LTC Properties Inc (LTC) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to the LTC Properties fourth-quarter 2012 analyst and investor conference call. All participants will be in listen-only mode

(Operator Instructions)

After today's presentation, there will be an opportunity 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, 2012.

Please note this event is being recorded.

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

Hello, and thank you for joining us today. The presentations will begin today 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, and good morning. I'm going to talk about quarter-over-quarter performance. And I will refer you to the 10-K and press release supplement that was filed yesterday for year-over-year comparisons.

Revenues during the quarter increased $723,000. This was due primarily to rental income increase of $936,000, due primarily to acquisitions and a one-time rent escalation from Emeritus of $255,000, which resulted from a faster-than-anticipated lease-up of the Bakersfield and Vacaville properties that were formerly leased to Sunwest. Mortgage interest income decreased $263,000, primarily due to the prepayment of a $16.2 million loan related to assisted living properties that we discussed last quarter on the conference call. Interest and other income were comparable between the two quarters. Interest expense in the fourth quarter was also comparable to the third quarter.

General and administrative expenses increased $824,000, primarily due to bonuses that reflect an increased level of investment activity in 2012 as compared to prior years. During 2012, LTC's transaction volume -- that is properties acquired, loans originated and development commitments signed, was $244 million, as compared to $109 million in 2011. Net income available to common shareholders increased $271,000, resulting from rental income from acquisitions, partially offset by higher G&A expense. Normalized fully diluted FFO per share was $0.57 this quarter, compared to $0.57 last quarter. And normalized fully diluted FAD per share was $0.56 this quarter, and $0.56 last quarter.

Turning to the balance sheet, we had a very active fourth quarter on the investment front, which Clint will talk about in a moment. From an liquidity standpoint, at December 31, we had $115.5 million drawn and $124.5 million available under our line of credit. Additionally, we have $100 million available under our shelf agreement with Prudential. Subsequent to December 31, we borrowed $2 million under our line of credit and, therefore, we currently have $117.5 million drawn and $122.5 million available under our line of credit.

During the quarter, our last limited partner redeemed a total of 20,000 shares in our limited partnership. We elected to satisfy this redemption through the issuance of 20,000 shares of common stock. At December 31, we had no more outside limited partners. The $7,000 balance on the balance sheet represents the former limited partner's accrued preferred return, which was paid in January. Therefore, you will not see a line item for this next quarter. During the quarter, we granted 26,300 shares of restricted stock at a grant price of $34.90 per share. Subsequent to December 31, we granted 20,000 shares of restricted stock at a grant price of $36.26 per share. During the fourth quarter, we paid $15 million in preferred and common dividends.

Turning to operator statistics. In discussing operator statistics, I'll 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' third quarter compared to the trailing 12 months second quarter 2012. Occupancy in our same-property ALF portfolio was flat at 78%. Excluding properties leased to assisted living concepts and extended care, occupancy in our ALF portfolio was 87%.

EBITDAR lease coverage, after a 5% management fee, was 1.4 times. Before management fee, or EBITDARM, coverage was 1.7 times. Occupancy in our same-property SNF portfolio was 79%. EBITDAR coverage, after an implied 5% management fee, was 1.8 times. Before management fee, or EBITDARM, coverage for our SNF portfolio was 2.5 times. Occupancy in our same-property range of care portfolio, which consists of properties that provide any combination of skilled nursing, assisted living, independent living, and/or memory care services, was 87%. EBITDAR lease coverage after a 5% fee was 1.4 times. Before management fee, or EBITDARM, coverage was 1.9 times.

The underlying payer mix for the nine months ended September 30, 2012 for our same-property portfolio, which includes skilled nursing, assisted living, memory care, independent living, 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 was 25% private pay, 25% Medicare, and 50% Medicaid.

I'll now turn the call back over to Wendy.

Thank you, Pam. Clint Malin, our Executive Vice President and Chief Investment Officer, will discuss our fantastic fourth-quarter acquisitions and development and underwriting. And make comment on our current deal flow of pipeline. After a very active 2012 fourth quarter, we have internally discussed that, had we had this call on January 2, our pipeline would have been zero because we closed so many deals at year end. But after a slow start, we have seen a good build to the pipeline. Clint?

Thank you, Wendy. Good morning, everyone. 2012 was a tremendous year for LTC. And we ended it with the best quarter of investment activity in memory. As Pam mentioned, for 2012, we made a total of $244 million of current revenue-generating investments in development commitments. And this investment activity expanded our operator base by adding five new relationships to our portfolio.

During the quarter, in a sale leaseback transaction, we acquired two assisted living facilities and three standalone memory care facilities, for an aggregate purchase price of $82 million, master leasing the properties to an entity affiliated with Juniper Communities. Additionally, LTC entered into an agreement to purchase a 72-unit assisted living facility from Juniper for $12 million, including the assumption of a $6.8 million HUD loan which is schedule to close in 2013, subject to HUD approval. Also during the quarter, we acquired three vacant parcels of land in Kansas, Texas, and Kentucky, in separate transactions, for an aggregate purchase price of $3.8 million. Simultaneous with these purchases, we entered into lease agreements and development commitments with three separate and unrelated operating companies in an aggregate commitment amount, including land cost, not to exceed $39.9 million, to fund the construction of two combination assisted living and memory care communities, with a total of 158 units and one 143-bed skilled nursing facility.

Additionally in the quarter, we originated a $5.1 million two-year interest-only bridge loan to an affiliate of Juniper, secured by a 70-unit assisted living facility. We also originated a $10.6 million construction and mortgage loan, $2.6 million of which was funded upon origination. The loan is secured by a 106-bed skilled nursing facility that is currently operating. And a $5.6 million acre parcel of land, upon which a 106-bed replacement facility will be constructed. The agreement gives us the right to purchase the replacement facility for $13.5 million during an 18-month period, beginning on the first anniversary of the issuance of the certificate of occupancy. The facility will be operated by Fundamental, who is also an operator of four of our SNF properties and will operate our new SNF replacement property in Amarillo. Upon exercise of the purchase option, the new facility will be added to a master lease with Fundamental at a lease rate equivalent to the then current interest rate on the loan.

All of the investments I just mentioned were previously announced. In addition to these announced deals, we invested $8.3 million in development and capital improvement projects during the quarter, at a weighted average yield of approximately 8.9%. Growth with our existing portfolio relationships is a strategy that helped spur our 2012 investment activity. And we look forward to more opportunities in 2013.

The transaction with Juniper was a combination of a great year of investment activity for LTC, establishing a solid new relationship with a highly-experienced and well-regarded operating company in the seniors housing space. Additionally, this transaction adds to the diversification of our operator base, geographic footprint, and enhances private pay metrics, as well as adds newer physical plants to our portfolio, with an average age of approximately 12 years, with all but one of the properties located in the top 31 MSAs. Our pipeline is active, but given the rush of activity in the fourth quarter, as Wendy mentioned, as well as the typical lull in first-quarter closings, any investments in 2013 will fall into latter quarters. We are seeing deals ranging from AL to private pay standalone memory care, to skilled nursing, in addition to numerous development opportunities. At this point our pipeline stands in excess of $200 million.

Additionally, we are continually in contact with our customers regarding expansion, redevelopment and renovation opportunities within our portfolio, which we hope will soon further add to our investment pipeline. We will continue our disciplined underwriting approach, be selective in asset quality and the establishment of relationships with operating companies possessing strong operational track records. We continue to successfully execute on our investment strategy by growing our operator base, completing follow-on deals with existing relationships, acquiring newer assets, growing our development platform, plus funding expansion and redevelopment and renovation opportunities within our portfolio, while maintaining a balance between private pay and government-reimbursed revenues.

Now I'll turn the call back to Wendy for her comments.

Thanks, Clint. I am not sure how we could be more pleased with our 2012 year. We said at the beginning of the year that we were diligently pursuing opportunities to commit today for the development of assets that would be significant additions to LTC's portfolio. As you can see from our supplemental, we underwrote approximately $78.3 million to build and develop new properties. Two of these projects, Amarillo, a replacement SNF, and Littleton, Colorado, a standalone memory care property, are both on track to open in the first half of 2013, and have been on schedule and on budget. Amazingly, even though they started late in the fourth quarter, our projects in Wichita and Slinger, Wisconsin, are well underway, despite construction sometimes being difficult in winter months.

In 2011, as we had more investment opportunities and deals in SNF assets, we purposefully turned our attention to adding more private pay investments, in order to maintain a balance in our asset portfolio. We began an initiative to identify new and entrepreneurial operators of memory care communities. During 2012, we established relationships with operators such as Anthem, Oxford, and Mustang Creek and have worked with them to develop assets for our portfolio and their operations platforms. We look forward to doing additional development with these companies, and building other new relationships in 2013 and the future.

While pursuing development opportunities, we did not lose sight of the accretive benefit of our core sale-leaseback transactions. In 2012, we closed on $161 million of sale-leaseback transactions. And I am pleased to report that the assets we have purchased in the past two years have been newer, competitively positioned, and operated by dynamic companies who are strategically looking to grow on strong operating platforms. In the summer, we added the great Carespring properties. And at year end we were so pleased to be able to add Juniper and their wonderful properties to our portfolio. Clint has already detailed the many benefits to LTC from these additions. And I just want to reinforce our appreciation for the opportunities these two operators have given to LTC and our shareholders. Plus I want to express my appreciation to all of our operators for their contributions to the strength of LTC.

Our two master leases with Assisted Living Concepts and Extendicare come up for renewal as of December 31, 2013. At which time, the lessee is required to give us at least 12 months advance notice. There has been significant attention placed externally and internally on these 37 properties, due to operational and corporate challenges being experienced by ALC. We continue our scheduled physical inspections of these properties. And I have commented on past calls that ALC has been maintaining and investing in these physical assets. In preparation to discussions that are likely to take place later this year, I have personally begun to see all of the 37 properties. To date, I have been to one Idaho, one Ohio, and all eight of our investments in the state of Washington. My goal is to get to all of these properties this year, either by specifically planned trips or side trips during other business travel.

Of the 10 properties I have already seen, every one of them is extremely well maintained. The available rooms were all-rent ready, and most with new carpet and new bathroom tile. Many of the properties had new roofs and none had any current roof problems. The kitchens were neat and clean. Many had new countertops and, where needed, new equipment. ALC has adopted a new standard decor package and most of the properties I visited had recently been repainted and received new wall art. All of the storage areas, maintenance offices, were neat and clean and well-organized.

In the dining room, even though occupancy has been low in these properties, all of the tables were set with linens, center table decorations, and all place settings. I had them open every wall panel, every hallway door, and found that everything clean and neat in the utility area. I walked the perimeter of each property and did not notice any significant physical business issues. The ALC operations people I met were all courteous and encouraged by the operational changes that Dr. Roadman had made at ALC, and continues to make at ALC. Also in preparation to discussions about the potential lease renewals, we are talking to companies to begin strategic analysis of these 37 assets and their markets. We want to be as prepared as possible to evaluate these assets as ongoing operational assets, and their positioning or possible repositioning opportunities.

All of this great investment activity has had to be paid for. And we have used our line of credit and completed the private placement of notes during summer to fund these investments. At year end, we had debt to market cap of 21.4%, not including our preferred stock as debt. If you include the preferred stock as debt, we were at 24.2% debt to market cap. We continue to have a strong balance sheet with debt to normalized EBITDA of 3.7 times, a normalized interest coverage ratio of 8.4 times, and a normalized fixed charge coverage ratio of 6.3 times. We have debt capacity and availability to fund growth in 2013, and maintain our discipline of having no more than 30% debt to market cap, and a well structured debt maturity schedule. However, we would look at equity to fund additional growth at the appropriate time, and, more importantly, at the appropriate price. And to forestall the question of what I think the appropriate price is, I'm not prepared to give you a number today.

A couple of weeks ago, we announced the retirement of Andy Stokes, our Senior Vice President of Marketing and Strategic Planning. Over this past six years, Andy has made a major contribution to our market presence and growth. We will miss him at the office, but continue to keep him personally and professionally as a friend.

At this time, using our base case, not assuming additional acquisitions or development, not assuming changes in debt financing or equity issuance, but assuming the sale in the first quarter of about $11 million of older SNF assets, we are projecting normalized diluted FFO of approximately $2.46 to $2.48. However, the first quarter of 2013 will have a one-time expense related to Andy's retirement.

At this time, I want to thank you for taking your time today to listen to our presentations. And now we will take questions.

(Operator Instructions)

James Milam, Sandler O'Neill.

Just quickly on Andy, what is the G&A bump in the first quarter? And that is included in guidance, Wendy?

It is not included, no. What I gave you was normalized. It's going to be primarily related to the acceleration of restricted stock.

Okay. And are you prepared to give us a number or should we wait?

Yes, I am not prepared right now.

Okay, no problem. And then bigger picture, with Andy leaving, obviously the portfolio has changed a little bit with the development program. And he was a big part of building the new relationships. I'm curious how you're thinking about filling that position. And whether there is a different skill set now that maybe you would like to have. And you're thinking about cultivating the existing relationships that you have now. Obviously I expect Clint will be a big part of that. But just wanted to get your comments there.

Yes, we are still trying to decide how to replace Andy. It's not a simple thing to do. Over the last year, Andy has developed another person on our staff, Mark Hemingway, who has been going with him to a lot of the regional meetings and developing relationships. So we already have somebody doing part of Andy's job. We will be adding to Clint's staff to take some of the actual paper pushing out of Clint's hands, and add some development opportunity. And let Clint spend a little bit more time in the field developing relationships.

Okay. And then, two quick ones on ALC. The first one, Wendy, did you notify them before you visited the assets that you have toured so far?

Yes. We have to give them at least 24 hours notice of coming out.

And do you push up to the 24 hours, or do you give them -- I'm just curious if they had weeks to prepare for your visit, or if you were --.

No, they did not have weeks. They had a couple of days.

Okay, perfect. And then on ALC, the coverage declined a little bit. I'm curious if you have any insight into whether that is from them having all of the linens out on the tables, even if the assets aren't occupied, if those are operating expenses that they are running now to try to improve the occupancy in the operations of the assets. Or is there something else in the coverage that we should be aware of?

No. From the people I talked to out in the field, they now have a full complement of staff at every property. So, they are fully staffed. They had reduced staffing to, I don't want to say a ridiculous level, but certainly a level that was not appropriate. They all have maintenance people for at least 30 hours a week, where sometimes they had maintenance people for eight hours a month. So, it is from a buildup of staffing. And it costs to do these things before they get the rooms rented. So, it definitely is -- you can tell that they are putting money back into the properties to have them prepared for the increase in occupancy,, which hasn't come yet. A lot of the administrators that I met were there for approximately one year. So, a lot of them are very new administrators.

Great, thank you, guys.

Michael Carroll, RBC Capital Markets.

Within your investment pipeline, can you break out the SNF and senior housing opportunities you're seeing? And then maybe also break out the acquisitions and development opportunities.

Sure. I don't want to go through the specifics of dollar by dollar, but there is a diversity in the pipeline consisting of all of those. There are a number of skilled nursing facilities that we are looking at. But there also are a number of assisted living and memory care communities that are out there, that are potential sale-leaseback opportunities. We have been working with a number of companies on the development platform, so we are layering that in, as well. So I think it's a really well-balanced pipeline that will continue to add the diversity and balance within our portfolio of private pay and government-reimbursed revenues.

Okay. And then how big do you want to grow that development pipeline? I think it represents 5% of your enterprise value right now. Would you be willing to double that, or --?

We have said in the past, Mike, that we were doing about $100 million a year of accretive acquisitions. We would be comfortable at about $50 million a year of development. So if we do more acquisitions, you can naturally do a little more development. But that is about the balance.

And also we try to manage that process, too, because, as we have development projects that are coming online, we have to look at opportunities that we are bringing on. So there may be a little bit more or less at any given point because we are managing the rolloff into properties that are coming online.

Okay. So, you would have about $50 million invested currently, and then as you complete you would put on more? Is that what you're saying?

Correct, yes. But there could be some overlap in adding it on, depending on the opportunities that present themselves.

Okay. And then my final question is, at what point would you talk about clearing your line? And then how would you decide between doing that with equity or long-term debt?

We would look at the time that we were looking to term out the lines, we would look at what the equity markets look like, what were opportunities on debt, unsecured. We could even do a little secured. We have like $2 million of secured debt on our balance sheet right now. We could do a little secured. It would really be opportunistic. And obviously with an eye to staggering the maturities if it was debt. Like we have done in the past. If we were a lot closer to 30%, which we are getting further away, if we were a lot closer to 30%, and we saw a pipeline as robust as we currently see ours, equity would be a little bit more attractive to us. But I think we will be terming out the debt and using our line for acquisitions.

Okay. And then when could we expect for you to achieve that 30% target ratio, of leverage?

I don't know, third or fourth quarter of this year, maybe.

Or maybe a little later.

Later? You think we can go through all this year?

Yes.

Yes, then 2014.

Because it is total market value. So absent any total collapse in the stock market or our stock price, yes, I think we could probably go through the balance of this year.

And by the end of this year, we will have a more definitive answer on ALC. And we really believe that it still is a drag on our stock. And as we get closer and closer, and work more and more to make it a possible earnings pick up, then I think the equity would be more reasonable.

Okay. Great, thank you.

Dan Bernstein, Stifel.

I just want to start off wishing Andy the best of luck going forward.

Thank you. He's not here. He's out marketing, I think.

I enjoyed seeing Andy at the conferences. I guess we'll still see him there perhaps.

Yes.

The $2.46 to $2.48, did that include any capital market transactions?

No.

At term out, what do you think the kind of rate that you might get today? Let's call it a 10-year unsecured under the Prudential line. What kind of rate do you think you would get today?

If we were doing something similar to what we did last year, the private placement, it was 12-year final maturity, 10-year average life, it would be sub 5%. That is what we're being told today. But the debt markets can be a little fickle and volatile. We also, Dan, when we had the opportunity with Juniper, they were already looking at possibly doing some agency financing. So, that is a possibility for us do on those assets maybe. And that would be in the 4% to 4.5% range. But that would be secured.

(inaudible).

I'm sorry?

Is that for 10 years?

Yes. Fannie Mae, Freddie Mac do 10 years.

I was thinking HUD is 30 years.

Not, HUD. I don't want that, to deal with HUD yet. But we have to balance the fact that that is secured debt. So we are looking at all those opportunities.

Okay. And last quarter on the transcript you indicated that price is your best mitigator of risk. On a couple of other earnings calls, we have heard that senior housing cap rates may still be compressing some, especially for maybe some of the secondary markets that you compete in and look at. Are you seeing any pricing pressure, further pricing pressure, on senior housing cap rates? And is there a point where you start to get concerned that the price you're paying no longer gives you that risk cushion that you have wanted to see in the past?

Dan, this is Clint. We haven't seen a lot of compression on the cap rate for those senior housing assets. They definitely are competitive, and there is definitely competition out there for those assets. But we have been very disciplined in our underwriting. Part of the reason that we have started in doing the development platform is looking at the pricing point, getting into existing operational assets, and having concern about that and looking at alternative ways to mitigate that to balance out our private-pay revenues. And, hence, the reason for the development pipeline on the private-pay side. But there are opportunities for onesy, twosy senior housing assets, that they are priced where it is possible for us to acquire them, to have coverage. Because we don't want to get into a relationship where an operator is not able to make money because they're not able to have a profitable operation. And that is just an inherent risk for our portfolio. And we don't want to put ourselves or our operator in that situation.

Okay. So the price at this point is not causing you too much of a concern.

You've got to really dive in to find the right opportunity, because there are some that are priced a little bit more. But there are unique opportunities out there. But I think that with the coming online, there's a lot of talk in the industry about development, and that may cause some mitigation of the pricing for the existing operational assets.

Okay. And then I don't know if maybe you can go back over the Emeritus dollar amount that you mentioned earlier that was in the rent for the fourth quarter. Maybe you could just explain what that was. Was that a one-time bump in the rent? Or is that something we should model going forward as permanent?

No, it was one time. That's why I mentioned it.

But isn't it in the base?

It's in the base, right.

Then they get increases on that.

Exactly. It's in this quarter. So, if you're taking this quarter and modeling it forward, that would be correct.

Okay, so take this quarter and model it forward, there is nothing to pull out of the numbers.

Right.

Okay, that is fine. That is all for me. Thank you.

Karin Ford, KeyBanc Capital Markets.

I just wanted to ask on ALC, I think in conversations past you guys had thought that the 1.1 times coverage level you were going to see this quarter was probably going to be the trough level. Is that still your expectation? And as you are traveling around, are you getting a sense that they are starting to get some traction on the occupancy side, and maybe starting to push cash flows up a little bit?

A small amount of traction. The good thing is there hasn't been a significant loss in occupancy. And I think that it takes a while to turn around a reputation. They are working very diligently on doing that. I think they are probably fully expensed now, because they seem to be fully staffed, of the one-third of the properties that I have seen. So, yes, I'm hoping, as they hope, that it will be turning around.

Yes. And there hasn't been really any new news from them on the strategic alternatives and some asset sales they were looking at. Have you had any conversations with management of ALC? And do you have any update as to what the bigger picture is there?

No, I haven't had any discussions with them. I have been waiting for them to finish their quarter and file their quarter. So we haven't seen anything. I don't like to push them to try to get insider type information. So I am waiting for them to go public with what they have to report and then have follow-up with a discussion.

Great. And then last question just on investments. You said the pipeline was over $200 million. I think that is the biggest number I think I've ever heard you guys say in the time that I've covered you. Just curious as to why you think the opportunities are greater today than they have been. Is it that you are casting your net a little bit wider? You're doing a better job finding new operators? And it seems like you guys have a much more focus on higher quality stuff, so how are you able to push the pipeline up so high today?

I think it is casting a wider net. I think that the bifurcation of the REIT space into large cap REITs and small cap REITs has opened up doors for us. So I view that as a positive. And then the development platform has added to that. So I think you take all three of those, and that is what has added to the increase.

And who would you say are your biggest competitors? Is it other REITS? Is it private guys?

It is a combination. We definitely see small cap REITs. We see NHI on certain transactions, and Sabra, as well. We don't always run into them but on certain deals we do see them out there. There are a number of private REITs that we have seen. And then there is, regional banks are starting to open up their lending, and you will see some competition on that, as well. And some private equity money, too. So it is from a number of different sites.

So regional banks are doing construction loans or just mortgage loans?

I have heard they are doing construction loans, but it is on a limited basis. And usually there is some type of cap on the exposure to a client. It is hard for them to replicate that multiple times with a regional bank.

Got it. Okay, thanks a much.

(Operator Instructions)

Rich Anderson, BMO Capital Markets.

Wendy, when you did your tour, was there anything -- you sort of said this, but I just want to ask it bluntly. Was there anything that endeared you more to ALC, having seen the upkeep and all that sort of stuff, that maybe this could all work out with them, to a better degree in the future? Or do you still feel the same way that you did prior to these visits?

I've got to say that I much admire the fact that they are paying as much attention to our properties as they must be paying attention to their properties. Because it would be maybe, I don't want to say understandable, but for them to say -- well, these are not our properties and we're not going to put any money into them, and we can argue with LTC about what that means. But, if Dr. Roadman were continuing to run the company, and he continued to make progress, and the company righted itself, it would be less of a hassle for us to continue on with ALC at an increased rent rate than it would be to make changes. But it encourages me that, if we have an opportunity to have new operators go out and look at these properties, that they will be properties that people will be able to take and make money out of.

For instance, I looked at a property in Ohio, because Clint and I went out to Kentucky for a groundbreaking for our Cold Spring property. And this property in Ohio is getting $50 a day for a smaller studio, $60 for a regular studio, and $80, I think, for a one-bedroom. And the Medicaid in the state of Ohio is $1,200 dollars to $1,300 a month. So, a company that would be Medicaid friendly -- and I'm not saying that ALC should change their policy or whatever -- and I asked the administrator whether she could fill it up if she took Medicaid and she thought she could. So, these things -- it is different in every market. But it gives me comfort that I believe an operator, either ALC, as a revised operator or a reorganized operator, or a new operator will be able to make these properties viable again.

So, my understanding is Medicaid is a relatively small piece of the puzzle when it comes to assisted living, in the neighborhood of 5% or 10%. Is that about right?

Overall, yes. But in certain markets and certain properties it could be higher.

Okay. But even still, would that really -- say, they decide to accept more of a Medicaid census, that really wouldn't close the gap much at all relative to their depressed occupancy level, would it? I'm curious how that would be the game changer in terms of getting occupancy up to a more stabilized number.

Rich, this is Pam. It is not the game changer. It is just another portion of the strategy. If they are staffing up -- what they had done was go more toward an IL type, going down the acuity spectrum. While during the recession all the other operators were taking higher acuity residents and providing more services. And being able to increase occupancy. They were a little delayed, I think, in that strategy. But now they have seen the light, and they are staffing up levels so they can take the higher needs resident and provide the services. And, therefore, I think they will be able to increase occupancy that way because they can offer the services.

But if they increase their occupancy by just 5%, that would be a game changer from where they are.

Okay, fair enough. Do you think a potential reasonable outcome might be, say, 50% goes back to ALC and 50% goes to market? Do you think that that is a possibility?

That is a possibility, yes. I am open to every possibility.

Okay. And then just the last question. And I don't know if this was again directly alluded to on the call, but you have sequestration talks still looming. What is the tone of your tenants as it relates to that issue? Or the transaction market. That was also discussed on the call. But directly on the issue of sequestration, is it holding people up a little bit? Is it making your operators nervous? Is it holding up the transaction environment? Anything along those lines, can you give some observations of what you're seeing?

Sure. In my conversations with operators, that's been baked into their analysis, and I think maybe an expectation. And we have, in our underwriting, we are taking that into consideration. So, I think that is fully accounted for. And with our portfolio, we have strong coverage, and even if and when that does happen, it is not going to materially affect the coverage within our portfolio.

Clint, is it almost like, having gone through an 11% average cut, is a 2% cut actually welcomed in some ways?

In a way I think it is seen as that is a win, if not more.

Yes. Although the broader implications of sequestration might be the bad stuff, right?

Correct.

Okay, thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.

Okay, thank you. Again, I went to thank you for the attention you have given to LTC. And we look forward to our first-quarter call. While we might not have a lot of acquisitions to talk about, I'm sure we will be able to talk about activity that we will have for the rest of year. So, thank you very much, and have a good day. Goodbye.

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