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National Health Investors (NYSE:NHI)

Q1 2013 Earnings Call

May 06, 2013 1:00 pm ET

Executives

Tripp Sullivan

J. Justin Hutchens - Chief Executive Officer, President and Director

Roger R. Hopkins - Principal Financial Officer and Chief Accounting Officer

Analysts

Richard C. Anderson - BMO Capital Markets U.S.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Peter Sicher - Sidoti & Company, LLC

John M. Roberts - Hilliard Lyons, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors' First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Monday, May 6, 2013. I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Tripp Sullivan

Thank you. Good afternoon. Welcome to the National Health Investors' conference call to review the company's results for the first quarter of 2013. On the call today will be Justin Hutchens, President and Chief Executive Officer; and Roger Hopkins, Chief Accounting Officer.

The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were released earlier this morning in a press release that’s been covered by the financial media.

As we start, let me remind you that statements in this conference call that 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 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, 2012. Copies of these filings are available on the SEC's website at www.sec.gov or at 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 the company's earnings release and accompanying tables and schedules, which has 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 Justin Hutchens. Please go ahead.

J. Justin Hutchens

Thank you, Tripp. Good afternoon, everyone, and thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer. As you've seen with our announcements over the past month, we have quite a bit to discuss this morning: a significant boost to our full year guidance, another big dividend increase and $63 million of acquisitions that were over and above our original outlook.

We had a solid first quarter. We increased normalized FFO by 10.4% compared with the prior year quarter, and we continued to fill an acquisition pipeline that has us very well positioned for the balance of the year. Roger will walk through our financial results, and then I'll discuss our outlook, investment activity and the state of the market. Roger?

Roger R. Hopkins

Thanks, Justin. Good afternoon, everyone. My comments this afternoon are consistent with our disclosures in Form 10-Q, our earnings press release and our supplemental data report filed this morning with the SEC.

I am very pleased to report strong normalized FFO growth for the first quarter of 2013. Normalized FFO for the first quarter rose 10.4% over the same period in 2012, primarily as a result of revenues from our new investments funded of $146,092,000 in 2012, including debt assumed in our RIDEA-structured transaction with Bickford Senior Living and $2,299,000 funded in 2013.

In the first quarter, our rental income from Bickford increased $1,201,000; new rental income from Polaris Hospital was $527,000; new rental income from Santé Partners was $505,000, related to a Senior Living campus; and new rental income from Landmark was $394,000, related to an assisted living facility. Our rental income from NHC over the base rent amount, which we refer to as annual percentage rent, included a true-up in the first quarter of $817,000 related to the certification of their annual -- of their actual 2012 facility revenues. This true-up occurs each year by March 31.

Normalized FFO for the first quarter was $23,595,000 or $0.85 per diluted common share compared with $21,375,000 or $0.77 per diluted share in the same period in 2012. Normalized FAD for the first quarter was $24,405,000 or $0.87 per diluted share compared with $22,085,000 or $0.79 per diluted share for the same period in 2012. Normalized FFO and normalized FAD for the first quarter of 2013 excluded the impact on net income of a loan impairment of $4,037,000 related to a note receivable from our not-for-profit borrower SeniorTrust. At the end of the first quarter, based on the declining net operating income of the borrower's operations over the past 12 months, we calculated the estimated value of the collateral for our note to be $15 million. On April 26, we announced an agreed settlement in litigation involving SeniorTrust to accept $15 million as full payoff of our note receivable.

Net income attributable to common stockholders for the first quarter of 2013 was $15,743,000 or $0.56 per diluted share compared with net income of $18,350,000 or $0.66 per diluted share for the same period in 2012. Net income for the first quarter includes the accounting impact of the impairment charge described earlier.

Large transactions that are infrequent or unpredictable in nature that affect net income are adjusted in our reconciliation of our net income to normalized FFO and normalized FAD. Our revenues for the first quarter were up $4,013,000 or 16.7% compared to the same period in 2012, due to the volume and timing of our new investments in 2012 and 2013. Straight-line rental income was $1,283,000 in the first quarter. The revenues from our RIDEA-structured joint venture with Bickford amounted to $2,103,000 in the first quarter and represent 7.5% of our total revenues from continuing operations. Revenues and expense for each year presented in our income statements exclude those properties that were sold or that meet the accounting criteria as being held for sale, with such revenues and expenses being reclassified to discontinued operations. This reclassification had no impact on previously reported net income. Revenues from discontinued operations in the first quarter relating to 6 skilled nursing facilities that we expect to sell to our tenant, NHC, by the end of June.

Rental income from our owned assets represented 89% of our first quarter revenue. Mortgage interest income represented 7% and investment income represented 4%.

Depreciation expense increased $1,151,000 during the first quarter of 2013 compared to the same period in 2012 as a result of our new real estate investments funded in 2012 and 2013. Our interest expense and amortization of loan costs increased $548,000 during the first quarter compared to the same period in 2012 as a result of additional borrowings to fund our new real estate investments. Our general and administrative costs for the first quarter of 2013 increased only $303,000 for the same period in 2012, due primarily to an increase in noncash share-based compensation expense of $148,000. Share-based compensation expense was $1,580,000 for the first quarter, and consists of $1,327,000 in expense due to stock option vesting that will not occur in the next 3 quarters. We estimate the market value of our stock options granted each year using the Black-Scholes pricing model. Based on the required inputs to this model, we expect our noncash share-based compensation expense to be $253,000 for each of the next 3 quarters.

Our debt at March 31, 2013, was unchanged from year-end and consisted of our bank term loans of $120 million, borrowings on our revolving credit facility of $64 million and $19,250,000 of secured mortgage debt due to our RIDEA-structured investment with Bickford. We have $136 million available to draw on our revolving credit facility.

Aside from the mortgage debt that matures in November of 2013, our remaining borrowings do not begin to mature until 2017. As mentioned during our year-end earnings call in February, we expect our normal monthly cash flows and borrowings on our revolving credit facility will be the primary sources of capital to fund our new real estate investments in the near term. During 2013, we will carefully evaluate sources of debt capital to pay down our revolving credit facility and extend our debt maturities, including bank term loans, a debt product placement, HUD and agency debt, all of which will come with a higher interest cost. We continue to have a very low leverage balance sheet relative to the value of our net assets and our market capitalization.

In addition, as shown on our supplemental data report, we calculate our EBITDA coverage of our interest expense to being 19:1. On an annualized basis, our consolidated debt to EBITDA is only 2.4:1. We ended the first quarter with cash and investments in marketable securities of $20,895,000. In addition, we owned 2 million in shares of LTC's cumulative preferred stock that is convertible into 2 million shares of LTC common shares with a current value of approximately $90 million.

I'd now like to turn the call back over to Justin with comments about our investment portfolio and our 2013 normalized FFO guidance.

J. Justin Hutchens

Thank you, Roger. Our results year-to-date demonstrate the continued benefits of our disciplined approach to managing the portfolio and being very selective with new acquisition opportunities. I can't stress enough how this discipline has translated to strong normalized FFO growth for NHI, while at the same time, possessing one of the lowest leverage balance sheets among all REITs. Given the positive news from the CMS announcement last week, I'll mention how this proposal impacts our portfolio. Recall that CMS has proposed a 1.4% net increase in reimbursement for the CMS fiscal year 2014, which equals a $500 million increase in payments to skilled nursing operators compared with fiscal 2013. We've stated for some time we would still be interested in new skilled nursing investments with select high-quality opportunities. Our concentration in skilled nursing has been declining steadily for the past several years. As it stands for Q1, our portfolio, as measured by revenue, is comprised of 56.9% revenue derived from skilled nursing properties. We are very close to achieving our previously stated goal of 50% skilled nursing concentration.

Our private pay assisted-living and Senior living campus properties account for 27.6% and hospitals are 7.6%, while REIT dividends, independent living and MOBs account for most of the remaining 8%. To help our investors better understand how our portfolio stacks up against the peer group, we have added some supplemental disclosure this quarter.

If you turn to Page 12 on our supplemental, you will see a breakdown of EBITDARM coverage ratios for our triple net portfolio. The EBITDARM calculation is the same one that our health care REIT peers are using and should be directly comparable. Each property type demonstrates strong coverage and has been fairly consistent for the past 2 years. Our assisted living lease service coverage ratio is 1.37; skilled nursing is 3.19; Senior Living campuses are 1.51; hospitals are 3.81 and MOBs are 5.96. The total portfolio weighted average lease service coverage ratio is 2.88.

Along those lines, I'd like to highlight the performance of our Bickford assisted living joint venture. The Bickford-RIDEA partnership continues to perform well. We have 2 quarters under our belt and the net operating income is up 10.2% on an annualized basis versus Q3 of 2012, which was the quarter prior to the formation of the joint venture. This performance to date lends good support to the 3% to 6% growth range we have projected for the full year.

In regards to investment activity, our pipeline is arguably the strongest it's been in some time and will continue to be largely comprised of private pay assisted-living properties. The timing of the transactions will be heavily weighted toward the second half of the year. In April, we completed 2 significant transactions that were outside of that expectation for timing and were not originally contemplated in our guidance. The first was the purchase leaseback of 2 skilled nursing facilities in Texas, totaling 254 beds for $26.3 million. These properties, which are each less than 2 years old, are leased to Fundamental for a period of 10 years at an initial lease rate of 9% with annual escalators.

The second transaction is one we've talked about for some time, and it was a very favorable outcome for us. As you've seen from some of our filings, we had been in a dispute regarding the ElderTrust and SeniorTrust loans. As a result of the settlement agreement, pending court approval, we are acquiring the 8 ElderTrust assets in Massachusetts and New Hampshire in exchange for $23.4 million in cash and cancellation of the $13.7 million note balance. We will then subsequently lease the properties to National Healthcare Corporation for 15 years at a lease rate of 9.3% with annual escalators. Also, pending court approval, the SeniorTrust note will be paid off with a $15 million payment to NHI. We are very pleased with the outcome of this transaction. One final comment in connection with this agreement, we were also notified by National HealthCare Corporation that they would accelerate their purchase of 6 older skilled nursing facilities to June 2013 instead of December 2013.

Turning to our guidance. As we announced a couple weeks ago, we are projecting our normalized FFO for 2013 to be in a range of $3.42 to $3.50 per diluted share. As the acquisitions in Texas, New Hampshire and Massachusetts were not included in our original assumptions, we went ahead and updated the guidance for these material transactions by $0.12 per share at both the top and bottom end of the range. The bottom end of that range continues to assume a baseline from Q4 2012, the impact from the acquisitions in April, the timing for terming out some debt on our credit facility and assuming 3% growth from our Bickford joint venture. The top end of that range assumes incremental investment activity, as well as 6% growth from our Bickford joint venture.

We have also increased our dividend. As we disclosed last week, we bumped the dividend to $0.735 for the second quarter, which equates to a 5.8% increase from the first quarter and a 13.1% increase compared with the second quarter dividend a year ago.

We strive to continually deliver to NHI shareholders dividend growth backed by the safety and security of a reliable income stream. I'm very optimistic about our ability to execute our selective growth plan and I look forward to continued success throughout the year.

Operator, we're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Rich Anderson with BMO Capital Markets.

Richard C. Anderson - BMO Capital Markets U.S.

So the guidance increase, is it entirely related to the unexpected closing of the acquisitions or is there anything else to it?

J. Justin Hutchens

It is entirely the unexpected closings of the acquisitions. And also, you might recall, how I framed our guidance during the last conference call. And that was, we'd expected some loan payoffs, which would have impacted income. The nonprofit loans were included in that assumption. And so the previous guidance had been pulled down a little bit due to that. So now that that's no longer an issue, in fact, it's positive income by making the acquisition of the 2 portfolios, it had a big impact on the guidance and as did the Texas acquisition.

Richard C. Anderson - BMO Capital Markets U.S.

So what was the magnitude, in rough numbers, of the loan payoff reversal?

Roger R. Hopkins

Rich, as Justin mentioned, we were considering several contingencies involving the not-for-profit borrowers. And that was certainly in the -- accounted for in the low end of our range that we previously disclosed. As we look to the actual closing of the purchase of the ElderTrust facilities, probably in June, net of all transaction costs and other fees and costs associated with the settlement, we think that the positive impact would be $0.03 in 2013.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Now as relates to terming out the line, is that a factor in your guidance as well? Do you have some embedded assumptions there?

Roger R. Hopkins

Rich, as I mentioned in my prepared remarks, there's various forms of debt capital that we're evaluating. We could potentially have a bit of all of those by the end of the year. Our strategy is to term out debt, to extend maturities, to be very mindful of the costs of doing such. And so we generally have some expectations of timing over the remainder of the year and have built those into our projections and forecasts for FFO.

Richard C. Anderson - BMO Capital Markets U.S.

Okay, all right. Just out of curiosity, what happens to the SeniorTrust assets in Missouri and Kansas? Are they just liquidated or what's going on with those?

J. Justin Hutchens

The Missouri assets were sold by the receiver to an operator. I'm not sure who. And then, the Kansas assets are in contract to be purchased by another operator. So 2 different operators either have already purchased or have agreed to purchase those assets. And of course, the proceeds, they're held to the court -- held by the court until the approval of the settlement and then all the proceeds will be dispersed, as we've described in -- as it pertains to NHI in our 8-K.

Richard C. Anderson - BMO Capital Markets U.S.

And so you got $50 million for the debt on the other pool, the ElderTrust, beyond that, though, you spent I'm sure some money with legal, how do -- you gave up some amount in this whole process, for sure. Have you -- is that just part of the settlement? I mean, I guess I'm just trying to understand you're willing to give up some just to get it off your books, is that basically it?

J. Justin Hutchens

Well, let me just describe, here's the way to look at how -- what the net proceeds are to nonprofits from NHI. First, they sold -- they either have sold or they've agreed to sell the SeniorTrust assets. And they have also -- but there was an insurance proceeds from a tornado from Joplin, Missouri that had been -- there's millions of dollars held in -- under court supervision due to that tragedy that occurred a couple years ago. So once they pay the $15 million to us, anything over and above that, and there's several million dollars above that, that the nonprofit keeps. And then over on ElderTrust, the ElderTrust and the way I look at it is we're up $15 million right now because SeniorTrust paid us $15 million, and then we're going to turn around and write a $23 million check to purchase ElderTrust on top of our note. And so the net proceeds from NHI to the nonprofit is $8 million. And then to us, what it means is an opportunity to have an ongoing lease income stream with National Healthcare Corporation and that's $15 million to go reinvest.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Fair enough. Curious why you're using EBITDAM with an M coverage when you do your stuff, when you do your coverage analysis, why not EBITDAR? And what would the numbers look like if you used EBITDAR instead of EBITDARM?

J. Justin Hutchens

When we underwrite new investments, we use EBITDAR, and we always assume a 5% management fee and then, we also use $500 of debt capital expenditure allocation through routine capital expenditures to determine your going-in coverage ratio when you make an investment. And what I've discovered reviewing our peer group is that the peers are disclosing an EBITDARM cover. And the reason they do that and the reason we've chosen to do that is because per our lease agreement, the management fee is subordinated to our rent income. So EBITDARM truly does represent the cash flow available to pay our rent.

Richard C. Anderson - BMO Capital Markets U.S.

All right. But could you say what would the EBITDAR be if your health coverage is 137? What would be the magnitude of the reduction in the number?

J. Justin Hutchens

I don't have that prepared.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. And last question, how much more room do you have to grow the dividend, do you think?

J. Justin Hutchens

Well, let's see. We have a targeted payout ratio in the – about the mid-80s. I mean our absolute max would be 89%. We've managed to keep it in the low to mid-80s over the past few years. That's a comfortable payout ratio range for us. So if you apply that to your projected FFO, you can gauge any potential dividend payouts. It so happened, I think our first quarter dividend payout ratio was around 81%, so we have some room to give, to go ahead and increase the dividend and allow that payout ratio to go up a bit. And we'll continue to evaluate it each quarter.

Operator

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

Todd Stender - Wells Fargo Securities, LLC, Research Division

Just looking at the swap between the 8 SNFs you're going to acquire from ElderTrust and the 6 SNFs that you're selling to NHC, what is the coverage? What's the EBITDARM coverage for each of those portfolios? What I'm getting at is what the SNF coverage going to look like after these transactions closed?

J. Justin Hutchens

It's actually not going to change much at all because when we look at the coverage ratio for skilled nursing facilities that we had leased to National Healthcare Corporation, we're using their Corporate fixed charge cover. And just to remind you why we do that, they have no debt obligations outside of our lease payment, so – and we have the corporate guarantee. So when you roll these in and out, given the substantial coverage we have using their fixed charge cover, I don't think you'll have much impact at all.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And what's the yield that you're selling those at? If they're really well covered, I'm sure they would come at a premium. Is that a fair way to think about it?

J. Justin Hutchens

We sold those for $21 million and associated with those assets, I think we gave up $2.9 million of income, base rent. And the rest of that transaction, though, Todd, was that we extended our lease with NHC by 5 years. So the way I was looking at the transaction was that we had older assets that we would sell today, we would extend the lease on the remaining assets, which in our opinion are the better assets in the portfolio with NHC and not really -- and really, the way the whole discussion regarding releasing those assets for another 5 years, which means that 14 years from now, we'll be sitting at the table with them. By then, the percent of revenue that we're dependent on from their lease income stream ought to be substantially lower. It's already down around 30%. I imagine, by then, it'll be much lower. So I think we've put NHI in a stronger negotiating position and it also just improved our overall quality of our assets by engaging that transaction.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And the change in timing, just having pulled these forward, is that reflected in the new guidance?

Roger R. Hopkins

Yes, it is.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And the 8 SNFs you're acquiring from ElderTrust, what were those, I think -- I don't know if you mentioned this, what the coverage was prior to the CMS cut, the 11% cut from 2 years ago. And what do those look like now?

J. Justin Hutchens

We did not mention that. And now that the assets are going to be leased to NHC, in our underwriting we look straight to the charge coverage so there's really -- I don't think there's any benefit to really discussing those assets apart from the rest of the NHC assets.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And any remaining litigation from ElderTrust or SeniorTrust, is there anything outstanding?

J. Justin Hutchens

No, there's not.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And what's the timing look like on getting the $50 million payment and any risk to that getting pushed out from anything else?

J. Justin Hutchens

The timing is going to be dependent on the court approval. And my understanding from our attorneys is this could be 4 to 6 weeks from now and we'll be ready go ahead and close those transactions.

Operator

[Operator Instructions] Our next question is from the line of Karin Ford with KeyBanc Capital Markets.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Just some question on it, are the coverage issue shown there, is there a 1 quarter lag on those or are those first quarter coverages?

J. Justin Hutchens

They're a 1 quarter lag. And you probably realize that this the first quarter that -- when we've actually published coverage ratios. We'll probably maintain a 1 quarter lag for a couple quarters and then we'll go ahead and update that at some point in time. But we want to make sure we have something that you could use as a frame of reference to understand the credit quality of our portfolio.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

That's helpful. Next question, just on investments. I think on the last call, you said you had baked into your expectations a typical yearly pace for NHI. I just want to make sure I understand to – I infer from your comments this morning that the deals you did, already year-to-date are in addition to that, so we're headed for an above average acquisition here for NHI at this point.

J. Justin Hutchens

I think it's fair to say -- well, it's absolutely fair to say that the transactions that have occurred so far were not included in our investment expectations for the year. So we had a difficult run rate of about $120 million or so a year. And as far as I'm concerned, none of that has occurred yet. Still, largely focused on assisted living assets or private pay back and I would expect the timing of any additional investments to be in the second half of the year.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

And can you tell us just what volume you currently have under review?

J. Justin Hutchens

We have a number far north of that expectation.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Okay, fair enough. Last question is just on Bickford. It looked like the occupancy in the NOI, if that's the same-store pool, ticked down a little bit sequentially, can you just talk about how the operations are going there and what the status is of new developments in Bickford?

J. Justin Hutchens

Sure, yes. Sequentially, they've ticked down, but if you go back to the starting point, which is third quarter, we're still up in that portfolio. So and anyone who's listening can find this in the supplemental report. But the Q3 quarter was 85.4%, Q4 was 88.7% and then, Q1 was 87.2%. And I'll point out that this portfolio has 10 properties. So given a small sample like that, you're going to have a little bit more volatility. So I think a better look is to look at several quarters in a row blended, which is why the way I look at it is, we have 2 quarters under our belt, since we underwrote the JV, net, they're up 10% in NOI. And digging down a little bit into the performance of the assets, it was more or less a hot Q4 and a relatively strong Q1 and no indications that the current performance shouldn't continue.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Do you have a sense for how much Bickford's pushing rates today?

J. Justin Hutchens

Yes. They're -- across the portfolio, it's a pretty difficult 3% to 5% rate increase.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Okay. Great. And new developments in Bickford?

J. Justin Hutchens

Yes, 3 new developments. They're all in construction and everything's going on as planned. We'll see a couple of openings towards the end of the year and then, we'll probably see at least 1 opening in early 2014.

Operator

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

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

I want to go back to the Bickford assets and do you have data going back to March 2012 as far as the occupancy and margin on those assets, just trying to get an understanding of how the year-over-year performance was?

J. Justin Hutchens

I don't have it right in front of me. And nor did we really track it that way because from our standpoint, the investment started in Q4, so I wanted to use Q3 as the launching pad. It's certainly -- it's no worse than flat or slightly up from prior year, I'm sure.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

All right. Well, let's just say even if we start from the September 30, look at the operating expenses have actually gone down as occupancy has gone up. Talk about -- do you have something to talk about, maybe in terms of are they doing something within that portfolio that's improving the operating margin at the expense level, aside from any other good seniors housing fundamentals, it's kind of interesting to me to see the expenses go down.

J. Justin Hutchens

Yes, I agree. And what you'll find with Bickford is a couple things. Don't forget they've been doing this for 20 years, and so they have learned how to run a very efficient operating model. And they do adjust very well to change in occupancy and correlating expenses. It's not something you typically see in assisted living, usually it's a little bit higher fixed cost. You don't see a rapid adjustment. You're also used to looking at larger public companies. This is a smaller private company, and so they're able to adjust probably a little more swiftly quarter-to-quarter when there is a change in the workflow, they're able to bring the operating expenses down a touch, and that's what they've done. So very -- they're very good at balancing quality service delivery and care for the residents with the appropriate amount of staffing and then, attracting competitive pricing by delivering that service.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And did it seem like in the quarter that they were affected by the flu at all? I mean, is that probably a large part of that occupancy drop, like in many other AL operators? Would that be correct?

J. Justin Hutchens

There really wasn't much discussion by them regarding the flu. What you really saw between Q4 and Q1 was, I think, more of the Q4 being a very exceptionally strong quarter versus the prior quarter and then, just a slight falloff sequentially. But heard in the industry, there've been some companies that experienced the flu. In this particular 10 properties, we're not really pointing to that to be the cause of this slight sequential dip from Q4 to Q1.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And some of your peers had talked about the cap rate compression in senior's housing. It seemed like that some of your peers may be, I don't if pulling back from seniors housing but maybe a little more cautious on what they're willing to pay. And have you – I mean obviously, you've moved somewhat away from skilled nursing and diversified the portfolio. But are you looking at senior housing valuations as something that might cause you to pull back a little bit from tilting the acquisitions towards senior's housing, maybe a little bit back towards skilled nursing or maybe something else like in-patient rehab?

J. Justin Hutchens

No. In fact, Dan, we're very much committed particularly to assisted living. And I think you'll see a majority of our investment activity to be focused there. The cap rates on the one-off portfolios, one-off acquisitions and small portfolios have been fairly consistent. And we still like the opportunity to diversify. We love the demographic demand and the fact that there's still very little new supply coming onto the market. And we've been finding operators that we can partner with that are very skilled in delivering service to seniors. So we're committed to continue to move ahead. The exception that you would see from us would be those that we made in the first half of the year, which should be skilled nursing, when we're leasing to a very high quality operator such as National HealthCare Corporation or new assets and an experienced operator with Fundamental, strategic, very high-quality opportunities to buy skilled nursing. But other than that, we are very committed to private pay back assisted living.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just a quick question on the balance sheet. You may have gone over this in previous quarters. But what is the ideal balance between equity and debt? Whatever metric you want to use, debt-to-EBITDA or debt to gross booked that you're going to feel comfortable with going forward?

Roger R. Hopkins

Dan, we have not set any particular targets in regard to our debt. We referenced in the prepared remarks about our interest coverage and also our consolidated debt to EBITDA. We're extremely low levered. And as we lever up a bit, we're going to look back a year from now, 2 years from now, and we're still going to be low levered but really, with no particular targets in mind.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I guess, the reason why I asked the question is obviously, health care REITs and your stock has done particularly well this year. You gave us a range of options for terming out the debt but why not use equity, given you could -- fixed costs of equity at 6%, and you're buying stuff at 7%, 8%, 9%. It seems like maybe you would want to stay low levered – even more lower-levered, given where you are on this year's maturity?

Roger R. Hopkins

Dan, we feel like we have really so much room and capacity with which to lever up a bit that, that will be our focus. We don't have any plans for equity. And obviously, it has a dilutive effect and so while we probably have very affordable debt options available to us, as I mentioned in my prepared remarks, that will be our primary focus.

Operator

Our next question is from the line of Peter Sicher with Sidoti & Company.

Peter Sicher - Sidoti & Company, LLC

So given the recent acquisitions and your pipeline that's, as you guys said, private pay, senior-housing heavy but back-half-weighted. Do you think you'll get your source concentration down to 50% skilled nursing this year or is that a 2014 expectation? And then, are there any tangible benefits to hitting that target or is it just a diversification measure?

J. Justin Hutchens

Well, if we give you that concentration number, then we're going to be forecasting for you our acquisition expectation. I would -- I do think that, that number will continue to fall. And would not be a surprise to see it fall during the second half of this year. Whether we get exactly the 50% or not, I'm not sure, but would expect to see us get to that number over the next couple of years.

Operator

Our next question is from the line of John Roberts with Hilliard Lyons.

John M. Roberts - Hilliard Lyons, Research Division

Most of my questions have been answered, let me just flesh out a few little things. On the SeniorTrust transaction, you're going to lose $1 million in interest income, basically, you're going to pay SeniorTrust $8 million and you're going to get those 8 properties, is that right?

J. Justin Hutchens

Actually, let me put it this way for you if you're going to use the income, here's another way to look at it. The combined income, interest income from ElderTrust and SeniorTrust was $2 million. We're getting a $15 million payment in, we're making a $23 million payment out and our new income stream will be $3,450,000 from NHC's lease payment.

John M. Roberts - Hilliard Lyons, Research Division

All right, very good. Pipeline. You really haven't -- you really didn't go into what the size of it and sort of the makeup of it.

J. Justin Hutchens

The size is very large. The reason I'm not defining that is because what I'm learning is there's a tremendous amount of activity that we see that probably is never really a realistic opportunity for us. But I can describe our pipeline as being $2 billion but the reality is, we're targeting a similar growth pace that we've had over the past couple years, so we would consider a successful year to do $100 million, $120 million or so of investments. And as far as I'm concerned, because of the fact that these other acquisitions weren't necessarily planned, none of that has occurred yet. And just expect to see activity in the second half of the year and I expect to see it to be mostly private pay back assisted living.

John M. Roberts - Hilliard Lyons, Research Division

All right, very good. And finally, on the dividends. You're saying 80% to 90% is sort of the payout ratio you're in. I would assume that number will come down as your debt increases?

J. Justin Hutchens

Yes, in fact, let me tell you that in -- let me just give you some numbers. In 2009, that dividend payout ratio was 96%; 2010, it was 85.5%; 2011, it was 86.6%; 2012, it was 83%; first quarter of 2013 is 81.8%. And that kind of low to mid-80s range is where we'd like to see it. I think that gives us plenty of cushion to support an ongoing dividend income stream for our shareholders if there was any issues. And we'd like to continue to reinvest some of the cash we have available to invest in new investments and so we're retaining some of that net cash that we get from our depreciation to reinvest and then, we are giving a portion to the shareholders and that it gets to that targeted payout ratio of around 80% to 85%, which is, by the way, on a compounded basis, meant 8% growth over the last 4 years.

Operator

And our final question is a follow-up from the line of Rich Anderson with BMO Capital Markets.

Richard C. Anderson - BMO Capital Markets U.S.

Just real quick. If the $15 million loan payoff doesn't happen for some reason, does the $23 million acquisition not happen as well?

J. Justin Hutchens

It actually all goes together, the joint settlement. I described it, because there was actually 2 different borrowers in the -- 2 different moving pieces, but the settlement resulted in all parties together in 1.

Operator

Thank you. And that was our last question. I will now turn the conference back over to our chairperson today, Mr. Justin Hutchens. Please go head.

J. Justin Hutchens

Thank you. I just want to thank everybody for your participation on the call, and reiterate our excitement for 2013 and our continued efforts in trying to drive positive returns for our shareholders. Look forward to talking to you on the next call.

Operator

Thank you. Ladies and gentlemen, that does conclude the presentation for today. We thank you for your participation and ask that you disconnect your lines.

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