our lease transitions.

As for our construction loans and real estate development activity, we are near completion of our loans to an affiliate of life care services for the phase two expansion of its entrance-fee community in Issaquah, Washington, named Timber Ridge. We had funded $128.4 million as of September 30, and we estimate we will fully fund our $154.5 million commitment by the end of the next 90 days.

We estimate that we will receive full re-payment on our construction loan by the end of 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 $43 million as of September 30.

As for our dividends, we typically announce our fourth-quarter dividend in early December. 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, our estimates for the full year have not changed. We currently estimate normalized FFO for 2016 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. However, our guidance includes the effects of expected transactions for which we have clarity, including financing transactions.

With less than two months to go in the year, 2016 has been an excellent year for investment volume, and for accessing new debt and the equity capital markets to help us maintain a low cost of capital. These factors position us well, and give us great optimism for 2017 just around the corner. I will now turn the call over to John Spaid, who will discuss the capital plan and balance sheet metrics.

Thank you, Roger. As of September 30, NHI's net debt to annualized adjusted EBITDA was 4.4 times. Weighted average debt maturity was 6.9 years. Weighted average cost of debt was 3.63%, and our fixed charge coverage ratio was 5.8 times.

Our balance sheet metrics for the third quarter are illustrative of our commitment to keep a healthy, low-leveraged balance sheet, and our commitment to position the Company for future growth and value creation.

Looking at NHI's revolver, at the end of the third quarter we had $128.6 million outstanding, with an available capacity of $421.4 million. Including unrestricted cash, our available liquidity at the end of the third quarter was $425.6 million. We will continue to manage NHI's available liquidity resources so that we are conservatively positioned to meet the Company's future investing and financing needs.

Since the first quarter of 2015, NHI has maintained available liquidity of over $300 million in each succeeding quarter. Excluding short periods to bridge larger acquisitions, NHI will strive to maintain similar available liquidity balances.

Over the course of the third quarter, we made use of NHI's ATM registration and issued 680,976 shares at an average price of $80.51 per share, providing the Company with $54 million in net proceeds. Proceeds from our ATM were used to pay down our revolver and maintain our low leverage balance sheet.

Also during the quarter, we issued $75 million in eight-year unsecured notes to our private placement lender, with a coupon of 3.93%. Maturing September 30, 2024, the notes fit well into our long-term maturity schedule. The notes require quarterly payments and interest only, and the proceeds were used to reduce NHI's balance on its revolving credit facility. Terms and conditions of the new notes are similar to those under NHI's bank credit facility, with the exception of provisions regarding pre-payment premiums.

As we move forward with planning for our future capital needs for Q4 in 2017, including capital required for the recently announced SLC investment, we are beginning to receive repayments on our $94.5 million mortgage to Life Care Services' Timber Ridge project. Phase two opened in October, and repayment at Timber Ridge's construction mortgage will occur as resident entrance fees are received.

As of the end of October, we have already received $20.6 million in repayments. Proceeds were and will be applied to our revolver balance. Timber Ridge pre-sales are strong, and we expect the majority of the mortgage to be repaid by the end of Q2 2017.

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

Thank you, John. 2016 has been a very productive year, as we have continued to build on our existing relationships, which will help bolster our portfolio. We continue to be pleased with the performance of our portfolio overall.

The portfolio EBITDAR and coverage ratio is 1.9 times. Our skilled nursing coverage is 2.86 times, and our senior housing portfolio is 1.27 times.

Taking a closer look at some of our larger operating partners, our relationship with National Healthcare Corporation represents 16% of our cash revenue, and provides a very healthy 3.76 times corporate cash coverage. Holiday retirement accounts for 15% of our cash revenue. Their EBITDAR and coverage for the quarter with 1.19 times, with occupancy averaging 92.5%, which held steady through the third quarter.

Holiday continues to make investments in the communities, and has spent over $11 million in CapEx over the last three years. Our partnership with Senior Living Communities represents 14% of our cash revenue, and has an EBITDAR and coverage ratio of 1.15 times on trailing 12-month basis as of second quarter end. Entry fees during the second and third quarter were very strong, and third quarter's was the highest in Company history.

There are a lot of updates to give today with our partnership with Bickford Senior Living, which accounts for 14% of our cash revenue. Occupancy and revenue per unit continue to increase quarter over quarter. EBITDAR was lower sequentially, due to pre-marketing and start-up losses at three communities, as well as wage increases effective July 1, in addition to the continued wage pressures we have discussed over prior quarters.

As Eric mentioned earlier, we have completed the conversion of the Bickford RIDEA into a triple-net lease structure. NHI purchased Bickford's 15% interest in the real estate for $25.1 million, and Bickford purchased NHI's 85% interest in the facilities operations for $8.1 million. Base cash rent for the next 12 months of $26.3 million on the 32 stabilized facilities remains unchanged based on NHI's investment to date of approximately $298 million of which NHI will now receive 100%.

There are an additional five facilities under development or in lease-up with Bickford, which are owned by NHI. One opened in July, two opened in October, and two are planned to open in 2017. Funded amounts will be added to the lease basis during construction, as well as rent for up to the first six months after opening. Thereafter, base rent will be charged to Bickford at a 9% annual rate. Once the facilities are stabilized, rent will be reset to fair market value. Base rent on all leases will continue to escalate by 3% annually on the anniversary date of the lease.

Future development projects between the parties will be funded through a construction loan at 9% annual interest. NHI will receive a favorable purchase option at stabilization, with the rent being set at the time of purchase, with a floor of 9.55% on NHI's total investment.

On current and future development projects, Bickford as the operator will be entitled to incentive payments based on achievement of predetermined operational milestones, the funding of which will increase the investment on which the lease payments NHI has calculated. The new agreement does not change the terms previously disclosed of the 15-year triple-net lease entered into between the parties for five assisted living and memory care facilities acquired by NHI pursuant to a purchase option with Bickford in May of 2016.

Moving on to other new investments for the quarter, at the beginning of September, NHI purchased two senior living facilities in McMinnville, Oregon, mental organ for $36.6 million lease them to Chandler Healthcare. The lease has a term of 15 years, with annual lease rate of 7.5%, plus annual fixed escalators. The first facility opened in 2008 and expanded in 2015. It consists of two buildings, and includes a total of 16 independent living units, 29 assisted living units, and 54 memory care units. The second facility opened in 2015, and is comprised of 35 memory care units. In-place EBITDAR and coverage at closing was 1.35 times.

Last week, we announced the $74 million purchase of a 299-unit C-share C in North Branford, Connecticut, that will be leased to senior living communities. This community has occupancy in the mid 80%s, and EBITAR coverage of 1.35 times. This acquisition expands our relationship with SLC to 10 communities, including our previously announced mezzanine loan on the Daniel Island, South Carolina, project, which NHI will have a purchase option on the community at stabilization.

As for our pipeline, we continue to focus on communities and markets with solid local market fundamentals. Cap rates in the top MSAs are still very low, and in general there seems to be an abundance of competition for marketed transactions.

We have seen some cap rate expansion in the smaller markets, which plays to our strength and aligns with our customers. Despite the competitive market place, we've been very busy reviewing opportunities with both our existing customers, as well as working on adding new relationships.

Except for a handful of markets, we are not seeing the adverse impact of over-supply. We remain vigilant in monitoring our portfolio for competitive impacts. Furthermore, we remain selective to make sure we are adding high-quality operators in communities, and feel our portfolio is well-positioned to continue to grow.

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

Thank you, Kevin. We will now open the line for questions.

Certainly.

(Operator Instructions)

Chad Vanacore, Stifle.

Hi, good afternoon, all.

Good morning.

Hi there. I'm just thinking about you had the RIDEA conversion impacts. You went through the charges real quick. Could you just reiterate that for me?

Chad, on the RIDEA, that was un-wound on September 30. Going forward, NHI will be receiving 100% of the rents. The minority interest deduct will not grow in respect to prop-co. We did have a gain of $1.6 million on the sale of the op-co. We normalized that gain. We also have the utilization of the NOL carry-forwards, a deferred tax asset. We normalize that, as well. We filed --

Roger, how much was that on the NOLs?

That was $1.2 million.

Okay.

And that was a normalizing adjustment.

Got you.

As I say, the important thing going forward is we will no longer be increasing the deduction of our net income in respect to the minority interest in the prop-co.

Okay. That goes to what should we expect in the fourth quarter, give or take?

We recently filed pro forma statements with the SEC upon closing that transaction. Those pro formas cover 2015 as well as 2016, and the implied accretion to AFFO as a result of those pro formas was about $0.08 in 2015 and $0.06 in 2016.

Okay, just to confirm, you expect a little over $26 million in rents, and then new developments coming on line over time?

Yes. The rent is unchanged, and about $26.2 million of rents going forward.

Okay. Then the lease -- the coverage of the lease is underwritten now. I think last quarter it was 1.3 times EBITDAR. Is that what it finally was?

Chad, this is Kevin. Just to make sure we're looking at the same number, you're asking for EBITDARM on the Bickford relationship or in aggregate?

Yes, on the Bickford relationship.

Yes, how we've described that was it's consistent with what our senior housing portfolio is. It will be in that range that you just described.

Okay. Then just on the pipeline looking forward. It seems like you had a pretty strong 2016. Do we expect more in the fourth quarter? Did you end up taking your foot off the gas?

(laughter) Hi, Chad. This is Eric. As you know, acquisitions are lumpy and the timing is subject to regulatory approvals and loan assumption. Frankly, I hesitate to give any predictions. We've had a great year thus far, and if this were the last acquisition I would call it a good year, but we're always trying to do more. We have two months left, so stay tuned.

Okay. Then just one more. You tapped the ATM in the third quarter; you tapped it in the second quarter. Do you think you're where you need to be right now, or do you think you'd fund more of whatever acquisitions you do by issuing equity on the ATM?

Well, we're at our historical leverage point. We're at 4.4. We're looking at some things like Bickford's construction pipeline is going to be generating some capital needs; and the [Ensign] building that we have a purchase option is going to be generating some capital needs.

But at the same time, we've got Timber Ridge mortgage paying off. It may be that Timber Ridge mortgage pay-off dovetails with our existing capital needs. Don't forget, we still have some LTC stock in the cupboard that we can liquidate if we need to.

We're probably good on the ATM thus far, and we had a good run. We're able to sell it in the low $80 millions. That's a great price for our shares. Right now at this level, mid-$70 millions, we would certainly think about it if we needed to.

All right, that's great. I'll hop back in the queue.

Thanks, Chad.

Juan Sanabria, Bank of America.

Hi, Juan, can you speak up? We can hardly hear you.

Sorry about that. Is that better?

There you go. That's much better.

On the Bickford, I was looking at the press release and it said cash transfer of $25.3 million; but is it now $26.2 million? Just curious on if that changed?

We've had some escalators there. It's $26.26 million going forward.

Okay, and how should we think about the cap rate for that? If you gave the investment value relative to that rent mid-to-high 8% cap rate, is that how you guys think of the value, or is that not the correct way to look at it from your perspective?

Hi Juan, it's Kevin. The way we've described that was look at some of our other transactions using even the other Bickford deals we have where we did the purchase option as a proxy for it. It would be consistent with that.

What are the purchase options, sorry?

We bought those for 7.25 % lease rate, and they had coverage of I think 1.35 times is what we announced.

EBITDARM?

That is correct.

Okay. On the CCRCs, what's your guys' comfort level continuing to increase that particular asset class, and if you could let us know roughly what the AL/IL split of your CCRCs will be with this latest acquisition in Connecticut?

Juan, it's Kevin again. As it relates to CCRCs, we remain opportunistic. We want to continue to be able to build with our customers. We still have the purchase option on Timber Ridge. It's something that we're going to continue to evaluate. I do think that we have a fair amount now, so it's going to be something that we scrutinize very heavily on a go-forward basis, just what the opportunity is; but we are going to make sure that we continue to grow with our customers and service their needs.

As it relates to the assets, they're all a little bit different, predominantly independent living units. I have to go back and check my math, but they would be -- they should generally be consistent with what you saw with the one in Connecticut that we just announced with Senior Living Communities. That was 200-plus units of IL, and I'm drawing a blank, sorry on the AL units, but similar percentage to that.

Okay. Last one for me. On Holiday, I think you said the EBITDARM was 1.19. The EBITDAR low 1, just over 1 to 1.1, and that's pre-CapEx. What's the comfort level there? Any discussions about necessary rent adjustments? How are you guys thinking about that into 2017? Maybe if you could comment on how those assets are exposed to suppliers, or maybe not? Any color would be great.

I'm sorry, Juan which portfolio?

The Holiday portfolio?

Yes. No discussions around rent concessions at this point in time. The coverage has been consistent since we purchased the portfolio. From an NOI standpoint, it's grown. But we have had some escalators that were 4%. Those will taper down to 3.5% after next year. We expect -- or we would plan, anyway -- to see some coverage increase over time.

I do feel like there's still some opportunity within the portfolio. They're 92%-ish occupied. There's a lot of NOI that can drop to the bottom line for every percentage point of revenue that they can -- for every percentage point of occupancy that they can generate.

We still feel good about those communities. Clearly we're -- it's something we focus on and make sure we understand what's going on with their business model, and to make sure that we're in tune with any changes that may happen.

From a supply standpoint, we haven't really seen a lot come on line from an independent living standpoint. The competition really is existing competition in those markets. They compete for a lower-mid price point share of the market, so feel like they have the most customers, if you will, available to them -- or they appeal to the most, the biggest base within their market. Again, still feel good about their prospects, but always something that we continue to monitor.

Okay, thank you, guys.

Thanks, Juan.

Jordan Sadler, KeyBanc Capital Markets.

Thanks, guys. Good morning.

Hi, good afternoon.

I just wanted to follow up initially here on the pipeline. I know you guys don't like to give tremendous insight into anything that's not locked up or done, but is there anything incremental in the 2016 guidance related to acquisitions?

Well, Juan, this is Roger. We include in our guidance those acquisitions and financing transactions for which we have clarity. We don't give specifics and details and the timing of those.

Eric has properly said the acquisitions are lumpy, and so are the financing transactions. But we think we have clarity on the next two months, and therefore we've reaffirmed our guidance.

Okay, so that's a non-answer whether or not you have anything in there, okay. You don't feel comfortable letting on as to whether or not there's anything in guidance related to non-unidentified acquisitions? Is that --?

Hi, Jordan. This is Eric. I will try and take another swing at that. In the past, we haven't announced acquisitions prior to closing. We stepped out of our comfort zone on this Evergreen deal that we just announced.

Right.

You will notice in the press release that it has not closed yet. It is closing in the next couple of days.

Okay.

We have shared as much as we can with you, so you have that visibility, and so that we could talk about it on this call.

Evergreen's in there, though, right?

Yes.

Okay. Then, because I'm trying to figure out how my numbers stack up against yours, and I'm sure everybody else on the call is doing the same. Bickford in particular from your comment, Roger, sounds like it should be $0.02 one quarter of accretion?

Yes. $0.015 in 2016.

Okay. Year to date, you said it was $0.06. Was that through the third quarter?

It's for a full year.

Oh, that's the full year, okay, great. I noticed the tweak from 2Q guidance to 3Q guidance now incorporates the Bickford transaction taking place, so the guidance stayed the same in terms of the range, but you're now incorporating $0.015 of accretion for 4Q?

We anticipated --

Is that fair?

We anticipated that accretion in our second-quarter guidance in the first part of August.

Oh, well, you anticipated it but you explicitly said in your press release that it was excluded, I thought?

That's correct. This is John. You're right. You're absolutely -- everything you stated is correct, yes.

Okay, thank you. Then I guess Kevin, coming back to some of your prepared remarks, you said you're not seeing an adverse impact of over-supply. I don't know if that was just a generalization as it relates to your overall properties, but I was kind of looking through the performance of the Bickford portfolio, and I noticed that in the same-store portfolio, the expenses year over year were up quite a bit.

You did speak to the wage increase, which I would imagine would hit the same-store portfolio, and maybe that's an increase, a bigger increase. But in 2Q year over year, the Bickford portfolio saw a 6.8% increase in same-store expenses. Then 3Q it was about a 13.5% increase. Is there anything else in there you might be able to share with us besides the expenses, or besides the wages, or do you think that's just the wages?

Well, a lot of it is wage and related items. It's the competition for staff at communities in specific markets is getting more competitive. That's not necessarily with new competition from senior housing. That's pressures from minimum wage increases going up, and from people in these have alternatives to go work at fast-food restaurants or a big box store, which is a much easier job than taking care of seniors.

There's a wage pressure there to continue to attract talent and retain talent that these communities are experiencing. That's a part of what you're seeing. It's not just somebody opening up down the street and them trying to hire away employees. It's a larger issue than that.

So this isn't like executive directors being poached away; this is just the normal caregivers?

A lot of it would be the turnover in the caregivers, yes. Bickford has a tremendous track record of attracting and retaining talent, particularly at the ED level. They're not seeing a ton of turnover there. It really is more in your line staff.

Okay. One last one, if I may, just on the cap rate expansion I think you touched on in some of your markets? Can you maybe expound on that a little bit? We've heard some others talking about the markets being -- we've heard mixed messages, I should say, this earnings season on what we're seeing in cap rates. Curious what you're pointing to?

Yes, sure. What we're pointing to is the deal activity I think you've seen from us over the course of the year, where we're able to purchase communities at a level where we can get a rate of return that we are pleased with, and still be able to give coverage to our customers. I would say that in prior years, it's been a little more difficult to give at least in a marketed transaction or one were it may not be marketed but the operator is leaving the operations, to be able to find a community that you can still get coverage for your tenant.

That's where I'm really -- the implied cap rate expansion, particularly in the -- really in the secondary and tertiary markets, where I think sellers are being a little more realistic about what their asset is, if you will, and willing to -- they're not necessarily pointing to some of the larger markets and saying well, I want that cap rate, as well. They're a little more realistic on their price expectations, and looking for more of certainty of close, which we can deliver.

Okay. Thank you for the color.

Todd Stender, Wells Fargo.

Thanks. Just to start with you, Kevin, I think for the first -- or for the two senior housing facilities you acquired in Oregon, what were the occupancies for those buildings? I think you said one of them might have been open in 2015. I want to get a sense of how that has leased up?

Yes, so those were -- if I'm recalling correctly, in the low 80s. There's still some meat left on the bone, if you will, for those communities. That was part of the attraction for the investment is you had what we characterize is like I just mentioned as a reasonable seller, and you're able to install a new operator that can go and add value and increase occupancy over time.

They have a number of independent living units which really weren't even leased yet. There's revenue to be had at these communities through the marketing process that Chancellor can do, and be able to increase coverage over time, and be a nice investment for both of those.

What do the escalators do for these? Is that something you can participate on the upside, or not at all?

They're fixed annual escalators, consistent with our rest of our portfolio.

Okay, and then when you get combination facilities like these where the units are mixed, is that something that Chancellor can adjust over time, whether they add to the IL component or move it to the other direction, and convert some to memory care? How does that work?

Well it varies by investment. This one I would characterize that there's a little bit of flexibility, in that there's potential for in this case IL units to become AL units. It probably doesn't go the other way, because there's a little bit of build-out that would have to happen to make that conversion.

Again, it's just different by opportunity; but in this case, there's a little bit of mixing, if you will, that can go into the asset, and be able to move it around a little bit. But generally, we like the asset or the components of the community. For them to have that smaller continuum of care I think is an attraction for the local market place, and something that will serve them well.

Thanks. Then looking at the new Connecticut deal, the CCRC. I don't know if you want to add much disclosure or details around this, but the -- or in reverse, the 4% rent escalator comes down to 3%. It sounds like a Holiday level. Is that a reflection of the large IL component? Is that where you can really get the inflation?

Well, that is a component to the investment. It's one where -- this harkens back to where we started with senior living communities in our initial transaction, where this lease mirrors our relationship with them. We'll have that 4% escalator that actually hits January 1.

It really is more fitting it into the relationship we have with them than saying we think you can get more on independent living. We do believe there is upside at this community. The operator that is moving on was a solid operator; but entry-fee communities were not their expertise, per se.

I think there is an opportunity for them to continue to improve the performance of this community, potentially improve occupancy, and be an NOI contributor, a solid contributor to the portfolio that we have with them.

Thanks. Finally, what were the in-place entrance fees, and where will they go to, as a reminder of what those --maybe what a Connecticut entrance fee is?

I'm sorry, are you asking for the dollar amount?

Yes, for the dollar amount. What were they, and what do you think they'll go to?

We have not disclosed individual entrance fee amounts for our communities. They typically -- and I'll say this as a macro. What they try to do is make it a percentage of the home price in the area, so it's an affordable measure for someone to be able to sell their home and move into the community, so it's consistent with that overall view on entry fee.

I would look at the home prices, and you can make an estimation based on that. It would be a percentage of that number.

Okay, thank you.

Thanks, Todd.

Rich Anderson, Mizuho Securities.

Thanks, good morning. What's the reason for holding on to LTC? Is there a tax issue about selling them, or you just haven't gotten around to it? Why do you still have it?

Hi, Rich. It's Eric. Frankly, we try and be smart about selling it and not pay any taxes. We look at the return of capital on our dividend, we look at depreciation, and we make a decision about how much we can sell based on that. Thus far, we think we've sold as much as we can this year, and we'll continue next year.

Okay, fair enough. Kevin, a lot of EBITDARM, with an M, coverage is obviously you're MO. What is the difference between DARM and DAR? Is it 30 basis points, is it not that much? Get a sense of that coverage, more conservative coverage metric?

Yes. It varies by product type that you're looking at. With skilled nursing, for instance, it's going to be a little bit higher, that variant. For senior housing, I would tell you it's 0.1 to 0.2, depending on what your assumptions are on Management fee and CapEx. On skilled nursing, it's probably more like 0.3 or so, give or take, just because you've got a higher top line that you're taking a Management fee percentage of, so it will be a little bit more of a variance there.

Okay. Then Eric, what do you think of negotiating these escalators? I'm not so sure that the health care REITs, particularly the smaller-cap variety get paid for 3% or 4% escalators these days. Maybe the sweet spot is something 100 to 200 basis points lower than that so you're protecting coverage, or at least having the perception of protecting coverage over the long term.

How do you feel about that? Do you think that the market is moving to a lower coverage -- I'm sorry, a lower escalator world, or do you feel good that 3% or 4% is here to stay for you and for the industry?

I would say that's a pretty astute observation, Rich. I think that we are very sensitive about the impact of those escalators as you telescope them into the future.

I would take it on a case-by-case basis, but I agree with you. I wouldn't be surprised if we came across a property that was fully valued, highly occupied, and in a competitive market, and we would agree to something between 2% and 3%, rather than between 3% and 4%, just so that going forward the operator has enough breathing room to make their cash flow that they should get from taking the risk as an operator.

I would also point out, Rich, that we're very focused on having a defined escalator, because that helps us with straight-line rents. If you look at some of our leases like the Ensign lease, as opposed to the Evergreen and the McMinnville, Oregon, leases, we try very hard to capture that straight-line impact on accounting, because that impacts us on our NFFO basis. We don't want to miss estimates, and we don't want to miss our guidance on that metric.

Okay. Last for me, Roger. Can you -- does the equity method adjustment just simply go to zero now starting October 1? Is that how we should model Bickford?

Yes. On Bickford, there would be no equity pick-up of any income or loss from the op-co.

So $754 million for -- in this case, for the third quarter goes to zero? There's no other noise in that number?

That's right. That goes to zero. That goes to zero for the fourth quarter. The minority interest in the prop-co does not increase. That's the deduct that you see for our net income.

Right, yes. Okay, so that stays the same. Yes.

Hi, Rich, and speaking of noise, we definitely want to point to the dilutive impact of the convertible. We had to add some additional shares as a result of our high share price. Obviously we didn't get the benefit of those shares, we just got the detriment. That was a little noise this quarter that made us the victims of our own success.

Well, it's a high-class problem so --

(laughter) Yes.

All right. Thank you very much.

Thanks, Rich.

(Operator Instructions)

John Kim, BMO Capital Markets.

Thanks you. It was a modest amount, but you had a write-down this period of rent receivables, due to a tenant's material non-compliance. Can you just comment on who the tenant was?

This is Kevin. We haven't disclosed who the tenant was. As you mentioned, it was a non-material amount. It's a small portfolio that we're working to transition to a new operator.

But was this tenant one of your top 10 partners, or was it one of the smaller ones that you're moving away from?

It is a smaller relationship that we're moving away from.

Okay. As far as non-compliance, does that basically mean not paying the rent on time, or was it a CapEx issue, or if you could provide some commentary?

It was a non-payment timely of rent, and one where we felt like it was better to move off of the relationship and put in a new operator, and install a new operator into the relationship.

Got it, okay. Your commitments to acquire four additional developments leased to Ensign, I think the option window's now open. Can you provide some color on the timing of these acquisitions and the lease yield?

The timing is such that it's a year after they get their life safety certification, so you're right. One is in their window. We have basically 120 days to exercise the option and close. I would look for that over the near term on one of the communities. Then another one, the other ones won't be -- they're further out into 2017 and into 2018 before we would see those come on line. The lease yield I think we described was 8.35%.

Got it, okay. Finally, can you provide some more color on your development pipeline with Bickford? Update us on the amounts that you are doing with them -- and also the incentive payments, how that will be accounted for going forward as they achieve those hurdles?

The pipeline is such that we had five developments that we were -- that have been announced already, three of which opened in the last few months. They've been received very well in their markets. We have two more that will open in 2017. The total amount that we have described is $55 million. That is just for basically the base construction cost. As you mentioned, there are some lease-up costs and incentive payments that go along with that.

What I would tell you on the incentive payment side is that gets capitalized into our lease basis. We get paid a return based on all dollars out. We expect a low double-digit return on our investment once these are stabilized.

Those incentive payments, are they achievable when -- within one year of stabilization, or could it be further out?

They're -- it takes a little bit of time to stabilize a building. Generally when we're looking at underwriting a new development wheel-out for 18 months, at least, for it to open and stabilize. Bickford's experience has been better than that. Generally speaking, we're going to allow for 18 to 24 months for these to stabilize and get some seasoning under their belt.

Got it, okay. Thank you.

There are no further questions at this time. I will now turn the call back to the presenters.

Thank you for joining us, everyone. We'll likely see you at NAREITS or one of the other conferences we attend on a regular basis. Thanks for your time today.

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.