LTC Properties Inc (LTC) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to the LTC Properties second-quarter 2012 analyst and investor call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions)

I would like to remind everyone that today's comments, including the question-and-answer session, will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC Properties, Inc.'s filings with the Securities and Exchange Commission, including the Company's 10-K dated December 31, 2011. Please note that today's event is being recorded.

I would now like to turn the conference call over to Ms. Wendy Simpson. Please go ahead.

Thank you. And thank you for joining us today.

We're very pleased to be able to report that since the end of our second quarter, we've had a series of positive events that we have announced to our shareholders and other interested parties. We announced the issuance of $85.8 million of 5.03% long-term debt. We announced the purchase of $60.5 million of skilled nursing properties. And we have increased our monthly dividend beginning with this year's August dividend by 6.9% over the prior month, and it represents a 10.7% increase over the dividend paid in August of 2011. And we're very happy that we have been able to report results for the second quarter in line with expectations, and in line with our guidance.

With me today are Pam Kessler, our EVP/CFO/ Clint Malin, our EVP/CIO; and Andy Stokes, our Senior Vice President of Marketing and Strategic Planning. Pam will comment on the quarter just ended and on the debt deal. Clint will then comment on acquisitions that we've completed, and acquisitions that are in the pipeline as we see them today. And Andy will comment on our continuing efforts in the marketing areas. I'll have additional comments after these presentations and then we'll open it up for questions.

Pam?

Thank you, Wendy.

I'll be discussing quarter-over-quarter results. And I'll refer you to the 10-Q that was filed earlier this morning for commentary on year-over-year results.

For the income statement, the second quarter of 2012 compared to the first quarter of 2012, revenues increased approximately $450,000 due to the following. Rental income increased $300,000, due primarily to acquisitions. Mortgage interest income decreased $100,000, due to one loan payoff and the normal amortization of mortgage loans.

Interest and other income increased approximately $250,000, due to the receipt of approximately $350,000 related to the Sunwest bankruptcy settlement, which was partially offset by a decrease in interest income resulting from the Skilled Healthcare Group bond redemption. Interest expense was essentially flat quarter-over-quarter. Acquisition costs increased $100,000. Operating and other expenses were essentially flat quarter-over-quarter.

Expense from discontinued operations, which relates to an independent living property in Texas, GAAP requires that we reclassify this income and expense to held-for-sale line items discontinued operations. Last quarter, we discussed that we had ordered an appraisal for this property. The appraised value is higher than the current net book value of $5 million. And the property remains held for sale.

Net income available to common stockholders increased $158,000 due to acquisitions. Normalized fully diluted FFO per share was $0.56 this quarter, compared to normalized fully diluted FFO per share of $0.56 last quarter. Normalized fully diluted FAD per share was $0.56 this quarter and $0.56 last quarter.

Turning to the balance sheet. During the quarter, we purchased a vacant parcel of land in Colorado for approximately $1.9 million, and entered into a lease and development commitment in the amount not to exceed $7.9 million, to construct a 60-unit freestanding memory care property. This was disclosed as a subsequent event during last quarter's earnings call.

Subsequent to June 30, we acquired a 90-bed skilled nursing property in Texas for $6.5 million. We added the property to an existing master lease at an incremental GAAP yield of 10.7%. On July 31, we purchased two 144-bed skilled nursing properties in Ohio for $54 million in a sale leaseback transaction. The initial term of the lease is 15 years with two five-year renewal options, and a GAAP yield of 10.1%.

We invested $453 million in capital improvements at a weighted average yield of approximately 9.1%. During the quarter, we received approximately $2.4 million related to the payoff of two mortgage loans. And $671,000 in scheduled principal payments on mortgage loans receivable. Subsequent to June 30, we received $493,000 related to a mortgage loan payoff. During the quarter, we funded $985,000 under other notes receivable. During the quarter, we received $6.5 million related to the redemption of the Skilled Healthcare Group bond. This was disclosed as a subsequent event in last quarter's earnings call.

During the quarter, we amended our unsecured credit agreement, increasing the commitment to $240 million. And the ability to increase commitments up to $350 million. The amendment also decreased drawn pricing by 25 basis points to 125 basis points over LIBOR, and decreased the unused commitment fee by 10 basis points to 25 basis points based on current leverage levels. Additionally, the maturity of the facility was extended for one year to May 2016, and we received a one-year extension option.

On July 19, we sold $85.8 million of senior unsecured notes in a private placement transaction. The notes bear interest at 5.03%, mature in 2024 and have annual scheduled principal payments of approximately $17.2 million in years 8 through 12. The proceeds of this transaction were used to pay down our unsecured line of credit and for acquisitions.

After the acquisition of the two skilled nursing properties in Ohio, we currently have $35.5 million drawn and $204.5 million available under our line of credit. Additionally, we have $100 million available under our shelf agreement with Prudential. We also have $65.5 million available on our at-the-market offering program and $168 million on our shelf registration statement.

Subsequent to June 30, our limited partner redeemed a total of 3,294 shares in our limited partnership. We elected to satisfy this redemption through the issuance of 3,294 shares of common stock. During the quarter, we received $595,000 related to stock option exercises. Also, during the quarter, we granted 8,000 shares of restricted stock that vest ratably over three years. During the second quarter, we paid $14 million in preferred and common stock dividends.

Turning to operator statistics. In discussing operator statistics, I'll give the general caveat that these numbers come from our operators. They are unaudited and have not been independently verified by us. Additionally, the occupancy and lease coverage information is for the trailing 12-months first quarter 2012 compared to the trailing 12-months fourth quarter 2011. Occupancy in our same-property out portfolio decreased to 78%. Excluding properties leased to Assisted Living Concepts and extended care, occupancy in our out portfolio was 88.2%.

EBITDAR lease coverage after a 5% fee was 1.4 times. Before management fee, or EBITDARM, coverage was 1.6 times. Occupancy in our same property SNF portfolio was 79%. EBITDAR lease coverage after a 5% fee was 1.9 times. Before management fee, or EBITDARM, coverage for our SNF portfolio was 2.6 times.

Occupancy in our same-property portfolio of properties that provide independent living, or a combination of independent living, assisted living, and skilled nursing, was 87%. EBITDAR lease coverage after a 5% fee was 1.4 times. And before management fee, or EBITDARM, coverage was 1.8 times.

The quality mix for the three months ended March 31 for our same-property portfolio, which includes skilled nursing, assisted living, independent living, and properties with the combination thereof, was 60% private pay, 14% Medicare and 26% Medicaid. Within our same-property SNF portfolio the quality mix was 26% private pay, 25% Medicare, and 49% Medicaid.

Thank you, Wendy.

Thank you, Pam. Clint, please give your presentation.

Thank you, Wendy.

Year-to-date, we have completed approximately $80 million of acquisitions with experienced, regionally-based operating companies for newer, high-quality assets. Assets we acquired this year were constructed in 2002, 2009, 2010, and 2011. The property we acquired in Brownwood, Texas, which Pam mentioned in her comments, is the newest asset in our portfolio, which is just over one year old. We are excited to continue to expand our relationship with Senior Care Centers based in Dallas by adding this property to an existing master lease, increasing to five the number of facilities leased directly to Senior Care Centers.

Our recently-announced $54 million acquisition with affiliates of Carespring Health Care Management, a regionally-based company located in the Cincinnati Metropolitan area, that owns and operates facilities in Ohio and Northern Kentucky. Carespring currently owns and/or operates 13 skilled nursing facilities and combination AL-IL facilities, 11 of which they constructed from 1986 through 2010. Carespring owns most of its facilities, but is familiar with the sale leaseback structure, given that they have an existing relationship with another REIT.

The two properties we acquired are state-of-the-art buildings and were constructed by affiliates of Carespring in, as I mentioned, 2009 and '10. Among other attributes, each property includes three therapy rooms, two dedicated for short-term stay rehab patients, four distinct dining areas with two dedicated for short-term rehab patients. 74 private rooms in the Cincinnati facility, and 34 private rooms in the Dayton facility.

All semi-private rooms are designed with a unique permanent floor-to-ceiling wall, providing significantly more privacy than typically found in a more common semi-private room setting. All rooms, whether private or semi-private, offer private bathrooms and private showers. The building in Cincinnati has a 30,000-square foot retail component located on the ground level, focusing on leasing of space to healthcare and fitness-related companies. We are very excited to welcome such an experienced and innovative operating company to LTC's portfolio.

Last week, we entered into lease amendments with Brookdale for a total of $14.6 million in commitments for expansions of and renovations to three facilities we leased to them in Colorado. One location currently consists of a 50-unit assisted living facility and a 36-unit purpose-built freestanding memory care facility. The third facility is a 50-unit assisted living property located at a different site. Assisted living and memory care units will be added to the properties.

The projects are anticipated to begin in the next 60 days, with completion expected in late summer 2013. During construction, rent will be compounded into the investment amount from the funding of each advance at the greater of a 580 basis point spread over the 10-year treasury, or 7.75%. Upon the earlier or completion of each project, or the second anniversary of the lease amendment, rent will increase by the investment amount funded, including compounded rent during construction based on the greater of the same rates just mentioned.

We have approximately another $20 million of identified investment opportunities within our portfolio that we are working on with a couple of our lessees. We strongly believe in reinvesting in our portfolio and continue to meet with our lessees to identify new opportunities.

Building permits have been issued and construction has commenced on both of our two ground-up development projects. The 120-bed skilled nursing replacement project in Amarillo, Texas, and the 60-unit freestanding private-pay memory care facility in Littleton, Colorado, are both on schedule and budget with completion expected in the fourth quarter of 2013.

Since last quarter's conference call, we have entered into two new letters of intent, each with a different operating company, to construct combination assisted living/memory care facilities. The investment commitment in total for these two transactions will be approximately $16 million. We are in the process of conducting due diligence on these transactions, and if successful, closing on the land acquisitions and development commitments are expected to occur in the fourth quarter. Both of these potential development opportunities are with companies that will be new to LTC's portfolio.

Our deal pipeline remains strong, in the $150 million range. Mainly consisting of memory care development opportunities and acquisition of existing operational facilities, including both skilled nursing and assisted living facilities. A few of the projects in the pipeline are for development of new SNFs, as either replacement facilities or for facilities that will be added as new supply into the marketplace.

Wendy and I have been on the road frequently this year, meeting with numerous operating companies that focus on memory care, and touring their facilities in various parts of the country, as we continue to build out our development program for freestanding private-pay memory care facilities. As a result of these meetings, we are now considering expanding our development program in certain situations, subject to market demand, to include combination assisted living, memory care facilities as is the case with the two recently executed LOIs I just mentioned. As Wendy indicated, any transaction we close from this day forward in 2012 will close in the fourth quarter.

Now, I'll turn it back over to Wendy for her comments.

Thank you. Thank you, Clint.

Before I finish my comments, we have Andy with us today. He's off the road, for, I think, two days and on the road again tomorrow. And he'll be giving you a presentation about our marketing efforts.

Thanks, Wendy.

LTC's marketing focus has shifted over the last few years. As you know, we have always concentrated on ways to identify potential customers, develop an understanding of them and ways to follow up on what their needs might be. We participate in meetings at the state and local level of trade associations. We follow up with marketing meetings and site visits.

Our kind of deal has been smaller by the standards of the time. We have been able to charge a little bit higher rent, because these deals have not been heavily shopped. And the price of our kind of asset has tended to be more reasonable for the same reason. However, we believe that as senior care has grown and changed, more attention from our potential customers is being paid to national and specialized organizations. LTC is shifting somewhat to follow this trend. A few new committees and groups have emerged in our target markets and at the regional level and we are actively participating.

Memory care as a specialized type of community has attracted attention in investment and LTC participates in those specialized groups. All providers are increasingly political, and LTC goes to these meetings, listens to customer needs, and explains our products. Our kind of deal remains the smaller, but still multi-facility group of properties, with tenants who want to grow and are committed to the business and our assets.

It is my sense that deal potential for the LTC kind of deal is very strong for all the reasons I have talked about in the past. These can be summarized as the need for the middle market provider to recapitalize or restructure ownership or expand. These are continuing needs and I expect the high level of deals to continue.

Thank you.

Thank you, Andy.

2012 so far has been the reality we have been expecting and disclosing. Going back over my comments from our last call, I believe everything that we've previously mentioned on our call has happened in line with our expectations. Right now, our pipeline is active. And, as Clint said, I'm not expecting that much will be closed in the third quarter. We'll be more active in closing acquisitions or opportunities, I believe, in the fourth quarter of this year. All of our senior staff is active in looking at deals. So, we have significant action around potential acquisitions for the rest of this year.

We're carefully pursuing and targeting purchases of newer assets. Again, as Clint was pointing out the years that our recent acquisitions had been built. We may strategically sell a few older skilled nursing properties, most likely to the current operator. I'm not suggesting that we have a material sale of assets in the pipeline. There's just small things that we might do that would make sense to the LTC portfolio and to the particular operator.

We're continuing to pursue the building of the memory care properties. And as Clint also indicated, we are looking at a potential of doing memory care/assisted living on the same campus. We've looked at a few memory care properties that are combination assisted and memory care, and memory care only, that are operating and for sale. But the prices have been too high for our underwriting standards, which flows right into our theory, as we started looking at these properties, that once operating and very profitable, the value of the property increases. And we are going to be better investing for LTC's future by helping the operator build these properties.

On our last call, I gave guidance between $2.23 and $2.25 for this year. Our internal projections, factoring in the acquisitions we've already had, the new 5.03% debt, the loss of interest income from the retirement of the skilled healthcare bonds, and the increase in our dividend for the second time this year and for the remainder of the year, our projections result in an FFO of between $2.26 and $2.28.

This also does not take into consideration the sale of any revenue-producing properties, or any further acquisitions for the year. If you annualize our current monthly dividend and proforma all of our 2012 activity to a full year, our dividend payout ratio will still be at an 80% FAD range, as we calculate FAD. So, it's still a comfortable range for our conservative position in our payout ratio. We are very happy to increase the dividend for the second time this year.

Before I thank you for listening and ask for questions, we did see the Assisted Living 8-K this morning. We have no further information on it. We've been working with Assisted Living on our maintenance request. They have been very responsive. They have indicated that they have hired additional maintenance people. We know that they are putting money in the operations of the properties.

I am meeting -- Clint and I happen to be going to Wisconsin. We're going to meet with Dr. Roadwin on the 24th. That date was selected by me because it fit into my schedule. He was very responsive and open to a meeting at any time. So the fact that it's not tomorrow is not because he didn't want to meet. It was just my schedule and the other commitments that we have for LTC business.

So he's been very responsive and accessible to us. They are not in default on any of their leases. So, I have no other further comment about Assisted Living Concepts. Certainly, I'll answer any questions you have, but that's my total information about the situation as it stands.

So, I thank you right now for your time, listening to our presentation. And we'll take any questions.

(Operator Instructions) Karin Ford from KeyBanc Capital Markets.

My first question, Wendy, is just going back to your comments about looking at potentially some properties to sell. Could you just talk about how big the universe of properties that could be? And what your plan on timing could be for some potential asset sales in the future?

It's a small, about somewhere between $10 million and $12 million. It's one group of assets in one state. They are much older assets. The strategy of the operator is different than it was. We just disagree with his strategy. So we're negotiating with him to buy these assets. They are covering, they are cash flowing nicely, but they are very old assets.

Okay, thanks. Second question is just on Assisted Living Concepts. Have there been any new licensing issues at any of your properties since we last spoke? And what's going to be on the agenda for your meeting with the Company on the 24th?

Lunch. We're going to -- no, there isn't anything relative to the licensing. We've got them on a tickler file and they are all current, unless something's happened today and we haven't been notified. I would just like to understand from Dr. Roadman a little bit about what he sees in terms of the future of the company, where he would like to take the company. I haven't talked to him other than to set up these meetings. And I've listened to his calls and he seemed to still believe that the private pay was the predominant way of going. But those were early days for him.

I would also hope we could talk about the future of these assets in whatever they are projecting for the Company. Maybe we can start an early transition of these assets since they are not part of the strategy. We've had independently other operators call and ask if they could get a look at these properties. So we're not too concerned right at the moment with the majority of these assets not finding a nice place to be housed. But my goal is to open a communication with one of our major lessees, which we didn't have at the prior executive suite at that company. And to see if maybe he does have already an idea of how they would be looking at these assets when 2013 rolls around.

That's helpful. My last question is just on your SNF coverage. I was looking at your supplement on page 10. It looked like, in that chart there, that now with two quarters of RUGS 4 in the cash flows, you're now at 2.01 times on an EBITDAR basis. The last time you were at two quarters, you were 2.16. And I was just wondering if that difference made you rethink your 1.9 target, or your expectation, for where you're going to be once the entire rate cut has been factored into the cash flow.

Sure, this is Pam. I thought that this table here, this historical table, would be helpful to show how RUGS 4 as it was implemented, how the increases came each quarter. Because they didn't come ratably. So as you see starting at the bottom of the table, when you increase going from pre-RUGS 4 to one quarter of RUGS 4, it increased 0.13 times, the EBITDAR coverage. And then going from one quarter to two quarters, it increased 0.14 times. Then going from two quarters to three quarters, it only increased 0.04. And then going to a full four quarters, it only increases 0.07 times.

So as burn off the RUGS 4 increase, it follows that you would expect the first two quarters of burnoff to be the highest decreases. So in fact we had, going from four quarters of RUGS 4 to three quarters of RUGS 4, it decreased 0.11 times. And then going from three quarters to two quarters, it increased 0.15 times. So if you were taking this historical trend and seeing how it rolled on, and saying it would follow that it would roll off the same way, you would expect, if everything else was constant, you would expect a decrease going from two quarters of RUGS 4 to one quarter of RUGS 4 to decrease 0.04. And then to go down to no RUGS 4, you would expect a 0.07 decrease. And that would get you to 1.9 times coverage, if you just took those increases and converted them to decreases and rolled it off. And that's what I was trying to show. We're guessing about 1.9. It might be a little lower than that, could be a little higher, because other things come into play -- occupancy, rates, and quality mix. But if you held it constant, that's what we would expect.

Okay. So no change to the 1.9. Thanks very much.

(Operator Instructions) Dan Bernstein from Stifel Nicolaus.

I don't want to dwell on Assisted Living Concepts too much. I still have to ask the question. I'll end with a positive question, though, at the end. Does ALC have a buyout option of those assets? They have a propensity to want to put assets back on their balance sheet. They just bought those assets out from Ventas. Do they have a buyout option on those facilities that you lease to them?

No, they do not.

They do not. And then what is the timing for them to -- assuming that they don't renegotiate the lease early with you -- is there a date that they have to notify you that they are renewing or not renewing those leases?

December 31, 2013.

Okay. Just wanted to make sure. I probably should have known that, but I wanted to ask it anyhow. And then the other question is, do you see those assets as possibly a candidate for sale, like a TRS? They are significantly below the occupancy of what you have now. And maybe a related question I had to that, if we went back three or four years ago, what would be the occupancy of those assets? What would be the lease coverage of those assets? If you don't have that in front of you now, maybe we can take that offline. Just trying to understand what the upside of those assets would be with another operator.

Three or four years ago, she was operating the company. So, before she came in, before Ms. Bebo became the CEO, they were covering reasonably. And the occupancy was probably in the 80%s. I think when they came out of bankruptcy, they were in the 80%s or 90%s. I'm not sure that we would look to put them all in another package to give to one operator. A TRS would probably be our last strategy. If we had to, we would do that. So I really do think, just based on unsolicited interest in these assets, because of the situation at Assisted Living Concepts, that we'll be able to place them with operators who will be able to do more business in those properties.

We also have quite a bit of land around quite a few of these properties. So we were very interested when Assisted Living, before Laurie had her strategy, of working with them about building on to some of these properties. So we would look forward to having that as possibly a strategic alternative, too. But right now, they are paying their rent. They are putting the money in so that they will be in good shape. Not that they are not currently in good shape, but we wanted to be sure that things were happening a little faster. So there we are.

Okay. I'll let you be on ALC and ask you something more pleasant regarding the pipeline, which seems to be a real positive for you. At least maybe on the development pipeline. How would you describe the criteria for choosing operators to build with? You have some new -- it looks like, from what you talked about, projects maybe for the second half of this year, there's some possible new tenants. Are those tenants experienced operators? Are they just short on capital? How should we think about the risk you're taking of developing for new operators?

The operators that we are doing business with predominantly all have existing operations. And they are just expanding their business. The operator that we're building the property for in Colorado has a property that's probably going to open this fall in the Sacramento area of California. So they don't currently have a great operational company established. They have got everybody onboard in terms of who they need to operate the company, but they don't currently have operations. However, because of the site in Colorado, we weren't too concerned about not having another operator, should that not work.

But in terms of every other development project we're doing, they are currently operating that type of facility, or a companionable type of facility. Whether it's an assisted living that has a memory care unit and now they want to build a whole memory care facility, or they have memory care facilities and they want to build additional memory care facilities. The same with developing SNFs. I'm not sure that we would ever develop a SNF with somebody who hadn't operated a SNF before. So all of the development opportunities we have with skilled nursing are with operators that have significant operations.

Okay, that's good. And in terms of, you're tending to buy a little bit more SNFs. You are starting to build the assisted living. But your mix now is about 54% SNFs, 44% assisted living on maybe an investment basis. How do you see that changing, given your investment pipeline? Should we think of you having a little bit more SNF tilt going forward than assisted living? Or maybe that's going to switch back at some point. Do you have any set ideas of how that range should mark out in the next few years or where you would want it to be?

I still think we're going to have more SNF opportunities than memory care purchase opportunities or assisted living purchase opportunities. There's a couple of deals that we're currently looking at that are small, one-off assisted living properties. But if we add a $10 million assisted living, it's not going to cut into this imbalance right at the moment. I think that in order to get back to even a 50/50, it's going to be in the future once we bring the memory care built properties online. I believe that we have a really good underwriting group, a good underwriting philosophy and criteria. So I'm still very happy to be buying the SNF assets that we are buying in this market. So I'm not trying to keep the balance sheet balanced in terms of the type of assets. We are actively looking for the private-pay business, assisted living and memory care. But again, for whatever reason, no matter what happens or what would appear, real estate values are going up again. And we're seeing significant competition in anything that is a private-pay asset.

Okay. I'll jump off and just offer my congrats on all the positive developments at LTC over the last couple of quarters.

Rich Anderson of BMO Capital Markets.

Sorry, I got to ask about Assisted Living Concepts. My question is, isn't this potentially a good thing in the sense that -- just to look at it as a silver lining -- if this gives you the right to be a little bit more aggressive about making a change at those properties? If they are found to be doing similar things, or accused of doing similar things that they were doing at the Ventas facility. Is there any evidence of employee usage of units or anything like that at your properties?

Not that we're aware of. We haven't been advised and none of our inspectors, our property inspectors, have ever mentioned that -- Oh, by the way, somebody is living in one of the units. And we do go in and look at every unit. So that's never been brought up in any of our surveys. I do agree with you, Rich, and that's a very good point. In that it might give us an opportunity to move a little faster on repositioning these assets. Because I would think that Dr. Roadman has plenty of things to worry about with his own owned assets. And maybe he would be very amenable to us taking 37 assets off of his hands relative to having to turn them around and that sort of thing.

On the other hand, absent Assisted Living Concepts imploding totally, they are still paying their rent and we don't have a reason to default them on their leases. But he seems like a very reasonable man, so far. And I think there is a real opportunity that we would be able to do something to maybe help him, which would also help us.

Okay. I just look at, it while it has a negative connotation to it, from your standpoint, you are maybe looking for some angle to have a little bit more leverage in the process. And maybe this could, if it materializes that way, could be just that, for LTC.

I think so. I would hate for it to create less FFO. But if it creates less uncertainty, maybe that's a little bit of a trade-off.

Okay. And then just curious, would you be equally open to transitioning them or seeing new management change the way the properties are run, and just go ahead with a new operating scheme, but the same operator? Would the latter be more attractive to you or would you rather see yourselves just significantly reduce your exposure to them, regardless?

Yes, I think B. But if assisted living -- I'm not doing anything at this company, but I think if they brought in a really good, respected name in the industry to run the company, and there was a real strategy relative to running this company. It's always traumatic to have to move assets from one operator to another. But I don't see that happening as quickly as our lease comes up in 2013. So absent that happening, but as it is with Dr. Roadman as a temporary CEO, it's not the situation we would prefer. So I think it would be better for us to put the packages somewhere else.

Okay, that's fair. I appreciate that. And what would you say is the broader attractiveness of the portfolio to outside operators?

I think there's some significant opportunities to convert some of these into memory care units. And also they're in smaller, but fairly -- not wealthy, but well-to-do communities that probably could do much better business if it had a new owner and a new strategy. And they are like infill for a couple of operators.

Got you. Thank you very much. That's all I have.

(Operator Instructions) Karin Ford from KeyBanc Capital Markets.

It's Austin Wurschmidt here with Karen. I believe on the memory care side you had previously said you were targeting development yields around 9%. What are you targeting for the SNF developments?

This is Clint, Austin. Right now on the SNF developments, we're still evaluating that and going through the process of evaluating. So until we get a little further along, it may be hard to say. But we were doing lease rates in the 8.5% to 9% on existing operational properties. So we would take that into consideration on how we price out a construction project to accommodate for the construction and lease-up risk. And that's also a function of whether it's a true replacement project or you're moving residents effectively from one building to the other and mitigating startup losses. Or if it's a new facility that's being built, introducing incremental supply into the market.

That's helpful. And then just lastly, I think you had mentioned there was a loan prepayment or repayment post quarter end. Are you guys expecting any additional loan repayments for the rest of the year?

We're not expecting any. They happen, but we haven't been notified specifically that any are repaying.

Okay. Thank you.

James Milam from Sandler O'Neill.

I had some questions that weren't ALC related, so I wasn't sure if I was going to be allowed to ask them on this call or not. But I guess I am. (laughter). I just wanted to ask, it sounds like the pipeline has more assisted living than it has had in the past. And then Wendy, you made some comments that maybe -- my question is, is the strategy shifting to pursue those more aggressively? Or is it that you're actually seeing some smaller assets that maybe aren't so competitively bid that the pricing may make sense for you guys to pursue them a little further?

The latter. We're not pursuing them any harder. It's just that the opportunities have come up. Andy has been pursuing everything and everybody in one state -- one particular state, not just one state, but one particular state. And has been able to develop a couple of opportunities to look at a property. Another property we looked at a couple of years ago, another company was selected to go forward. And for whatever reason, that deal didn't get completed. So we've got another opportunity to go back and look at that. And that's an assisted living. So there are various reasons that there are a few individual assisted living properties. We did go and look at a very nice group of properties in another state, but we were not the selected company to go forward. So there has been a lot of activity, but the prices are pretty high and our underwriting, we're not going to take our coverage down to 1.1 in order to add assisted living to our portfolio.

Okay. That makes sense. My second question is, is there any reason why -- thinking about it, you're pursuing deals and it sounds like the closings are pushing out into the fourth quarter. Are there any deals going the other way, that are materializing and then being pushed ahead, out of the first part of next year into this fourth quarter to try to get ahead of any potential tax law changes or anything like that?

Not that we've seen. No.

Andy is not having any conversations with anybody about that behavior at this point?

Only on a preliminary basis. We talk to people. We talk to a lot of folks. And there might be three or four circumstances where we have had preliminary discussions when they were talking about the tax law changes. That comes up. People also ask us how fast can you close, and we always say faster than you can. But I don't sense quite yet a panic acceleration of deals. Although I wouldn't be surprised if we saw some of that in September and October. Now, whether or not one can meet that is another story.

Okay. That helps. And then this is my last one. With all of the changes that are occurring, particularly on the skilled nursing space, there's a lot of conversations about how important scale is in terms of being efficient, and meeting the demands of the reimbursement environment. What do you guys think about -- I know you have some smaller operators and some midsize regional operators. Where do you guys see the efficiencies going? How big do you have to be to really build a successful business in that environment? Can a two-asset skilled nursing operator survive? Do they need to be growing to 20? Just curious to get your thoughts on that.

Yes, I am trying to go through our list of operators and see. The ones that have won, we're transitioning probably to operators who have multiples. But maybe Clint has a better answer to that.

You're probably looking at -- in order to get a level of sophistication, to bring on the talent and invest in technology -- you're probably looking at companies that have somewhere in the 10 to 20 facilities, would be my guess. Andy, your thoughts?

I think you can probably do it for smaller than that. And it depends on the market. But, certainly, two buildings is probably too small. And 20 is certainly enough.

Okay. Thank you, guys. I appreciate it.

(Operator Instructions) And at this time, I'm showing no additional questions.

Excellent. Thank you, Jamie. Thank you all for joining us today and we look forward to talking to you at the end of the third quarter. If you have any questions, of course, Pam or I will be available. And again, thank you very much.

And the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.