LTC Properties Inc (LTC) 2014 Q3 法說會逐字稿

Good morning. And welcome to the LTC Properties, Incorporated's third quarter 2014 analyst and investor call. (Operator Instructions)

I'd 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 Securities and Exchange Commission including the Company's 10-K dated December 31, 2013.

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, Andrew. Good morning, everyone, and thank you for joining us today.

This morning, Pam Kessler, our CFO, will start our presentation with comments on our financial results for the third quarter of 2014. After Pam's comments, Clint Malin, our Chief Investment Officer, will talk about the resolution of the 37 properties currently under lease with Enlivant and Extendicare. He will also comment on the performance of our portfolio, and he'll give you some color regarding our pipeline and development projects.

Before I turn the call over to Pam, I want to say that we've all been looking forward to this call, so that we could put an answer to the last questions about the former assisted living concepts properties and put this initially wonderful relationship, which turned sour well before its due date, behind us.

However, based on current recent announcements regarding merger activity in the healthcare REIT space, I fear that I can anticipate having the focus around LTC go from -- what about the Assisted Living Concepts, to who or when is LTC going to merge with another REIT? So I do want to stress that our focus is now completely on growing strategic development with our operators and a select few new operators that we are currently negotiating with, and by converting some of our sale leaseback opportunities into completed deals in 2015.

At this time, I will turn the call over to Pam.

Thank you, Wendy.

Normalized FFO increased 13% this quarter, to $22.5 million from $20 million in the second quarter of last year. Normalized fully diluted FFO per share was $0.64 this quarter, compared to $0.57 a year ago.

Revenues for the quarter increased 14% or $3.7 million year over year, primarily due to investments made in the second half of 2013 and completed development projects, partially offset by property disposal in 2013 and 2014. Interest expense increased by $189,000 from the third quarter of last year, due primarily to the sale of senior unsecured notes to fund acquisition and development.

General and administrative expenses were $238,000 higher this quarter compared to a year ago, due to expenditures related to the new website logo design, Analyst Day, and the timing of certain other expenditures. During the quarter, we invested $8.6 million in properties under development and capital improvement projects at a weighted average yield of 9%. Capitalized interest for the quarter was $474,000.

Subsequent to September 30th, we purchased a parcel of land in Illinois for $1.4 million, which we added to a master lease with Anthem. Simultaneous with the purchase, we entered into a development commitment to build a 64-unit Memory Care property for $10.6 million, including the land price.

During the quarter, we sold 30 million senior unsecured notes under our shelf agreement with Prudential. These notes bear interest at 4.5% and have a 12-year maturity. Subsequent to September 30th, we amended our unsecured credit agreement, increasing commitments from $240 million to $400 million, with the ability to increase total commitments to $600 million. The amendment also lowered the pricing grid by 25 basis points based on certain leverage ratios. Current pricing under the agreement is 125 basis points over LIBOR with an unused commitment fee of 30 basis points.

Additionally, we added two new banks to our bank group and extended the maturity of the credit agreement to October 2018, with a one-year extension at our discretion. Currently, we have borrowings of $24 million outstanding and $376 million available under our line of credit.

Also subsequent to September 30th, we prepaid $1.4 million of bonds secured by five assisted living properties in Washington leased to Extendicare and Enlivant. Thus, we no longer have any secured debt outstanding on our balance sheet.

At the end of the quarter, our investment-grade metrics remained one of the best in the healthcare REIT universe, with debt-to-trailing 12 months normalized EBITDAR of 2.9 times and normalized trailing 12 months fixed charge coverage ratio of 6.2, and debt-to-enterprise value of just under 19%.

I'll now turn the call over to Clint.

Thank you, Pam. Good morning, everyone, and thank you for joining us today.

As Wendy mentioned, we are pleased to report that we have reached a resolution on our portfolio of 37 assisted living properties co-leased to Enlivant, an affiliate of Extendicare. We will be re-leasing 20 of the properties and selling 16.

As to the final property in the portfolio, due to significant occupancy challenges, we have given consent to Enlivant to close the property. We are exploring sale and lease options for this property, which has a net book value of $954,000 and is subject to a ground lease.

Relating to the re-leasing of the 20 properties, we are very pleased to be expanding our existing relationship with Senior Lifestyle by adding 13 of the 20 properties consisting of 500 units to an existing master lease. Beginning January 1, 2015, the initial term of the amended and restated master lease will be 15 years, and rent will increase by $5.1 million over the current annual rent in the existing master lease, for a total initial rent of $6.6 million, increasing annually by 2.6%.

The other seven properties, all located in Texas, consisting of 278 units, will be leased to Veritas InCare under a new 10-year master lease. Beginning January 1, 2015, the initial rent will be $1,461,000, increasing 2.5% annually. Both master leases will provide us with the potential for additional rent attributable to participation in revenue growth at the properties over a predetermined base amount. Additionally, the initial cash yield on the 20 properties re-leased to Senior Lifestyle and Veritas is comparable to the cash yield in 2014 under the expiring master leases with the Extendicare and Enlivant.

Given the low occupancy of the Pacific Northwest properties, we explored both lease and purchase proposals, as I mentioned on our previous earnings call. Ultimately, given the occupancy challenges of these properties, we decided that recycling capital is a better option for LTC.

Therefore, after running a thorough process in which we were assisted by CS Capital Advisors, we entered into an agreement with an affiliate of Enlivant to sell 16 properties consisting of 615 units [now], which includes two properties in Arizona, for a sales price of $26,465,000, equating to $43,000 per unit. We expect to record a gain on the sale of approximately $3.9 million, with closing expected to occur in December of this year. Extendicare and Enlivant are obligated to pay rent in accordance with the terms of the current master leases through December 31st of this year.

Turning to the portfolio -- lease coverage for the trailing 12-month period in the second quarter 2014 remains consistent and strong. I will caveat that the following coverage metrics are derived from unaudited financial statements provided to us by our operators and are reported one quarter in arrears.

For our skilled nursing portfolio, EBITDAR coverage is 2.29 times, and our assisted living portfolio, excluding the properties leased to Extendicare and Enlivant, is 1.66 times, and 1.4 times including these properties. EBITDAR coverage, including an allocated management fee of 5% of revenues, is 1.69 times for skill nursing and 1.42 times assisted living, excluding Extendicare and Enlivant, and 1.18 including them.

Compared to the previous quarter, occupancy has remained consistent across all property types. Occupancy for the trailing 12-month prior ended first quarter 2014 is as follows -- assisted living excluding the Extendicare Enlivant portfolio is 89.5%, and including these properties is 80.2%. Skilled nursing is 79.9%, and range of care is 83.4%. Our quality mix remains strong, with almost 60% of our underlying rental revenue coming from private-pay sources.

We continue to have success in our development program. During the quarter, Anthem Memory Care opened our second developed project with them in the Denver Metro area. After being open approximately six weeks, occupancy at the property was 37% as of September 30th. Highline Place, our initial development project with Anthem, also in the Denver Metro area, remains at 100% occupancy.

We continued to expand our relationship with Anthem, and I have entered the Chicago land market with them via our land acquisition in Burr Ridge, Illinois, which Pam referred to in her comments. Anthem anticipates opening our third project with them, located in Aurora, Colorado, in mid-December of this year, followed by the opening of the fourth project in Q1 2015.

Our developed project in Wichita, Kansas with Oxford Senior Living reached 95% occupancy as of September 30th, which is ahead of projection and has been achieved within 12 months of opening the project. On October 31st, our SNF development project with Care Spring Health Care Management, located in Cold Spring, Kentucky in the Cincinnati Metro area, received its certificate of occupancy, and it's anticipated that the first resident will be admitted in mid-November.

Our pipeline remains strong, at approximately $800 million, which includes sale leaseback and development opportunities, as well as expansion and replacement projects within our portfolio. Currently, we have five fully executed LOIs representing $108 million of transactions. With the exception of $11 million relating to a SNF investment, the remaining $97 million pertains to seniors housing properties.

Of the $97 million, approximately $38 million relates to three Memory Care development projects. The remaining $60 million relates to acquisition of four assisted living properties and one Memory Care property, via two separate transactions that will be added to a master lease with an existing customer.

We anticipate one $10 million transaction will close in the fourth quarter, with the remainder anticipated to close during the first quarter of 2015. Although these LOIs have been fully executed, I must caution that the deals remain subject to due diligence and therefore may not be converted to closed investment.

Now, I'll turn the call back to Pam, so she can discuss the effects on FAD and FFO regarding the resolution of the 37 properties leased to Extendicare and Enlivant.

Thanks, Clint.

I want to go over the solution resulting from this transaction, so we'll all on the same page in terms of cash and GAAP. I'm going to start with cash.

The current cash rent that we're receiving on ALC properties totals $12 million. If you were to allocate that by unit or by unit or by property for simplicity, you would get approximately $6.6 million of cash rent allocated to the properties that are keeping and re-leasing, and $5.5 million related to the properties we are selling or closing.

The initial cash rent on the two portfolios we're re-leasing is $6.6 million. That results in approximately a $0.15-per share FAD dilution before assuming any reinvestment or proceeds. We're assuming reinvestment of the sales proceeds of $26.5 million at 8%, which would result in incremental cash rent of approximately $2.1 million, giving a dilution from the sale of approximately $3.4 million, or $0.09.

Going to FFO -- the current GAAP rent on the total portfolio is $11 million. If you were to allocate it by unit or by property for simplicity, you would get $6 million allocated to the properties that we are retaining and re-leasing and $5 million to the properties we are selling or closing. The new GAAP rent on the properties we're keeping is $8 million. So that is a dilution to FFO of $0.08 prior to any reinvestment of proceeds assumption. We're assuming that we reinvest the $26.5 million at 8% in a 10-year lease with 2.5% annual escalations, which would get you a GAAP rent of $2.4 million, resulting in a GAAP rent dilution to FFO of about a penny and a half.

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

Thanks, Pam.

As Clint mentioned, we have a nice level of transactions represented by fully executed LOIs. And it's likely that we will close a small one before year end. But it also looks like our first quarter of 2015 will be very active.

Currently, several of our operators are sourcing deals and have requested that we consider being the financing source. We are experiencing much more activity in those opportunities than we had previously this year. These deals are relatively easier to do, because the operator already knows our style of lease and is comfortable in knowing that we are eager to help them grow and prosper in their operations.

We hope to welcome two new operators into our development platform and are advanced in our discussions and negotiations with them. Based on the deals we see in the market, we decided to renew our bank line, expand the capacity, and add two new banks. If we did not see opportunity for LTC, we could've saved significant dollars in fees and more than a few of Pam's brain cells.

At this time, I'm not changing our 2014 guidance. So we are likely to be on the low side of our guidance, at around normalized FFO of $2.56, a penny up or a penny down, which does not include the additional cost of the $30 million -- it does include the additional cost of the $30 million represented by the Prudential borrowing.

Thank you for dialing in. And I'll now open it up for questions.

Thank you, Andrew.

(Operator Instructions) Paul Morgan, MLV & Company.

This is Joe Ng, here for Paul.

Could you provide more color on the revenue participation component of the new leases? Is it portfolio-wide, or [post let] assets? And how much could it move the needle in the near term on the new leases?

Sure. This is Clint.

It's based on each master lease. And it basically functions on revenue growth over a predetermined baseline amount at different percentage participation. So we anticipate -- again, looking at our modeling, depending on where occupancy goes -- these participating rents in total for both master leases could be somewhere between $300,000 to $900,000. So we're looking at possibly $0.01 to $0.03 on the participating rent.

In 2015, or --?

Going forward, I guess it's a function derived on basically increases in occupancy. So if the new operators can get in to make a tremendous amount of progress in increasing occupancy, then yes. But most likely, it probably would be modeled -- Pam, what would you say for modeling?

Year three or four. I'd give these properties a 12- to 24-month turnaround.

Okay, I see.

And just one more quick question -- do you think the lack of acquisitions this year has been partly due to the primary focus on getting the 37 properties like we leased? Or is it more of a reflection of your appetites for [getting] the market pricing today?

Well, we engaged an advisor to assist us, a CS Capital advisor that was assisting on running the process for the 37. I think that one of the drivers on deal flow this year is a very competitive marketplace. You've seen a compression in cap rates. And also, you have seen transactions getting done what I'll call [as] covenant-light, that do not have much security or risk-adjusted parameters in their lease on that. So, we've just not been in a position where we've wanted to bid up a transaction that high, to where it wasn't accretive for us.

Okay, thank you. Thank you very much.

Karin Ford; KeyBanc.

(Multiple speakers) a question on that last point, regarding compensation and cap rates -- can you just talk about what pricing looks like on the four assisted living acquisitions that you guys had teed up, and talk about how low you'd be willing to go on a cap rate basis to compete in the SNF arena today?

Sure. Those are 6.75% to 7% cap rate. But one of the transactions has low-rate HUD debt associated with it, at about a 3% rate. So our pricing on one of the transactions is a function of the HUD assumption that would come along with it. And it's about 50% of the dollars on that transaction.

And then she wanted to know cap rates on SNF.

Sure. Cap rates on SNFs -- you're probably looking at -- for higher-quality portfolio rated, probably 8% to 8.5%, depending on the size. More standard one-offs, somewhere between 8.5% and 9%, depending on the quality and the location and the operator.

And are you guys buyers of (inaudible) skilled nursing today? Would you be?

I think for the right transaction, Karin, it would depend again on the quality of the assets, the location, the operator and security we have for that investment.

Okay. Thanks.

And next question, just on the Enlivant resolution -- could you just talk about how many bidders you had in both pieces, both the re-leasing and the sale process; and why you elected to -- ultimately the solution that you did, what the main sort of qualitative reasons for splitting it up and doing it the way you did?

To begin with, at the beginning of the year, we had probably 80 operators that we targeted and sent out in terms of interest in the portfolio. As the year went along, we realized that what we wanted to do was to regionalize and have more operators interested. The original strategy, which I know I've talked about before, was to sort of entice the newer operators to have an opportunity in these properties.

We found out in the Northwest -- Washington, Oregon, Idaho -- that the occupancies were way to stressed for a newer operator to want to come in. They don't have the capital to fund the working capital during this period of time. And I didn't think it would be a healthy thing for LTC to fund the working capital of new operators and continue to have to explain these assisted living concepts properties to the investment community.

So sometime in June or July, I recall walking into the conference room when we had had capital source -- we had our advisors here, I can never remember their names.

CS advisors.

CS advisors here. And Pam and Clinton -- they were talking about possibly selling these assets. And I walked in, And they thought I would be totally against it. Because I was, up until that point. But seeing what the opportunities we were getting for the re-leasing, it became clear that for LTC we were better off selling the assets.

We changed our focus, then on those properties to selling them. And we had three or four companies, larger companies, who had come forward with interest in buying these properties. So we had a competitive bidding going. When Enlivant evidenced interest in them, we went into negotiations with them. And we think we got a very fair price based on the other opportunities we had for selling them to other operators. And we determined that the surety of closure and the non-messiness of changing operations was better with Enlivant than anyone else for those assets.

Going back to the assets on the other side of the country -- we found that these two operators that we have done business already, Veritas and Senior Lifestyle -- were the best in terms of matching their current operations to those properties. So it was a very iterative process. And we looked at many, many different configurations. And this is what we came up with, Karin.

Thanks for the color.

If I remember correctly, on previous calls I think you'd said that the resolution of the ALC properties was one of the conditions towards you guys moving towards an investment-grade rating. Does that look like that might be a 2015 item? And can you just give us your thoughts around your previous statements about plans to lever up with the next round of investments?

Sure.

Hi, Karin, it's Pam.

In terms of our outlook for investment-grade rating, yes, it's definitely putting us behind us taking away the uncertainty, moves us forward in that direction. There's still the $2 billion market cap hurdle that we need to meet. So we need to continue to grow, although we will do that accretively. We don't feel the pressure to do a non-accretive deal or a flat deal just to bulk up.

And an interesting thing that's happened in the private placement market with the insurance company senior unsecured notes that we sell, that market's become very competitive. And I have found pricing, especially in our last round of notes that we sold, to be equal to that of the bond market, which in the past it was not, because it's a little more illiquid, and we paid maybe a little bit higher price than we would with a similar investment-grade rating in the bond market.

We recently received an upgrade from the NAIC, which is the rating agency for the insurance company paper. We are now an NAIC 2 flat, which would be the equivalent of a BBB.

So right now, I'm not feeling the overwhelming need to go to the rating agencies and access the bond market, as long as the private placement insurance market stays as competitive. We like the fact that we can take down smaller amounts, something less than $250 million. We like the fact that we can stagger the maturities of that so we can ladder our maturities to match our free cash flow.

So right now, I'm probably cooling my heels on going to the rating agencies. But that is a function of size. We will get to the point where -- do we need to do $250 million placements at a time? And I look forward to that. But right now, we're getting very well priced to debt.

Okay, thanks.

And then, just last questions on the Aviv Omega deal -- not going to ask you who you're planning to merge with next, but just do you think it changes the competitive landscape for you guys out in the investment environment? Or do you feel like your deals continue to be with your existing customers primarily, and you're finding enough smaller-size stuff; you're not worried about it?

This is Clint. We don't run across Omega as often as some of the other REITs in looking at transactions. Aviv we would run across occasionally. I think that with Omega being a larger organization, and probably looking at larger transactions, I think that petition can be a benefit for us in looking at some of the smaller transactions that have sort of been our bread-and-butter investments over the past few years.

Great, thank you.

Thank you, Karin.

Rich Anderson, Mizuho Securities.

Sorry, I might've missed this. But did you give what the cap rate expectation is for the $26.5 million that you're selling?

I did not give the cap rate, because it's negative cash flow, Rich.

Yes, it's not -- I don't think that the cap rate's the right way to look at it because --

Oh.

-- (multiple speakers) concepts.

Yes.

Oh, okay. Okay, understood.

Clint, when you said 8% to 8.5% cap rates on SNF assets today, were you talking about a cap rate, or a lease rate?

Lease rate.

Okay. Just wanted to make sure. All right.

Now, on the asset sales, back to the $26.5 million -- I understand that you're assuming some things about redeployment. But would you consider a special dividend?

We've talked about that, Rich. And we don't need to do it for tax purposes. We don't have to distribute the gain for tax purposes. And we really feel that we can reinvest the proceeds for a better FFO FAD, and help grow the Company again.

Okay.

The other thing is -- one of the drawbacks, one of the reasons for the underperformance of these assets has been the Enlivant's unwillingness to accept Medicaid. But how much are we really hanging our hat on that issue in order to get the occupancy back up to a reasonable level? It seems like that would only kind of move the needle about 10 percentage points or 10 basis points. Am I wrong about that? Or is Medicaid a much bigger percentage of the natural census for these assets?

No, I think the biggest percentage of Medicaid, Rich, was in the Northwest. That's one of the reasons why the occupancy is where it is now. And we have occupancies on average in the Northwest in the 40% range on average.

So in other states, there's not been historically as much reliance on Medicaid. So I think as the new operators come in, they have an option to rebrand these properties and seek the private-pay residents, and selectively fill with Medicaid as needed. And that may be on a per-property basis as opposed to on a statewide or portfolio basis. As the previous management company had made that decision, regardless of property, it was a decision across the Company.

So how much of Medicaid is a percentage of the Northwest portfolio (multiple speakers)?

Historically, or today?

Well, not today; historically, I guess.

Historically in the Northwest -- pulling the number, just one second. In the Northwest, we are looking at about -- before the decision by Enlivant or Assisted Living Concepts to exit that program, it was probably about 50% of the occupancy.

Okay. Interesting, okay.

And if they now are looking to rebrand and bringing private-pay, I assume Enlivant was doing that as well. So what makes you think that the new operators will be able to have greater level of success attracting a private-pay element to their facilities?

I think part of that is when you go through a transition on leases, first of all, ALC went through a management transfer with an interim CEO, and then a private equity buyout, and then a lease expiration. And as you go into all those dynamics plus a lease expiration coming forward, the focus on those assets, I think, is not as great as it otherwise would be if they were invested long term in those assets. So I think that companies who now are going to be in for a long-term basis have more of a focus on the buildings to increase occupancy.

Okay. How much is Medicaid generally, outside of the Northwest?

Outside the Northwest, it's been a pretty small percentage. Let me give you an example. Bear with me a second.

For instance, in the Indiana-Ohio regions, historically back, it was probably about 10% --

Okay.

-- as just an example of --

And in Texas.

Texas --

Sounds like you're flipping through the Bible there.

(Laughter)

Texas was about 20%.

Okay.

Much lower outside of the -- the Northwest was where there was just an inordinate amount of Medicaid.

Okay.

And then, last question -- the GAAP spread relative to what you were -- I think it was $8 million versus $6 million for those that you're keeping -- were those previous rents straight-line-able?

Yes.

Yes, the previous rents were straight-lined.

They were, okay. So you still are able -- I guess the escalators are that much greater?

Well, you're starting from the same cash rent -- for the properties that we're re-leasing, you're starting with the same cash rent that we received in 2014. And you're growing that by 2.5% to 2.6%. So then you take that over the lease terms, and --

I see.

-- that's how your GAAP (inaudible), yes.

Okay, got you. Thank you very much.

Thanks, Rich. Welcome back.

John Roberts, Hilliard Lyons.

Most of my questions have been answered, so I think I'm going to go big picture here.

And since you brought it up, I'll you to discuss -- in light of the Aviv deal, how do you look right now at sort of your strategic direction going forward? Do you feel like you could still accretively buy properties, given the type of cap rate they were taken out at, and add value as an independent company at this point?

I really do. I mean, we have plenty of liquidity to grow the Company at very reasonable rates. So we can look at opportunities at the lower cap rates, lower cash yields. There's opportunity out there, as Clint indicated, by our pipeline.

I think ALC has been a significant distraction in the second half of the year -- not so much in the first half of the year, but in the second half, as the negotiations were getting more specific and we had asset tours and a lot of things like that. We now feel a heavy sigh of relief to have it all decided and almost all done. There will be some activity at the end of the year as the assets transfer. So I really do believe that we have opportunity to grow.

We still have a lot of confidence in our construction projects. We are strategically doing these, we are not constructing all over the country. I think those assets that Clint talked about that we've brought on just recently in the last couple of years are showing based on their lease up and their performance that we're underwriting properly, we're selecting the right operators. I do believe that we have a significant opportunity to grow this company again.

I guess, of course, that's the downside of doing this for awhile, just looking at current cap rates versus what I'm used to from the 1990s --

Right.

-- getting scared.

But anyway, you said the 9% yield on capital improvements is sort of what you're targeting. Would that be more the direction you're going to go at this point versus acquisitions, given the cap rate environment? Would you tend to look more at those capital improvements, and maybe development type opportunities versus going out and buying properties?

Hey, John, this is Clint. We're definitely actively engaged with our tenant base in deploying capital on -- [whether it's] capital expansions or innovations. But to be able to grow the Company from a sizeable standpoint at those rates, we would have to go out and do high-volume and large projects. So all that will continue to be a focus of ours. I think it'll be a balance between that and looking at acquisitions to deploy capital.

Okay. And is that going to color at all how you do acquisitions? You going to do acquisitions, you going to look for acquisitions where you might have the opportunity to do some higher-cap rate or higher-return type investments on the development side? Would you be more liable to look at buying a property that might offer you that versus just buying a one-off that might offer you very little on the back end?

Absolutely. Absolutely. A great example of that is the Michigan transaction, the loan we did last year. We are looking at a couple replacement projects within that portfolio right now. So we like being able to identify opportunities where it's not competitive, where we can deploy capital and have value-add opportunities with the right operator. I think that's a great result not only for us, but also for our operating partner.

Great. Thanks a lot.

Thanks, John.

Thank you.

(Operator Instructions) Daniel Bernstein, Stifel.

I just wanted to follow up on Rich's questions on Enlivant, and just wanted to understand -- Seniors Lifestyle and Veritas -- are they already operating small properties in smaller markets? Or are these -- is this a newer type of market for both of those operators? Just trying to understand their ability to go ahead and manage those assets effectively.

Dan, for Veritas, no. But they do operate in a few properties, similar size as this. So it fits in with their profile. And Senior Lifestyles has historically done larger communities. But as they've grown their company and expanded, I think they have been willing to look at other opportunities. And they do have the smaller properties in their portfolio, and this just continues to grow that expansion of it. So I think for them, it's just being opportunistic and layering in opportunities within their existing footprint.

(Inaudible) Are these -- they already have regional press in these areas, and they don't have to invest in additional dollars in regional management -- they already have experience in these geographies? That's the way to think about it?

Correct.

Okay.

And then, on the broader picture -- I'm trying to understand what's driving cap rates in skilled nursing, aside from the decreasing capital costs. Are there new entrants looking for assets that you're coming up against? Just trying to think about kind of in line with the OHI-Aviv merger, what are the strategic changes that are going on in the skilled nursing space that you're seeing in terms of competition for assets? And what's driving that space?

Sure. Well, I think one thing that's driving the space is just increased capital. They're looking at opportunities to deploy dollars. That's one item that's driving it. The other item is that some of the transactions that have been brought to market are just -- it's a concentration of assets and higher-quality, better-located assets.

Those two items, combined with -- [least] from our pipeline, we're not seeing as many opportunities on the skilled side as we are on the private-based seniors housing side. So we don't have as many opportunities out there. That tends to drive pricing as well. So those would be the three items that I would identify in regard to what's driving pricing on skilled nurses.

Plus also, you have a reimbursement environment that right now is --

Pretty steady.

It's pretty steady. So there's no headline news out there right now. So that tends to bring maybe, say, non-dedicated investors in skilled nursing -- we can bring them back. Because it is a higher-margin investment. And without headline risk out there, people are maybe willing to jump back in and look at that as an opportunity.

Outside of any of the headline risk that you see out there in reimbursement, are your operators or you concerned about any other reimbursement items that might be flying under the radar, that people aren't worried about?

Not that I'm aware of, no. There's always that concern that it can change. But right now, we have nothing at a high level that our operators have brought to our attention that they're concerned about.

Okay.

And then, my last question, I guess, is another broad question. Maybe switching back to seniors housing -- it seems to me like interest in development in the space has picked up a lot. At the same time, the NIC MAP data shows assisted living starts has maybe come down a little bit. What are you seeing out there in terms of interest to develop and maybe opportunities to expand beyond your current development platform in Memory Care? Are you concerned about the development picture out there, or does that seem to be moderated a little bit to you?

I think it's moderated a little bit. I think there continues to be a lot of talk about people looking at opportunities. But when you actually dive down into local markets and engage experts to do market studies in the local markets, there's opportunity to proceed on that. And so that's where we're -- certain markets we may not want to expand into. But others, there's still a lot of opportunity out there. So I think it's really being prudent and disciplined in your underwriting, which -- hopefully the properties that we have done in a development basis demonstrates our due diligence in underwriting of these transactions by the occupancy levels that we've experienced on our lease up properties.

So I think it's really market specific, Dan.

Okay. That's all for me, thanks a lot.

Thank you, Dan.

Karin Ford, KeyBanc.

Hi, just one quick follow-up. Is the EBITDAR coverage positive day one on the two new leases? Of, if not, when do you expect EBITDAR coverage to be positive on those properties?

Going into it, Karin, it's probably going to be close to one-to-one on the coverage. And then, we've done modeling to what it could look like with occupancy increases over time. And our hope is that the coverages can sort of fall out in the [13] to [14] range, somewhere in that neighborhood, long term.

Okay. That's in the 18- to 24-month stabilization time --

Twenty-four-ish.

But Karin, you've got to realize, these are coverage numbers that the operator gave us as they're negotiating their lease. So --

Right.

So they're not going to be aggressive in terms of how much -- everybody needs more expenses than anybody else had. And revenues are going to come down, and that sort of thing.

So while we were very aggressive in negotiating, these are the numbers that our operators gave us. And hopefully, they will be much more profitable than those numbers show. We believe we got a really good deal for LTC. And as we've always said, we would like our operators to outperform. So based on the numbers they gave us while negotiating their lease, it looks like a one coverage.

Thanks for the color.

And as they increase their performance, that's why we have the participation rents in the leases.

Right.

Great, thank you.

Thank you, Karin.

Daniel Bernstein, Stifel.

I just had another quick question on Enlivant. Do the properties that you're re-leasing need any CapEx? Are you providing any of that?

We are providing some CapEx to the properties. In total, we're looking at about $3.5 million in total.

And that's revenue producing.

That's revenue producing that we made a commitment on. And there's about -- we will have about 800 that would be included in the base rent starting off.

Okay. Great, thank you.

Thanks, Dan.

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, Andrew. And thank you all for joining us today. I know several of you are leaving to get to NAREIT. Pam and I will be there and would welcome an opportunity to talk to you further. And we look forward to our year-end call.

Thanks a lot. Have a great day.

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