National Health Investors Inc (NHI) 2019 Q4 法說會逐字稿

Greetings, and welcome to the 2019 National Health Investors Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, February 19, 2020.

I would now like to turn our conference over to Dana Hambly. Please go ahead.

Thank you, and welcome, everyone, to the National Health Investors Conference call to review the company's results for the fourth quarter of 2019. On the call with me today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; and John Spaid, Executive Vice President and Chief Financial Officer. The results as well as the notice of the accessibility of this conference call on a listen-only basis over the Internet were released this morning before the 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 risk or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 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 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, Dana. Hello, everyone, and thanks for joining us today. We are pleased to report our fourth quarter and full year results for 2019, which were at the top end of our guidance range despite the many headwinds that we faced last year. We started 2019 in a much more defensive posture than as usual for NHI, and we experienced good momentum throughout the year. We are in much better shape as we enter 2020. We are not out of the woods by any means as the senior housing industry continues to be challenged by new deliveries and labor issues, which we do not expect to improve for at least the next several quarters. But we are generally encouraged by slowing inventory growth and very strong net absorption, which in 2019 showed the highest level of demand in the 13 years since Nick has been collecting this data.

Furthermore, our skilled nursing portfolio continues to show very strong coverage, and we expect that the new PDPM reimbursement system will moderately improve on that coverage.

We have remained optimistic despite some of the headwinds and announced $329 million in acquisitions in 2019, primarily with existing partners. We also added 3 new partners with whom we are excited to grow with for many years to come. In 2020, we have already announced $150 million, including $135 million for Timber Ridge, which is a class A CCRC just outside of Seattle, and we are thrilled to partner with LCS on this deal. Kevin will share more details later.

With the Timber Ridge acquisition, we are dipping our toes back into RIDEA with a 25% interest in opco. But unlike other RIDEA structures more common with health care REITS, we've done so with an embedded triple net lease that mitigates volatility of the underlying operation to NHI shareholders. We are always open to creative financing solutions with premier operators like LCS, and investors should inspect that our focus will continue to be on the triple net strategy.

We recently announced a 5% increase in our dividend, which marks the 11th straight year we have increased the quarterly dividend by 5% or more while maintaining a coverage ratio below 80% of normalized FFO for the last 7 years. This makes us a dividend achiever if you keep track of such things.

We are not satisfied with the limited per share growth that we experienced in 2019, and our G&A reflects that in the form of reduced executive compensation this year. This demonstrates accountability to shareholders.

We work hard to anticipate areas that need attention and proactively addressed issues in a transparent manner. As we talked about on our third quarter call, we expect that we will return to mid single-digit growth this year. John will discuss the guidance in more detail, but I will add that we have good visibility on our outlook and that our desire is always to underpromise and over-deliver.

With that, I'll turn the call over to John.

Thank you, Eric, and good morning, everyone. I'm pleased to report a solid quarter and year-end to 2019 as well as 2020 guidance more representative of historic NHI growth.

Beginning with our 3 FFO performance metrics on a diluted common share basis. For the fourth quarter ending December 31, 2019, NAREIT FFO increased 6.9% to $1.39. Normalized FFO increased 4.4% to $1.41, and adjusted FFO increased 2.4% to $1.30. On a full year basis, NAREIT FFO per diluted common share increased 2.4% to $5.49. Normalized FFO increased 0.7% to $5.50. And adjusted FFO increased 1.2% to $5.10, which, as Eric previously mentioned, was at the top end of our guidance range. Reconciliations for our pro forma performance metrics can be found in our earnings release and 10-K filed this morning at sec.gov.

I want to now talk about our cash NOI. Cash NOI is a metric we use to measure our performance. We define cash NOI as GAAP revenue, excluding straight-line rent, excluding escrow funds received from tenants and excluding lease incentive and commitment fee amortizations. For the year ending December 31, 2019, cash NOI increased 7% to $290.5 million compared to $271.5 million in the prior year. Our increase in 2019 cash NOI was reflective of our organic NOI growth from lease escalators, our partial year contributions from newly announced 2019 investments, our continued fulfillment in 2019 of the prior year's announced investments, offsets by impacts due to the Holiday master lease restructuring and finding new homes for the 9 transition properties. A reconciliation of cash NOI can be found on Page 17 of our Q4 2019 SEC-filed supplemental.

G&A expense for the 2019 fourth quarter increased 28% over the prior year fourth quarter, and for the entire year, increased 6.8% over 2018 to $13.4 million. Included in the fourth quarter and full year 2019 G&A expense was approximately $716,000 in severance. Excluding the severance expense, G&A increased 2.7% in the fourth quarter over the prior year's fourth quarter and 1.1% for the full year compared to 2018. As Eric mentioned in his opening remarks, the flat year-over-year G&A expense growth is reflective of our muted executive compensation for NHI's 2019 performance.

Turning to the balance sheet. We ended the year with $1.44 billion in total debt, of which a little over 90% was unsecured. At December 31, we had $250 million capacity on our $550 million revolver. During December, NHI entered into privately negotiated agreements with certain holders of our 3.25% convertible senior notes, under which, we issued 626,397 shares of NHI common stock plus cash consideration and payment of fees totaling $22.1 million to redeem $60 million in aggregate principal amount of our outstanding convertible notes. As a result of a redemption at year-end, NHI's aggregate balance of convertible notes is now $60 million, which will mature in April of 2021.

Our debt capital metrics for the quarter ending December 31 were net debt, net debt to annualized adjusted EBITDA at 4.7x, weighted average debt maturity at 4 years, and our fixed charge coverage ratio at 5.7x. For the quarter ended December 31, our weighted average cost of debt was 3.54%.

We've mentioned in prior calls that we expect 2020 to be a transformative year for NHI's balance sheet, and the interest rate is currently favorable. Our announced public credit ratings allow us to consider the public debt markets.

Our current shelf registration is expiring, and we will be filing a new shelf registration in the coming weeks. Stay tuned on more to come in the forthcoming quarters as we look to term off our revolver balance and make room for future growth.

This morning, we issued our 2020 guidance. We expect NFFO to be in the range of $5.67 to $5.71 per diluted share or an increase of 3.5% at the midpoint. We also expect AFFO to be in the range of $5.31 to $5.35 or an increase of 4.5% at the midpoint. Our guidance continues to reflect management's intent to underpromise and over-deliver. Our guidance issued today includes effects from the recently announced Brookdale purchase option, expected contribution from the recently announced Timber Ridge joint venture, continued fulfillment of our commitments as detailed in our 10-K, and line of sight on unannounced investments under LOIs totaling approximately $50 million.

Our guidance also reflects our views on our transition properties. While we don't expect the cash NOI in the 9 transition properties to return to 2018 levels this year, we do expect them to get to between 40% and 45% of the way back to 2018 levels. We do believe, though, after straight-line rent, the GAAP revenues for the transition properties will get to between 60% and 65% of the way back to the 2018 levels. Our guidance this year includes assumptions for terming off our revolver debt and further assumes that we will continue to make additional investments on a leverage-neutral basis.

In addition to our per share guidance, we wanted to also give you -- give guidance on several items that many of you use to evaluate our FAD performance. In addition to noncash stock compensation, which you'll see referenced in our reconciliation table as part of this morning's earnings release, moving forward, we wanted to also provide you with pro forma routine capital expenditure and nonrefundable entrance free cash flows attributable to our 25% share in the Timber Ridge opco.

Together with our earnings release this morning, we also announced our first quarter dividend. We increased our quarterly dividend 5% or $0.525 to $1.25 to $1.1025 per common share. The first quarter dividend is payable on May to shareholders of record, March 31, 2020.

As Eric mentioned in his opening remarks, we started 2019 off on defense but ended the year back on offense. And 2020 is shaping up to be a good year for NHI. With that, I'll now turn the call over to Kevin Pascoe to discuss our portfolio. Kevin?

Thank you, John. Looking at the overall portfolio at the end of the third quarter, the EBITDARM coverage ratio was 1.66x for the total portfolio compared to 1.65x in the year earlier period and 1.69x in the prior quarter. Senior housing coverage declined year-over-year is expected to 1.14x compared to 1.23x last year and 1.15x in the prior quarter. And our skilled portfolio at 2.73x improved from 2.55x last year but declined from 2.8x in the June quarter. The sequential decline is attributable to NHC as the non-NHC SNF coverage improved to 1.92x from 1.87x in the June quarter. And we are still very comfortable with the NHC coverage, which was 3.69x in the third quarter.

Our ample SNF coverage is a testament to the hard work of our best-in-class operators. And while the senior housing industry continues to be challenged by supply and labor issues, we have not seen a meaningful shift in operating trends and feel our operating partners are doing a good job of competing in their respective markets.

According to recent NIC data, properties with an average age of 10 to 17 years have the highest occupancy followed by properties with an average age of 25-plus years. Interestingly, the lowest occupancy was reported for properties with an average age of 2 to 10 years. This tells us that performance is operator-driven, consistent with our philosophy, and that the newest buildings will not always garner the most market share.

Turning to our operators by revenue. Bickford Senior Living represents 18% of our cash revenue and had an EBITDA coverage ratio of 1.07x for the trailing 12 months ended September 30. On a same-store basis, the Bickford EBITDARM coverage is 1.12x. Including a development property, which will roll into the coverage calculation in the fourth quarter, the Bickford total and same-store coverage was 1.09x and 1.14x, respectively.

Due to the lagging nature of EBITDARM coverage and in an effort to provide more transparency, we have continued to disclose Bickford's occupancy. Bickford's occupancy started to turn positive in the second quarter, which continued through the third quarter. We are pleased to report that Bickford's fourth quarter occupancy remained steady on a sequential basis and showed significant improvement year-over-year. Bickford's total and same-store leased portfolio occupancy improved by 160 basis points and 230 basis points, respectively, in the fourth quarter of 2019 compared to the same quarter in 2018. Importantly, Bickford has maintained price discipline while showing this improved occupancy.

Lastly, NHI exercised its purchase option on the Bickford Shelby property for $15.1 million at an initial yield of 8% during the first quarter of 2020. This transaction is similar to the Bickford journey deal and that it replaces a $14 million construction loan we had in place previously. We have similar agreements on 2 other Bickford properties, which we believe will help stabilize and improve our coverage with this operator. Developing new assets with Bickford will help us continue to evaluate additional asset sales while maintaining our relationship with Bickford and upgrading the portfolio.

Moving to Senior Living Communities. Our relationship with SLC represents 16% of our annualized cash revenue. Including net entry fee income, their EBITDARM coverage ratio was 1.1x on a trailing 12-month basis. This compares to 1.28x in the year earlier period and 1.1x for the June quarter. As discussed on prior calls, we are watching entry fee sales closely, and leading sales indicators have started to turn positive where SLC has purchased additional unit inventory. The benefit of entry fee sales will take some time to roll through the coverage calculation as the quarters with those inventory repurchases roll out of the calculation.

Our next largest partnership is with NHC, which accounts for 14% of our annualized cash revenue. As previously mentioned, NHC, had a corporate fixed charge coverage of 3.69x in the September quarter.

Lastly, Holiday Retirement, which represents 12% of our cash revenue, had an EBITDARM coverage ratio of 1.21x, which is a slight improvement on both a year-over-year and sequential basis. Recall that we restructured the masteries with Holiday at the beginning of 2019, which required some difficult decisions at the time. But the goal was always to put Holiday in a better position operationally and financially while acting in the best interest of our shareholders. While the story continues to play out, we are encouraged by the outcome just over a year later.

Moving on to new investments. In the fourth quarter, we continued to expand our relationship with 41 Management with the acquisition of a 48-unit assisted living and memory care community in the Saint Paul, Minnesota area for $9.34 million at an initial cash yield of 7.23%. We also extended a second mortgage loan of $3.87 million at a rate of 13% on an assisted living community in Bellevue, Wisconsin. This is a 1-year loan with extension options, and NHI has a purchase option on the community upon stabilization.

We also exercised our purchase option and formed a joint venture with LCS to own and operate the 401 unit Timber Ridge CCRC for $135 million effective January 31. As Eric mentioned earlier, this deal includes a reduced structure whereby NHI holds an 80% interest in the propco and a 25% interest in the opco. Propco is leasing the community to opco under a 7-year triple net lease at an initial yield of 6.75%.

NHI has also provided financing of $81 million to propco or approximately 60% of the purchase price. This is a class A property in a high barrier to entry and affluent market outside of Seattle with one of the premier CCRC operators in the country.

Regarding the acquisition environment and pipeline, we announced $329 million in acquisitions during 2019, and we are off to a good start in 2020 with announced deals already totaling $150 million. We look forward to our new building opening in Milwaukee with Ignite Medical resorts. Our $25 million investment has a yield of 9.5%, and we expect rent to commence when it opens in the second quarter. Valuations are still very competitive, but through a relationship-driven approach, we continue to see additional opportunity as we survey the market and are committed to adding high-quality operators and communities to the portfolio yields comparable to what we have done in the last few years.

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

Thank you, Kevin. The challenges in this industry cannot simply be lumped into general categories like AL versus IL or primary versus secondary. NHI is committed to succeeding in all of the markets and products in which we invest. We are constantly reviewing our portfolio to identify opportunities that we can proactively address. We do this through a number of methods, and our preference is to always do it in unison with our operators and through a financial structure, which leads to stability in our cash flow. As I mentioned earlier, we have good visibility in our outlook this year, and we look forward to updating you on our progress throughout the year.

With that, operator, we'll now open the line for questions.

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

This is Seth Canetto on for Chad. So John mentioned in his opening remarks about the strong cash NOI, 7% in 2019. How should we be thinking about that in 2020? And do you guys have any guidance on that metric?

So let's see. This is John. How should you be thinking about that? So obviously, it's going to show -- that's the easy answer. So no, we don't have guidance on it. I think that the best way to explain it is we have to grow our cash NOI in the 7% or greater range which then, after we issue additional shares is diluted back to the growth metrics that we need to get to our 5% target. And our 5% target on AFFO is roughly $0.26 over 2019. So there's a lot of ins and outs that goes through all of our forecasts. And we had some outs in this year, which includes some of our -- the purchase options. So that's why it gets a little bit tricky. But at the end of the day, we're trying to grow the company, and we're trying to grow the company through cash NOI, which eventually funnels down to how we're able to cover our dividend and also pay for all of our capital, our other capital. So yes, it's a little bit tricky.

All right. That's helpful. And then just looking at that Timber Ridge acquisition you guys did with that RIDEA structure. Is that how we should think about you guys dipping our toe into the RIDEA structure going forward? Do you think there will be more deals structured like that?

Seth, this is Eric. I think so. That's a structure that we have spent a lot of time and energy vetting with our legal advisers and tax advisers to make sure it works and make sure that it's appealing from a joint venture partner perspective as well. And obviously, now that it's in place, we'll have some time to experience it as a joint venture partner and see how it works. But we think it's a winning combination of exposing us to RIDEA in a limited sense so that the operating performance, which is generally lumpy, will not interfere with our guidance and giving us some upside at the same time.

All right. Great. And then, Eric, you mentioned that when we think about senior housing, we're not out of the woods yet. There's still new deliveries and labor issues affecting the industry, and we really don't see a lot of improvement in 2020. But how should we think about the show total portfolio coverage? I think it deteriorated from 1 2 3 last year to 1 1 4. I understand those are trailing numbers, but how should we just think about that coverage metric moving forward?

Sure. Well, keep in mind, our reporting on coverage is through the 2-quarter lag -- a 1-quarter lag. So we're always looking in the rearview mirror. And I think we've been very transparent about what's going on with Bickford, and we're starting to see the benefits of all of the work that we're doing with them. Just to reiterate, we're publishing current occupancy in our 10-K. We've adjusted their rent. We've sold -- or about to sell underperforming buildings. We transitioned an underperforming building in Minnesota to another operator. And while they're still supporting that rent this year, that will lessen next year. And then they have new developments that are coming on board that are improving their immediate coverage, which does not show up in same-store for 2 years. So that's one way to think about the coverage. And then the other is Senior Living Communities, and they have invested heavily in new product that was available for sale and their buy-in community, and that weighs on their coverage. So generally, we're optimistic. And what we're seeing is an improving trend.

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

I just wanted to make sure, do you -- are you responsible for CapEx in the JV structure with LCS?

So because we own -- we're part owners in the opco, and because you're trying to understand the cash flows that we might recognize from the opco. We're giving you a little bit of a guidance on what might help you sort of get to a performance metric on the opco as we move forward. So when we, at the end of the day, make a decision about distributions out of the opco, you'll see the earnings loss on our profit and loss statement. So -- and you won't see some of the other sort of items that we'll have to sort of take care of before we make distributions, and we're trying to give you some help on that. We're also trying to give you some help on how we're going to report ourselves moving forward. We haven't made final decisions on all that. But I think you're going to see components of all of these numbers in our first quarter results. And then finally, one of the things I want to make sure you -- I'd point out to you is that we might actually be able to distribute to ourselves more than our performance metrics indicate because one of the things we're not really talking about is the refundable entrance fee portion of the cash flow streams that the opco will also see. So that's more of a liquidity measure, so we try to stay away from those other measures. But you'll hear Kevin talk more about that as we progress forward on the Timber Ridge co-venture.

Okay. And then on skilled nursing, I mean, it seems like you have some positive comments on PDPM and we've seen some positive comments across the space from other REITs and operators, as they report. So when you think about your pipeline going forward, most of what you've done has been seniors housing. Do you think your pipeline might shift a little bit more balanced between skilled and seniors? Are you really more focused on seniors at this point?

Dan, it's Kevin. I think our focus has never gone away from skilled nursing. It's really just been letting the market come back to what we want to transact on that in terms of just coverage and yield. It felt like we've seen that happen. So we've been an active participant, so to speak, in terms of reviewing deals and trying to do some more investment there. I don't know that it changes the way we move forward. Again, I think we are still actively looking at skilled nursing. I don't think yet we're saying we're going to do more just because of that. But I do think you'll see us make investments in the skilled space. We're just going to remain selective on what we go after.

What would be the hold up? Would it be competition on cap rates? Lack of operator quality? I mean, what would be -- what would get you more excited about skilled nursing versus where you are today or where you are last year?

Sure. So operator quality always is going to be first and foremost. I think we've got -- vintage is definitely something that weighs heavily on an investment decision, how old the buildings are. That said, if you've got a good operator and a good plan to invest capital, we would definitely evaluate that. So the things that have held us up before were really more where the market was pricing lease coverage on those types of assets, and it's just not -- it wasn't interesting at those levels. But again, I feel like we're starting to see more deal flow at levels where we would be interested. So stay tuned there, but it's definitely on our radar.

Okay. And one last question, if I could. When it comes to supply growth within, say, Bickford and SLC Holiday markets, it seems if you look at the NIC MAP data, starts are coming down. Supply growth is slowing. Within those markets that you're in, are you seeing that same type of trend? Maybe you don't see all that benefit this year. But over the next couple of years, if supply growth is going to slow down, you probably get some improvement in lease coverage. So what does the supply outlook look within the markets that you're invested in?

It really depends on the market. And so within different -- those general markets, we've seen some new supply. But really, supply by itself hasn't hampered them all that much. I think you mentioned SLC. There's been a couple of markets there that where there has been new deliveries that has impacted them. So it is -- it varies market to market very widely. We are -- as you mentioned, see those deliveries happening, the absorption happening. So it does take some time to get there to soak up the inventory where there was new inventory. But it's not been rampant a cost like the Bickford markets. And there's been, as I mentioned, a select few there and then some in some of the SLC markets. So we're watching those. But we feel like they're able to compete well. The buildings look good. They maintain them, and they're able to show well and still get sales, get people to move in, want to be a part of those communities.

(Operator Instructions) And our next question comes from the line of John Kim with BMO Capital.

I was wondering if you could provide some insight on what you're seeing as far as CCRCs and the average as well as the range of the nonrefundable portion of entrance fees either in your existing portfolio or with underwriting at Timber Ridge?

You're asking about nonrefundable?

Yes. So again, this is one that changes or varies widely based on the community. In the instance of Timber Ridge, the entry fee component is much larger because it is of the asset quality and the -- what they're able to charge for those entrance fees. So it is a bigger proportion of entry fee income or entry fee receipts that they would be even, say, we are with by senior living communities, at least in some areas in the south where the entry fees would be lower. In terms of percentage, is that your question, the percentage of entry fee that is not refundable?

Yes. I mean, residents have different options, right, on what they could choose?

If we're talking about Timber Ridge, there's really only 1 contract, it's an 80% return of capital contracts. So 20% plus the increase in value of that unit over the turnover time is what would be the nonrefundable portion.

And is that pretty typical with your existing CCRC portfolio?

No. It actually varies quite a bit. Some have -- so SLC has 90% return of capital or 90%, 60% and 0. So there are several different selections there. In a couple of our Connecticut communities, there's even more different options than that. I would say -- and then within SLC, it's probably split almost 50-50 between the 60s and the 90s in terms of the plan that the resident would choose. So on average, I would say you're going to be 75%. So a little bit different number but just different contract types that are available. So there's nuance between the return of capital components, and then there's also just nuance between the type of building as is. So Timber Ridge is a type A community. SLC is a type C community or market rate. So some of that -- some of those things will drive what they can charge, what the service fees are for each line of service that they're getting. So there's a lot of components that go into entry fee, how it gets calculated, and ultimately, what their return will be.

And can you remind us how are you accounting for this as far as the normalized FFO impact then on a cash basis? Are you amortizing the nonrefundable portion?

So depending on what line you're talking about. So the net income line will have recognition of the nonrefundable piece that -- and you're talking about with respect to Timber Ridge only. That is a function of the average residents' expected stay in the community. And from there, we will, at the AFFO line, adjust out the noncash amortization of the nonrefundable entrance fees. But we intend to give you a picture of what the actual cash flows will look like below the AFFO line. For FAD purposes, I'll let you choose to use that information as you deem appropriate. And you'll see some irregularity in that cash flow as we move forward. And what you won't see is the cash flows from the refundable entrance fees.

The adjustment is made to AFFO, but it will remain in the normalized FFO, is that correct?

Yes. So normalized FFO sort of contains all of those sort of revenue items like straight-line rent. In this case, it will contain the amortization of the nonrefundable entrance fees at the NFFO line but we'll back it out to get a little closer to the cash flow at the AFFO line and then give you the actual cash. And this is just on the nonrefundable entrance fee component.

Right. Okay. Eric, you mentioned in your prepared remarks that you remain committed to the triple net lease structure. It seems like a structure that's increasingly not working for a lot of operators, just given the CapEx and the rising rents. So I'm wondering, is there anything you're doing as far as altering your leases to be more operator-friendly? I know you've done this joint venture with LCS and the opco, but is there anything else that you're doing on the triple net leases to resonate with operators?

Yes. We have done things like made our escalators CPI-based so that they don't get too far ahead of resident rent increases. We have done things like paid for renovations of buildings and added them to the lease basis. So even though we are contributing to CapEx, those dollars out are getting us an investment return. And generally, that's a formula that works. And then finally, John, I think you've noticed, we are very careful about our investments and underwriting that we do, and we are constantly making sure that there is coverage that allows the tenant to, A, make money and make a profit on their efforts; and B, have enough left over for CapEx in the buildings. And when that coverage is not there, we pay close attention to that. And I would point to Bickford as an example of that.

And our next question comes from the line of Omotayo Okusanya with Mizuho.

For the guidance number, I just have 2 clarifying questions. First of all, in regards to just investment/acquisition activity that's built into guidance, I just wanted to confirm that, that is the loan commitments you still have out there, which you kind of lay out in the 10-K, the $150 million that you've done year-to-date. I think you also mentioned about $50 million also built in for deals that are in line of sight. Is that correct?

That's correct. That's correct. And don't forget, though, of the $150 million that are sort of subsequent event items, you might think of it as sort of recycling capital. We transitioned a Bickford loan to a lease, and we transitioned a LCS mortgage to a lease. So those aren't totally new dollars going out right.

Right. Right. They're offset.

Yes. Yes.

Got it. And so all in all then, when you kind of just add up all those dollars, that total investment of how much built into guidance?

So you're talking about new dollars going out? Is that your question?

Yes.

It's roughly in the $200 million range.

Okay. So that's $200 million. Okay. So that's helpful.

Yes. And so that's fulfilling -- like you said, that's fulfilling our development and loan commitments, but not completely, right? We're not going to get them all filled this year. So it's roughly 60%, 60% to 70% of those being fulfilled this year. And of course, timing is a big part of that, right? So timing is a function of basically, how much of the year are we going to get as those numbers get built into our forecast.

That's helpful. Then second of all, sort of also to kind of clarify around the transition portfolio itself. You kind of discussed built into guidance was this idea of you kind of get back to about 60% of the NOI from 2 years ago from 2018. Could you just clarify again exactly how much NOI that's built into guidance then based on that assumption?

Well, I gave you a range, right, for 2 components, cash and GAAP. So in 2018, we had $9.6 million in cash recognized in approximately $10.7 million in GAAP revenues. So we're saying 40% to 45% of cash and 60% to 65% of GAAP. And the reason for that is we've signed some longer-term leases with Discovery and Senior Living Communities. The cash components of those really come about more in 2021 than they do in 2020.

Got you. Okay. Okay. So that's helpful from that perspective. Okay. And then just one more, if you may, that could indulge me. On your most recent disclosure about tenant purchase option, there was kind of a new purchase option there for an NHI-owned hospital that could be exercised as early as 2021. Just kind of curious, is this a new purchase option? Because it just kind of seems like it sprung in there this quarter and wasn't in prior disclosures.

Yes. So this is Kevin. So it's not a new option. What it is, is we have an agreement with the operator there to extend the option into the first part of 2021. So we're -- they're just not going to exercise their option this year. So that's the change. And just kind of add-on to that, we've been working with -- we feel like we have good relationships with each of these operators, and we're talking through scenarios in which we can do more things like that. Nothing is done yet, but we feel like we have the ability to hopefully make some changes to be able to improve some of these options. And in any event, we do feel like where the options do get exercised, it's capital that we'll get back, be able to redeploy. So we have -- we'll be able to overcome in time. But we do recognize some of these, like the hospitals, those are high-yielding returns. And so those are ones that we're definitely focused on and trying to do things like this where we can move them around, if at all possible.

And our next question comes from the line of Connor Siversky with Berenberg.

A quick follow-up to Tayo's first question, looking at some of these loan commitments and development commitments. Can you provide any color as to the timing maybe of some of the completion of these bigger projects?

So the bigger projects will be Sagewood right? So it -- obviously, else -- it's controlled by the developer there, and we do expect that to open towards the end of this year. So most of the LCS, Sagewood commitments will -- not all, not all, but most will be funded this year. You'll see some other items in there. They tend to be sort of front end, a little bit heavy, and then they kind of maybe mitigate a little bit and then towards the back end, be a little bit heavy for the other sort of construction commitments. Ignite Medical resources is something we do expect to open here pretty soon. And so that's something that you should see get fully funded between now and the end of the second quarter. Does that help?

Yes. Yes. And then maybe a little bit more of a high-level question. Just looking at the external acquisition pipeline, given pretty strong performance of your portfolio, could be considered secondary markets. I mean, are you seeing any meaningful pricing pressures develop there? Are you being kind of pushed out at any deals you're looking at? Or is the competitive environment relatively stable?

This is Kevin. I feel like the environment is definitely still competitive. That said, those secondary markets have really been where we've built up a good -- a lot of good relationships and are able to find new deals where we can find either repeat business, which has kind of been our bread and butter; or find new, growing operators, which we've also done a good job of over the last few years. So as it stands, I feel like we're seeing the market pretty well. We're able to be competitive for some of those. And the key for us is to get there before it goes to a broker, really. And if we can continue to make those inroads and kind of stay out of that competitive process, I mean, that's really where we're going to be successful. And like I said, I feel like we have really good relationships there and can continue to make investments.

Okay. And then, I mean, how would that kind of vary for the different asset classes? I mean, CCRCs versus IOS or ALS?

Well, we just took down a lot on the CCRC side, so that's something we're going to monitor very closely from an exposure standpoint. I think if we continue to invest in the various asset classes that we have on a relative or a proportional basis, we -- that's a good place for us. I mean the question came up earlier about doing some additional skilled nursing. That's always been on the table for us. We'd love to do it. At the same time, we've got to find the right operator and the right opportunity. So we're open for business on really all asset classes. It's just really finding the right operator, right opportunity and fit. I mean I think that's really been what NHI has been as well as opportunistic. So we'll continue to look at senior housing, skilled nursing. We've said for a while, we were looking at behavioral. That's still on the table. So it's just a matter of where we can make those relationships and continue to build them.

And the next question comes from line of Jordan Sadler with KeyBanc.

Just clarifying somewhat on the pipeline, the LOIs, the $50 million you mentioned, John, is mix and pricing. What are we looking at there?

Yes. Mix and pricing. So I guess what I would say is it's above our average. How does that help? Does that help?

Better-than-average cap rates?

Better-than-average lease rates if you look at our commitments page. I mean -- I'm sorry, our history on prior investments.

Okay. Better-than-average lease rates. Is that a function of mix? Is it...

Just mix and pipes and yes, a variety of things. Yes.

So is it like SNFs or more development deals or what?

Again, it varies. I would say it's still in the proportion that we just talked about where it's majority senior housing. But some of it might be where it's secondary market or might be where it's still leasing up, things like that where it deserves a little bit higher yield. So that's -- those are the kinds of things that we're looking at, but where they have good track records and are -- continue to build and have already established a good rapport in those markets.

Okay. And then while I've got you on guidance, coming back to you, John, I guess. We talked about the purchase options, but are you assuming the exercise of the one open purchase option this year in the guide? Or actually -- I don't mean the MOB, I mean, the hospital that opens this year.

Yes...

But you could speak to either or both. I assume the MOB is not -- your expectation there is that it's not going to be purchased.

Yes. It's not that impactful either, so either way. But the -- yes, the hospital is in there. And in other words, we're expecting it to be exercised in our forecast.

And Jordan, if I could make a plug for Kevin's ability to turn lemons into lemonade, remember that we had a huge purchase option with Legend in 2016, and that ended up being transformed into a new deal with Ensign. So we -- I've said before that the purchase options and lease maturities are things that we're hyper-focused on and spend a lot of time on here working on. So we'll give you more color as we get closer, but we view them as opportunities and conversation starters and not necessarily the end of a transaction or a relationship.

Okay. That's helpful. So how does that float with John's comment that you're assuming it's being...

We -- well, have to be realistic. And we like to underpromise and over-deliver. So we're assuming the worst. And the moment we have a different update for you, we'll let you know.

Opposite would be worse, right? I assume it doesn't go away. And then all of a sudden, it goes away. That would not be a good outcome for us. Yes.

Then we wouldn't expect it of you guys. And I can't remember because you had the 2 hospitals in there. Is this the one that had the fourth quarter opening?

The one that was in the fourth quarter got pushed to the 1/1 of '21. The one that's in March has been there for some time now. And as I mentioned a moment ago, I mean, we have good relationships with them. There's an open dialogue. It's still their right, which is why we assume that it would get optioned.

Okay. And then just one other clarification on the Timber Ridge and rest. Did you say -- so did you say 80% -- I mean, only 20% is refundable?

No.

Nonrefundable. 80% is refundable.

80% refundable. Okay. So -- got it.

And our next question comes from the line of Rich Anderson with SMBC.

So I guess can you just give an order of magnitude, should we just put like a 10 cap on these purchase options for '20 and '21 and call it a day? Or you're not willing to sort of provide that level of, call it, coverage -- or color?

Yes. I'd be cautious because we're still...

There are negotiations, yes.

Yes, on pricing, things like that.

Okay. The -- I lost my train of thought here. Oh, yes, so you talked about -- Kevin, you went through all your individual larger relationships. Bickford, still running at a almost parity on a DARM basis in terms of coverage. I know there's some adjustments there with development and so on. But on a DAR basis, which, I would argue, should be really the number you should lead with, but we could talk about that another time, it gets pretty close to 1. I'm wondering if Bickford ever becomes a part of your line of thinking the way you did with Holiday. And you have to think about restructuring so you can get yourselves into a more comfortable coverage zone and not kind of put this matter to rest.

Well, I think -- we think of Bickford as a different scenario than Holiday. With Holiday, you have a financial owner. Bickford, this is a cultivated relationship over time. And frankly, they don't have millions of dollars sitting around. I mean you see that in their numbers. That said, we've actually -- I think we've talked about already, we've been very active with Bickford in terms of our discussions with them, how we optimize this relationship over time. And I just think it's a very different approach. We have -- we've done some things around the edges, whether it's sell a couple of buildings, do continue with the development. We've worked with them on escalators. We've worked with them on some of smaller pieces on the rent. So it's going to be something that plays out over time, and we can continue to do -- we can continue to make adjustments around the edges, plus all that factored into what we're seeing on the occupancy side. They've put in the time, they've put in the effort, they're making strides on improving their business. They're -- as a whole company, you're right, they're running better than we'd like them to be. But that fixed charge that they have as a company has improved each quarter over the course of the year. So something that we're keeping a very close eye on, but they're dedicated to this business. And they're -- I think they're doing all the right things. So as Eric said in his comments, just about the -- kind of the NHI in total, but I think this would apply to Bickford as well. We're not out of the woods yet. We're doing a lot of work there. Working very hard. I feel like we're making progress. But it's going to be a different way to get there than like a Holiday scenario.

All right. I'm a believer in ripping the Band-Aid off, but I suppose every situation calls for different approaches. And then I want to get back also to the quasi RIDEA structure with Timber Ridge. So would you -- how would you describe the economics of this? So in a conventional RIDEA, you own the real estate and the operations and you pay a fee to a manager. Here, it's sort of gray area. 80% of the real estate, 25% of the operations for you guys. Do you -- would you think of that sort of economically? Are you kind of splitting it in half between RIDEA and triple net in this case? Is it like a 50-50 split? Or is it something leaning more towards like a RIDEA structure or more towards like a triple net structure in the way the numbers are just going to play out, if that makes any sense at all?

Yes. Well, let me try to answer it and bring me back in if I'm not getting where you want to go. But I think just from the propco side, clearly, that is a more like a triple net structure. They pay rent in and they share in that rent. On the operating side, it was very important for our partner to have a real partner in the opco with them. That said, we are not operators. We feel like that's their business. We're happy to be their partner. We feel like they're a premier operator in this -- in certain circumstances, and this is one of them. We're willing to take that risk, so to speak, and really have that opportunity with them. But we're not the day-to-day owners. And I think that's really been our position to date on RIDEA anyway is, what we do is help with financial solutions and bring capital. We're not the day-to-day operators, and we don't feel like we should have that disproportionate risk. So in this case, we've set it up through a triple net lease where the property will look a lot like what you've seen from us in the past. And then there is an opportunity on the opco side where they have to care it to come to work every day, and make a better return for themselves. We'll share in some of that. But it really was just aligning what each party does best and being willing to be a partner with them but only to a certain level because that's just not our -- that's not who we are.

Yes. So is 25% the maximum you can invest in an operator?

So this is John. No, it is not. I think that because of the nature of the refundable entrance fee liabilities, in this case, it kind of is. It is, even though we're planning on -- we don't know how we're going to book this for sure yet. But right now, we're not planning on fully consolidating the opco. Even though we don't reflect those liabilities on our balance sheet, it doesn't mean that we're not having to, in our compliance certificates with our bank lenders and private placement lenders, show them the effects of our -- provide a share of ownership. So we want to be a low levered REIT. And that's sort of the situation in this case. In other cases, we could go higher. We did in Bickford, for example, just a little different operator.

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

Really everything I had on follow-up was answered, but I'll just ask something real quick on the CCRCs, which is there are some changes come, perhaps, to the provider taxes. Is that altering how you underwrite CCRCs? And did you underwrite that at all into the Timber Ridge purchase?

So it's Kevin. It'll -- we're monitoring that. I don't think we have enough information today to say how it would impact. So there, frankly, wasn't anything at the time to model into this. That said, the skilled components, and particularly in Timber Ridge, is small compared to the rest of the building. So we don't feel like it's going to be overly impactful. But where there are larger skilled units, it's definitely something that we'll be thinking about.

And our next question comes from the line of Omotayo Okusanya with Mizuho.

Just one quick follow-up. We talked quite a bit about uses of capital. And I just wanted to focus on sources of capital a little bit going forward. What's the remaining balance on the ATM? Do you intend to kind of use that before it expires? And then this idea of kind of terming out the line of credit, when do you think that could happen? And is that likely an unsecured debt offering?

So this is John, again. I would say, our leverage is in pretty good shape as it stands right now. The shelf expires in February. So the current shelf, I would say, no, we really don't have a lot of capacity up. We had 94 point -- $95 million in capacity left. But we did this convertible bond redemption in December. And the way we did it was in a way kind of a deleveraging transaction because we took care of $60 million of debt on our balance sheet using a lot of our equity. So we'll get the new shelf filed here, and you'll see a new number on there. And at that point, kind of moving forward, we'll have more to say about that. I think I mentioned in my prepared remarks, but when you think about our investments moving forward, we're thinking about them on a leverage-neutral basis. So we'll be back into the equity markets later this year as we make new investments. In terms of term loan and terming off of revolver, midyear, we really do want to get something done here this year. We're going to have to free up some capacity for growth without using too much of our liquidity. We don't like to do that. We like to try to target about 50% of that revolver in free liquidity on average. So that's kind of what we're thinking.

And Mr. Hambly, I will turn the call back over to you for any closing remarks.

All right. Thank you, everyone, and we'll look forward to seeing you at NAREIT.

Thank you. That does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.