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National Health Investors (NYSE:NHI)

Q3 2012 Earnings Conference Call

November 5, 2012, 9:00 am ET


Tripp Sullivan – Corporate Comm

Justin Hutchens – CEO, President

Roger Hopkins – Chief Accounting Officer


Karin Ford – Keybanc

Rich Anderson – BMO Capital Markets

Daniel Bernstein – Stifen Nicolaus

Todd Stender – Wells Fargo

John Roberts – Hilliard Lyons


Ladies and gentlemen, thank you for standing by. Welcome to the National Health Investors third quarter 2012 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded Monday, November 5, 2012. I would now like to turn the conference over to Tripp Sullivan with Corporate Comm. Please go ahead.

Tripp Sullivan

Thank you, (Shirley), and good morning. Welcome to the National Health Investors conference call to review the company's results for the third quarter of 2012. On the call today would 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 made 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 September 30, 2012.

Copies of these filings are available on SEC's website at or at NHI's website at

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.

Justin Hutchens

Thank you, Tripp. Good morning, everyone, and thank you for joining us. With me today is Roger Hopkins, our Chief Accounting Officer.

This was another strong quarter for NHI. We increased normalized FFO by over 9%. We closed on $76 million of new investments that added a significant layer of new growth to the company and enabled us to raise full-year guidance.

We also remain vigilant in aggressively asset managing our portfolio. I will cover these transactions, notably the use of the RIDEA structure and our joint venture with Bickford and the state of our pipeline in a moment.

First, let me turn the call over to Roger and walk through our financial results. Roger?

Roger 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 (debt) report filed this morning with the SEC.

I'm very pleased to report strong, normalized FFO growth for the third quarter and the full year. Normalized FFO for the third quarter of 2012 rose 9.2% over the same period 2011 primarily as a result of revenues from our new investments funded at $82,372,000 in 2011 and $91,846,000 so far in 2012.

Lease revenues from tenant Legend Healthcare increased $1,681,000 due to new investments made in the fourth quarter of 2011 and in the second quarter of 2012.

Normalized FFO to the third quarter of 2012 was $22,357,000, up $0.80 per diluted share compared with normalized FFO of $20,474,000 or $0.74 per diluted share in the third quarter of 2011.

Normalized FAD for the third quarter of 2012 was $21,736,000 or $0.78 per diluted share compared with $20,055,000 or $0.72 per diluted share for the same period in 2011.

Normalized FFO and normalized FAD for the third quarter of 2012 excluded the impact on net income of a loan impairment I'll discuss later of $2,300,000 and other adjustments of $197,000.

FFO for the third quarter of 2012 includes the effect of catch up depreciation extents of $2,398,000. That was recorded for a portfolio assets leased to our current fundamental and are no longer classified as held for sale.

Net income for the third quarter of 2012 was $14,351,000 or $0.52 per diluted share compared to net income of $18,808,000 or $0.68 per diluted share for the same period in 2011.

Net income for the third quarter of 2012 includes the accounting impact of the loan impairment, catch up appreciation expense and other adjustments 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 and are included in our earnings release, our Form 10-Q and the supplement (debt) report.

At September 30, management estimated that the fair value of the collateral securing our mortgage note from our borrower Senior Trust has declined and at the previous carry amount of our note receivable of $21,336,000 occurring on December 31, 2014 may not be fully recoverable.

As a result, we recorded a loan impairment of $2,300,000. Senior Trust is a not-for-profit corporation which owns skilled nursing facilities in Missouri and Kansas. Senior Trust currently pays interest only on its mortgage and receiver has been appointed to manage its financial affairs in place of a board of directors.

Our revenues for the third quarter of 2012 were up 12% compared to the same period in 2011 due to the volume and timing of our new investments in 2011 and 2012.

Straight line rental income was $1,248,000 in the third quarter. Rental income for each year excludes the revenues from those properties that were sold or that meet the accounting criteria as being held for sale.

In September we cancelled our agreement to sell five of our skilled nursing facilities in Texas to our current fundamental. These properties had been classified as assets held for sale in our balance sheet and as discontinued operations in our income statement.

For accounting purposes, we were required to record catch up of depreciation expense on the assets for the period of time in which they were classified as held for sale.

We agreed to a three-year extension of the lease to February 2016 at the current lease amount of $4,989,000 per year plus fixed escalators.

Fundamental has an option to purchase three of the facilities during the lease renewal term. Rental income from our owned assets represented 87% of our third quarter revenue.

Depreciation expense increased $2,962,000 during the third quarter of 2012 compared to the same period in 2011 as a result of our new real estate investments and the catch up depreciation adjustment of $2,398,000.

Our interest expense and amortization of loan cost was $854,000 for the third quarter of 2012 compared to $1,781,000 for the same period in 2011 as the previous year included a charge of $1,188,000 relating to the change in fair value of a previous interest rate swap agreement.

Our general and administrative costs for the third quarter of 2012 increased $405,000 from the same period in 2011 due primarily to a legal settlement of $275,000 and a tax settlement of $180,000.

Stock based compensation expense was $245,000 for the third quarter of 2012 and is expected to be the same for the fourth quarter. Altogether, our third quarter normalized operating results met our internal forecast.

Normalized FFO for the nine-month period in the September (earning) 2012 was 10.9% 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 $4,474,000 due to new investments made in the fourth quarter of 2011 and the second quarter of 2012.

Normalized FFO for 2012 was $65,118,000 or $2.34 per diluted share compared with normalized FFO of $58,729,000 or $2.11 per diluted share in 2011.

Normalized FAD in 2012 was $64,829,000 or $2.33 per diluted share compared with $59,512,000 or $2.14 per diluted share for the same period in 2011.

Normalized FFO and normalized FAD for 2012 excluded the impact on net income of a loan impairment of $2,300,000 described earlier, a legal settlement of $275,000, adjustments related to a terminated lease in the second quarter and other smaller adjustments.

Normalized FFO and normalized FAD for the same period in 2011 excluded the impact on net income of gains of $9,899,000 on the sale of marketable securities, a $922,000 change in the fair value of a previous interest rate swap agreement and a recovery of a previous write down of $99,000.

Our debt as of September 30 consisted of our term loans of $120,000, borrowings on our revolving credit facility of $55 million and $19,250,000 of secured mortgage debt through our joint venture with Bickford that Justin will describe in a moment. We have $145 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 mature until 2017. We expect our normal monthly cash flows and borrowings on our revolving credit facility and potential longer term debt including HUD and agency debt will be the primary source of capital to fund our new real estate investments in the near term.

We have a very low leverage balance sheet relative to the fair value of our net assets and our market capitalization. In addition, in our supplemental (data) report, we calculate our EBTIDA coverage of our interest expense to be 30 to one.

We ended the third quarter of 2012 with cash and marketable securities of $16,216,000. We will begin shortly to calculate our expected taxable income for 2012 and will declare a fourth quarter dividend in the coming weeks.

It has been the company's policy to pay out 100% of our taxable income in dividends to our shareholders.

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

Justin Hutchens

Thank you, Roger. As we have embarked on our growth strategy over the past few years, I see a dramatically transforming company in many respects. Since 2009 we have significantly diversified NHI by geography, tenant mix and asset class.

Our portfolio is comprised of 139 properties in 25 states, up from 17 states three years ago. Our largest tenant accounts for a little over 42% o four revenues compared with over 70% of revenues a few years ago.

Prior to 2009, over 80% of our revenues were in skilled nursing and investments. Today, that's down to 67% with substantial diversification through assisted living, senior living campuses and specialty hospitals.

I'll also note that a majority of our skilled nursing derived revenue is backed by a national healthcare corporation, one of the most experienced operators with the best record on file in the healthcare industry.

Our investments during the quarter clearly reflect this diversification strategy while at the same true we're staying true to our disciplined investment criteria. In mid-August, we completed the acquisition of 138 unit senior living campus in Silverdale, Washington for $25.2 million and an initial lease rate of 7.8%.

We also extended an additional $3.5 million at an 8.3% lease rate for an expansion and renovation that will be drawn down over the course of the next year. The community offer is independent in assisted living as well as rehabilitation care. It is operated by (inaudible) partners, an existing operator in our portfolio.

In September, we closed on our first RIDEA transaction in a partnership with Bickford Senior Living. The immediate financial benefits are substantial with longer term implications for growth as attractive, if not more so.

The business structure is comprised of 10 facilities, eight of which we contributed, and all of which were currently operated by Bickford, totaling 448 units plus the current development of three 60-unit facilities.

NHI has an 85% ownership interest in both the real estate and operations with Bickford owning 15%. We're pleased to complete this transaction in the (NASDAQ:TRS) and to do so at a very attractive initial yield of 9%.

NHI will have the exclusive right to Bickford's growth pipeline which includes all future acquisitions and developments. With 20 years of experience, Bickford is one of the top assisted living operators in the country.

At the end of the quarter, we also closed on an acquisition of 181-unit senior living campus in Loma Linda, California for $12 million and an initial yield of 9% operated by Chancellor Health Care. The campus has 98 independent living units and 83 skilled nursing beds and represents our first senior housing investment in Southern California.

Through the first nine months, we've invested or committed $135 million in capital and weighted average initial yield of approximately 9%. That compares with an average of approximately $110 million per year achieved during the 2009 to 2011 timeframe.

We don't really have a crystal ball to project exactly what the investment pace looks like through the balance of the year and in 2013 but we believe there are enough opportunities available to continue growing at a similar pace.

Our pipeline for new investments remain very busy. From a capital allocation standpoint, we will continue to prioritize assisted living and senior living campuses and our focus on skilled nursing facilities will remain very selective.

Assisted living assets and operators remain the most desirable in the market with absorption outpacing supply. In independent living, occupancies are returning to their pre-recession levels. While skilled nursing continues to be under scrutiny by most investors, this asset class has performed quite well.

Now, I know that most discussions on build plans get investors concerned about debt levels. In the past few years, however, we've seen the benefit of our diversification strategy result and a significantly lower cost of capital as well as a much stronger growth profile while still being able to tout one of the lowest leveraged balance sheets in the REIT industry.

With its pristine balance sheet and available liquidity, we have plenty of dry powder to execute our growth plans. Turning to our guidance, based on the investments completed to date and our timing, we are now projecting our normalized FFO for 2012 to be in a range of $3.15 to $3.18 per diluted share and that's up from $3.08 to $3.13 a quarter ago.

Before we go to Q&A, I want to talk about the dividend as we normally set the fourth quarter dividend during the first week of December.

Since 2009, we have raised the divided by 18% while lowering the payout ratio by 10%. We are committed to growing and protecting the dividend with our aggressive asset management strategies and highly selective investments.

With that, Operator, we're ready to take some questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Karin Ford – Keybanc.

Karin Ford – Keybanc

Wanted to ask you a couple questions about the Bickford transaction; first of all, can you tell us what your expectations are for NOI growth over the next few years in the portfolio and can you give us some metrics on what the rent per unit, the occupancy rate and what the rate growth experience has been in the portfolio?

Justin Hutchens

Sure, so let me address the first part of your question and then I'll end with some other metrics. You're asking about our growth expectations. When we did the underwriting for this investment, we reviewed Bickford Senior Living's operating track record.

Bickford operates 47 communities. They've developed several and they've also operated several over a number of years. And we took the same-store operations over a 10-year period and Bickford's operating growth experience as it pertains to NOI has been 6% per year.

So we don't think it's unreasonable to expect that our JV assets will perform the same. There's no guarantees but certainly there's a long track record to rest on it to force that 6% growth.

Regards to some other metrics, they run what we consider mid-high price point, around $4500 a unit. They're 88% occupied currently which leaves some room for some occupancy growth as well.

What other question did you have?

Karin Ford - Keybanc

What type of rate growth experience have they had the last years that have gotten them to the 6% same-store growth?

Justin Hutchens

There's – as I'm sure you're sell aware, in assisted living, there's the pre-recession great growth and then there's the recession great growth and then there's the expectation that the industry has moving forward.

And pre-recession, they were around 5.5% and they're a little lower than that. During the recession, I don't have the exact number but I know they performed lower than that. And then moving forward, competitive pressures will play a role and certainly CPI growth will play a role, so I don't think we have a crystal ball in terms of exactly what to expect.

But what we do expect is regardless of the rate growth, they'll do their best to manage the balance of service delivery to the residents and maintain a one to 1.5 spread between that revenue per unit growth and their respect for unit growth.

If we do that, then that's how you get to that mid-single digit NOI growth that their track record reflects.

Karin Ford - Keybanc

Is Bickford your RIDEA horse, essentially, from here? Do you plan to do any additional deals with other operators or would all your future RIDEA activity come through Bickford?

Justin Hutchens

So circulating what we own, very high regard for the relationship with Bickford Senior Living in addition to the 10 stabilized assets in our relationship we're inclined to pursue acquisitions together and even up to eight developments together, three of which are underway. So there's a very strong commitment to that relationship.

However, we're not limiting our potential RIDEA partners to Bickford Senior Living. In fact, we're exploring other operators as well. The general criteria that we use is we want to (inaudible) operating track record and private pay assets.

Karin Ford - Keybanc

Just my last question is on the fundamental assets. Can you just talk about why you chose not to sell the assets and whether there's any changes to your rent and your cash flow as a result of the reclassification and the extension on the lease?

Justin Hutchens

Starting with the second half of your question, there is no real change in terms of rent and cash flow. In terms of the decision to sell the assets, the buyer, which is from the memo, had maybe a change of priorities that say in terms of how they're going to allocate their capital.

So we just reworked the deal. And they do have the option of buying three of the buildings. They already bought one building for $4 million. They closed on that last year. It was a cash drain and it was in both properties' best interest just to move that out of our portfolio, so there's been some movement from the standpoint of fundamental making a purchase.

There's potential that there will be more and, in any event, we feel good about the three-year lease extension and we'll have many discussions between now and the end of that extension that determine the best place for the assets.


Your next question comes from the line of Rich Anderson – BMO Capital Markets.

Rich Anderson – BMO Capital Markets

Good color from Karin's question on Bickford and the future of RIDEA for you guys but how big is a percentage of the portfolio do you think it can become?

Justin Hutchens

That's a great question and we haven't established a target yet. So stay tuned and as we get deeper into the structure we'll come up with some goals for that.

Rich Anderson – BMO Capital Markets

Interesting how you structured at 85%, 15% but Bickford doing all the management. Did you give any thought to just doing 85%, 15% on the entire business of the properties and, thereby, having an ownership stake in the management or did that – was that something you just did not want to be a part of?

Justin Hutchens

From the get go, in terms of all discussions related to the investment, we excluded management from the discussion. We didn't have an interest in owning management. It was always assumed that that was going to stay with Bickford and that we focused on all the cash flow after management fee was paid.

Rich Anderson – BMO Capital Markets

So what is your general view of that because (NYSE:HCN) has a 20% stake in their deal recently? Do you feel like that blurs the line too much as a general rule of thumb or do you feel like there could be situations where you might want to be involved on the management side?

Justin Hutchens

As it pertains to NHI, we're comfortable owning a majority stake in the operations. Clearly we want to own a majority of the real estate. We're comfortable that we can choose the appropriate partner so that we're protecting our potential downside risk adequately but really haven't thought of also adding in the management risk at this point in time.

So it really hasn't reigned in on our radar. It doesn't mean it isn't a good investment for others but for us right now it's just not the way we're (feeling) the best way to utilize the structure.

Rich Anderson – BMO Capital Markets

And then from a political standpoint, is the person you're voting for the same person that would be good for the business of healthcare or where do you stand politically on the election and how it impacts the business of the healthcare delivery system overall?

Justin Hutchens

That is a great question and I’m going to keep that between me and the voting booth. I will say though that it seems to me that no matter who wins there's going to be some tax increases down the road and it'll be interesting to see what happens, the impacts on healthcare related to tax increases, the overall growth of the economy.

I don't have a crystal ball to even come close to being the right person to make those predictions and the other, obviously, metric we'll watch is what do interest rates do over the next two to three years? I don't have a crystal ball for that either.

Rich Anderson – BMO Capital Markets

What is your sense of the operator – your operator population in terms of what would be the better – would it be better to see Obamacare just carry on or would it be better – would your operators think it would be better to have some changes at the margin from Obamacare?

Justin Hutchens

I will say this. The one thing about Obamacare that does benefit the skilled nursing industry is the penalties that the hospitals won. They were for the readmissions within the 30-day discharge window and that should help and there's a lot of work done by the skilled nursing operators in the last couple years to position themselves to maintain these physicians and their facilities and earn the confidence of the physicians to do so, which ultimately should have some impact on (census).

Outside of that, I think we'll wait and see and as we learn more, we'll adjust our underwriting criteria accordingly.

Rich Anderson – BMO Capital Markets

Then last question is on the dividend. Roger mentioned the policy being 100% of taxable income and you're working out those numbers now. But is that the floor? In other words, if it worked out that 100% of taxable net income was a number lower than what you're paying now, you wouldn’t cut the dividend.

Roger Hopkins

That's right, Rich. We have been paying more than 100% of our taxable income. But we go through that exercise to consider particularly what I would call the non-recurring transactions that may have occurred during the year and see what the impact is on taxable income.

So at least we'll have to cover that but we have been paying more than 100% of our taxable income.


Your next question comes from the line of Daniel Bernstein – Stifel Nicolaus.

Daniel Bernstein – Stifen Nicolaus

I'll start off with the negative question. Is there – with the balloon in receivership, is there a potential for additional write downs going forward?

Justin Hutchens

I'll let Roger explain the rationale for the write down and then I'll talk a little bit about the status of those loans.

Roger Hopkins

It is our policy to look at the underlying collateral of any of our mortgages on a quarterly basis. And there has been deterioration in the NOI of that portfolio. And we made estimates of what we believe to be the value of that portfolio and what amount could be recoverable when the loan maturity occurs in 2014.

And so it was prudent to impair that loan at this time. We don't have any indication at this point about obviously there are operating results for the future. There is a receiver in place.

We recently updated the public in an 8-K about our business relationship with Senior Trust back on September the 7th that from an accounting standpoint it was prudent to impair that loan at this time.

Justin Hutchens

I'll just add, Daniel, that we've actually been down this road before three, four years ago. We had another non-profit borrower that was liquidating their assets. And the state of Tennessee when a non-profit company liquidates a substantial amount of their assets, the Attorney General's Office has to approve the transfer of those assets.

So that action brought the Attorney General's Office in. That particular investment had some litigation and then some negotiation. We wound up purchasing the assets. In that case we had about 1.7 times cover over our lease payment when we made the purchase. We're going through a similar process with these two loan portfolios now whether it's receivers have signed.

The goal of the receiver is to liquidate assets. The goal of NHI is to substantiate the value that we have in those assets and we have the option perhaps to purchase them. If not, we're just going to make our case in terms of the underlying value of the assets and the amount of any proceeds that are due to NHI.

All of those discussions are happening and we'll certainly keep everybody up to date as that moves forward.

Daniel Bernstein – Stifen Nicolaus

I guess I presume you see the assets of equality that you would bring on balance sheet as an owned real estate if possible if that – if the process allows that.

Justin Hutchens

Yes, I think that's a safe assumption. We wouldn't rule out making a purchase.

Daniel Bernstein – Stifen Nicolaus

So on to the good stuff with Bickford. I appreciate again the color that you gave earlier on the occupancy and rate. Do you have the margin for those facilities as well? I presume at 88% occupancy and the good fundamental backdrop you're expecting some margin improvement there to help the NOI growth.

Justin Hutchens

They kind of run in the mid 30s. I don't have the exact margin in front of me but Bickford's general track record is in the mid 30s.

Daniel Bernstein – Stifen Nicolaus

And you think it's a correct statement that the margins can go a little bit higher as occupancy improves and costs stay low?

Justin Hutchens

If we're going to get that 6% growth we're looking for, I sure hope so. Yes, we would expect to see a margin improvement going forward.

Daniel Bernstein – Stifen Nicolaus

And then I had one question. I was looking through your supplemental and I noticed you were about maybe 50% public operator. I presume that's mostly (NYSEMKT:NHC), on the seniors housing side. It looks like you have mostly regional small operators, some public operators.

How do you view investments in the public operators versus the regional or smaller operators? Do you see differences in quality of care of quality performance of the assets? Would you prefer to be in one or the other?

Justin Hutchens

Well, let me start with why I like regional operators and smaller operators. The profile of the management is that they're owners. And their entire livelihood is dependent on the outcome of their operations.

So you have owner/operators very close to their customers and close to their value creation within their company. So from just a pure incentive or motivation standpoint, I really, really appreciate that dynamic.

It's also not a coincidence that they also are a group that needs us more because public companies have more access to capital. They tend to play in larger transactions. We tend to play smaller transactions with companies that don't have all of the access to capital that the public companies have.

So a lot of our growth is going to come from the smaller operators and the regional companies moving forward.

As it pertains to the public companies, we feel just terrific that half of our credit is backed by public company balance sheets and we have some great operators.

We have National Health Care appropriation, American Senior Living, Community Health Systems, really strong, experienced operators with very solid credit backing a large percentage of our revenue and public companies have grown over time to have a level of sophistication than a lot of them that successfully manage hundreds of sites in some cases.

So we feel very good about those relationships but also just expect a lot of the growth to come from those smaller companies that have so much invested personally in the outcome of their business.

Daniel Bernstein – Stifen Nicolaus

Did you break ground on the Bickford development yet? I think you mentioned on the last conference call you would expect all three to have broken ground by year end. Is that still the case?

Justin Hutchens

We'll have to – for sure, we'll break ground by year end and there will be one right behind those.


Your next question comes from the lien of Todd Stender – Wells Fargo.

Todd Stender – Wells Fargo

Just going over the Bickford deal, particularly the three developments and anything else that comes down the acquisition pipeline, how are they allocated whether it goes into the JV or you guys wholly own them? How is that determined?

Justin Hutchens

That's a good question and the answer is it depends. Let's just take on the acquisition front as an example. Certainly Bickford, we want to maintain an 85%, 15% split. We'll have the opportunity to contribute capital to an acquisition.

Should they choose not to do so, then we would set up targets for them to earn their 15% ownership through operating performance. And also the same would be true when it comes to new developments.

Let's just be clear about why this relationship makes sense. NHI has a tremendous balance sheet and access to capital. Bickford Senior Living has a very solid 20-year background in operating and creating value for their customers and for their company.

And so it wouldn't be unnatural for NHI to bring (holster) capital in front of these deals and for Bickford to earn out their share over time. But we'll see as we move forward how each investment lines up.

That's probably how I see it going. Another option, by the way, is that the JV is a co-borrower and as it stands today, that debt that Roger mentioned, that $19,250,000 doesn't have an NHI guarantee. That's just a mortgage (inaudible) price and Bickford and NHI are co-borrowers in the JV entity and we'll also pursue financing opportunities straight to that joint venture to the extent that we can co-borrow a revolving credit facility that assigns specifically to the JV.

That gives Bickford the opportunity to maintain their 15% NHI, maintain our 85% and that's a potential outcome as well. We're in the process of really evaluating all of those options right now.

Todd Stender – Wells Fargo

Is that applied to the CapEx requirements, too, 85%, 15% split on – I think you mentioned in the release it was a 500 unit assumption?

Justin Hutchens

Right, there's a waterfall and in the waterfall that 500 a unit CapEx is taken before we share the remaining cash flow.

Todd Stender – Wells Fargo

Is that your responsibility up front? How does that get allocated?

Justin Hutchens

It's really theirs.

Todd Stender – Wells Fargo

Just switching gears back to the five (sniffs) in Texas that were held for sale, I know the current tenant and perspective buyer was waiting on HUD financing. Did that play a factor into them not making the transaction, they couldn't get financing? Is there anything around that?

Justin Hutchens

There was – it definitely played a role. Let's face it, these assets had been held for sale for over two years I think. So that's exceptionally long. And the reason we had them in that category is because the operator was pursuing HUD financing and had some snags in getting it approved.

And then I just think so much time passed they just changed priorities altogether. So now they targeted a few of the assets they can purchase. We're comfortable extending the lease. We're comfortable with both of those options, so we just arrived at a mutually beneficial new deal together.

Todd Stender – Wells Fargo

Did this negatively impact your budgeting at all? Were you expecting any gains of sale to allocate the capital elsewhere? Any impact to your results for this year?

Justin Hutchens

Absolutely zero impact to the results for this year and then from a capital allocation standpoint, we feel we have sufficient capital available to continue to meet our growth goals really all the way through next year and without even worrying about the sources. We have our sources lined up.

Todd Stender – Wells Fargo

I don’t know if you mentioned this. I might have missed it. When does the Senior Trust loan mature? When does that come due?

Roger Hopkins

Todd, that matures in December of 2014.

Todd Stender – Wells Fargo

And that's a – you'll get a balloon payment. You'll get your principle back. Is that the current assumption.

Roger Hopkins

That is the way the note is structured currently. They are paying interest only monthly. They are making payments on time each month and otherwise the principle is due in December of 2014.

Todd Stender – Wells Fargo

Are you able to look at the loan right now in terms of a loan to value ratio? Is there anything you could share from a quantitative standpoint?

Roger Hopkins

Well, essentially, by this impairment that we've taken in the quarter, we've reduced the carrying amount down to the value of the portfolio.


(Operator Instructions) Your next question comes from the line of Karin Ford – Keybanc.

Karin Ford – Keybanc

Can you talk about – you said you had your sources of funds for next year basically lined up. Can you talk about what those sources are?

Justin Hutchens

Sure, I'll let Roger elaborate on that a little bit and then I might add some comments, too.

Roger Hopkins

Karin, as I mentioned in my prepared remarks, we do expect to continue to access our revolving credit facility of which we have $145 million available to draw. We also have our normal cash flow over and above our payout in dividend.

We will also explore longer term debt options, including HUD and agency debt and so all of those will really contribute to funding our acquisitions for 2013.

Karin Ford - Keybanc

It looked like you had about $55 million out on the line now and you're not selling the (sniffs). So can you just talk about what your thoughts are on when – how much more exposure you'd want to have out on the line before you do longer-term debt?

Justin Hutchens

Let me articulate it this way. First of all, it's a very high priority in 2013 to term out debt. I think among one of the first options you'll see penalize is HUD financing and we have many others that are under review. So I'll be surprised next year if all we have is five and seven year maturities still as we do today.

Second point is (before) the sale we put $150 million of debt in place. That gives us about $350 million in total and, as you know, we don't have the crystal ball to know exactly when we'll deploy that capital.

But when it is done, we think our debt to NAV will still be around 25%. We think our fixed charge cover will be roughly 12 times still at that point. And probably a good point to make is given that in 2013 we really don't anticipate buying some large acquisition, which would be out of character for us.

We don't anticipate having a need to access equity. So we feel like we're very well positioned and continue to use short-term debt and well positioned to turn out debt throughout 2013.

Karin Ford - Keybanc

And as far as looking ahead on the future pipeline, are there any other deals that are likely to close before year end?

Justin Hutchens

I'll tell you – and you ask it every call. What I'll say is this. In terms of the guidance, we did – I think we have clarity on the top end of the range but there's some moving parts that I'll just mention and we'll update investors as we have more information.

But there's a potential long pass in the quarter. There's also a potential draw request to capital funding to refund that (inaudible) facility we have in place with them that we would fund.

And then we always have acquisitions in our pipeline. So we try to put a range in place that we felt comfortable we could achieve and we do have clarity on that (inaudible).

Karin Ford - Keybanc

And the loan path, is that (Polaris) or is that other things as well?

Justin Hutchens

Now, there is some legacy loans that could potentially pay out. That is not material to the guidance. I can tell you that. That was the point I was trying to make.


Your next question comes from the line of John Roberts – Hilliard Lyons.

John Roberts – Hilliard Lyons

Any impact from the hurricane?

Justin Hutchens

I'm sorry, what was that?

John Roberts – Hilliard Lyons

Any impact from the hurricane on any of your properties?

Justin Hutchens

Thank you for asking and no. Fortunately they – everyone came out okay.

John Roberts – Hilliard Lyons

Finally, the dividend, if you're at 100% and you haven't paid out enough, do you anticipate paying a special?

Justin Hutchens

John, we'll be going through that calculation. We'll also be considering internally our outlook for 2012 and we have had occasions over the last several years where large, non-recurring transactions gave rise to special dividends. But as we sit here this morning, it's much too early to tell. We'll be going through that analysis in the coming weeks.


There are no further questions at this time. I'll turn the call back over to you, Justin Hutchens.

Justin Hutchens

Well, I'm sure everyone can tell we're very pleased about our growth this year and confident about the opportunities moving forward. We appreciate your participation on our call today and we look forward to speaking with you on the fourth quarter call.


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

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