National Health Investors Inc (NHI) 2019 Q1 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 first quarter of 2019. 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 March 31, 2019. 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 in 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.

Good morning, everyone. Thank you for joining us today. It's been a busy first quarter. In addition to growing the company through accretive acquisitions and raising capital to keep our leverage low, we've been working on transitioning some of our underperforming buildings to new operators. Fortunately, our leadership team has been in this business a long time and has seen up and down cycles before. We have deep experience transitioning and rehabilitating distressed buildings. Let me give you some details on what's been happening on that front as we have made good progress.

We transitioned 9 buildings over the past 4 months, beginning with the 3 communities formerly leased to affiliates of East Lake Capital or Regency, the first being in Nashville. The Nashville building has been successfully transitioned to a new local operator, Vitality Senior Living. Census plateaued in the late first quarter and is trending upward moving into quarter 2. This new lease is an NOI based lease, with Vitality getting a base management fee along with a small percentage of the NOI as an incentive. There was also some upside incentive built into the lease with the end result being a traditional triple-net lease by year 3. We're excited to have partnered with Vitality and look forward to the potential of growing with them.

In Charlotte, we're working with an existing tenant, Senior Living Community, to reposition the property. They're finishing up an extensive renovation on the building and are projected to reopen in June this year. NHI has committed $3 million towards the renovation and lease up, which will be added to Senior Living Community's lease basis upon completion.

In Indianapolis, the building is currently managed on an interim basis by Senior Living Community. We're actively working to finalize an agreement with a new permanent operator and hope to transition the building by the end of the second quarter.

Turning to the 5 LaSalle Group buildings formerly operated by Autumn Leaves. In April, we successfully transitioned the 5 communities to Chancellor Health Care, an existing operating partner of NHI based on the West Coast who has had great success operating memory care buildings. Chancellor currently leased us 7 NHI buildings with an occupancy of 94% as of March 31. The 5 Autumn Leaves buildings generate cash flow above operating expenses, but not enough to service NHI's prior lease payment. Chancellor has a plan in place to restore cash flow. However, restabilization could take up to 18 months. In the interim, NHI will be receiving 100% of the building level cash flow as a lease payment. We're excited to grow with Chancellor, and they are energized by the opportunity to add 5 buildings to their portfolio.

Finally, a single property in Wisconsin we discussed on our last call has transitioned in the first quarter to a new operator, BAKA, who has a good understanding of the local market. They have begun stabilizing the building and improving occupancy. In addition to transitioning the building, we also collected $625,000 in settlement from the previous tenant.

We've done a great job transitioning these buildings to new operators that will love and care for the buildings and the residents. Through this process, we have also gained 2 new operating partners who we look forward to growing with. We've increased our disclosure surrounding these transition buildings. In the 10-Q, you'll find a chart detailing the occupancy and cash flow we've received thus far from each building. We hope you'll find it helpful as you update your models. In August, we plan to revisit our guidance as we have more clarity. Transitioned properties can be distracting to our normal investment activity, so our rapid repositioning means we are back to making accretive investments full time. We hope to have some great news around our growth in the not-too-distant future.

With that I will turn the call over to Roger.

Thanks, Eric. Hello, everyone. We're having a good 2019 in spite of the tenant transitions that Eric spoke about a moment ago. So far this year, we've announced $101 million in purchase lease backs, primarily in senior housing. We also have approximately $130 million in previously announced commitments that are funding over the next year, some much sooner. This investment activity has provided us good fortune of replacing the temporary lost revenue from the small tenants that Eric described, plus the lost revenue from the restructure of the Holiday leak that we have also previously described and have disclosed in our Form 10-Q.

NHI's management is focused on continuing to make accretive investments in our priority pipeline that Kevin will describe later. For the first quarter of 2019, normalized FFO per diluted share was $1.31 compared to $1.35 in the same period 1 year ago due primarily to lower straight line rent income for GAAP purposes of $734,000 and higher noncash compensation expense of $576,000 calculated by the Black-Scholes pricing model. Normalized AFFO was $1.22 and was the same for the first quarter last year. We believe AFFO is the best quarterly and annual indicator of our consistent ability to grow our investment, our ability to quickly respond to instances of temp challenges and to increase our dividend annually to shareholders. This has been our playbook for many years now.

Our portfolio growth in 2018 and 2019 has enabled us to offset the effects of the renegotiated master lease with Holiday at the end of 2018 when the previous lease was unsustainable. Our portfolio growth has also helped to fill the gap with the small portfolios in default that Eric described earlier. A plan for increased occupancy and stabilization is well underway.

NHI's total revenues for the first quarter were $76.1 million, which was a 2.1% increase over the same period in 2018 when you exclude the effects of straight line rent and the tenant escrow funds discussed in a moment. This reflects good investment volume above new deal and in the utilization of our capital to accomplish renovation projects, which automatically boosts our lease revenue.

John will explain shortly how we make new acquisitions that provide funding for new construction and renovations by deploying the careful mix of debt and equity capital.

Our 2019 increases in interest expense and depreciation expense are reflective of our growing portfolio. Our general and administrative expenses declined $156,000 compared to 2018. Approximately 60% of our annual noncash compensation expense occurs in the first quarter due to vesting schedule. Our realty losses of $2.5 million relates to the write down of 2 small Bickford facilities, for which we intend to sell. A new accounting standard required we separately disclose the amount of tenant escrow fund used to pay taxes, insurance and other in cost included in the triple-net lease. That amount was $1.090 million in the first quarter and was included in operating revenue expenses.

Moving on to our dividend. This morning, we announced a quarterly dividend of $1.05 per outstanding share. We currently estimate our normalized FFO payout ratio for 2019 will be in the mid-70% range, and our normalized AFFO payout range will be in the low to mid-80% range.

As for our guidance for 2019, currently, the 2019 guidance given in February remains unchanged. Our normalized FFO per share is expected to be in the range of $5.43 to $5.53 per diluted share and normalized AFFO in the range of $5.04 to $5.10 per diluted share. These estimates include our expected new investments, the funding of our ongoing commitments mentioned earlier and the composition of new debt, equity capital to properly align our capital resources for growth and maintaining low leverage. We will adjust our guidance as necessary to account for the volume of completed property acquisitions and the capital with which to fund them.

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

Thank you, Roger. For the quarter ended March 31, our debt capital metrics were net debt to annualized EBITDA at 4.6x, weighted average debt maturity at 4.9 years and fixed charge coverage ratio of 5.1x. For the quarter ended March 31, our weighted average cost of debt was 3.7%. NHI ended the first quarter with $89 million outstanding on the revolver, leaving us with $461 million in available revolver capacity.

Turning to our ATM program. During the first quarter, we sold 462,925 shares of our common stock. The shares were sold at an average price of $78.95 per share before fee, resulting in net proceeds after commissions of $36 million. Proceeds were used to reduce our revolver debt. After our first quarter ATM activity, we have approximately $155.8 million in capacity remaining under our shelf facility.

The quarter-over-quarter recent increase in our net debt to annualized EBITDA ratio reflects the temporary loss of EBITDA attributable to the transitioned property. We expect the transitioned property's EBITDA to improve over the coming quarters. But in the interim period, we intend to continue to rightsize our [purchase] as we make additional investments in keeping with our stated financial policy of between 4x to 5x net debt to annualized adjusted EBITDA.

Turning to interest rate. At the end of the first quarter, while the interest rate yield curve was favorably inverted, NHI entered into $200 million in variable to fixed-rate swap transactions with 2 of our existing lenders. The swaps fixed our LIBOR phase debt at 2.22% before credit charges through December 31, 2021. Currently, the new fixed index rate represents a 26 basis point savings when compared to our previous index of 30-day LIBOR at 2.48%. In total, at quarter end March 31, 2019, NHI has $450 million in fixed interest rate swaps, of which, $40 million recently expired in the second quarter.

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 fourth quarter, the EBITDARM coverage ratio was 1.63x, senior housing was 1.16x and our skilled portfolio was 2.66x. I would also note that expanded our disclosure in the supplemental and 10-Q. We now break out coverage for the portfolio of same-store properties as well as having some detail on our larger customers.

As Eric has illustrated, we've done some heavy lifting (inaudible) and continue to monitor our portfolio closely and make changes where necessary to position the portfolio for improvement.

Taking a look at our larger operating leases. Bickford Senior Living, which represents 18% of our cash revenue, had an EBITDARM coverage ratio of 1.09x for the trailing 12 months ended December 31. As a reminder, this EBITDARM calculation excludes 2 smaller properties held for sale. It also now includes 2 to 4 new development properties we discussed last quarter. The remaining 2 developments continue to lease up nicely on or ahead of schedule and add additional cash flow to the Bickford portfolio. These development properties, excluded from the total portfolio and same store, had a T12 EBITDARM coverage of 1.32x as of [December] end.

The portfolio we purchased in mid-2018 in Ohio and Pennsylvania continue to transition into the portfolio. The renovation projects are finished, staffing efficiencies, need to improve. We continue to work with Bickford to find ways to optimize the relationship. In addition to the assets held for sale and new developments, we continue to [look] for avenues and improve cash flow over time.

Our relationship with Senior Living Communities represent 16% of our cash revenue. Including net entry fee income, their EBITDARM coverage ratio is 1.18x on a trailing 12-month basis. This ratio is down quarter-over-quarter due to some lumpiness in extra fees during the winter months, but the spring months are back in line with historical levels when normalized for inventory purposes.

Looking at our National HealthCare Corporation relationship. Our partnership with NHC accounts for 14% of our cash revenue and had a corporate fixed charge coverage of 3.72x. Holiday Retirement represents 12% of our cash revenue, had an EBITDARM coverage ratio of 1.16x. Trailing 12-month EBITDARM coverage on the Holiday portfolio would be 1.25x as of fourth quarter end adjusting for the impact of the recent lease amendment.

Moving on to new investment. Earlier this month, we announced a $10.8 million acquisition in Shelby Township, Michigan. The building, Canton Manor Care, comprised of both assisted and memory care units and is leased to an affiliate of Comfort Care Senior Living. The 10-year lease will have an initial lease rate of 7.75% plus annual escalator starting in year 3. We're pleased to expand our relationship with Comfort Care and look forward to continuing to grow with them.

Turning to our pipeline. We are seeing a large influx in activity, both new and existing customers. These new investment prospects are mainly comprised of private pay senior housing opportunities. As we evaluate these deals, we remain selective and are committed to adding high-quality operators and communities to the portfolio.

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 comes from the line of Chad Vanacore with Stifel.

So Eric, I was hoping that you could clarify something [for me]. There's a $1.1 million expense in your income statement, tax measuring it, expenses related in escrow. It looks like a onetime item, but you didn't back out normalized FFO. Can you give us more details there?

This is Roger. I'm glad to address that. This is really a new accounting standard that required us to call out separately those funds that our tenant paid to us in escrow, which were used for property taxes and insurance. And it's the same number that is in the revenue section, you just can't see it called out separately. So it's literally $1.090 million in both places. We don't like -- I personally don't like that standard. I don't think it really added anything because monies were coming in and monies were going right out to the escrow accounts. But that's what we had this quarter. So there's absolutely no effect on the bottom line.

All right. And then I've got a couple of questions masquerading as one, which is you transitioned 3 tenants to new operators, can you quantify the expected FFO pickup from 1Q to 2Q from those transactions? And just given the timing that you laid out with the current performance, where did your NOI assumptions put you in terms of guidance range? Are you trending towards the high, low or mid-end of your range?

This is Eric. Given that these buildings were essentially transitioned with some of them just a couple of weeks ago, it's a little too soon to give you estimates on what the NOI will look like. We did make some very conservative assumptions when we put together our guidance at the beginning of the year. And so far, we're tracking that guidance.

Let me add just a little bit to that. We disclosed in our note that the revenue from those transitioned properties in the first quarter was $702,000 compared to almost [$3.002 million] last year. So we've got these stabilized to the point that we believe that higher revenue to us is coming this year.

Okay. Roger, that would assume -- so which is annualized at that $2.8 million or so that you expect to come back annually at a $3.2 million. Is that a fair way of looking at it?

Well...

Or maybe there's something higher in there.

You have to be careful because $625,000 of that $702,000 was a onetime settlement fee paid for by the tenant. So I wouldn't be annualizing that number.

Right, right. That's right. And furthermore, one of the buildings is undergoing an intensive remodel and will open in June, so it's really hard to say exactly what the rest of the year is going to look like. We think we'll have far more visibility by the second quarter call.

And we put a chart in there that lays out all of this, what this -- which buildings, what the status is, what the occupancy is, what the NOI is.

All right. I'll check it out. So you mentioned in your press release about updating acquisition guidance post 2Q, and Kevin made comments that the pipeline was pretty substantial. So are you considering any sizable portfolio deals in the pipeline? Or are they particularly smaller sized transactions?

Chad, I would just say that we have a lot of different opportunities under review in terms of how we do business. And the fact of the matter is we've been very successful in doing smaller portfolios and bolt-on type transactions. But we're also looking at what's available to us and how we build relationships and establish new relationships with good quality operating partners. So we're open for business on all fronts at this point.

Eric, Kevin, if you had to sort of handicap the BEAT percentage of your pipeline of being, say, $50 million up kind of transaction versus, call it under $50 million, what would you set that at?

That's hard to say. I mean most of our transactions, if you look back at our volume over the last few years, has been on the smaller end, I'd say below $50 million if you looked at historical. And the fact of the matter is we need to be open to doing the smaller ones and the bigger ones. And the smaller deals have been good to us. We'll continue to look at those. But we're definitely looking at seeing how we might be able to do some other investments over time and be able to build out some bigger relationships and platforms as well.

All right. I'll keep patient and wait for a 2Q update, and I wish you luck on that front.

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

Following up on that pipeline question, Eric, in sort of the tail end of your prepared remarks. Again, I think you mentioned some anticipated good news regarding your growth in the future. Anything you can sort of elaborate on there? And then in that same vein, is there any update on Timber Ridge -- the Timber Ridge option?

Good question, Chad. Just -- Jordan, I'm sorry. Jordan. And I'm looking at your thumbs up, your yellow and red thumbs here. Timber Ridge, the purchase option is open presently so we are actively in discussions about that. So stay tuned, we should have an update for you in the second quarter on that. And then insofar as other acquisitions, we are working on several acquisitions that are past the LOI being signed, staged and in due diligence, but we are just not at the point where we wanted to announce anything. It's our practice to be very conservative about revising guidance and announcing acquisitions. We want to make sure that due diligence is satisfied and that we're in a binding agreement before we say anything.

Okay. So nothing under contract?

Not yet.

Okay. In terms of Timber Ridge, is there -- can you sort of give us a guidepost for what cap rates might look like on that caliber of an asset?

Given that the seller is listening, no, I can't.

Between 1 and 10, though?

That's fair to say.

Okay. Okay. And then just another follow-up just on the sequential role of NOI. I know this is tricky and I really do appreciate the added disclosure this quarter. So -- but looking at the NOI from these transitioned properties, it's not onetime, we're looking at $77,000 or thereabout. Is there any sort of way to think about either the Chancellor portfolio now, the old Autumn Leaves portfolio, what kind of rent they'll be paying approximately? Or any other identifiable pieces that we could figure out what run rate NOI might start to look like.

It's a fair question, and I understand your eagerness to get that information. It's just early days especially on the Autumn Leaves portfolio. We literally transitioned that 3 weeks ago. So there are -- when you take over new buildings, there's all sorts of -- I wouldn't call them startup cost, but you have to pay for new checks, you have to pay for new signage, you have to pay for -- when a building's in distress, you get a bill from Comcast for 6 months overdue and you either have to pay it or the cable goes out. So you're kind of stuck with some going in cost that we're still trying to get visibility on and negotiating with vendors. So this quarter in particular will be tricky. We should have a much clearer picture for you when we report on second quarter insofar as Autumn Leaves. On Charlotte, the building that is under renovation, that is basically a new development. It's presently scheduled to open in June, and it will look like the lease up of any other new development. So it will take a year to 1.5 years to fill up and you'll have some operating expenses to cover. In the meantime, you will see some straight line rent fill up if that helps you in Charlotte once the lease is signed. The Indianapolis building, that's still treading water and negative NOI, frankly, until we find a home for it, which we're actively negotiating right now. And then Maybelle Carter in Nashville, that is cash flow positive. But again, it has some startup cost and vendors and CapEx. And these buildings have not been loved for 2 or 3 years, so we're putting money into them at the expense of NOI for a couple of quarters just to make sure that they return to their former glory.

And just so I understand, the lease revenue disclosure is net revenue or net cash flow depending on the structure of the lease. But that's what it would be...

That's essentially it except for Charlotte. Charlotte will be an actual triple-net lease that, again, you'll see some straight line rent show up but no cash until next year.

Yes. And even then, through the lease-up period, there's -- the cash rent associated with it is small just because there's significant cost in getting it leased up.

The thing to remember is we like -- in each instance of these buildings, we like the real estate and we like the market. Otherwise, we would just sell the building. So when there are buildings that we're selling, you can see that in our disclosures. So we've made a conscious decision to hold onto these, to reinvest in them and to go through the trauma of changing operators.

I guess just one more for Kevin. You mentioned that the fees coverage slipped sequentially, and I was trying to understand what you were saying. I guess I thought it was trailing 4 quarters. So the lumpiness -- I guess I don't understand where the lumpiness comes from. I also noticed the decline year-over-year from [1 3 to 1 8], so I wouldn't expect any seasonality. But what's the principal driver of the lumpiness you were describing?

The biggest thing there, Jordan, is just that a really good quarter for entry fee sales rolled off and was replaced with a much more moderate quarter. So that's what we're referring to. And as we look back at entry fees, there's some cyclicality and seasonality to it. But it's really been, I guess really has been lumpy quarter-to-quarter. When you look at it year-to-year, it tends to smooth out a little bit. But as I mentioned, we had a really good quarter overall. And through the winter months, the amount of entry fee that came in was less. And then as I also mentioned, they have made some strategic decisions to repurchase some inventory. So the way we look at coverage on it is net cash generated. So they used cash to purchase inventory, which becomes an asset for them but it's not cash flow. But they can turn around and sell that unit and not have to repay an entry fee at that point in time. So there's a little bit of a timing issue that gets layered in there as well.

Our next question comes from the line of Rich Anderson with SMBC Nikko.

So just a couple more questions. I just want to make sure I understand this and partly in response to what Jordan was asking. So you're essentially going to be in an operating lease for some of this in an interim period, right? And then transition to triple-net for all of it? Or is there a chance that if you love the building so much that you could see yourself wanting to control the future a little bit better and having more of a RIDEA setup for some or all of it at the end of the day?

That's a fair question, and I would consider these at the moment accidental RIDEAs. But I can tell you that in all instances, these leases or agreements we're signing, contemplate them converting to triple-net. So at this point, that's the plan. Now that doesn't mean 2 years from now, I won't be eating those words, but at the moment, that's our plan.

Okay. I appreciate that honest comment, Eric. Now when I think about these assets, did -- a lot of this sort of happened with a fair amount of suddenness. Or did it sort of fall between the cracks a little bit for you guys? How did we get to this point? I know it's relatively small versus the rest of your portfolio, but I'm just curious, the speed bump, which some of these things happened to you or to them.

Well, Rich, it actually coincides with your vacation. And so while you're away, we were forecasting this to all the analysts that we met with at Nareit and other places on non-deal roadshows. So I think in all seriousness, we've done a pretty good job of forecasting that these things were in trouble or going to happen. If you look at our filings from third quarter last year, you'll see references to Autumn Leaves. You'll certainly see references to Regency. We've been battling with them for well over a year, and people have been fascinated by that. And then Landmark, we also talked about last year as well, so.

Eric, it was a pretty full discussion of these 3 in the 10-K back in February.

Right. I read all of that. I was just wondering if it was percolating behind the scenes a year, 1.5 years ago. But maybe not.

No. No, no, no. I mean Autumn Leaves paid its rent up until November and East Lake Regency paid its rent all the way up to December of 2018. So if someone is still paying their rent, you might know they're in trouble or they're shaky or doing them in the case of Regency. But we're limited in what we can disclose until they're actually -- we're ready to evict them.

Okay. As far as the guidance goes, I think the only thing that's sane about last quarter is the actual numbers because I think the recipe to get to the range of $5.43 to $5.53 is probably quite different, a different balance between what you've done from an external growth standpoint and some of these moving parts with the transitions. Is that a fair way to think about it? That the endgame is the same but the process to get there is quite different?

Well, certainly, the stew may be a little bit different now than it was back in February. We certainly feel very comfortable that we're going to land in that range.

And I guess and then -- yes, well, Roger just to make it maybe a quicker question out of it. To what degree did the external growth activity come to the rescue by you not having to lower guide it? In other words, how dilutive is the one basket versus the accretion of the external growth basket?

Well, one thing I think that will frame our response, we were able to do the same amount in FFO per share -- AFFO per share, $1.22, as we did 1 year ago. We take that as a great accomplishment when you consider the tenant upset that we had for those 3 tenants plus the fact that we had already described how our rent from Holiday was going down in January. So we are greatly relieved and proud of our performance this quarter.

Yes. I would -- massive, it's been a heroic effort to get back to even. And that I would also like to point out, there is a silver lining on the Regency buildings and that is they were subject to a purchase option next year so that rent would have gone away anyway. So now instead of having it go away next year, it's likely that those buildings will start perking up and producing NOI. So I take comfort in that.

Okay. And then last quick question for Kevin on Bickford. You said you are still working together to get to optimal solutions and so on. I know the sales aren't anything new, but is there anything -- a deeper conversation going on with Bickford in the past 3 months just to find the right mix of coverage and rent out of that portfolio?

Well, with all of our customers, particularly the big ones, we stay in very regular contact with them. So there's been plenty of conversations that happen on how we can help each other out. The thing that Bickford does really well is develop in big markets, and that's something that they've continued to do a good job of. So I think our strategy with them is refine the portfolio, sell some buildings where they make sense, continue to try and help them develop where it makes sense and then see where there's avenues along the way. And they remain very engaged in the business. They're doing a lot of initiatives to make sure they're getting -- keeping their house where they want it. And we talked about it in the last quarters or probably a couple of years now, just wage pressure. And I think a lot of that is what you're seeing show up in the coverage. They had some initiatives underway to help them on both the occupancy and the staff side. So we have had plenty of conversations with them, where they're headed, where they're at, how we work on making things better. And they do some things really well. Those are the things that we want to foster. And where we can make improvements in the portfolio, we're going to take a hard look at that.

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

Just wanted to go back to Senior Living Communities and just understand that you're not seeing any occupancy or operational pressures that's in the lease coverage. It's just more of a, like you said, kind of a nuance of them repurchasing some of the entrance fees.

The entry fee volatility, so to speak, is the bigger part of the equation. They're not immune to competition and wage pressure as any of our other operating partners have been. But they feel like they've done a good job of weathering the storm, so to speak, there. But there are some things that they're trying to improve on their own as well. So like I said the biggest contributor from a coverage perspective is the entry fee as it relates to what we've disclosed. But like I said, they're not immune to those other pressures as well.

Okay. Okay. And then on the assets that are being transitioned, are you able to talk about the competition for those assets in terms of new supply? Were the pressures on those assets just operational from the operators making mistakes? Or where there other local issues in terms of supply or something else that were impacting those assets? I know you said that you'd keep the -- you would sell the assets if you thought there was something wrong with the real estate. But I just wanted to see if I can get some more color on those markets.

Sure. I would say each one's a little bit different. As we looked at the Regency portfolio, if you look at Indy, very competitive market on the AL side. This is an independent -- predominantly independent community, so it has a different niche in that area. Charlotte with Senior Living Communities coming in, that's their home base. Not as -- that's not really -- there is competition there, at the same time, the opportunity here was to step up the level of finish and really relaunch the building as a Class A type community, so reposition it. The one that I would say have some competition would have been LaSalle buildings. And that said though, there's -- it's more of a management issue than a market issue. We still really like the physical plant. We like the market. There's competition. But I think it's a matter of just having somebody that is focused on the day-to-day operations and not how to restructure the company. And that's going to really -- having somebody in there that has that focus and that we can support that relationship is going to allow those buildings to get back to where they need to be.

Okay. And then the last question, I don't want to put Eric in box of having to use words on not doing RIDEA, but I'll ask it in a different way. Did you have any propensity to do value add properties at this point? I know you're transitioning some assets. It's almost like value add -- or is value add. But would you have any propensity to bring on additional value add assets? And the reason why I asked that is some of your competitors, peers discussed maybe see more value add opportunities in the market, particularly senior housing. But I just want to see what your propensity is to go at -- go after value add properties at this point.

Absolutely, Dan. I mean I would point to our New Hampshire loan, the Alzheimer's building we bought at the beginning of last year.

Yes. It was a little over a year ago now.

Yes. So we funded a loan on a distressed memory care building. So we're always on the hunt for deals like that. And so short answer, yes. I'm not sure that it would look like a RIDEA. It would probably look more like a loan because we're very interested in current pay to fund our dividend.

Do you see any of those opportunities within the pipeline that you mentioned earlier in the call?

There are some opportunities that are out there that we continue to evaluate. So it's just a matter of what -- how deep the turnaround of the value add is. Ultimately, what we'd like to be able to get is something where we could get a good value for our customer but still has some current cash flow to it so they're not having to continually beat it and be a big drag on the organization. That said, where it makes sense to either bolt on to a lease or do a lump as Eric described, we're definitely taking a look at that where there might be some essential currency in lease where they might have a little bit of coverage or something and use that to help get a building back to where it needs to be. So it's definitely an opportunity, something we're seeing a little bit more of. I would just say stay tuned on that.

(Operator Instructions) And our next question is a follow-up question from the line of Jordan Sadler with KeyBanc Capital Markets.

I just -- on Chancellor, did you mention how many total properties Chancellor has under its umbrella, including the existing 7 that you have with them?

We did not. They have a building in Colorado that is owned by Ventas, and then they manage 3 other buildings for Bridge. So 4 in addition to ours.

Okay. And any thoughts on the scope or scale of this incremental portfolio relative to their existing portfolio? I mean is this pretty manageable?

We believe it's manageable. And this is an opportunity for us to really not so much help them, but it affords them the ability to grow their bench, bring some people onto the team and really help grow their organization. So I feel like they have the right scope, but at the same time, this allows them to add some bench strength. And they've done a really nice job within our portfolio specifically as it relates to memory care. So it felt like this was a good addition for them and helps them keep coming as an organization.

Okay. And then I was just noticing looking at the -- backing into the Brookdale coverage through the disclosure, and it looked like it was well under 1x on those 9 properties. Any thoughts or update on what's going on there, the status of that lease?

Sure. Well as a reminder, they have a purchase option on those properties next year, which they've indicated they intend to exercise. So a, they're an excellent credit; b, we have a huge deposit on those properties; and c, they're probably going away next year and we'll get a cash payment that we can reinvest.

Okay. Is that -- do you have the cap rate on that repurchase, I guess...

It's a fair market value, so TBD.

Okay. TBD. Great. And then the last one would be just on this Ensign spin news last night. I don't know if you've had a chance to digest it at all. But any thoughts on of sort of impact to the credit would be...

Well, yes. We reached out to them right away as soon as it was announced. And for starters, it doesn't affect any of their SNF buildings. They're spinning out the senior housing buildings, and it actually improves our coverage and our credit. So we're...

We're high level, right?

Yes. We're neutral on the spin.

Mr. Mendelsohn, there are no further questions at this time. I'll turn the call back to you. Please continue with your closing remarks.

Thanks, everyone, for joining us today. And we'll see most of you at Nareit in next month.

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