LTC Properties Inc (LTC) 2018 Q4 法說會逐字稿

Good day, and welcome to the LTC Properties Fourth Quarter 2018 Analyst and Investor Conference Call. (Operator Instructions) Before management begins its presentation, please know that today's comments, including the question-and-answer session, may include forward-looking statements subject to risks and uncertainties that may cause actual results and events to differ materially.

These risks and uncertainties are detailed in LTC Properties' filings with the Securities and Exchange Commission from time to time, including the company's most recent 10-K dated December 31, 2018. LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation.

Please note this event is being recorded. I would now like to turn the conference over to Wendy Simpson, CEO. Please go ahead.

Thank you, operator. Welcome to LTC's 2018 Year-End Investor Conference Call. Joining me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer.

I'll start with introductory remarks and then turn the call over to Pam, who will discuss our financial results, followed by Clint, who will discuss our portfolio, recent activity and operator performance. I'll end with a brief wrap-up before we begin with questions and answers.

The current real estate cycle has been interesting to say the least. The continuing massive influx of private equity and other financing sources has, in our opinion, inflated pricing, resulting in lower investment volumes for us in 2018.

At this point in the cycle, however, we're starting to see formation of a disconnect between certain sellers and buyers. Private equity is looking for large deals in the private pay space. And we are beginning to see a decline in their interest in the mid- to smaller-deal opportunities that we expect will cause sellers to start adjusting their pricing expectations.

On the skilled side, there is still a lot of capital moving around and while we remain interested in investing in [SNIPs], we are seeing more opportunities in private pay.

We believe LTC is well positioned to capture opportunities created by a shift to a slightly more favorable investment market. Fortunately, our leadership team has been in this business for a very long time. And we've weathered these transitions before. Over the course of many real estate cycles, LTC has succeeded by being patient and this cycle is no different.

To repeat something I've said before, being a patient capital provider does not mean being stagnant. While Q1 tends to be slower in terms of pipeline creation, we are continuing to build ours with strategic assets where we can grow with our current operators, improve the average age of our portfolio, add new, strong regional operating partners and expand our existing geographic footprint.

We are using our time wisely, maintaining a strong and well-capitalized balance sheet, proactively managing our portfolio assets and strengthening industry relationships. We are meeting with operators, both inside and outside of our current portfolio, and educating them about LTC's willingness to provide innovative financing structures. Structures that are flexible and tailored to the specific operators' needs.

Our ongoing focus on regional operators allows us to better understand how they operate, what's important to them, the decisions they need to make, the challenges they need to overcome to be successful. We believe this focus is what sets us apart, what allows us to be ready and able when an opportunity arises, and what will allow us to continue to drive long-term growth and value.

Before I turn the call over to Pam and Clint, I'd like to provide a brief update on 3 of our current operators, Senior Care Centers, Thrive and Anthem. I'll start with Senior Care Centers, which operates 11 skilled nursing facilities for us in Texas. As you know, Senior Care declared bankruptcy in December, and we don't believe they have the ability to emerge from the process as a viable ongoing concern.

Given this assumption and acting as good fiduciary stewards, we are proactively negotiating a potential new master lease with a different Texas-based operator familiar with these assets to ensure we are poised and ready to act should the opportunity arise. It is still very early in the process, and any lease transaction with a new operator is subject to bankruptcy court approval.

Next, I'll provide an update on our Thrive portfolio, which includes 395 units across 6 memory care and assisted living communities. As we previously discussed, Thrive exhausted $1.4 million of deferred rent we provided in the second quarter of 2018, which based on their projections of lease-up, was well before they were able to stabilize the properties in the portfolio.

Thrive short paid their contractual rent in November and did not pay rent in December. We believe this $619,000 of rent is collectible, so we accrued and recorded it in 2018. We have not received payment of January and February rent or of the deferred rent we provided. As a result, we have issued a reservation of rights letter to Thrive as we pursue our options related to the nonpayment and are no longer accruing contractual rent starting in 2019.

I'd note that we do have certain guarantees in place. We anticipate cash rent to be approximately $1 million this year, should these assets remain with Thrive. Annual GAAP rent under the Thrive master lease is approximately $7.2 million and at the end of the quarter, the net book value of the properties was $81.7 million. We had $4.5 million in straight-line rent receivable, inclusive of the $1.4 million in deferred rent and $5.7 million in other assets on our balance sheet at December 31.

We are evaluating several options related to the Thrive portfolio, which could include ongoing negotiations with them, transitioning some or all of the properties to new operators, selling some or all of the properties, or finding a solution through some combination of these options.

As we have done in the past, most recently with Anthem, where we addressed similar challenges where Anthem has recently turned the corner, I believe we will find a successful resolution that is in the best interest of all parties, especially our shareholders.

I'll finish now with Anthem. We recently agreed to $7.5 million in rent from Anthem for 2019, which is approximately 45% higher than the rent they paid us in 2018. We continue to actively monitor expected ongoing improvements. We will revisit appropriate rent levels associated with these properties in the 2019 fourth quarter.

From an occupancy standpoint, the Murrieta property is stabilized. Occupancy at Burr Ridge and Oak Lawn grew nicely. Glenview was flat and Tinley Park was down slightly. We are pleased that Anthem met their 2018 rent commitment, but we will continue to closely watch their progress and their ability to meet their new, higher 2019 commitment.

Before I turn things over to Pam, I'll provide our guidance for 2019. Assuming no additional investment activity, asset sales, financing or equity issuances, FFO is expected to be between $3 and $3.02 per share for the full year, which reflects a $0.03 reduction for Senior Care remaining on the cash basis. Pam?

Thank you, Wendy. Revenue for the 2018 fourth quarter increased $1.8 million, primarily as a result of onetime income of $3.1 million, resulting from the write-offs of a contingent lease incentive and related earn-out liability, pertaining to our master lease with Senior Lifestyle, which I discussed on last quarter's call.

This was partially offset by a $1.3 million decrease in GAAP rent due to the nonpayment of December rent by Senior Care as a result of their bankruptcy filing. $1 million of the $1.2 million cash rent is subject to administrative post-petition claims that have priority over general prepetition unsecured claims.

Excluding the effects of Senior Lifestyle and Senior Care, revenue was flat quarter-over-quarter as increases from investments were offset by decreases, resulting from properties sold. NAREIT FFO was $0.81 compared with $0.77 in last year's fourth quarter. Excluding the onetime revenue just described, FFO per share was $0.73 for the 2018 fourth quarter. The change from last year related to the Senior Care bankruptcy and the nonpayment of December rent, and increased G&A expenses, partially offset by a reduction in interest expense.

Net income available to common shareholders increased $10.9 million from the prior year, resulting from a higher gain on sale in the 2018 fourth quarter. And the onetime income related to the write-off of the contingent lease incentive and related earn-out liability with Senior Lifestyle.

Interest expense decreased $468,000 from the prior year quarter due to lower debt balances resulting from scheduled principal payments on our senior unsecured notes and the elimination of the $126,000 quarterly interest expense, associated with the earn-out liability to Senior Lifestyle that was eliminated.

General and administrative expense increased $558,000, primarily related to performance based incentive compensation. Last year's G&A amounts were reduced due to the Anthem lease default. We expect G&A to be about $4.5 million per quarter through 2019 or approximately $0.5 million per quarter lower than 2018, due to lower projected performance based incentive compensation resulting from Thrive.

During the quarter, in 2 separate transactions, we sold 2 skilled nursing centers, one in Florida and one in Georgia, for $10.5 million, recognizing a gain on sale of $8 million. The properties had a combined gross book value of $4 million and GAAP rent related to these 2 properties was approximately $684,000.

2018 was an active year for capital recycling and, although our sales volume was higher than typical, we were net investors in real estate in 2018. We sold 10 properties for a combined $95.9 million, recognizing a total gain of $70.7 million. The 6 senior housing communities and 4 skilled nursing centers had a combined gross book value of $50.9 million and a net book value of $22.4 million. The annualized GAAP reduction in revenue related to these properties sold was $6.9 million.

We used the combined net proceeds of $92.7 million to invest $40.3 million in acquiring 3 senior housing assets and one parcel of land for development. And $14.5 million in 2 skilled nursing centers that were added to an existing mortgage loan. We also funded $35.3 million in development commitments and $10.1 million in capital improvement projects.

This total gross investment of $100.2 million translates into annualized revenue of approximately $7.5 million, $5.4 million throughout 2019 and an additional annualized $2.1 million upon the completion of development projects during 2019.

While 2018 asset sales were higher than normal for LTC, we currently expect 2019 divestitures to be in a more typical historical range. We have provided a graph of historical asset sales on Page 11 of our supplemental, which should give you some color on prior asset sales by year.

We will continue to be a strategic seller, identifying opportunities to recycle capital into more productive assets. Clint will discuss our investment activity subsequent to the end of the fourth quarter shortly. We repaid $8 million on our line of credit during the fourth quarter and, subsequent to the end of the quarter, borrowed $26.4 million, bringing the total outstanding on the line to $138.4 million.

Additionally, we continued to fund LTC's $0.19 per share monthly dividend during the fourth quarter, and paid $18 million in scheduled principal paydowns on our senior unsecured notes. We also funded $10.7 million under existing commitments for development and capital improvement projects and $834,000 under mortgage loans.

At December 31, we owned 3 properties under development with remaining commitments totaling $25.2 million, and 2 properties under renovation with remaining commitments of $5.2 million. Additionally, we have remaining commitments under mortgage loans of $17.1 million related to expansions and renovations on 8 properties in Michigan and $2 million remaining under a preferred equity commitment.

Our balance sheet continues to provide us with substantial flexibility and a capacity to fund current and future growth initiatives. We have $461.6 million available under our line of credit, $98 million under our shelf agreement with Prudential and $184.1 million under our ATM program, providing total liquidity of $743.7 million. As always, we will continue to employ a conservative capital allocation strategy.

Our long-term debt to maturity profile remains well matched to our projected free cash flow, helping moderate future refinancing risk. And we have no significant long-term debt maturities over the next 5 years.

At the end of the fourth quarter, our credit metrics remained well matched to the healthcare REIT industry average with debt to annualized adjusted EBITDA of 4.2x, an annualized adjusted fixed charge coverage ratio of 5.1x, and a debt-to-enterprise value of 28%.

Now I'll turn the call over to Clint.

Thanks, Pam. I'll start by sharing progress on a previously disclosed lease transition, a joint venture acquisition and developments nearing completion.

I'll start with the lease transition. As you may recall, with the leases on our buildings in Bakersfield and Vacaville, California, offered by Brookdale Senior living, were due to expire on November 30, 2018. We signed a new master lease agreement with an affiliate of Fields Senior Living, to be effective upon issuance of life insured by the state of California, which is anticipated to occur on May 1. The new master lease provides for a purchase option and includes a $3 million capital commitment from us at a 7% yield.

Fields has 12 months from lease commencement to utilize these funds. Until licensure is obtained by Fields, Brookdale will continue to operate the properties under a lease amendment. The annualized GAAP rent for 2019 from these communities under both leases is expected to be $2.5 million. Once the transition is complete, our relationship with Fields will include 4 properties.

While these maturities are a fact of life, we see them as an opportunity to expand operator relationships as we are in the process of doing with the Bakersfield and Vacaville transition to Fields. We can leverage the meaningful relationships we've built to quickly fill gaps and transition properties if necessary as leases expire.

As previously disclosed, we completed one transaction subsequent to the end of the quarter. We closed a $17 million real estate joint venture acquisition with an affiliate of English Meadows Senior Living communities. LTC has a 95% interest in the real estate joint venture.

English Meadows' Abingdon Campus, which opened in 2015, is a 74-unit assisted living and memory care community in Virginia that was 90% occupied at the time of closing. The initial lease rate is 7.4%. The Abington Community is operated by English Meadows, a new operating partner for LTC. English Meadows was founded 10 years ago and operates 8 communities across Virginia.

Now I'd like to update you on the progress of communities under development. First, Boonespring of Boone County, a skilled nursing development project in Kentucky, opened and accepted its first 2 residents in early February. Boonespring, a 143-bed transitional care center, is operated by Carespring and is part of a 4-property master lease.

Next is our Hamilton House project. A 110-unit independent living, assisted living and memory care developed project in Wisconsin that anticipates opening in early to mid-April. The community will be operated by Tealwood Senior Living.

Moving now to the portfolio numbers. Q3 trailing 12-month EBITDARM and EBITDAR coverage, using a 5% management fee was 1.43x and 1.21x, respectively, for our assisted living portfolio and 1.67x and 1.28x, respectively, for our skilled nursing portfolio. Thrive has been excluded from our assisted living portfolio numbers because only one Thrive community would've rolled into coverage this quarter, and as Wendy mentioned, we are no longer accruing contractual rents starting in 2019.

Coverage in our skilled portfolio increased by 2 basis points over the previous quarter. The skilled operators in our portfolio prepared a transition to the patient-driven payment model in October. Sentiment continues to be positive as to the expected benefits from this change in Medicare reimbursement.

Along with the expected positive associated with PDPM, we are closely monitoring the current biennium legislative session in Texas, pertaining to a proposed provider tax bill that the for-profit skilled nursing industry has long supported. Passage of such a bill would bring needed relief to many operators in Texas and positively impact coverage in LTC's skilled portfolio. Current Texas legislative session concludes in May, and while passage of the bill is not guaranteed, and we are not relying on it, we remain cautiously optimistic.

Before I wrap up, I'd like to briefly comment on our pipeline. As Wendy mentioned, this time of year is generally slow in terms of pipeline growth. However, we are seeing some opportunities for smaller, stabilized private pay assets where prices have come down a bit. Even though some large deals have been reported recently, we remain focused on select opportunities that add new operating partners and optimize our portfolio. We're maintaining our focus on strategically and methodically identifying quality, growth-oriented operating partners and newer assets.

While we are pleased to see that pricing is starting to become more realistic, we caution that a gap still remains between what buyers are willing to pay and how sellers are pricing their assets, creating extended transaction cycles. We obviously can't predict when the gap will fully close, but we do feel confident that the transactions now in our pipeline have a strong probability of converting this year. Now I'll turn things back to Wendy.

Thank you, Pam and Clint. We believe this year will provide several growth opportunities. Our challenges with Senior Care and Thrive are being addressed and controlled, investment opportunity has picked up, marketplace challenges are starting to abate slightly. And the 2 reimbursement changes that Clint mentioned might significantly benefit our SNIP portfolio at the end of 2019 and into future years.

We believe new construction will slow down with cost headwinds and occupancy of existing properties will increase. Broken private equity deals could result in some interesting new opportunities. We will remain optimistic and opportunistic as the cycle runs its course. Thank you again for joining us today, we are now ready for your questions.

(Operator Instructions) Our first question comes from Chad Vanacore with Stifel.

So just thinking about guidance $3 to $3.02. That's a pretty tight range, especially considering all the moving pieces here. Can you share some of the primary assumptions as to collections and as timings of changes there?

Yes, we lowered -- the primary change is reducing the Thrive rent. We've assumed Senior Care pays the contractual rent through the year. But no straight line (multiple speakers) $1 million lower of straight line.

Yes, we had to reduce straight line. We've increased for Anthem, reduced for Thrive.

Yes. And reduced G&A.

And reduced G&A.

Discussed on the call.

Okay. And then just on the Senior Care part. Didn't you mention in the guidance that a $0.03 drive -- drag associated with Senior Care? Or did I hear that wrong?

No, that's correct, that's in 2018. Because we did not record rent in 2018 for December because they did not pay it. So bankruptcy claim.

Okay, got you. And then, just thinking about -- you've got new developments coming online in first half of '19. How should we expect rent -- incremental rents to flow through in the income statement there?

I'm sorry, repeat the question.

The developments coming online in 2019. We release our -- you've got it in the incremental...

Yes, according to the supplemental, we give that -- Page 7 of the supplemental, the date of the C of O, that's when we should start modeling rent.

We have a rent, estimated rent inception date.

All right, is that mid-quarter, beginning of quarter, you get full rent starting April 1 and January 1?

For GAAP purposes, yes, the accounting rules require you to start recording rent on a GAAP basis at certificate of occupancy. So those are the dates we laid out. So for the Carespring property in Kentucky, it'll be first quarter of this year or the property in Wisconsin will be the second quarter. And for the property in Oregon, fourth quarter.

And, Chad, right now, everything's on track as far as the development timelines.

Okay. Yes, these things typically, they get pushed back. All right. So just one more, in looking at your third quarter SNF coverage in your supplemental, it looks like trailing 12-month coverage improved sequentially despite occupancy impairment declines. That's counterintuitive. Can you tell me what's behind that change?

Sure. Part of that, Chad, we received -- I talked about this previously about some quality mix indicator of payments that one of our operator was expecting in Michigan. And that did actually come through. So that was -- it was funded at the end of the fiscal year for the entire amount that applied for the prior fiscal year. So we did see a large pop in that one operator, which I had talked about the last couple of quarters. So that's one reason why you're seeing the occupancy go down a little bit, but why you saw the coverage slightly go up.

Okay. And one last one actually, just going back with guidance...

Chad, [that's going to be] going forward as well, so that QMI payment is going to continue going forward into the future. That'll just be paid on a monthly basis going forward.

Okay. So it's not an end of the year quality payment, it's -- [they're going] to book it consistently month-by-month?

That's correct.

Okay. So going back to guidance, just -- did that include any new investments or acquisition dispositions?

No, it does not.

Our next question comes from Michael Carroll with RBC Capital Markets.

Just real quick on the guidance numbers. Pam, I guess, you said you assumed $1 million of rent from Thrive, were they scheduled to pay $6 million-plus of rent, is that correct?

In 2000 -- yes, they were scheduled to pay $7.2 million in 2019 so (multiple speakers).

Okay. So then how does the math work if you're only assuming $1 million from Thrive? So that seems to be $0.15 lower off of the current run rate, then it seems like it's all recovered. So is the new investments and reduction in G&A making up for that $0.15 shortfall?

So GAAP and cash on this particular lease because they -- the escalators are variable, so they are not straight lined. And there was lease incentives, free rent in the beginning of this lease. The cash rate is actually higher than the GAAP rate. So the GAAP rate is $6.7 million. So that's what is in guidance.

How much rent was recorded for Thrive in 2018?

$6.7 million.

$6.7 million. So then you're dropping from $6.7 million down to $1 million, which is roughly $0.15? So then what's the uptake to get you back to that $3 run rate? Is it just new investments and reduction in G&A?

Yes.

And Anthem, an increase in Anthem. So it's the properties coming on line that we talked about, and Anthem, and then reduction in G&A. Those are your primary components.

That increase in Anthem was just 45% over what it was in 2018. So it has a positive contribution.

Okay, great. And then can you talk a little bit about Preferred? I know that in the 10-K, it highlighted that they missed their date to either affirm or reject your lease. What's the thought process there?

You know, I think that right now, Preferred Care has been going through sort of an elongated period. I think they felt like they would be out of bankruptcy by this point. And they've been working through the transfers with other landlords, which I think, they accomplished, I think they only have 2 buildings remaining in New Mexico. But they have the lawsuits in Kentucky and the matter with the state attorney general in New Mexico, that's sort of drawn their case out a little bit.

And sort of through that process, I think, they're trying to evaluate what their post-petition organization looks like after they emerge. So they've continued to pay rent to us. I think they're looking at exiting certain markets, and in those markets would include some buildings in our master lease.

So right now, we're working with them to see if we can accommodate, possibly removing some of the buildings from that master lease. They do want to stay in and have a viable entity coming out of bankruptcy. I mean, the good thing for us in working with Preferred Care on this is it gives us an opportunity to reduce our operator concentration, because Preferred Care, right now, is our 6th largest operator, and we do value them and having the diversification among our operators.

Okay. So I guess, a good way to think about that is that basically, I want to stay in the master lease just going forward, it's just going to be a few assets you plan on selling, and you're going to just have higher asset sales in 2019?

No, I don't see a higher asset sales. We might look to sell some, we might look to retenant others as well.

And would those be done with a similar rental rate?

We're working through that right now. We would think that the same rate, that -- that's what our preference would be. That's part of a negotiation as Preferred Care wants to retain some of the buildings and that's -- we're working on that right now. Actually Wendy and I were in Dallas about 2 weeks ago, meeting with them, and walking through with their -- looking at it from an organizational standpoint, and what they want to look like when they emerge from bankruptcy.

Okay, great. And then, I guess, last one for me. I know that Frontier has had troubles leasing up those 2 developments, it seems like those were stabilized this quarter. So what's the occupancy rate? And I guess, have you seen a pretty good uptick in those trends?

Well, in Clovis -- we've actually been making some proactive progress on Clovis. We've seen some lumpiness in the occupancy as evidenced, we've been monitoring that and talking about it over the last number of quarters.

So what we've done actually is we proactively identified a solution for the Clovis properties. And we found a new operator that actually has seen long-term value in that asset. And so, we right now have -- we have negotiated a new lease and a guarantee with another operating company to take over operations of the Clovis community. Right now it's just subject to state approval, which we hope to have any day now.

So effectively, the lease terms will be on similar terms as Frontier as far as the current cash payment. We're actually getting a stronger credit enhancement in working with this new operating company, but in exchange for that, we're giving them a purchase option to buy the community between the 6th and 10th lease year upon -- from lease commencements.

Okay. Now what release rate is that purchase option at?

I don't have the rate, but it basically would be our gross book plus any investments we make into the property. And then we would retain 40% effectively of the upside. The purchase price would include 40% of upside based on appraised value.

So we think it's really a strong win-win for us in this new operating company. And actually, Frontier, who has been managing the community, they've been great to work with. I think this wasn't the right opportunity for them, but they've been engaged with this process and very cooperative. So we appreciate their efforts.

Our next question comes from Daniel Bernstein with Capital One.

I wanted to go back to Thrive and, can you talk about -- a little bit about the performance of the properties and which direction you're going? I thought they were loosening up slowly, but still moving in the right direction. Did something change there? And I guess, we'll start there.

Thrive is an opportunity. They've had some challenges with cost. They've had challenges with using agencies. They have a couple of properties that are doing very, very well, like Anthem had a couple of properties, all of their Colorado properties were doing well. They're having challenges in the lease-up of the newer properties.

One of the good things about Thrive is that we have -- it's not the same as the Anthem in terms of the entire portfolio, we could easily split up Thrive. They've got one asset in Texas and we have an operator who might be interested in that asset in Texas. The one asset within the Thrive portfolio that is probably more likely to be assailed than a retenanting would be in Jacksonville, Florida. And I think we would come out net -- the same amount of money that we invested in it.

But there seems to be a lot of challenges in Jacksonville -- in that area of Florida. But the other areas are viable, it's just taking them a little bit longer. They just had extreme expense variations in terms of controlling those expenses. They've turned their attention to the assets.

Another good thing about Thrive is they have assets outside of the LTC portfolio, and we have certain guarantees that support our amounts due from Thrive. So Anthem didn't have that, and Anthem only had our assets.

So while Thrive is a challenge right now and we haven't put much in our projections for Thrive, there's every opportunity for us to be able to get more out of the Thrive facilities in 2019. But at this point, we can't promise our shareholders that we'll -- we are going to do that, but I think we have a really good opportunity of getting more than what we've got in our projection from Thrive rent.

So it would be a characterization that they're under managing the assets at least from an expense perspective. Maybe they got over their skis a little bit with the number of development properties and how fast they grew. Is that the right way to characterize it?

Yes. If Thrive's listening, we love them as a management team, but they've had challenges. So they've done...

No, I've met them before. So...

Okay. They've done very well in their development, and they're turning the properties over to a new owner and participating in the windfall and all of that sort of thing. It's just adding that as -- or adding the operating of day-to-day assets hasn't been a real success for them with our assets. I don't know their entire portfolio.

Okay. And then the other question I have here is that, on SEC, you'd previously indicated that when you're negotiating master lease rent, new master lease with a different operator, you [thinking about] maybe the possibility of similar rent. And I go back to December, in the press release, where you had 1.6x EBITDARM coverage. Has anything changed in your thoughts about maybe BMO gets similar rents on those properties to transfer to another operator? And has there been any deterioration in the lease coverage?

Right now, Dan, there has not been deterioration in the lease coverage, we're monitoring it closely. I think in transferring the operations to a new operator, which obviously would be subject to court approval, we don't have a unilateral right to do that. But we are being proactive and trying to position the company to take advantage of opportunities and have a backup should something happen.

We don't think that Senior Care as an organization, as it's structured today, is going to survive through bankruptcy. So we want to be prepared for the alternatives. I think the way to think about rent, is there -- could potentially be possibly some deferred rent, potentially depending on when the buildings would transfer possibly and where performance is at at that point. That really comes down to what the negotiation is and how we would treat that.

But I think there are probably some low-hanging fruit on some of these buildings because of just the focus in Senior Care has been more on corporate events and bankruptcy and not as much on driving performance at the facility level. So we think there's opportunity long term, if we get a new operator to come in and operate those properties. So it's a little dynamic in regard to what rent would be, but there is positive cash flow currently on those buildings.

Okay. And one more question. Really, going back to the pipeline, and originally, Wendy's comments on the bid/ask spread kind of widening out. What do you think has caused that for private equity in terms to be a little bit more cautious on the smaller midsized deals? It's just they're elephant hunting?

Has there been any -- do you think there's some pullback in money into the private equity space? [Let's start from] wealth money from China? Or was it the December drop in the stock market? Just trying to understand, kind of, where those thoughts are coming from?

I think it's just there's larger opportunity -- there are a lot of transactions. We're seeing a lot of activity right now on the deal front, we're signing a lot of confidentiality agreements. But we're also being judicious and sticking to our underwriting standards.

So we're seeing a lot of deals out there. And so I think there's a lot of things to look at. And I think from a private equity standpoint, you can do a multiple-facility transaction, it's the same amount of work as doing one property. So we've just seen that interest fall off a little bit in areas that we've been looking.

But still, there are opportunities that we see where we can find where the price and the metrics work, like the Virginia deal, that we just closed on. So it's hit-or-miss. But we're seeing a little bit of disruption on that bid/ask price and we view that as an opportunity.

Our next question comes from John Kim with BMO Capital Markets.

On Anthem, can you just remind us what drove the recovery in operations to get that increase in rents? And also, what is the coverage now on an EBITDAR basis?

We don't give coverage on EBITDAR basis by lessee. But what's the recovery is that they have then development properties starting about 5 years ago and as they have leased up, they've stabilized operations. So it was a combination of lease-up of assets.

Indeed, they did lease-up a little later than we had originally underwritten them 5 or 6 years ago, but they are leasing up now. And Anthem took some overhead cuts this year at our urging. So their overhead is much more in line with the fact that they're operating 11 properties. So it's a combination of new properties leasing up, Anthem spending less on overhead, and filling up their assets.

So we expect that we have 4 that are still in lease-up. And by the end of the year, we think that their rent coverage ratio will be significantly higher than it is in January, February. And for 2020, we expect to have even higher rents from Anthem.

Okay. And then on Senior Care. I think you mentioned in your press release back in December that you were in discussions with another operator for those properties, which you also mentioned in your prepared remarks today. But back in December, you were saying they were on similar terms as the Senior Care lease, and I'm wondering if that was still the case.

Yes, it is the case. We are still working on that lease. We don't have the unilateral ability without court approval to move the properties. But as a backup, we've negotiated. The lease terms are very similar. As I just mentioned on one of the other questions about one of the open items would be the rent level as far as is there any deferred rent or not, but currently, there is cash flow on those assets, so that's to be determined.

But we're just trying to position LTC to be prepared and have a backup, if the opportunity arises, where we can transfer operations to this new organization, which they do have experience with these buildings, specifically. So we view that to be a strong advantage for us.

On your acquisition pipeline and focus more on private-pay stabilized assets, is there anything else you could share as far as what you expect cap rates to be, the AL/IL mix and geography?

What I would say right now, most of what we're looking at is from private-pay assets, our focus in on stabilized assets, which is evidenced by the deal we just did in Virginia. Right now we're targeting similar yields to what we got on the Virginia deal, which is around 7.25% to 7.5% for private-pay assets that are stabilized.

And geography really is -- depends based on the opportunities that present themselves with operators in certain markets, because we've been very focused on building relationships with regionally based companies. So we're opportunistic in regard to locations.

And why do you think cap rates have gone up on stabilized assets? Is there a potential for you to -- or a buyer to put in the CapEx upon...

This was an opportunity where we had -- it was effectively a sale leaseback transaction that the operator effectively coinvested with us on the real estate joint venture. So that led to a unique opportunity where we could come in and price it at that yield and get coverage off of it on a stabilized basis.

So we're starting to see more opportunities where you can fit these newer, stabilized assets into triple-net leases, and the real estate joint venture structure that we've been utilizing helps to lower the lease cost to the operator where they're getting their return on the -- they're effectively lowering their rent cost and giving themselves more flexibility.

Our next question comes from Todd Stender with Wells Fargo.

And Clint, just to stay on that theme with the Virginia asset. Is it a triple-net lease within a joint venture? I didn't catch it.

That is correct. So we coinvested on the real -- in propco, and then there is a triple-net lease to the operating company. And the principles on our JV partner as well as the opco are common.

Okay. And do you own the real estate 100%?

95% is our economic interest in the real estate.

Okay, got it. All right. Okay. And then go to the mezz loan commitment. There is a piece of deferred interest on that, I guess, the bulk is cash, but how does that get booked on the P&L? And has it been funded yet?

It has not been funded yet. We made the commitment in 2018, and right now, the -- everything is in line. We expect the funds by the middle of March, it is a mezz investment at 12%, but during the first 46 months, it's 8% current pay.

There is a strong equity position in front of us with about 30% equity on this development project, so we view this as a unique opportunity to come in and look at a transaction that we probably -- of a size, we probably wouldn't come in and own 100%. But it's a great way for us to build relationships with operating companies that would be new to our portfolio. And we think with the current pay piece and the ultimate yield of 12% is a risk-adjusted return for LTC.

But we'll be booking the 8%, to answer your question.

Okay, that's helpful. And with the ultimate goal of owning or having a seat at the table, as a loan to own?

No, this is a little bit of a larger project, so it was the idea of coming in on risk-adjusted basis. A bite-size investment for us to get a look at this type of investment and build relationships with companies that are new to our portfolio.

(Operator Instructions) Our next question comes from Karin Ford with MUFG Securities.

Just one more question on Senior Care. I know you said it's early in the bankruptcy process, but if the court rejects your leases in the process, how much downtime do you think there could be in a transition? Is there any risk that we could have some downtime in 2019?

There's always risk of downtime. But the good thing about investing in the state of Texas is the licensor process in the state is a very short timeframe. So being able to transition buildings is landlord-advantageous, I mean, it's much different than California like which we're experiencing on the transfer of Bakersfield and Vacaville to Fields Senior Living. So there is a possibility but I think, that it will be -- if any, it would be limited.

And even if they do reject our lease, don't they still have to pay rent --

They have to [pay us first].

-- until it's taken out? And they could say, well, we only need to pay economic rent. Well...

Recent occupancy.

Yes, it covers 1.6x before management fee. So I think we would have an argument in court that our lease rate is a reasonable amount of rent. So yes, it's disruptive and I don't think we will lose in the transaction. I don't think we'll lose GAAP. We may delay cash a while, but I don't think we'll lose GAAP rent.

No, that's helpful. And then second question is just on Thrive. I think 3 of Thrive's 6 properties were 2017 transitions from other operators. With now 2 failed attempts at leasing those, do want to sell those 3? And what do you take away from this from an underwriting standpoint especially on development?

Well actually, 2 of the -- you're correct on timing, and 2 of the 3 were transitions from Clarity Pointe to Thrive. It was the building in Louisville and the one in Jacksonville, which Wendy talked about a few minutes ago. The Jacksonville community is probably a sale for us on that, and it just seems like, in the Jacksonville market, there's been a lot of development, and it's just going to take a longer period of -- timeframe for the lease-up sale.

What we looked at in that specific case, the target of lease-up should have been a longer period of time. And just having the runway to span through that elongated lease-up period. So that's probably going to be a sale most likely. The other building that they opened in '17 was a building that Thrive actually opened themselves. And we came in at a takeout at certificate of occupancy.

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

Thank you. And thank you all, again, for joining us for our year-end. We look forward to talking to you in just several weeks about the first quarter. Have a great weekend.

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