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Executives

Tripp Sullivan

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

Roger R. Hopkins - Chief Accounting Officer

Analysts

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

Todd Stender - Wells Fargo Securities, LLC, Research Division

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

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

National Health Investors (NHI) Q2 2012 Earnings Call August 6, 2012 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors' Second Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Monday, August 6, 2012. I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Tripp Sullivan

Thank you, Nelson. Good morning, everyone. Welcome to the National Health Investors' conference call to review the company's results for the second quarter of 2012. 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 to 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, the 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 in its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended June 30, 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 morning, everyone, and thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer. We stayed on plan during the quarter. We remained disciplined on our investments, closely managed our portfolio and kept plenty of dry power available for potential new investment activity planned in the second half of the year. As a result, we were able to raise our guidance and increase the quarterly dividend.

We'll talk more about all of those in more detail in a few minutes. First, let me turn the call over to Roger to walk through our financial results. Roger?

Roger R. Hopkins

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

Normalized funds from operations for the second quarter of 2012 rose 6% over the same period in 2011, primarily as a result of revenues from our new investments funded at $82.4 million in 2011 and $29.6 million so far in 2012. Lease revenues from our tenant Legend Healthcare increased $1.2 million due to new investments made in the fourth quarter of 2011 and the second quarter of 2012. Normalized FFO for the second quarter of 2012 was $21,386,000 or $0.77 per diluted share compared with normalized FFO of $20,179,000 or $0.73 per diluted share in the second quarter of 2011.

Normalized funds available for distribution for the second quarter of 2012 was $21,010,000 or $0.76 per diluted share compared with $19,724,000 or $0.71 per diluted share for the same period in 2011. Normalized FFO and normalized FAD for the second quarter of 2012 excluded the impact on net income of write-offs and expenses related to an early lease termination, which I will discuss in a moment, and other adjustments of $155,000.

Normalized FFO and normalized FAD for the same period in 2011 excluded the impact on net income of gains of $8,655,000 on the sale of marketable securities and a $988,000 change in the fair value of a previous interest rate swap agreement. Net income for the second quarter of 2012 was $16,928,000 or $0.61 per diluted share compared with net income of $25,117,000 or $0.90 per diluted share for the same period in 2011. Net income for the second quarter of 2012 and 2011 includes the accounting impact of the adjustments, write-offs and other expenses mentioned above. 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. It is included in our earnings release at Form 10-Q and the supplemental data report.

In June 2012, due to material noncompliance with our lease terms, we terminated our lease with a former tenant of 4 assisted living and memory care facilities in Minnesota and transitioned the least to a new tenant, White Pine Senior Living. As a result, during the second quarter, we realized lower cash payments of $450,000 from our former tenant. We wrote off an additional $126,000 in billed receivables. We incurred $171,000 in legal and other direct expenses and incurred a noncash write-off of straight line rent receivables for accounting purposes of $963,000.

The former lease provided for an annual lease amount of $2,204,000, whereas the new lease provides for a higher annual lease amount of $2,338,000 plus annual fixed escalators. In addition, the first 6 months of the lease contains additional supplemental rent payments of $410,000 that will be recognized in the income over the initial term of the lease of 13 years.

Our revenues for the second quarter of 2012 were up 10% compared to the same period in 2011 when you exclude the impact of the early lease termination in 2012 and the gains on sales of marketable securities in 2011. Straight line rental income was only $14,000 in the second quarter after the write-off of $963,000 related to the Minnesota lease. Rental income for each year excludes the revenues from those properties that were sold or that made the accounting criteria as being held for sale. There remains 5 skilled nursing facilities in Texas that we plan to sell to our current tenant when they obtain long-term HUD financing. These properties are classified as assets held for sale on our balance sheet and as discontinued operations in our income statement. We plan to defer recognition of the tax gain on the sale of these properties when they're sold.

Income from properties classified as discontinued operations was $1,247,000 in the second quarter of 2012 compared to $1,275,000 during the same period in 2011. Rental income from our owned assets represented 87% of our second quarter revenue. Depreciation expense increased $466,000 during the second quarter of 2012 compared to the same period in 2011 as a result of our new real estate investments in 2011 and 2012 in facilities that are leased to Legend Healthcare.

Our interest expense and amortization of loan costs was $747,000 for the second quarter of 2012 compared to $601,000 for the same period in 2011 when we exclude the change of $988,000 in the fair value of the previous interest rate swap agreement in 2011. The higher interest expense is indicative of our higher borrowings to fund our new investments in healthcare real estate.

Our general and administrative costs for the second quarter of 2012 increased $300,000 from the same period in 2011 due primarily to a $171,000 in direct expenses related to the early lease termination described above to $95,000 of transaction costs of an acquisition classified as a business combination for accounting purposes, a $90,000 legal settlement related to one of our subsidiaries and was partially offset by lower stock-based compensation expense and corporate overhead. Stock-based compensation expense was $248,000 for the second quarter of 2012 and is expected to be the same for each of the next 2 quarters.

Altogether, our second quarter normalized operating results met our internal forecast. Normalized funds from operations for the 6-month period ended June 30, 2012, rose 11.8% over the same period in 2011, primarily as a result of revenues from our new investments funded in 2011 and 2012. Lease revenues from our tenant Legend Healthcare increased $2.4 million due to new investments made in the fourth quarter of 2011 and the second quarter of 2012.

Normalized FFO for 2012 was $42,761,000 or $1.54 per diluted share compared with normalized FFO of $38,256,000 or $1.38 per diluted share in 2011. Normalized funds available for distribution in 2012 was $43,093,000 or $1.55 per diluted share compared with $39,458,000 or $1.42 per diluted share for the same period in 2011. Normalized FFO and normalized FAD for 2012 excluded the impact on net income of previous write-offs -- on net income of write-offs and the expenses related to the early lease termination discussed previously and other adjustments. Normalized FFO and normalized FAD for the same period in 2011 excluded the impact on net income of gains of $8,809,000 on the sale of marketable securities and a $266,000 change in the fair value of a previous interest rate swap agreement.

Our debt at June 30 consisted of our bank term loan borrowings of $120 million. We have a low debt to book capitalization of only 21.2% and a low debt to market capitalization of only 8.2%. We expect our normal monthly cash flows, borrowings on our revolving credit facility and potential longer-term debt will be the primary sources of capital to fund our new real estate investments for the remainder of 2012. Though we plan to leverage our balance sheet to fund our new real estate investments in the short term, we intend that our debt to total book and market capitalization remain at a level that is below our larger peers in the REIT industry.

We ended the second quarter of 2012 with cash and marketable securities of $22,942,000. This morning, we announced that our third quarter dividend will increase from $0.65 to $0.67 per share for shareholders of record on September 28, 2012, and will be paid on November 9, 2012.

I'd now like to turn the call back over to Justin with comments about our 2012 normalized FFO guidance.

J. Justin Hutchens

Thanks, Roger. As I look at where we stand halfway through the year, I like how we're positioned. The investing climate is very favorable with experienced operators looking for growth capital. We are staying disciplined on underwriting with attractive yields and high-quality assets. The reimbursement environment appears to be normalizing, and the pipeline of new opportunities remains full. On our last call, we talked about the investment and financing activity we completed in early May, so I won't rehash all of those details about the restructured credit agreement with Capital Funding Group or our new unsecured credit facility.

During the quarter, we completed the acquisition of 125-bed skilled nursing facility in Kyle, Texas for a purchase price of $13.5 million. The facility opened in 2010 and is already stabilized with attractive pay mix and strong cash flow. Through the first half of the year, we've invested or committed $58 million in capital and a weighted average initial yield of approximately 10%. With clarity on potential investments in the second half, we have adjusted our guidance accordingly. We are now projecting our normalized FFO for 2012 to be in the range of $3.08 to $3.13 per diluted share. The bottom end of the range is a baseline from Q2, and the high end of the range assumes new investment activity.

Before I turn it over to the operator, I'd like to comment on what Roger noted earlier about the tenant transition we completed with 4 of our assisted living memory care facilities in Minnesota. When we made this initial investment early 2010, we were attracted to their high-traffic locations, excellent demographics, mix of private pay and the strong operations at asset level. We had no shortage of strong interested operators to take on these assets and on terms that may make this transition essentially a wash in the end.

In summary, NHI's business plan to grow and diversify is being executed at a measured pace, and I'm encouraged by the prospects to continue our progress.

With that, we'll be happy to take any questions that the you may have for us this morning.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Daniel Bernstein with Stifel, Nicolaus.

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

I figured out how to ask questions on this call. On the new transition, the new tenant lease, that $2.3 million lease term, is that cash? Or is that straight line?

J. Justin Hutchens

The $2,338,000 is a cash number.

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

Okay. And then they have to straight line -- and it is going to be straight line, I presume?

Roger R. Hopkins

We will have straight line there are fixed escalators, and we will straight line that over the term of 13 years.

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

Okay. And on this transition, did you have multiple tenants looking to transition into the facilities at this point? Or is this just sort of a preferred tenant that you had or second choice that you had back in 2010?

J. Justin Hutchens

We actually had about half a dozen companies interested in stepping into that lease. And we went with a Minnesota operator that operates over 20 buildings, had familiarity of the markets and turned out to be a really good fit for the portfolio.

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

Okay. And then the other question I had was, how do you define normalizing investment environment, Justin? Or is the sellers were willing to sell their assets at the price you're looking for? Or is the volume of investment opportunities increasing? Just trying to understand your comment about normalizing investment environment.

J. Justin Hutchens

Actually, what I meant to say was normalizing reimbursement environment. And I was referring to the, of course, kind of a benign Medicare news as it relates to skilled nursing facility reimbursement. In terms of investment environment, it's been relatively consistent with what we've seen over the last couple of years. There's plenty of opportunities in the small yield size market. We're selecting those that are a combination of high-quality, experienced operators and then ultimately a relationship fit for our company in the long term. And those are the investments you'll see us continue to execute. So I feel comfortable that we'll continue to grow on a similar pace that we have over the last few years.

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

Okay. Are you seeing any more...

J. Justin Hutchens

About $10 million a year.

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

Okay. Are you seeing any more development opportunities beyond Bickford at this point?

J. Justin Hutchens

We have agreed to review and commit up to 8 projects for Bickford. And so far, we've actually committed to 3 of them, all 3 of which we expect to break ground on this year. So around about $9 million per project at a 9% yield. And then in terms of our construction pipeline, because of the relationship with Bickford, we're not -- I wouldn't expect us to see much more outside of that relationship, at least as it pertains to assisted living. That's pretty much fulfilled our appetite for new development.

Operator

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

Todd Stender - Wells Fargo Securities, LLC, Research Division

Can you tell us again who the tenant was on the lease termination in Minnesota?

J. Justin Hutchens

Sure. It's technically an affiliate of White Pine Senior Living. And White Pine now with our 4 -- I think they operated a total of 25 buildings, all in Minnesota and a few in Wisconsin as well. So our 4 were right in our backyard. And they are experienced operators. They have a great track record. The transition went very smooth. We even had the benefit of their solid track record with the state of Minnesota because it accelerated the licensing approval of it. So we feel really good about White Pine.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And who was the old tenant who moved out?

J. Justin Hutchens

It was affiliates of Suite Living.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And will Suite Living lease any other space from you guys?

J. Justin Hutchens

No.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And what prompted the termination?

J. Justin Hutchens

The previous owner had other business interests that put a strain on cash management. So we agreed to cooperative transition that brought in a new operator that would be 100% focused on our buildings and the assisted living business in general.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And was the new lease underwritten about what you typically underwrite your coverage at?

J. Justin Hutchens

It was, yes. What's interesting in this case is the underlying cash flow of the buildings remains very solid. It was more of at the parent level, just a cash management concern. So in this case, you had the old party can go pursuit their other business ventures. And I have the headache of managing leased buildings. The new party gets to step in and place cash flow, and they agreed to make payments to us that makes it a cash wash, basically, for the year.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful, Justin. And then just can you just give us an update on where the ElderTrust loan is and maybe just refresh us on that deal that didn't turn out to be an acquisition for you guys this quarter?

J. Justin Hutchens

Okay. So in the case of ElderTrust, that's a nonprofit borrower that is -- we believe it has not occurred at this point, but we believe that the Attorney General's Office made or assigned a receiver to review the future of that portfolio. In the case of the portfolio, NHI has been interested in pursuing the acquisition of those assets, leasing it to a solid tenant. But AG Office in the state of Tennessee has approval of authority over the transfer of all nonprofit assets. So they're taking a closer look. We're awaiting for their determination so that we can know who we're dealing with in terms of a receiver, and then we'll -- as we know more, we'll keep our investors updated about the progress. But the intent is to continue to pursue the acquisition. And if anything changes, as I said, we'll let everybody know. And then Todd, is that the investment you're referring to?

Todd Stender - Wells Fargo Securities, LLC, Research Division

Yes. And just -- yes, that was the bulk of it. And then part 2 would be is the ElderTrust, have they been current on their loan payments to you guys?

J. Justin Hutchens

Yes, they are. Yes, they are absolutely current.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And just finally, it looked like that Texas SNF you acquired was purchased through -- was that an option you had in the facility? And how did you obtain that?

J. Justin Hutchens

Sure. When we acquired portfolio of Legend last October, we had the option to purchase this. We didn't want to bring it in immediately because it had not reached a stabilized cash flow yet. So we just wanted to give it a few more months to season and make sure that it actually reached the potential to support our purchase price. And it certainly has, and we went ahead and closed on the transaction.

Operator

And our next question comes from line of Karin Ford with KeyBanc Capital Markets.

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

Just a couple more questions on the tenant transition. Was there any deferred maintenance on the assets? And are you guys funding any capital as part of the transition?

J. Justin Hutchens

No, there's no capital being spent, and the buildings are in good repair.

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

Okay. Any other assets in your portfolio that might have similar issues or that you have any concerns about at this time?

J. Justin Hutchens

No.

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

Okay. The second question is just on the Polaris Hospital development. Is that still on track to be completed and start paying rent in the fourth quarter?

J. Justin Hutchens

Yes. In fact, they're hosting an open house this week. And we projected that they would actually open the hospital beginning of the fourth quarter. And so far, we feel very comfortable that, that's right on plan.

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

Okay. And then just finally, on the pipeline. Is there any change to the characteristics of the pipeline's assets versus loans or any change as far as the timing of when you expect to close some deals on the second half?

J. Justin Hutchens

Okay. I'm going to start with your timing question first, and then I'll get to the asset type. The timing was actually considered in our guidance. The top end of the guidance range assumes that we're going to close investments in the second half of the year. So we're into the second half of the year, and we left room in the guidance should we go ahead and close on those transactions. The asset types that we've been pursuing really remains unchanged. I know we've had a sprinkling of loans and we've had a little bit of construction activity, but the bulk of where we focus is in stabilized assets. And they -- primarily, we've been pursuing the assisted living portfolios that are 90% private pay. And then also, particularly in the case of Legend Healthcare where we've had opportunity to purchase a new skilled nursing facility, something that's going to attract the quality mix that's above market averages, as well as high-quality physical plant, something that's going to have relevance in the long term, we've been pursuing those skilled nursing facility investments as well. So those are really the 2 types of assets that we're pursuing, and you should expect to see us continue to execute on the acquisition of those assets.

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

Some of your competitors have talked about increasing interest in memory care assets. Are you guys looking at anything on the memory care side? And what's your feeling on that product?

J. Justin Hutchens

Well, we've been -- if you look at the assisted living assets we've been pursuing, majority of them have a combination of assisted living and memory care. And in fact, all of the new buildings that we're developing with Bickford, including -- up to 8 of them, but particularly the 3 we've already committed to, has both assisted living and then a secure memory care portion of the community. So yes, there is solid demand for memory care services. It's been our experience and even my experience in the previous life operating that the combo communities do very well to retain residences. They advance in their disease, whether it's Alzheimer's, other dementia-related issues. The communities that we're building captures that need. Also, free standing memory care facilities can do very well. And we have, I think, only one in our portfolio now. We're not pursuing those just primarily because Bickford's model is to go with the combo community and it's worked very well for them and we have confidence in it.

Operator

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

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

Justin, you've said you didn't see any problems in the portfolio that something like this can surface in the near term. But how quickly did this issue come together. I don't know if it was even a glimmer in your thought process, that is this lease termination during the first quarter results. So I was wondering how this quickly this thing transpired.

J. Justin Hutchens

Yes, it really happened in Q2. So we had only, I think, 120,000 that we ended up writing off, and then we promptly quit collecting rent as we worked to do not transition to the new operator. So it really happened very fast. And because of the route we took to facilitate the transaction, where all parties are all in agreement, there was no litigation and we had the full cooperation support of the state of Minnesota, it moved very swiftly. And then the other thing, too, that I just mentioned that helped with that is that the location there is high traffic and the occupancies were solid. The cash flows were solid. We had a lot of interest from operators. So it was a very quick lift on the radar.

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

Okay. So you didn't see any indication of it? I obviously would have gotten that. I mean, as you look forward, may be a little bit more an eagle eye on situations like this. So have you kind of taken a closer look at the rest of your portfolio given how quickly this thing came together on you?

J. Justin Hutchens

You know what, we didn't have any material insight that there would be issues. But mostly due to the quality of the assets, we are able to -- and the cooperation of all parties, we're able to move it pretty quick. And we actually -- our asset management is very detailed and also communicative with our tenants. We have much oversight. And that's part in why we're able to move so quick. So I feel comfortable in our ability to manage the portfolio, and actually I think this is good evidence that we can move past issues pretty quickly.

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

Okay, good enough. Acquisition, expense acquisition cost, I think, was about $95,000 for the quarter. But what would you say is a reasonable number that you'd be thinking about if you guys achieve like $100 million of investments during the course of the year, which has been your norm? What's a good kind of acquisition cost percentage of that gross number of investments?

Roger R. Hopkins

Well, this is Roger speaking here. In the case of those transaction costs that were expensed, they were required to be expensed because they were business combination or nearly transaction cost or capitalized into the purchase cost in our carryover balance sheet. So it's really difficult to anticipate what those would be. They would be a very small part of any purchases that we will make.

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

Right. But I mean, FFO requires you to expense acquisition-related costs in the calculation of your FFO metric. And so those are the expenses I'm trying to target, I guess.

J. Justin Hutchens

It's always been a relatively low number for us because most of those expenses are picked up by the operator. So in this case, it was just, to Roger's point, just an accounting requirement because it's classified as a business combination, so we had the expense, those expenses that did apply to us rather than capitalize them. And so I wouldn't expect a big material run rate in terms of acquisition costs.

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

Okay, that's helpful.

J. Justin Hutchens

The type of transactions that we pursue changes, and if that happens, we'll always incorporate it in our guidance, of course.

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

Got it. You mentioned the payments that the former operator -- by the way, is Suite Living spelled, S-w-e-e-t? I just want to make sure if I have...

J. Justin Hutchens

No, that's S-u-i-t-e.

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

Okay, got you. Is that the $410,000 you said that they're going to reimburse you for that, the number?

Roger R. Hopkins

That's what the amount of supplemental payments are going to be over these first 6 months from the new tenant.

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

Okay. So where is the reimbursement that you mentioned there making you whole on the costs that you incurred? Where is that going to show up?

Roger R. Hopkins

Well, the point is we have a higher base lease from the new tenant, and then we were able to negotiate additional supplemental payments. So we're looking at on a cash flow basis that we're getting more cash flow from the new tenant, and that is helping to offset the loss of cash that we incurred during the second quarter.

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

So Suite Living doesn't have to -- you're not going to go after them or there's not going to be an issue regarding the write-offs or the receivables, no legal costs that you incurred, all that stuff is kind of aggregating it all up, let's say, the supplemental payments you're getting from new tenant that's good enough for you? Is that basically what you're saying?

Roger R. Hopkins

That's right. And then we have the cooperation of Suite Living during the transition. So it was cooperative all the way around, which helped the -- which is clearly the best interest of the residence and families of these communities, and so we're able to move it pretty quick. And those liabilities that Suite Living might be accountable to, they've been released of that liability.

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

Okay. And then last question. Justin, you mentioned the reimbursement environment -- I'm sorry, the regulatory and reimbursement environment kind of stabilizing, becoming maybe more of a benign factor for you on a go-forward basis. Because of that, do you have less appetite for RIDEA structure because your core business seems to be doing okay from a reimbursement perspective? Or is your RIDEA just sort of on the radar screen as it was maybe 3 or 6 months ago?

J. Justin Hutchens

Right. Okay, so the RIDEA structure is still of interest to us. What we like about it is the opportunity with private pay assets to outpace our typical 3% escalator that we get in our current model. So we're interested in that. We're also interested in having an operating partner that can pursue open market, stress the acquisitions where we can benefit from the upside. But we also like the upside opportunity on the development as well. So there's many reasons to continue to pursue the RIDEA structure. And one thing I've mentioned, if we do get into such a relationship, we want to make sure that the operator is firmly committed to working more with NHI and that we have -- it's not involvement in their whole company, at least adequate involvement that we have their full attention on the assets that we will include in the JV. So that's a criteria. And then we're also looking for returns that are representative of operating risks. And so we'll try to get something done that may be a little better than market so that we feel that we're protected as cash flow fluctuates over the years. But yes, we're still very much interested in it. And in fact, we've added some disclosure about our interest in pursuing it in our 10-Q. I suspect we'll have more updates down the road as we get more comfortable with the model.

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

So is a possible scenario you buying an operator to fold into NHI and make that be the avenue by which you grow it from there? Or is that one way of pursuing the RIDEA structure or maybe the most likely way?

J. Justin Hutchens

The most likely way would be joint venture where NHI has a majority ownership but not 95% or 100% ownership. So that the -- we're not exiting an operator. They still have adequate skin in the game to be motivated to continue to grow the business. So it would be majority, but not a 100% acquisition.

Operator

And I'm showing no further questions. Mr. Hutchens, I'll turn the call back to you.

J. Justin Hutchens

Okay. Thank you for the participation on our call today. We look forward to speaking with you on the third quarter call.

Operator

Ladies and gentlemen, that does conclude the conference call. We thank you for your participation and ask that you please disconnect your line.

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