National Health Investors Inc (NHI) 2017 Q3 法說會逐字稿

Hello, everyone. This is Colleen Shaylor, Director of Investor Relations. Welcome to the National Health Investors conference call to review the company's results for the third quarter of 2017. On the call with me today is Eric Mendelson, President and CEO; Roger Hopkins, Chief Accounting Officer; Kevin Pascoe, Chief Investment Officer; and John Spaid, Executive Vice President of Finance.

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 opened in a 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 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 September 30, 2017. 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 NHI's earnings release and related tables and schedules, which have been filed on Form 8-K with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release, together with all other information provided in that release.

I'll now turn the call over to Eric Mendelson.

Thank you, Colleen. Hello, everyone. We're glad you could join us today. With 2017 quickly coming to a close, we're very pleased with the financial strength of NHI. Our industry is currently facing a few headwinds. It's seeing crosscurrents in occupancy throughout the senior housing space. We appear to be nearing a cyclical peak in terms of supply, and cap rates continued to remain low. In light of these factors, we've stayed focused on conservatively managing our balance sheet, targeting accretive acquisitions and setting up NHI for growth and the ability to thrive in the current environment, which presents challenges as well as opportunities. We've placed a great emphasis on delevering during this time.

Earlier in the year, we proactively amended our credit agreements. These gains are starting to impact our financials through interest savings. As John will discuss later, we've also issued shares on our ATM program using those proceeds to reduce our revolver balance. Through these strategic steps, we've seen our net debt to EBITDA drop this year from 4.5x in Q1 to 4.0 in Q3. As a result, we have ample runway in terms of borrowing capacity and our ability to make new investments or weather a storm.

Our third quarter is reflective of our financial health. During the quarter, normalized FFO grew 11.4% and normalized AFFO grew 10.9% per share when compared to the same period in 2016. Year-to-date, we've executed $164 million of investments and gained $2.6 million in annual revenue from a SNF lease renewal earlier this year, which was $0.06 accretive per share on an annualized basis. We're very pleased with this quarter's results, the health of our balance sheet and the platform for growth it provides.

Before we move into the quarterly details, I'd like to pause and recognize our operating partners who were affected by the recent natural disasters. Their preparation and responsiveness has been outstanding, keeping residents, patients and staff safe. We're especially grateful for the efforts of Senior Living Communities, HSM and the LaSalle Group as they each took on evacuating residents. Our portfolio thankfully sustained no damage, and operations in the affected buildings have returned to normal.

I'll now turn the call over to Roger Hopkins to walk through the financial results. Roger?

Thanks, Eric. Hello, everyone. We've had an excellent third quarter as our results reflect steady investment growth in 2017 with new and existing tenants and a low cost of debt and equity capital with which to fund these investments. Normalized FFO per diluted share increased 11.4% to $1.37 compared to $1.23 for the same period 1 year ago. Normalized AFFO increased 10.9% to $1.22 per diluted share compared to $1.10 1 year ago. Along with $166 million of announced investments so far this year, we continued to fund our development and loan commitments, totaling $102 million at September 30 as outlined in our Form 10-Q. We have deployed a careful mix of debt and new equity to maintain our low leverage profile.

NHI's total revenues for the third quarter showed strong growth of 12.8% over the same quarter in 2016. This growth has been primarily fueled by our new investments in 2017, the full year impact in 2017 of investments made throughout 2016 and the renewal of a significant lease that Eric mentioned earlier.

For the third quarter of 2017, our general and administrative expenses were $2.5 million, and when compared to the same period 1 year ago, increased due to additions to our corporate staff and in incentive and noncash share-based compensation. Our noncash stock-based compensation expense in the third quarter was $405,000. During the third quarter, we opportunistically bought back a portion of our convertible notes due in April 2021. We had a loss of $495,000 on such note retirement during the third quarter.

For the first 9 months of 2017, revenues increased 13.1% over the same period in the prior year. Normalized FFO increased 9.4% over the prior year, and normalized AFFO increased 9.3% over the prior year.

General and administrative expenses have increased approximately $1.9 million when compared to 2016, primarily due to additions to our corporate staff, incentive compensation and noncash stock compensation expense calculated using the Black-Scholes pricing model.

NHI's management team is focused and incentivized on annual growth in AFFO on a per-share basis. This non-GAAP metric excludes the accounting convention of noncash straight-line rent income and gives credit to our actual lease escalators and to our investments for which those straight-line rent calculation is required. Importantly, it assures management's focus on making accretive new investments over our blended cost of debt and equity capital.

This morning, we announced our regular fourth quarter dividend of $0.95 per share. We currently estimate our normalized FFO payout ratio will be in the low 70% range, and our normalized AFFO payout ratio will be in the low 80% range.

Moving on to guidance for 2017. We have affirmed our previous normalized FFO guidance range of $5.22 to $5.26 and our normalized AFFO guidance range of $4.70 to $4.72. Going forward, we will give more information on pending transactions that we have included in our guidance. For example, we now have clarity on approximately $42 million of new investments that we currently estimate will close by December 31. One is an IL for $34 million with an assumed loan of $18 million. The other is an AL memory care facility for $8 million. Both are expected to close in the fourth quarter.

I'll now turn the call over to John Spaid, who will discuss our recent capital transactions. John?

Thank you, Roger. For the quarter ended September 30, our debt capital metrics were net debt to annualized EBITDA at 4x, weighted average debt maturity at 6.5 years, weighted average cost of debt at 3.56% and fixed charge coverage ratio at 6.6x.

Looking at the revolver. At the end of the third quarter, we had $167 million outstanding with an available capacity of $383 million.

Turning to our ATM program. During the quarter, we sold 537,977 shares of our common stock. The shares were sold at an average price of $80.20 per share, resulting in net proceeds after commissions of $42.5 million. After our Q3 ATM activity, we have $275.6 million in capacity remaining under our recently filed shelf facility. Net proceeds were used to reduce our revolver balance and maintain our low leverage metrics.

Since its founding, NHI has consistently maintained its balance sheet and keeping with investment-grade debt metrics. We are committed to maintaining those metrics into the future. Our incremental cost of debt remains low. Our ability to efficiently access capital continues to be strong. And as Eric mentioned in his opening remarks, NHI's balance sheet is well positioned to competitively serve our existing and future customers.

I'll now turn the call over to Kevin Pascoe to discuss the portfolio.

Thank you, John. As Eric mentioned, there are some headwinds affecting our industry. The good news is we have solid operators that are up to the challenge of these pressures who continued to create strong corporate cultures to attract and retain talent and have prepared themselves by improving the physical plants ahead of new competition. The strength of our SNF operators is second to none, and they work tirelessly to prepare themselves for the changing reimbursement climate. We are proud of our operators and the work they do every day.

With some of the activity of our peers, we get many questions about how often and how we transition operators. As with any portfolio, we have a few buildings that transition to a new operator from time to time, either through lease maturities or through issues that may arise from operations. With a stable of 34 operating partners and other industry relationships, we're able to find a solution to these issues with a targeted and thoughtful approach. By having these relationships with operators who have ample expertise and geographical coverage, we feel confident we can transition underperforming communities if necessary. An example for NHI is a small portfolio in Minnesota we recently transitioned to Bickford. After trying to work through some issues of noncompliance with the operator, it became clear the portfolio needed to have a new operator. We worked with the tenant and the guarantors to transition the properties to Bickford, and NHI was paid in full on the rent it was due. The new rent on the portfolio is slightly lower than previous tenants, but this is also reflective of an upgrade in guarantor for NHI.

Looking at the overall portfolio. At the end of the second quarter, the EBITDARM coverage ratio on the portfolio was 1.7x. Our senior housing portfolio's performance is steady at 1.24x, and our skilled portfolio remains very strong at 2.54x. The skilled nursing coverage now includes the rent impact for the new lease with HSM.

Turning to our larger operating leases. Our partnership with Senior Living Communities represents 16% of our cash revenue and has an EBITDARM coverage ratio of 1.27x on a trailing 12-month basis as of second quarter end. National HealthCare Corporation, which represents 15% of our cash revenue, has a corporate fixed charge coverage of 3.6x. Our relationship with Bickford Senior Living accounts for 15% of our cash revenue and has an EBITDARM coverage ratio of 1.21x for the trailing 12 months ending June 30. The opened development properties continued to perform ahead of their respective pro formas. The 2 remaining developments with Bickford underway are under a loan structure where NHI has a favorable purchase option at stabilization. One project is slated to open in the first quarter of 2018, and the other is expected to open in the third quarter of 2018. Holiday Retirement has an EBITDARM coverage ratio of 1.17x as of second quarter end and represents 14% of our cash revenue. Occupancy through the third quarter continues to improve as the company's average occupancy improved 170 basis points in sequential quarters. The marketplace is competitive, but our pipeline remains very active, largely comprised of private pay senior housing opportunities. We continue to focus on growing selectively with high-quality operating partners and communities.

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

Thank you, Kevin. We look forward to seeing many of you at the upcoming NAREIT conference in Dallas.

With that, we'll now turn the line over to questions.

(Operator Instructions) And our first question comes from the line of Chad Vanacore of Stifel.

So in your Q, you mentioned a tenant that's out of compliance with the lease. Could you quantify the rent at risk and what you're doing to mitigate it?

Chad, it's Kevin. I think what we said in the Q is that it's less than 4% of revenue. We're working through our remedies that we have with them. I think, as normal, of course, we need to make sure we protect our rights as it relates to the lease, and that's what we're doing here. We're also very customer focused and want to make sure that we work with them to get through the issue, so that's what we're doing now. And as we've also mentioned that NHI is current with its rent. We're just making sure that they get their house in order, and we're helping them get there.

All right. And then you also transitioned that one property that you mentioned with the same operator?

I'm sorry.

No.

I think you're mentioning there's a small portfolio in that one property. That was to Bickford Senior Living.

How many properties was that? Because I saw in the Q that there -- it looks like one property and at $1.5 million rent.

It was -- it's actually 4 smaller buildings.

But that's unrelated to this issue that's ongoing?

That's correct.

Okay. And then thinking about this quarter here, you beat pretty substantially, and the G&A was pretty low. Why was that? Should we expect that to continue? And what's a good run rate that we're talking about?

Chad, we did have a good quarter, and part of that is due to the fact that we received all of the rent on the small portfolio that Kevin mentioned just a moment ago that we've transitioned to Bickford. As we approach the fourth quarter, we do expect our general and administrative expenses to be a little bit higher than this quarter as we approach year-end and do the things that we normally do at that time.

All right. So thinking about the quarter, pretty substantial beat versus consensus in the quarter. Were there any onetime items that you'd point to? Or was that pretty clearly what you thought you would -- how you've performed?

It turned out the way that we hoped it would, primarily because we were able to collect all of the rent from the small portfolio that Kevin mentioned. And so we were unsure of that 3 months ago, and now we're transitioning that small portfolio to Bickford.

Okay. And then just one more. You didn't raise guidance in the quarter despite the substantial beat. Can you talk about fourth quarter? It is implied down from third quarter and how you're thinking about that.

Yes. With the transition of the small portfolio to Bickford, there is a 2-month period of rent free that would be in our FFO but not in our AFFO. And then in the other portfolio that Kevin mentioned that was out of compliance with some of our technical covenants, we're taking a wait-and-see approach and helping them to hopefully work out the situation that they have. And so we're a bit uncertain for the fourth quarter as to how that will come out.

Our next question comes from the line of John Kim of BMO Capital Markets.

Can you just clarify? So are there 2 separate portfolios or assets being transitioned to Bickford? One was in the prepared remarks and one disclosed in the 10-Q? Or are they the same issue?

John, it's Kevin. Two separate portfolios. So the one -- the transition to Bickford was a small portfolio that we've mentioned a couple of times here now. That transition's happened effective 10/1, so Bickford is moving forward with that portfolio so it's separate. And apart from the issue that we've mentioned of the notice of noncompliance that we have -- that we're not transitioning those assets at this time. We're just working through some of those issues of noncompliance with the lease terms, again which are not rent. They are the technical defaults, as Roger had mentioned.

So can you explain what noncompliance means?

So specifically in this case, just they did not meet their lease service coverage test that we have prescribed in our lease agreements. So as I mentioned before, in accordance with that, we need to make sure we protect our rights by having a default letter issued. And it was at a level where we wanted to make sure we had appropriate disclosure around what we're working on here.

Okay. On the asset that you're transitioning, are you putting any additional CapEx?

We are not, no. That's under a triple net lease. Bickford is 100% responsible for CapEx on that portfolio.

Okay. The purchase option that you provided, is this what was necessary to get the transaction completed? And also, at 8.5% cap rate, it seems like it'd be exercised, I would imagine. But I just want to get your thoughts on that.

Yes, sure. That's really the intent. As we look at this portfolio as one that had some issues historically in terms of just holding occupancy and so forth, felt like this is probably a better one for NHI to sell and prune over time. So to be able to give Bickford the opportunity to come in, get their operations transitioned to them and then really incentivize them to buy the buildings down the road I think is a good outcome for NHI.

Okay. And then a final question for me is I think on your development disclosure, there's a Bickford senior development project that didn't progress as far as the capital spend on it this quarter. Is that -- is there something with this project? Did it get stalled? Or is there a reason why there was no apparent movement on it?

This is Kevin again. I think -- well, there's not any issues, if you will, in terms of the development pipeline with Bickford. There may be some normal course licensure things that are going on that have maybe pushed back opening or its progression, but we're talking a matter of 30 to 45 days. It's not a material delay, if you will. It's just a matter of normal course things that happen with development, but the pipeline with Bickford is good. We feel very strong about where -- how that's progressing, and the building is at -- have been opened or doing really well. So we very much feel very strong about where that sits.

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

Just first question. On the small portfolio that you're transitioning to Bickford, what was the old rent and what's the new rent? And/or what's -- if it's a temporary rent reprieve or a free rent or whatever you want to call it, what's that amount, the dollars?

Yes. We disclosed in our 10-Q in the MD&A that the rent with the former tenant was $2.1 million, and all of that rent was collected by the end of September. This is the third tenant. Now Bickford will be the third tenant that we've had in a relatively short period of time, and we have -- we feel like we've rightsized the rent going forward to $1.5 million in the first year, plus escalators.

And then you said something about 2 months free, is that right, in addition to that $1.5 million delta versus the Tier 1?

That's right. There's a period of free rent in our agreement.

And that's 2 months, though, right?

Correct.

Okay. And then separately, on the skilled nursing coverage, I just wanted to go through some massive -- just looking at the breakout that you guys gave for NHC and the fixed charge coverage, it implies a 1.4 EBITDARM coverage for the non-NHC skilled nursing portfolio. I mean, it depends on what margins you assume and the fees you assume on for asset management. But it looks like that portfolio's EBITDAR could be below 1x, which, I guess, could be why one of your tenants is in technical default. Could you just help us understand, I guess, one, what the EBITDAR coverage. Is it the non-NHC skilled portfolio? And what the coverage is for this tenant is that's in technical default or bridge the [covenants], sorry.

Sure. Juan, it's Kevin. So first off, the technical default is with a senior housing customer, not a skilled nursing customer. So where we're looking at, issues of -- where we're looking at the skilled nursing portfolio, where there are some areas where it's a little bit lower than maybe we would have liked, we do have strong credit on those leases. I understand how you're coming up with your math, but our portfolio, as it relates to skilled nursing, we still feel good about. The customers we have are very strong. And like I said, where there may have been some lower coverage, we have very good credit enhancements and feel good about the customer and the trajectory of the portfolio.

Is it wrong to assume that the EBITDAR is below 1x?

I think -- I mean, I think if you're making that assessment, I mean, there's definitely some assumptions in there. I do not think that would be an accurate assessment.

So what do you guys calculate the coverage as?

Juan, typically, we don't break out by operator. So our practice has been to give you skilled nursing and then to give you our top 5 operators, which includes NHC. I understand that analysts in The Street are hungry for more information on this. We have to straddle those wishes against the fact that some of our operators are publicly traded and consider that information their own. So both NHC and Ensign are public, so this is kind of the tug-of-war that we're in between you and them.

Okay. And then could you just go into more color, last question, on the seniors housing portfolio that's in -- has some issues? What's their coverage since -- I'm assuming since you're not naming it, maybe you're freer to say what the coverage is.

Well, needless to say, the coverage is below the covenant and not where we want it to be. The good news is that we believe the situation is salvageable, and we also have the asset management skills here. We have several former operators on staff that can help with supervising and managing the rehabilitation of this tenant, and we're in the middle of that right now. I would describe the situation with this tenant as salvageable and abundance of caution. We issued that letter. And I want to reiterate that the rent is still being paid, but it's one of the reasons we didn't raise guidance for next quarter. We want to make sure that we're taking a conservative approach as we look at the situation with this tenant and make decisions about what's needed to get them back within compliance.

Okay. So it's not a liquidity issue. It's a coverage issue.

A little bit of both.

Our next question comes from the line of Daniel Bernstein of Capital One.

I would ask the questions in a little bit different way if you're not going to give out the lease coverages. Are any of the tenants -- the tenant that you gave the notice of, I guess, default or a lease covenant notice of covenant violations, are they behind on rent at all? Are they paying the rent in full? I just wanted to understand how come...

Yes. So to reiterate what Kevin said, Dan, that this is not a skilled nursing tenant. This is a senior housing tenant, and they are not behind on rent. So it's a nonmonetary default.

Okay. Is the issue there an operator management issue? Or is it something that's systemic to the industry like oversupply or wage pressure or something that could end up being more -- a little bit more transitory?

Well, when I described it as salvageable, I guess I would characterize it as more a management issue. I think that there are some levers that can be pulled like, not to get too granular, but managing over time less reliance on referrals like a place for mom that can give you residents but charge too high a price to do that and then just some basic blocking and tackling of marketing and customer service and other types of hospitality issues. So when we go visit these buildings and talk to the management and interview the employees and even the residents, this is something that we have done in the past 60 days. We have really immersed ourselves in the operations of these buildings and come up with a business plan, a strategy and a week-by-week pro forma that we update and monitor to make sure that the buildings are on track and doing what they think we can do.

Okay. And just also a little bit more detail. Is it systemic through the portfolio? Or is it maybe 1 or 2 properties that are underperforming that you could transfer to another operator or sell? I'm just trying to get a sense of the magnitude there.

Dan, it's Kevin. I mean, I can help on this. It's -- I mean, it's -- I think it's more of the latter. It's one where -- there are some optimization that can happen. We're evaluating all of our options still, so we haven't made decisions in terms of what that looks like. But there is some opportunity, I think, to maybe potentially move some pieces around if it goes that way. But then again, if they get back on track and where they were before, then that's a different conversation. So it's something we're watching very closely, but all options are still kind of on the table in terms of how we look at the opportunity to help them succeed.

And, Dan, let me...

Sorry.

Go ahead.

I was just going to ask, is that -- would that include the options include a RIDEA structure at all to capture some upside in the operations? Or is that just not something you would want to go back to?

Well, Dan, we're very picky about who we do our RIDEA with. So I would say that if we were going to do a RIDEA on operations, it would have to be with an operator that has a different profile than this operator.

Okay, I appreciate that. And one last quick question. You delever the balance sheet. You've been very conservative on -- and for good reason on the underwriting. What would get you more aggressive investor? And maybe you can take it piece by piece in terms of like seniors housing versus skilled nursing. Was it -- is it fundamentals, pricing? What would get you to be a more aggressive investor and use some of that firepower in your balance sheet?

Dan, it's Kevin again. I think it's one where we just remain selective in terms of what's out in the marketplace. A lot of what we've seen this year have been kind of odds and ends, to be honest with you. It's either a larger portfolio that's going at pricing that's not accretive, which isn't really for us, or it's been stuff that's just not something that we really want or want to pursue to have in our portfolio. So it's, one, the opportunity got to be there. But as we discussed, we've got to have -- we have the dry powder when that does present itself. We would like to see the yield or the pricing improve a little bit. But the fact of the matter is for the right portfolio, the right customer, we have that ability to stretch. We're just, again, remaining selective on what we pursue and make sure we're adding the quality of the portfolio that we want.

Our next question comes from the line of Jordan Sadler of KeyBanc Capital Markets.

Just coming back to this. Sorry to beat a dead horse. On the portfolio that you've issued the letter to the tenant, did you say how many properties it is?

We did not.

Can you? Will you?

So, Jordan, let's talk about that for a minute. I consider the gold standard of disclosures on defaulted tenants to be LTC and Wendy Simpson's disclosure last quarter about her tenant, Anthem. And when and if this tenant is in default on a monetary issue and when and if it's going to affect our earnings, you will get that level of information, which I think was great and the right thing to do. Right now, we're being a little cautious about how much we say, because frankly, this is a private company with a brand name that if we start talking about them, the Internet will light up in their markets and they could lose business. It kind of becomes a self-fulfilling prophecy when a competitor is having issues, their competitors pull that out to all new leads and say, "You don't want to put your family there because of this." I've saw that happen at Emeritus when the FRONTLINE story came out. It's a very market-driven environment. So we're trying to be careful about respecting their ability to do business, and we're also trying to satisfy our analysts and investors with information that you can use to plug in your model and make decisions about NHI as an investment and management's ability to deal with issues like this. So watch us play defense, and I think you'll be satisfied. That's why we highlighted this transitioned portfolio in our prepared remarks because we want you to know this type of stuff goes on and that we know how to deal with it, and we can come out whole or close to whole.

Okay. That's fair. I appreciate the disclosure you've given us so far and the sensitivity. The -- can I read into sort of your cadence right now as you view this as ultimately a no-harm, no-foul type of situation, which it will be ameliorated in a short window? Or is it too soon to tell?

That's a fair question. I would say this is probably a 6- to 12-month project for us, and this won't be the last you'll hear about it. We'll probably be updating you quarterly until we're either at a position to make a decision as to whether or not they're rehabilitated or whether or not they're going to be transitioned.

And then the other last one on this, and I'll leave it alone is do you own all of these tenant facilities? Or do they have additional facilities outside of NHI? And the reason I'm asking that is really to figure out just their scope and the scale and just their exposure to you versus having a very similar...

We do not -- yes. We do not own all of their facilities. They have others besides ours.

And then just -- I actually wanted to talk a little bit about the offensive side of the business. You've been deleveraging, I've noticed, and you've mentioned issued some ATM in the quarter to take it down a little bit further. I was a little bit surprised at the pace of acquisition was a little bit slower this quarter. Can you sort of comment on the environment and the opportunities you're seeing?

Sure. This is Kevin, Jordan. As I've mentioned just a few minutes ago, we're -- we remain selective, but we are very focused on growing with our partners and trying to develop new relationships, which we're out there doing every day. As Roger mentioned, we have in the pipeline a certain number of acquisitions that are underway. The pipeline itself, we are seeing -- I feel like we're seeing everything in the market. It's just a matter of being able -- or really just finding the right one to bring in and have the opportunity. So we expected a little bit of lumpiness this year, as I've mentioned. There's kind of 2 different, I'll say, kind of a bifurcated market that there's kind of Class A stuff that's going at or below our cost of capital, which just doesn't really make sense to spend time on if you're not going to get paid for any risk that you're taking. And then while that kind of serves to our benefit to spend time in more of the secondary markets, which really plays to our favor, what we've seen so far this year has been kind of more odds and ends and not really ones that we want to bring into the portfolio. That said, I do feel good about the opportunities that are out there, what we're seeing. It's just a matter of continuing to cultivate those relationships and being able to add to our customer base, and I feel strongly that we'll continue to be able to do that. That's been our business plan. It's worked well for us. We just have to stay patient, and we'll find those opportunities.

Okay. And then Eric or Roger, just on the balance sheet. Do -- should we expect leverage to continue to come lower from here? What's sort of the objective?

Jordan, this is John. We're not changing any of our guidance regarding our leverage metrics. We recognize we're at the lowest end of that guidance. It's possible we could still go a little bit lower, but it's -- we're not trying to signal anything different there.

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

Kevin, thanks for the color on your underwriting. If we can just stick with you. Based on where we are in the cycle, I guess specifically with senior housing, as you look at the growth prospects over the next couple of years and factor them into your underwriting, are you starting to assume a bottoming at some point, I guess in trends when you factor in new supply? At some point, demand is going to exceed supply. Can you just give an update maybe on how you're thinking about seeing the light at the end of the tunnel?

Sure. Hopefully, this doesn't sound like a nonanswer, but it really depends on the market. This is still kind of a local market business where we've got to look at each individual market and see what the supplies being delivered. Are they kind of chewing through those new units that have been in? I would say that if you looked at supply that's coming on and new starts that it does seem like there is light at the end of the tunnel, that the demand characteristics are starting to get better. The supply is leveling out a little bit. As it relates to new supply in our portfolio, nothing's really changed in terms of what we've seen in our markets. We've been fortunate in that respect. Our operators are feeling good about their position in their respective markets and how they're able to compete. So I think there is good news in the future here and something that we continue to watch very closely.

All right. That's helpful. And what is your -- I didn't know if I missed this. What is your Bickford concentration go-to pro forma for the recent transition?

Well, currently, it's 15% of our revenue with the new rent. I wouldn't expect that to change materially.

So inside the 20%?

Yes.

Okay. And I know this is a small piece. But just looking at the MOB coverage, it's really not a focus of yours. But when you see a drop of coverage from 9x down to sub 7x just seems like a lot and maybe there was something in there.

So our tenant on those, the medical office buildings, are the hospitals. Those hospitals have allocated expenses that go -- that vary from quarter-to-quarter, so I think that's really what you're seeing is just the -- really the changes in the hospital versus the underlying medical office because that's, in essence, is who our tenant is that entity. So when we're measuring coverage, that's what you're seeing. That is normalized down for the amount of rent that they pay, so we're not grossing up the imputed coverage by a hospital's NOI. But that just gives you -- what that really is there to give you is a way to see how well the rent is covered on those properties. No systemic issues that we picked up in those properties or anything like that. I think it's just kind of -- yes. The amount of rent as it relates to a hospital's NOI just changes -- can change substantially because we're not talking about huge numbers here.

Got it. So off a smaller base. Okay.

And our next question comes from the line of Eric Fleming of SunTrust.

I wanted to go back to the other Bickford portfolio transition. So the rent is moving from, you say what,$2.1 million from the prior tenant to the $1.5 million. Did you say that the prior tenant paid that full $2.1 million? So is that going to benefit in the rent for third quarter? So they paid like essentially an additional quarter of rent that runs through the third quarter number.

This is Roger. They just paid all of their rent that was due. This is a portfolio that we've been working on for several months to try to transition, but they were not the tenant for it. We knew we wanted to make a change, but we needed to rightsize the rent for that local market.

So they've paid their -- just the year-to-date required rent for 3 quarters, and so that was all paid in full. They didn't pay any additional rent beyond it to get out in it?

Yes. They paid all the rent that was due.

And we have a follow-up question from the line of Juan Sanabria of Bank of America.

I was just hoping for an update on how Ensign is doing with the Legend portfolio that was transitioned to them and if you could just give us an update there.

Sure. They've continued to put resources into the portfolio. They like where it's heading. They don't like where it's at. I would say they wouldn't tell you that they're happy with where things are today, but they are happy with the progress that they feel good about the investment and that it's going to be a bigger portfolio and good investment for them. So they would -- I think they would say just that, that they're -- it's progressing. It's not really where they want it to be but starting to get there.

Okay. And then just one more for me. For the ATM, I mean, what drove the decision to issue during the quarter with the leverage already being very low and I guess these new tenant issues kind of propping up in between the last quarter and now?

Well, I think we mentioned that we continue to want to have as much dry powder as we can to take advantage of opportunities in the future. We also announced that we have in front of us some additional investments that we're going to be making over the next quarter, and then we have ongoing commitments that are highlighted in our Q that you can see as well. But it was clearly an effort to continue to kind of maintain our leverage at the very, very bottom of our range.

And our last question comes from the line of Jordan Sadler of KeyBanc Capital Markets.

I'm not sure if I missed this, but I guess in an abundance of caution, I wanted to ask the question regarding the condition of tenants more broadly. Obviously, you give these broader coverages, which you've spoken to, but there were 2 separate instances in this quarter that arose. And I'm just curious, are there any other tenants that they are mentioning that are on the watch list that have become distressed in the quarter or over the course of the last 6 to 9 months or what have you that we should be aware of?

Well, Jordan, Eric. Welcome back. Sure. Fair question. We're watching Brookdale very closely. We do have 9 buildings with them, and they're performing reasonably well. They're not killing it, so that's enough buildings for us to pay attention and to wring our hands about as we watch all that's happening with them and the turnover and the COO's suite that's a concern to us. We do have some bright spots, if I could point to Senior Living Communities and to Bickford. We have some tenants that are just truly excelling and doing much, much better than their competitors and that the market would expect. And then we've talked about Holiday before. I'm concerned whenever a company like that has as much turnover as they did last year and then moves their corporate headquarters across the country and turns over much of their back-office personnel and then, of course, changed their management model in the buildings from live-in managers to external professional management. So Holiday and Brookdale are on my worry list, and Senior Living Communities and Bickford are on my bragging list.

And on the worry side, are those guys near or close to breaching covenants? Or are they kind of -- they're fine for now?

They're fine. They're fine.

There are no further questions at this time. I will now turn the call back over to you for some closing comments.

Thank you, everyone, for joining us today. And hopefully, we'll see you all at NAREIT in Dallas, Texas. Thank you.

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