National Health Investors, Inc. Price & Performance (NHI)

The results as well as notice of the accessibility of this conference call were released after the market closed yesterday and a press release that's been covered by the financial media. 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 ks for the year ended 12/31/2024. Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireit.com. In addition, certain terms used in this call are non GAAP financial measures. Reconciliations of which are provided in NHI's earnings release and related tables schedules which have been furnished on Form eight ks to 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 Mendelson.

Hello, and thanks to everyone for joining us today. We ended the year on a strong note as the fourth quarter results exceeded our expectations expectations with contributions from across the portfolio. Our cash rent increased by nearly 9% year over year on solid organic growth from rent step ups and deferral repayments as well as increased investment activity shop occupancy continued to accelerate through the end of the year which helped to generate 12.5% NOI growth [indiscernible] we announced investments of over 150,000,000 during the quarter at an initial yield of 8.5%, while our balance sheet leverage ticked down to 4.1 times from 4.4 times in the third quarter. Reflecting on the full year's results, Our hard work performed during the portfolio optimization contributed meaningfully to 2024. This included over $11,000,000 in total deferral repayments and approximately 17% growth in Bickford's cash rental income Shop NOI increased by approximately 32% which was above the high end of our guidance.

Driven mainly by improved occupancy and three fifty basis points of margin improvement. From a capital allocation perspective, we announced over $235,000,000 at an average yield of approximately 8.6%. This was our most active year since 2019 and the momentum is clearly building. As a result, the company delivered growth in annual NAREIT FFO normalized FFO and FAD for the first time since 2020.

And while that growth is not linear, we exceeded the high end of our original February guidance for the full year. John will provide more details in his comments. Looking forward to 2025, we expect growth to continue as reflected in guidance. As noted a moment ago, our 2024 results were bolstered by rent step ups and deferral repayments resulting from the effects of COVID era restructuring, While we still expect some benefit to accrue from the 2025 financial results, We are looking for other avenues to support internal growth. Specifically, we're considering select opportunities to transition triple net senior housing assets to shop structures where we see excellent long term potential. With existing or new operators. The senior housing industry has exceptional tailwinds so we believe this strategy is a capital efficient way to improve shareholder value by increasing our overall exposure to senior housing operations and working with strong partners to generate greater cash flow and higher real estate valuations. We also continue to see significant organic up side in our existing shop platform with the portfolio operating at close to 90% we plan to strategically increase Rev4 to further drive margin expansion. After 32% NOI growth in 2024, we're guiding to 12% to 15% in 2025 Turning to our outlook on external growth, the balance sheet is in great shape and very supportive of funding significant investment opportunities, We were able to be advantageous in the equity markets last year by raising net proceeds of approximately $262,000,000 on a forward basis of which approximately 119,000,000 remains available to settle.

As John will detail in his comments, we are including $225,000,000 of incremental investments in our guidance reflecting our high conviction in the near term outlook While we're not including any investments beyond that, I think it's safe to say that we'd be disappointed we did not surpass last year's total $237,500,000 We're off to a good start in 2025. We closed 21,200,000.0 sale leaseback in January have 152,300,000.0 under signed LOIs And in addition, have an active pipeline of approximately $190,000,000 In closing, I'm pleased with the execution in 2024 and I'm very optimistic that 2025 will be an even more productive year While the interest rate environment has weighed recently on the cost of capital, we still have the capacity and ability to move more quickly than other capital providers to the senior housing sector of either scaled back their exposure or exited the industry entirely. As operators rushed to take advantage of the most favorable industry fundamentals in the history of senior housing, NHI is competitively positioned as the partner of choice which convinces us we're in the early days of multiple years of exceptional growth. Before I turn the call over, I want to briefly comment on the recent filing in which land and buildings has nominated two candidates for election to our Board of Directors at the upcoming Annual Shareholder Meeting, The company and the Board take information received from As such, the Board has made significant changes of the last several years which reflect its commitment to its fiduciary responsibility and in direct response to shareholder concerns.

We appreciate everyone's interest hope that you'll understand that we have no further comment on this matter. I'll now turn the call over to Kevin to provide more details on our operation [indiscernible] Thank you, Eric.

Since our last call in November, we have announced investments of $53,100,000 at an average initial yield of 9%. This included $28,100,000 in real estate acquisitions an average yield of 8.1% and a $25,000,000 loan at 10%. We have $152,300,000 in Board approved deals with an average yield of 8.2% that are expected to close in the first half of this year. This includes a mix of senior housing sale leaseback and real estate acquisitions as well as mortgage and construction loans with purchase options. We also have an actionable pipeline of approximately $190,000,000 in investments which have a reasonable chance of closing within the next twelve months. Not included in this figure are portfolio deals including shop deals. Turning to asset management, I want to comment specifically on a master lease on six properties in a partnership with Discovery Senior Living. As you will recall, we amended this lease in November of twenty twenty three with a scheduled 05/01/2025 reset to a minimum of a 5% yield on gross investment. While we have seen NOI growth, the buildings have not performed as expected, so we are evaluating several options These properties generated $4,500,000 in 2024 base rent and approximately $1,200,000 in deferral repayment.

While no final decisions have been made, we currently model a slight increase in the base rent but not to levels contemplated in the 2023 amendment. We expect to provide a more detailed update on this portfolio as we continue our evaluation. Now turning to the results. We had another good quarter with improving EBITDARM coverage and cash collections as well as solid contributions from acquisitions and shop growth.

The knee driven operators again had positive coverage trends with EBITDARM at 1.41 times.

Bickford's coverage adjusted for the April 2024 rent reset was 1.63 times while the other needs driven tenants coverage improved We made good progress on repositioning the SLM portfolio expect that we will have recaptured a significant portion of that NOI by the end of twenty twenty five. Of the four leased properties, one was transitioned to the William James Group in October with cash rent commencing April 1, Two properties in Louisiana are now under triple net lease effective in January.

Of this year and the remaining property was sold for $9,700,000 in net proceeds at which NHI provided $9,400,000 in financing at 8.5% during the fourth quarter. Earlier this month, we took ownership of the Florida property that secured our $10,000,000 mortgage note and are leasing it to Mainstay. We are still evaluating options on the $14,500,000 mezzanine loans on which we carry a substantial reserve and we'll provide more details when available. Our entrance fee in skilled nursing portfolios continue to show great performance. The discretionary senior housing portfolio which includes our entrance fee portfolio, had coverage of 1.7 times compared to 1.6 times in the sequential period. The SNF portfolio reported solid coverage at 3.05 times which improved sequentially from 3.04 times Recall that the SNF coverage is largely driven by NHC, is calculated using a fixed charge coverage at the corporate level as opposed to a facility level EBITDARM, Lastly, in shop, momentum we saw throughout the year continued through the [indiscernible] NOI increased 12.5% year over year to $3,200,000 Resident fees increased by 8.1% year over year driven by occupancy improvement of six twenty basis points to 89.4%. The margin improved 90 basis points to 23.2% which was the strongest result since the second quarter of twenty twenty two.

With the portfolio occupancy approaching 90%, we are starting to strategically target Rev4 growth as the primary driver to margin expansion. For the quarter RevPAR increased 60 basis points, While small, this was actually the largest RevPAR increase since we started operating the SHOP platform. We see plenty of runway for organic upside in SHOP and target NOI growth of 12% to 15% this year and with the expectations for several hundred basis points of margin improvement over the long term, we expect elevated NOI growth The portfolio is expected to show normal seasonal patterns with occupancy and NOI dipping in the first quarter and improving throughout the year. I'll now turn the call over to John to discuss our financial results and guidance. [indiscernible] Thank you, Kevin, and hello, everyone. For the year ended December 31, 2024, our net income per diluted common share was $3.13 unchanged from the prior year. Our NAREIT FFO results per diluted common share for the year and quarter ended 12/31/2024 compared to the prior year periods, increased 3.613.8% the $4.55 and $1.24 respectively. In the fourth quarter, we recognized a non cash non operating gain of $6,300,000 related to our forward ATM equity activity that is reflected in net income and NAREIT FFO, I'll talk more about this item in a moment.

Our normalized FFO results per diluted common share for the year ended December thirty one increased 2.52.8% to $4.44 and 1.12 respectively as compared to the prior year periods. FAD for the year for the quarter ended December 31 compared to the prior year periods, increased 8.710%, to $204,200,000 and $52,100,000 respectively. Sequentially compared to the third quarter, cash rent for the fourth quarter increased $2,600,000 largely attributable to $2,300,000 in new rent associated with the Spring Arbor portfolio acquisition. But also due to higher sequential deferred rent collections. Those increases were partially offset by other changes including $300,000 in lower cash rents attributable to the SLM default. NOI from our SHOP portfolio for the year and quarter ended December 31, increased 3212.5% to $12,200,000 and $3,200,000 respectively. Compared to the prior year periods.

Loan and realty losses for the year increased $3,900,000 compared to the prior year. The increase was primarily due to the increased reserves on the mortgage and loans During the fourth quarter, we just The company ended the year with no properties classified as held for sale. For the year, we made investments $237,500,000 an average initial yield of 8.6%.

Our financing activities included forward overnight equity transactions totaling approximately $272,000,000 in gross proceeds on 3,700,000.0 common shares at a price of $72.54 before fees.

We also retired $75,000,000 in senior notes utilizing proceeds from our revolver.

We additionally recast our $700,000,000 revolver extending the facility's maturity date into 2028.

As we previously mentioned in our third quarter earnings call, after closing the Spring Arbor investment, delivered 1,800,000.0 shares under our August forward overnight equity offering.

Approximately $122,400,000 in proceeds. [indiscernible] we previously mentioned, our investment activity continues to be very active. Subsequent to the Spring Arbor closing through January of this year, We closed an additional $53,000,000 in investments at an average yield of 9%. As a result of our investment pipeline during the fourth quarter, we activated our ATM sold on a forward basis, dollars 989,000 common shares an average price before fees of $76.14 per share. As we close the additional investment activity just mentioned at the end of the year, we settled $266,000 common shares of the ATM forward equity at an adjusted forward price of $75.22 per share after fees. For proceeds of approximately $20,000,000 Including the remaining escrow August overnight equity forward proceeds, at the end of the year, we had total escrowed forward equity proceeds of approximately 118,700,000.0 available to us in exchange for the future delivery of 1,680,000.00 common shares at an average price of $70.53 per share. I mentioned in my summary of operating results the $6,300,000 gain on forward equity sale agreement recognized in the fourth quarter associated with our ATM equity activity. [indiscernible] This game is recognized because our forward equity arrangement was deemed not to satisfy all the accounting requirements for equity classification during the time we were raising equity during the quarter.

The accounting treatment moves some of the equity from paid in capital to retained earnings via the income statement. So it's more presentation and substance and should be viewed through that lens. Our balance sheet ended the fourth quarter and you're in great shape. Our net debt to adjusted EBITDA ratio was 4.1 times for the fourth quarter well within our stated four to five times leverage policy. We ended the year with approximately $425,000,000 in available ATM capacity And as I mentioned, we continue to have approximately $119,000,000 in remaining equity forward proceeds available to At the January, we had $327,000,000 of availability on our revolver. For 2025, we're focused on the company's liquidity needs as we continue to make make investments and plan for the retirement of our maturing debt. We intend to exercise our right to extend our $200,000,000 term loans maturity date into 2026. And we will retire our other maturing 2025 debt totaling $125,800,000 We are monitoring long term bond rates and continue to expect to tap the public bond market in 2025 to further improve our liquidity. Let me now turn to our dividend and guidance.

As we announced last night, our Board of Directors declared $0.9 per share dividend for shareholders of record 03/31/2025, and payable 05/02/2025. Last night, we also issued our full year 2025 guidance. Our guidance for NAREIT FFO and normalized FFO per diluted common share the midpoint is $4.63 or 1.84.3% increases for over 2024. Our guidance for FAD at the midpoint is 2 and $21,700,000 or an 8.6% increase over 2024. Our guidance this year includes the impacts from S. Grot forward equity proceeds during the year. So because our confidence in our pipeline has led us to raise significant forward equity, today we are including in guidance our view on our future 2025 unidentified investment activity. Our 2025 guidance includes $225,000,000 in new The timing for the investments is generally assumed incredibly over the year. In the future, we may discontinue giving guidance unidentified investments should we discontinue obtaining equity on a forward basis. Our guidance includes shop NOI growth in the range of 12% to 15% over 2024. Our guidance includes the continued collection of deferred rents and the fulfillment of our existing commitments. It also includes our preliminary assumptions for the annual NHSEAP percentage revenue rent increase, and the Discovery PropCo May one, twenty twenty five rent step up We expect NOI from the Discovery base rent but we do not believe the portfolio will be able to meet the 5% target yield set under the lease.

The anticipated discovery lease modification will likely result in change in the portfolio's GAAP revenues. Finally, guidance continues to include assumptions for additional costs and concessions related to normal asset management transitions, dispositions and loan repayments. So once again, thank you all for joining our call today. That concludes our prepared remarks. So with that operator, please open the lines for questions.

Certainly. Everyone at this time will be conducting a question and [indiscernible] Your first question is coming from Rich Anderson from Wedbush. Your line is live.

Thanks. Good morning.

So on the SLM, if you could just sort of triangulate that for me, John. How much rent and interest income did you generate in 2024? And how much are you expected to generate in 2025 inside the framework of your guidance?

So we're talking about rent and interest or just rent?

The whole nut. [indiscernible] So, rent and interest in including our mezzanine loan would be probably closer to 55%. 2025 versus 2024. On a say full year full quarter over full quarter basis when we get to the end of the year?

Okay. So run rate by the fourth quarter Yes. But the mezzanine loan and Kevin can talk more about this is still still in a state of flux that can improve materially Before Kevin chimes in, what about on just rent? Would it be So it'd be about 70% of rent. Right. I was trying to get to that. [indiscernible] Okay. And can you guys comment on the mezz piece? I know it's TBD at the moment, but any more color there, dollars 14,500,000.0? Sure, Rich. This is Kevin. As you said, it's TBD, but we're looking at several alternatives. We know that The company SLM is going through a sale process We're negotiating with them on what a recovery would look like assuming that they execute the sale. Financing right now is still not terribly easy to come by particularly on distressed properties, but there are a few in there that are producing NOI. So we expect to my expectation is that we have some element of recovery. We're still in terms of dollar size, don't know. We're looking at alternatives in terms of what can we do, is there a buy opportunity or for us to step in and help a prospective buyer, if it's somebody that we want to work with, So we've got a lot of options on the table So it's still To be continued, I got one more comment if I can make on this.

It's a little bit of an apples and oranges equation two you think about it, what we're trying to do is collect our principal on the mezzanine loan. And then of course, we will redeploy it. But if we can collect that principal depending on how much we collect, we could recoup some of our credit loss reserve and then redeploy the proceeds. At the very least, it would go to pay down our right now our 5.5% cost revolver.

Okay. Second question, you're not talking about about land and buildings, so I understand that. But on NHC, that expires in 2026. I know it's not too soon to be talking about that. It's over three times on a corporate level. I guess at the property level, it's got a two handle on it. You may not comment on that, maybe you will. But but what's the market in your mind for those assets in their markets in terms of what would be appropriate market coverage should you get a fair deal out of that lease expiration? Thanks. Hey, Rich, this is Eric.

The market is very robust for these buildings. They're in good markets. A market coverage, in my opinion, would be $13.14 and with a new operator, you'd have to account for transition trauma and NHC under the lease and this is all publicly in their publicly listed lease, NHC does have the right to personal property, so you'd have some CapEx or FF and E costs on a transition.

But there's is room to maneuver there. And we're having active discussions now with NHC and other interested parties.

Okay. Sounds good. Thanks very much. Thanks, Rich.

Thank you. Your next question is coming from Juan Sanabria from BMO Capital Markets. Your line is live.

Hi, good morning. Just with regards to SHOP, Hoping you could talk about the piece parts to guidance with regards to assumptions behind occupancy and rate behind the 12% to 15% And then maybe as part of that, if you could expound upon the comments made by Eric at the top of the call, about considering some transitions that sounded like of existing operators from TripleNet Hey, Juan, this is Kevin. In terms of how we're looking at performance for SHOP over the year, we had good momentum throughout 2024. Feel like we ended the year on a high note. As we also talked about in our prepared remarks, we have some seasonality in the first quarter And then we're looking back at getting momentum on occupancy throughout balance of the year and being able to push Rev4 over over that period. So when we take in those pieces, we think that we can continue to grow at, again, the 12% to 15% that we mentioned year over year basis. There might be some opportunity there where we're evaluating some more operational structures and how there might be some costs savings here and there. Overall though, it is going to be more of a revenue play and a lot of it is just reducing the incentives and as they continue burn off, we'll see the Rev four climb a little bit higher.

We talked about it going up a bit quarter over quarter. We're looking to see that continue to improve throughout the year. So I think we've we've pushed our operating partners to be able to continue to deliver better performance. We're still continuing to put CapEx into these buildings, which the delivery of that will also help as we look at RevPOR performance. We've got some more work to do on that I mean, I think that's just how we were building the the forecast for the year and thinking about where we can go with this portfolio.

Great.

And then I was just hoping you could comment on Bicford, it looks like the second half of the year from the late summer I saw deterioration in the occupancy from the same store pool that you disclosed in the press release [indiscernible] what's driving that? Any pause or thoughts or concerns around that loss of momentum I think there's a little there's a couple of things in there. One, they pulled forward their rate increases So, you had a little bit of move out just from a price point standpoint. On the whole though, it's still a net positive for Vigford from NOI look at the portfolio. And then you have some some seasonality as well that I think started creeping in there in some of the winter months. So I think they can still be successful throughout the year. They are known for delivering Higher acuity care, it's going to be at a higher price point. So some of the people that moved in that were maybe on the edge in terms of affordability decided to move out, but they've done a really nice job or continue to do a really nice job of selling the care that they deliver But I think that's part of the the occupancy piece that you're seeing there.

Thank you.

Thank you. Your next question is coming from Amocha Okusanya from Deutsche Bank. Your line is live.

Yes.

Kevin, hoping you can help me understand the acquisition guidance a little bit better. It $225,000,000 built in. But it sounds like you have $150,000,000 plus or already in LOIs and a pipeline of $190,000,000 So could you just help us reconcile a little bit three forty versus guidance of $2.25, especially when you still have another kind of ten months to go in the year?

Sure. This is John, Tayo. How are you doing? Let me take that one. Yes. So in our guidance, is our expectation to close a number of those properties in the LOI, but they're under LOI. So they're not definitive agreements just yet. So we have high degree of confidence that we're going to be able to hit the number in our guidance. Our guidance is a combination of sale leasebacks as well as additional mortgage loans. That's how we got to the weighted average yield. We expect to underpromise and overdeliver on that number. And you're right, we have quite a bit more in our pipeline than in our guidance. So there's some upside there clearly. Okay. That's helpful. And then second question also on deferred rent collection. If you could help us through that as well. It's the balance is $21,000,000 or so you collected about $11,000,000 in 2024. Just help us understand what's kind of baked into 2025 and if there's any potential upside there as well?

Yes, there is upside. Recall that some of the equations on that $21,000,000 include some deferral credit that if the operators perform or exceed performance, they might get some credits. But generally, our guidance is still in line with what you saw in the fourth quarter for the collection of deferrals and are primarily Bickford. Let me back up a minute. Actually, there are approximately a $1,000,000 a little over $1,000,000 a quarter The fourth quarter was a little ahead of what we forecasted So you have about $4,000,000 baked in. For $2,025,000,000 dollars relative to the $11,000,000 from 2024? That's right.

And the reason for the big slowdown is Well, it depends on the source of the deferrals, right? And there was quite a few extraordinary collections in 2024 that looks very difficult to repeat in 2025. For example, Chancellor paid a $2,500,000 number. There were some others, including some from Discovery that we don't think that are going to be repeatable in 2025.

So that's just that's just our guidance right now.

Got you. That's helpful. Then one more for the road. This How ultimately do you expect that to play out. If you could just kind of help us kind of go through kind of different scenarios for that, just kind of given some of the earlier comments about the profitability of not quite getting to where you need to kind of get the direct reset you were expecting? Tayo, this is Eric.

Is your question regarding the future of the collectability of deferral payments?

It's a combination of both things. It's that the future of the deferrals and also if you couldn't get the or you're not going to get that the direct reset you expect I think there was some conversation of you are expecting a step up in rent anyway, but longer term this idea of are you going to is there going to continue to be an operator see you guys transitioning to someone else? What could that look like? Just kind of trying to think about the ultimate scenarios with [indiscernible] Right. Okay. So your question is deferrals and then rent resets and then operators who aren't able to make the rent reset [indiscernible] Yes. So at that point, we would investigate either re teneting the building Sometimes it's one building and a group of buildings that's the problem, maybe you sell that one building or re tenant that one building.

And as we said in our prepared remarks, we're also doing an analysis to see if converting it to SHOP or RIDEA would result in greater NOI. So everything's on the table in that instance. Sounds good. Thank you. Thanks, Tayo.

Thank you. From KeyBanc Capital Markets. Your line is live.

Great. Thanks and good morning everyone. Eric, commentary continues to be very positive around investments. I guess when you kind of break out the investment pipeline, from the $350,000,000 last quarter and then kind of what's under LOI and in that future pipeline it's really unchanged. So just curious what your confidence level is that you can [indiscernible] size that we should be thinking about on a future pipeline basis where that the right level is Austin, this is Kevin. I would tell you that when we're looking at the $350,000,000 that you quoted, you're right, it's a similar size, but it's a different opportunity set.

We continue to look at a bunch of different opportunities. I can tell you that if we looked at the total funnel, it's couple of billion dollars in terms of what we're looking at at any given time. Which again continues to churn week over week and month over month. So I feel pretty good about the opportunities that we're seeing in front of us. It's really just whittling it down to the ones that we think are executable. And then moving on from those that are not. So it's it may look like a stagnant number, but I can tell you with with certainty that it's a pretty new opportunity set each week to month and we just kind of whittle it down to the ones that we think are actionable. So as the market sits today, I feel pretty good about our outlook.

That's helpful comments. And then with respect to the larger portfolio opportunity, [indiscernible] size up, I guess, the number of opportunities or investment volume that that includes and what your confidence level is that maybe you're able to close one or more of those opportunities?

Well, I don't know that say anything different than other than what we talked about in the prepared remarks, which is Our portfolio deals are not or shop deals are not included in what we talk about from our investment pipeline as that just mentioned, we're looking at a couple of billion dollars worth of stuff at any given time. So I feel good about the opportunity for us to be able to get down the path on some of those, but we're not at a place where we want to give you guidance based on something that would be a pretty meaningful change. To the company. So we're holding back on that Hey, Austin, this is John.

Let me add another 2¢ to that. In the fourth quarter, and a little bit recently, There's been a lot of movement in everybody's cost of National. And we're very sensitive to deploying capital that's accretive. So if you think about it, we're always looking at the opportunity set and then the long term interest rates and our stock price And so despite some of the increased cost of capital that we've seen here recently, that opportunity set is still still penciling out well.

On an accretive basis.

That's all helpful. And then just the last one for me. This I think got asked maybe looked over a little bit from an earlier question, but the presentation last night did highlight potential shop conversion opportunities. And I'm just wondering if you could size up how big that could be from a gross investment or in place NOI perspective and whether or not the discovery Triple net assets are a consideration for conversion with a new operator? Hey, Austin, this is Eric.

Yes. Discovery portfolio is definitely a possibility. And so are others. We have other operators that are currently running RIDEA portfolios for other REITs have a strong back office, which is one of the criteria we're looking at. And would be A good partner for us to start our RIDEA journey.

Understood. Thanks for all the comments. Thank you. Your next question is coming from John Killechowski from Wells Fargo.

Your line is live.

Maybe just going back to that last question and talk about sizing the opportunity. How about the earnings impact of any SHOP transitions here? I know that there's probably some elevated CapEx and some transition time associated with those. So I'm not sure if there's maybe upside to 25 guide or if this will likely roll through to 26. Hey, John, this is John Spade.

Yes, we're very sensitive to that. As a matter of fact, and it ultimately comes down to earnings growth, NOI growth, transition trauma and like you said CapEx requirements.

So So the opportunity sets vary depending upon the current coverage ratios over the current rent. So obviously, if we convert something that's well covered suddenly all that EBITDAR, if there's no transition trauma, could be very accretive. But there's whenever there's a transition to work through that and communicate that properly to you. And then of course, we'll also communicate to you what our expectations are for the CapEx requirements as well. So every opportunity sets a little different.

Okay.

And then how about when might you all start including shop acquisitions in your pipe total opportunity set. What does the end of twenty twenty five look like in terms of total shop exposure in your portfolio?

This is Eric. I could see it being 5% to 10% of our portfolio by a end of this year, early next year.

Okay.

Great. Thank you. Thank you. Your next question is coming from Farrow Granite from Bank of America.

Your line is live.

Thank you for taking my question.

I was curious just in terms of your acquisition pipeline, are you looking to at all expand your skilled nursing portfolio?

Hey, there, this is Kevin.

We're absolutely looking. It's just a matter of getting an opportunity at the right price with the right operator We have Very good. Skilled nursing operators now. We would love to to do more with them. That said, the market's been pretty frothy. We think from a pricing perspective, and we've been pretty rigorous around our underwriting criteria in terms of our expectations of credit and coverage. So we haven't seen anything lately were ready to act on, but we continue to look. We'd love to see that percentage investment in our portfolio tick up a little bit if we could get something of reasonable size to add, but right now, again, it's just we haven't seen those opportunities, but we would absolutely take a look. Great. And I was hoping to get a few comments Just with current news, the House passing their budget through a vote. And then with the Senate having their own budget outlined, the possible cuts to Medicaid, any thoughts on how maybe that would impact your business or going forward in your negotiations?

Sure.

This is Kevin again.

It's something we're watching, but it's I think too soon to tell. It seems to be teed up that it may affect those programs. That said, from what I've seen so far, it's not explicitly outlined in the in the bill. So we'll be working with our operators and make sure we understand and our other resources that have closer intel to what's going on in Washington. Anecdotally though, what we've heard from our other resources is that it has not cooled the market in terms of skilled nursing and Buyers interest or pricing So we'll see where that goes. But to date, it still remains pretty robust market Great. And sorry, one more for me about within your guidance, do you have any bad debt or credit loss assumptions baked in?

We do. We do. And you got to keep in mind, over the last Say two years, year end 2022 to 2024, our mortgage and loan receivables have grown right at 8% And as that grows, there's always going to be a certain level of credit loss reserve. Taken against that growth.

And so our guidance continues to assume growth which includes growth in mortgage And it sorry, is there a sort of base play associated with that?

No, sorry, I don't have that for you.

There is in there, but there's a little bit of squishiness to that number depending on when we're talking about mezzanine loans or mortgage loans. So it's basically an average number. I think what you should do is just use 2024 was an unusual year because of the SLM reserves if you were to go back a couple of years, and look at the average CECL reserve on our mortgage and loan portfolio then and then sort of make an assumption of what our growth might look like you get a pretty good number.

Okay. Appreciate it. Thank you so much. Your next question is coming from Juan Sanabria from BMO Capital Markets.

Hi. Thanks for the follow-up, Tom.

Just going back to SHOP and incremental investments, I think John you made an allusion to that be kind of [indiscernible] So does that mean that you're looking at potentially buying a platform, so to speak, where you'd have a bigger like asset management capability as part of that to oversee a shop investment?

Just trying to tease out kind of what you implied by that.

I don't think I made that implication One thing I would point out in Kevin's remarks and Eric's remarks too is we are looking at some fairly large portfolio transactions that are not included in our pipeline numbers. And those are so difficult, they're so material No, they're so difficult to really determine whether or not they're real yet.

That it's hard for us to talk about those But no, in my guidance, was not really any transformative I wasn't necessarily talking about what's in guidance, but just what's being contemplated is strategically for the business? Like, Is it Is it a platform or is it more assets that are under a shop structure, I guess is the question? Hey, Juan, this is Eric.

I would say that it's more smaller portfolios, maybe 3s or 4s. We definitely would add to our asset management talent [indiscernible] We're almost at that point now anyway, just the pace of acquisitions we've been doing last year and this year So we'll make appropriate overhead and headcount adjustments along the way And you know our usual cadence before the pandemic was $200,000,000 to $400,000,000 a year.

That's a lot of 2s and 3s and 4s portfolio deals. That's our sweet spot.

Great. And then just as a follow-up to a prior question about Any potential dilution from triple net to shop conversions? I guess Are those contemplated conversions being done out of a position of strength or weakness meaning is the are the conversations or strategies around leases without great coverage I just I'm confused why a tenant under a lease would choose to give up that upside if they're in the money with the rent coverage that they're that they have That's a fair question, Juan. You're absolutely right. If there is coverage on a lease and we wanted to convert it to shop there would definitely have to be a conversation about profit sharing and promotes or bonuses and management fee The reason though that people would be interested in having that conversation is they probably have personal guarantees or other strong credit in place that is meaningful to them and converting to shop would mean less of that. So and whether or not it's from a position of strength or weakness, you're right about that as well. I mean, it's It's a conversation that we would have in both instances if lease isn't working out or the coverage is just above breakeven, then we need to have a conversation about changing operators what the CapEx looks like, what a new joint venture partner might do for us and whether the operations can improve based on all of that.

Okay. And thank you for that. And just one last quick one for me. The guidance has like a shop CapEx number.

Is there anything over and above that for kind of deferred CapEx or more redevelopment type CapEx that has been spent or is intended to be spent to help the pricing power of the asset? There is. The number that's in guidance is a recurring CapEx number. The number that we're continuing to deploy in our current SHOP portfolio is closer to $10,000,000 and we're repositioning those assets get at that NOI improvement. Great. Thank you. You're welcome.

Thanks, Juan.

Thank you. That concludes our Q and A session. I will now hand the conference back to Chief Executive Officer, Eric Mendelson for closing remarks. Please go ahead.

Thanks everyone for your time and attention today and we'll look forward to seeing you at NICK or other investor conferences.

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