Earnings Call Transcript
NATIONAL HEALTH INVESTORS INC (NHI)
Earnings Call Transcript - NHI Q2 2020
Operator, Operator
Greetings, and welcome to the National Health Investors Second Quarter 2020 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Tuesday, August 11, 2020. I would now like to turn the conference over to Dana Hambly. Please, go ahead.
Operator, Operator
Thank you, and welcome, everyone, to the National Health Investors conference call to review the company's results for the second quarter of 2020. On the call with me today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; and John Spaid, Executive Vice President and Chief Financial Officer. We're also joined today by Donald Thompson, who's the founder and CEO of Senior Living Communities. The results as well as the notice of the accessibility of this conference call, on a listen-only basis, over the internet, were released yesterday after market close 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 June 30, 2020. Copies of these filings are available on the SEC's website at www.sec.gov or 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 these 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, CEO
Thank you, Dana. Hello, everyone, and thanks for joining us today. First and foremost, we want to express our gratitude and admiration to all of our operating partners and their frontline heroes that go to great lengths to keep our senior population safe in what is inarguably the worst crisis this industry has ever experienced. While too often overlooked and unfairly criticized in the media, the work they do is inspirational to all of us at NHI, and we cannot thank them enough. I said on our last conference call that reputations are made during a crisis and that, when history reflects back on this time, there will be operators that are hailed as heroes. Now that we are another three months into this pandemic, I still feel the same way. Our operating partners weathered the initial onslaught of the pandemic, which introduced significant obstacles, including difficulties in sourcing PPE and addressing erratic staffing and regulatory issues, not to mention the negative media coverage. While certainly not back to normal, our operators have adapted and generally experienced better stabilization as move-ins have gradually rebounded to slow the rate of occupancy decline experienced in the earliest months of this crisis. But the challenges posed by COVID, particularly to our senior residents are very real, and it is difficult to say with any degree of accuracy when we will return to a more normal operating environment. In recent weeks, our operators have experienced an increase in active resident cases, which broadly reflects what we have seen in the country as COVID spreads. As of August 4, we had 450 active resident cases in 85 of our buildings. This was down from the prior week, but still the second highest weekly number since we started reporting this data in mid-March. It should be pointed out that in some cases, our skilled operators are accepting COVID-positive patients for treatment from hospitals in the normal course of business. Our operators have done an admirable job of limiting the spread of COVID, if it does get into the community. More extensive testing is leading to earlier detection, particularly of asymptomatic residents, which we believe translates to better clinical outcomes and fewer deaths. Today, we are pleased to have Donald Thompson with Senior Living Communities join us as a special guest today, to provide an operator's perspective on the impact of the pandemic and his longer-term outlook for SLC and seniors' housing in general. Our second quarter and year-to-date AFFO growth have been above our initial projections, reflecting the strength of the triple-net lease strategy. John will cover the results in more detail. Our second quarter contractual rent collections were nearly 100%. July was strong as well at 97%. And month-to-date August collections are as expected. We expect to provide a business update for August, as we have done for June and July. Notwithstanding the results so far, our visibility is obviously clouded by COVID and the impact it is having on our operators' margins. Subsequent to the quarter end, we reached a rent deferral agreement with Bickford and are negotiating another agreement with a separate operator. Kevin will provide more details in his comments. Our priorities for the balance of the year are simple and straightforward; continue active dialogue with our operators and support them when and where we can with the goal of improving coverage; maintain a low-levered balance sheet to provide financial flexibility; and continue to provide transparency to the investment community as the pandemic unfolds. With that, I'll turn the call over to John.
John Spaid, CFO
Thank you, Eric, and good day, everyone. We had a very solid second quarter. And if it were not for the ongoing COVID uncertainty, today, we would have been reporting to you that our 6-month performance was tracking at the high end of our suspended 2020 guidance. Beginning with our net income per diluted common share, for the quarter ending June 30, 2020, we achieved $0.99 per share in earnings. That compares to $0.92 per share for the same period in 2019. For our three FFO performance metrics per diluted common share for the second quarter compared to the prior year quarter, NAREIT FFO increased 7.4% to $1.46, normalized FFO also increased 7.4% to $1.46 and adjusted FFO increased 7.1% to $1.35. Reconciliations for our pro forma performance metrics can be found in our earnings release and 10-Q filed yesterday afternoon at sec.gov. Cash NOI is a metric we use to measure our performance. Reconciliation and energized cash NOI can be found on page 17 of our Q2 2020 SEC filed supplemental. For the quarter ending June 30, cash NOI increased 8.5% and 1.5% to $77.4 million compared to $71.4 million in the prior year and $76.3 million in the prior quarter, respectively. Our increase in the second quarter 2020 cash NOI was reflective of our organic NOI growth from lease escalators and the effects from our post-Q2 2019 investments, including the Timber Ridge joint venture investment in the first quarter of 2020 as well as the continued fulfillment of our commitments. While our triple-net strategy muted the cash NOI effects from COVID for the second quarter and our operators continue to soundly execute on their infectious control protocols, as Kevin will discuss in more detail in a moment, we are evaluating on a case-by-case basis, COVID-related rent deferrals that will impact cash NOI in the coming quarters. In some cases, we are pursuing a strategy of temporarily releasing deposits and escrows back to our tenants as a means to support our operators’ cash flows in lieu of deferrals. In addition to date, all our rent deferral discussions with our tenants have included equitable compensation for any proposed deferral. Turning to the balance sheet. Our debt capital metrics for the quarter ending June 30 were net debt to annualized EBITDA at 4.8 times, weighted average debt maturity at 3.4 years, and our fixed charge coverage ratio at 6 times compared to 5.6 times in the first quarter of 2020. We ended the quarter with $1.55 billion in total debt, of which 91% was unsecured. For the quarter ended June 30, our weighted average cost of debt was 2.9%, which is our average cost of debt after the June 30 expiration of $210 million of fixed-rate swaps. Given where the 30-day LIBOR is currently, we expect this to have a positive impact on our interest expense in the third quarter. On July 9, we announced that we added liquidity to our balance sheet through a $100 million term loan at a variable rate of LIBOR plus 1.85%, with a 50 basis point floor for LIBOR. We're grateful to all our banking relationships for the strong show of support for NHI with commitments that totaled more than 2 times. This demonstrates the credit quality of NHI even during turbulent economic conditions. At July 31, we had $237 million in availability under our $550 million revolver and $83.9 million in unrestricted cash and cash equivalents. Additionally, recall that during the first quarter, we filed a new automatic shelf registration and refreshed our ATM program, giving us an additional $500 million in capacity. We continue to actively monitor both the equity and debt capital markets. Equity capital markets have stabilized in recent weeks but still look less than ideal to us given our recent stock price history and our current NAV. Having said that, and despite the COVID uncertainty, I'd like to reiterate our commitment to our low leverage and 4 times to 5 times net debt-to-EBITDA financial policy. As we review our leverage outlook moving forward, we're continually mindful of NHI's financial policies and potential future COVID impacts to our leverage metrics as well as the leverage impacts due to future disposition proceeds from purchase options and scheduled customer loan repayments. Debt capital markets during and after the second quarter continued to show improvement. We're fortunate that we do not have any significant maturities until 2022. And our liquidity has improved due to the recent term loan. However, we continue to look for an optimal entry point for a larger long-term debt issuance and are targeting later this year or early next year for just such an issuance. With that, I'll now turn the call over to Kevin Pascoe to discuss our portfolio.
Kevin Pascoe, CIO
Thank you, John. Starting with an update on COVID. The pandemic continues to pressure our operators' margins, though occupancy has shown more signs of leveling off in June and July, while COVID-related expenses have also come down significantly in that time frame. As of August 4, we had 85 buildings with one or more active resident cases, including 43 senior housing properties and 42 SNFs. The 85 properties span 16 operators in 22 different states. We had a total of 450 active resident cases, which included 360 cases in our SNFs and 90 cases at our senior housing properties. The active resident cases declined from the prior week's tally of 483 cases, but still represented the second highest total since we first started reporting this weekly data 6 months ago. But digging deeper into our senior living communities, we find that the average cases per building was 2.1, and excluding SNF cases at our senior living campuses and CCRCs, the ratio falls to 1.8. The ratio has fallen for 4 straight weeks and is well below the highs of nearly 5 cases per building, we experienced in May. Through more testing and enhanced protocols for isolation, treatment and cleaning, our operators have become even better at their mission to keep our senior population safe. And even with the increase in resident cases, it still represents less than 2% of our resident capacity. Turning to collections, we received nearly 100% of second quarter contractual rent, 97% of July rent, and August is in line with expectations. While we did not grant any rent concessions in the second quarter due to the pandemic, we reached an agreement with Bickford to defer $2.1 million for the third quarter, half of which will be escrowed with NHI. The deferral can be forgiven contingent on the sale of 9 Bickford properties to Bickford by the end of this year. Separately, we are in deferral discussions with another operator for an amount less than the Bickford deferral. You can find more details on Page 32 of the 10-Q. Turning to the performance of our different asset classes and larger operators, our needs-driven senior housing operators were hit hard at the onset of the crisis but seem to be leveling off as move-in activity, while well below normal, has picked up enough to slow the pace of occupancy losses. Bickford move-ins have recovered from April and May lows, and increased sales activity is a good harbinger that this trend will continue. Bickford's average occupancy on a same-community basis was 84.2% in the second quarter, down 300 basis points sequentially. June and July same-store average occupancies were each at 83.5%. Bickford had monthly occupancy declines of over 100 basis points in April and May, so we are cautiously optimistic by the slowing trends. Our entrance fee communities continue to fare slightly better as the resident turnover is much lower, and the residents tend to be younger and healthier relative to other property types. Still, they are not immune, and we had 8 entrance fee communities with an active resident case as of our last weekly update, though, like assisted living, the number of cases per community is limited. Senior Living Communities, which represents 15% of our revenue, had second quarter average occupancy of 79.1%, which was down 120 basis points from the first quarter. After experiencing a 150 basis point monthly occupancy loss in April, occupancy has flattened out around 79% and even ticked up to 79.2% in July. Donald will provide more details in a few minutes. Our rental independent living communities have experienced a more pronounced and sustained occupancy decline than our needs-driven and CCRC assets, which we attribute to the discretionary nature of the freestanding IL properties. Holiday Retirement, which represents 11% of our annualized cash revenue, had average occupancy of 83.5% in the second quarter, which was down 380 basis points from the first quarter. The occupancy continued to decline in June and July with average occupancy at 82.3% and 80.7%, respectively. While the occupancy declines have been more severe, we are in regular contact with Holiday and are impressed with their response to the crisis as their infection rate is below 0.5% in NHI's buildings. Bickford, SLC, and Holiday represent approximately 58% of our senior housing leased units. On a combined basis, those 3 saw average occupancy decline by 60 basis points sequentially in both June and July, which is an improvement compared to April and May, which experienced month-to-month declines of 150 basis points and 110 basis points, respectively. This is a good proxy for the rest of our senior housing portfolio. The skilled nursing portfolio, which represents 26% of our annualized cash revenue, is anchored by 2 excellent credits in NHC and the Ensign Group. As of our last weekly update, 42 of our 78 SNFs had active resident cases. Outbreaks in SNFs are more difficult to contain given the more frequent patient interaction and higher acuity levels. In several of our SNFs, operators are actively accepting COVID patients. The average active resident cases per SNF in our most recent update was 8.6. Occupancy has started to rebound as elective procedures start back up and the SNF industry has received much-needed government support through this pandemic. So overall, we feel very comfortable with the credit in this portfolio. As I mentioned on our first quarter call, the pace of deal activity declined dramatically at the beginning of the pandemic, and while we are seeing some recovery in the pipeline, it's still not at levels suggesting an active market. With our balance sheet in good shape, we are evaluating some smaller deals, primarily with existing operators, and favoring shorter-term higher-yielding products like mezzanine and development financing. We're also looking at a select number of deals with higher acuity operations. We are always looking for any distressed property that could provide strong, long-term risk-adjusted returns and we'll pursue any of those opportunities that meet our underwriting criteria, but we are not yet seeing many proposals that fit into this category. For the longer term, we continue to have conversations with existing and new operators and expect that our pipeline will be ready to support significant external growth when some sense of normalcy returns to the market. NHI has completed over $192 million in investments year-to-date, including $33.5 million in the second quarter. We acquired two properties in Indiana for $14.25 million, which are leased to Autumn Trace, which is a new relationship for NHI. We also started funding a $14.2 million loan to Bickford for the construction of a 64-unit assisted living and memory care building in Chesapeake, Virginia. We also completed a lease amendment, which pushed a purchase-option open date from 2020 to 2027 from 2021. With that, I'll hand the call back over to Eric.
Eric Mendelsohn, CEO
Thank you, Kevin. Now I'm pleased to introduce Donald Thompson, who is the founder and CEO of Senior Living Communities. Senior Living Communities is one of the country's premier operators of CCRCs with 15 properties in six states. Donald is one of our industry pioneers having built his first community in 1980 and his first CCRC in 1982. In lieu of direct questions by analysts, after Donald's comments, we will have Dana Hambly conduct a question-and-answer session based on previously submitted analyst questions. Welcome, Donald. Please tell us about yourself and your organization.
Donald Thompson, CEO, Senior Living Communities
Thank you, Eric. I appreciate the opportunity. Our company is located in Charlotte, North Carolina, and we operate three brands along with our management company, Maxwell Group. Senior Living Communities represents our life plan community brand, known as CCRCs, which offer a range of housing options such as houses and apartments for independent living, along with assisted living, memory care, skilled nursing, and rehabilitation services on the same property. This allows residents to transition through different levels of care as their needs change. We also have a home health service called Live Long Well Care, aimed at helping people maintain their independence at home. Our third brand, Wellmore, is an integrated healthcare campus focusing on assisted living, memory care, rehabilitation, and skilled nursing. Maxwell Group has been in business for 33 years, operating primarily from Charlotte. We manage 15 communities across six states, with 11 of them financed and owned by NHI. Our presence spans Indiana, Connecticut, North Carolina, Florida, Georgia, and South Carolina, accommodating around 2,900 residents across 3,200 units and employing 2,700 team members. Like many in senior care, we've faced significant challenges due to COVID-19 in recent months, and our frontline staff have genuinely been remarkable during this time. This sentiment is shared across the industry, and I believe the media hasn't adequately covered the efforts made by our peers, regardless of competition. As noted by our colleagues at Bickford Senior Living, we've been preparing for viral outbreaks for over 30 years. While the flu is a yearly concern, COVID-19 presents new challenges, especially with the lack of herd immunity and its unique impact on immune systems. Overall, the industry has been largely prepared for such situations, and the majority are doing an impressive job. We view the current circumstances as a temporary situation, projecting it to last 12 to 18 months. To date, we have encountered COVID-19 infections in 14 of our 15 communities, with the majority involving team members. The infection rates peaked in June and July, and currently, we average 0.8 resident infections and 1.5 infections among team members per community, although these numbers vary by location. Most tragic resident deaths occurred in April and early May, with only one resident fatality since then, which I believe reflects improvements in treatment protocols. In total, we've seen 11 resident deaths from COVID among our 2,900 residents in the past five months, compared to an expected 140 deaths during that same period. This indicates that COVID-related mortality for our population is about 8% of the normal death rates we would typically see. The financial impact of COVID has resulted in additional costs of $44 per month per resident, which includes those living independently. The costs for our residents requiring care services like skilled nursing or assisted living are higher, typically rising to $150 to $200 per month during active infections, primarily due to increased labor costs rather than just PPE. From January to now, our occupancy has dipped by 130 basis points, but we have seen increases in May and June, and a further rise in July across our portfolio managed by NHI. In terms of resident categories, independent living has decreased by 50 basis points, assisted living remains stable, memory care has risen by 900 basis points, and skilled nursing has fallen by 630 basis points due to reduced elective surgeries and potential residents opting out of skilled nursing care after hospital visits. Regarding personal protective equipment, we have not faced shortages and have successfully maintained our supplies over the last two months, though we have experienced some challenges acquiring gowns. We have two main concerns related to COVID: the ability for family members to visit their loved ones in our communities, which we believe significantly impacts new resident move-ins and overall occupancy; and the negative media portrayal that casts skilled nursing facilities as hotspots for COVID-related deaths, which I contend is misleading. The statistics don't accurately reflect our reality, as our 2,900 residents had only 11 fatalities when 140 were projected to have occurred normally. I know many older adults are struggling at home, feeling isolated and receiving inadequate care, when in fact, they could thrive in a senior living community, whether ours or a competitor’s, leading a more fulfilling and safer life. This is the narrative I hope we can convey as an industry. I'm ready to take questions, Dana.
Operator, Operator
Thanks for the overview, Donald. Very helpful. You called us a short-term issue. I'm going to pin you down a little bit though and ask you exactly when do you see this – some sense of normalcy returning to the business? And what's your timeline based on?
Donald Thompson, CEO, Senior Living Communities
My idea of normalcy is roughly four months from when a vaccine is generally available. I believe they're going to be available in December. I believe that means, April will be some sort of normalcy, although I think it will be a new normal. I think there will be increased infection control procedures realistically going forward probably forevermore. So – but I do think the new normal is April right now.
Operator, Operator
Okay. We'll hold you to that. Just kidding. On the two issues that you called out as being the two biggest issues, how do you combat those obstacles? What are you doing? What's your experience been? Or is it just something you have to deal with?
Donald Thompson, CEO, Senior Living Communities
Well, I think it should – we have to deal with this. Everybody has to deal with this. There's – I wish I could tell you the answer. I mean, helping people visit their loved ones. There really is no great solution until there's a vaccine generally available and you have people walking in your door. They're going to be showing a vaccine card, like we all do with yellow fever if we're working in Africa or just a vaccination record like you would have to show if you were to go to or show up in the Bahamas today. And I think that's the only solution to when we can solve people visiting their loved ones, and that's a huge issue to marketing. And then on the media, I think a lot of the media attention has already started to go away, but I think the real effect of it going away is probably going to be December, January or at least a month or two into vaccinations being widely available. I think that story is so out there, people aren't going to overcome it for a few more months.
Operator, Operator
Right. Right. Okay. And in light of that, how is the sales and marketing function changed for you as this crisis has unfolded?
Donald Thompson, CEO, Senior Living Communities
We immediately ramped up home visits, where our lifestyle advisors and sales team visited people in their homes, delivering items like food. For two months, we even provided grocery delivery from our food suppliers to residents outside our communities, as many individuals weren't able to go grocery shopping during that time. We approached this situation with creative solutions. Additionally, we've focused on communicating to potential residents and their families the benefits of living in our communities. However, it is a challenging process, and we anticipate that it will remain difficult for several months ahead.
Operator, Operator
Right. Right. And then what are you seeing in your leading indicators that would make you either optimistic or pessimistic about the next several months?
Donald Thompson, CEO, Senior Living Communities
Well, our independent living person-to-person and voice-to-voice traffic is down 18% year-over-year. That makes me less than thrilled. On the other hand, our assisted living memory care person-to-person, voice-to-voice traffic is up 20% year-over-year. So they're slightly divergent on that. Our web traffic overall is up 18% so far this year. So looking at it holistically, we believe that it hasn't totally changed. A lot of the issue in our industry is that assisted, memory care, skilled are very much needs-based. Our independent living, on the other hand is discretionary. You could choose to live in your same single-family home, generally speaking, versus moving to our apartment or our single-family cottage in one of our communities. So a little bit tail of two different cities, so to speak between care services, independent living.
Operator, Operator
Right. And then on the conversion rate for leads and tours, how has that changed since the pandemic began? And assuming it has, what do you attribute that mostly to?
Donald Thompson, CEO, Senior Living Communities
I think the big change has been that people, when they do show up to talk to you are very serious about moving in. They're not showing up to kick the tires, so to speak. And a couple of statistics are in 2019, our leads to move-ins was 10.2%. And since March 1, actually just in the last two months even better to use, it's only been 5%. However, our leads are up almost 100% in the last 2.5 months. Our tourist to move-in, that's when people come actually to the community and then tour it and then move in was 23.5% last year in 2019 full year. And it's been 26.2% since March 1. I don't have the numbers just for the last two months, but my guess is it's also been up. So the good news is things are going in the right direction. We just need to keep it that way. And hope it's not just comp demand from six to eight weeks of no one leaving their homes.
Operator, Operator
That's good context. Regarding the EBITDA coverage with SLC and NHI, it has been declining for several months. We recently reported it at 1.06 in the first quarter, which is obviously outdated information. What were your expectations for coverage at the start of the year? Additionally, how has your perspective changed now that we are five months into the year?
Donald Thompson, CEO, Senior Living Communities
I would say that on February 28, I was feeling optimistic about the year ahead, as everything seemed to be going well. However, by March 15, things took a dramatic turn, and for the next several weeks, I felt quite down, even into late April and May. By May 20, we began to see positive changes. Initially, we were concerned it might just be a rebound after a period of low attendance, but we've experienced three consecutive months of positive developments, even into August. I believe that what we report for the second quarter will likely align with our first quarter results, with a potential increase. I am hopeful that we can maintain this momentum for the remainder of the year, but this is merely my personal outlook.
Operator, Operator
Thanks for the clarification. As you approach the flu season, is it going to be different this year than in years past?
Donald Thompson, CEO, Senior Living Communities
I would like to tell you that it's going to be somewhat different. I'm not sure it is. We are always pretty jammed up on doing the right things for infection control. We had no flu desks in this past flu season and spanning in the spring of 2020. Last year, I believe we had two; year before it, three; and then one in the year before that. So, flu season is something we've always taken seriously. The only concern we have, and one thing we are doing is we believe there's going to be a flu vaccine shortage this year. So, instead of taking our flu shots in late October, we're actually looking to get our flu vaccines in hand and in people's arms by the end of September and that's probably the biggest change we're making. The other changes that have occurred because of COVID, I think people are more attuned to hand washing, social distancing, using masks, infection control, isolating people, whether they're a team member walking and feeling ill or a resident who might be showing signs of potentially COVID or anything that looks like COVID.
Operator, Operator
Switching gear a little bit. Yes, appreciate that. Switching gears a little bit to talk about the CCRC model. It's unique. It touches all the asset classes within senior living and skilled nursing. You touched on this in your prepared remarks, but I wanted to revisit and ask how the different asset classes performed throughout the pandemic and how the CCRC model has really held up there in the crisis.
Donald Thompson, CEO, Senior Living Communities
Our CCRCs are somewhat different from others, with an average of 60% independent living and 40% healthcare, whereas many CCRCs have 85% independent and only 15% healthcare or even less. This gives us a significant advantage in transitioning residents to care services from outside the community. We not only support our pipeline by facilitating movement from independent living to care services within our facilities, but we also offer care services to individuals from outside. We're proud that around 80% of those who move in independently never require our healthcare services. We focus on helping residents maintain their independence for as long as possible, which has been beneficial, especially during times when independent living hasn't performed well. Currently, having independent living options is advantageous since it's generally more stable. Residents tend to stay longer, and the decision to move is more discretionary, leading to a slower decline in occupancy during challenging periods, such as a pandemic, compared to facilities that only offer care services. The unique CCRC model provides diversification, proving to be more resilient during tough times, although it may underperform slightly in better times for the same diversification reasons.
Operator, Operator
How have the entrance fee sales held up?
Donald Thompson, CEO, Senior Living Communities
Entrance fee sales have been moderate, and we hope to see improvement. While more tiers for move-ins are emerging, increasing the number of tours has been challenging. Many potential clients still express a desire to wait until COVID is over before making a decision, a sentiment we hear frequently. From March through May, we faced the most significant impact, as many people were unable or unwilling to leave their homes. Reviewing our contracts as of March 15, we found that 13% were canceled, 22% have yet to move in although they maintain plans to do so, and the remaining 65% have already moved in. The pandemic hasn't had a dramatically negative effect, but it hasn't been beneficial either. Overall, our occupancy is stable across the entire system, significantly increased in memory care, but has dropped considerably in skilled nursing, which is pulling us down. In independent living, we are only down by 50 basis points, and we anticipate some improvement in that area by the fourth quarter.
Operator, Operator
All right. And just a couple more questions in the interest of time, Donald. How's the pandemic impacted your workforce?
Donald Thompson, CEO, Senior Living Communities
I think interestingly, our turnover is down 11% year-over-year. Wages are about the same here in 2020. That's a real positive given the incredible pressure everybody has on NOI on margin because of expenses of COVID. And our average number of job openings has dropped from about 100 to around 75. So, pandemic actually is probably business purposes better for your workforce from a business perspective, obviously, not a good thing for the people that are out doing the work.
Operator, Operator
Right. Last question, big picture. Will the business be stronger, weaker, or about the same when the crisis is abated?
Donald Thompson, CEO, Senior Living Communities
Well, my favorite saying is whatever doesn't kill you makes you stronger. This isn't any different. There isn't a soul in this industry or any part of the industry, whether it's REITs, providers, operators, brokers, everyone is going to be stronger because of this. We're all being stress-tested. And all I'm seeing is people come through really with shining colors.
Eric Mendelsohn, CEO
Thank you, Donald. Thank you for your insights and your wisdom. And with that, we're going to turn the call over to analyst questions.
Operator, Operator
Thank you. We'll get our first question on the line from Daniel Bernstein from Capital One. Please go ahead with your question.
Daniel Bernstein, Analyst
Good morning.
Eric Mendelsohn, CEO
Good morning, Daniel.
Daniel Bernstein, Analyst
And thanks for having Donald on. The color was fantastic. So I don't want you to contradict – I'm not trying to get you to contradict, Donald. But when you look at acquisition opportunities and your underwriting, perhaps distressed operators on the real estate side, how are you thinking about the long-term outlook for the business, particularly how you think about occupancy margin. When you look back at 2009, entrant change moved out, length of stay moved out. It became a changed business. So how are you thinking about the underwriting of potential assets going forward? Thanks.
Kevin Pascoe, CIO
Hey, Dan, it's Kevin. As we look at acquisition opportunities, I mean, we're really trying to figure out what you're hitting on is, what is the go-forward expense margin occupancy, is there a new normal? I would tell you, we've not really set new parameters yet, although I would tell you, it's one of those – it's funny. I would say, you know it when you see it, it's going to be more than what we were looking at before. If we're thinking about coverage, it's going to be – we're going to want to have some additional padding in the expenses Right now, it's really hard to underwrite an operator transition. That doesn't mean you can't. But I mean, the fact of the matter is, at least for the past few months, you've not really been able to do as much diligence as you otherwise would in terms of getting into the building and being able to make sure you have everything mapped out. What we're trying to make sure we have a handle on is what is the demand going forward for those respective markets as Donald had kind of alluded to starting to see some flashes here and there of pent-up demand, but it's too soon to call it returned. So I think all that's to say is, we're still being very cautious, and we're – as you heard in my remarks, we wouldn't consider an active market just yet. But at this point, we're being pretty conservative, making sure that we have adequate cushion on coverage and making sure that the operating partners have a pretty good handle on expenses. We're able now to at least look into what they've spent through the pandemic. We've seen those numbers start to drift down in terms of what their monthly spend is, but it's still elevated, but we're able to kind of incorporate that as we're looking at new investment opportunities.
Daniel Bernstein, Analyst
Okay. And then on Bickford, obviously, this – any potential sale of assets hasn't occurred yet, so it's hard to comment on. But when you think – I'm trying to think of it is, it a band-aid or a long-term solution. And really, maybe you can give us some more color on the assets that might be sold. And how are you thinking maybe lease coverage or corporate coverage can improve post any asset sales if they occur?
Kevin Pascoe, CIO
So, this is Kevin, again. What I would say is what we're working on with Bickford is things that will help towards a longer-term solution. We've talked about in our conference calls before, that would be – could potentially be selling some of these assets, and that's exactly what we're exploring here. I would characterize these as ones that are maybe one of two types, either underperformers that are a drag on our current relationship with Bickford or ones that have just frankly tapped out in their current markets, where it's a market where the rent or the pricing power is not keeping up with a lease escalator or something like that. So coverage has kind of started to erode a little bit over time. Still good building, still good margins, good operations, just it needs a different capital structure on those buildings. And there's some opportunity for them to improve operations all the way around. But we feel like putting those – the subset of buildings in a different capital structure, putting real estate on Bickford's balance sheet, making them be less dependent on NHI is a good move for them in the long term. And frankly, the savings that they'll see from putting new capital in place will be a long-term benefit to them by having fixed debt – fixed bank debt on it versus an escalating lease.
Daniel Bernstein, Analyst
Okay. I will hop back up into the queue. Appreciate the color guys. Thanks.
Kevin Pascoe, CIO
Thank you.
Eric Mendelsohn, CEO
Thanks, Daniel.
Operator, Operator
Thank you very much. We'll get to our next question on the line from Connor Siversky from Berenberg. Go ahead with your question.
Connor Siversky, Analyst
Hi, everybody. Thanks for having me, and I appreciate the comments before by Donald. That was very helpful color. Just another question on Bickford, saw that construction loan initiated, I think it was June 30. I'm just wondering how your calculus behind the project changes at all with the deferral? Would appreciate some color there on the thought process.
Kevin Pascoe, CIO
Sure. This is Kevin again. Our process here is how do we optimize the relationship with Bickford. They've done a tremendous job picking sites, developing, filling buildings, and we want to support that portion of the relationship. We have a program, so to speak, with them. We'll see how that evolves over time. But currently, we get a 9% yield on our investment with a purchase option on the building. So, we feel like that's a very attractive investment to be able to get new real estate once it stabilizes. So if we can optimize the relationship by selling some of the older buildings and replacing it with newer stock, we're able to keep the relationship going, support the things that they really do well and make sure that we're helping them get to a better overall capital structure.
Connor Siversky, Analyst
Okay, thanks for that. And then one more for me on the Autumn Trace acquisition, can you speak on the markets or the relevant submarkets there in Indiana? How do they look during the pandemic? Are there any positive signs related to occupancy or performance in general?
Kevin Pascoe, CIO
I consider these at least secondary markets. They are smaller, but they performed very well. There were no COVID cases reported in the building, and there weren't many instances in the county either. We monitored both the county and the operations closely. So far, they have held up well and met our expectations. We are happy with that relationship, which we started before the pandemic. Our reputation in the market is crucial for fulfilling our commitments. We evaluated their performance leading up to the closing and since then, and they have performed excellently. We want to ensure we uphold our commitments, and we are pleased to have them with us.
Connor Siversky, Analyst
Okay. I’ll leave it there. Thanks for the color. Appreciate it.
Operator, Operator
Thank you very much. We'll get to our next question on the line from John Kim with BMO Capital Markets. Go ahead.
John Kim, Analyst
Thanks. Good morning. I appreciate having Dana speak. Could you explain why you would waive their rents if you're selling it back at book value? Is there a chance that you're selling it for more than book value?
Kevin Pascoe, CIO
The price is currently being documented, and we expect it to be higher than book value. The rent forgiven is part of the purchase price, serving as a deferral and an incentive to complete the transaction. They are actively working on securing financing and making the necessary commitments. We are pleased with their progress so far, though there is still work ahead. They are doing what they need to ensure this is finalized. We want to ensure they are incentivized appropriately to complete this deal. Once everything is finalized and all details are taken care of, I believe the outcome will be beneficial for both parties.
John Kim, Analyst
And is the 11.5% cap rate, is that a good indication of where you think assets of similar quality and geography would trade today?
Kevin Pascoe, CIO
Well, I mean, I guess I would point you to that cap rate, as you've mentioned, it is a rental rate on the initial book value. The final numbers will be different than that. What you're seeing there is a function of a lease that started years ago and escalated over time. And as I mentioned, these buildings haven't kept up. So this is making sure that we help the relationship a little bit by getting rid of some of the laggards and making sure that, as we mentioned with some of the development, focus on the things that Bickford has done well and move on some of these other buildings that are holding the portfolio back.
John Kim, Analyst
Okay. So yeah, the lease rate versus cap rate, cap rate will be lower because of the coverage. Is there an indication of where that cap rate would be?
Kevin Pascoe, CIO
We haven't disclosed that yet. You'll be able to see some more information once we finalize everything.
John Spaid, CFO
We don't like to negotiate against ourselves.
John Kim, Analyst
Yeah. Okay. And then finally, on the other potential deferral, is it safe to assume that one or the other couple of operators with the coverage at around one, two or lower? And how are you going to account for the revenue on that deferral that's deferred out to 2021?
Kevin Pascoe, CIO
Well, I guess I would say this, and I'll hand it over to John. But just from a deferral perspective, as we've mentioned, the pandemic has hit senior housing and pretty hard. And that, if it was one of our top five major customers, we'd be doing some additional disclosure. This is not one of those major tenants, somebody that we're trying to help in that. We're talking about a portion, a smaller portion of the rent that will be deferred for a period of time, and there would be some interest paid on that deferral. So I think, as John mentioned in his comments, an equitable trade for the deferral of rent is what we're seeking here and feel pretty good that, that's where the arrangement will end. And also because for competitive reasons, we're not outing any of the operators as we talk to them. We want to make sure that they have the ability to operate their business. What we're simply trying to provide is a little bit of flexibility through what is a very tough situation.
John Spaid, CFO
So John, this is John. We'll record the cash received on the deferral at the time we receive the cash.
John Kim, Analyst
Okay. So it would impact the 2020 earnings. So basically, are you switching to cash accounting for this particular time?
John Spaid, CFO
On the deferral. On the deferral.
John Kim, Analyst
On the deferral?
John Spaid, CFO
Right.
John Kim, Analyst
Okay. Okay. Thank you very much.
Operator, Operator
Thank you. We'll get to our next question on the line from Jordan Sadler with KeyBanc. Go ahead with your question.
Jordan Sadler, Analyst
Thanks and good afternoon. Just wanted to follow up on that last question on the unidentified tenant. Can you just give us a sense, this is a senior housing tenant, I would imagine, and is this one of your top tenants?
Eric Mendelsohn, CEO
Jordan, this is Eric. As Kevin mentioned, it's not one of our top five tenants. We are making an effort to provide additional disclosures due to COVID. We are issuing monthly occupancy reports and business updates. We will share the results of this deferral once they are available. The timing is complicated as we are currently in discussions, but we are providing as much information as we can, as soon as we can.
Jordan Sadler, Analyst
Okay.
Eric Mendelsohn, CEO
And I think Kevin pointed out that the amount of the deferral would be less than Bickford, so we wanted you to have a order of magnitude by telling you that.
Jordan Sadler, Analyst
And that's very helpful, actually. But this tenant paid rent in full during the second quarter. Did they also pay rent for July?
Kevin Pascoe, CIO
Yes. We're indicating that it is reflected in the numbers we have published so far. What we are discussing is how we will finish the year.
Jordan Sadler, Analyst
In your comments, John, you mentioned the potential relief for tenants regarding deferrals and mentioned considering security deposits. I'm trying to understand if the discussions for relief are limited to the two tenants, Bickford and one other unidentified tenant, or if they are part of a broader approach where you have found other solutions due to the availability of security deposits.
Eric Mendelsohn, CEO
Let me take a moment to highlight the advantages of triple net leases. They often involve various financial elements like deposits, credit, and guarantees, which can be corporate or personal in certain cases. This gives us more options to find solutions when dealing with a triple net lease. Additionally, I want to clarify that when we refer to deferrals, we mean there is an expectation that those revenues will be accounted for and received in the future. In contrast, if revenue isn’t collected in a shop portfolio, it’s essentially lost permanently. In response to your question, Jordan, we have been having many conversations with stakeholders. As you know, we conduct weekly surveys to assess the status of the COVID situation, and we share those findings. Some of these discussions focus on financial situations and tenants’ capabilities to pay rent. So far, we have been performing well, and our operators are faring well too, with significant support from the PPP loan programs. We will continue to be as transparent as possible and as quickly as we can, but these discussions are complex, and the current environment is competitive, which we need to navigate carefully.
Jordan Sadler, Analyst
That makes sense. And then lastly, just, I guess, you mentioned and discussed keeping your powder dry and staying in your target leverage range. What's sort of the acquisition appetite or investment appetite beyond these couple two or three investments you made in the quarter, some of which seemed a little bit pre-committed or defensive?
Eric Mendelsohn, CEO
Right. Well, as Kevin was saying, we're more focused on the needs of our existing clients. The acquisition market right now is pretty funky. There are deals out there circulating. Some of them, I think, are trial balloons to see if it's safe to transact yet because the numbers and the broker presentations are still kind of tone-deaf. And I would say that acquisitions that we're interested in doing are going to be unique. They're going to be opportunistic. And the pricing is going to be different than what we've normally been seeing. We want to bargain.
Jordan Sadler, Analyst
Okay. That makes sense. One last one on Bickford. Is there anything about the geography or the vintage of the Bickford sales of assets, those nine that you can share?
Kevin Pascoe, CIO
What I would say is that each situation is somewhat unique. Some markets are quite competitive and may have been overdeveloped. Others are secondary markets where pricing power has lagged. There are also areas that require some attention and may function better under a different capital structure. It's not specific to one location; rather, it's a matter of refining our portfolio to ensure we can enhance coverage over time, while also allowing these properties a chance to improve or potentially sell them if they prefer. Ultimately, restructuring the capital for this group of buildings will be beneficial for them and for our ongoing relationship and creditworthiness.
Jordan Sadler, Analyst
Okay. Thank you.
Eric Mendelsohn, CEO
Thanks, Jordan.
Operator, Operator
Thank you very much. Mr. Mendelsohn, there are no further questions at this time. I'll turn it back to you for any closing remarks.
Eric Mendelsohn, CEO
Thank you for participating, everyone. Thank you, Donald. You were a big hit, and you're probably going to have to do an encore presentation at some point. I would normally say we'll see everyone at a conference, but more than likely we'll see you on a Zoom call in the near future. Signing off.
Operator, Operator
Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation as you disconnect your lines. Have a good day, everyone. Be safe.