Greetings, and welcome to the National Health Investors Third Quarter 2019 Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we'll conduct a question and answer session. As a reminder, this conference is being recorded Thursday, November 7, 2019. Would now like to turn the conference over to Director of Investor Relations, Dana Hambly.
Please go ahead.
Thank you, and welcome, everyone, to the National Health Investors conference call to review the company's results for the Q3 of 2019. On the call with me today are Eric Mendelson, President and CEO Roger Hopkins, Chief Accounting Officer Kevin Pascoe, Chief Investment Officer and John Stade, Executive Vice President of Finance. The results as well as notice of the accessibility of this conference call on a listen only basis over the Internet were released this morning before market opened in a press release that's been covered by the financial media. As we start, let me remind you that any statements in this conference call, which are not historical facts, are forward looking statements. NHI cautions investors that any forward looking statements may involve risks uncertainties and are not guarantees of future performance.
All forward looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10 Q for the quarter ended September 30, 2019. Copies of these filings are available on the SEC's website at www.sec dot gov or on NHI's website at www.nhireit.com. In addition, certain terms used in this call are non GAAP financial measures, reconciliations of which are provided in NHI's earnings release and related tables and schedules, which have been filed on Form 8 ks with the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release.
I'll now turn the call over to Eric Mendelson.
Hello, everyone. Thanks for joining us today. Investors recently heard from others in our industry that the senior housing market continues to see challenges from new supply and wages. We know many of you are concerned with the health of the senior housing industry, but we are cautiously encouraged by the NIC data, which has shown a general slowdown in new starts and healthy absorption rates, which appear to be helping to stabilize occupancy. This supports our continued long term bullish outlook on the industry.
New deliveries and wage inflation remain as top industry challenges and concerns for us. And as I've mentioned on our previous calls, we don't see these dynamics changing in a meaningful way for the next several quarters. But we are still optimistic in our outlook as our triple net strategy helps to mitigate the cyclical downs, which we're currently seeing in the industry. We've worked hard to keep our investors updated on the good and the bad. Our approach is to balance our commitment to our shareholders with our desire to see our operators succeed.
Let me say that I'm also proud of our team here this year because we've accomplished a great deal, and today we're reporting a number of improvements as a result of our operator focused strategy. During the last 12 months, we work hard to anticipate areas that need attention and proactively address them in a transparent manner. We've restructured our holiday lease, rehabilitated an operator that stumbled in 2017, who by the way is succeeding today. We've transitioned 9 properties out of 3 leases quickly and successfully. We've closed over 315,000,000 dollars in new accretive investments this year.
And as Kevin will talk about more, we are seeing better occupancy in other green shoots and blossoms from our initiatives with Bickford. The challenges in this industry cannot be neatly boiled down to AL versus IL or primary markets versus secondary markets. It isn't that simple. And NHI is committed to succeeding in all the senior housing markets and products in which we invest. While we plan to provide detailed 2020 guidance with our 4th quarter results, our expectation today is that NHI will resume growth in 2020 that more closely resembles our historic performance in the mid single digit range.
With that, I will turn the call over to Roger.
Thanks, Eric. Hello, everyone. So far this year, we have announced over $315,000,000 in accretive purchase leasebacks and mortgage note investments, all in seniors housing. Approximately $117,000,000 in previously announced commitments that we expect to fund over the next 12 to 18 months as shown in our Form 10 Q filed this morning with the SEC. Given the full year impact of our new investments, the year ahead is shaping up to be a good growth year in terms of our net income and our non GAAP metrics.
For the Q3 of 2019, normalized FFO per diluted share was $1.42 compared to $1.39 in the same period 1 year ago due to the growth in our new investments. Normalized FFO for the 9 months ended September 30, 2019 was $4.09 versus $4.12 for the same period 1 year ago, due primarily to 1,561,000 additional weighted average fully diluted common shares outstanding. For the Q3, normalized AFFO was $1.32 per diluted share and for the 9 months ended September 30, 2019 was $3.80 per diluted share, both metrics increasing $0.04 when compared to the same periods in the prior year, despite the challenges we faced this year in transitioning 3 leases to new operators. So far in 2019, there have been no adjustments between our NAREIT FFO and our normalized FFO. NHI's total revenues for the 3rd quarter were $81,700,000 which was a 9.3% increase over the same period 1 year ago.
For the 9 months ended September 30, revenue increased 6.9 percent to $235,900,000 These increases reflect good investment volume in both new lease and mortgage deals. We have utilized a careful mix of debt and equity capital with which to fund them. John Spay will explain in a few minutes how we have funded the significant volume of new investments in 2019, while protecting our low leverage balance sheet. Our interest expense increased $2,287,000 in the Q3 of 2019 when compared to the same period 1 year ago and a corresponding increase of $5,718,000 for the 9 months ended September 30 compared to the same period 1 year ago. This increase is reflective of our new investment volume.
Our increase in depreciation expense of $1,442,000 in the Q3 of 2019 $3,924,000 for the 1st 9 months of 2019, compared to the same periods in 2018 are reflective of our growing real estate portfolio. Our tax expenses increased $584,000 for the 9 months ended September 30 when compared to the same period 1 year ago, as we were required in some cases to pay the property taxes on the portfolios in transition as described earlier. Our general and administrative expenses increased only $7,000 during the Q3 from the same period 1 year ago. Our non cash share based compensation expense is computed by the Black Scholes pricing model and was $477,000 in the 3rd quarter and is expected to be the same for the 4th quarter. Property taxes and insurance expenses on our lease properties was $1,608,000 for the 3rd quarter and $4,205,000 for the 1st 9 months of 2019 and was paid out from our tenant escrow deposits made each month to us according to the terms of our leases.
A new accounting standard requires companies to show this caption separately on an income statement. However, the same amount is included in our lease revenue, so there is no effect to our net income. Moving on to our dividend. This morning, we announced a quarterly dividend of $1.05 per outstanding share for the upcoming Q4 ended December 31 to be paid on January 31, 2020. The 4th quarter dividend is taxable to investors in 2019.
We currently estimate our normalized FFO payout ratio for 20 19 will be in the mid-seventy percent range and our normalized AFFO payout ratio will be in the low to mid-eighty percent range. As for our updated guidance for the remainder of 2019, we are increasing the midpoint of our full year estimate of normalized FFO to be in a range of $5.47 to $5.50 per diluted share for 2019. We are increasing the midpoint of our full year estimate for normalized AFFO to be in a range of $5.08 to 5.10 dollars per diluted share. These estimates include new investments planned near the end of the year, the funding each month of our ongoing loan and lease commitments and the composition of new debt and equity capital to properly align capital resources for growth and for maintaining low leverage. Our guidance allows for the uncertainty in the results of operations of the transition properties from which we derive current income from the net operating income of the facilities.
I'll now turn the call over to John Spade, who will discuss our uses of debt and equity capital.
Thank you, Roger. Earlier this week, we announced that S and P Global assigned NHI a BBB- investment grade issuer credit rating and Fitch affirmed BBB- Investment Grade Rating. Moving forward, these investment grade credit ratings will enhance our ability to grow our real estate portfolio through adversity of funding sources. The 2 ratings will also provide the company with the ability to toggle our 2017 2018 bank facilities to credit based margin pricing grids from their current leverage based pricing grids, which we are currently evaluating. As we mentioned in prior earnings calls, we view 2020 as a transformative balance sheet year for NHI as we look to term off revolver debt and position the company to refinance its upcoming 2021 convertible bond maturity.
Going public with our credit ratings supports our long term debt strategy. But more importantly, the investment grade ratings exemplify NHI's strong balance sheet and our stated financial policies. Turning to our ATM equity program. During the Q3, we sold 590,868 shares of our common stock. The shares were sold at an average price of $82.47 per share before fees, resulting in net proceeds after commissions of $48,000,000 Proceeds were used to reduce our revolver debt.
And after our 3rd quarter ATM activity, we have approximately $94,900,000 in capacity remaining under our shelf facility. Turning to our debt capital metrics for the quarter ending September 30, net debt to annualized EBITDA improved to 4.5 times from 4.8 times in the prior quarter. Weighted average debt maturity was 4.2 years and our fixed charge coverage ratio was 5.2 times. For the quarter ended September 30, our weighted average cost of debt was 3.6%. Turning to our liquidity.
NHI ended the 3rd quarter with $250,000,000 outstanding on the revolver, leaving us with $300,000,000 in available revolver capacity. With that, I'll now turn the call over to Kevin Pascoe to discuss the portfolio. Kevin?
Thank you, John. As Eric mentioned, the team has accomplished a great deal this year, and we are pleased with the overall trends in our coverage. The operating environment remains challenging, so we know that we need to continue to find creative ways to help our operating partners while also protecting our shareholders. Looking at the overall portfolio. At the end of the second quarter, the EBITDARM coverage ratio improved to 1.69x for the total portfolio compared to 1.64x in the year earlier period and 1.65x in the prior quarter.
Senior housing coverage declined year over year as expected, but was steady with the March 2019 quarter at 1.15x and our skilled portfolio at 2.8x improved from 2.49x last year and 2.76x in the March quarter. I do want to caveat the sequential comparison as they are not apples to apples, but we are comfortable with the trend we are seeing. Our ample sniff coverage is a testament to the hard work of our best in class operators. While it is too early to gauge the impact of PDPM, the feedback has generally been neutral to slightly positive. The senior housing industry continues to be challenged by new supply and wage rate growth, but we have not seen a meaningful shift in operating trends in the secondary markets where the lion's share of our portfolio resides.
We are seeing trends improve throughout our needs driven assisted living operators, while our independent living operators have been stable. We remain diligent in our asset management efforts and do see positive leading indicators that these efforts are bearing fruit. Turning to our largest operator by revenue, Bickford Senior Living, which represents 18% of our cash revenue, had an EBITDARM coverage ratio of 1.07x for the trailing 12 months ended June 30. On a same store basis, the Bickford EBITDARM coverage was 1.12x. Including 2 development properties, which are leasing up nicely and have coverage of 1.63x, the Bickford total and same store coverage is 1.1x and 1.15x, respectively.
As we highlighted last quarter, occupancy started to turn positive in the 2nd quarter, which continued through the 3rd quarter. Same store occupancy for our Bickford portfolio improved by 60 basis points year over year and by 200 basis points sequentially to 87.9 percent in the 3rd quarter. Bickford's same store occupancy was 88.2% in September and improved through October, which sets up well for the year end push. Importantly, Bickford has maintained price discipline while showing this improved occupancy. For example, in the NICMAP covered markets, which covers 32 of our Bickford buildings, Bickford's average occupancy during the Q3 improved 146 basis points sequentially compared to 50 basis points for those markets.
Bickford's average rent increased slightly over this period and remained significantly above the comparable market average. We continue to work with Bickford to find ways to optimize the relationship, and we outlined some of these efforts in our 10 Q. This is a level of detail that we do not normally go into on a specific operator, but feel that additional transparency is important in this situation. In sum, we believe the actions we are taking with Bickford put them in an improved financial and operating position while having a de minimis impact on our cash flow. We estimate the collective impact of these efforts amount to less than 1.5% of our 2020 Bickford revenue.
We will continue to proactively monitor this relationship and hope to share more good news in the coming quarters. Our relationship with senior living communities represent of our cash revenue. Including net entry fee income, their EBITDARM coverage ratio was 1.1 times on a trailing 12 month basis. This compares to 1.27 times in the year earlier period and 1.1 4 times for the March quarter. This ratio is down quarter over quarter due to some lower entry fees during the winter months as we discussed on the prior two quarterly calls.
The summer months were back in line with historical levels and net entrance fee sales were better year over year and quarter over quarter for the Q3 of 2019. Due to some solid entry fee quarters rolling off the calculation and the 1 quarter lag in reporting, it will likely be a couple more quarters before the portfolio shows improvement due to this variability in their income. As we've discussed on prior calls, SLC has been opportunistically purchasing and renovating available entry fee units, so we expect this additional CapEx and investment in unit inventory will lead to improved coverage as the renovated entry fee units are sold. To put this in some perspective, SLC's current entrance fee inventory with no additional refund due amounts to 50% to 60% of their annual net entrance
fee cash flow.
While the entrance fee model does introduce more variability into the operator's quarterly coverage due to the timing of these entry fee sales, we like the long term prospects of the industry, which include limited new CCRC supply, lower average resident move in age and an average length of stay that is significantly longer than IL and AO. Looking at National Healthcare Corporation. Our partnership with NHC accounts for 13 and had a corporate fixed charge coverage of 3.95x, which improved from 3.59x in the same period last year and 3.91x in the March quarter. Holiday Retirement, which represents 12% of our cash revenue, had an EBITDARM coverage ratio of 1.2x, which is consistent with coverage in 1Q 'nineteen. Trailing 12 EBITDARM coverage on the Holiday portfolio would be 1.24x as of 2nd quarter end, adjusting for the impact of the recent lease amendment.
This was down slightly from 1.26x in the March quarter. As I mentioned earlier, we are seeing improvement from our AL operators in our IL portfolio, including Holiday, is stable, and we commend the team for their hard work in this environment. Moving on to new investments. We continue to build our relationship with Discovery Senior Living during the Q3 with a new $6,400,000 senior mortgage on a 74 unit assisted living property in Indianapolis, Indiana. This is the 10th property in the NHI Discovery relationship, which now represents 4% of NHI's cash revenue.
We exercised our purchase option on the Bickford property, so we are pleased to turn this into a long term triple net lease on a building that is over 80% occupied and steadily improving. We have a similar option on the Bickford Shelby property, which we expect to exercise in the coming months. The pace of deal closing slowed in the Q3, but we have still had an active year with over $315,000,000 in investments and our pipeline is keeping us busy. We continue to see additional opportunity as we survey the market and are committed to adding high quality operators and communities to the portfolio like the Timber Ridge purchase option we continue to evaluate. We will have an update on this and any additional transactions as we have firm commitments or closings.
With that, I'll hand the call back over to Eric.
Thank you, Kevin. Constantly reviewing our portfolio to identify opportunities that we can proactively address. We do this through a number of methods and our preference is always to do it in unison with our operators and through a triple net lease structure, which leads to stability in our cash flow. We're proud of our accomplishments in 2019 as we move into 2020. We expect that our growth will return to a more normalized level, driven by better than usual organic growth, the full year impact from over $315,000,000 invested year to date and future contributions as we close on deals in the pipeline.
All of this notwithstanding some purchase
This is Roger Hopkins. I just wanted to make one note. This morning, one of our research analysts pointed out a computational error in our schedule of Bickford rental income on Page 13 of our Form 10 Q as it was inconsistent with the description in the paragraph that followed. We have filed a Form 8 ks to show a 2019 contractual rent of $48,618,000 and straight line rent of $4,986,000 for a total of $53,604,000
We apologize for this oversight. And now we'll open for questions, operator. Thank you.
Certainly. Thank you. And we'll proceed with our first question on the line from Jordan Tsai with KeyBanc Capital Markets. Please go ahead.
Thank you. Good morning.
Good morning. Good morning.
Just wanted to look at this afternoon already here. So question on sort of the transitions and not specific per se to Bickford, but not to exclude them. As you look at the pipeline, where do you feel you are sort of inning wise in this game of continuing to sort of have to reset and adjust relative to in place rents. Are there additional watch list type tenants or other leases that feel like they're at risk as you sort of we sort of made our way through these last couple of months?
Hey, Jordan, this is Eric. Sticking with your inning analogy, I would say we're in the 7th inning of an 8 inning game. And we've given a lot of information on what we've been up to with Bickford. I know we've been talking about it all year, but things are really starting to happen. And we published better occupancy numbers, a lot of the financial engineering that we've been working on behind the scenes and that they've been working on behind the scenes with buildings outside our portfolio.
So that is 7, 8 inning. With the transition properties that we took back from Regency and others, everyone has a permanent home now. So I would say they're in overtime. And with the Minnesota, the Matthews Yes, to 41 Management. 41 Management.
We took a building from Bickford that wasn't doing well and gave it to a new operator that is local. So that was also something that happened this quarter. And I'd say that's an overtime.
That was 4 properties though? Yes. In Minnesota? Yes. Yes, 4 properties.
Yes.
And that rent I'm sorry, go ahead.
I think I know where you're going. That rent was at a reduced rate.
Well, for the new manager, it will be reduced from where it was. The aggregate rent that NHI will receive is unchanged through a negotiation with Bickford. They're going to support it through the balance of this year in 2020. So our income as it relates to those properties is again unchanged.
Yes. And then the new operators rent will ramp up as the Bickford subsidy goes away. So it's not quite seamless, but it's close.
So the $1,560,000 that was on the repurchase, the purchase option schedule last quarter, with I assuming related to these properties. Is that maybe I'm making a mistake here mixing apples and oranges, but is that the total rent that you're getting or are you just getting the 906 So is it additive, the amount that's coming from Bickford just in terms of rent support plus the $900,000 $6,000 or is the total?
Yes. Jordan, you're correct. It's additive. So it's $900,000,000 plus the $700,000
Okay. But in year 2, you just get an escalator of 2.5%, but you have a fair market rent reset at some point as well? Correct. And how does that work, the rent receipt?
It will be based on the performance of the communities at that point in time and just again resetting it to fair market value. So if they're doing well, we should get a little bit of a step up. If they're performing as they currently are, only slightly better, then we would get an escalator. So we're still expecting to get an increase in income. It just depends on how much at that point in time.
Did you give us the pro form a coverage for Bickford?
We gave the same store and the total portfolio coverage.
On the trailing? Yes. What does it look like if you get if we boot out Minnesota?
It would be slightly improved. We didn't give a pro form a coverage. But again, it's a small percentage of the total. So it's not going to move the needle more than a basis point or 2. So it would be a small impact to overall coverage, but it is additive to their cash flow as an organization.
Okay. My last one for you is just on the acquisition pipeline. It sounds like there's a little bit included in Roger's updated guide. Do you have a pencil or circle around that amount yet? What's in
the guide at least?
Roger is asking about guidance.
We have a number of things that we're working on and we've determined internally that any acquisitions we make would be late in the year and probably wouldn't be that impactful to the guidance that we've given. And it certainly would be additive to 2020, but probably not 2019. But Jordan, this
is John. In our guidance, it does include continuing to sort of fulfill our commitments. If you remember, we have a number of construction loans out there that were that are being drawn upon as we speak.
Okay. I'll hop back in the queue. Thank you.
Thanks, Jordan.
Thank you very much. We'll proceed to our next question on the line from Chad Vanacore with Stifel. Please go ahead.
Hi, good morning. This is Tao Qiu on for Chad.
Hello.
Hi. My first question is regarding the coverage trend. So the coverage on your portfolio at the end of the quarter was pretty stable from 1Q. And you mentioned a volatile economic condition in your press release. As we have also seen this quarter from your peers and some of the senior housing operators, there are some intensifying challenges in certain markets late in the quarter at a pretty meaningfully worse than what's suggested by the NIC data.
Are you seeing any similar trends in any particular operator or market in your portfolio? And how should we expect coverage to trend given the market and some of the changes you made with BigFur when you report next quarter?
So this is Kevin. As it relates to the markets that we're looking at, we have not seen and I think we talked about this in our opening remarks, not seen a meaningful shift. We do believe that it is there are some challenging components to what our operators are working on. We talked about wage rate. We did talk about some new supply, although that we've seen that abate to some degree as that's consistent with the NIC data.
So we've not seen a shift in our markets from what we've talked about previously. And I think to the opposite, we've seen at least good traction on the occupancy. That's a little bit of a leading indicator. We would expect improved performance to go along with that, but they are still fighting these other headwinds that we talked about like the wage rate. So those are things that we're looking to as well.
We would expect to see that improve over time as occupancy continues to season, but it's going to be another few quarters before you really see that really roll through the portfolio.
That's helpful. My second question is regarding kind of the market volatility. So given the rapid correction of the restock in general in so far this month, would you say that you are kind of taking a temporary pause on investments or kind of delay equity funding at this point? How does that affect the your plan near term?
Well, this is Kevin again. I'll take the at least the investment part. We're not looking to delay investments necessarily. We're still very active. We have an active pipeline.
We're still looking at continue to make investments and we're looking for accretive opportunities, which is a little bit of a function of what we where our cost of capital is at any given moment. But we're by no means pushing pause on our investment pipeline.
Yes. I mean, and this is John. With respect to equity, I can't say that this volatility we're seeing right now in our stock price is going to prevent us from doing accretive transactions. We're just going to continue to be focused on making sure that we grow NOI. We're hopeful that the Street will begin to see that we've got a pretty good 2020 teed up for ourselves next year.
We've had a lot of investments this year, which you're seeing partial year effects. Next year, you'll see the full year effects of those. Yes, there's things that we're talking about that we're monitoring that we're working on regarding our coverage ratios. But I would also point you to our credit ratings. And our credit ratings have a lot of great things to say about our business model and just the benefits of triple net right now during these sort of down periods.
So business as usual in our from our book.
All right. Just a final one. Are there any dispositions that you are planning for the Q4?
So this is Kevin again. We have the held for sale assets, which are the 2 smaller Bickford communities. We would expect those to sell in the near term. You say Q4, will that close in the Q4? Maybe, might roll to the first.
We'll see just from a timing perspective. We didn't I think we classified the Brookdale assets as held for sale this quarter. So we expect those to be exercised early next year. So those are the ones that we're contemplating at this point. As we continue to evaluate our portfolios and just normal asset management, we continue to talk about where it makes sense for us to do some dispositions, but nothing else planned at this time.
All right. That's it for me. Thank you for taking my question.
Thank you.
Thank you very much. We'll proceed to our next
morning. Good morning. So, toughest question I had all day. So on the Bickford disclosure in the Q, you gave a new for the 14, you have a new escalator. What did that come down from?
It was a fixed 3% before. Now we have a CPI based escalator that is really on about half of the income as it relates to Bickford. So two leases have the new CPI escalator with a floor of 2% and a cap of 3%. So we'll get a minimum of 2% percent, but up to 3% in any given year.
Okay. And so the other one that you that happened on October 1, you don't give the floor and ceiling, but is it the same 2% 3%?
It is, yes.
Okay. All right. And is there so will you now have to report those on a cash basis because of the CPI component?
This is Kevin stepping in. So let me know if I'm overstepping, but there's still a straight line component because there's a minimum.
That's correct.
Okay. Okay. Just double checking on that. Now would you say reducing escalators, as we always say, the fortunes of your operators accrue to the REIT. And so I've always thought that many REITs got over their skis by announcing these huge escalators, which it was perhaps a shortsighted phenomenon.
Do you think you will see more of this in the way of sort of stepping back on your escalators as this are you done with it as it relates to Bickford or anywhere else in your portfolio as you see it today?
Hey, Rich, it's Eric. I would say that we're done with Bickford in terms of amending escalators. But in terms of new business, 2% is the new 3%. We agree that it's hard to stay ahead of 3% escalators in a low inflation environment or dare I say disinflationary environment. So, I think escalators that are CPI based and have collars are a much more equitable arrangement between landlord and tenant.
Okay. Agreed. And with regard to the ratings upgrade, congratulations on that first. Would you say when S and P was going through its process, it was mostly looking at your balance sheet? Or was it identifying also some of these other things that are going on around your portfolio, whether it's the 9 assets that you've transitioned, or Bickford or anything else, how much was that did that play a role in their thought process?
Or was it mostly a balance sheet sort of observation?
Well, that's really a question for them. But I can tell you this, they got to see a lot more than what we typically publicly disclose. We also went on property tours with them. And we definitely touched on a lot of points very deeply with respect to our portfolio. But how that played into their thinking, I'm not 100% certain.
I think you just have to ask them or read the report.
Okay. And then, I reckon the beginning of the call, you said, by the way, holiday is getting better. How much of that comment is a function of the restructuring that you did to improve upon coverage? And how much of it is stuff that they're doing to improve upon their revenue?
I'd say a little bit
of both. Keep in mind that we're really the only REIT that came through the restructuring with a lease that has credit intact. Sabra and New Senior both went to RIDEA and Ventas is still a work in progress. And I can tell you that Lilly and her team have done amazing things at their new headquarters in terms of adding systems, creating culture, all the stuff that works well in senior housing and in particular independent living. So, we're really happy for them and glad to be a part of their success.
Okay. And then last for me, the kind of disclaimer text around your guidance is almost a cut and paste from the Q2, which is perhaps a good thing, no news, good news or something. But I wonder if you have any beyond what was said in the release, any more visibility on the timeline about some of the 9 transitioned assets and when they might get back up to sort of a full pace of operations?
Hey, Rich, this is Eric again. I would say there's still a work in progress. The Indianapolis building just found its permanent home with Discovery. The Charlotte in Charlotte just opened after a massive remodel. So we would expect 2020 to show good progress, but I wouldn't expect those buildings to be stabilized or back anywhere close to our former rent until 2021.
Okay.
If I
had to draw ground.
So no change in terms of your future perspective of the 9 assets in total?
No. Okay. No. I think what we said before is that it
was going to be varies by community, but realistically an 18 to 24 month rebuild, so to speak, of NOI that was associated with those communities from the time in which they got their new home. So again, it's going to be staged in and just take some time to get back there.
Yes. So this is John again. We just come back to our 2020 thoughts that Eric mentioned in the beginning of his remarks, and that is we feel pretty good about it. We've got a lot of organic growth in our thought process that we don't usually see and transition properties are a part of that. We have a lot of partial year effects from our investments that will be full year effects next year.
And that also includes our the mortgage loans that we're making as well. A lot of those investments we announced in 2018 are being drawn upon this year. So we'll have better effects from those next year. And something a lot of people tend to overlook is we have this really terrific project up in Wisconsin with Ignite that's under construction. It's a little different project than we typically do because it's a lease construction project, But it's slated to be open in end of Q1, beginning of Q2.
And when it does, all of a sudden, we'll have some nice rents show up immediately from that. So there's a lot of green shoots out there for our 2020. And we're kind of giving you that narrative also knowing that we have these purchase options out there as well that we've got to overcome. So we're trying not to give you guidance here that we don't really firmly believe in.
Okay, fair enough. Thanks very much.
Thanks, Rich.
Thank you. We'll get to our next question on the line from John Kim with BMO Capital Markets. Please go ahead.
Thanks. Good morning. On the Bickford occupancy improvement, which was certainly positive and encouraging this quarter, can you comment on how this translates to EBITDA for Bickford? It sounds like the rate growth was lower. I'm not sure if that was on a gross or net basis after incentives.
And also, any commentary on expenses?
Sure. This is Kevin. As it relates to the rate growth, again, we saw modest growth over the quarter versus the peer group, but they still remain one of the leaders in those respective markets as it relates to rate and they've kept their discipline on price, which we're very happy to see. On the occupancy, I guess, what I would say to that is, these communities, particularly being smaller in nature, there's a certain amount of fixed cost that resides in there. So they to build the occupancy back up, you're still paying some of those fixed costs along the way.
Once you crest, and this isn't hard and fast, but generally speaking, once you crest about 85% occupancy, each next resident will add a fair amount to the bottom line. So what I would say is they've built occupancy back up. They've gotten back kind of above the area where they need to actually start building NOI. And as each quarter month and quarter that clips by, we should start to see that cash flow improve. Again, they still got to mitigate some of the things that we talked about like wage pressure, but we should start see that improvement flow through.
But it's still going to be a couple of quarters before that really translates to what we are able to display in our public filings.
Okay. But when you quote the rate growth for Bickford, is that on like a gross basis like the way the Nick reports it? Or is that like a net effective rent basis?
It is a we look at it from a revenue per occupied unit, which is pretty close to the way Nick displays it. I haven't given the number because it is not exactly the same. So I don't want to give data and present it as if it is the same, but it's really close. But it is a net revenue number of the revenue and all revenues that they receive from residents. That's how we think about it.
Okay. On the early indication of earnings growth next year, Eric, I'm assuming that assumes no rent restructurings or transitions next year. And I'm just wondering how much visibility do you have on that for next year at this time today?
Correct. It assumes no rent restructurings or dumpster fires.
But
and in terms of visibility, I always have my worry list, like I say. And I also always say that at any given time, 5% of our portfolio is experiencing difficulty and every year it's a different 5%. So, right now my worry list is pretty short. And as I was saying to Jordan, the Bickford worries are in late innings. They seem to be really on the mend.
And we have a couple of non material worries, but right now things look pretty stable.
And you also mentioned in your prepared remarks, you expect better organic growth next year. Can you just provide some more color on this means, just given some of the escalators are being modified?
Certainly. As John was pointing out earlier, we have this unique development lease, which you don't see a lot of in this business, where we're putting out money this year. And then once the building opens in February, March of next year, rent will begin in April. So that's a great example of organic growth. The total amount will be Well,
it's roughly at the $25,000,000 commitment at a 9.5 yield. So there's the rough math on that.
Yes. So there's some organic growth. We have the Sagewoods, and this is all detailed on Page 6 of the supplemental. We have the Sagewood loan that we're funding on an almost continual basis and that's a huge number. And that'll be paying interest in full next year.
So those two things alone are a pretty big part of my comfort level.
Yes. And then John, we had a lot of investments this year and those investments are partial year to FX this year and we'll get full year FX next year. So and then in addition to our normal organic escalator growth in addition to that, makes us feel pretty confident about next year. Finally, transition properties. Those, they're now they've got all got new homes.
They're all in different stages of rebuilding. And so we do expect them to provide some organic growth organic lift next year.
So improved organic growth and no dumpster fires. Got it. Okay.
Thank you. Yes, that's right. Exactly right. Okay. I can see the headline now, John.
Thanks a lot. Yes.
Thank you very much. We'll get our next question on the line from Daniel Bernstein with Capital One. Go right ahead.
Hi, good afternoon. I want to understand the process with the Brookdale leases, whether it's a purchase option. I guess those assets have been moved right to held for sale and you're marketing those assets for sale? And I guess a related question is Brookdale reported some pretty good numbers in the quarter. I wonder if there's anything in terms of the performance of those assets that has changed at all?
This is Eric, Dan. So the purchase option gives Brookdale the right to buy the buildings directly. And that's those are the discussions we're having with them rather than selling them to the market. So I can't speak for Brookdale, but we're modeling mid January, late January closing on those buildings. And I think we've been pretty clear that the purchase price, the proceeds will be in the high-30s, low-40s area.
And the way the purchase option works is there's a base amount in the lease. And then I think that base is 36,000,000 dollars 37,000,000 And then there is a fair market value component. So let's just say the fair market value was $42,000,000 and then there's a 50% sharing of the value, the upside between $37,000,000 $42,000,000 or $5,000,000 So they would basically be able to buy this portfolio at a $2,500,000 discount, if those were the numbers.
Okay. And then senior living communities, it sounds like the entrance fee sales season for them has been pretty solid. Is there anything indication that you can give in terms of whether the entrance fees they're charging this year are higher than last year as well, not just the unit sales are up, but the actual pricing?
Pricing has been pretty consistent for them. They're not ones that believe in discounting either. They'll do it in certain instances. If there's a unit that's been sitting there for a while, it makes sense to make a deal, so to speak, on a specific unit. But generally speaking, they've been trying to move pricing upwards.
It's frankly just been modest, because they do want to try and continue to improve occupancy and get some of these sales of the accumulated inventory that they have.
Okay. We haven't really talked much on the call about pipeline. It seems like there's been some fairly aggressive deals with private equity out there. Cap rates are a little lower than I would have expected. So are you seeing any pressure on cap rates could come in and investment spreads, whether that's seniors housing or skilled nursing?
I guess how confident are you that acquisitions will be there in 2020 and investment spreads that you like?
Well, I think your observation is correct. There has been some more at least more aggressive money than where NHI has transacted in the past. I feel like we've kept our discipline though as we look at new investments and we're not going to chase people to the bottom. I still feel good about our prospects and our ability to bring in business. It's not just a saying.
We do really focus on trying to make inroads with operators and establish that relationship. I feel like we still get a tremendous amount of direct referrals. So when you go to a brokered process or something that's going to be a big splashy headline, yes, we see all that stuff, but we're not the ones that are generally participating in those auctions. And we really rely on our relationships with the operators and being able to do direct deals to continue to drive business. And I still feel like we have a good team here, great relationships with our operators and be able to perform.
As Eric said, we'll be able to we should we expect to be able to do what we've done in the past. That hasn't changed.
Never say never on a portfolio, but the pricing might be.
Right.
That's all I have. We'll see you guys on the report. Thanks, Dan.
Thank you very much. And we'll proceed to our next question on the line. It's another follow-up question from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Hi. So I just follow-up on Bickford. You guys gave some good color. I'm just curious, did you guys can you give us a sense of when they push through their increases? Are they also sort of typically January 1st escalations or do they do anniversary?
This is an absolute, but generally it's in the Q1 normally in February when they do their escalations.
Because it's a short month.
Exactly right. Yes. That's the rest of the story there is it's a 28 day month. They bill on a per day basis. So they pass it through in the shortest month.
Okay. So you don't notice it as much?
Right. That's exactly right. They did. They've had good success with that. There's other operators that we work with and that we see that do that pricing model on a daily basis, and they have a similar tactic that they would do it in February and it works generally speaking works well for them.
Okay. And then the escalators in your portfolio that you're pushing through to Bickford, what's the timing on those?
The escalations for the 2 amended leases are January 1.
And the 3rd?
I'd have to get back to you on the exact timing. They're throughout I believe they're throughout the year, but we can get that information. But those 2 happen to be January 1.
And they will see an increase of CPI or with the floor 2% this January?
Correct.
To amended? Okay. And then in terms of the investment grade ratings for John, you touched on it, but I'm curious what's the impact here as you're thinking about it? So if you switched over to the credit facility to Toggle based on credit, what would the impact be right away on the credit facility? And then also how does this inform your view on permanent financing for the balance sheet and extending the weighted average maturity?
Sure. Thanks for the question, Jordan. So there's a slight increase in interest expense when we toggle, and that results from the facility fee on our revolver going up, partially offset by some of the spreads on our term loans going down, but it's not a complete offset. In terms of moving forward, we have probably say mid year need to term off some of our debt into something that's on our revolver. So, public bonds will be on the table as part of that assessment.
And these ratings allow us to have a much more definitive conversation about what that might look like for us. So that's very helpful. And but finally, I would say in terms of our interest rate risk, we don't have a lot of interest rate risk except for part of our revolver through 2021. And so we've got our eyes set on 2021 as part of LIBOR discontinuation to do some modification of these bank facilities anyways to address the index changes. So that's kind of our plan next year and then long term.
Okay. Thank you.
You're welcome. Thank you very much. And we have no further questions on the line. Please continue with any closing remarks.
Thank you everyone for attending our call today and we'll see many of you at NAREIT in Los Angeles next week.
Thank you very much. And that does conclude the conference call for today. We thank you for your participation. I hope you disconnect your lines. Have a great