National Health Investors Inc (NHI) 2018 Q2 法說會逐字稿

Hello, everyone. This is Colleen Schaller, Director of Investor Relations. Welcome to the National Health Investors conference call to review the company's results for the second quarter of 2018. On the call with me today is Eric Mendelsohn, 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 June 30, 2018. 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 Mendelsohn.

Thank you, Colleen. Hello, everyone, and thank you for joining us today. I'm pleased to report we had another great quarter. Normalized FFO increased 4.6% per share and normalized AFFO increased 6.8% per share when compared with the same quarter in 2017. From an investment standpoint, we executed over $115 million in the second quarter bringing our year-to-date total to $159 million. I'm also happy to say, we've gained a new operating partner, Comfort Care Senior living, a growth-oriented operator with an excellent reputation. Kevin will tell you more about them later.

NHI continues to grow at a measured pace with new acquisitions and investments. We're exploring all avenues of growth, not just triple-net leases. While we know it's a tough environment in the senior housing space right now with supply and occupancy concerns on the top of everyone's mind, we continue to view these conditions as an opportunity.

As a reminder, we are one of the only few health care REITs that have shown positive revenue growth year-to-date. Additionally, skilled nursing continues to be a bright spot in our portfolio. What a difference a year makes in sentiment for this sector. With that, I'll now turn the call over to Roger Hopkins to walk through the financials. Roger?

Thanks, Eric. Hello, everyone. We are very pleased with the performance of NHI's portfolio for the quarter and year-to-date. All other REIT peers are rationalizing certain large portfolios that have been a significant drag on their performance metrics so far this year, NHI is focused on giving its shareholders another good year of steady performance and accretive new investments in an industry where there is more competition for assets, many of which are priced at levels that are not accretive to REIT investors.

For the second quarter of 2018, normalized FFO per diluted share increased 4.6% to $1.38 compared to $1.32 for the same period 1 year ago. Normalized adjusted FFO or AFFO excludes the effect of straight-line rent for GAAP purposes. AFFO increased 6.8% to $1.26 per diluted share compared to $1.18, 1 year ago, and is reflective of our good investment volume and annual lease escalators. We continue to fund our development and loan commitments, totaling $50 million as outlined in our Form 10-Q. These commitments relate primarily to new construction and renovation projects at facilities leased by our existing tenants. Funding of our commitments add to the lease space on which rent income is calculated. Several of our tenants are actively renovating or expanding their facilities to meet the wants and needs of a growing demographic of senior adults. Whether we acquire new assets or provide funding for construction, our goal is to deploy a careful mix of debt and equity to maintain our low leverage profile. This approach allows NHI access to new capital in its many forms.

NHI's total revenues for the second quarter show growth of 4.5% over the same quarter in 2017 and 7% year-to-date. Our rental income increased 6.3% to $69.9 million for the quarter and 8% year-to-date due to funding of $130 million for new investments and $4.3 million in property renovation so far in 2018.

For the second quarter of 2018 and year-to-date, our general and administrative expenses increased 9.7% when compared to the same period 1 year ago, primarily due to the hiring of a new experienced business development professional and additional part-time corporate accountant and other accruals.

Our noncash share-based compensation expense in the second quarter was $368,000. And is planned to be the same in the next 2 quarters. During the second quarter, we recorded a write-down of straight-line receivables for GAAP purposes of $1.4 million, due to the planned transition of a single property to a new tenant and recorded a receivable write-down of $413,000 related to a development loan to a company focused on international growth.

NHI's management team is incentivized on annual growth and dividends and normalized AFFO on a per share basis. Our normalized AFFO is a non-GAAP measure of performance, which excludes the accounting convention of noncash straight-line rent income but gives credit to our actual lease escalators. We believe this measure is the best quarterly and annual indicator of growth in our portfolio and the ability to increase dividends to shareholders.

This morning, we announced our regular third quarter dividend of $1 per share to shareholders of record on Friday, September 28, and payable on Friday, November 9. We currently estimate our normalized FFO payout ratio for the year will be in the low 70% range and our normalized AFFO payout ratio will be approximately 80%, thereby permitting NHI to retain over $40 million of excess cash above its dividend for 2018 to be used for making accretive new investments.

Moving on to guidance for 2018. We have tightened our guidance ranges, as we have greater visibility on our performance for the remainder of 2018. We currently estimate normalized FFO in the range of $5.47 to $5.51, and normalized AFFO in the range of $5.01 to $5.03 per diluted share as shown in our earnings press release this morning. These estimates include the expected funding of our ongoing commitments and the composition of our debt and equity capital to properly align our capital resources for growth.

I'll now turn the call over to John Spaid, who will discuss further our uses of debt and equity capital.

Thank you, Roger. For the quarter ended June 30, our debt capital metrics were net debt to annualized EBITDA at 4.3x, weighted average debt maturity at 6.4 years and fixed charge coverage ratio at 6x. For the 6 months ended June 30, our weighted average cost of debt was 3.56%. NHI ended the second quarter with $327 million outstanding on our revolver, leaving us with $223 million in available revolver capacity. Our revolver balance was reaching the point where we're not planning to turn off some of our debt to free up capacity on our revolver. We expect to provide you with further details and our plans during our third quarter conference call.

Turning to our ATM program. During the second quarter, we sold 628,403 shares of our common stock. The shares were sold at an average price of $72.70 per share, resulting in net proceeds after commissions of $45 million. Net proceeds were used to reduce our revolver debt. After our second quarter ATM activity, we have approximately $230 million in capacity remaining under our shelf facility. With our leverage currently at the lower end of our 4 to 5x net debt-to-EBITDA ratio, NHI continues to be well positioned for future accretive investments. I'll now turn the call over to Kevin Pascoe to discuss the portfolio.

Thank you, John. Looking at the overall portfolio, at the end of the first quarter, the EBITDARM coverage ratio was 1.68x. Senior housing remained steady at 1.23x and our skilled portfolio was up slightly at 2.53x. Our operating partners have continued to feel the effects of wage pressure, but they are working diligently to mitigate the challenges.

As a group, they have done an excellent job of holding occupancy. When we compare sequential quarter results for NHI's NIC map covered communities versus their respective NIC map markets, NHI's communities in aggregate are essentially flat. This is in comparison to a slight decline seen in the respective NIC map markets. Furthermore, the NHI NIC map covered communities showed a slight improvement year-over-year versus the decline seen in the respective NIC map markets.

Taking a look at our larger operating leases. Bickford Senior Living, which represents 18% of our cash revenue, had an EBITDARM coverage ratio of 1.18x for the trailing 12 months ending March 31. The developments in aggregate continue to lease up on or ahead of schedule and the recently acquired portfolio in Ohio and Pennsylvania is performing in line with underwriting as Bickford works to transition and upgrade these communities.

Additionally, NHI closed on another site in Michigan, with Bickford in July that is expected to break ground later this quarter.

Looking at Senior Living Communities, which represents 15% of our cash revenue, including entry fee income, their EBITDARM coverage ratio was 1.28x on a trailing 12-month basis as of first quarter end and year-to-date 2018 performance has been in line with the expectations.

Turning to National HealthCare Corporation. Our partnership with NHC accounts for 14% of our cash revenue and had a corporate fixed charge coverage of 3.59x. Our relationship with Holiday Retirement represents 14% of our cash revenue. As of first quarter end, their EBITDARM coverage is 1.17x, up 1 basis point from our last call. The second quarter saw net positive move-ins and occupancy for the quarter ended at 90.7%.

Turning to new investments. In May, we announced the acquisition of 2 skilled nursing facilities in Texas for $29 million. These facilities released 2 affiliates of the Ensign Group and added to the existing mass release at an incremental rate of 8.1% plus annual lease escalators based on inflation. The mass release obligations are guaranteed by the Ensign Group. These 132-bed buildings are located in the Greater Dallas-Fort Worth MSA and bring NHI's total relationship with the Ensign Group to 19 buildings. This acquisition completes NHI's commitment to acquire 4 skilled nursing facilities in development. Also, in May, we announced the acquisition of 2 assisted and memory care communities totaling 106 units in Michigan for $17.1 million. The communities were acquired from and will be leased to affiliates of Comfort Care Senior Living at an average yield of 8.1% with CPI-based escalators. NHI also has a purchase option on 2 additional communities in Michigan. Comfort Care is a growth-oriented company based in Michigan, with newer communities that serve secondary markets. They are a wonderful addition to NHI's operator relationships that overlays well with NHI's Investment Strategy. Moving on to our pipeline. We remain strong with a healthy level of opportunities under review. The marketplace is competitive as we continue to see various investor types in the market, particularly private equity. We remain selective to ensure we're adding high-quality operators and communities to the portfolio and as Eric mentioned, we continue to evaluate solutions to foster long-term relationships with operators. With that, I'll hand the call back over to Eric.

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

(Operator Instructions) Our first question is from the line of Rich Anderson with Mizuho Securities.

So just a couple of things on guidance to start. Roger, you spoke a little bit about what's in G&A in terms of stock, but what's the full number that you have in guidance right now? Unless if you said it, I apologize.

For our AFFO?

For G&A in the guidance for FFO, AFFO.

Yes. We -- I didn't disclose the number on that. We don't expect anything unusual in the third or fourth quarter at this stage. And really, our guidance as it is sort of allows for perhaps the increase in interest expense we would incur from terming out some of our revolver, as John described, but also gives us the ability to do some additional investments. And so this is really the best guidance and visibility that we have right now.

Yes. You got to my second question on interest expense. Then, do you have anything dialed in from an acquisition standpoint in guidance going forward?

Nothing that we could put a dollar amount on. We have things circling that can hopefully close before the end of the year, and we have -- and we do have our ongoing commitments for construction and renovation, Rich.

And Rich, if we did an acquisition before the end of the year that was material to our guidance, we would put that in a press release and adjust our guidance accordingly.

Okay. Fair enough. Turning to Bickford. You saw coverage go down 1.22 to 1.18, I believe, if I'm reading this right. Can you talk about that, Kevin? Is there anything material to read into that move?

I don't think there's anything material to read into it. I think there -- what we've done is been adding communities where we've brought on the Minnesota portfolio. There's been some transition associated with it. We're -- you will see next quarter that we brought in the Ohio and Pennsylvania portfolio. So it's been transition associated with it. So I think, there's just kind of normal transition. There is no 2 ways about it in terms of the market. There is wage pressure that everybody is dealing with. I feel like they're doing a good job to try and mitigate it. So I don't think there's anything big that you need to read into it. It's just a matter them working through, adding new properties, bringing on the new developments and continuing to try and operate as best as they can in this environment.

Okay. And then the $2 million of write-downs split between the debt and the lease. How -- do you have any visibility into whether or not this could be a more of a recurring commentary or is this a one-hit wonder this quarter?

It's not whack'em all, as you like to say. It is -- these are one-hit wonders that we have from time to time. And if you look at last year and the year before, I think, we've done something similar every year. I like to say that at any time there's probably 5% of our portfolio that is in distress or has a question mark over it and that every year, it's a different 5%.

Okay. Last question for me. You mentioned what a difference a year makes on SNF sentiment. Is it just sentimental or is it real in your opinion, Eric?

Well, I'm -- was very pleased to see the CMS rate increase, such as it was and Ensign continues to outperform. NHC the same. So from where we're sitting, we like skilled nursing. We like where the market is on skilled nursing. And so far, has better coverage on transactions. And we think that investor sentiment has turned on skilled nursing as well.

Our next question is from the line of Juan Sanabria with Merrill Lynch.

This is Kevin on for Juan. I just had a question pertaining to the asset, the use transitioned and the other asset that was categorized as out of compliance. Could you just go into detail about each situation, what happened there? What are the issues?

About which situation? Each situation...

The asset that you -- one asset, your situation in Wisconsin and then the other asset that you noted was noncompliant in the 10-Q?

Yes, Kevin, this is Kevin. So the one that we talked about was noncompliant that's been in there for a couple of quarters that was an issue of they got behind on some of their payables and they were working through some occupancy issues. They've made a lot of progress. They've been doing everything they're supposed to be doing, working very hard to prevent the problem. And feel like they've made really good progress. So we're happy with where they're at, leaving them in their -- our filings, for now, are just disclosed -- where their average just that there was the issue, but are very pleased with the progress they've made. And then the other as Eric kind of touched on. That's just kind of a one-off transition that happens from time to time. It's a small operator that just was not performing well in that market, and I think there's an opportunity for us to get a new operator in there that will help that property succeed.

Okay. And then follow-up on coverage. Was there any impacts to coverage from, I think, it was 3 properties that were pulled out from the need-driven coverage pool from last quarter?

Right. So we pulled those out because we don't have visibility right now on the occupancy. So we can't report on it. So once we get that information, we'll certainly plug it back in.

Okay. Can you say what coverage would have been if they were included in the pool?

We -- like I said, we don't have that information. They haven't supplied it.

Okay. And then just next question, in general, senior housing supply environment. I guess, have you seen operators, I guess, on lower pricing or discounts offer concessions in order to, I guess, bring occupancy back up post flu season?

So this is Kevin again. There has been in select markets with some of our operators. We do see them try to use some tools on the marketing side to be able to attract more lead generation and be able to get people to move in. Frankly, we haven't seen significant discounting. It will be remiss to say there is none. But it does happen. It served as an effective tool, but I feel like our operator has done a good job about being very focused on what markets they do it in and having a very tactical approach. It's not let's just lower pricing for the sake of trying to get occupancy. There is a very measured trade-off of getting that next resident in the building versus the income you're going to get. And I think they do it in a very smart way.

Our next question is from the line of Chad Vanacore with Stifel.

So I just wanted to take off on Rich's question on Bickford coverage trend. So last quarter, you mentioned that you would expect some transitional period there and some CapEx was needed to stabilize some property. Is it reasonable to expect some additional slippage in coverage next quarter given that it's reported on a lagging quarter basis, it's trailing 12 months and that you might need the time to make necessary capital investments to get those assets up...

There is going to be a transition as I kind of mentioned or alluded to just bringing in that new portfolio of 5 buildings. There is going to be some transition associated with those in getting them to where they need to be. We're -- I think, Bickford is doing a very good job of transitioning. They're on plan in terms of where they wanted to be, but rolling those into the portfolio, there is going to be some transition cost associated with it.

All right. And then this quarter you made another construction loan to Bickford. Can you tell us a bit more about that? And then what other development opportunities you have in the pipeline or on paper?

Sure. So the development commitments, we have listed out. That's part of the guidance that Roger had mentioned. The one that we closed is either prototype would be another 60- to 64-unit model. It's located in Michigan. I feel like they've done a really nice job selecting markets, selecting sites and as I noted in my prepared remarks that they have done a really good job in leasing those up. So that was -- that's the one that we have -- the last one we closed or we continue to look opportunities with them and with all of our customers for that matter. If they have a desire to look at development. We're open for business there. We are selective on the markets we'll go into, but in the case of Bickford and some of our other operators that have kind of the track record development, it's something we'll definitely continue to evaluate.

All right. And then I may or may not have this correct, but I think last quarter you mentioned that midyear update, you gave some clarity on expected acquisitions through the year. We're now sitting at midyear, you're $153 million of new investments year-to-date, which seems to be ahead of schedule. You want to give us an idea of what outlook for the balance of the year is?

Chad, this is Eric. As I was saying to Rich earlier, we got some stuff that we're circling, but we're not certain on closing or terms. So we're not in a position yet to adjust our guidance any more than tighten the range. But if we do close something, we'll adjust the guidance at the same time through a press release.

Eric, what about the -- maybe pipeline of potential opportunities that you're going through right now?

We're as busy as we've ever been. It's an interesting environment out there. We're seeing a lot of distressed stuff that isn't necessarily our cup of tea, but we're also seeing a lot of stabilized portfolios come to market. So it's an interesting time if you are in a position to take advantage of it.

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

And Kevin, just going back to the Bickford recent deal of the 5 property portfolio. The initial lease yield of 685, it's on the lower side we've seen, I guess, for Bickford. What would be a stabilized yield? It sounds like if it's in transition maybe there would be up step up in rent or something like that? Any detail?

Yes. So on that one, we do have fixed annual escalators. There is also a feature -- a fair market reset feature after, I believe, it's 2 or 3 years of performance. So there is a potential step up in the rent. It's not something that we've -- is guaranteed. But if they perform the way they think -- we think they can, there will be that opportunity to adjust the rental payment at that time.

What would be or how do you underwrite this on a coverage basis, if it's transitioning? It's under a triple net lease. What's the coverage maybe now and maybe what it will be upon stabilization?

Yes. So with any senior housing assets, we're targeting kind of 115 to 125 asset stabilization. These are in transition. So they're below that kind of on a initial basis, but we have reason to believe they'll reach that level once they get to stabilization.

Okay. And Bickford is listed as 18% of the portfolio. I guess it's as of Q2. Is this portfolio included in that number? Just wanted to see where concentration goes to.

Yes. The 18% does include this acquisition.

Okay. And then, Roger, you mentioned the write-down on notes receivable in your prepared remarks. Can you talk about that? Maybe the size of the loan and then you indicated the operator has maybe have a little more of an international field?

Well, I'll defer to Eric on that one.

Todd, so this was a development loan for an outfit called Signature India. And it's a legacy loan for me. And it started out at $1.5 million. We're not ready to give up on it yet, but the accountants tell me that it's time to at least write-down a portion of it. And we do have a personal guarantee to some extent so that would -- that $400,000 would be the amount at risk. And I'd say the loan is 4-years old, and it was 8% interest.

I think that was -- believe it was 10% or maybe...

Started out at 10%. Yes. So we've probably broke even when all was said and done, and we're not done trying to collect yet.

Okay. And then just finally, on Holiday. It sounds like a positive trend maybe now. Coverage and occupancy are trending higher. Can you share any thoughts on what you're seeing at Holiday and any improvements there?

They continue to work to build occupancy. We've documented the -- discussed the challenges they faced last year, but do feel like they're making progress from an occupancy perspective. Frankly, it's going to take them a little bit time to build coverage, but we're starting to kind of see that little bit in the numbers. The first thing that's going to come is occupancy. They have had net positive move-ins. So we're very pleased to see that. So something we'll continue to watch closely.

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

Maybe I'm misinterpreting some of your comments from your opening remarks, but are you getting more interested in right data structures or where you can capture some upside in seniors housing, and if not, maybe just talk about how you're thinking about capturing up your thoughts about maybe taking advantage of opportunities in the senior housing space that you refer to?

Dan, this is Eric. You're absolutely right with that observation. We're talking about a lot of different structures. One of my favorite is a joint venture on the real estate where an operator has worked with the private equity or some other investor and has a promote structure that would give them equity in the property and they could roll that over in a tax-efficient basis into a joint venture. And participate in that ownership with real estate and NHI may or may not participate in ownership of operations. So whether or not it's a RIDEA or a joint venture, we're looking at a lot of opportunities like that.

Is there a size of the portfolio that you would -- or as a percentage of your assets, is there a size number that you're thinking of that you would or a limit that you would go up to? Some of your larger peers are 35%, 45% exposed to seniors housing operating. Is that -- would that be too much for you guys? Or you think it's a much smaller number?

Well, I think you're getting ahead of us there. I will say this that given that we don't have any, right, we're a triple-net REIT at the moment, and I would say this. The type of structures that we're talking about are very labor-intensive on the front end in terms of legal and accounting costs. And then on the back end, once the transaction is closed, you have typically have to have audited financials and other high overhead activities to maintain it in compliance with being a public company and the tax codes, so the deals would be -- need to be big enough to warrant the extra overhead and brain damage.

Okay. That's fair enough. And then on -- you issued equity, I guess, in May, June on the ATM. You'd previously been buying back your converts, so I was just trying to think about well, how you're thinking about the effective price that you bought back the converts at and the exercise price on those converts versus your ATM issuance? And then would you bring at the current stock price, which is higher than what you issued the equity you had. Would you consider issuing more equity to bring down leverage further over the rest of the year?

So, Dan, this is John. We're just maintaining a disciplined approach to our capital plan. And we're not trying to be market timers, although when we look at that convert, we can't help, but look out to the 2021 maturity date and ask ourselves what we might look like at that particular time. And, as you know, that convert ratchets down, which means the cost to pair up because of the conversion feature goes up and that conversion feature goes up every time when we issue a dividend in excess of $0.77 a share, which we intend to continue to do and grow. So we turn out to be market timers and this is been a bit of a little bit of a tough year because of our interest rates and our stock price. But having that capacity to do deals, which means primarily, a good stock price and a strong equity support, allows us to continue to grow, which we need to do to be accretive. So that's kind of our thinking. And I don't know that we would just go out for the sake of delevering, issue a lot of stock because that would hire -- that would be additionally dilutive, and we want to continue to be accretive.

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

I wanted to follow-up on the earlier question -- Dan's earlier question regarding additional potential joint ventures or some of these deals you alluded to. Would these be potential conversions of existing relationships or existing properties that you currently own? I didn't catch if you said that.

Jordan, this is Eric. Now that isn't really where we're headed with this. This would be a new business, different operators, different structures.

And the structures, it sounds like they would be unique to what else is out there. Or are you just saying it would be unique to what's typically -- what you guys have typically had in the portfolio?

Yes. Exactly, the latter. It would be unique to us. And these are just conversations at the moment. So I really can't give you any type of definitive examples. My remarks at the beginning were just to signal to the analyst and investor community that we're open to these types of structures. I think I've talked about that in our one-on-one meetings that we're interested in those structures, where it's the right operator where the operator has a good history and where the operator has a sufficient balance sheet to participate in the real estate and not just use us as a checkbook.

Okay. So new operators, which I think I did hear.

Yes.

Right. Yes, and I think you've been pretty consistent in your view and vision that there could be something like this out there for you over the course of the last 2 years as you've discussed it, I think since you converted the Bickford relationship. So I think we're just curious why you flagged it today, which it sounds like maybe you're just doing a little bit more work is my perception?

I would say you're very perceptive.

Okay. The other question I had for you is on coverages. And this is a little bit along the same lines. When I look at the all other category within the need-driven show portfolio that coverage has slipped -- that EBITDARM coverage is now 1.12x versus 1.18x a year ago. And I guess, I'm curious. That seems like a pretty thin level of coverage, number one, and so I'm kind of curious how these folks are able to because I think there's a pretty significant number of properties. It's probably 46 properties according to the Q that make up this bunch of this portfolio. So are there a small handful that are driving that materially lower and those are the ones that are flagged in your filings? Or is it that just EBITDARM coverage across that portfolio has slipped lower, broadly?

Good question, Jordan. And for all the other analysts and investors listening, this is new -- a new format of information that we've put out. It's on Page 32 of our Q, and it's in response to questions about our coverage in the past. And your curiosity regarding the coverage of our portfolio that isn't spelled out with the largest operators. So good for you, Jordan, for spotting that. I would say that it's just a couple of portfolios that are underperforming, and it concerns us too. That's kind of why we put it out there because we wanted people to have as much transparency as we can give them without singling out individual tenants. So we felt that this was a good way to do it. And just keep in mind, 2 things: one, we're a triple-net REIT, so we're -- this is not a RIDEA situation where underperformance like that will have a direct impact on our revenue. And the second thing to keep in mind is that these are leases that have other credit enhancements, whether it's deposits, whether it's personal guarantees, whether it's assignment of cash flow from other buildings that aren't in the lease. We have other levers we can pull when coverage gets tight through the lease that help us maintain the lease payments.

Okay. Would the 2 tenants that are noncompliant currently sit in that bucket?

Yes.

Okay. So that makes sense. And then, I guess, on the opposite side, we were talking about the improvement in SNF sentiment, but I noticed the opposite trend occurring in your skilled nursing portfolio ex NHC, so you're all other skilled nursing portfolio saw a pretty dramatic improvement year-over-year to 151 versus 139. Now I know that NHC is a big concentration there, but can you maybe offer a little bit of color there what drove that improvement?

Sure. Yes. Sure. This is Kevin. Yes, there is -- as you know, there's a couple of different operators that would be sitting in that bucket, but there's been a few things: one being what Ensign has talked about on their conference call is the improvement of the Legend portfolio over time. They're a good-size customer of ours that would be in that bucket. And then I feel like just over time the operators that we have on the skilled side, they've done a really good job of managing through the headwinds that have been facing. That's not to say that they're all where they want to be, but I would say that they have worked very diligently to making improvements and the biggest contributing factor there is going to be the improvement of the Legend portfolio.

When you look at the mix of your pipeline, Kevin, are you underwriting new SNF deals?

We are. We're looking at them. We remain very selective on skilled. Kind of I think what Eric was alluding to is that the market is coming back to us in terms of what we require from an initial coverage standpoint. So we've been open for business the whole time. It's just the market has been much more aggressive than we have. I feel like there's the opportunity for us to do deals, but at the same time we're going to make sure they're good buildings, have good coverage and have an operator that has a bench and the size to be able to accommodate the new -- the changes that are coming in the industry.

Okay. And then lastly, is there insight, Eric, you can lend into this -- the litigation that popped up in the quarter with East Lake? I mean, it looks -- I'm not an attorney, I know you are. Can you help explain what's going on there? It doesn't -- it's not intuitive.

It is an intuitive. And because it's in litigation, I hesitate to comment. We gave as much disclosure as we could, including the case number for those of you interested in pulling a copy of the file. So that's as much as I'm able to say at this point.

Okay. That's -- I guess that would be helpful. And but that tenant is currently -- is current on its rent or they end...

They're current on their base rent. Yes.

Okay. Okay. But there are, obviously, other issues, which are currently being litigated within the relationship and relative to the contract. Am I reading that correctly?

It's all there in the pleadings.

(Operator Instructions) Our next question is a follow-up from Rich Anderson from Mizuho Securities.

So can I go back to the needs-driven disclosure and it, I guess, sucks a little bit. Yes. You gave new guidance -- or new disclosure and everyone tests you on it. So please don't take this the wrong way, but I'm curious about the 18 excluded assets. Can you remind me of that again, you said you don't have information on the financial situation at those. Is that what you said?

It's only 3, Rich. We excluded 3 assets and that is the litigation. We're not giving -- so we're actually suing to get the information.

Okay. I understand now. And then the second question I have is when you saw Holiday's coverage go up by basis points, so I guess, that's good directional stuff. And you've covered the situation, Kevin, but I'm wondering if you look at your top tenants, do you feel movement in the right direction. I mean, would you bucket some amount in moving in the right direction and some amount moving in the wrong direction? I'm just curious how you feel about directionally, how things are going across a broader swath of your top tenants?

Sure. This is Kevin. Yes. If you look at the top tenants, I feel like they're all working very hard to mitigate the issues that they have. And they're all a little bit different just by the asset class that they are. But we talked about Bickford a little bit. I think across all of them we can talk about wage pressure, Senior Living Communities is doing a great job. You feel like they're on the right track, and they're continuing to perform as expected. And then, we talked about Holiday a little bit. Just that -- they've had some challenges. They've gone through a lot of turn over. But in the face of that, they've been able to build some occupancy. So I think, everybody has a little bit different challenges. Some are consistent, but I feel like they're all trying to do the right things. And making progress on those just, frankly, at different rates.

Okay. But progress pretty much across the board or anybody kind of falling into a bigger worry bucket?

As we look at the top customers, we -- there are people we spent a lot of time with. So I would not be sitting here saying it's a big worry bucket. There are challenges that they're facing. Like I said I think they're on it, and they're working very hard to fix those. Now we've talked a little bit about Bickford and just what you've seen in the coverage there. There's been transition expense on a couple of portfolios. That's going to show up for another quarter or 2, but I do feel like between where we think those portfolios can go and having the new developments, that's a very positive relationship for us.

And there are no further questions at this time, I will now turn the call back to the presenters for the closing remarks.

Thanks, everyone, for participating today, and we'll look forward to seeing you at the next Nareit.

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.