LTC Properties Inc (LTC) 2013 Q2 法說會逐字稿

Good morning and welcome to the LTC Properties, Inc. second quarter 2013 conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions.

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 the LTC Properties' filings with the Securities and Exchange Commission, including the company's 10-K dated December 31st, 2012. Please also note this event is being recorded.

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

Thank you, Jessica. Good morning, everyone, and thank you for joining us today. At the time of our last earnings call, we were a day or so away from issuing 4,025,000 shares of our common stock at $44.50 a share. This issuance was primarily to fund $141 million transaction we announced yesterday.

In May, looking forward, we determined that based on our confidence in the deal pipeline and our development pipeline, we would need to issue equity by the end of the year or stop growing in 2014, or take our leverage above our 30% comfortable level, or bet on good equity markets in 2014. In May, we thought the Michigan deal would close earlier this year. But it is a fairly complicated transaction and it has taken longer than we anticipated. Clint will provide more details about the transaction in a moment.

At the time we issued the new equity, we could have experienced no dilution this year had Michigan closed sooner than now scheduled. However, we are very pleased to have the deal. And while I regret the dilution, I believe we were correct in scoring the permanent equity at the time and at the price.

I will now turn the call over to Pam Kessler, our Executive Vice President and Chief Financial Officer, who will comment on the financial results and operator covered statistics. And then Clint, our Executive Vice President and Chief Investment Officer, will talk about the Michigan deal, our pipeline and our development activity. I will then have closing comments before opening the call to questions. Pam?

Thank you, Wendy. I will be discussing quarter-over-quarter results. I will refer you to our Q that was filed yesterday for a discussion of year-over-year results. For the income statement, revenues flat quarter-over-quarter. Interest expense decreased $335,000, primarily due to the payoff of our line of credit in May with the proceeds from the equity offering.

General and administrative expense decreased $540,000. In the first quarter, G&A included a one time charge of $707,000 related to the retirement of our former Senior Vice President of Marketing. On a normalized basis, G&A was $167,000 higher in the second quarter, due primarily to the timing of certain seasonal expenses surrounding the annual meeting, proxy, legal and some state franchised sales and use taxes.

We recognized $1 million loss of on the sale of a 47 bed skilled nursing property in Colorado that was built in 1954. Although we were not actively marketing this property for sale, we determined that we did not want to own and further invest possibly needed capital in this small rural property. Annual rent for this property was $138,000. The property was approximately 60% occupied and had EBITDAR coverage of 0.8 times and EBITDARM coverage of (inaudible) times for the trailing 12 months ended March 31st, 2013. When the current operator offered to buy it, we viewed it as an opportunistic time to remove the property from our portfolio.

Net income available to common shareholders was flat quarter-over-quarter. Normalized fully diluted FFO per share was $0.57 this quarter compared to $0.61 last quarter. The decrease is due to the increase in the weighted average shares outstanding during the quarter resulting from the equity offering in May. Normalized fully diluted FAD per share was $0.57 this quarter compared to $0.60 last quarter.

Turning to the balance sheet, during the quarter we invested approximately $7.5 million in development, redevelopment and capital improvements at a weighted average yield of approximately 8.8%. Capitalized interest for the quarter was approximately $300,000.

We sold a 47 bed skilled nursing property, as previously discussed. During the quarter we received approximately $470,000 in scheduled principal payments on mortgage loans receivable. Also during the quarter, we received a $2..3 million payoff of a note receivable and we funded approximately $450,000 under various notes receivable.

During the quarter we sold 4,025,000 shares of common sock at a gross sales price of $44.50 per share. Net proceeds from the offering of $171.4 million were used to pay down the line of credit and fund our development commitment. At June 30th, 2013 and currently, our line of credit is undrawn. Therefore, we have $240 million available under our line of credit. Additionally, we have $100 million available under the shelf agreement with Prudential and approximately $65 million of cash on hand. In July we filed a new shelf registration statement to replace our old shelf. We currently have $800 million available under the new shelf and we are considering a new aftermarket offering program to replace the one that expired with our old shelf.

During the quarter we granted 8,400 shares of restricted stock at a grant price of $46.54 per shear, and 6,000 shares of restricted stock at a grant price of $41.83 per share. During the second quarter we paid $16.4 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 are operators are unaudited and have not been independently verified by us. Additionally, the occupant fee and lease coverage information is for the 12 months first quarter 2013 compared to the trailing 12 months fourth quarter 2012.

Occupancy in our same property [ALF] portfolio was flat at 78%. Excluding properties leased to Assisted Living Concepts and Extendicare, occupancy for the [ALF] portfolio was 87%. EBITDAR lease coverage, after a 5% management fee, was 1.4 times. Before management fee, or EBIDARM, cover and 1.6 times.

Occupancy in our same properties SNF portfolio increased to 79%. EBITDAR lease coverage after 5% fee was 1.9 times and before fee, or EBIDARM coverage, was 2.5 times.

Occupancy in the 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 86%. EBITDAR lease coverage after a 5% fee was 1.4 times. Before management fee, or EBIDARM coverage, was 1.8 times.

The underlying [pair mix] for the 12 months ended March 31st, 2013 for our same property portfolio, which includes skilled nursing assist living memory care, independent living and properties in combination there of was 69% private pay, 15% Medicare and a 26% Medicaid. Within our same property SNF portfolio. the underlying payer mix was 25% private pay, 28% Medicare and 47% Medicaid.

Thank you, Pam. Clint?

Thank you, Wendy, and good morning, everyone. We are very excited to announce our transaction with Prestige Healthcare. We are providing long-term mortgage financing for their acquisition of assets in Michigan from the MediLodge Group. Prestige Healthcare is a privately-held operating company based in Louisville, Kentucky, that currently operates skilled nursing facilities; approximately 2,500 beds in seven states, including one facility in Michigan. They are an operator currently within our portfolio, operating a range of care property in South Carolina, which we acquired in February of 2011. Each of the three principals of Prestige has over 20 plus years of experience in the skilled nursing industry.

Since our first deal in 2011, we have sought opportunities to expand our relationship with Prestige, and this opportunity in Michigan was a unique off-market transaction they brought to us. The Michigan portfolio consists of 15 properties with 2,092 licensed skilled nursing beds and 24 IL units, which will increase Prestige's total beds under operation to approximately 4,500. We have announced the details of this of $141 million investment in our press release issued on Wednesday. So I will first speak to the benefits to LTC of this transaction and then walk through the details of the investment.

To begin, this was a non marketed transaction, which we always prefer, as it increases the likelihood of our execution and helps us better prioritize deployment of our resources. The transaction adds a new state to our portfolio and expands the relationship with an existing customer. In evaluating a new state, we take into consideration critical mass. And obviously this transaction meets that requirement.

Additionally 85% of the properties in this transaction are located in the Detroit metro area, continuing to improve our metric of investments located in the top 31 MSAs. Additionally, this investment continues to reduce our gross investment concentration in Texas from 25% to 22% and reduces operator concentration within our portfolio to under 10% per operator, with the exception of Prestige, which will be at 13% upon closing the of the loan.

This transaction increased our SNF concentration within the portfolio based on gross investment to 57% and revenue derived from SNF to 59%. To mitigate this higher concentration, we are continuing our development financing program targeted towards private pay, senior housing properties. As these transactions are completed, we will continue to grow our private pay assets, allowing us to maintain more of a balance between government reimbursed and private pay assets.

Turning to the details this of investment. As a requirement of Prestige and due to certain regulations in Michigan, this investment is structured as a mortgage loan. But it embodies most elements of a long-term master lease. The loan is for a term of 30 years and will bear interest at an initial rate of 9.41% for five years, escalating annually thereafter by 2.25%. Payments will be interest only for a period of three years, after which the borrower will make interest payments along with annual principle payments of $1 million.

The $141 million loan includes a $12 million forward commitment for capital improvements available for 30 months from the date of closing and is -- and a contingent $3 million commitment for short-term working capital. The $3 million working capital commitment is available for 15 months after the date of closing and must be fully repaid at the end of 18 months.

Also, this loan agreement provides the borrower with access to additional loan proceeds of up to $40 million plus any principle payments made subject to a 1.45 times forward interest coverage, ratio based on audited financial statements, for a trailing 12 month period. Such additional loan proceeds are limited to a maximum of $10 million per year. Additional loan proceeds may be requested between the third and the 12th year of the loan, but only available if the partial prepayment option, which I will discuss next; one, has expired without exercise, two, has been exercised but failed to close, or has been rescinded. The borrower has a one time option between the third and 12th year to repay 50% of the loan balance outstanding without penalty.

Exclusively for the purposes of this option, the properties collateralizing the loan have been separated by LTC into two pools of assets. If and when the option is exercised, LTC will identify which of the two pools it will release for repayment and removal from the portfolio of the properties securing the loan. Had this transaction been structured as a lease agreement instead of a mortgage loan, this arrangement would be equivalent to granting a partial purchase option to a lessee. If the partial prepayment option is exercised and timely concluded, the borrower forfeits its opportunity to access the $40 million of a additional loan proceeds.

Additionally, under certain circumstances, including a change in regulatory environment, LTC has an option to purchase the properties for an amount not to exceed $178 million of consideration paid at closing equal to the outstanding loan balance plus any principle payments made and an amount based upon certain operating metrics and subject to audited financial statements. The loan then converts to a pre-negotiated master lease for the remaining term. The purchase price paid at closing is less than $178 million when exercised in the option. A difference based upon a rent coverage ratio for the master lease will be available through the 12th anniversary of the loan closing as an earn-out.

Within this portfolio, there is one you property undergoing a major addition and renovation and another undergoing a major renovation, totaling approximately $6.5 million in aggregate, and it being funded by the seller and completion is a condition to our loan closing. Including this amount, the total capital invested by the seller in this portfolio over the past five years is approximately $33 million. After funding the $12 million commitment for capital improvements from the loan proceeds, this portfolio of assets will have approximately $45 million deployed into the properties within a six to seven year time frame.

Additionally, about one-third of the properties have excess land available to consider additional major additions to the properties and or replacement projects, creating additional opportunities within this portfolio. Over the past three years, the occupancy for the portfolio has been maintained in the 82% to 84% range and is at 84% for the most recent trailing 12 month period.

We have underwritten this investment at a 1.5 times interest coverage ratio. But this coverage is conservative for a number of reasons. First, the interest rate for the first five years of the loan is fixed. So without an increase in interest costs over the next five years, prospective coverage should increase. Second, the 1.5 times interest coverage includes a fully loaded management fee of 5%. However, given the size and geographic concentration of this portfolio, the 5% management fee, as an allocated expense, is in excess of actual costs.

Next, one of the facilities underwent a complete renovation and modernization in 2011 and has been in the 60% occupancy range because it initially only accepted Medicare patients. However, because of the lower overall occupancy, the facility began accepting residents with Medicaid in the first part of 2013. Today the Medicaid census represents only about 10% of the facility's resident population. Our borrower believes they will be able to run this facility at near 90% occupancy by significantly enrolling the Medicaid population, which will still give the facility an approximately 40% quality mix based on census.

One of the facilities previously mentioned that is undergoing a major renovation currently has had approximately on-third of its beds out of service. The 1.5 times coverage does not include any increased NOI resulting from the repopulation of residents to the facility. Additionally, underwritten coverage does not include any increased NOI attributable to the $12 million commitment for capital improvements.

Finally, the current EBITDA margin for the portfolio is only at 10%, which is on the lower end of the average. In addition to items just mentioned, our borrower believes they can achieve increases to the margin via efficiencies from the operational model and better expense management.

Closing on the loan is expected to occur on or about November 1st, subject to standard conditions to closing including the issuance of new operating licenses to affiliates of Prestige. Of the aggregate loan amount, we anticipate funding $126 million under the loan agreement at closing. The initial funding amount represents an 83% loan to value metric based on a portfolio valuation contained in the independent third-party appraisal report obtained as part of our underwriting process.

Lastly, as it relates to the transaction, I want to mention the City of Detroit since it has been in the news as of late and we are assuming that might prompt questions on this call regarding the city's bankruptcy filing and what impact it might have on the transaction. Although a majority of the properties are located in the Detroit MSA, none of the properties are located in the City of Detroit proper. So we viewed Detroit bankruptcy filing as headline risk only. Detroit's finances have no direct impact on the state's Medicaid program.

The recovery of the auto industry as well as the overall economy in Michigan since the recession has led to significant growth in the state, including Michigan's Rainy Day Fund from its low point during the recession of $2 million to $580 million in 2013. The state's 2014 to 2015 fiscal budget, beginning in October 2013, was signed into law in June by Governor Rick Schneider in June, and did not include any significant changes to the state's Medicaid reimbursement system. In the states' prior fiscal budget, which we began in October 2012, the facilities in this portfolio received an average increase in their Medicaid rate of approximately 4%.

Despite Michigan's economic trouble during the recession, the state's Medicaid payment system has remained relatively healthy in recent years. According to a recent study by state Medicaid underfunding, commissioned by the American Healthcare Association, Michigan was the only state of 37 states studied to have an average Medicaid rate in excess of average costs in 2010. Also, Michigan has adopted tort reform.

Turning to other items. We are pleased to have two of our developed projects opened within the last 45 days. The 120 bed skilled nursing replacement project in Amarillo operated by Fundamental, opened on June 20th and is currently at 68% occupancy and a 41% quality mixed based on census.

Our 60 unit free-standing private pay memory care property in Littleton, Colorado, operated by Anthem Memory Care, opened on July 15th with 43 resident deposits. As of yesterday, the community has admitted 38 residents and is 63% occupied within less than 30 days of opening. Our underwriting projections assumed Anthem would not reach 63% average occupancy until the 12th month after opening. This speaks to Anthems capabilities in site selection and leaseup executive. It also demonstrates our disciplined approach and prudent underwriting process in evaluating development projects. Both projects were completed on budget.

Following the announcement of our Michigan transaction, our pipeline stands at approximately $170 million, including expansion and renovation projects within our portfolio. The majority of the pipeline relates to development opportunities. We do have a fully executed letter of intent for a sale leaseback transaction on a skilled nursing facility with an existing tenant. This transaction will not close until late fourth quarter due to contractual obligations of the operator. The transaction documents are being negotiated and we look forward to announcing this transaction in the near future once all documents have been executed.

Additionally we are close on finalizing documentation on four development projects for free-standing private paid memory care properties with Anthem. We should be in a position to purchase land on one site in the near future and can currently begin funding construction. We look forward to announcing the details of these projects once transaction documents are executed.

And to conclude, on June 4th we announced the hiring of Brent Chappell as the company's Vice President of Investment and Portfolio Management. We are excited that Brent decide to join the team. Brent's prior experience with LTC is a great fit -- within HP -- I'm sorry -- is a great fit for LTC, providing increased capabilities for continued execution of our growth strategy through acquisition and development. He brings a wealth of knowledge about the industry to our company as well as exposure to relationships cultivated with operating companies during his tenure within HP.

Now, I will turn the call back to Wendy.

Thanks, Clint. We are so pleased with how Amarillo and Littleton have turned out. We are looking forward to attending the opening of our Wichita project on October 5th. And we might have another opening in Wisconsin at the end of the year.

Our construction and development initiatives are progressing at a pleasing rate and are adding new and modern properties to our portfolio. At the June quarter, we had $90 million of active development and lease-up projects underway, with $34 million having been disbursed through the end of June. We have $56 million committed to complete these projects. We anticipate spending $27 million for the remainder of 2013 on these projects and $29 million in 2014.

The largest project rolling over into 2014 is the new Skilled property we are building with Carespring in Kentucky. Of the $29 million we are currently committed to spend in 2014, I anticipate that about $18 million of that spending will be done by the end of the second quarter in 2014 and will be producing additional rental income. Carespring is the project that will be completed at the end of 2014, probably opening in 2015 or close to the end of 2014.

As a reminder, we talk about our pipeline as those possibilities in which we have a reasonable chance of converting to an actual deal. Right now the dollar investment opportunities for sale leaseback transactions is relatively low in our pipeline. But recently Mark Hemingway, our Vice President of Marketing, has introduced us to new operators who are possibly interested in pursuing sale leaseback transactions. With the heaviest lifting of the Michigan deal now done, Clint will be turning his attention to addressing these opportunities.

Now, we get to what has become my favorite part of these calls; how do we feel about assisted living concept? I'm sure you all know that the TPG acquisition of ALC has closed and that Jake Callison, previously of Holiday Retirement, has been named CEO. Several weeks ago I got an e-mail from an ALC representative letting me know that Mr. Callison would like to meet. As of today, we have not set a date for that to happen.

So all of the current information I have about ALC is from the fine reporting of Steve Monroe in the Senior Care Investor. For those who have read Steve's comments, Mr. Callison is described to have energy and optimism. My interpretation of Steve's full article is that he is slightly skeptical in general about the resurrection of this company. However, he did point out positive strategies discussed with Mr. Callison, such as increasing quality of care, investing in technology to ensure they are in compliance with all state rules and regulations, investing in staff and staff training. I agree with Senior Care that if Mr. Callison can do all of these things, it will be a win, win, win for him, TPG, the industry, the residents, their families and the staffs of the property. It will take lots of time and lots of energy and optimism.

Right now, I'm not sure what that means for the 37 properties owned by LTC and currently operated by ALC. I do expect Mr. Callison to not default on any of the obligations ALC has under leases. I have now toured 21 of the properties and will do four more in a couple of weeks. They continue to be very well maintained and in markets that I believe can be revived with the appropriate marketing and operating energy. Some of the properties have experienced occupancy increase and some have experienced slight decreases. All in all, a pretty stable environment during a period of great turmoil. I continue to be positive about the opportunities I see in these 37 properties and look forward to meeting Mr. Callison.

As I said in my preliminary comments, when we gave guidance at the end of the first quarter, while we were anticipating an equity transaction I was not anticipating dilution based on projected deal completion. However, timelines slipped and so has our normalized FFO guidance. Anticipating the Michigan deal closing no sooner than November 1st and using our line to fund it, I am giving guidance of normalized fully diluted FFO in the range of $2.35 to $2.37. Again, as in the past, the guidance is on an as-is basis and does not contemplating terming out our draws under our unsecured line of credit or doing additional accretive deals before year end.

I'm not giving 2014 guidance but the Michigan deal will be very accretive in 2014 and beyond. We still have great opportunities to add to our FFO by converting some of the deals in our pipeline and continue to build our relationships with our operators and new operators that we meet.

Thank you for taking the time today to listen to our presentation. And Jessica, I will now open it up to questions.

(Operator Instructions). the first question from Karin Ford with KeyBanc.

Good morning. A question on your comment that the sale leaseback volumes are relatively low in the pipeline today. Why do you think that is? Is it because there was a lot of management attention on the prestige deal? Or do you think something changed in the environment that has created a short fall in the volume there?

This is Clint, Karin. Part of it has been just the attention on the Michigan deal. It was a little bit of a complicated transaction to structure. And that is probably the primary driver on that. I see that there will be more opportunities for us to pursue sale leasebacks, as Wendy mentioned.

So the increase in rates and some of the uncertainty there in the capital markets hasn't changed seller interest or the competitive landscape in anyway?

Right now, no.

Okay. Thanks. And what was it that -- what was the primary reason that the Prestige deal not delayed this year?

Just structuring.

Just because it was complicated?

Right.

Right.

Okay. And then finally, there has been some discussion about new supply coming in, particularly into the the memory care space. Have you guys thought about that as you are look at new additional memory care developments and owning those properties going forward?

Absolutely. We look at that and as a primary concern of ours and we get market studies. We vet out the markets. But looking at the Littleton project that we just completed was a good example of the due diligence we undergo to look at opportunity. We are very cognizant that there are more development projects coming online. And you really have to know the specific market and partner with the right operator who knows that marketplace.

Thank you.

Thank you, Karin.

The next question comes from Tom Roberts with Hilliard Lyons.

It's John. Hey, Wendy. First I wanted to ask if there is anything specific with you doing all this investment in Kentucky? We hope you are coming out and seeing us when you are here looking around, is all I can say.

We're going to move the corporate offices.

Sounds like it. First of all, let's ask a little bit here about the acquisition environment. Heard from a lot of people that sellers might be taking a little time to adjust to a new reality. Is that a function in the pipeline being mostly development at this point?

I'm sorry, Pam was just saying something to me. What? Who said that?

No, John is talking about all of our peers have commented that the --

-- that they are taking a pause?

I think on the private pay side, there has been a fair amount of competition between our peers for that asset type. And so there is, there is still a lot of people looking at deals, I think, on the private pay side. On the skilled nursing side, a lot of people looking at diversifying away from skilled, as far as some of the competitors go. I think that there are some more opportunities on the skilled side, and hence looking at the transaction that we were able to execute on in Michigan.

Okay. I was talking about more from the seller side. Are you seeing sellers really hold back at this point, and not adjusting to the new reality?

I haven't. I haven't seen the them hold back a lot, no.

Are they willing to understand that cap rates have moved, with the move across the capital?

I think that there is so much competition on the private pay side that you have private REITs that are active, looking at investing in that space. You have other REITs that are trying to diversify. I think sellers can still command a certain price for that product type. And this is one of the reasons we are focusing on development of the private pay assets. Because I think it is a better value proposition and better risk adjusted return for us.

Good, good. Any guidance on G&A for the remainder of the year?

I think last quarter I had put out a guidance of about $2.7 million a quarter. And I think, on average, that is still good. There are slight seasonal fluctuations in G&A. On the whole, I think $2.7 million is still a good run rate.

Okay. Your operating and other expenses -- now that's including just G&A or are you putting acquisition costs in there, et cetera?

There are some acquisition costs in there. Right now, it is pretty immaterial. But with next quarter with Michigan, it may be a bit higher, it may be $100,000 higher, based on that.

Okay. Very good.

And we will obviously point that out. Any fluctuation that is not normal or recurring, we typically disclose.

Super. And as I said, I hope while you are doing your due diligence, give us a call and stop in and see us here.

Okay, thanks, John.

Thank you.

The next question from Daniel Bernstein from Stifel Nicolaus.

Good morning, Dan.

Good morning and congrats on the mortgage Prestige deal. I think it is a big event for you.

Thank you.

And tremendous detail that you gave earlier in the call. I have one question, though, on that. Once they go ahead and redevelop some asset properties and fully stabilize some of the assets they have in the portfolio, where do you think the census -- Medicare, Medicaid census would be or quality mix or skilled mix, whatever your preferred metric would be; how are you underwriting where that portfolio will be and when it is stabilized?

Right now, they are at about -- I would say, other than a couple of assets, it pretty much is stabilized. Right now hooking at Medicare census probably in about the upper teens to 20% for Medicare. And I think they have got the ability to grow that a little bit. And Medicaid census right now is right around the 65% range.

And are they moving anywhere, in terms of acuity, up or down in terms of Medicare? Looking to do more ventilators? Just trying to understand it where the portfolio is going in terms of how they are -- ?

They are not looking at that at the time being. But as they get more into the forecast into the marketplace and see what the relationships with the local hospital systems and managed care providers, that could change over time. Right now its really more of a focus on short-term rehab patients.

Dan, I would point out that you are one of the few analysts that actually talks about quality mix in terms of census. Most of the other analysts talk about it in terms of revenue. For the other analysts out there, we typically talk about quality mix based on revenue -- it is obviously much higher than census quality mix.

Absolutely. That is why I ask about the skilled mix. Whatever your favorite metric was. I also wanted to ask about the dynamic of looking at top 31 assets versus 31 to 100 metro areas or even outside the top 100. What are you liking about top 31 markets versus going outside that market? Because I think some other REITs and maybe some other operators like going outside of that top 31. They see it as maybe a barrier to entry for construction because folks can't get the rents that they want. How do you look at the dynamic between top 31 and outside? It may be different between seniors housing and skilled nursing, obviously.

I think it is different between the two asset types. Really a function of positioning these assets going forward, the a new environment with ACOs potentially coming about, being able to integrate into hospital systems aligning with them, managed care systems being able to provide higher acuity levels of care. We look at smaller markets as well and made some investments in that. It really depends on the underwriting and the opportunity in front of us. We do think that the -- whether it is the top 31 or top 100, I think our portfolio -- we have a large percentage in that --

Its over 60%.

-- over 60% of the top 100. And that provides a lot of opportunity giving -- ultimate price on changing environment, with the implementation of ACOs whenever that does happen.

It is not that the top 31 is so much better than 32 to 100? Is it a market by market analysis?

In general, the industry breaks it down in those classifications, so we provide that for comparative purposes.

Okay. I wanted to understand the competition for development funding or the loan funding as well. Obviously folks have asked a lot of questions on the acquisition side, the competition there. But do you think you kind of have a real competitive environment for development funding for the kind of loans that you did with Prestige? Is that why your operators are coming to you for development and loan financing?

I wouldn't look as Prestige as far as development funding. I would think of the development funding primarily on the private pay side. And that is getting more competitive. I think you are seeing banks that are willing to lend a little bit more. You are seeing some of our REIT competitors getting more active in development of the private pay assets. It is getting -- there is more competition on that side.

Okay. But there is still -- it is still not so competitive that you can't win development deals?

Right.

I think that's all I have. Thank you very much.

Thank you, Dan.

The next question comes from Todd Stender with Wells Fargo.

Hi, good morning, everybody.

Good morning.

Good morning.

Clint, any indication on Prestige's credit rating? I know they are private and they probably don't have one. But you what your shadow rating is? Or how you assess the credit quality of Prestige?

They are a private company. So disclosing that information -- we have confidentiality agreements on that. We have gone through a vetting of their organization and management group and we have evaluated them overall as a credit risk. We also look not only to the operator but we look to the assets as well. Its a combination of underwriting both. Our risk is always, do we have to replace a tenant and the question of replacing a tenant is, what is the asset quality, location, concentration. We look at both aspects.

And you said we evaluated them from a credit risk standpoint. Not evaluated them as a credit risk. Just to clarify.

I'm not sure we mentioned that we are getting deposits through. This isn't -- generally, as we have loans we don't get loan service deposits. But because this is functioning as a -- or is a loan, but really functioning as a master lease, we have three months of interest coverage deposit.

Debt service reserve. Tax escrows and things of that nature.

That was my next question. Thanks for bringing that up. So the cash will be held in escrow for a certain amount of time?

It is effectively like a security deposit. It'll be in the form of a letter of credit for us as the beneficiary of that, as well as the replacement reserves that have a minimum balance have to be maintained -- the escrow capital dollars with us along with real estate taxes on a monthly basis.

Okay. Thank you, Clint. And I don't think I caught this. Of the 15 properties, how many of them are currently stabilized? Or by the time that you extend the first payment?

Pretty much all of them except the three -- the one that I mentioned that was catering pretty much to an all Medicare population, and the two that are under additions and renovations going on right now.

And it is going to -- the timing of the first payment of $126 million is in Q4. Any chance that gets delayed within the quarter?

Really, right now it is subject to licensure -- is the main item outstanding. Michigan has an 80 day process for licensure. And applications have already been filed by Prestige with the state. So at this point, I don't see any delay in that. Typically our experience is with licensure with states, it has gone fairly smoothly. I'm not anticipating -- always subject to the review process. But the good thing is Prestige already operates in the state of Michigan, and they are familiar with the state's process. So I'm not expecting any delay at this point in time.

Okay. Thank you. And Pam, has your cost -- kind of your blended cost of capital, has that changed at all? You used the equity to pay down your line and that you are probably looking at terming out the line of credit that you will be using to fund the first payment? How do you kind of think about what your investment spread is going to look like at the end of the day?

A good question. Certainly, our cost of capital has increased. Our weighted cost of capital, including equity, has certainly increased. Rates have increased but spreads have come down. So I would say right now, if we were looking at a long-term borrowing eight to ten years or probably 4.5% to 5%. And then for an overall weighted cost capital, probably low to mid sixes.

Okay. Thank you.

Thank you.

The next question from Rich Anderson with BMO Capital Markets.

Good morning, everybody.

Good morning.

I'm sorry, the deal -- there is three parties involved here. What risks -- what extent can somebody kind of -- is this out of your hands in terms of it not going forward -- in terms of a deal actually happening?

Three parties including the seller?

Including the seller.

Those documents have been executed and earnest money has gone hard. Really, it is very minimal,.

But -- ?

The risk is license.

The risk is really licenses, that is it.

That's it? At this point they could walk away and risk losing those initial funds, is that right?

They could technically default and put at risk their earnest money. Given the time and effort and opportunity within the portfolio, I would see that as a very unlikely event.

Where would you place the timing and how much of a surprise do you think the -- because I don't know how far back this goes -- the Detroit bankruptcy and how that -- when did that happen? And how much do you think that kind of threw a wrench in the system, in the whole negotiating process?

It didn't throw any wrench -- they filed about a month ago, I believe.

Detroit, that's right.

Detroit. And that had basically no impact at all on the negotiation or on the deal. Again as I said in my comments, we view that as just headline risk only. And I addressed it in my comments because I thought it might come up as a question on the call.

The operator had been -- owned these properties for a long time. He had -- he has a chief operating officer that has been with him for twenty some years. And they just aged out and wanted to sell the asset. So it is -- I don't think it has anything to do with the economics of the state of Michigan. Or the -- and he didn't have a management team that wanted to go forward and buy him out. And he was found a willing buyer and so that is what happened.

To what degree is this just a stepping stone, in the sense that -- you mentioned your purchase option -- that you allow -- you finance Prestige's purchase and then within a short window, you end up being the owner of the assets?

There is contingencies upon how our purchase option would be available. I don't know when that -- maybe a number of years down the road before that may even come into --

There is a trigger that is not -- it can't happen any time soon, you are saying?

Right, correct.

Okay. And I was going to ask you if you met Jack Callison, but you said you didn't.

Have you?

I know Jack very well, yes.

Well, say hi when you see him.

Well, I don't see him that much these days. Anyway, good luck. Thanks very much. Good call.

Thanks, Rich.

Thank you.

The next question from Michael Carroll with RBC Capital Markets.

Can you give us an example of how and when your purchase options will be triggered? I think you said a change in the regulatory environment would make those available to you.

Right now the reimbursement system under Medicaid in Michigan reimburses for property-specific debt. And since we don't have property-specific debt on our investments, other than a nominal amount, they don't reimburse for rental expense. If the state's reimbursement system were to change at some point in time in the future that would trigger a mechanism where we would be able exercise the purchase option.

How is your current pipeline right now? And do you have any other large portfolios that you are look at?

We are not the looking at any other large portfolios. As I indicated, we are about $170 million right now, which primarily -- a majority is development or expansion renovation opportunities within our portfolio.

Okay. And then related to the assistant living concepts, I think those coverage issues were largely flat and now they are about 0.9 times. Is that where you expect them to kind of stabilize at?

I would expect that they will be going up. When Dr. Roadman started running the company, he was adding costs, appropriately, of course. He was staffing up and getting the right combination. I think overall, we have seen some improvements in the census. The census is catching up with the costs. I think just the energy that a new company and a new attitude brings to it, I would expect these properties will see an increase in census.

And it is trailing 12, so we may have one more quarter for the additional costs to roll in so we could have one more turn down. I think if you go to before Dr. Roadman took over, it clicks down one turn each quarter. And I think we have one more quarter to go, so it could go --

But in those two quarters that ticked down, the next quarter might have had increase in census.

Right.

So it knocked --

I'm not too concerned about those properties through the end of our lease term with them.

And then the coverage ratio says 0.9. Is that 0.94 or 0.86, or which one is it closer to?

It is 0.89.

And do you still expect or could we expect that a resolution could occur by year end? Or how soon could we expect something to be completed?

I would expect that we will have -- we will need a resolution by the end of this year, which is when the option is first addressed. And now that they are even more distance from Extendicare, I expect that Extendicare not at all interested in renewing the lease. By the end of the year, we will have some opportunity to start looking at additional or replacement operators if that is the way we go.

And I would point out, Mike, that that coverage is the EBITDAR after a 5% fee, EBIDARM, it is 1.1.

Okay. Great. Still cash flow positive.

Yes, they are cash flow positive.

Great. Thanks, guys.

Thank you.

(Operator Instructions). With for further questions this concludes our question and answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.

Thank you, Jessica. Thank you all for listening to our conference call. And hopefully we answered all of your questions about the Michigan deal. But if somebody has another question, give us a call. We will be in today and answering. And we look forward to talking to you at the end of the third quarter. Thank you very much.

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