Welcome to the National Health Investors third quarter 2022 conference call. At the start of the presentation, all lines will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference, you need to reach an operator, please press star zero. As a reminder, today's call is being recorded Wednesday, November 9, 2022. I would now like to turn the conference over to Dana Hambly. Please go ahead.
Thank you, and welcome to the National Health Investors conference call to review the company's results for the third quarter of 2022. On the call today are Eric Mendelsohn, President and CEO, Kevin Pascoe, Chief Investment Officer, John Spaid, Chief Financial Officer, and David Travis, Chief Accounting Officer. The results, as well as notice of the accessibility of this conference call on a listen-only basis, were released after the market closed yesterday in a press release that's been covered by the financial media. As a reminder, 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 or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call.
Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended September 30th, 2022. Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireit.com. In addition, certain items 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-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 our CEO, Eric Mendelsohn.
Hello, and thanks for joining us today. We continue to make progress on our portfolio optimization, and it showed in our strong third quarter results, which were ahead of our internal expectations. Our collection rate improved as tenant deferrals declined to $1.4 million versus $3.9 million in the second quarter. Since we announced our optimization plans in the second quarter of 2021, we have completed the sale of 32 senior housing properties for net proceeds of $296 million and had a cash NOI yield of just 2.7% and EBITDARM coverage of only 0.47 x. We're seeing the positive impact of the dispositions on our senior housing coverage ratios.
Trailing twelve EBITDARM coverage for the senior housing portfolio again showed improvement and has increased from 0.98 x to 1.14 x over the last two reported periods. Over the same time frame, Bickford's coverage increased from 0.82 x to 1.0 x, and our other needs-driven tenants improved from 0.79 x to 0.91 x. Adjusting for Bickford's April 1st rent reset, their coverage was 1.32 x. Please reference our business update published yesterday afternoon for more details. While the third quarter results exceeded our expectations, the operating environment for our tenants and the SHOP portfolio remains challenging, with labor and other inflationary pressures weighing on margins. As announced yesterday, we're maintaining our annual guidance for the year, which implies a sequential decrease in FAD.
We feel that this is prudent given the increasing interest rates as well as industry stress, which may lead to further dispositions, deferrals, rent restructurings, or tenant transitions in the fourth quarter. As noted in our business update, we're targeting additional asset sales with proceeds in a range of $50 million-$60 million. This includes 10 properties currently held for sale and certain other properties that are expected to be sold or moved into held for sale. Fortunately, our conservative financial policies and early and decisive actions to dispose of underperforming assets in a seller's market benefited us and has kept our balance sheet in excellent health. We ended the quarter with leverage in the middle of our targeted range at 4.5 x, and we've completed share repurchases totaling $152 million.
The acquisition market still strikes us as dislocated, though our pipeline discussions have been more actionable lately, so we expect that we will be able to announce some investment activity before the end of the year. We remain optimistic that outstanding deferral balances, rent restructuring, and tenant transitions should all contribute to better internal growth over the next few years as deferral balances are repaid and the restructured and transitioned leases move back towards market rates later next year and into 2024. We also continue to see significant NOI upside in the SHOP portfolio as margins start to rebound from historically low levels.
We are focused on concluding our optimization efforts and returning to growth. We continue to be bullish on the long-term industry fundamentals for senior housing and Skilled Nursing and are fortunate to be in a position of considerable financial strength to navigate through the near-term macro headwinds and capitalize as these industries recover. As always, we'll continue to provide transparency to the market on our progress along the way. I'll now turn the call over to John to discuss our financial results and guidance in more detail. John?
Thank you, Eric. Hello, everyone. I want to highlight our 2022 accomplishments with all our capital providers and punctuate our commitment to utilizing our capital effectively. This year will be a record year for returning capital to our shareholders while maintaining an industry-leading strong balance sheet. For the year-to-date, including our just-declared fourth quarter dividend, NHI has returned $312 million to our shareholders. Since year-end 2020, we've also reduced debt $377 million. I plan to talk more about our 2023 maturities in a moment. We remain committed to the senior housing industry. However, our continuing financial strategy this year is to position ourselves to be opportunistic as we move through the dramatic macro changes which are unfolding in real time before us, namely increased inflation, higher interest rates, and cap rates.
We believe that when cap rates materially rise, which we believe must happen in this rising inflationary and interest rate environment, then we are very well positioned to be responsible, responsive to our rising cost of capital and to deploy FAD accretive investment. If during 2023 the economy cools, inflation subsides, and interest rates roll over and cap rates don't rise or even compress, then we are equally well-positioned. The theme for us this year is to be well-positioned either way. I'll now turn to our third quarter results before talking a little bit more about our guidance for the remainder of the year. For the third quarter ended September 30th, 2022, net income attributable to common stockholders per diluted common share was $0.78. NAREIT FFO and normalized FFO per diluted common share were $1.04 and $1.06, respectively.
Adjusted NOI and FAD were $62.1 million and $47.4 million, respectively. Our new SHOP segment's adjusted NOI was steady at $2.8 million as compared to the second quarter's $2.9 milliont , but slightly less than we forecasted for the quarter. All in all, we're on track to meet our updated August guidance, which we are reiterating today. At the end of October, we had the full amount available on our revolver. We have three upcoming maturities in 2023 totaling $415 million. You'll see us initially retire the first $125 million note due in January using proceeds from our revolver. We will be working toward a new debt facility in 2023, and we'll keep you apprised of our strategy and progress. Our lender and credit agency relationships continue to be supportive.
In fact, in October, Moody's improved their outlook on us up to stable. Our three investment-grade credit ratings recognize that we continue to be committed to our financial policy. As of September 30, our total debt was $1.1 billion, of which 78% was fixed-rate debt. More than likely, this percentage will decline as we move into and through 2023. However, some of the increase in variable rate debt will be offset by additional asset sales, as we've previously mentioned. At 4.5x, our net debt to adjusted EBITDA ratio was in line with our expectations and our 4x-5x leverage ratio policy. We managed to achieve this conservative ratio while at the same time repurchase almost 2.5 million shares of NHI stock this year.
As a result of our stock repurchase activity, using our current dividend rate of $0.90 per share, we are annually distributing approximately $8.9 million less in aggregate dividend, and our dividend payout ratio, based on normalized FAD as of September 30th, is at a comfortable 82.4%. Turning now to our guidance. A few items made it difficult to narrow our guidance for you this quarter. The timing of some of our dispositions and the recognition of any gains or additional impairments is one variable. Another variable is the identification of additional disposition, which may result in additional impairments, straight-line receivable write-offs, and changes to straight-line rent revenues. These items are all non-cash items and are normalized differently between NAREIT FFO, FFO and FAD.
Finally, compared to the third quarter, we do expect to see slightly higher fourth quarter rent concessions and higher Q4 interest expense. We can continue to be comfortable with our guidance range for all of these metrics. With that, I'll now turn the call over to Kevin. Kevin?
Thank you, John. I'll concentrate my comments on the pipeline activity as well as our major asset classes and operators. Starting with an update on our pipeline, the third quarter was quiet from an investment standpoint. The pipeline is definitely more active than it had been in recent quarters, which is encouraging, and we expect to announce some investment activity this year. More generally, we have yet to see material pricing changes despite the significant increase in financing costs.
As John noted, we expect that cap rates must increase and that we are in a strong position to deploy capital as that happens. Moving on to our senior housing need-driven portfolio. This group accounts for approximately 28% of adjusted NOI and is where most of our optimization efforts have been focused and will continue to be focused in 2023. As Eric mentioned, we are seeing results from the optimization in our coverage ratios. EBITDARM coverage for this group improved from a low of 0.8 x in the fourth quarter period to 0.96 x in the most recent period. This was driven in large part by improvements at Bickford, but we also had better coverage across the balance of the need-driven portfolio.
While the Bickford enterprise copes with the current industry operating challenges, NHI has worked diligently to better position our lease portfolio through strategic asset sales and rent restructuring, which has improved the pro forma EBITDARM coverage to 1.32 x. We are working on the sale of certain other Bickford properties, which should further improve coverage and does not impact our in-place rent of approximately $28 million annually. As for our discretionary senior housing portfolio, this group accounts for 29% of adjusted NOI, including 26% from our entrance fee communities. The entrance fee portfolio continues to perform well as it has throughout the pandemic. SLC, our largest tenant, had EBITDARM coverage of 1.25 x, which improved from 1.22 x in the sequential period.
Occupancy improved 100 basis points in the third quarter to 83.3% and is 280 basis points higher than pre-pandemic levels. Our senior housing discretionary coverage, excluding SLC, declined sequentially from 1.8 x to 1.7 x, but we are comfortable with operator performance and the underlying tenant credit strength. We are mindful that entrance fee properties are more correlated to the housing market than other senior housing products, so have been monitoring these markets in our entry fee geographies and have not experienced any meaningful impact at this point. Continuing with Skilled Nursing, the SNF portfolio, which represents 33% of annualized adjusted NOI, continues to have solid EBITDARM coverage at 2.47 x, including 3.24 x at NHC and 1.97 x for other SNF operators in our specialty hospital.
The year-over-year and sequential decline in the coverage is driven primarily by NHC, whose corporate level fixed charge coverage ratio has been impacted by a decline in revenue from federal government stimulus programs. NHC remains an excellent credit and along with the Ensign Group anchors our SNF portfolio. Our five other SNF operators, which represent approximately 7% of adjusted NOI, have received minimal rent concessions since the pandemic began, and we did not provide any SNF related deferrals in either the second or third quarter. As previously announced, we sold seven NHC properties for $43.7 million and amended our master lease on the remaining 35 NHC buildings. The amendment shifts a substantial portion of the rent from the seven sold properties to the remaining lease.
The dispositions were cash flow negative to NHC and not core to their portfolio, so we viewed this as an attractive IRR opportunity that assists our tenant, provides immediate capital to NHI at an attractive price, and preserves a significant percentage of rental income from NHC through the maturity of their lease. Lastly, our SHOP portfolio, which represents 5% of adjusted NOI, saw occupancy increase 40 basis points sequentially to 76.9%, while RevPOR declined slightly. The lack of RevPOR growth is by design as we've been using price as one tool to drive census growth. Operating expenses experienced similar inflationary pressures as the rest of their industry and caused NOI margin to decline from 24% in the second quarter to 23.1% in the third.
While the third quarter results were slightly below our expectations, we still see significant NOI upside over the longer term, driven by occupancy and margin improvement from historically low levels. As I've noted in previous calls, many of the external growth opportunities in senior housing are RIDEA type deals, so we want to make sure we have our infrastructure in place before we start growing this strategically important platform. With that, I'll hand the call back over to the operator to open the line for questions.
Thank you. If you would like to register a question, please press one followed by the four on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you would like to withdraw your registration, please press one three. One moment please for the first question. Our first question comes from the line of John Kim with BMO Capital Markets. Please go ahead.
Thanks. Good morning. On the 10 assets held for sale, can you just share any more characteristics as far as what type of asset and if it's concentrated in a particular operator? Also if you can confirm what the CapEx would be, because it looks like on book value it's about 8%, but on the $50 million-$60 million that I think Eric mentioned, it's closer to 5%.
Hey, Kevin, you wanna get that?
Yep. John, I think the thing to focus on here is that. One, they're gonna be mostly senior housing assets, more on the need-driven side. They're gonna be ones that are just not really working for the operator right now. It's across several other operating partners, primarily where we're doing some of our deferrals and what you saw in the third quarter. These are not yielding what the contractual rent is, and we don't really think that they're going to recover. You know, I think the profile. Think of them as more of smaller markets, geographies where the labor is gonna be a little more challenged and ones where, again, we just don't feel like they're gonna recover quite as quickly, so we think it's in our best interest to move on from them.
I'm just trying to get a sense of how much of an impact it would have in earnings on the sale.
Well, this is John. Let me take that one. What we've been doing is, you know, managing down the deferrals we keep having to talk about, the concessions we keep bringing up, and we're succeeding at that. At the same time, you know, we're thinking about these as sort of trapped investment dollars. We get the proceeds in, you see the yield, you know, that we talk about. For example, in our business update, you'll see a yield that's going out at 2.7% or something like that, very low. You know, we're paying off debt and doing other things with it, which turns out to be very accretive. We're entering into these sort of transactions, you know, to improve ourselves and to get growth back.
You mentioned selling a number of assets this year in a seller's market. Can you just describe the environment today and also how the buyer composition looks like today for asset sales, whether it's PE operators or other types of buyers?
Kevin, you wanna get that?
Sure. I would say it's still mostly smaller groups, PE firms where they're investing their own capital. It is a little more challenging now than it had been earlier this year, so getting deals across the finish line is taking a little more time. We were seeing that anyway, just because some of these buildings are turnarounds and a little more challenged to get some financing in place. Financing now is even more difficult to come by, so we're seeing the horizon move a little bit in terms of getting them closed. They're also having to bring more equity to close the deal.
It's gonna be a slower pace to get these out of the portfolio, but they still are ones where we're seeing offers come in, we're seeing people, you know, we're seeing groups that have capital come to the table. It just takes a little more time to get them out.
Okay. Then my final question is on your SHOP NOI, which declined sequentially, but you're talking about margins at low levels, and that's rebounding, you know, maybe pushing rent a little bit harder when you have to move unit up. I was wondering how you see the next few quarters progress, just given the continued expense pressure and the recent decline in occupancy levels.
This is Kevin again. The key here is to really rebuild the funnel. That is what our operating partners are focused on to get more leads, drive the leads to the building and get them closed, which again, is why we mentioned that you're not seeing that increase in RevPOR. The expense growth is something that we're mindful of, but again, the real opportunity here is to get move-ins and move the occupancy needle, and then we'll be able to see more RevPOR growth. We feel like over the last six months, they've done a really good job of getting into the buildings, assessing talent. There's still some things they're doing inside the communities to make sure that they're getting the right talent in place and hiring some more leadership, and instilling their culture.
We're seeing that tide turn and seeing more inquiry volume, so good leading indicators. Clearly, they need to get the move-ins and move occupancy, but that is really the focus here.
Thank you.
Once again, to queue up for a question, please press one four on your telephone keypad. Our next question is from the line of Stephen Mea with Credit Suisse. Please go ahead.
Hi, this is actually Jonathan Hughes and Stephen Mea on for Tyler today. My question is, I think Kevin mentioned that there were some additional Bickford properties that you guys identified for disposition. Just curious if that was part of the, I guess, the original portfolio optimization plan. If it wasn't, then I'm just curious, I mean, just on the overall state of Bickford and I guess how you guys feel about collecting on the deferrals balance over time.
Hey, Kevin, I'll take this one. This is Eric. The two buildings were not in the original plan, but we
Got an unsolicited offer for them, and it made sense to take advantage of that. Speaking of deferrals, we got our first payment on our deferral balance from Bickford this month. It's not a third quarter event, but it is a fourth quarter event. We're starting to see funds from that trickle in, and we're very pleased by that. I think you can see that the pro forma coverage for our Bickford portfolio is very strong at 1.32x.
Got it. If I mean when I look at the occupancy trend, it seems like it's in good standing, but I guess during third quarter, it has been declining. Are there any concerns on that front?
You know, we pay very close attention to that, obviously. In our business update, we show you a comparison of the Bickford occupancy versus the NIC MAP occupancy, which is all other competition blended together. Bickford compares favorably. I would also point you towards Brookdale's recent earnings release that showed they had a plateau of occupancy this past quarter. What's happening with Bickford is an industry-wide event. We're looking for an occupancy pickup. Typically, that happens around Thanksgiving when people go home and see their parents and realize they need to do something quickly. Stay tuned.
Got it. My last one, I just wanted to revert back to the SHOP portfolio. I guess what are you guys seeing on the agency labor side, and what are you guys trying to do to mitigate those pressures going forward?
Kevin, you wanna take that?
Well, the lucky thing for us as it relates to agency labor is that we're not delivering healthcare in these communities, so we're not having to go out and get nurses or CNAs or, you know, caregivers. The agency pressure is much less in this portfolio than it would be in, say, a Bickford type community. There is still agency, but we're not seeing that as a major factor in our mix.
Thanks, guys, for the color.
Thank you.
We appear to have no further questions on the phone lines.
All right. Thanks for joining us today, and we'll look forward to seeing everyone at NAREIT next week in San Francisco.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.