LTC Properties Inc (LTC) 2012 Q3 法說會逐字稿

Good morning, and welcome to the LTC Properties Incorporated third quarter analyst and investor call.

All participants will be in listen-only mode. Operator: (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 Incorporated's filings with the S.E.C. --

I'm sorry, the Securities and Exchange Commission, including the Company's 10-K dated December 31st, 2011. Operator: Please note this event is being recorded.

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

Thank you, Laura. Hello and thank you for joining us today. The presentations today will begin with Pam Kessler, our Executive Vice President and Chief Financial Officer, who will comment on our financial results and operator coverage statistics. Pam?

Thank you, Wendy. Revenues -- I am going to compare second quarter to third quarter, and I will refer you to the 10-Qfor year-over-year results. Revenues increased in the third quarter approximately $700,000 due to a $1.1 millionincrease in rental income due to acquisitions partially offset by interest in other income decrease of $390,000 due to the receipt of $347,000 in the second quarter related to the Sunwest bankruptcy settlement and a decrease in interest income resulting from the Skilled Healthcare Group bond redemption.

Interest expense increased $984,000 due to an increase in debt outstanding during the third quarter and higher borrowing costs associated with the $85.8 million senior unsecured notes that we sold in the third quarter as compared to short-term floating rates on our line of credit. Acquisition costs increased $64,000. Operating and other expenses decreased approximately $300,000 due to the general timing of marketing and public company expenditures. Net income available to common shareholders decreased $611,000 due to higher interest and depreciation expense, partially offset by the increased revenues resulting from acquisition.

Normalized fully diluted FFO per share was $0.57 this quarter compared to $0.66 last quarter, normalized fully diluted (ADS) per share with $0.56 this quarter and last quarter. Turning to the balance sheet, during the quarter, we acquired two 144-bed, skilled-nursing properties in Ohio for $54 million and a 90-bed, skilled-nursing property in Texas for $6.5 million. Both of these transactions were disclosed at subsequent events last quarter. Subsequent to September 30th, we acquired a vacant parcel of land in Kansas for $730,000. Clint will discuss this transaction in a few minutes, and I will refer you to the subsequent event footnote and the 10-Q that was filed yesterday for the development funding and rental rate details.

During the quarter, we invested $1.9 million in development and capital improvements at a weighted average yield of approximately 9.2%. During the quarter, we have received approximately $480,000 related to the pay off of a mortgage loan, and $620,000 in schedule principle payments on mortgage loans receivable. Recently, we received a pre-payment notice from a borrower who holds seven mortgage loans secured by seven assisted living properties with a weighted average interest rate of 12.1%. We expect to receive $15.2 million in principal later this month related to the payoff of this loan.

During the quarter, we funded $441,000 under other notes receivable. During the quarter, 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 principle payments of approximately $17.2 million in years eight through 12. The proceeds of this transaction were used to pay down our unsecured line of credit and for acquisition.

At September 30th, we had $35.5 million drawn and $204.5 million available under our line of credit. Subsequent to September 30th, we repaid $6 million and, therefore, have $29.5 million drawn, and $210.5 available on our unsecured line of credit. Additionally, we have $100 million available under our shop agreement with Prudential. This $100 million of unsecured debt is available to assess at any time subject to customary bring down due diligence, and will price at the market the day we lock rate. With LTC's incremental long-term borrowing costs at approximately 5%, we continue to be very competitive on pricing for newer assets located in top markets.

During the quarter, 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 1.2 million related stock option exercises. During the third quarter, we paid $14.7 million in preferred and common dividends.

During the third quarter, we increase our monthly common dividend from $0.14 and a half per share, to $0.15 and a half pershare. In discussing 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 second quarter, 2012, compared to the trailing 12 months first quarter, 2012. Occupancy and our same-property out portfolio was flat at 78%. Excluding properties leased to us that have been in concept and extended care, occupancy in our out portfolio was 88%. 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% management fee was a 1.8 times; before management fee, or EBITDARM, coverage for our SNF portfolio was 2.5times. Occupancy in our same-property portfolio of properties that provide independent living or a combination of independent living, assisted living, and skilled nursing was 86%. EBITDAR lease coverage after a 5% management fee was 1.3 times. The before management fee, or EBITDARM was 1.7 times.

The underlying pair mix for the three months ended June 30th for our same-property portfolio, which includes skilled nursing, assisted living, independent, and properties with a combination thereof was 60% private pay, 14% Medicare, and 26% Medicaid. Within our same-property SNF portfolio, the underlying payer mix is 25% private pay, which includes managed care, and other insurance; 25% Medicare; and 50% Medicaid. I'll turn the call back to Wendy.

Thank you, Pam. Clint Malin, our Executive Vice President and Chief Investment Officer, will discuss our current deal flow and pipeline.

Thank you, Wendy. 2012 has been a good year for us so far with continued growth of newer assets and development projects. As Pam mentioned, subsequent to the second quarter, we closed on a land acquisition in Wichita, Kansas; and concurrently entered into a lease agreement making a $9.9 million investment commitment upon construction of a two-story, 77-unit combination assisted living-memory care facility. Our lessee is an affiliate of Oxford Development Holdings based in Wichita, Kansas.

They currently own and operate two senior holding facilities and manage two additional facilities on a fee-per-service basis, providing assisted living and memory case services. Three of the four facilities are located in the Wichita market, so they are well versed in that local market. Senior management at Oxford has extensive experience in both development and operations of senior housing facilities, previously working with or for larger operating companies in the industry.

We are very excited about entering into this new relationship with Oxford and look forward to future growth opportunities with them. Construction on the Wichita project commenced immediately following our land acquisition, with a conservatively-estimated completion date of January, 2014. This project continues to diversify our private pay assets and increases to eight the number of properties we own in Kansas.

Our pipeline is very strong, and remains consistently above the $150 million mark. As expected, we have seen a uptick in deal flow in the second half of the year, with a noticeable increase following the NIC conference that was held in September.

Currently, we have three letters of intent that are fully executed by LTCand other parties. We are in the process of conducting due diligence on these three transactions, and subject to successful completion of due diligence and execution of definitive agreements, it is possible to close some or all three transactions by year end. We are actively negotiating LOIs on other transactionsin the pipeline, which consist of unique, off-market opportunities.

The following seven points will provide some detail regarding the composition of our pipeline. First, the pipeline consists of both development opportunities and acquisitions. Second, the development projects consist of a mix of skilled nursing, free standing private pay memory care, and assisted living memory care combination facilities.

Third, the pipeline is mainly comprised of acquisitions and on-balance-sheet construction funding, but includes a couple of loans which, in one case, is for a development project giving LTCa purchase option exercisable upon stabilization of the property. Fourth, the properties and land sites are located in six different states. In five of the states, we currently hold investments, and the asset in the new state will be added to an existing master lease.

Fifth, the pipeline consists of both new relationships to LTC,as well as existing relationships adding properties to master leases. Sixth, the original dates of construction are no older than 1999 at all existing operational properties are looking at in the pipeline.

And lastly, with the exception of one property, all are located within a top 40 MSA. Our pipeline is reflective on our focus of requiring newer, more modern assets, expanding our development funding program, increasing diversification of private pay assets, cultivating follow-on deals with existing customers, and continually working to establish new relationships with experienced healthcare operators in the senior housing and long-term care space.

Given the current market, we are very optimistic about future growth opportunities for the Company, and we look forward to announcing deals as they are converted into executing transactions. Wendy?

Thank you, Clint. Andy Stokes, our Senior Vice President of Marketing and Strategic Planning has some comments on our specific marketing effort, and what he perceives as the broader market available to LTC. Andy?

Thank you, Wendy. When I talked to you guys about a year last time, I sanguine. At that time that I was -- things were about as good as I had ever seen them in over 20 years of doing this. And they are at least that good now. I am still very optimistic. There's a lot of churn out there. The market was kind to us in 2012.

Our memory care efforts and our development efforts, and the trend that I see there is increased availability to us in terms of having met more people, the developer, operator combination. In doing underwriting, you can't just have a good operator, you can't just have a good developer, you have to have both. Sometimes that's a team of two, sometimes that skill resides in the same company.

But we are finding more of those. More of them are emerging, and we are getting a little bit smarter about where to find them, which includes some of the smaller gatherings around the country. Market prices for SNFs over the last, probably, six months, I think has softened.

The newer assets continue to do well, but there's a very large stock of very old -- much older assets. We don't own very many of those, very, very few. But there are some, and those prices seem to be weaker. And newer assets, the newer SNF assets are holding up pretty well, but even that price is a little soft, and those deals have slowed down a little bit.

Assisted living prices for multi-facility deals are higher. And there are still some good deals available, but with our conservative underwriting, we tend to not get as many of those, unless it was a special circumstance. But we do look for the special circumstance, and we are able to find some of them.

Independent living around the country is doing better. There just kind of caught up with a lot of markets. There was a lot of building coming on line and that seems to work its way through. And one of the things about this change for us is we are going uptown with our marketing. Spend more, I spend more and approve more, and we go to more expensive events.

Partly, this is due to the operators have more money. They're successful. Five years ago, people were crying the blues. And now they have a little more money to spend, so they are not going maybe to the Hyatt, maybe more often they are going to the Four Seasons. Well, that's not all bad news for me, because I'm often there. But we still spend a lot of our time in places like Taunton, Massachusetts, and Tukwila, Washington.

There's a lot of deal enthusiasm there, a lot of new faces. The older group of operators that I grew up with, they are older; and newer faces are evolving. People are starting new businesses. We have put a lot of effort into meeting those folks, working with them on state profits committees, putting our efforts with our operators and try to develop more business, and touched on our rate pricing. I would like to comment on that a little bit at length.

I have heard people say out in the field, but you guys have to grow really fast, and you won't be able to compete on a cost-capital basis with the big guys. And from when I look at our deal flow, and our deal risk, and the way Clint and I work together in handing things back and forth, I believe that we can compete on a rate basis with anybody. The deals that we have had in the last two or three years, at least half of them and maybe more, were in direct competition with megacap,the big three plus others that are extensively in our field.

We are conservative about what we will pay for the building. We will continue to be that way, because that is our best mitigator of risk. However, if it is just a matter of the price, the rate that we can do, we can beat these guys, and we have done it. So that's the evidence that I am not just making. So why I'm looking forward to the next couple of years very happily. I think that there's going to be a lot of business. I think there will be a lot of assisted and skilled and memory care that we develop.

Thank you, Andy.

In the last several weeks, Pam and I have had the opportunity to visit with various current investors and potential investors. We are listening closely to their questions, and with Pam communicating very actively with our analysts who cover LTC,we are continuing to provide more and more detailed information about our Company, to assist our analysts and investors in their evaluations of LTCas it is now and how we are directing our efforts for LTC's future.

In our supplemental, we now separately show acquisition deals that total $81.7 million so far this year, and development, redevelopment, and expansion deals which total about $40.6 million so far this year.

The underwriting and due diligence of the $40 million of expansion and redevelopment is often more extensive and costly than the sale lease back transactions. This level of activity is not immediately accretive but about $30 million of this will begin generating revenue sometime in 2013. Estimated completion dates are conservatively stated in our supplemental, and I think all of the operators are hoping to open an advance of the completions we show on the schedule in the supplemental.

We also provided recent photos of two construction projects already underway. We will provide additional photos on our website as these and other projects progress. Additional new information is in a pie chart on page 13 of our supplemental, showing the percentage of LTC'sinvestments by MSA.

We believe that analysts and investors have the impression that LTC'sassets were predominately rule. This chart shows that 33.1% of our assets are in the top 31 MSAs, and 22% are in MSAs32 through 100. Only 4.6% of our investments are not in an MSA,a designated MSA.

And as Clint said, the transactions we are working on currently are primarily within the top 40 MSAgroups. Since the first of the year, we have reduced our concentration to our three largest operators by a total of 3%. Successful completion of transactions in the pipeline and bringing some development projects on line will additionally diversify our investments and revenue sources.

Also at the present time, the majority of our pipeline represents private pay assets that would return our portfolio closer to the 45%, 55% profile of invested assets in private pay and skilled nursing. Our analysts and investors and potential investors continue to focus great attention on our assets leased to Assisted Living Concepts and Extendicare.

On page 16 of our supplemental is some summary disclosure that we have given verbally several times. Of note on this page is that these properties cover 1.2 times after a 5% management fee.

In addition, please go to our website, click on properties, then click on ALC/EXE, and you can see recent photos of each of these properties. These photos were taken by our employees when they have made recent property reviews and are not professional photos, but hopefully, they will dispel any notion that these properties are in poor repair.

I'm sure many of you have listened to the recent ALCconference call. Dr. Roadman, the interim CEO,discussed many improvements that he and his team have implemented and will implement at ALC. They indicated that they are making progress with mending relationships with regulators, employees, and residents. They are hiring more caregivers, holding open-houses and spending capital to improve properties.

We are carefully monitoring the capital being spent on our properties and ALChas been cooperative in addressing our requests. We will insure that our properties are well maintained in accordance with the provisions of our leases, which are the joint and several obligation of ALCand Extendicare.

Dr. Roadman indicated that ALC is considering some strategic initiatives, one of which was the possible sale of seven owned New Jersey properties. We lease one property to ALCExtendicare in New Jersey. ALChas no authority to include our property in a disposition transaction nor have they requested that we consider it.

Mark Hemingway, our Vice President and Investment Asset Management Executive, was in Millville, New Jersey, last Friday, right after Hurricane Sandy. At that time, the property had only two vacant units with one expected admission. They had purchased new dining room furniture and new living room furniture.

I reviewed Mark's report and his photos of some of the interior areas of the building, and it has obviously greatly improved since his prior visit earlier this year. Mark made note that the executive director returned in July after having been gone four months perhaps because of displeasure with prior ALC senior management. Mark also made a note to go back and assess the roof that had two leaks and may need replacement, but generally, the building appears to be in improvement mode.

As I have said in the past, that I reiterate now, there is no reason to assume that LTC will not collect all rents due us under our two master leases with ALC Extendicare. ALC disclosed in their 10-Q that they may violate debt covenants at year end. Our leases with ALC Extendicare do not provide that this potential default will be a default under our leases.

ALC also stated in their 10-Q that it is working to get waivers. ALC is selling assets, it could give more security to the banks, it could pay higher interest. There appear to be ways to negotiate a waiver. I believe banks in general are not in a panic mode and are willing to work with borrowers.

In this environment, where banks have liquidity and the borrower is in a verifiable turn-around situation, it seems counter productive to put undue stress on a customer. And I stress again, LTC can and will look to Extendicare for any shortfall in rent or capital expenditures. There is no reason to believe that the assets will be in a diminished physical condition at the termination of our master leases.

There is no reason to believe that LTC will not be able to collect the same, if not more, rental income when the master lease terminates on the properties that are now covering 1.2 times after a 5% management fee, and have been operating under a challenging turn-around environment. Perhaps we will see some reduction in the coverage ratio for the next 12 months -- next trailing 12 months as ALC adds staff and expands in expense maintenance dollars, but all of that should only improve occupancy and cause coverage to again increase.

Pam mentioned that we received notice of an early pay off of a $15 million loan. This is approximately a year earlier than its due date, but was within its prepayment window. While we did not anticipate early payment of this particular loan, the low interest rate environment provided the borrower with an attractive option, and we could not and would not meet that rate.

The anticipated $15 million in proceeds will be used to pay down our bank line that's currently at $29.5 million, Until we can request re-invest these proceeds plus additional funds, this early pay off will have approximately $0.01 of negative FFO impact for 2012 results. Assuming no additional investments that are accretive for 2012.

Should we convert some of our pipeline into funded deals within the next few months, we would use our line to make these investments. Rather than look at more permanent, expensive financing early in the year in 2013, we may look to expand our line by an additional $60 million. It continues to be our strategy to have our debt-to-market cap be no more than 30/70; and right now, we have the liquidity and the debt capacity to fund additional accretive transactions and development.

When we do projections internally, we have traditionally not included acquisition costs as FFO expense. Because of the GAAP requirement to expense these costs, which in the most part are added to investment basis for rent calculations, we have absorbed about $0.01 in reduced FFO year-to-datecompared to what we were looking at projecting at the beginning of the year.

There is significant activity right now, as Clint said, in a push to close accretive transactions before year end, and we look forward to being able to announce the additional positive news. With the changes in tax law coming possibly under the Obama administration, we may look at personal tax planning within the management group. I am not saying any of us are selling back before the end of the year, but if people decide to sell stock before the end of the year, it is going to be because of tax planning and not because of issues with LTC. Just wanted to put that out there since any small selling of stock seems to be of concern.

Without any additional accretive, incremental investments or incremental acquisition costs our current projected 2012 fully diluted FFO per share is still around $2.25 to $2.26. Thank you for your attention today and listening to our presentation, Laura, I'll now open for questions.

(Operator Instructions).

Our first question comes James Milam of Sandler O'Neill.

Good morning, guys. Thank you for all the extra disclosure and dialog. Wendy, I appreciate that. First question, just following up on your guidance commentary. I thought the prior range was $2.26 to $2.28, so when you said $2.25 to $2.26, that's essentially the same range, but accounting for the mortgage prepayment. Is that the right way to think about that?

That's correct.

Okay, thanks. And then, I guess I'll ask this one as well, you talked about potential coverage declines for the ALC leases from the 1.2 times. I think that's a trailing 12 number from June. I'm curious if you have any quantitative measure of how that coverage has trended through the summer?

No, we don't. We don't have any current information on operations from our properties.

Okay. And then on the three letters of intent, can you give us the dollar amount for possible invested capital? And are those stabilized assets? I think Clint went over this, but are they stabilized or potential development properties?

Those LOIs are both for development and stabilized acquisitions. Right now, we are under confidentiality agreements; and we are going through due diligence. So -- not able to give a range right now, per transaction, but we do look at various sized transactions. And as we progress further and we can bring these to definitive documents and we're in a position to go ahead and announce them, we will be able to go ahead and provide more detail.

Okay. I guess just one last quick one. There was a potential $10 million SNF disposition before the end of the year, do you guys have an update on the status there?

We have talked to the tenants, and they are actively working on finding financing to exercise the option. They have given us the impression that they think it will be likely. I'm not exactly sure what date they will be, but they have until March 31st to accomplish that.

Okay.

So right now, we haven't received any request to get the documents together for any legal -- okay. So it's unlikely it will happen before year end.

Got it. Perfect. Okay. Thank you, guys. I appreciate it.

Thank you, James.

And our next question is from Karin Ford of KeyBanc Capital Markets.

Hi. Good morning. Wanted to ask you about on ALC and the Board's decision to pursue strategic alternatives. Have they been in touch with you guys about participating in that? Would you be willing to if they did? And have you had discussions with other operators on potentially taking the portfolio over?

We have had no further discussions with any other operators. We have had some earlier in the year when Assisted Living Concepts first announced that they were changing management. We have had no discussions with Assisted Living Concepts about adding our properties into any disposition.

We aren't interested right now in selling any of our assisted living properties. We would be more inclined to find new operators if they were going to make those available under the lease. But they haven't asked and we haven't reached out to say, please consider ours in your disposition packages.

Okay. Thanks. And if you were going to transition those properties, what would market coverage level be for a new operator today?

Well, we're looking at underwriting at 1.2, aren't we?

1.2, 1.3, somewhere in that neighborhood. Of course, you have to factor in the consideration of being in lease up, depending on how stabilized the assets are.

Right. So you might give lower rent for an initial period and then higher rent post-lease up?

It would all depend on the circumstances, I think.

Okay.

I don't see having to give -- our hope is to find companies that can go ahead, and if occupancy has not been increased already through ALC, is to find companies that know the markets, are able to go ahead and achieve ramp ups on the occupancy. So I wouldn't say that we would go in initially with lower rent. That's not our initial expectation.

Okay.

When I go out in the world, I routinely get people asking me, saying to me, I say routinely, three or four times in the last six months, but whatever. Companies that are fairly substantial, if you get any of those back, I would like to rent -- I would like to lease them. And these would be fairly knowledgeable companies, usually middle market; but we do get those inquiries. I mentioned to Wendy briefly, certainly, it is preliminary for me to be pursuing it further.

Okay. Thanks. And then, solely, if you were to consider doing something like that, it would solely be under a new triple net lease. Would you consider it a RIDEA transaction on those properties or not?

I think that right now it seems like we have more -- we have a decent opportunity to do a triple net lease.

Okay.

If for some reason that wasn't possible and it was going to be beneficial to our shareholders to enter into RIDEA, we might do that. But that's not our first strategy --

Choice. Okay. Last question, it sounds like from your comments that you're focused on increasing private pay, and increasing the assisted living portion of the portfolio. Just talk about, has the pipeline moved towards assisted living today? And what's the split in the stuff you are looking at between ALF and SNF?

The majority of the stuff we are looking at right now is ALF. It just is that the deal's slow. There is no standard. It's sometimes you have an opportunity and other times you don't. But right now, we have got an opportunity to do some creative investments in assisted living properties and memory care properties that are already opened and operating. So they would be lease back transactions.

What do you think is driving the increased seller willingness on the ALF side, increased volume of deals there?

Taxes.

Yeah. Okay. Great. Thank you very much.

Yes.

And the next question comes from Rich Anderson of BMO Capital Markets.

Hey. Thanks. Good morning.

Hi, Rich.

So I guess the first question is from a previous question. You said you didn't have any information on how the summer went for your portfolio?And I guess that makes me feel a little uncomfortable. Do you have -- can you hazard a guess of what will happen to coverages with the full effect of the CMF cuts in the numbers at that point?

Rich, we have been receiving -- we get monthly financial statements on the -- I'm sorry, quarterly financial statements on those, so we have got the last quarterly statements. We're analyzed those through June. And as those other statements come in, we will continue to analyze those.

We are constantly in contact with our larger operators talking about any things they see on the horizon, whether it's from a state perspective or federal perspective, so we are actively engaged with operators monitoring that. But we typically review that on a quarterly basis.

And we are still projecting a 1.9, Rich. I think for the past nine months we've been, as it flows through projecting it will shake out to be about a 1.9 on a same portfolio basis.

But that compares to -- am I looking at this right, 1.83 for the second quarter?

What you are looking at on the top part is the portfolio that includes new properties, so properties that we have bought recently at a 1.5 coverage drive your overall coverage down; but if you look down below where we isolate the RUGs quarter by quarter, that is a stabilized same portfolio basis. That's like, we would say, the core portfolio without acquisitions, that's going to be at 1.9.

Okay. Fair enough.

And also, we have started to receive the third quarter financial statements and we don't have all those, but we are actively working on inputting those for our additional data analysis. So we are actively monitoring it.

Okay.

The companies have 45 days from quarter end to get us their financials, we that's why we just don't usually have them all in time for this call.

Okay. And bigger picture question on memory care, and just thinking that product through, stand alone memory care. What is it about that that appeals to you so much? Because when I think about it, memory care as a wing, or on an assisted living facility has a feeder element to it, where this stand alone product does not. So it seems like it is more vulnerable to turnover and the rest. I am just curious, what is it about memory care fundamentally that appeals to you?

Well, right now, the demand, the unmet demand is significant. If you talk -- you go out and look -- talk to operators, the units of assisted living that provide memory care are almost 100% full. You don't necessarily transition from assisted living into memory care. You very often have direct admissions to memory care as a memory care patient. And assisted living don't often admit from outside. They keep their units for the transition people.

So the market is underserved right at the moment for memory care. It's all private pay. There are smaller properties. There's somewhere between 60- and 80-unit properties. So there's not the 120-unit properties that's very costly to buy. That's what I see, and Clint might have more comments about memory care.

No. I think those are spot-on.

Okay.

This is Andy, Rich. I think we have to think about the decision maker. The decision maker for taking care of mom or dad wants them to go someplace nice. And this product is increasingly acceptable. 20 years ago, nobody knew what assisted living was. And it became acceptable. The stand alone memory care has a place in marketing to up-market folks thathave a lot of money.

And they are -- when they are done and when they market it correctly, they are saying, you don't want to send mom over there. We know how to really take care of her here, and we have a building that is designed to add to her comfort and experience and it works. So it's really much -- I think it is more the market side why these are good investments and they are.

Also to add to that, Rich, is that the focus in a dedicated free standing memory care facility is the staffing ratios and the programming is targeted specifically for a care of a certain population of resident. Whereas in a combination facility or assisted living memory care, they are running two different programs effectively catering to two different populations, so this is just a dedicated focus on that diagnosis.

Okay, and maybe the last question for you, Clint. Have you noticed or anybody, I should say, have you noticed or were you sensing that existing owners of real estate or operators were anticipating and hoping for an Obama win? And do you think that will have any influence on your pipeline as you now have some clarity about Obamacare, and the healthcare delivery system in general?

I think people were anticipating that Obamacare was going to survive. And so, our operators haven't indicated, our SNF operators haven't indicated any significant concerns about the implementation of all the provisions of Obamacare. In terms of providing service at the lowest cost level, that is still the SNF profile.

So we haven't had any indication that our operators are concerned about their revenue. I guess it is a little too early to determine whether there's going to be any more deal flow from it. We haven't noticed it in the last couple of days.

Okay. Fair enough. Thank you.

Thank you, Rich.

And our next question is from Michael Carroll of RBC Capital Markets.

Good morning, guys. Has there been any progress on potentially negotiating an early termination on some of the ALC properties?

We haven't tried to negotiate an early termination of the ALCproperties. Any negotiation that we would -- I mean, if we opened it up, they would assume we were willing to take some lesser amount in order to get out from underneath this lease. We are very comfortable that we are going to get everything that we are entitled to under this lease.

And that at the end of this lease, we will have assets that will provide at least the same amount of lease stream, if not more. So I don't see that there is a benefit to our shareholders and our Company of negotiating an early termination of this lease other than uncertainty in the marketplace. Which I think is overheated.

Okay, can you now talk a little bit about your mortgage book?Are there any additional investment opportunities out there?

Our mortgage --

Are you talking about initiating --

Yes. Investment opportunities.

New mortgages?

Yes.

We occasionally see opportunities.

We are talk about doing a short term one right now. A swing to HUD.

Yeah, so we are looking at unique opportunities, but as a general line of business in going out and looking for mortgages with the rates that are available through the agencies and HUD, it's hard for us to compete for those. Other than unique opportunities, I would say it's not a big part of what we are looking for.

I would say -- this is Andy. In terms of the charter that I have been given, my marching orders are to go out there and do leases. And we can do more mortgages. But our objective is, if somebody starts out with, I would like to do a mortgage, then we want to listen to them and see if we can meet their needs with a lease or use a service better than mortgages.

And we, from time to time, will make a mortgage for specific reasons. We have mentioned earlier that we are going to start out with a one asset, which has a little bit of turn around risk, we are going to start with the mortgage, so they have to pay us back. And if it does okay, then we will exercise an optionand buy it. That's the kind of circumstance that I think we might use it most.

We also could look at doing a mortgage on -- we are looking at a development project where we would do a mortgage, as I mentioned in my comments, and have an option to purchase. That would be a unique where we would look at a mortgage.

Okay, then do you still expect that you can have about $30 million if development start to year? Is that still your goal to reach those?

The $30 million to $50 million per year.

Okay, great. Thanks.

Thanks, Mike.

Our next question comes from Daniel Bernstein of Stifel Nicolaus.

Good morning.

Hi, Dan.

Hi. I know you don't want to have any more ACL question but this one may not be too bad. The master lease, the lease with ACL, is split between the master lease one and master lease two? Is there any difference between the lease coverage on those two pools?

Yes.

And the reason why I ask is, the carbon indents being violated is a leverage covenants, so if there's anything that's below one or even individual assets for the pools, then maybe you'll have a little bit of leverage to negotiate a lease. The early termination of the lease without you having to give up anything.

Perhaps. I don't understand that theory.

Well, if you have any individual assets that are leased to them that are not positive EBITDA, if they gave it back to you -- if it helps them in their covenant.

Oh, I see. If they gave it back, it helps them in the covenants.

Yes.

Both leases cover EBITDARM, so they're making a management fee that the one portfolio covers one time after a 5% fee, so EBITDAR. That's the portfolio that has the lower occupancy, the Pacific Northwest portfolio that we've talked about.

Yes.

The other portfolio in the Midwest, which also includes the New Jersey property, covers 1.5 times after a 5% fee.

Okay.

So I don't think they would want to give up either of these.

As long as they gain positive EBITDA on it, it helps their covenant issue.

Right.

Okay. I'll move on from them. Then, have you spoken to NHI at all lately about them converting their preferred? I mean, given the capital gains tax maybe going up, they may need capital at some point. Have you spoken to them about their preferred at all?

We have not.

Okay. I guess just a matter of -- have you any concerns about sequestration being higher than people expect? I've heard all kinds of different rumors the last couple of days with the fiscal cliff, that people are worried about sequestration being higher. I don't know if that's true or not. Have you heard any concerns from your operators at all, about the fiscal cliff, or anything? Not just Obamacare, but the fiscal cliff, or any other issues that are concerning to them?

Dan, this is Clint. Yes. I'm actively in conversation with our operators on a routine basis, and that is something right now that they have not stressed any significant concerns about. Also within our portfolio, our SNF coverage is pretty strong, so they have the ability within our assets to weather any cuts on that. Even as it relates to existing portfolios that they have, they have not stressed any concern to me specifically about it. I'm sure it is in the back of their mind, but it hasn't been on the forefront of issues they are raising to me. Andy, have you seen anything different?

I think the most common concern for the last couple months has been tort reform. There's been progress about tort reform in some states.

Okay.

That's kind of what they talk about, and it's on a positive way. They are sick of the regulations and they are not looking forward to more regulation.

Yeah. Then they should have voted differently. There was a way to fix that.

I wasn't going to say it, but yes. (laughter)

Had they stood up.

Okay, I think that's all from my side.

Thank you, Dan.

All right.

And next, we have a question from Todd Stender of Wells Fargo.

Hi. Good morning, guys.

Hi, Todd.

The length of the lease on the Wichita development project, it seems on the shorter side, just being only ten years. Are you seeing anything, any migration to shorter lease terms in general?

No. They had the -- in this case, they are expecting that construction commenced the day following the acquisition. So they think they are going to have that building up and operational, I think, before January, 2014. Which is the estimated completion date. So, no, I am not seeing any migration towards shorter-term leases.

Actually,they want longer.

Yeah.

And we want less. For an opportunity to reset the rates.

Yes.

My sense is ten years is standard.

Yes.

Not 15?

Within our industry and within our --

Not 15?

No. 15 would be very unique. At least within our portfolio.

Okay that's helpful. And just looking at the rent stats, if you can give us what some of the monthly rents are for AL in theWichita market and how they compare to, say, what you are doing in Colorado and Texas and then versus your overall portfolio?

Sure. Well, the Wichita market is a little different than the Denver market. The rates are definitely a little bit lower on the --

Our projected rates, or are you talking about --

The projected rates on the Wichita market.

Right. Is that what you're asking, or is it our rent?

Yes. Yes, I am.

Okay. You are asking what the operator is going to charge. Okay.

Sure.

On a blended basis, there are probably about $5,000. For the -- in the average rate between AL and memory care,including services. So on the -- this property is skewed more towards AL, and then there'smemory care. So you are looking probably more in the $5,000 to $5,200 on the memory care side. And more in the low four's on the -- right on the $4,000 mark on the assisted living side.

How about in Colorado and Texas?

Colorado, we were looking at memory care. The properties in Colorado we are looking at are --

All memory care.

All memory care, so we are looking probably in the $5,500 to $6,000 per month range on the memory care side in Colorado.

And then in Texas?

Texas is a little bit lower, probably in the market, we're looking at more in line with the Wichita market.

Okay. Thanks, Clint. And just staying with you, Clint, you gave some coverage numbers before about 1.2, to 1.3. Were those reflective of only assisted living?

That was just assisted living on stabilized assisted living.

If you tuck in memory care, does that change the numbers at all?

Well, there's not a lot of existing operational memory care facilities we have looked at, so we would view that as private pay housing similar to assisted living. So we would probably look at it somewhat similar.

We are projecting a stabilized memory care to cover --

We are looking at about 1.5 times on our development projects.

After 5% management fee?

Of course, after 5%.

Okay. Thank you very much.

Sure.

Thank you.

And next we have a question from John Roberts of Hilliard Lyons.

Hey, Wendy.

Hi, John.

Most of my questions have been answered. But I do want to echo thanks for the additional information on the supplemental. Very helpful. Can you talk maybe a little bit about operating and other expenses going forward? Q3 seemed to come down a bit. I just wanted to know what you're looking at going in the future.

I think we're -- if you took our year to date and divided by three, it's probably what we're going to be doing in the future. I think we have, what were we budgeted for the year?

I think our run rate's about $2.6 million.

$2.6 million.

Yes.

So you came in about, a little over $2.1 million

And that's, well, this quarter was low a bit. Marketing expenditures in the summer time, typically there's not many conferences. There's just not a lot going on, so marketing is quite seasonal. I will expect it to pick up here in the fourth quarter, but I think our run rate's been about $2.6 million.

All right. Great. And Pam, you were so organized on your presentation, I was scribbling down stuff so quickly. Did you that you recognized some more Sunwest income this quarter?

We had last quarter, and that's why other income went down this quarter. Because we had that.

Okay. All right.

About $300,000 last quarter, yes.

Yes, it wouldn't be out of last quarter, but I thought you -- I was scribbling down stuff so quickly, I missed it. And I wasn't sure if you said this quarter or last quarter. Okay. Great. That's all I had.

Yes, that's the reason why it dropped.

Thank you, John.

(Operator Instructions).

And our next question is a follow-up from James Milam of Sandler O'Neill.

Hey, guys. I just wanted to make sure I understood that last question on operating and other expenses. Does the $2.6 million number include transaction costs and everything else in there?

No. It does not.

Okay. So that's, I guess, just looking back, it looks like it was $2.5 million, $2.4 million, $2.2 million for quarters one, two, and three; and you're saying the fourth quarter and next year is around $2.6 million?

Yes. Going forward. I'm projecting into 2013 for you guys, to give you a good run rate.

Okay. Perfect. And then, my last one. Pam, or I guess you guys are talking about next year expending a lot of credit and doing more funding on the line of credit rather than drawing on the unsecured shelf agreements. Can you just talk about -- I guess, to me, that sounds like a little bit of a shift in strategy. Is that more timing related or is there a preference there for using the line of credit more?

I think it's reflective of the development strategy as we start to fund the development. It's more accretive to keep that on the line short-term, and then as you get closer to C of O and it switches to being revenue producing, then term it out.

Okay. That makes sense. Thank you.

You're welcome.

(Operator Instructions).

Showing no further questions, this concludes our Q-and-A session. I would like to turn the conference back over to management for any closing remarks.

Thank you. Thank you, Laura. And thanks to everyone for participating today. And if you have any follow-up questions, please give us a call and we'll try to give you additional answers. Again, thank you, and we'll talk to you in January?

Yes.

February. Okay. Thanks a lot. Bye bye.

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