LTC Properties Inc (LTC) 2011 Q2 法說會逐字稿

Good day and welcome to the LTC Properties Inc. second quarter 2011 analyst conference call. All participants will be in a listen-only mode.

(Operator Instructions)

Before proceeding, let me mention that this presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words such as believes, expects, may, will, should, seeks, approximately, intends, plans, estimates, or anticipates, or the negative of those words or similar words. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position.

A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements including but not limited to the status of the economy, the status of capital markets including prevailing interest rates, our access to capital, the income and returns available from investments in healthcare-related real estate, the ability of our borrowers and lessees to meet their obligations to us, our reliance on a few major operators, competition faced by our borrowers and lessees within the healthcare industry, regulation of the healthcare industry by federal, state and local governments, compliance with and changes to regulations and payment policies within the healthcare industry, debt that we may incur, and changes in financing terms, our ability to continue to qualify as a real estate investment trust, the relative illiquidity of our real estate investments, potential limitations on our remedies when mortgage loans default, and risks and liabilities in connection with properties owned through limited liability companies and partnerships.

For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under Risk Factors contained in our annual report Form 10-K for the fiscal year ended December 31, 2010, and in our publicly available filings with the Securities and Exchange Commission. We do not undertake any responsibility to update or revise any of these factors, or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events, or otherwise. Please note this event is being recorded.

I would now like to turn the conference over to Wendy Simpson, CEO and President. Ms. Simpson, please go ahead.

Thank you, Jill. Good afternoon and thanks for joining us today.

With me are Pam Kessler, our Executive Vice President and Chief Financial Officer, who will be giving some specifics about our 2011 second-quarter earnings; Clint Malin, our Senior Vice President and Chief Investment Officer, who will comment on our pipeline of potential investments, both for acquisitions and for capital deployment to existing assets; and Andy Stokes, our Senior Vice President of Marketing and Strategic Planning, is also here with us and was recently out at a state industry meeting and will comment on the mood of operators at that meeting and other visions he has for this marketing strategy for LTC for the rest of the year.

Rather than start with any opening comments, I'm going to ask Pam to briefly comment on our financial results and our balance sheet. And we will also point out some new or different disclosures that we have in our supplemental report. We continue to try to improve our public information so that you will have access to the data that you may need when evaluating LTC.

I will then discuss what we believe the impact of the recent Medicare cuts may have on our operators and what our strategy is for the balance of the year based on conditions as they now exist. Then Clint and Andy will make their comments, I will make some closing comments and then open it up for questions. Pam?

Thank you Wendy. I will be discussing second-quarter results as compared to first-quarter results of this year. I will refer you to the 10-Q that was filed yesterday for year-over-year comparisons. Revenues increased this quarter approximately $900,000 due to acquisitions. Interest expense increased approximately $400,000 due to higher outstanding balances on our line of credit, related to acquisition, an increase in the amortization of debt issue cost related to the new $210 million line of credit, and the accretion of the earnout liability which is a non-cash interest expense.

Excluding non-cash interest expense of $177,000 related to the earnout liability, fully diluted FFO per share was $0.54 this quarter compared to normalized fully diluted FFO per share of $0.52 last quarter. Fully diluted normalized FAD per share was $0.52 this quarter compared to fully diluted normalized FAD per share of $0.51 last quarter.

Moving to the balance sheet, during the second quarter, we sold $50 million -- actually I'm sorry, during the third quarter, this was subsequent to June 30, we sold $50 million of 4.8% face senior unsecured notes under our shelf agreement with Prudential. The notes mature in 10 years and have a 7 year average life with amortization beginning in 2016. We used the proceeds from the sale to pay down the line of credit.

On August 1, we acquired a 140-bed skilled nursing property in Texas for $10 million. We used cash on hand and borrowed $5 million under our line of credit to fund the acquisition. In terms of liquidity, we have $185 million available under our line of credit, $65 million available under our ATM program and approximately $168 million under our shelf registration statement.

Moving to operator statistics and discussing the operator statistics, I will give the general caveat that these numbers come from our operators are unaudited and have not been independently verified by us. Additionally, the occupancy and lease coverage information is for the trailing 12 months for the first quarter of 2011, compared to the trailing 12 months for the fourth quarter 2010.

Occupancy in our same-store ALF portfolio was 77%. Excluding properties leased to Assisted Living Concepts, occupancy in our ALF portfolio in a same-store basis was 88%. EBITDAR lease coverage after a 5% fee was 1.4 times and before a management fee, our EBITDARM coverage was 1.6 times. Occupancy in our same-store SNF portfolio was 79%. EBITDAR lease coverage after a 5% fee increased to 2.1 times and before fee, our EBITDARM coverage for our SNF portfolio was 2.9 times.

Occupancy in our same-store portfolio of properties that provide independent living or a combination of independent living, assisted living and skilled nursing was 83%. EBITDAR lease coverage after a 5% fee increased to 1.9 times, before a management fee, our EBITDARM coverage was 2.4 times.

Quality mix, this is a new statistic for us this quarter, the quality mix for the first quarter of 2011 for our same-store portfolio, which includes skilled nursing, assisted living, independent living and properties with the combination thereof, was 63% private pay, 14% Medicare, and 23% Medicaid. The quality mix for the first quarter of 2011 for our same-store SNF portfolio was 23% private pay, 28% Medicare and 49% Medicaid.

Thank you Pam. I suspect that the preeminent question is about the impact on our lessees of the recent Medicare cuts and even the possible additional 2% cuts if Congress cannot agree on recommendations from the bipartisan committee that's to address additional deficit reduction strategies. First, as Pam said, 45.2% of our lease and mortgage income comes from SNF operations. 9.4% comes from other senior housing that usually contains some Medicare revenue within operations.

EBITDARM coverage, after a 5% management fee for SNF properties using the 12 month from the first quarter of 2011, is 2.11 times using a 5% management fee and 2.88 times before a management fee. Yes, RUGs did increase our coverage as it did for all REITs who have skilled nursing properties, but before RUGs IV, our SNF operators still covered 1.99 times if you use September 30, 2010, annualized results. The total amount of our revenue that comes from Medicare-related operations is 14.3%, private pay is 62.6% and Medicaid is 23.1%.

On page 9 of our supplemental, it will show you the percentage of GAAP revenues we received from major operators. The only SNF public operator that does not show up on the schedule is Sun and they represent 2.5% of revenue. I believe that the public SNFs have all commented as best they can on what they believe will be the impact on their revenue of the reduction. But they have not have enough time to evaluate the mitigating cost reduction. We have had discussions with all of our significant SNF operators and none of them are happy, but none of them are even hinting that they will face an inability to pay their rental obligations.

In the past, LTC has been viewed as not having the highest quality operators, such as ManorCare or Genesis. We have concentrated more on the regional local non-public operator who does not generally add other businesses such as therapy, hospice, or pharmacy. Our operators mostly have therapy contracts with outside contractors and some other contracts are for multi-years. None of our non-public operators that we have talked to are overly concerned about the impact of the therapy reimbursement regulation changes as a significant impact on their operations or our leased properties.

At this time, with the information now available from CMS and our operators, I see no reason to believe that any of our SNF operators will not be able to absorb the proposed reimbursement cuts and still meet comfortably their obligations to LTC. In 2010, before RUGs IV, our operators were profitable after [revved] and had comfortable coverage.

Since the first-quarter 2011, we have been able to add 3 additional analysts following LTC. They all came out with an initial buy recommendations and I sincerely hope this call will not change their minds or the minds of our other analysts who have buy recommendations on us. There are still a couple who need to be convinced, but I don't think their issues are as much about LTC as they are about industry caution. We will do all that we can to maintain our good relationships with all of our analysts, and I know Pam sincerely appreciates comments and questions, so that we can make LTC's disclosures meaningful and helpful.

Year-to-date in 2011, we have closed $72.3 million of transactions. That amount includes $11 million of possible earnout expenditures. $4 million that $11 million may -- is related to Texas Medicaid cuts which we thought might happen. The Texas Medicaid rates are now set and we'll probably pay out that $4 million before the end of the year. The remaining amount is related to occupancy increases in coverage over a period of time and we probably will not be paying out any of that amount of this year. Subsequent to the quarter end, we closed on a $10 million SNF acquisition which Clint will talk about.

Clint will be giving more specifics on our acquisition opportunities, but right now I think we may do about $34 million more in acquisitions and commit to build a replacement SNF facility that will break ground this fall and open next fall or late summer and cost in the range of $10 million. We are going over more detailed numbers and factoring in the Medicare cuts, but at this time, it still seems to like a feasible deal.

Page 3 of our supplemental shows pro forma market capitalizations, as it was at a point in time when our stock was $27.82. If you used a $21 stock price, and I don't want to, but just for instance, that would only represent 15.9% of capitalization. We still have the ability to do deals with debt capacity and maintain our conservative balance sheet.

We did draw the balance on our Prudential shelf. We drew $50 million at a fixed rate of 4.8% and staggered the amortization so that we do not have any significant wall of debt in any one year. We still have $185 million available under our line of credit, and we have primary -- preliminary discussions with expanding our relationship with Prudential and believe we may be able to secure some additional liquidity at favorable rates. We will, however, be ever mindful of our debt levels and the potential of need for equity in future years.

Speaking of which, Pam and I did do our regular update call to keep our ATM current, but I do not see our using this at this price almost ever, ever -- if we just maintain our discipline and we will. I will ask Clint to make some comments about our pipeline and our acquisitions.

Thank you Wendy. On August 1, we acquired a 140-bed skilled nursing facility, located in Waco, Texas, for $10 million or $71,000 per bed which was constructed in 2008. The property was added to a master lease for SeniorCare centers, and expand our relationships with them to a total of 3 properties. The acquisition continues to demonstrate our ability to execute on our strategy of investing in newer modernized healthcare properties. Although this transaction closed following the CMS' announcement of changes to Medicare reimbursement, the investment was underwritten based on the full 11.3% average proposed cut in Medicare rates and is being added to a master lease with strong rent coverage.

Given our conservative underwriting standards, we believe this was an excellent opportunity to acquire a newer physical plant in a strong market, with an experienced operator, capitalizing on a solid long-term investment for LTC. Our pipeline continues to be strong, and has been consistently in excess of $100 million. The majority of the investment opportunities in our pipeline are skilled nursing facilities. And as a result of CMS' reductions in Medicare rates, most of these transactions have been delayed until a thorough assessment has been made of the impact of changes to Medicare reimbursement.

All of the transactions in our pipeline are off-market deals and we hope to have the opportunity to revisit them in the near future. Any closing on such delayed deals will most likely fall in 2012 at this point. However, we do have the one transaction under letter of intent with an existing operator in our portfolio, for an initial $16.3 million investment to acquire an existing operational 196-bed skilled nursing facility located in the Houston, Texas MSA, for $15.5 million or $79,000 per bed, via [SLE] transaction, along with the purchase of a vacant parcel of land in Amarillo, Texas, for approximately $800,000.

The vacant land parcel is being acquired to construct a 120-bed replacement property for an older SNF in our portfolio operated by the same company. Closing of the transaction is subject to standard contingencies and upon closing, the 2 properties will be combined into one master lease. The capital commitment for the replacement property, excluding land and land cost mentioned above, will be $8.25 million. All-in cost for the replacement property will be approximately $9 million or $75,000 per bed.

We expect the purchase and sale of agreements to be executed within the next two weeks, and the concurrent closings are expected to occur on or about October 1. We anticipate construction of the replacement property to commence within 60 days following the closing of the transaction. As was the case in the previously mentioned acquisition of Waco, Texas, this investment has been conservatively underwritten based on the full 11.3% average proposed cut in Medicare rates. We anticipate the lease-up period for the replacement property to be relatively short given that our operator anticipates transferring the majority of the residents from the existing facility to the new facility, significantly reducing their start-up losses. It is likely $24.5 million investment will continue to add newer, modernized healthcare properties to our portfolio.

Turning to our existing portfolio, on last quarter's earnings call, I noted that we had a capital expenditure pipeline of approximately $30 million. SNF replacement project in Amarillo, that I just discussed, represents $9 million of this amount. During the second quarter, additional opportunities were identified increasing the $30 million pipeline to approximately $40 million. However, given the Medicare reimbursement changes, we expect that conversion of the remaining $31 million into invested capital will be delayed while our operators assess the impact of changes to Medicare reimbursement. We should be able to provide a better estimate of amount and timing for these investment opportunities on our third quarter earnings call. Wendy?

Thank you, Clint. Andy, would you please comment about the markets?

Sure. Thank you Wendy. Let's talk -- excuse me, I would like to talk about the circumstances that lead to deals for LTC. Our transactions are driven by needs of customers for capital, not by fees. Often our operators need to extract some capital from properties they own in order to grow or reinvest and improve systems or expand older buildings and renovate. And they need to move quickly, take advantage of a really favorable acquisition, or, and this is increasingly common, they would like to realign ownership, generation to generation of work from founder to successor management. Except in the very short run, I do not see current capital market or government reimbursement pressures affecting these needs.

At the level of the multi-facility operator, say of approximately 10 beds or -- 5 beds to 10 beds, they don't look at that on a day by day basis, they look at the problems with CMS as transitory, they have all been doing this for a long time. Now LTC has been -- we have built in our nurturing, our network of operators. With the goal that we will know them and they will know us and understand our programs well in advance of these capital needs. We can move effectively, and to meet their needs, hopefully before they find the need to [shop] the transaction.

I am very optimistic about future business. As Wendy mentioned, I just came back last weekend from a trip. At this time, I was in Alabama, although we have people out in the field almost any day, they talk to us, and we are -- and that's often me, most of my time is spent in the field, the level of interest in meeting LTC, and understanding what we do, has never been stronger. Customer needs are in the immediate future. We are going to have many opportunities to deploy our capital in conservative deals and good rent rates based on this level of interest.

Thanks Wendy.

Thank you Andy. I figured (technical difficulty) the comments before this because you are so up. I'm going to put those comments in your personnel file to evaluate you later. (laughter)

Like in 2008, we do not have a liquidity problem. We didn't need to re-equitize in 2008, when that was all the rage. I believe that we have some additional opportunities this year. These latest Medicare cuts may convince owners who are thinking of selling, that this is a good time to finally not have to deal with these uncertainties. We have always conservatively underwritten and that is why in past years, we have not purchased many properties.

We are not generally the highest payer in any competition. We are okay with that. If you underwrite properties properly, you are much less likely to have a problem with the property and I believe we are underwriting appropriately, including the risk of reimbursement.

At this time, I am reaffirming our guidance of $2.10 to $2.14 of fully diluted normalized FFO. Absent the market impact, on all of us as shareholders, LTC is having a very good year. And we come in every day, or travel somewhere every day to keep moving this Company forward.

Thank you for listening and I'll now open it up for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Jill? Hello? Hello?

Karin Ford of KeyBanc Capital Markets.

Karin? Hello?

I am having a technical issue here.

(Operator Instructions)

Jerry Doctrow of Stifel Nicholas.

So just a couple of quick numbers questions and then a couple of broader things. I thought, Pam, is there more left on the shelf, or have you now fully drawn that down?

We have fully drawn down -- the Prudential shelf?

Okay. And then Wendy, just to make sure I understand this correctly. So you had talked about $34 million more in acquisitions, that counts there -- so the $10 million deal you have announced and the $24.5 million that Clint was talking about?

No. I am counting the one deal that Clint was talking about, that is the purchased, the property in Houston. And another deal, that I think we have a high likelihood that he didn't put in his numbers.

Okay. I just wanted to make sure that I had the right numbers. And then, you talked about expanding the Prudential line. I was thinking about what other -- whether you're thinking about other things. Dan thought since your balance sheet is better than the US government's now --

(laughter)

What access to unsecured or that thing, are there other options you are thinking about? Through the Prudential or -- ?

Yes, we are always listening to opportunities that the market presents, so right now we're not exactly sure when we are going to need additional capital. But the Prudential line, if they give us another line, it does not really cost much money. And, it would be available. So yes, in terms of LTC being more in the market, we would look at a market deal for debt. So we're not ruling it out.

Okay. And my sense from Andy's comments, your comments, and certainly our thinking was that there might be a lot more transaction volume post-disruption courtesy of CMS. Do you have a sense, I know that you don't want to set a goal, but what volumes might you be capable of, if things open up and what pricing do you think comes as we get into 2012?

We are still looking at cash on cash above 9%. And we were looking at a couple of relatively large deals of $60 million, $40 million. And we were looking at one that was in excess of that -- the $40 million came with some HUD debt which would have been nice for us to absorb but everybody stepped back once CMS ruled. So I think that if those people had in their minds that they wanted to sell, now it's going to be an opportunity for them to decide if they want to go forward with selling, and what they would expect in possible price reductions.

So I think the opportunity out there, I have not been really one to say specific numbers for the future, but I think we will do over $100 million this year though I'm not promising it. Next year, I don't see any reason why we should not be able to do that again, if not more. So I think we have the liquidity, and we have the team in place to identify them and work on them. And so, we will just be running as fast as we can when we get the opportunities.

Karin Ford of Key Banc Capital.

First question just follows up on Jerry's question there, how much SNF exposure would you guys be comparable with assuming that the acquisition environment plays out as you laid out and you see a lot of good opportunities?

I wouldn't limit our SNF -- I wouldn't not do a good deal because it was a SNF. If you have underwritten properly, and you have taken into account risks and coverage and credit quality of companies, I wouldn't put a limit on our SNF acquisitions at this moment.

Okay, so 75% SNF, you would be comfortable there relative to the assisted living?

I would be comfortable based on prices, yes.

Okay. And the 1.99% coverage level from 2010 in RUGS IV that you threw -- before RUGS IV that you threw out, is that where you think the coverage will head to for 2012? Our do the operators need to do a significant amount of cost cutting to get back to that level, post the CMS cut?

Yes, our operators haven't indicated that they need to do a lot of cost cutting, MDS 3.0. -- we talked to some operators about the increase cost that they might have had for that. They -- we have been told that they had some initial increases in cost, but not -- it has come down again, because of the electronic medical records that have come in to make things more efficient. So I think we would probably be in the 1.9% coverage range for our operators as they are now.

Okay. And what is the range? I know the average of coverage today is 2.1%. What is the range of coverage between master leases and operators in your portfolio?

Okay. Pam is flipping pages --

And we are just talking SNF's now?

Correct.

The range is from about from about 1.3 to about 3.8 on the high.

Okay. And no concerns about possibly having to give rent relief on the 1.3?

It is one property.

Medicaid property.

Yes, it is all Medicaid.

It is not a high Medicare property.

Okay. And last question is just on your return requirements, given higher levels of uncertainty, and given this new government environment that we are in, you said 9.5%, and you did the late -- the last deal, this new deal at 10.5%. How much would you say return requirements have changed since the new ruling?

It really hasn't changed. I gave a cash on cash, and we were talking GAAP at 10.5% because great line always adds about 100 basis points.

Right, right. So no change in your required returns to do a deal today than it was a month ago?

I don't see it yet. Because we have not -- we are not buying properties that are heavily dependent on Medicare RUGs IV reimbursement. So, if -- we always underwrote to a RUGs III because of the question about RUGs IV, the sustainability. So we are right where we were.

John Roberts of Hilliard Lyons Capital.

Any -- I'm following up on the same line of questioning. Any -- do you think -- do you see any change in your acquisition strategy going forward based on the CMS changes, product mix, et cetera?

No, I don't see any changes.

Okay. How about, are you seeing any difference from sellers?

Difference from sellers. Well we have tried to do a couple of deals that got put on the back burner, because we wanted a contingency in there for the RUGS IV. The sellers, I think they will be looking to have a little bit less of a sales price than they were thinking.

I think it will be -- this is Clint, I think it will be a little bit of a maybe a wake-up call as well as -- just the, knowing the change in reimbursement and people who want to sell for specific reasons, I think they are now given the cuts that were out there for Medicaid, with, then with Medicare. Certain people are going to look to be sellers, and they're probably not going to be looking for high prices. I think they're going to be looking to partner with people that have the ability of access to capital and can execute on transactions.

And yes, it is really too early at this point. That is going to be something that is probably going to develop over the next several quarters rather than immediately.

I think that some deals we looked at, some of the sellers pulled back because they did not want to have to go through transaction with the contingency, then potentially spend money and possibly disrupt their operations, and have somebody have this contingency as an out. So now that the rate cuts have been identified, I think that will put the sellers in a different mindset that there is not as big of a contingency out there, now with the rate cuts are known.

Right, thanks. Go ahead Wendy. I'm sorry.

I was just going to say, I think there's a misconception of the CMS cut as it applies or it might impact healthcare REITs. We had an incident or instance where somebody's friend was going to buy some healthcare stock, and their broker said -- no, no, you have to sign a 6 page acknowledgment about the risk exposure, because all of the healthcare stocks, because of CMS are going to be cutting their dividends. I mean that type of feeling is out there. And I have got to say, we are not cutting our dividends.

And Wendy, you've got to know, I went through that in 2002 and 2003, so I remember very well.

Right.

As well as I'm going through it now. I'm hearing it from clients left and right. And I am having to walk them through those issues as well.

It is incredible. Thank you for fighting the fight, but --

Yes. You mentioned capital raising. I know you've obviously retired all your preferred, except for the BNHI issue, and you have mentioned that in the past as a possible avenue for capital in the future. What are your thoughts on where you would like to be, where you would like the rates to be in order for you to do a preferred, to make it attractive from a capital structure perspective?

Probably 6% -- a little bit above borrowing costs. But I think preferreds are probably in the 8% right now.

Yes, undoubtedly, yesterday they all spiked. Hopefully, they will come back down.

Yes.

Todd Stender of Wells Fargo Securities.

Can we get into your underwriting on the deal that you announced post-Q2? I think that you said it was underwritten on RUGS IV but you did take into consideration the extreme, the 11.3%.

That's correct.

What was that underwritten at? Do have a coverage, it was looking on a EBITDARM after CapEx, how do you look at that?

Those -- little bit of a unique opportunity. It was a developer who had constructed the property and had gone through the uncertainty of the Medicaid rates and now Medicare and was looking at selling the property. And there seemed to be possibly some discontent between the seller and their lessee. Someone wanted to exit the building and occupancy had been a little bit lower. So this was a building that has significant upside in occupancy.

And so we underwrote it, based on actual as well as pro forma given the current occupancy levels, which are right around the 60% mark when we acquired it. And the tenant that we are leasing to, SeniorCare centers, they have executed on being able to lease up newer properties. So part of it included some growth and occupancy.

So SeniorCare centers are going to be the new tenants?

That is correct.

Okay.

And it went into a master lease.

We went in to a master lease, with 2 properties that already have over 2 times coverage.

Okay. What would be -- just switching gears. You are not using the ATM right now. When does that make sense to use it again? Is it a specific cost of capital, cost of equity that you earmark? How do you look at that?

Yes. It would be a cost of capital, in the low single digits. Mid-single digits, I think, before we would access the capital markets again, in terms of common stock. So I don't -- if we had a 6% -- 5% or 6%, you know we might do -- and we had a good use for it -- I mean, an opportunity to grow with it, We might access the market at that time.

But one of the things that we're careful about doing, and one of the reasons that we are a little hesitant about public debt, is it is hard to do public debt without having big payback days. Whereas, in Prudential, we can set an amortization schedule so that we don't face any year where we are going to be forced to issue equity, because the markets are closed or something like that. So we are very, very careful about looking forward and actually growth quote-unquote, needing to raise equity capital.

Okay, thanks. And the acquisition that we just talked about is in Texas. And I think you referenced that the property under a letter of intent is in Houston. So with emphasis on Texas, what have you learned recently, particularly with the Medicaid cuts that Texas had gone through and talked about for so long? What have you learned with in terms of Texas?

In regards to the operations or the Medicaid cuts in particular?

Yes, the Medicaid and the risks around that and what was your thought process to keep continuing to look into Texas markets?

Well, we just keep seeing a lot of opportunities there. Now that the rates have been for Medicaid, it's easier to underwrite, so looking at reasonable Medicare rates and stable two years, that's correct, they've been set for two years. It is a stable environment as far as regulatory environment is concerned and litigation to operators is not significant.

So it provides a good atmosphere, it's a business friendly state, and we are acquiring properties that are of newer construction, usually 2008 or more recent. It is a good long-term strategy to bring in these quality assets within our portfolio, and have long-term viability to them. We are happy to find a lot of these opportunities in Texas.

Mark Lutenski of BMO Capital Markets.

You guys have spoken already about seller mindset. I am wondering if, on the other side of the coin, can you discuss perhaps the competitive landscape for acquisitions? Have you seen some buyers drop out of deals or some competitors drop out of deals related to the CMS issue?

As of past Friday, yes. I think as we talked, a lot of deals were put on hold at that point. So I think that, that definitely has seen that happen --

Well, we dropped out of one. We were working on a brokered deal, a represented deal, not necessarily brokered but fairly significant. And we dropped out. Our partner/operator, wanted to take a step back and we had been told that they have extended the final offer date for a couple of weeks. Now we will be surprised if the transaction does get completed.

So we have been a buyer who has stepped away. And I still don't think like this opportunity that we had in Waco. It was an individual opportunity. We don't really necessarily have a feeling of a competitor buyer in a lot of the deals that we are looking at.

Okay. And then also you mentioned that you were looking at deals on the size of $60 million, $40 million, it seems a bit larger than some of the deals that you guys have looked at in the past. I'm wondering, is that perhaps related to the CMS issue? Do think that more larger deals will be there for you guys to take advantage of?

We have seen a few larger deals recently. And we are fairly comfortable working on those. I think both of them had that in place, which would have helped us pull that easily into the Company. But, for the right deal, of course, we're going to be looking at a $40 million, $60 million, $80 million deal. There are still a lot of regional people out there, that have 4 properties or 5 properties or 10 properties that are making some decisions today or next week about whether or not they want to continue in this business.

Okay, thank you.

One of the things that Andy is finding are a lot of young management groups out there wanting to continue on in the nursing home industry and build their companies. So that is the attitude we would like to help finance.

Are you may be disinclined to do deals with younger management operators just because of the fact that they might not have the experience of going through such as severe Medicare cut?

Mark, this is Andy speaking. I wouldn't say that at all, I, we -- in this field, we have heard for 20 years, that it is consolidated and it is all going to go away. There going to be 7 big operators and size will matter for everything. And it continually happens for whatever reason, companies shrink, management goes off on their own, packs up the business. And the number of, there were 16,000 nursing homes in this country 25 years ago, and there's still 16,000.

And there were about 5 public companies to 10 public companies, and there are still 5 public companies to 10 public companies. And the average size of a company, 25 years ago was, if my memory serves, was about 6 buildings and now it is 8 buildings. That number, I am sure of. So I see it as part of a -- there's nothing new under the sun.

(Operator Instructions)

Frank Morgan of RBC.

Quick question here. In our calls with some of the SNF operators, when they were talking about strategies to adjust to the changes, obviously, cost mitigation was one area, but also the other was capital deployment. And it was suggested, that there would be potentially a possibility of toggling CapEx over and letting REITs become more involved in some of those efforts for expansions in some of these specialty programs they are developing.

So I'm just curious, have you had any conversations or any -- or do you have any interest in funding any of this CapEx that might be for renovation in these express recovery units, or these specialty acute units that are Medicare focused? Just curious what your interest is in exploring and funding some of those efforts? Thanks.

This is Clint. We have been very active in this process in working with operators in our portfolio to doing just that. I mentioned that we have about $30 million -- or about $40 million in our pipeline to do the exact same type of things on our existing portfolio and that has continued to grow throughout the year, and I see it probably continuing. So we have been very bullish on that.

We have, Frank, we have done that over the last many years. We were one of the first to come out and offer our operators CapEx dollars for, of course, a return. And so when we weren't buying total facilities a few years ago, we were spending quite a bit of money on updating and modernizing properties that we currently have in our portfolio. We have done that, I think almost exclusively on skilled nursing. So far, the assisted living properties that are in our portfolio, have not utilized our offer of capital. That may change in the future, I'm not sure. We do make sure that they know that we are interested in doing projects on our properties, but we are very much in favor of having them use our money if it improves our properties.

And we have a follow-up question from Jerry Doctrow of Stifel Nicolaus.

So I just wanted to clarify a little bit, on earnouts again because I think that you were counting for as a non-cash item. And is the accrual just for that $4 million or is the accrual for the larger amount? I just wanted make sure that I'm straight on that.

It's for the larger amount. It is a maximum of $11 million that we would pay.

So the accrual represents the $11 million that we would anticipate paying which is the $4 million, plus an additional $7 million, possibly. And then, we are required to book it at the net present value. So the amount showing on the balance sheet is the net present value of that. And it is accreted up to the maximum of $11 million over time, through interest --

And what is the time period, because you make some estimates then about when that might be paid -- or is there a contractual period?

There is. There are 2 payment periods that they can request that additional $7 million and that is in 2012 and 2013.

Okay.

We have estimated out through 2013.

Okay. So then as the cash then, like on the $4 million is actually distributed because you said you're paying that this year? Would that drop the accrual or is that just built into the accrual numbers?

It does drop, well, it drops the accrual, and it also drops the non-cash interest expense. So if we assume that we paid the $4 million in the third quarter, in the fourth quarter, that non-cash interest expense, that accretion amount, drops down from $177,000 you saw this quarter to $110,000.

Okay. Okay, fair enough. I may come back to you on details but I think I understand it.

(Operator Instructions)

There is a follow-up question from Karin Ford.

I just wanted to ask about an update on dispositions. It looked like a Texas SNF is now listed as held for sale, and I did not see anything, any update on the charter school.

Okay, thanks for mentioning that. The charter school is now leased. It is leased for the same lease payment that we were getting on the mortgage.

Yes, it is leased. It is under a one-year lease, and we hope that the tenant will buy the property. That is our hope, it is a Minnesota Centers for Autism. And the property is still being marketed for sale. It just, because it is leased, it does not meet the GAAP criteria for being classified as held for sale. But we are continuing our -- we would like to sell that property.

The other properties you see in held for sale, is an independent living facility in -- outside of Fort Worth, Texas. It was formally a loan from Sunwest. We took -- we foreclosed and took over the property and we have an operator that has been operating it. But we don't focus on independent living. It is not our core business. So we think now might be a good time to divest that property.

Plus we have not been getting any rent from it, because it needed some renovations. It's in a competitive market. So, we have not been booking any income on that property for, I think, a couple of years. We have been paying the real estate taxes and the operator really has not been able to make much inroads. So we decided to just go ahead and put it up for sale.

How much could that sale potentially bring?

We will have to see what the --

Our broker is much more positive than we are on it. I think, what's our net book value on it? We are $5 million on it.

$5 million book value.

Yes, he is expecting to --

Something higher than that.

Something higher than that

I'm sorry.

I hope the buyers aren't listening to this call.

And the charter school rent, how much is that per quarter and when did it start in the quarter?

It is $19,000 a month and it starts in September.

I'm showing no further questions. This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Jill. And thank you all for spending this time on our call. We, as I said, we will move forward with the Company, with our strategy, and hopefully, on the third quarter call, everything will be better, the markets and we will have more to discuss in terms of actual completed acquisitions. Again, thank you and have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.