Nationwide Health Properties, Inc. Q2 2008 Earnings Call Transcript

Nationwide Health Properties Inc. (NHP)

Q2 FY08 Earnings Call

August 7, 2007, 11:30 AM ET

Executives

Ron Hubbard - VP, Capital Markets & IR

Douglas M. Pasquale - President and CEO

Donald D. Bradley - EVP, Chief Investment Officer

Abdo H. Khoury - EVP, Chief Financial and Portfolio Officer

Analysts

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

David McCarthy - Citigroup

Philip Martin - Cantor Fitzgerald

Christopher Pike - Merrill Lynch

Dustin Pizzo - Banc of America Securities

Presentation

Operator

Good morning. At this time I would like to welcome everyone to the Nationwide Health Properties second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now turn the call over to Mr. Ron Hubbard, Vice President of Capital Markets and Investor Relations. Mr. Hubbard you may begin your conference.

Ron Hubbard - Vice President, Capital Markets & Investor Relations

Good morning and thank you for joining us for Nationwide Health Properties' second quarter 2008 earnings conference call. Certain statements made on this conference call are forward-looking in nature. These statements are based on reasonable expectations and information currently available. However actual results could differ materially from those projected and/or contemplated by the forward-looking statements in the risks and uncertainties described in from time to time the SEC reports filed by the company.

As this call will be available on our website for sometime, it is also important to note that it includes time sensitive information that may only be accurate as of August 7, 2008. Company believes that funds from operations are an important supplemental measure of operating performance. NHP's definition of FFO, the reasons for its importance, certain of its limitations and reconciliation to net income are included in its earnings release dated August 6, 2008.

As a reminder, NHP's complete second quarter 2008 earnings release package was filed yesterday as a Form 8-K and is available on the Investor Relations section of our website at www.nhp-reit.com.

I will now turn the call over to Mr. Douglas Pasquale, President and Chief Executive Officer of Nationwide Health Properties.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you Ron. Good morning and thank you for your interest in Nationwide Health Properties. Joining me for today's call is NHP's senior management team. On Monday August 4, we announced the appointment of Dr. Jeffrey Rush and Richard Gilchrist to our Board of Directors. We are fortunate to have these two highly real estate executives join our board.

Jeff is the Chairman of Pacific Medical Buildings which as you know, is a developer, owner and, manager of medical buildings in the western United States. He is also a practicing board certified radiologists for 25 years. Jeff has over 20 years of MOB acquisition and development experience.

Rich Gilchrist is President of The Irvine Company's Investment Properties Group. Irvine Company is a 140 year old privately held company well known, as a master planner investor and operator of a large and diversified real estate portfolio. Rick has also served as Chief Executive Officer and founder of several major public and private reeds and real estate operating companies. We look forward to their contribution in helping NHP continue to create shareholder value.

Now I will briefly highlight the important aspects of our detailed earnings release and supplemental analyst information. Compared to prior year results for both the second quarter and the first half of the year, NHP's revenue increased by approximately 25% and FFO increased by approximately 20%. Similarly, for both the second quarter and the first half of the year, FFO per share increased by about 10% and FAD per share increased by approximately 6%.

NHP has a strong balance sheet with ample capital available to make quality investments as they present themselves, without any to access to the capital markets. During the second quarter of 2008, we issued 315,000 shares through our controlled equity offering program at an average price of $36 per share resulting in net proceeds of approximately $11 million.

On April 2, we closed on the sale of 23 facilities to Emeritus for $305 million, representing a 6.1% cap rate on 2008 in placed rent. The $220 million net sale proceeds, we paid the entire outstanding balance on our credit facility. NHP balance sheet is liquid with 100% availability on the $700 million credit facility and about $130 million of cash.

Our current leverage remains conservative at 43% on an under depreciated book basis.

Interest in fixed charge coverage ratios are 3.3 times and 3.0 times respectively. Our investment volume for the second quarter was $215 million of which $20 million was in senior housing with an initial yield of 8.4%. $32 million was in long term care facilities with an initial yield of 9.8% and $198 million was invested in eight medical office buildings acquired from Pacific Medical Buildings at a 6.2% yield as part of our multi-year agreement.

For the eight medical office buildings, we issued approximately $47 million of operating partnership units at approximately $32 per unit, assumed $97 million of debt, at an average rate of 6% and funded the balance from available cash. With our second quarter investment volume, year-to-date investment total now exceeds $300 million. Potential sellers of healthcare real estate, particularly senior housing assets, are increasingly focused on improving our operations and less so on selling assets.

Accordingly, we believe identifying quality senior housing investments will remain a challenge for the foreseeable future. During last quarters earnings call, we painted a less enthusiastic picture of the investment climate than most other healthcare reads and our forecast remains that good senior housing investment opportunities will be limited.

With all the taping on the economic and political fronts, I thought it would be a good time to review the state of our senior housing, long-term care and medical office building investments.

In a nutshell we continue to believe that all three of these asset classes have strong prospects for the long-term although they are likely to be short-term bumps in the road as evidenced by what we are seeing today in senior housing. The current economic trends further support NHP's decision to diversify its portfolio into the medical office building sector. MOBs can weather economic conditions due to its recession resistant, cyclical nature.

NHP's growing medical office building portfolio, which is fast approaching $600 million and three million rentable square feet, continues to demonstrate solid performance with an average occupancy of 91%. Statistics reflect that during the dotcom bust of 2000, recession of 2001 and the jobless recovery of 2002 and 2003, asking rental rates for medical office fees barely budged, while standard office rates fell by 21% from peak to drop

Although initial NOI yields are lower in MOBs than in senior housing and long-term care, their stable and steady growth profile, make this asset class an attractive long-term investment.

Similar to MOBs long-term care facilities represent another need driven component of NHP's portfolio. Long-term care received good news last week, when CMS announced better than expected final SNEF MediCare reimbursement rules, including a 3.4% market basket increase.

Massachusetts and Texas, the principal states in which we own SNEFs continue to offer favorable Medicaid reimbursement programs with no signs that will change anytime soon. So, with an already robust 2.1 time EBITDA rent coverage, our overall SNEF portfolio is in good shape.

That said, we do have a couple of small portfolio as well as a seven property Trans healthcare portfolio with only 0.8 time DARM coverage as shown in our supplemental analyst report. We have been actively monitoring these port coverage portfolios for sometime, all of which are current in their rent and will continue to carefully do so.

At this point, we expect these tenants will continue to pay their rent in a timely manner. The economic slowdown driven in large part by the housing crisis and now exacerbated by job losses is adversely impacting senior housing. The negative impact it's had on independent living occupancy is now spilling over to assisted living facilities, largely it appears, as a result of delayed move in decisions.

Although most who follow the senior housing industry believe business fundamentals are basically sound, a view which we share, these are not the long core how CMDs anticipated when the industry emerged from its unfavorable supply and demand imbalance six or so years ago, and we don't expect the current situation to correct quickly.

The poor stock market performance of senior housing operators, suggests investors see no quick resolution either. NHP senior housing portfolio has been impacted by the economic downturn, but is generally performing well. And generally, we expect it to continue to do so.

For our same property senior housing portfolio representing assets held for greater than 12 months, year-over-year occupancy has declined 130 basis points and EBITDARM rent coverage decreased by 4 basis points to 1.28 times. Our largest tenant Brookdale has seen its year-over-year portfolio actually drop 160 basis points while EBITDARM coverage has remained relatively flat, decreasing 4 basis points from 1.51 times to 1.47 times.

Our second largest tenant, Hearthstone, has seen its year-over-year occupancy drop 220 basis points while its EBITDARM coverage has decreased 6 basis points from 1.23 times to 1.17 times. Hearthstone is our primary senior housing focus since it is one of our largest tenants and due to its unique situation. In tenants with Hearthstone's failed attempted sale to capital senior living there have been management changes at Hearthstone resulting in Tim Hekker, its President and CEO, substantially increasing his ownership stake. Generally, we believe Tim's increased ownership is good because he has historically been at the heart of the organization and a proven experienced operator.

Although market conditions has certainly contributed to Hearthstone's less than optimal performance, we believe its attempt to sell the company resulted in a significant distraction. Intense focus on operations has only recently been restored. Consequently Hearthstone has real work to do to fully regain lost momentum. Fortunately, we believe that has the capability and motivation to improve their operating results. We have every expectation that NHP will collect its base rent from Hearthstone which with two years of 3% rent increases currently provides an attractive 8.5% rent yield.

In addition, Hearthstone agreed to pay supplemental rent, equal to a specified percentage of Hearthstone's annual gross revenue. This revenue base supplemental rent was negotiated to compensate NHP for unwritten investment risk and to sweeten our returns as Hearthstone grew its business. Payment of accrued supplemental rent totaling 1.6 million for the first 24 months of the lease was deferred until June 2008 when it became payable in 12 monthly installments of $132,000.

It was not paid in June or July. In addition, current supplemental rent initially projected at 127,000 per month is to be paid quarterly starting September 2008. We anticipate that as supplemental rent becomes due and increments later this year that it will not likely be paid and Hearthstone has requested we renegotiate the terms of the lease. We, in turn, are considering our alternatives including modifying the lease terms, or transferring the lease to a new tenant. The recently passed REIT Investment Diversification and Empowerment Act, permitting healthcare reach to use taxable subsidiaries, in the same manner as hotel REITs, also may provide us with interesting options.

The financial impact of the Hearthstone situation to NHP in 2008 is nil as we have recognized no revenue from supplemental rent. We have no Hearthstone rent accrued on our balance sheet except straight line non-cash rent which accounting rules would require us to approve totaling 4.9 million, and our guidance incorporates no expectation of supplemental rents being paid in 2008. Further, we have a 6 million letter of credit to support our lease.

When I was appointed CEO in April 2008… excuse me, 2004, just seems like 2008, I made transparency a top priority for NHP, making a commitment to provide comprehensive disclosure on the strength of our financial position and the overall health of our real estate portfolio. Proactive portfolio management continues to be at the heart of our strategic initiatives. To that end, we continue to pay very close attention to any and all underperforming assets, particularly in challenge… challenging economic periods.

With respect to Hearthstone, while we are carefully considering all our options, Hearthstone currently represents no meaningful cash to NHP. The fundamental issue is that we are not getting the full return we expected for the risk we took. Overall, our investment in Hearthstone continues to perform and we believe absence significant further deterioration in operations, it should continue to do so. However, consistent with our commitment to transparency we thought you would appreciate knowing that there are… there are matters to be addressed.

You will find additional information about Hearthstone and the supplemental rent in the MD&A of our Form 10-Q and the other factors that affect our business sections and of course we are pleased to answer any questions you might have.

Finally we are increasing the floor of our full year 2008 FFO guidance range by $0.01 to 2.19 per share resulting in an FFO guidance range of $2.19 to $2.23. In addition, we are increasing the floor and ceiling of our guidance by $0.01 per share to a range of $2.11 to $2.15. Our guidance range incorporates no results from acquisitions, except those completed or previously announced, nor it is in corporate impact of any future impairments of capital transactions.

In summary, we've had a very good first half of 2008, with double digit growth in both revenue and FFO, we are getting more than our fair share of investments in a challenging market, which we expect to continue, due in large part to our exclusive acquisition pipeline with Pacific Medical Buildings. Our portfolio is performing well and most importantly, our balance sheet is strong with ample liquidity to take advantage of opportunities as we identify them.

We are now pleased to answer your questions. Operator, please open the lines.

Question and Answer

Operator

[Operator Instructions] And your first question is from Jerry Doctrow from Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

Thanks. I guess, like a couple of things. It's interesting, your characterization, senior housing, definitely seems a bit more sober than some of the others we've heard from some of the REITs and Brookdale had a call this morning and talked about rebounding occupancy in June and July, and I guess I was curious if I can get a little bit more color. Hearthstone is a different price point, different area of the country.

Obviously, this… I agree with you that the potential sale was a distraction. But just any sense… better sense about the environment out there? You definitely sound more sober and obviously I respect your experience in the business, just trying to get a little better color.

Douglas M. Pasquale - President and Chief Executive Officer

Sure, Jerry. We are glad to provide that. It's difficult and, of course, no one really knows, and the other opinions are being expressed by individuals that have a good sense of what is going on as well. I think for us, one, we are, as people know, conservative by nature and so we are taking a cautious view of things because to us the facts don't yet suggest us that the challenges are behind us. And not terribly unlike the stock market where you have these bursts of recovery only to find that you get sucked back down to where you were.

We are not convinced that pockets of occupancy increases over the short term mean that we are out of the period when occupancy will be challenged. And those, in my experience in running ARV and Atria for many years, a lot of times we saw, what all call head fix, for lack of a better description, where you would see short-term bursts of occupancy, and you would feel that oh, we turned the corner and now we are back to the good times.

That may be the case. That may be the case now. We may have a series of these bursts only to find occupancy softness falling the burst. We don't know, and we don't believe others really know. But if you subscribe to the notion that there is some connection to the housing industry, which we do, we have said before and at a conference… your conference Jerry in January, I said that there's a connection, and it's negative but I can't quantify it.

I think we are seeing some quantification of that. As I mentioned in my remarks, it definitely impacted independent living and we think it's spilling over. The job losses frighten me because the biggest competition I think for assisted living is just other alternative of family provided care. So because of that we take the cautious perspective on things.

We hope we are wrong, frankly we hope that this short burst that we are seeing of occupancy's improvements are the real thing. But, frankly, it will take a couple of quarters of seeing that consistently for me to be convinced that this is all behind us.

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

Okay. That's really helpful. And then just on the in the plans of restructuring and maybe you know even more broadly use of idea, I'm assuming that something with Hearthstone would be converting that supplemental rental section and effect into like an equity investment in a TRS or a joint venture and then you capture upside -- more of the upside as those things start to turn around. Can you just give me a little bit more color on that structure and do you see using it more elsewhere? And if so, how?

Douglas M. Pasquale - President and Chief Executive Officer

Well, we don't know yet. We are obviously having discussions with him and have for a period of time. Hearthstone has had some real challenges, some that were self inflicted, but we think that that's behind now and that they are focused on things.

We don't know how this is going to play out Jerry and… but we are going to know sooner rather than later. We need to have more discussions with Hearthstone. We very much want the benefit of the bargain that we negotiated for, but there may be timing difference, related when we are going to be able to realize that and there are likely some considerations and perhaps compromises that will need to be made.

So we want to have more discussions with him. We'll sort out what things will work for him. We'll have to determine what's in our best interest and simultaneously we'll have to explore other alternatives. Because, you never can be a 100% certain if you are going to come to a satisfactory meeting in the minds. We hope that that's the case, and we don't know that that can be the case. That we are optimistic, that we'll fine a way to make that happen. But we have to explore all alternatives.

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

Yeah sure.

Douglas M. Pasquale - President and Chief Executive Officer

From those, it's a tax for REIT subsidiary. There may be a way to as you mentioned; captures part of the supplemental rent or what that return is supposed to represent through that vehicle. But there are complications with that and so we are going to have to get deeper into it to decide what that might be. But as soon as we do, we'll let the world know that.

In terms of tax for REIT subsidiaries in general, we took a slow, cautious approach to that. We very much like options and we are very grateful that that bill has passed. We almost without question can say we would use that at some point in time. We can't say how we would use that, but I would expect that it might be used somehow with troubled assets, where we have the opportunity to really capture some of the upside that's going to be created for underwriting the risk.

And I still believe there may be opportunities to create value by assimilating small portfolios of assets and putting them in a larger portfolio so we have an ability to take a larger package of assets to favor tenants and say here's a group of assets that we've put together in a nice portfolio and we'd like to lease them to you on these terms, what do you think. So those are just a couple of the many ways we think that can be used.

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

Okay. Now that's very helpful. Thanks.

Douglas M. Pasquale - President and Chief Executive Officer

You're welcome.

Operator

[Operator Instructions]. And at this time there are no further questions in queue.

Douglas M. Pasquale - President and Chief Executive Officer

That was one hell of a script. We'll give it a few minutes.

Operator

We do have a follow-up question from David McCarthy from Citigroup.

David McCarthy - Citigroup

Hi, everyone. I'm sorry about that. I thought we were in the queue. But, I'll start off. I just want to talk a little bit about the medical office building environment. You guys have talked in some detail about the recent acquisitions but could you speak about the asset class in general? Are you seeing any kind of distress selling? And also, could you talk a little bit about the cap rate ranges on assets in general?

Douglas M. Pasquale - President and Chief Executive Officer

Don you…

Donald D. Bradley - Executive Vice President, Chief Investment Officer

Sure. This is Don Bradley. As far as distress selling, I can't say that we have seen anything like that. I was just trotting my memory to see if there's anything that's come across my desk. So, now I can't say we have seen any distress sales on MOBs. As far as cap rates go, they've been pretty sticky. They continue to have a rate around 7% on average, with you paying a lot lower cap rate, sixes or less for something that's very high quality and seeing things that are higher for maybe things that are of lesser quality or maybe not as strategically located.

David McCarthy - Citigroup

Okay and then could you also speak a little bit about your CapEx expectations for the acquisitions that were completed in the second quarter?

Donald D. Bradley - Executive Vice President, Chief Investment Officer

Do we have the budget on that available? Is that in the supplemental?

Douglas M. Pasquale - President and Chief Executive Officer

In our guidance and it is showing about $0.05 for the rest of the year, for total. I don't know how much of it was spent of that EBIT we are a little behind on that $0.05 per share and it's mainly TI and CapEx, it's not only due to CapEx.

David McCarthy - Citigroup

Okay great. And then just one last question, with regards to your balance sheet, you guys are pretty… your leverage a little bit below average relative to your peers. What's your comfort level in terms of the upper hand of where you can see that going?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

This is Abdo Khoury. We have always said that our comfort zone is to be about 50/50, and so, we are currently well below that, with 43%.

David McCarthy - Citigroup

Okay and then just lastly, could you speak a little bit about… and I am sorry it's a thorny question, but could you speak a little bit about what you anticipate in 2009, 2010 if there's a shift in power in the government towards the democratic control and if there'll be any impact to your industry specifically?

Douglas M. Pasquale - President and Chief Executive Officer

We don't expect much to change irrespective of whether there's a republican or democratic administration, and history supports that thesis. The common perception is not really completely accurate and so we expect that that trend to continue. The scenario where there might be more change than has historically been represented, would be if one party… and it would be more likely that it would be the democratic party just given their superior position in both houses of congress, that if they really swept everything and they had enough, that they can overwrite those easily and prevent some of us using the set and all that thing that you might see more change than you would otherwise expect. But generally it's more talk than real substance in terms of there being big changes.

David McCarthy - Citigroup

Great, thanks for the color.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you very much.

Operator

Your next question is from Phil Martin from Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Good morning.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning.

Philip Martin - Cantor Fitzgerald

I thought I was in the queue as well. I just hit the button again. A couple of questions, in terms of Hearthstone, can you talk a little bit about what their operating margins are? Where they were and where they are now? I know you talked about occupancy declining, but how about on the margin side?

Douglas M. Pasquale - President and Chief Executive Officer

The margins are actually quite high among the best in the industry, which stems from a couple of things. One is that the double occupancy model facilitates the achievement of higher margins, which is one of the things that was attractive to us. The other thing is Hearthstone has historically has been really efficient operators and notwithstanding the distraction… that they continue to generally be good operators. A third part of it is maybe we are less comfortable with and we have to do some digging to find out about this.

But when companies experience declines in occupancies and I would be shocked if this weren't occurring across the industry, they tend to cut expenses because they know how to make money and when revenues goes down, what you do is you look to expenses and, that's generally okay. Its just you want to make sure, you are cutting the right expenses and not barring the future for the present.

And so that's something that we are monitoring. Again I think our background as operators facilitate our ability to do that. We just want to make sure that all of our operators have their cutting expenses… are cutting the right ones. Of course, our ability to control that is limited based on our triple-net leases, but we can… have some influence over that and certainly that will be one of the things we look at and discuss with Hearthstone next week together.

Philip Martin - Cantor Fitzgerald

And in terms of where the margin is roughly, upper 30s, mid 30s?

Douglas M. Pasquale - President and Chief Executive Officer

We haven't published that I don't think… before Philip and so we would probably won't know, but I will tell you, you can look at the public companies and see their margins in it, it's among the best in the business and part of that has to be due to the upside. But they are up there quite high and again part of it is from the double occupancy model.

Philip Martin - Cantor Fitzgerald

Okay. And your portfolio with them is at or above kind of their overall average, would you say? Or it's at the higher end?

Douglas M. Pasquale - President and Chief Executive Officer

Well, we have their entire portfolio.

Philip Martin - Cantor Fitzgerald

Yeah. So everything that they own, okay.

Douglas M. Pasquale - President and Chief Executive Officer

Yes.

Philip Martin - Cantor Fitzgerald

The other thing, in just an ever changing healthcare environment and this is speaking more to the medical office building side, in the ever changing healthcare environment for doctors, are you finding different structures or different negotiating leverage points with doctors? Are they looking to get a little bit more creative or is there an ability or an opportunity to get a little more creative just given the different pressures and stresses that doctors are having to deal with, with their own practices and with the way they do business in an ever changing healthcare environment?

Donald D. Bradley - Executive Vice President, Chief Investment Officer

This is Don Bradley. Actually we are seeing a fair amount and we like it. We are seeing doctors get involved with the MOBs. They are wanting to take an ownership piece and we encourage that as do folks like PMB. So that is something you are seeing quite a bit. It's not just in our portfolio but I think you are seeing it in the industry in general.

Philip Martin - Cantor Fitzgerald

Okay. And where -- well, I'll talk to you more about it offline because it will wait the 50 another questions. Okay. I appreciate the answers. Thank you.

Donald D. Bradley - Executive Vice President, Chief Investment Officer

Thanks a lot.

Operator

Your next question is from Chris Pike from Merrill Lynch.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning Chris.

Christopher Pike - Merrill Lynch

Hi. Good morning, everybody. Bob you sound a little closer to the phone today. Usually you sound like you are across the room. I have a couple of questions. First with respect to the pipeline, I know you guys don't comment on acquisition volumes and then your cautious stance going forward, but can you comment on what the pipeline looks like now relative to what it has looked in the past across various segments?

Donald D. Bradley - Executive Vice President, Chief Investment Officer

Sure Chris. This is Don. And I am very close to the phone, actually this time. On MOBs it's quite robust. That area, and I think there is a lot of different reasons for that. It's getting a lot of attention. While the hospitals systems seem to be looking for ways to monetize their… to generate funds for their operation and looking to this… to their MOBs as a way to monetize their assets and it's not quite so unique anymore. It's becoming more the norm.

So MOBs are quite robust. Senior housing and skilled nursing for us is still Groundhog Day. It's really the same as it was in Q1. You see very few attractive opportunities, always the kind of stuff that we like to underwrite in either segment. And you are really not on the senior housing side, in particular, you are really not seeing opportunities that when they do come out, are that are priced properly.

Christopher Pike - Merrill Lynch

Well, it's not the question. Is the pipeline as robust… thresholds… it's just now… it's nowhere near from your perspective where you would like to bid on assets.

Donald D. Bradley - Executive Vice President, Chief Investment Officer

It's as robust in the MOBs if not more so. It's not as robust as in the past in senior housing and long term care.

Christopher Pike - Merrill Lynch

All right, okay. And I guess, Abdo, you talked about the… or maybe Doug you guys talked about the excess cash on the balance sheet and your line is fully open. What is your total capital capacity? In other words, I believe you have an amount in accordion feature on the line and just wondering to what extent you have the availability vis-à-vis secure debt on your portfolio?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

Hi, Chris, this is Abdo. We do have a lot of unencumbered assets and we have plenty of room under our covenant. I think that we have close to probably $900 million of additional debt at place before we get close to our covenant. So we have quite a bit of capacity if needed.

Christopher Pike - Merrill Lynch

So the 900 million that includes the accordion as well--?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

Accordion is 150 million.

Christopher Pike - Merrill Lynch

Okay. So that brings you to 850. And then roughly speaking how much secure debt capacity do you have? Another 9?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

Sorry.

Christopher Pike - Merrill Lynch

Excuse me. Another nine?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

About 900 or so. About 900 million secure debt.

Christopher Pike - Merrill Lynch

So 850 of cash line… I am sorry, 850 of line, another 130 of cash and another 900 of secure debt? Is that… so that's the total number?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

That's a yes. Yes. And we do have, as you know, some long payoff as well as options that… I'm looking at the number. Will be done in one sec. We expect about maybe 50 million or so.

Christopher Pike - Merrill Lynch

Yeah, 52 million, I think.

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

And then, of course, Chris, as when we still have capacity. Looking just in terms of capacity, it feels we have the joint venture as well.

Christopher Pike - Merrill Lynch

Yeah. Okay. And I guess, it's the last question, maybe back to Don or Abdo. With respect to the coverage on the SNEFs the facility EBITDARM coverage at 2.08, understanding there is different same store pools quarter-over-quarter from Q1, but what drove the upside? Was it the Emeritus sale? Were those assets weighing you down last quarter? And being that they are not in this… now they are not in the portfolio, they are just not in the same store pool this quarter?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

This is Abdo. The Emeritus portfolio is actually assisted living.

Christopher Pike - Merrill Lynch

Oh, I'm sorry. Okay. So then what drove… what drove the… why the sequential increase in EBITDARM? Is there anything to note there or is it just better operations at these facilities?

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

Mainly better operations. That's where it's coming from. Better mix.

Donald D. Bradley - Executive Vice President, Chief Investment Officer

And also, Chris, some of those high quality assets that we acquired have now been around for a bit and we bought them with their underwriting coverage of around 14, somewhere around in there. And so now they've had a chance to season a little bit and they are high quality with high Medicare, high private pay. So you are starting to go see more impact from those.

Christopher Pike - Merrill Lynch

And then, I guess, just in general -- go ahead.

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

Sorry, Chris, the two mix was like up from 44% to 46%. So that improves the margins a little bit.

Christopher Pike - Merrill Lynch

Okay. Thanks a lot, gentlemen.

Abdo H. Khoury - Executive Vice President, Chief Financial and Portfolio Officer

You're welcome.

Christopher Pike - Merrill Lynch

Thank you.

Operator

Your next question is from Dustin Pizzo from Banc of America.

Dustin Pizzo - Banc of America Securities

Good morning, thanks. Good morning, guys. Doug, I guess two questions. First, what option do you have across the board whether it's Hearthstone or other situations to replace an operator? And then second, given the balance sheet flexibility, your background as operators, would you consider buying an operator in the TRS and switching out the tenant or is that not a business that you want to get back into here?

Douglas M. Pasquale - President and Chief Executive Officer

I'm sorry. I was concentrating on both parts and I lost the first one when I was thinking about the second one. Tell me the first part again. I am sorry.

Dustin Pizzo - Banc of America Securities

The first part is what options do you have to actually go ahead and replace any of the tenants or operators in your portfolio?

Donald D. Bradley - Executive Vice President, Chief Investment Officer

Well, we… most folks know the big operators out there. And you frankly have some options, but not always terrific options about transferring portfolios to some of the larger operators. Well, with that possibilities, this Brookdale, for example, and Sunrise is another example. They kind of have their own plans and either your portfolio fits into their plans or it doesn't but they are not likely to alter their plans.

Some of the more… other operators that are really good operators like in Emeritus or private ones that are in our tenant pool, get some real opportunities to at least have discussions with them. And, frankly, it's a way to enhance customer relations if you can bring them additional business and you have the possibility of breaking larger portfolios into smaller ones.

There's a lot of different things that you can do in that regard. But the… if you look at our industry, it's highly fragmented and there's only a couple dozen that really have any meaningful presence in terms of capacity. And so you are limited in that regard. So you have to be a little careful about that, and we are mindful of it.

In terms of our capacity and whatnot, we really do understand the operating risk, and so it's true that you can harvest some really nice upside, but you want to be circumspecting how you evaluate the opportunity and make sure that you give full consideration to the risk involved and the down side involved. It's not difficult to try and get your arms around and rationalize the upside, which over the long term we believe it's there, but it's easy to forget these pockets of difficult times and try and quantify what that really means.

So, as we use the REIT subsidiaries, we'll think about that and as we identify things and make those public, we'll explain you what our reasoning was and it will be impacted in part by timing a little bit, among a variety of different other factors that we to take into consideration.. So I think again over time you will see us exposing our self to that, but I see it more on a constrained situation specific basis as opposed to, oh boy, this is now available to us, we want to… we have a huge appetite for underwriting investment risk and taking the upside to that.

Dustin Pizzo - Banc of America Securities

Okay, and then just taking advantage of the REIT subsidiary and whatever means that you ultimately end up using, is that something we could expect to see over the next six months? Or is it something that now you have the option, you are going to sit there and look at what's on the table and weigh it more carefully over a longer time frame?

Douglas M. Pasquale - President and Chief Executive Officer

Well, we were thinking about it and have been thinking about it for sometime. There was some clarity and comfort given to the fact that it had acceptability with the private letter rulings that were made public, prior to the law being passed. Now with the law being passed, there's no risk from a tax standpoint about that.

So, we've been thinking about it for a while. We just frankly haven't seen the right opportunity to employ that yet. And… but we are mindful of it. We have been mindful of it. When we see the right opportunity, we'll jump at it. And it could be with Hearthstone or it could be a small part with Hearthstone or it could be something that's a couple years out.

And I really don't mean not to give you the specific answer, you maybe looking for, but the fact is, it really is situation specific and circumstance specific and at this point we have not seen a situation or a set of circumstances that make us comfortable with utilizing that option. But you can never have too many arrows in your quiver and we are really thrilled that that's one that we have and I believe we will use it. I just don't know where or how.

Dustin Pizzo - Banc of America Securities

Okay. Thanks.

Douglas M. Pasquale - President and Chief Executive Officer

You're welcome.

Operator

[Operator Instructions]. And at this time there are no further questions in queue.

Douglas M. Pasquale - President and Chief Executive Officer

Okay. Why don't we just wait ten seconds just to make sure this isn't a false alarm and then if there's still none, we'll tell everybody good bye.

Operator

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

You are showing no callers in the queue?

Operator

No, sir, there are no questions in queue.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you so much. Have a good day.

Operator

This concludes our conference call, and you may now disconnect. Thank you.

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