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National Health Investors Inc  (NYSE:NHI)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 12:00 p.m. ET

Contents:

Prepared Remarks:

Colleen Schaller -- Director, Investor Relations

Hello, everyone. This is Colleen Schaller, Director of Investor Relations. Welcome to the National Health Investors Conference Call to review the Company's results for the fourth quarter of 2018. On the call with me today is Eric Mendelsohn, President and CEO; Roger Hopkins, Chief Accounting Officer; Kevin Pascoe, Chief Investment Officer; and John Spaid, 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 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-K for the year ended December 31st, 2018. Copies of these filings are available on the SEC's website at www.sec.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-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 Eric Mendelsohn.

Eric Mendelsohn -- President & Chief Executive Officer

Thank you, Colleen. Today, I'll talk about the opportunities and challenges NHI will execute on through 2019. Since our Q3 earnings release, we've closed a number of new investments and completed the Holiday restructure including the acquisition of the Vero Beach building. Our pipeline is as active as I've ever seen it with some distressed product as well as stabilized. Our focus on operator relationships and our low cost of capital are significant contributors to our activity. Our challenges this year come from the 5% of troubled operators that you've heard me speak about in the past. Let me first say that the operator that we entered into a forbearance agreement with in 2017 is doing great and we recently ended the forbearance agreement with them. We're delighted with their progress and are looking forward to growing with them in the future.

During Q4, we took possession of the three communities that were part of the litigation we continue to have with the affiliates of East Lake Capital. We've entered into transition and management agreements on two of the communities and an interim manager is in place on the third. We continue to have security deposits in place to offset the ongoing transition costs and expect to show positive momentum on the communities as the year progresses. At this time, the trauma inflicted by the previous operator was severe and we cannot give you a firm assessment on how quickly these properties will return to the form of cash flow, but we expect to have a much better picture to share with you during our Q1 call.

We also previously mentioned, there are two other operators that we're having difficulties with. The first one is the single property operator in Wisconsin that we expect to transition during Q1. This property is financially supported with deposits and the operator guarantee, mitigating the impact as the property is transitioned. The second operator situation is more uncertain at this time and more difficult for us to give you a definitive outcome. It consists of five memory care buildings run by Autumn Leaves. We are in talks to forebear LaSalle (ph) which includes failure to pay rent, but their continued ability to operate those communities is not certain. We are giving them some time during which they will either perform or we will move on to plan B.

Moving on to our opportunities, we're extremely excited to enter into a new investment with LCS on a project very similar to our Timber Ridge project in Issaquah, Washington. LCS and their entrance fee product continues to experience very robust demand. The new LCS Sagewood Phase II development is substantially pre-sold. We also announced two new relationships with Ignite and Wingate, both have interesting strategies around skilled nursing, which Kevin will talk about more in a moment.

As we gave guidance for 2019, we reflected on the challenges and the opportunities in front of us. It's my strong desire to continue to under-promise and over-deliver and this year is no exception. The entire NHI team is committed to making that happen by executing on our opportunities and by quickly addressing the challenges I previously mentioned. We will keep you well informed over the coming quarters on how we're doing.

With that, I'll turn the call over to Roger. Roger?

Roger R. Hopkins -- Chief Accounting Officer

Thanks, Eric. Hello everyone. Eric has just described the challenges we faced late in the fourth quarter with three tenants, which collectively accounted for 3.6% of our total revenue in 2018. Payment defaults on our lease agreements occurred, we engaged outside counsel to assert and protect the interests of our shareholders. We charged the escrow accounts of these tenants, a total of $2.5 million at year-end for payment of delinquent property taxes and our legal expenses including $135,000 for a portion of unpaid December rent associated with the repossession of three facilities leased to SH Regency Leasing and affiliate East Lake Capital.

We will pursue all measures to maximize the collection of originally scheduled cash rent of $10.6 million in 2019 plus the recovery of all expenses we incurred in the process of ensuring compliance with our lease agreements. We will also exercise our rights under agreements with personal guarantors to recover expenses and unpaid rent to us. Finally, we will transition leased operations to new tenants or third-party managers when we believe it is advisable. The situations we have described did not have a material impact on our planned financial results for the fourth quarter and full year.

In December, we announced $205.3 (ph) million in mortgage and construction financing with two operators bringing the total announced investments in 2018 to $364.4 million (ph). Last month, we announced $90.2 million in purchase leasebacks, so 2019 is off to a great start. We also have nearly $160 million in loan and development commitments described in our 10-K, which will be funded primarily in 2019.

NHI's management is focused on resolving the disruptions caused by the three tenants in default and on executing accretive new investments in our priority pipeline. For the fourth quarter of 2018, normalized FFO per diluted share declined to $1.35 from $1.37 (ph) in the same period one year ago, because of the recognition of straight-line rents for GAAP purposes, which was $4.2 million in the fourth quarter of 2018 compared to $7.1 million in the same period last year.

Normalized AFFO increased 4% to $1.27 per diluted share compared to $1.22 (ph) in the fourth quarter one year ago. For the full year, normalized FFO increased 3.2% to $5.46, normalized AFFO increased 6.1% to $5.04 per diluted share. As I've described on previous calls, at NHI we are more focused on the growth of AFFO because we exclude the accounting convention of straight-line rents, which tends to make comparability from period-to-period less useful. Furthermore, we believe AFFO is the best quarterly and annual indicator of growth in our portfolio and demonstrates our ability to increase quarterly dividends to shareholders.

NHI's total revenues for the fourth quarter and full year were $74 million and $294.6 million, which were 4.2% and 5.1% (ph) increases respectively over the same periods in 2017. These increases reflect good investment volume in both new deals and in the utilization of our capital to accomplish sizable renovation projects for tenants at our facilities, which automatically boost our lease revenue. Further, we are purchasing new buildings for our portfolio or renovating existing ones, we encourage our operators to maintain facilities, which are up-to-date and with appearances and finishes that today's seniors expect. We make acquisitions and provide funding for new construction and renovations by deploying a careful mix of debt and equity to maintain our low leverage profile as John will explain shortly. This approach has allowed NHI to access new debt and equity capital from both public and private sources. Our 2018 increases in interest expense and depreciation expense are reflective of our growing portfolio.

Our general and administrative expenses declined 8.3% to $2.8 million in the fourth quarter compared to $3.1 million in the prior year and increased only 2.5% for the full year to $12.5 million. These increases were only 4.3% of total revenues for 2018 and compared to 4.4% for the prior year. Our non-cash share-based compensation was $359,000 for the fourth quarter and $2.5 million for the full year. Approximately 60% of our annual non-cash compensation expense occurs in the first quarter due to vesting schedules.

Moving on to our dividend. This morning we announced a 5% increase in our quarterly dividend to $1.05 per outstanding share. We currently estimate our normalized FFO payout ratio for 2019 will be in the mid 70% range and our normalized AFFO payout range will be in the low to mid 80% range. These ratios may fluctuate throughout the year as we manage through our properties in transition.

As for our guidance in 2019, while we have significant new business and a robust schedule of funding commitments for 2019, the uncertainty over the three tenants in default described earlier makes us very cautious to estimate the expected growth in our non-GAAP financial metrics for 2019 as shown in our earnings press release this morning. We currently estimate normalized FFO will be in a range of $5.43 to $5.53 per diluted share for 2019 while we estimate normalized AFFO will be in a range of $5.04 to $5.10 per diluted share. These estimates include our expected new investments, the funding of our ongoing commitments mentioned earlier, and the composition of new debt and equity capital to properly align our capital resources for growth and maintaining low leverage. We will adjust our guidance as we are able to estimate with more certainty, the resolution of defaults among those tenants described earlier.

I'll now turn the call over to John Spaid, who will discuss our uses of debt and equity capital. John?

John Spaid -- Executive Vice President, Finance

Thank you, Roger. For the quarter ended December 31st, our debt capital metrics were net debt-to-annualized EBITDA 4.5 times; weighted average debt maturity at 5.3 years; and fixed charge coverage ratio of 5.6 times (ph). For the year ended December 31st, our weighted average cost of debt was 3.9%. NHI ended the fourth quarter with $84 million outstanding on our revolver leaving us with $466 million in available revolver capacity.

Turning to our ATM program, during the fourth quarter we sold 444,291 shares of our common stock. The shares were sold at an average price of $77.69 per share resulting in net proceeds after commissions of $34 million. Proceeds were used to reduce our revolver debt. After our fourth quarter ATM activity, we have approximately $192.4 million in capacity remaining under our shelf facility. With our leverage currently at the midpoint of our 4 times to 5 times (ph) net debt-to-EBITDA ratio, NHI continues to be well positioned for future accretive investments.

I'll now turn the call over to Kevin Pascoe to discuss the portfolio. Kevin?

Kevin Pascoe -- Chief Investment Officer

Thank you, John. Looking at the overall portfolio, at the end of the third (ph) quarter, the EBITDARM coverage ratio was 1.64 times, senior housing was 1.19 times, and our skilled portfolio was 2.58 times. Taking a look at our larger operating leases, Bickford Senior Living represents 18% of our cash revenue and has an EBITDARM coverage ratio of 1.1 times for the trailing 12 months ended September 30th. This EBITDARM calculation now exclude two smaller properties held for sale, which will be a net positive for Bickford once sold. The four remaining developments continue to lease up nicely on or ahead of schedule and add additional cash flow to the Bickford portfolio. These development properties excluded from same-store have a T12 EBITDARM coverage of 1.4 times as of the third quarter ended 2018. It is anticipated two of the four development properties will be rolling into the same-store coverage calculation next quarter.

The portfolio we purchased in mid-2018 in Ohio and Pennsylvania continues its transition into the portfolio. The capital improvements are nearly complete and Bickford will be well positioned to compete with these properties going into the spring selling month. Our relationship with Senior Living Communities represents 15% of our cash revenue including net entry fee income, their EBITDARM coverage ratio was 1.28 times on a trailing 12-month basis as of third quarter-end. We have agreed with SLC to take over the Charlotte property we took back from East Lake and we'll be working with SLC to reposition the asset, which is currently non-operational. We expect to reopen the building in late second quarter as a Class A asset similar to the high-end assets we have in our SLC portfolio.

Looking at National HealthCare Corporation, our partnership with NHC accounts for 14% of our cash revenue and had a corporate fixed charge coverage of 3.66 times. Holiday Retirement, which represents 14% of our cash revenue, had an EBITDARM coverage ratio of 1.17 times. The third quarter saw net positive move-ins and occupancy for the quarter average 89.2%.

Earlier this month, we announced the purchase of the Isles of Vero Beach, a senior living community in Florida owned by an affiliate Holiday Retirement. The community consists of 157 independent living units and 75 assisted living units. It was acquired for $38 million as a part of our lease restructure and will be leased back to an affiliate of Holiday for $2.6 million annually and added to the amended master lease announced in November of last year. The annual lease escalators began in November 1st, 2020 and vary between 2% and 3% of current rent based on an average (ph) revenue growth on our Holiday portfolio. This purchase was accomplished as part of the restructuring and extension of the Holiday amended master lease. As a result of this purchase and in consideration of the terms of the amended master lease, Holiday has made a cash payment to NHI of $17.1 million and relinquished $10.6 million in a cash security deposit. Beginning February 1st, 2019, annual cash rent for the portfolio was $34.1 million. Trailing 12 EBITDARM coverage on the Holiday portfolio would be 1.25 times as of third quarter-end adjusting for the impact of the recent lease amendment.

Moving on to other new investments, we are delighted to expand our relationship with Life Care Services. In December, NHI committed up to $180 million to recapitalize and finance the expansion of Sagewood, a 567 unit Continuing Care Retirement Community in Scottsdale, Arizona. At closing, NHI funded $86.8 million of this commitment. The Class A CCRC currently consists of 316 independent living units, 44 assisted living units, 28 memory care units and 78 skilled nursing beds, and the project will fund the completion of a 101-unit independent living expansion. Serving the greater Phoenix/Scottsdale area, the existing independent units have approached 100% occupancy in 2018 and the expansion is 96% presold. The borrower is a joint venture between Westminster Capital and LCS. The financing includes a $118.8 million senior loan and a $61.2 million construction loan with proceeds from the entrance fees of the new expansion to be applied to the construction loan balance. The senior loan has a 10-year maturity and a 7.25% interest rate that escalates 10 basis points per year after the third year of the loan. The construction loan has a five-year maturity and an 8.5% interest rate.

Also in December, we announced a commitment to finance the development of a 144-bed skilled Nursing Facility in Oak Creek, Wisconsin, near Milwaukee, for a commitment of $25.4 million with a 9.5% initial yield. The yield earned during construction will be capitalized into NHI's investment. The initial funding under the commitment totaled $4.7 million. Construction is under way and expected to be completed in the second quarter of 2020. A 12-year lease term begins post-construction with two 10-year renewals and a 2% annual escalator. In addition, there is a $2 million earn out based on the operator meeting certain metrics in 2024 and 2025. The facility, Ignite Medical Resorts Oak Creek, will be operated by a tenant entity owned by affiliates of Villa Healthcare and Ignite Medical Resorts. We are excited about owning new skilled nursing product and also Ignite's hospitality focused operating strategy while taking on medically complex patients.

In January, we announced the purchase and leaseback of the senior living campus, Wingate at Silver Lake in Massachusetts for a total investment of $50.3 million. The lease has a 10-year maturity with three, five-year renewal option and an initial annual lease rate of 7.5% plus annual fixed escalators. NHI has committed up to $1.9 million for agreed-upon capital improvements to the campus over the next two years, which we added to the lease base. The campus, located south of Boston in Kingston, consists of three separate buildings with 34 independent living units, 69 assisted living units, and 164 skilled nursing beds. The operator, an affiliate of Wingate Healthcare, is a family owned business that has been in operation for over 25 years and currently operates 37 communities predominantly located in the Northeast. We like Wingate campus approach to senior housing.

Turning to our pipeline, we saw an increase in activity during the second half of the year in both senior housing and skilled nursing opportunities, which we're able to turn into accretive transactions with high quality operating partners. As Eric mentioned, the current pipeline is very positive (ph) and we feel very positive about our ability to continue to make accretive investments.

With that, I'll hand the call back over to Eric.

Eric Mendelsohn -- President & Chief Executive Officer

Thank you, Kevin. And with that, we'll open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question coming from the line of Chad Vanacore with Stifel. Please proceed with your question.

Chad Vanacore -- Stifel -- Analyst

All right. Thanks and good morning all. So how much recovery of these non-performing leases is assumed in 2019 guidance. Any additional details on changes in rent assumptions or a rough timeline could help us with modeling?

Eric Mendelsohn -- President & Chief Executive Officer

Sure, Chad. This is Eric. As you noticed, our guidance range is very wide. So we've -- the low-end of the guidance assumes very little rent and the high-end of the guidance assumes medium amount of rent based on the previous rent amount.

Chad Vanacore -- Stifel -- Analyst

All right and Eric, you had mentioned that one property you are already transitioning to, I assume that you're getting rent from that. Another property is going to be offline for a little while, are you putting some CapEx, can you give any more details around those?

Kevin Pascoe -- Chief Investment Officer

Sure. This is Kevin. Yes, the Charlotte community that we have that would be leased to Senior Living Communities is currently being repositioned. We're going to provide CapEx dollars and then lease the community to them. So there will be a period of time where there is a lease-up for that community and very minimal rent coming off of what goes through the lease-up, but we're going to reopen that as a repositioned asset that will be much improved physical plant from what we took back over.

Chad Vanacore -- Stifel -- Analyst

All right. Kevin, did you say that that was offline right now, the building is dark and then you're going to have SLC go out there and lease it up?

Kevin Pascoe -- Chief Investment Officer

Yes, that is right.

Chad Vanacore -- Stifel -- Analyst

Okay. And then, it's going to reopen, did you say second quarter, I couldn't hear you on that initial comment?

Kevin Pascoe -- Chief Investment Officer

Yes, it should be later in the second quarter is what we're expecting at this time.

Chad Vanacore -- Stifel -- Analyst

Okay and then just thinking about the progression of earnings throughout the year. Is it fair to assume that we should expect a dip in the first quarter of '19 before recovery later through the year?

Roger R. Hopkins -- Chief Accounting Officer

Chad, this is Roger. You should probably foresee a dip in the first quarter and as you know that is a period of time where we also issue our annual stock option awards. So there's a natural dip there due to vesting of a good portion of those in the first quarter and we will be continuing to work through the three tenant problem that we've described.

Chad Vanacore -- Stifel -- Analyst

All right. So, one of those issues was with East Lake that's got three properties but you're moving one. What's resolved this quarter? What's left to be dealt with on that front?

Eric Mendelsohn -- President & Chief Executive Officer

So we've got two of the three under new arrangements with new operators. We have an interim operator on the third community that we took back. We will have a -- we're working toward finalizing (technical difficulty) now and we'll be able to give an update on that in the next call.

Chad Vanacore -- Stifel -- Analyst

All right. I will hop back in the queue. Thanks.

Eric Mendelsohn -- President & Chief Executive Officer

Thanks, Chad.

Operator

Thank you. Our next question coming from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Hey, guys. Good afternoon. Wanted to just come back to the guidance a little bit, it seems that there -- you've got the year-to-date investment activity baked in, but -- and maybe some additional activity, I just want to clarify what you're guiding us toward in the release here?

Roger R. Hopkins -- Chief Accounting Officer

This is Roger. We do have a line of sight on investment in the first half of this year. We've already announced $90 million so far in January. We had good volume last year, which (ph) there will be a spillover effect this year and about $160 million of commitments to loans and leases, the majority of which we will fund this year. As mentioned, first quarter is tempered by the fact that a good number of the stock options that are awarded to our employees each year will vest in the first quarter and we're working through the three tenant problems that we have outlined and so those are going to take a little while to resolve in the first quarter and we think we'll have much more clarity on the direction of those three portfolios by our May conference call.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

But specifically, you're saying there is an incremental $160 million of funding baked into the guide or is that include the $90 million you've already done or --

Roger R. Hopkins -- Chief Accounting Officer

It does, it does include the incremental investment of $160 million in commitments over the year and --

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

In addition to the $90 million?

Roger R. Hopkins -- Chief Accounting Officer

Yes and we have -- we've been very conservative because there's a lot of unknowns with respect to the three portfolios that we've described and we're working very diligently on those portfolios and we expect to have more clarity in May.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Roger, what portion of the $160 million comes from the remaining to be funded amounts under your -- the investments that were made in 2018, that $136 million or $137 million that's remaining?

Roger R. Hopkins -- Chief Accounting Officer

Well. For example, Kevin described our new investment with LCS (multiple speakers) on the Sagewood property and we've got approximately $93 million (ph) yet to fund on that the majority of which would occur in 2019. We also have construction commitments to Bickford Senior Living, which will be funded monthly. We've got several renovation projects. We mentioned the new tenant Ignite Medical Resort, we'll be funding construction there this year, remaining of about $20 million.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. So, it sounds like the bulk of the $160 million is comprised of your existing funding commitments, just having to fund?

Roger R. Hopkins -- Chief Accounting Officer

That's exactly right and the majority of which we believe will occur in calendar 2019.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay and then maybe while I have you, Roger. The -- just taking a little bit of a different angle on Chad's line of questioning there. Can you maybe walk us from 4Q to 1Q in terms of revenue from those three combined tenants that are troubled as you described them. So, if those three tenants amount to roughly $10 million of total rental income on an annualized basis, how much did you book in 4Q, is that a $2.5 million number from those few tenants and then how much will you be booking in 1Q?

Roger R. Hopkins -- Chief Accounting Officer

Well, let me take just a little bit different approach with it because I examined the revenue that we lost from those three tenants. We couldn't expect what would occur that did occur and so let me just give you a little context. In the case of the East Lake portfolio as we described in our 10-K, we took possession of two buildings on December 7th and then we took possession of the third building on December 14th. We had been in litigation for over a year, it was completely unpredictable as to when we would be able to take possession and then Eric and Kevin have described our strategy with respect to putting new operators in those facilities. So we had a loss of revenue in December related to East Lake with regard to a small one property operator, we did not --

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Can you quantify that? You just say, you just didn't collect rent for December?

Roger R. Hopkins -- Chief Accounting Officer

Yes, the cash rent and straight-line rent together would be approximately $320,000 that was not collected, which we could not foresee.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay.

Roger R. Hopkins -- Chief Accounting Officer

Okay. The second one was a one property portfolio...

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And would you -- sorry -- and so, you would say you collected $640,000 from that tenant in the quarter, because you got October and November?

Roger R. Hopkins -- Chief Accounting Officer

I don't have the exact numbers in front of me...

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay, I can follow-up with you offline.

Roger R. Hopkins -- Chief Accounting Officer

Sure.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

It's fine, but I think for the sake of the community it would be helpful because you obviously, I know this is -- and Eric, you describe them as a small amount or 5% of your tenants that you have exposure to causing this disruption, but it is disruptive to the earnings and we're trying to obviously model this, some of this is known activity as it relates to you guys, I know there's color in the K, but there's not -- the level of detail that would be helpful to be able to sort of project your earnings throughout the rest of this year and if we get a little bit more granularity it might help?

Eric Mendelsohn -- President & Chief Executive Officer

Sure.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And then my only other question there is, do you still have one property left with East Lake? Is that the CCRC? What's the status there?

Kevin Pascoe -- Chief Investment Officer

Sure. This is Kevin. We have two CCRCs that were leased to an affiliate of East Lake that are then sub-leased to an operator Watermark Communities, who is a high quality operator doing a good job. Those buildings are doing fine. So, they are not the operator of those buildings.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. Those are going to stay in place?

Eric Mendelsohn -- President & Chief Executive Officer

Yes. They are still in place and performing.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay and then my last question for you is what's in the guidance as it relates to holiday's rent? I think there was a rent -- you talked about the rent cut being to $31 million in cash rent for beginning January 1, '19, but what's the straight-line rent?

Roger R. Hopkins -- Chief Accounting Officer

Jordan, this is Roger. We may have to discuss that offline because I don't think I have a number readily available for that. We do have (technical difficulty) disclosure however about cash rent we expect from Holiday, which will be $31.5 million (ph) this year plus the property in Vero Beach, which we acquired on January 31st, that has first year rent of $2.550 million.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

I get it. Just a very big delta between 2017 -- sorry, '18 and '19 rent coming from that large tenant and you did recast that lease in the amendment and that will materially impact that straight-line rent number, which is how we get to the FFO guidance that you provide, which is that $5.43 to $5.53, you know, every $400,000 moves the needle and so, I'm just curious what's embedded in that guide that you just offered from the tenant, it can't be just $31 million I would imagine?

Roger R. Hopkins -- Chief Accounting Officer

Yes, there would be an impact to straight-line rent.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Right. So, little bit of color there would be helpful too. I'll hop back in the queue. Thank you.

Eric Mendelsohn -- President & Chief Executive Officer

Thanks, Jordan.

Operator

Thank you. Our next question coming from the line of Daniel Bernstein with Capital One. Please proceed with your question.

Daniel Bernstein -- Capital One -- Analyst

Hi. Good morning. Actually I want to switch gears a little bit to Bickford. That coverage has been coming down some. So maybe if we can talk about a little bit about what's impacting the coverage, their operations, is it systemic or is it just a couple of properties, and maybe -- we'll start there.

Kevin Pascoe -- Chief Investment Officer

Sure, Dan, this is Kevin. I guess what I would start with is a couple of things. First, what you're seeing in the coverage is a little bit of the wage pressure that we've been talking about the last few quarters. There has been some incremental costs that have come into the buildings as they continue (inaudible). There's also a little bit of transition that you're seeing there from the Minnesota portfolio that we had transitioned in last year, and then also the Ohio and Pennsylvania portfolio that we had in the middle of last year as well, which is still transitioning in, as I mentioned on the call, we've put some CapEx dollars in those buildings, feel like they're going to be in a good position to compete that are starting to get the wage situation in those specific buildings figured out. Going through the transition, there was some turnover. The previous operator was soliciting employment from their prior employees, things that we've guarded against, but it was still happening. So they're getting back up to speed. Again, that did put a little bit of pressure on the coverage. That said, we spent a lot of time with Bickford, we feel good about where their organization is. They continue to invest in the company and in the buildings and the other thing I'd add is if you looked at the markets that we have Bickford buildings in, the occupancy is in line with those little (ph) after-market, but they do a better job of being able to drive revenue and increase revenue overtime. So, I still feel really good about their ability to compete and do well and the other thing I remind you of is that there are buildings that they have in their portfolio outside of ours and other investments that they have that provides cash flow to the organization. So, again, we spent a lot (technical difficulty).

Daniel Bernstein -- Capital One -- Analyst

Hey, guys, you just cut off.

Kevin Pascoe -- Chief Investment Officer

Dan, you hear us?

Daniel Bernstein -- Capital One -- Analyst

I can hear you now, yes.

Kevin Pascoe -- Chief Investment Officer

Sorry about that. I'm not sure where it cut off, but yes, we feel good about the organization. We spent a lot of time with them and I feel like they're doing all the right things to be able to compete and do well.

Daniel Bernstein -- Capital One -- Analyst

Is there anything in terms of the transition assets that you could say occupancy or I think you mentioned the labor getting that under control, anything else on those transition assets you can say that, that make you feel comfortable?

Kevin Pascoe -- Chief Investment Officer

Mainly just that, that we've put the CapEx dollars and those buildings haven't been touched in probably 10 or 15 years. So to bring them back up to the quality that they needed to be and be more in line with what Bickford presents to the market will be really good for them to go out and be able to sell those buildings and be able to present well to the market. And we've got the spring selling season coming up here where they usually see a good occupancy increase. So, we're excited about the opportunity they have.

Daniel Bernstein -- Capital One -- Analyst

Okay and then I know this is a little bit further out, but there were some purchase options in 2020, I was in reading in the K, it worked about maybe $9 million rent, any insight on how those tenants might react or whether they would exercise those options and when do they have to notify you if they exercise those options to purchase the assets?

Kevin Pascoe -- Chief Investment Officer

Yes. This is Kevin, again. Each one's a little bit different. So the notice period that we get is again a little bit different, the way the option works is different. We go into it expecting that they're going to, and that's the way we're going to manage that relationship. That said, we're going to be active in trying to see if there's a way to reposition or buyout the option or anything is on the table in terms of being able to recapitalize those buildings to the extent we want to keep them. There's some of those that I would say would be OK if they bought. So each one is a little bit different, but I would -- the way I approach it is expecting them to exercise it, it is their option, so that's the way that we generally think about it.

Daniel Bernstein -- Capital One -- Analyst

Okay. One switching gears, just wanted to ask about the acquisition pipeline, where do you see cap rates heading, where is the kind of underwriting you're doing in terms of lease coverage. Just trying to get a sense of why there's more opportunity today than there was six months ago, I mean what are you seeing different in terms of the bid-ask spread and what's (technical difficulty).

Eric Mendelsohn -- President & Chief Executive Officer

Again, I feel like that varies widely by market, if you're going into what are lot considered your core or core plus market those cap rates have stayed compressed for sometime now, and I haven't really seen that change a lot. I think we have talked about on prior calls that a lot of the areas that we service, more of the secondary type markets, there has been a little bit of cap rate expansion. I don't know that the pool of opportunity has changed that much. I think what we're trying to communicate is that there is still a fair amount of activity and that we're still able to get free (ph) transactions done, which we've demonstrated a couple of times now. So again, feel good about the pipeline, feel good about what's out there and our ability to make accretive investments. Hopefully that answers your question.

Daniel Bernstein -- Capital One -- Analyst

Almost, but would you say you're looking more at value-add and construction loans, like what you've been doing, places where you can put CapEx in, something that's been under-managed maybe under-funded over the last five years, 10 years and tend (ph) it to one of your better operators and turn those assets around, that's kind of how it sounds to me, but...

Eric Mendelsohn -- President & Chief Executive Officer

Yes. I think that's fair. We are looking -- we like stable assets and to the extent they can provide cash flow and stability to the portfolio, but the value is going to be in those value-add opportunities. When we look at opportunities, each one is a little bit different. We're always trying to price it through a management fee and CapEx to make sure we get an assessment of cash flow and then refine the appropriate cash flow stream. That said, there is a story that's along with some of the asset can be repositioned and create value and coverage down the road, that's definitely something that (inaudible) entertain and to the extent we can have a portfolio that has a little bit of all of that, that's really interesting.

Daniel Bernstein -- Capital One -- Analyst

Okay. Sounds good. I'll hop off. Thank you.

Operator

Thank you. Our next question coming from the line of Todd Stender with Wells Fargo. Please proceed with your question.

Todd Stender -- Wells Fargo -- Analyst

Hi. Thanks, Kevin, probably just stick with you, you extended more credit to Life Care, looks like in Q4. Can you talk about what Life Care's using the money for. The coupon is a little higher this time I guess than your last senior loan to them. Can you just describe maybe some of the underwriting and just some of the details around that? Thanks.

Kevin Pascoe -- Chief Investment Officer

Sure. So, this is a Class A CCRC in the Greater Scottsdale, Phoenix area Arizona. The pricing was up mainly just because really it's a large investment. The terms were a little bit different that -- again, we're making a large investment with them and it was a small increase (ph) over what we had before. And this one, the thing that is a little bit different is we do not have a true purchase option. We will have the ability to look at it from (ph) sale, but there is definitely value in having that option, so we felt like a premium is warranted if we weren't getting that defined option like we had on Timber Ridge. So, that's kind of the pricing aspect. This -- the funds are going to pay for the next expansion which is 101 unit independent living, so the full of dollars were to recap the loan that was in place and then pay for the expansion. It is basically the exact same deal from that perspective as what we did with Timber Ridge, so we'll fund up to the full about $180 million (ph) commitment, and then as entry fee comes in from that expansion, the 100-unit expansion that will pay down the loan and that will be left with -- I think the numbers $118 million (ph) in senior loan at the end of the day.

Todd Stender -- Wells Fargo -- Analyst

And for how long, what's the duration (technical difficulty).

Kevin Pascoe -- Chief Investment Officer

The term is similar, the 10-year term. We do have a lock out for a couple of years, so it will be out there for at least two years and then there is prepayment fees thereafter. So, we would expect to have the loan -- our expectation or at least what the way we understand the way they're looking at the world is they're going to get it built, they're going to get filled and then they'll look at a recapitalization event and at that point we'll be well positioned to have that look and see if that's an additional investment that we want to make.

Todd Stender -- Wells Fargo -- Analyst

Is this cash flowing, do they pay a coupon or does this just accumulate?

Kevin Pascoe -- Chief Investment Officer

It's cash flowing. Yes...

Todd Stender -- Wells Fargo -- Analyst

Got it. Just a quick one, the Vero Beach asset you just acquired, does that go into the existing master lease and any coverage on that individual property?

Kevin Pascoe -- Chief Investment Officer

It does go into the master lease and then the coverage would be similar to what you've seen on the portfolio, we sized it to be similar to how we resized the Holiday portfolio.

Todd Stender -- Wells Fargo -- Analyst

All right. Last one, so with Ignite Medical Resort, you've got just in your disclosure you described it as a development lease, I guess in your prepared remarks just sounds like it's standard issue development, it shows up as a 9.5% yield, but I imagine, some of that yield has the loan tucked in there, kind of distinguish what a market yield would look like on that property?

Kevin Pascoe -- Chief Investment Officer

Well, the yield to NHI is 9.5%. That is approved through construction and goes into our lease base. The way we would think about that is where we've done other skilled nursing is in kind of that 8.5%, 8% to 9.5% (ph) range, so to speak, so there is a premium that will go into development, which is why this is the rate (technical difficulty).

Todd Stender -- Wells Fargo -- Analyst

Okay. So day one, it's fully stabilized, what do you think the yield -- will it be a market yield property?

Kevin Pascoe -- Chief Investment Officer

NHI's yield or you're talking about cap rate?

Todd Stender -- Wells Fargo -- Analyst

Yes. I would say NHI, oh no, market cap rate, that's fair.

Kevin Pascoe -- Chief Investment Officer

It would be -- yes, cap rate on high quality skilled nursing, at least the way NHI would look at it would be kind of a low-double digit number. So call it 12%, 13% would be my guess at this point in time. if we're looking at a stabilized asset.

Todd Stender -- Wells Fargo -- Analyst

Got it. All right. Thanks.

Operator

Thank you. Our next question coming from the line of John Kim with BMO Capital Markets. Please proceed with your question.

John Kim -- BMO Capital Markets -- Analyst

Thanks. Good morning. So you have three troubled operators currently, include Holiday (inaudible) you had to deal with just in the past quarters (ph) I'm wondering if your guidance anticipate any other tenant issues in 2019?

Roger R. Hopkins -- Chief Accounting Officer

This is Roger. No, it does not. Certainly the impact of the non-payment in the fourth quarter -- including the other two aside from East Lake were impactful to -- the total impact to our FFO was about $0.04 relating to those events. On the plus side, we were able to invest money and with our ongoing commitments to new business, we were able to actually have a $0.01 higher result in AFFO on the top-end than we'd even projected. So, while we think the year-end finished well and we were successful, we certainly are considering how to deal with those three tenants that came up in the late in the fourth quarter was difficult.

John Kim -- BMO Capital Markets -- Analyst

So, it's not in your guidance, and I'm just wondering, if it is on your watch list, or do you think in a reasonable scenario for this year that there will not be any other tenant issues?

Eric Mendelsohn -- President & Chief Executive Officer

Hey, John. This is Eric. You know that our guidance is generally very conservative. Obviously this year includes the reduced Holiday rent and I'll remind everyone that if you applied this new rent on our 12-month trailing coverage, it would be roughly 1.25 (ph) lease coverage ratio, so we feel like that's a substantial improvement over where we were last year. So we consider Holiday dealt with and they don't have another lease escalator until next year. So that's the first issue that we've dealt with in terms of a lease amendment and a rent cut. We took a hard look at Bickford, we got a lot of questions about Bickford and we know people are concerned about that. We've done a deep dive with them in their operations, in their marketing strategy, in their portfolio. You'll see that two of their properties are held for sale that will be an accretive sale and help their coverage once those two properties are disposed off and then we've got the new developments coming online later in the year that will also help their coverage, so we are mindful of the thin coverage on Bickford and considered that when we planned our guidance.

John Kim -- BMO Capital Markets -- Analyst

Eric, on the coverage of Bickford, the one-one (ph) already excludes the two transition assets, correct?

Eric Mendelsohn -- President & Chief Executive Officer

Yes, it does.

John Kim -- BMO Capital Markets -- Analyst

So where do you think coverage will be by year-end, if you -- once you sell those and then you have the developments coming online?

Eric Mendelsohn -- President & Chief Executive Officer

It's a moving target, John, and because of the acquisition we did in Ohio and Pennsylvania, those properties have a lot of upside in terms of improving agency labor costs once they start hiring permanent positions and getting rid of the agency, you'll see an immediate improvement there and then some occupancy gains as well. So, I'm hesitant to predict how long that will take for those reasons.

John Kim -- BMO Capital Markets -- Analyst

Okay and a follow-up to your answer to Chad's question on what's in your guidance with (inaudible) with the transition operators, I know you gave a range in your guidance, but what is reasonable as far as what you've seen historically, what you anticipate. Should we expect like a 30% rent cut to get the coverage level to 1.25 (ph) or over, six months to nine months of downtime and then I guess as part of that, what kind of coverage do you expect underwriting to if you do restructure?

Roger R. Hopkins -- Chief Accounting Officer

Well, thinking of the three East Lake properties, we have one that's completely dark that's being renovated, so that will take six months or eight months and then you will have the lease-up after that, which could take 12 months to 15 months being optimistic. So, that Charlotte property is probably not going to start producing good NOI until 2020, mid-2020. The Nashville property that we took back is open and is still dealing with the transition trauma of lack of CapEx and lack of funds. So that's probably going to start showing a good recovery by the end of this year and then the one in Indiana is a question mark. We've got a temporary manager in there, I can tell you that the occupancy is very low and it's probably not losing money, but it's not making money. So all of these buildings, you'll probably start to see a lift in mid-2020.

John Kim -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. (Operator Instructions) Our next question coming from the line of Eric Fleming with SunTrust Robinson Humphrey.

Eric Fleming -- SunTrust Robinson Humphrey -- Analyst

Hi. So, I wanted to ask a question from the other side of guidance. You guys have been really great at hitting your incentive targets of more than 5% growth on the AFFO line. Given where you've left the 2019 guidance right now -- is there -- what would you need to do to get to a 5% AFFO growth in '19 or is there a way to get there this year?

Eric Mendelsohn -- President & Chief Executive Officer

This is Eric. There is a way, but we don't have visibility on that right now. The way would be through accelerated acquisitions and that's something that we don't have control over. We're constantly working on it and constantly trying to wind up acquisitions that are accretive. So that's something that I can't give you clarity on at the moment. We'll probably have an update, given our guidance this year, it's something we'll be updating everyone every quarter.

Eric Fleming -- SunTrust Robinson Humphrey -- Analyst

Okay. I'll leave it that. Thanks.

Eric Mendelsohn -- President & Chief Executive Officer

Okay.

Operator

Thank you. Our next question coming -- is a follow-up question coming from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Hi, guys. Thanks again. I wanted to follow-up on Timber Ridge, did you mention whether or not you're exercising that option, I believe it expires in this month?

Kevin Pascoe -- Chief Investment Officer

Yes, it doesn't expire. It opens this month.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

It opens? Okay.

Kevin Pascoe -- Chief Investment Officer

We're actively evaluating.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay and can you remind us, I think the K indicates it's $115 million, a max price of $115 million or an agreed-upon fair market value, can you remind us sort of what kind of cap rate that would look like if exercised?

Kevin Pascoe -- Chief Investment Officer

So just to clarify, the minimum is $115 million with a fair market.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Sorry about that. Yes, sorry.

Kevin Pascoe -- Chief Investment Officer

Yes. So, it's a minimum of $115 million. It's a fair market option. So it's something that, again, we're actively negotiating and frankly, your question on the cap rate, that's something where we've been researching here over the last month or so to really hone in on what should be the appropriate cap rate for a Class A asset like this. So, we'll have to get back to you on that once we get further down the path, but it is something that we're very interested in, it's a fantastic asset, something that we've been very proud to have in the portfolio and something that we're taking a really hard look at.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Is that...

John Spaid -- Executive Vice President, Finance

No. Go ahead and ask your question. This is John Spaid.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

No. Go ahead, John, I'm sorry.

John Spaid -- Executive Vice President, Finance

So, I wanted to get back to you on -- actually, I wanted to get back to you on your straight-line rent question on Holiday because we should have been ready for that. So, let's just start with the original Holiday transaction of 25 assets. Cash $31.5 million, it looks like our straight-line will come in for the first 12 months with $6.25 million, so $37.75 million GAAP rent. Vero Beach then needs to be added into that equation, which looks like it will be $2.55 million for cash and another say $0.4 million for straight-line, $3 million. So, they're doing a little bit more work around Vero Beach and settling on that, but that should be pretty close to it. So that should give you what you need to determine your FFO impacts.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

What was the $6.25 million number, John?

John Spaid -- Executive Vice President, Finance

That's the straight-line rent.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

I guess the $37.75 million, that's a monthly number?

John Spaid -- Executive Vice President, Finance

No. (multiple speakers).

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

That's the annual straight line number.

John Spaid -- Executive Vice President, Finance

Yes.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Oh OK. Got you. Yes, $31 million plus $6 million, got it. Thank you. That's really helpful. How do I -- just bridging from 4Q to 1Q, do you know what the GAAP rent booked in 4Q was? (multiple speakers) that will make...

John Spaid -- Executive Vice President, Finance

I think it was $40.5 million, as I recall.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. So, it would have been a quarter of that in 4Q.

John Spaid -- Executive Vice President, Finance

Yes.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. That's going to make things really easy. I appreciate that very much.

John Spaid -- Executive Vice President, Finance

You're welcome.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And then, Eric, you mentioned the distressed opportunity potentially. Can you maybe offer a little bit of insight in terms of the pipeline?

Eric Mendelsohn -- President & Chief Executive Officer

Sure, we're seeing more sales developments, more broken deals, a couple of developers who built beautiful buildings and they're a third or a half full and they want to sell them based on pro forma stabilized occupancy. So, more of those deals are starting to be surfaced and then we're also seeing what Kevin calls retread, which are deals that were marketed widely that are stabilized, but the pricing was so outrageous that nobody took them up on it. So they go back and regroup and come back six months or 10 months later with new pictures and a new broker and a new pro forma and see if they can get anyone interested.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay, that sounds senior housing-esq then...

Eric Mendelsohn -- President & Chief Executive Officer

Yes, it sounds like 2007 to me. I remember a lot of this stuff happening in 2007.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

That's helpful. And then lastly, well two others. One, just this legal recovery in the quarter, it looks like, can you just -- I may have missed what the driver of that was and is that included in the normalized FFO for the quarter?

Roger R. Hopkins -- Chief Accounting Officer

This is Roger. We did disclose that we charged the tenant escrow account for our legal expenses associated with collection of those rents. That was a portion of it. The other portion that we charged to their escrow account was their property taxes, which they had not paid and that was a substantial amount. So all together, we charged these tenants escrow accounts $2.5 million.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Well. Okay. So you must have -- and then you had $2.1 million of legal expenses in the quarter offsetting that, I'm just looking in the legal line, Roger, that says minus $396,000 under the expense category in your P&L?

Eric Mendelsohn -- President & Chief Executive Officer

Right. So, this is Eric. The legal expense is as you say and that was reimbursed and then we had some property taxes, which would show up elsewhere.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. So that's just charging them back, but that's actually a recovery of prior expenses, I would imagine, prior quarter expenses?

Eric Mendelsohn -- President & Chief Executive Officer

Yes.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

(inaudible). Was that in normalized FFO, I don't know if it was backed out. Just curious?

Roger R. Hopkins -- Chief Accounting Officer

Well, our charge of those tenant escrow accounts would reduce our expenses, so it's in the net income when you start the reconciliation, that reimbursement of those expenses, if you will.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Yes, but you have a gain in the quarter. I'll follow-up, that's fine. And the last one I had for you, Eric, was just on Holiday in general. You made the comment that we should consider Holiday dealt with and from your perspective, I get that, but it seems like they've got one other creditor out there that just hasn't yet necessarily dealt with them that I know of at least and I'm kind of curious, do you think they as a corporate entity and credit are stabilized at this point?

Eric Mendelsohn -- President & Chief Executive Officer

That's a fair question, Jordan. When we were negotiating our settlement with them, we modeled what their span of control would look like with and without the Sabra buildings and with and without the Ventas buildings to make sure that they were still a viable business and manager and tenant if those buildings would go away and we determined that they would be, so I know that the Ventas settlement is still out there and we're waiting to see how that resolves itself.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay, do you know if they had recourse the entity -- to the corporate entity?

Eric Mendelsohn -- President & Chief Executive Officer

They had recourse to the guarantor entity, as we all did.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

Eric Mendelsohn -- President & Chief Executive Officer

All right, Jordan. Thank you.

Operator

Thank you. Mr. Mendelsohn, there are no further questions at this time. I will turn the call back to you.

Eric Mendelsohn -- President & Chief Executive Officer

All right, everyone, thanks for your time and attention and we'll see some of you at NIC in San Diego.

Operator

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.

Duration: 69 minutes

Call participants:

Colleen Schaller -- Director, Investor Relations

Eric Mendelsohn -- President & Chief Executive Officer

Roger R. Hopkins -- Chief Accounting Officer

John Spaid -- Executive Vice President, Finance

Kevin Pascoe -- Chief Investment Officer

Chad Vanacore -- Stifel -- Analyst

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Daniel Bernstein -- Capital One -- Analyst

Todd Stender -- Wells Fargo -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Eric Fleming -- SunTrust Robinson Humphrey -- Analyst

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