Earnings Call Transcript
NATIONAL HEALTH INVESTORS INC (NHI)
Earnings Call Transcript - NHI Q3 2021
Operator, Operator
Greetings and thank you for standing by. Welcome to the National Health Investors Third Quarter 2021 Conference Call. During the presentation, all participants will be in a listen-only mode. And afterwards, we'll conduct a question-and-answer session. This conference is being recorded Monday, November 8, 2021. And now I'd like to turn the conference over to Dana Hambly. Please go ahead.
Dana Hambly, Conference Call Host
Thank you and welcome to the National Health Investors Conference Call to review the Company's results for the Third Quarter of 2021. On the call today are Eric Mendelsohn, President and CEO, Kevin Pascoe, Chief Investment Officer, John Spaid, Executive Vice President and 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 today 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, 2021. Copies of these filings are available on the SEC 's website at sec.gov, or on our NHI's website at 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 our CEO, Eric Mendelsohn.
Eric Mendelsohn, President and CEO
Hello, and thanks for joining us today. We've been working this year to transition NHI into a stronger company entering 2022, and we have accomplished a great deal. Our portfolio optimization efforts, including dispositions, tenant transitions, and ramp restructuring, will have touched more than 120 of our senior housing properties, or more than 50% of our entire portfolio. We expect these efforts to be largely concluded by the end of the first quarter of 2022. While there are many eyes to be dotted and T's to be crossed, we are pleased that we have established frameworks that fundamentally transform our partnerships with Bickford and our legacy Holiday portfolio. The completed and pending dispositions greatly improve the health of the Bickford and Holiday portfolios, which are well-positioned to participate in the recovery of senior housing that is currently underway. Starting with Bickford, we are making progress on the disposition of another subset of buildings, which will reduce the size of a lease portfolio to 35 or 36 properties, compared to the 48 at the beginning of the year. Following the dispositions, we plan to reset Bickford's annual cash rent to a lease coverage level that makes them a much healthier tenant financially and allows repayment of deferred rent. From an operations standpoint, we've been encouraged by the rebound in Bickford's occupancy, which increased by 280 basis points from the second quarter to the third and is up 520 basis points from the first quarter, that's more than double the industry growth rate of 210 basis points for comparable assets. Labor issues should start to subside, driven by accelerating rate growth and Bickford's margins should recover some of the more than 800 basis points loss due to the pandemic. That is why our agreement includes resetting a lease to a fair market value after 2 years with a minimum floor. Kevin will provide more details in his comments. Shifting to the legacy Holiday portfolio, we have disposed of 9 underperforming properties and are evaluating the sale of 2 others. These properties had been earmarked as possible sales prior to the start of the pandemic. In fact, the pre-pandemic margins on the 11 properties were more than 1,000 basis points below the remaining 15 we continue to own. And that gap widened to over 1,500 basis points during the pandemic. With the remaining Holiday properties, we're forming 2 separate joint ventures in RIDEA-like structures with 2 excellent managers that have extensive experience operating middle-market independent living communities. We are excited to start a new relationship with Merrill Gardens, a well-established operator based in Seattle, that will manage our 6 West Coast properties. We're also pleased to expand our relationship with Discovery Senior Living, through the formation of a joint venture to own and operate 8 to 9 communities with an East Coast footprint. We're also transitioning the Vero Beach assisted living community to the Discovery master lease. The ventures will be similarly structured with equity contributions from both operators, and include value-creation and operating cash flow promotes, which we think best align interests as operating performance improves. There's plenty of potential in the legacy portfolio as the pre-pandemic margins were more than 900 basis points higher than current margins and we're glad to be in a position to capture that upside. In addition to participating in the operating recovery of these independent living communities, we believe that by entering into these operating joint ventures, we are better positioned strategically to grow our senior housing business with this new product offering. Our progress so far is showing results. We've completed the disposition of 16 underperforming senior housing assets for approximately $173 million. The cap rate on these sales was 3.1% and lease coverage was 0.33 times. We have targeted another 21 underperforming senior assets for disposition, which we estimate will generate gross proceeds of approximately $150 million to $155 million with a combined NOI yield in the low single-digits, and very little lease coverage. We are transforming NHI into a high coverage, high-quality portfolio, in other words, a jewel box. Our balance sheet is in great health as we reduced debt by $150 million during the quarter and currently have full capacity available on our revolver. Considering the cap rates for many of the senior housing asset sales we're contemplating are in the low single-digits. We see a nice arbitrage opportunity as we replace them with investments at yields in the mid to high single-digits. With nothing drawn on the revolver, additional proceeds coming from dispositions and low leverage, we see little need to issue equity as we resume our external growth. Our current position reminds me of a point in time in our company's history in 2009 when we had no debt on the balance sheet and a $100 million in cash. We are very eager to turn the page on this chapter of our story and get back to growth with new and existing partners. While we spend most of our time talking about our assisted living and independent living operators, we want to point out the exceptional performance of our entrance-fee and skilled nursing segments, which represent close to 60% of our annualized cash revenue, net of deferrals. We're fortunate to be in line with these best-in-class operators and they serve as a blueprint for the long-term stability and growth that we're pivoting back to as a company. I will now turn the call over to John.
John Spaid, Executive Vice President and CFO
Thank you, Eric. And good afternoon, everyone. Beginning with our net income per diluted common share for the third quarter ended September 30th, 2021, we achieved $0.67 compared to $0.95 for the same period in 2020. The year-over-year decline in net income is largely due to $6.6 million in lower rent received from Holiday, $5.2 million in additional quarterly rent deferrals provided to other operators, $22.4 million in real estate impairment charges, and the revenue reductions due to dispositions and mortgage repayments since the prior year's third quarter. These declines to net income were partially offset by $19.9 million in gains from the sale of real estate and revenue increases attributable to $142.2 million of investments and commitment fundings made since the third quarter of 2020. For FFO metrics per diluted common share for the quarter ended September 30th, 2021, compared to the prior year, NAREIT FFO decreased $0.26, to $1.16 from $1.42, and normalized FFO decreased $0.27, to $1.15 per share from $1.42. For the quarter ended September 30th, 2021, our normalized FAD declined $9.1 million year-over-year and by $1.7 million sequentially to $51.2 million. As I previously detailed, the year-over-year and sequential quarterly decline was driven by lower Holiday rent, additional rent deferrals, dispositions in mortgage repayments offset by investments made over the prior 12 months. Reconciliations for our pro forma performance metrics can be found in our earnings release and 10-Q filed this afternoon at sec.gov. Our third quarter dividend of $0.90 per share was paid on November 5th, 2021, and represents normalized FFO and FAD total payout ratios of 78.6% and 80.6% respectively. As announced this afternoon, our Board declared our fourth quarter dividend of $0.90 per share for shareholders record on December 31st, and payable on January 31st. Turning to the balance sheet for the quarter ended September 30th, our net debt annualized EBITDA leverage ratio improved sequentially to 4.8 times from 5.1 times. The improvement in leverage was purposeful, as the Company disposed of low yielding assets, but it's additionally reflective of the unexpected reduction in Holiday rents. Our purposeful strategy means that as we enter 2022, and the clouds clear around Holiday, Bickford, and other distressed relationships, we'll be in a position to quickly and accretively redeploy capital. As detailed in our cash flow statement, for the 9-month period ended September 30th, the $163.4 million in net cash flow from investments from investing activities is capital, which in large part will allow us to accretively redeploy into new investments without the need for additional equity while still staying comfortably within our stated leverage policies. Having said that, we're still not done selling low-yielding assets, which we believe we can further redeploy into additional higher-yielding investments in a relatively short period of time over the coming quarters. That's extremely good news for NHI as we enter 2022, and we look forward to next year. On October 31st, we had no amounts outstanding under our $550 million revolver and $74 million in cash. We did not issue any equity through our ATM program during the third quarter and do not expect to issue equity during the fourth quarter, which continues to have approximately $417 million in capacity available to us under our ATM program. Our 2017 $800 million revolver and term loan credit facility mature in August of the next year. We're in the process of engaging our banking relationships for the recent indication of our credit facility and we are targeting closing the facility in our first quarter of 2022. Regarding the fourth quarter, we want to point out a few items that will impact the results. First, we sold two properties in September that contributed approximately $1 million to our third quarter cash revenue. Second, we expect that the Bickford deferrals will be $1 million higher in the fourth quarter compared to the third quarter. Last, we received approximately $2.3 million of rent payments from Holiday during the third quarter. But as of today's call, we have yet to receive any payments in the fourth quarter. We continue to hold an $8.8 million holiday security deposit, and the final recognition of the deposit will coincide with the termination of the legacy Holiday lease by foreclosure of agreement. We made no determination as to how or if any other deposit will be applied, but we expect a resolution on the deposit in early 2022. With that, I will now turn the call over to Kevin Pascoe to discuss our portfolio.
Kevin Pascoe, Chief Investment Officer
Thank you, John. The last few years have obviously been challenging, but we have learned quite a bit about what it takes to be successful even in the most difficult business environments. We are using past experiences and lessons learned to reposition NHI this year so that we are set up to grow with the very best partners going forward. Our needs-driven senior housing portfolio, which accounts for approximately 31% of our annualized cash revenue net of deferrals, generally experienced solid occupancy gains throughout the quarter. However, margin growth has not advanced in line with historical trends and occupancy growth due primarily to increased wages for hourly staff, as well as increased use of agency staffing. On a positive note, residents and their families have been sympathetic to the labor issues, and in multiple instances have been receptive to increased rents to offset the wage growth. We expect that this trend, coupled with the scheduled 5.9% increase in the Social Security COLA, will lead to much stronger rate growth in 2022. Bickford, our largest assisted living operator, representing 14% of annualized cash revenue, net of deferrals, increased quarterly occupancy by 280 basis points sequentially, but labor expenses have been a major hurdle, so we deferred $3.5 million in the third quarter. But as we discussed, we have reached a preliminary agreement that transforms our Bickford relationship. As we work to complete several more asset sales, we have agreed to defer $4.5 million in fourth quarter rent and up to an additional $4 million in the first quarter of 2022. We are also working to restructure the leases, which we currently estimate results in annual rent of approximately $28 million. For reference, we collected approximately $7.8 million in rent from Bickford in the third quarter, and we expect to collect approximately $6.8 million in the fourth. Based on recent operating performance, this reset would improve Bickford's lease coverage after management fee and capital expenditures of $500 per unit to 1.21 times from 0.91 times. We think this cushion allows for some further near-term margin deterioration, as well as potential incremental CapEx. Following the rent reset, Bickford will use 85% of the lease portfolio's free cash flow to service a deferral balance of approximately $26 million. There are milestones and performance incentives included in the agreement that would reduce this balance, which we view as a strong alignment of interest. After 2 years, Bickford's rent will be increased based on fair market value, but not be below a minimum of 4, which is based on an 8% yield on the portfolio's original purchase price. We greatly value our long-standing relationship with Bickford and are hopeful these actions restore stability to this relationship for many years to come. Turning to our independent living communities, this group accounted for only 5% of our annualized cash revenue net of deferrals as we sold 9 Holiday properties for $120 million, which had annualized contractual rent of approximately $9 million. We have targeted 2 more Holiday properties for sale, which have annualized rent of approximately $1.8 million. In aggregate, we estimate that these 11 properties have lease coverage below 0.5 times and margins that are approximately 1,500 basis points below the remaining portfolio. As Eric noted, we are in the process of transitioning the remaining properties to Merrill Gardens and Discovery, which we expect to happen in early 2022. We are excited to be partnering with these well-established operators and believe this will open up a new path of growth for NHI that supplements our triple-net strategy and allows us to participate in the upside as performance recovers from historic lows. Our entrance fee communities, which account for 27% of our annualized cash revenue net of deferrals continue to outperform the other senior housing asset classes. EBITDARM coverage, excluding senior living communities, increased sequentially to 1.76 times from 1.65 times. Senior living communities, which represent 19% of our cash revenue, had third quarter average occupancy of 80.4%, which was up 190 basis points from the second quarter and was actually higher than the pre-pandemic first quarter of 2022 at 80.3%. The EBITDARM coverage through the second quarter and excluding grant bonds was 1.09 times, which was down sequentially from 1.13 times. The skilled nursing portfolio, which represents 32% of annualized cash revenue net of deferrals is anchored by NHC and the Inside Group who contributed 15% and 9% of annualized cash revenue respectively. SNF EBITDARM coverage for the trailing 12 months ended June 30th was 2.8 times, including 3.82 times at NHC and 2.1 times at our other medical properties. Turning to our business development activities, year-to-date, we have announced over $120 million of investments at a weighted average yield of nearly 9%. We did not make any new investments during the third quarter, but activity with our partners at Montecito has picked up recently, so we expect to fund multiple projects before the year-end, and still estimate that the fund will be fully invested within 2 years from inception. The pipeline remains active across multiple asset classes and product types, but it's been a better sellers' market, which has certainly worked to our advantage this year. As we conclude our disposition program, we expect to be more active rebuilding the pipeline in 2022. With that, I'll hand the call back over to Eric.
Eric Mendelsohn, President and CEO
Thank you, Kevin. We are repositioning NHI to emerge as a stronger company going into 2022. We are making steady headway, and expect that our portfolio optimization activities will be complete by the end of the first quarter of 2022. We believe that repositioning is in the best long-term interest of our stakeholders and are very optimistic about the future for several reasons. First, we fully expect that senior housing fundamentals will recover, driven in the near term by easing compensation pressure and unprecedented rate growth. Over the longer term, as the supply and demand dynamics start to tilt in our favor, we see years of consistent growth ahead for the industry. Second, we're set up for strong long-term organic growth. We expect deferral balances to start repaying in 2022, and our new joint ventures position NHI to participate directly in the upside of the senior housing recovery. Third, our low-leveraged balance sheet will only improve as cash flow stabilizes, and with plenty of access to capital, we're able to drive strong acquisitive growth, which is made more accretive as we have limited need to issue equity. Operator will now turn the line over for questions.
Operator, Operator
Thank you. And we do have a question from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead. Your line is open.
Jordan Sadler, Analyst
Thanks, guys. Wanted to dig in a little bit, there's a little bit more going on this quarter than I anticipated, particularly as it related to Bickford and the rent cuts. And I was curious if you could maybe walk us through how you arrived at what looks to be about an 18% rent cut for Bickford? And correct me if I'm wrong there, at this point in time. And when that goes into effect, exactly? Thank you.
Kevin Pascoe, Chief Investment Officer
Hey Jordan, it's Kevin. We have assessed our portfolio in its current state and considered the dispositions we are reviewing for the next three to six months. We are looking at the net operating income for those properties and what they can support now and in the future once we remove certain buildings. We believe that even after these removals, the remaining properties will generate enough cash flow to manage the deferred rent balances. We're focused on the current cash flow from the existing buildings and what they can provide, taking into account the buildings we plan to divest. Ultimately, we're evaluating what the new portfolio will look like and ensuring we can handle rent payments, especially if some properties take longer to sell or if new ones are added. We believe we have a solid strategy for the transitions we are making, which may involve moving one or two buildings here and there, but overall, the portfolio can meet our rent obligations based on its current performance. This has been our foundational approach. We are also hopeful that occupancy margins will improve as we manage the wage pressures we've encountered across the portfolio, not just with Bickford, and if those pressures ease, we should be able to address the deferred rent effectively.
Jordan Sadler, Analyst
Okay. How did you determine the extent of the rent reduction? Was it solely based on the pro forma lease service coverage ratio? I'm trying to understand the difference between the $46 million mentioned on Page 4 of the deck and the $37.7 million.
Kevin Pascoe, Chief Investment Officer
Right. Yes. So the $37.7 million that you mentioned is the portfolio minus the 7 buildings that we're looking at disposition currently. And then furthermore, the rent cuts to $28 million is what we believe the portfolio can service today based on current NOI. So we're expecting that step-down from the $46 million, and really to $37 million to the $28 million beginning next year. And then after 24 months, that rent will be reset to what we believe should be a more stabilized portfolio at that time.
Jordan Sadler, Analyst
And it's a minimum of an 8, right? On the basis in those assets?
Kevin Pascoe, Chief Investment Officer
Correct. On the original basis, not the depreciated basis.
Jordan Sadler, Analyst
Do you know what that is offhand?
Kevin Pascoe, Chief Investment Officer
Well, I can give you some goalposts. Based on the disposition of the 7, that number would be between $32 million and $33 million. Again, if there's some additional sales along the way, or if a building turns and we elect not to sell it, that number will change a little bit, but ultimately, according to the plan that we have right now, it would be in that $32 million to $33 million.
Jordan Sadler, Analyst
That's the 8% before.
Kevin Pascoe, Chief Investment Officer
Correct.
Jordan Sadler, Analyst
Okay. Regarding the joint venture agreements, what is the base management fee or the net operating income from this asset? I tried to estimate it based on the lease coverage and the previous rent, and I arrived at a $15 million figure for net operating income, but I need some assistance in understanding how we reached $21 million for these 14 or 15 assets that are going into the joint venture. Where did that amount go?
Kevin Pascoe, Chief Investment Officer
You're asking what's the management fee for the?
Jordan Sadler, Analyst
Plus the NOI. Yeah. And the way the structure of the JV, what the percentages are? I'm just trying to understand what these numbers are going to look like compared to the previous in-place rent.
Kevin Pascoe, Chief Investment Officer
I would say that typically with most companies and management agreements, there's a 5% management fee, along with performance incentives based on certain hurdles. It's important to ensure that the managers are adequately incentivized, but the base fee is generally around 5%.
Jordan Sadler, Analyst
And am I about right on the in-place NOI, that $15 million?
Kevin Pascoe, Chief Investment Officer
Are you asking about the remaining 15 buildings?
Jordan Sadler, Analyst
Yes. On page 6, the pro forma LSCR is 0.73 times, and I am assuming you are using the 0.73 for the services coverage ratio based on a combined rent of $21 million to $21.4 million for the two portfolios.
Kevin Pascoe, Chief Investment Officer
Yeah, we'd be looking at it in a while a little bit higher than that.
John Spaid, Executive Vice President and CFO
Jordan, we don’t want to be vague, but we are undergoing a transition with the properties. This is John, and we aim to provide the market with a clear set of guidance in February, but please remember that there will be some changes. Additionally, we previously indicated that the numbers we shared reflected roughly the NOI from these properties based on the net deferrals prior to their transfer to Welltower and Atria. However, there is a potential of $6 to $8 million in NOI upside for these properties if we can return to pre-pandemic levels, though there will be some fluctuations as we progress.
Jordan Sadler, Analyst
When will the transition date be effective, essentially for these 2 portfolios?
Kevin Pascoe, Chief Investment Officer
So is Kevin again. We're going to target the first of the year.
Jordan Sadler, Analyst
Okay.
Kevin Pascoe, Chief Investment Officer
In transition. There's movement, but at the end of the day, that's what our goal is.
Jordan Sadler, Analyst
Okay. Thank you, guys.
Kevin Pascoe, Chief Investment Officer
Thank you.
Eric Mendelsohn, President and CEO
Thanks, Jordan.
Operator, Operator
Our next question is from Juan Sanabria with BMO. Please go ahead, your line is open.
Juan Sanabria, Analyst
Hi, good afternoon. Regarding Jordan's question on Holiday, could you elaborate on the structure in terms of the potential upside? Should we consider it similar to the working task Bickford, or is it more aligned with a triple-net than shop structure? Also, what is the ownership split among you, Merrill Gardens, and Discovery in that venture?
Kevin Pascoe, Chief Investment Officer
Sure. This is Kevin. This situation will differ from Bickford in that, while NHI will still hold the majority stake, there won't be a lease like we had with Bickford. In that case, we had a separate operational company and property company. Here, we are expecting a management agreement that we could describe as back-to-back. We are partnering with them on both the real estate and the overall venture. The ownership structure between Discovery and Merrill is somewhat different. We are not ready to disclose specific figures yet, but it will be significant for each organization. They are investing substantial amounts to ensure these properties perform well, which we believe fosters good alignment for our venture. To clarify, both parties are contributing financially to join us in this endeavor.
Juan Sanabria, Analyst
Okay.
John Spaid, Executive Vice President and CFO
I wanted to mention that these will be shop portfolios. We will structure them with some synthetic debt, and each will hold a portion of the equity. We believe we know what those numbers are, but we are not ready to disclose that information yet. However, I can tell you that the vast majority, over 90% of the capital, will still come from us.
Juan Sanabria, Analyst
Can you comment on your confidence in the ability to address deferred unpaid rents, improve the holiday performance, and the credit associated with the lease with Welltower?
Eric Mendelsohn, President and CEO
Hey, Juan, this is Eric. That is obviously a sensitive legal topic, I hesitate to speculate on an earnings call, but just know that we are focused on recovering that, and that the balance sheet information we received from Atria indicates that those funds are accruing on the buildings' balance sheets.
Juan Sanabria, Analyst
Okay. Regarding Bickford, have you decided to reduce rents based on current performance and cash flows, despite the potential for upside in the next two years? It seems like you're opting to recoup the deferred amount instead of implementing a lower coverage from day one and possibly sacrificing the repayment of deferrals, while avoiding a two-year rent cut. Is that an accurate interpretation?
Eric Mendelsohn, President and CEO
That's a way to think about it. The reason we did that is because the repayment of the deferrals will most likely be lumpy and dependent on the recovery of the buildings, the margins from labor expenses. And we wanted a rent number that we could depend on, that was backed up by coverage. We think it's important to show investors that our leases have good coverage and that the rents are solid. And then finally, as John said, we're endeavoring to give you guidance in our February earnings call. So all of that went into the thinking on how we structured this.
Juan Sanabria, Analyst
And just one last question from me, can you provide any insight into what the pro forma dividend coverage will look like at the end of the first quarter of 2022 once everything is settled and the comfort level regarding that?
John Spaid, Executive Vice President and CFO
I'd say we have a very high degree of confidence in our payout ratio being where we think it will be, which is low 80s to even below 80%. A lot of that will depend on closing these joint ventures and possibly some transitional costs that may appear in the first quarter. We can't provide guidance on that just yet. However, in the fourth quarter, you'll note that we've mentioned heavier deferrals. You should expect some increase in the payout ratio as a result, so that shouldn't come as a surprise. But we are quite confident that this increase will be very short-lived.
Juan Sanabria, Analyst
Thank you.
Operator, Operator
Our next question is from Rich Anderson with SMBC, please go ahead, your line is open.
Rich Anderson, Analyst
Thank you. Good afternoon. In listening to other earnings calls this season, especially from your larger peers, there's noticeably more optimism about the future in the senior housing sector. I'm wondering if you're experiencing a similar sentiment. Are there specific company-related issues that may have been overlooked in your analysis? What do you think has contributed to such a challenging path for your company, especially when others in the REITs seem more positive today? What are your thoughts on your unique situation?
Eric Mendelsohn, President and CEO
Good marketing and good voice coaches.
Rich Anderson, Analyst
Is that really your final answer?
Eric Mendelsohn, President and CEO
Rich, we are aware that there are many supporters in our industry. If you review our prepared remarks, you will notice a sense of optimism and how we structured the restructuring of Bickford and Holiday, which positions us to benefit from potential growth. We believe this will positively impact 2022 and beyond. There is definitely optimism present. I would also like to emphasize the portion of our remarks that highlights Bickford's exceptional performance. They are leading in occupancy, significantly outpacing Nick and other portfolios, with occupancy rates in the '80s while many others are still in the '70s. So don’t mistake my calm tone for a lack of enthusiasm; I truly am enthusiastic. We aim to convey to the market and analyst communities that we are increasingly confident in 2022. This quarter, we declared a dividend without delay, unlike in previous quarters. We intend to provide guidance for 2022 in February, which we did not do this year. Our payout ratio has been adjusted, and we believe it is appropriate. The adjustments we made provide us the flexibility to manage disposals and pave the way for future dividend growth. There are many positive signals in our remarks and the progress report we shared this morning as part of our release. We feel we have successfully addressed the restructuring needed.
Rich Anderson, Analyst
Okay. We appreciate the candor, for sure, so don't take the question the wrong way. Now, the other thing is rate growth, and you said it yourself, unprecedented rate growth. Does a lot of that or most of that hit in the very early part, maybe January 1 of next year? I'm just curious if you can outline the timing of when offers start going out and when we could start seeing some of that.
Kevin Pascoe, Chief Investment Officer
Sure. I would say that it will happen throughout the year, but most operators aim for the beginning of the year. Some may do it on the anniversary date of the resident, but that's more of an exception than the norm. We expect most activity to be in the first quarter. We've heard estimates ranging from 5% to 10%. Most of our operating partners are likely to request increases within the 5-6% range, which is aimed at offsetting rising labor costs. Additionally, some groups are considering implementing a labor surcharge to reduce the growing overhead. We believe there's a strong potential for significant rate growth this year, along with efforts to manage expenses. If they can bring people back into the workforce and reduce reliance on agency and overtime labor, that will be beneficial. However, it's important to note that rising wages will present a challenge. Overall, the rate increases should help alleviate that pressure to some extent.
Rich Anderson, Analyst
Are residents really saying they need to pay you more to cover your labor costs? It seems like a kind gesture, but is that actually happening, or is it simply a reflection of the market, meaning they just have to pay?
Kevin Pascoe, Chief Investment Officer
I would say it's likely a combination of both. People are not eager to pay higher charges, but during resident council meetings, they gain insights and discuss with family members about the situation. They recognize that prices are increasing elsewhere. While they may not be supportive, they are aware of the circumstances. This reflects market dynamics. Some may be implementing increases of 8%, 9%, or 10%, while others might be considering 5%, 6%, or 7%, which could still be viewed as reasonable.
Rich Anderson, Analyst
Kevin, when, and my last question is, when you came up with the Bickford restructuring after first, the sales, and then the right size of coverage, and obviously, all the steps that you went through, what did you assume in rate growth in underwriting that decision?
Kevin Pascoe, Chief Investment Officer
They're going to be in line with the 6% we mentioned earlier. As we've discussed, wage pressure remains significant. We've also indicated that we anticipate some short-term margin compression as we move through the winter months and into the first quarter. They will align with what we're observing from our other operating partners, but we're also providing them some flexibility to start addressing these deferred balances. This creates an opportunity for us, and if we came in a bit low, it simply means we recover those amounts a bit quicker.
Rich Anderson, Analyst
I'm sorry, one more. I know the deferred balance for Bickford is $26 million, I think is right. What's the total deferred balance?
Kevin Pascoe, Chief Investment Officer
The $26 is going to be the anticipated total, so that includes the first quarter.
John Spaid, Executive Vice President and CFO
We're well over $40 million, which includes some notes we've not yet taken into income, such as the second mortgage on the fixed properties sold to Bickford earlier this year. As Kevin mentioned, this amount also includes what we plan to defer in the fourth quarter and the first quarter of next year. We are utilizing some of those deferrals as performance incentives as well, where meeting certain hurdles will allow for a portion of those deferrals to be forgiven. Additionally, when considering the coverage ratios presented today, keep in mind we're using $500 per unit in capital expenditures, but we believe the actuals will be somewhat higher. We want to avoid another discussion about a rent cut, which influenced our decision-making. When they do generate excess cash flow, we anticipate being able to collect it through these deferrals.
Rich Anderson, Analyst
Okay. And when you start reporting FFO in 2023, you could see significant growth numbers. You need to be cautious about how you communicate that, as it could present challenges.
John Spaid, Executive Vice President and CFO
We'll have to be very careful about that. We'll have to help you with bridging through that. We'll have other things that will make its way down to the FAD line, including $8.8 million in deposits that we hold on Holiday and we fully expect to be able to collect rent on Holiday. So I don't want you to think that we're sitting here, saying that that's not going to happen. So we're going to have some discussions about that coming up. So once we get through this period of time, we get into those discussions, there's another spot where you'll see some lumpiness. So yes, we'll have to help you to bridge all that, and get to a stabilized number.
Rich Anderson, Analyst
Well, at least it's interesting. Thanks, guys.
Eric Mendelsohn, President and CEO
Thanks, Rich.
Operator, Operator
Our next question is from Daniel Bernstein with Capital One. Please go ahead, your line is open.
Daniel Bernstein, Analyst
Hi, good evening. I want to revisit the Holiday joint ventures and understand the possible deferred capital expenditures involved, as well as how to consider your capital expenditure obligations related to those joint ventures.
Kevin Pascoe, Chief Investment Officer
Sure. Hey, David, it's Kevin. Generally, the buildings have been well-maintained. However, as we've observed in the portfolio, and this isn't specific to this group, there has been a slight deferral in maintenance. For example, some carpets may need replacing or walls might need painting. As part of our capitalization for each of these joint ventures, we are allocating a significant amount of CapEx for both portfolios. We will address this upfront to ensure they make good first impressions and allow the new operating partners to effectively market them.
Daniel Bernstein, Analyst
Okay. And then I wanted to kind of understand on Holiday. How much rent was actually booked in 3Q? I thought I saw $600,000, but I just wanted to make sure I understood what was being booked in FFO and FAD, given that you didn't use any of that $8.8 million or draw down much of that $8.8 million deposit.
John Spaid, Executive Vice President and CFO
Yeah. Dan, we originally had $10.6 million in deposit, $600,000 of that was used in the third quarter. FAD that was recognized was $2.3 million in the third quarter.
Daniel Bernstein, Analyst
Great. And then, just going back in the JVs in the pipeline and expectations for investments in 2022. You've done some shop like JVs before on a small scale, but this seems like you're much more positive about the recovery in the space. And maybe would use these JVs as a platform to increase the amount of assets in your portfolio. So outside the assets that you're donating to these JVs, are there other assets that you've identified within your portfolio, Mike donate to those JVs, and then are you thinking about in 2022 expanding the JVs through acquisitions?
Eric Mendelsohn, President and CEO
Good question, Dan. This is Eric. You're right, we're excited about this and it does have potential as a new platform. Most of our other properties are still in triple-net leases, so it might not be possible to put them into the JV. The current operators have something to say about that. But it certainly could be a platform for growth and for new acquisitions, and we're hopeful that will be the case.
Daniel Bernstein, Analyst
Okay. All right, I'll hop off. Thanks for taking the questions.
John Spaid, Executive Vice President and CFO
Thanks, Dan.
Operator, Operator
We have a question from Tayo Okusanya with Credit Suisse. Please go ahead. Your line is open.
Omotayo Okusanya, Analyst
Hey, good evening everyone. I just wanted to follow up on Rich's question about Bickford. So, Kev, I think you gave some general guidelines around assumptions that were made about the portfolio recovery as it pertains to OpEx labor, possibly also kind of rental growth. Could you talk a little bit more about just other assumptions you may be making that led you to feel confident about the way this is being structured, that we will be able to pay the newly established rent rates and as well as all the deferrals?
Kevin Pascoe, Chief Investment Officer
Sure, this is Kevin. We discussed in our prepared remarks the collections from Bickford for the second and third quarters, as well as our expectations for the fourth quarter, which aligns with the $28 million run rate we mentioned. In recent months, their agency and overtime usage, along with labor costs, have reached historical highs. If these remain stable, we are optimistic about their capacity to meet rental obligations as we move into next year. Based on current occupancy and rates, without any additional rate increases, we believe they can meet the $28 million rent figure. By improving operational efficiency and managing agency and overtime costs, we expect to see labor expenses come under control. Various factors will contribute to their potential for increasing net operating income over time. Historically, we have observed monthly occupancy growth of 50 to 100 basis points, which we consider a positive indicator for the upcoming 12 to 24 months and their chance to boost net operating income. They have several factors in their favor, but our assessment based on current information and labor rates suggests they should be able to handle rent payments. Assuming they manage labor effectively and achieve both occupancy and rate growth, that should assist with the deferral aspect.
Omotayo Okusanya, Analyst
Got you. Okay. That's helpful. And then, again, pardon me because I'm a little rusty; I've been out of the game for a couple of months. Regarding those smaller tenants that were in your portfolio and in transition, a few of them were in lease-up, and some may even have been triple-net transactions. Could you discuss what's going on with those tenants? Pre-pandemic, they were still in lease-up mode, and occupancies have obviously declined since then. Is there anything we should consider that might continue to impact earnings going forward due to the prolonged pandemic?
Eric Mendelsohn, President and CEO
That's a great question, Tayo. This is Eric, and welcome back to the game. We carefully evaluated some of those properties and noticed that they have negative value and aren't generating any NOI. We questioned whether they would generate NOI in the near future. Since the disposition market is quite strong, we found ourselves in a unique position where we could sell these underperforming buildings for cash, allowing us to pay down debt or reinvest in opportunities that would provide immediate NOI and returns. Several of those buildings ended up on our disposition list, which you can see on page 7 of the slide deck on our webpage. After our evaluations, we decided to hold onto a couple of buildings in end-markets we believe in, to wait for recovery. However, some buildings that struggled prior to the pandemic are still underperforming, but they can be sold at a good price. That's our strategy regarding those buildings.
Omotayo Okusanya, Analyst
Great. Thank you.
John Spaid, Executive Vice President and CFO
Tayo, this is John. On slide 7, you'll see there are 21 assets.
Omotayo Okusanya, Analyst
Yeah.
John Spaid, Executive Vice President and CFO
In the 'In progress' line, those 21 assets include 2 Holiday assets that have not yet been disposed of, 7 Bickford assets that we discussed on other slides, and approximately 12 additional assets that we've been talking about, which addresses your question regarding smaller tenants.
Operator, Operator
And there are no further questions at this time.
Eric Mendelsohn, President and CEO
Thank you everyone for your time and attention today, and we'll see some of you tomorrow at NAREIT.
Operator, Operator
That concludes the call for today. We thank you for your participation. That's it. Please disconnect your lines.