LTC Properties Inc (LTC) 2022 Q2 法說會逐字稿

Good morning, everyone, and welcome to today's LTC Properties, Inc. 2022 Analyst and Investor Call. (Operator Instructions)

Before the management begins its presentation, please note 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, 2021. 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.

And I would now like to turn the conference over to Wendy Simpson.

Thank you, operator. Welcome, everyone to LTC's 2022 Second Quarter Conference Call. Joining me today are Pam Kessler, Co-President and Chief Financial Officer; and Clint Malin, Co-President and Chief Investment Officer.

I'll start today by continuing to share my enthusiasm for LTC and its future. Too often over the past several years, we have spent time discussing COVID, economic headwinds and the challenges facing our operators. And while the industry is not completely out of the woods and LTC still has a few specific issues to resolve in the short term, I believe our company is on sure footing and is operating from a position of strength.

Since the beginning of COVID and to date, we have successfully transitioned several portfolios to strong regional operators with whom we can grow. Most recently, we took important steps to rectify ongoing rent abatements and deferrals by transitioning our marketing properties for sale that have made up the majority of our ongoing assistance. You'll hear more about that later in the call.

We have continued to make successful investments that generate positive returns for our investors, especially through creative and flexible structured finance vehicles, have taken a number of steps to enhance the quality of our portfolio, including reducing its average age and have divested properties that no longer fit with our longer-term goals. To date this year, we have invested over $110 million in senior housing and care, slightly ahead of the entirety of last year and have generated net proceeds from strategic sales of approximately $72 million, which is $19 million in excess of our gross book value of $53 million.

We are continuing to identify additional strategic investments and have been busy touring sites and building relationships. I cannot thank the entire LTC team enough for their hard work in helping us execute on our goals. And while there are still some heavy lifting needed by our operators to return to a pre-pandemic environment, including occupancy and rent increases, a more permanent solution to ongoing staffing issues and an easing of the inflationary pressures being felt by us all, we are steadfastly moving in the right direction with a strong sense of hope for the future.

Occupancy in our portfolio is gradually increasing, and we're hearing from some of our partners that temp agency utilization is dropping and rent increases have been implemented by several of our private pay operators. Multiple signs are pointing in the right direction, and I believe our industry and LTC specifically is successfully emerging from the worst of the COVID crisis.

As I said before, need-based care is a vital part of our economy and that favorable demographics and the growing fundamental needs of our senior population speaks to the long-term health of the seniors housing and care industry. I'm confident that much of the angst we've managed through is now in the rearview mirror, and we can focus more clearly on growth.

We maintained our $0.19 per share monthly dividend during the second quarter with a total payout to shareholders of $22.6 million. Throughout the pandemic, many REITs elected to cut their dividends, but I'm proud to say that LTC's conservative financial approach has allowed us to continue paying a steady current return to our shareholders.

Our FAD payout ratio moderately decreased to 88% for the second quarter, down from 89% from the first quarter. We continue to believe that our FAD payout ratio will approach our target of 80% in the fourth quarter of 2022. Our guidance for the third quarter anticipates that FFO will be slightly higher than this past quarter. This excludes nonrecurring items from both periods.

I'll now turn the mic over to Pam.

Thanks, Wendy. Total revenue grew by $4.9 million from the second quarter of 2021. The increase resulted from a $1.8 million increase in rental revenue, primarily due to a lease termination fee received in connection with the sale of a 74-unit assisted living community. Other contributing factors included rent received from the former senior care and senior lifestyle portfolios, rental income from completed development projects and annual rent escalations and higher property tax income. The increase in total revenue was partially offset by reduced rents resulting from property sales as well as the temporary rent reduction to Anthem, which we discussed on our last call.

Interest income from mortgage loans increased by $2.2 million, primarily due to mortgage loan originations, while interest and other income increased $907,000 principally related to its mezzanine loan origination and additional funding under working capital loans, partially offset by loan payoffs. Interest expense increased $663,000 from last year's second quarter, mainly due to term loan originations, the issuance of $75 million of senior unsecured notes in the second quarter and higher interest rates partially offset by a lower outstanding balance on our line of credit and scheduled principal paydowns on our senior unsecured notes.

Transaction costs and income from unconsolidated joint ventures were comparable to the year-ago period, but property tax increased by $219,000, primarily due to our acquisition of a 4-property portfolio in Texas during the second quarter. Our provision for credit losses increased $305,000, primarily due to mortgage loan originations, partially offset by principal paydowns. As a reminder, upon origination, we record a loan loss reserve estimate equal to 1% of the loan balance. This reserve is amortized as the loan principal is paid down.

G&A increased by $374,000 mainly due to higher costs related to conference sponsorships and travel, higher noncash compensation charges and increases in overall costs due to inflationary pressures. Net income available to common shareholders increased $35.9 million, mainly resulting from a higher gain on sale of real estate, loan originations and the increase in rental revenue previously discussed, partially offset by the higher interest expense, G&A and provision for credit losses also discussed.

Fully diluted NAREIT FFO per share for the 2022 second quarter was $0.64 versus $0.57 in the second quarter of 2021. Excluding nonrecurring items, FFO per share was $0.62 this quarter compared with $0.57 in last year's second quarter. The increase in FFO, excluding nonrecurring items, was related to higher revenues from loan originations and the net increase in rental revenue previously discussed, partially offset by higher interest expense, G&A and provision for credit losses.

During the second quarter, we recognized a gain on sale of real estate of $38.1 million related to the sale of 4 properties. 2 of the properties were assisted living communities in California, which we sold for $43.7 million and reported a gain on sale of $25.9 million. Another property was an assisted living community in Virginia, which we sold for $16.9 million and recorded a gain on sale of $1.3 million. The final property was a skilled nursing center in California, which we sold for $13.3 million and recorded a gain on sale of $10.8 million.

Of note, 2 of the assisted living communities were approximately 25 years old and the skilled nursing center was more than 50 years old. We have been very successful at recycling capital into newer properties to further reduce the average age of our portfolio.

Moving now to our second quarter investment activity. We purchased 4 newer skilled nursing centers located in Texas for $51.5 million. The centers, which we discussed in detail last quarter, are being operated by Ignite Medical Resorts. We continue to anticipate reporting cash and GAAP rent of approximately $1 million in each of the third and fourth quarters of 2022 and $4.3 million in 2023. We also originated 2 senior mortgage loans for $35.9 million secured by 4 assisted living communities operated by an existing LTC partner as well as a land parcel in North Carolina.

The assisted living communities have a combined total of 217 units with an average age of under 4 years. The land parcel is approximately 7.6 acres adjacent to one of the assisted living communities and is being held for the future development of a senior housing community.

Regarding our former senior lifestyle and senior care portfolios, I'll provide some additional details on expected rents going forward. For the 6 buildings in the former senior lifestyle portfolio under 2 separate leases with quarterly market-based rent resets, we received $20,000 in the second quarter, approximately what we expected, but now anticipate receiving $160,000 in the remainder of the year, which is down from our prior projections due to slower-than-expected lease-up and continued cost pressures. Our expectation for 2023 is that we will sell these assets or set a more permanent rent.

Regarding the former senior care portfolio, we received rent of $1 million in the second quarter as expected. As we discussed last quarter, we continue to anticipate receiving approximately $2.5 million in each of the third and fourth quarters of this year. We are continuing to work toward amending and extending our lease with HMG Healthcare, the operator to whom we transition the portfolio prior to its current maturity in September. We also received $5.3 million of principal paydown on the $25 million working capital loan with HMG. The loan has a current outstanding balance of $13.3 million.

During the second quarter, we sold $75 million aggregate principal amount of 3.66% senior unsecured notes. The notes have an average 10-year life, scheduled principal payments and mature in May 2033. We also repaid a net of $101.9 million under our unsecured revolving line of credit at a weighted average rate of 1.9%, and we sold 909,800 shares of common stock for a total of $34.2 million in net proceeds under our ATM program. We used the proceeds from the sale to pay down our unsecured revolving line of credit, which we had used to fund investments and for general corporate purposes.

Subsequent to the end of the second quarter, we paid $20.2 million in regular scheduled principal payments under our senior unsecured notes at a weighted average rate of 4.9%, borrowed a net of $20.5 million under our unsecured revolving line of credit at a weighted average rate of 2.7% and sold 125,200 shares of common stock for a total of $4.8 million in net proceeds under our ATM program.

Presently, we have $6.4 million of cash on hand, $323.5 million available on our line of credit with $76.5 million outstanding and $160.3 million available under our ATM. This provides us with total liquidity of just over $490 million. We have no significant long-term debt maturities over the next 5 years.

At the end of the 2022 second quarter, our credit metrics remain solid with a debt to annualized adjusted EBITDA for real estate of 5.7x and annualized adjusted fixed charge coverage ratio of 4.3x and a debt to enterprise value of 32.1%. Although our debt to annualized adjusted EBITDA for real estate metric remains higher than our long-term target of below 5x, we believe we will achieve this metric by year-end as a result of increased rent from the properties previously leased to senior care and senior lifestyle, recent investments that we expect to start producing revenue, debt reductions from principal paydowns on our line of credit from asset sales and scheduled principal paydowns on our senior unsecured notes.

During the 2022 second quarter, we provided a net of $702,000 in rent deferrals, including $114,000 of repayments and $1.2 million in rent abatement, again, to the same small subset of operators that have been receiving assistance from us. This amount does not include Anthem, which we will discuss in a moment. Of note, as Wendy mentioned, we recently took steps to resolve the portfolio challenges related to the majority of the deferrals and abatements. Clint will also discuss these actions.

Now I'll turn things over to Clint.

Thank you, Pam. Addressing the serve operators that Pam just referenced, on July 1, we successfully transferred a 12-property 625-unit private pay portfolio across 5 states to an affiliate of ALG Senior, a current LTC operator. The former operator who is not in our top 10 in terms of concentration was one of the few for whom we had provided assistance in the form of rent deferrals and abatements.

In conjunction with this transaction, we provided the former operator a $500,000 lease termination fee, which will be recognized as a onetime charge in the third quarter in exchange for cooperation and assistance and facilitating an orderly transition. We also have forgiven the former operators deferred rent balance of $7.1 million, which was not previously recorded since the leases on a cash basis.

The transition communities are pursuant to a new master lease with a 2-year term with 0 rent to the first 4 months. Thereafter, cash room will be based on a mutually agreed-upon fair market rent. We also provided the new operator with a $410,000 lease incentive payment, which will be amortized as a yield adjustment to rental income over the term of the lease. Working with the new operator, we are currently determining whether we will retain all of the buildings or sell all or part of the portfolio. We will keep you updated.

We also are in the process of resolving the other contributor to our deferrals and abatements by marketing for sale 180 unit private pay campus offering the services ranging from independent living cottages to memory care. We are not receiving any rental income from this campus currently. So by selling it, we can redeploy the capital into income-producing assets. For the same quarter, we have agreed to abate the operator's full contractual rent of $720,000.

Now for a quick update on Anthem and on a portfolio with another operator, not in our top 10 concentration. As we noted, we are providing assistance to Anthem as they work through some operating challenges related to COVID. In the 2022 second quarter, we provided them with a $600,000 temporary rent reduction. We also agreed to provide them with a $900,000 temporary rent reduction for the third quarter of 2022, bringing their anticipated third quarter rent payment to $1.8 million.

Upon Anthem's receipt of additional stimulus funds in the fourth quarter, we expect to receive the $1.5 million of rent we temporarily reduced, bringing Anthem's total annual cash rent to $10.8 million this year. Anthem is up to date on the modified rent payments through July of 2022. We also agreed to defer $150,000 of the $445,000 monthly contractual rent for August and September from a lessee that operates 8 assisted living communities under a master lease with us.

The operator requested into systems due to a protracted lease-up with their portfolio during COVID. We anticipate receiving the $300,000 of deferred rent in 2023 upon the operator's receipt of additional stimulus funds. This operator is current on rent through July 2022 and as I mentioned earlier, is not in our top 10 in terms of concentration.

Next, I'll provide an occupancy update on the former senior lifestyle portfolio, which includes 18 communities with the May licensure and transfer of one remaining community. Occupancy at June 30, 2022, was 85% and which was up from 83% at March 31, 2022, and 81% at January 31, 2022. For the 6 communities under the 2 separate leases with quarterly market-based rent resets, occupancy was 80% at June 30, 2022, up from 76% at March 31, 2022, and 69% at January 31, 2022.

For the 11 property former senior care portfolio that we transitioned to HMG, occupancy for the month of June 2022 was 56%, the same as for the month of March 2022 and compared with 57% for the month of January 2022. While occupancy has been relatively flat since the transition, we expect HMG's efforts to reposition this portfolio and reestablish referral relationships to result in occupancy gains over the next 6 to 12 months.

Moving now to our portfolio numbers. With the usual disclaimer that we do not believe coverage is currently a good indicator of future performance at this time given the pandemic and the challenging environment it created. For clarity, recently transitioned properties, including the former senior care and senior lifestyle portfolios as well as the 12-property portfolio already discussed, no longer qualify for our same-store metrics, so they are excluded from these numbers.

Q1 trailing 12-month EBITDARM and EBITDAR coverage as reported using a 5% management fee was 1.04x and 0.82x respectively for our assisted living portfolio. Excluding stimulus funds received by operators, coverage was 0.95x and 0.73x, respectively. For our skilled nursing portfolio, as reported EBITDARM and EBITDAR coverage was 2.14x and 1.68x, respectively. Excluding stimulus funds, coverage was 1.52x and 1.08x respectively.

Moving now to some recent occupancy trends, which are as of June 30, 2022, and for our same-store portfolio. Our partners have given this data to us on a voluntary and expedited basis so the information we are providing includes approximately 55% of our total same-store private pay units and approximately 92% of our same-store skilled nursing beds. Private pay occupancy was 83% at June 30 compared with 81% at March 31 and January 31, 2022.

For our skilled portfolio, average monthly occupancy was 72% in June of this year compared with 71% in March and January 2022. As a point of reference, our average skilled nursing occupancy in 2019 was 80%.

I'll conclude my remarks with a discussion regarding our pipeline. As Wendy mentioned, so far this year, we have closed about $110 million in investments, and we are on track to close another $60 million to $70 million by the end of this year. With interest rates rising, the spread between bank rates and our investment rates have greatly contracted particularly related to the cost of a complete capital stack. This has driven demand not only for our structured finance solutions, including unitranche loans, mezzanine loans and preferred equity investments, but also for accretive triple-net lease structures.

And while we can effectively compete on plain vanilla transaction such as bridge financing, we also excel at more complex transactions, including construction and acquisition financing. Importantly, the way we structure transactions encourages operators to fully maximize their own value in part by not diluting ownership. This is a significant competitive advantage for LTC in the marketplace.

We plan to continue identifying new ways to offer a wide assortment of diversified products that are tailored needs of operators who otherwise may not think of a REIT for their financing needs. We are ready and able to capitalize on great opportunities as they arise.

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

Thank you, Pam and Clint. Our focus for this year remains on strategic and sensible growth. Seniors housing and care is here to stay, and I truly believe that the industry will once again flourish. LTC has taken the steps to make sure we are an integral player in the market. Positioning LTC as a partner of choice in today's market is not a difficult decision to make. We not only have the creativity to provide financing solutions to an extensive range of solid regional operators, but we have the balance sheet to back it up.

Operator, we're now ready to take questions.

(Operator Instructions) Our first question is going to be from Michael Carroll from RBC.

I wanted to touch on the other tenant that you guys have been highlighting for the past several, I guess, several quarters. And it was recently transitioned to a new operator. What is the condition of those buildings? And is occupancy and cash flow fairly weak? And is that the reason why you had to provide the lease incentives to the new operator?

No, Mike, this is Clint. This a portfolio we've talked about over the last few quarters, and we've mentioned previously that it was operationally cash flow positive. That lease incentive things we made to the new operator, I mean, covered transitional things cost for the transition, buying out some equipment, vehicles, things of that nature. So more transitional in nature.

Okay. And then when you're saying that you're evaluating options for this portfolio, I mean, can you kind of go through some of the options that you're thinking about and possibly the timing of when those could be executed?

Sure. Looking at in my prepared remarks. If we're going to look at sales as well as re-leasing to the new operator. So it's something we're working on right now and I think we'll move fairly quickly in that evaluation process.

Mike, several of those assets were former ALC assets. So there are the smaller assets that we have a very low book value on and they're in smaller marketplaces. The condition of the properties is good. I mean everybody wants to put some capital into it -- into a property that they currently take. One of the things that was an advantage to us in moving so quickly and paying a $500,000 lease termination was that the prior operator allowed the current operator to operate under their lease or under their license for a period of time.

So in order to expedite everything, we spent some dollars to make it happen. And it's likely that we'll sell most of the ALC properties. There's not a great market. There's not a great national market for those types of properties. There's local markets for those type of properties. So some of the -- a few of those assets may stay with the current operator, but it's likely we'll sell most of those old ALC assets. And you -- it's long enough to know who ALC is. I'm sorry...

Yes, I do remember. Yes. And then the former -- the 6 former SLC assets, what drove the change in the rent forecast there?

We've seen occupancy growth. It's really been more on the cost side, Mike. It's been through the first quarter surge with COVID. Everybody has talked about agency staffing issues, just general inflationary price pressures. That's been the main driver of what modified our guidance on those properties. So -- but occupancy has been there. And as we see that they've been able to capture rate growth, it's really rightsizing on the expense side.

Yes. And there were a lot of marketing dollars that went into those early on to get that occupancy growth. So hopefully, the marketing dollars will moderate.

And as Wendy mentioned, that we may look at evaluating whether either the performance improves or we look at selling some of those assets as well. So we have options to consider.

Okay. And then just last one for me. The new tenant issue that popped up that you provided $300,000 of deferred rent, I mean, should we think about that as more of a onetime type thing? I mean is there a concern that, that issue could persist as you go into the fourth quarter?

Yes, I think it's really a function of the ERC credits being funded by the IRS. So it's really a function -- we've heard that time frame has been 4 to 6 months after application, it could change as well. So I think it's really a function of that timing.

Our next question comes from Connor Siversky from Berenberg.

A quick question on the dispositions completed during the quarter. And I apologies if I missed this earlier, but could you provide a sense of what rent those facilities were providing prior to the disposition?

On in factual rent numbers, I have a cap rate that we provided last time on last quarter's call. So the skilled at that we sold at a 6.3% cap rate. One of the AL sales at a 5.7% cap rate and the AL where we had the termination fee paid to us was 7.1% cap rate. So there's some attractive cap rates on those sales.

Okay. And then I know you mentioned this before, just the difference in occupancy recovery between ALS and SNFs. I'm wondering just from your point of view, is that still due to pressures in the labor markets and ability to fill head count within these facilities? Or if it's just kind of the summer months and a slowdown in elected procedures that might put some downward pressure on the occupancy recovery for SNFs in general?

I think summer months typically has been slower. So I think that's probably a contributing factor. The other thing to think about, too, is skilled providers increased occupancy if they open wings of buildings as a higher staffing element to open a wing of a building to accommodate increased occupancy. And so with that higher staffing level, it's a function of the expense side of being how much they want to admit to be able to offset that increased cost.

Okay. Understood. And then last one, maybe for Pam. I know we've gone over this in the past, but just given the sharp spike we've seen in rates and the way the multiples held in quite nicely for LTC, and as you kind of look at the forward investment pipeline, how do you look at the debt equity mix on acquisitions going forward?

Yes. We're still at 70% equity, 30% debt. And that's been the way we've consistently looked at it even when gap was really cheap relative. I mean, I think that historically, it's still pretty cheap if you look at the past decade. But when it was really, really cheap, we still were very disciplined in looking at our weighted average cost of capital with that blend.

Okay. And then within that same context, I mean, do you see some of the private equity players now stepping back from these deals, maybe opening up some more opportunities for LTC to be involved in acquisitions, or some of the acquisition that it has been mispriced?

Yes, yes, exactly. I think the movement in rates has really helped us because of the private equity players, they use a lot more debt. And so that part of their capital stack has really increased their cost. And so I think the increase in rates perversely have been positive for LTC and REITs in general. So we're feeling much more competitive now.

Got it. Well, maybe positive for LTC, but I don't know about gold REITs. I appreciate the comments.

Our next question comes from Steven Valiquette from Barclays.

I guess just for Anthem Memory Care, you mentioned on Page 12 in the settlement, you expect your occupancy to recover and also they're expecting to receive some additional stimulus funds to be used to pay the deferred rent. I guess I'm just curious when you think of all the things that could be involved in improving their operations, what's the most important variable at the end of the day? Is it the occupancy that you cited? Is it more just the pricing power they might have? And also, I'm curious how much pricing they can do midyear versus Jan 1? And also how critical is the labor pressure subsiding? So just kind of bouncing rank order, what's the biggest variable, you think, in your mind on their recovery?

I think it's definitely -- it's a combination of occupancy and staffing. And as we've talked to operators across the board and skilled as well as the private pay, is there has been a reduction in the temporary staffing costs. So that's actually -- that's a positive for the properties. And just growing occupancy after COVID, right now they've reforecast their expectations for the remainder of the year and they're on target for that, that by the end of the year, we feel that our operations will be able to cover rent.

So -- and they've had dips in the past, as we've mentioned on previous calls, and they've been able to bounce back. So at this point, we feel confident that we'll be able to do that. And the stimulus dollars through the ERC program or the employee retention credit program, I mean, is very helpful. And we think that once those funds are made available, they'll be sufficient to -- for them to cover their deferred rent we've provided.

And have a cushion.

Yes, but and...

And did you guys provide a number around that? I could probably figure out roughly what it is. I mean you guys actually give a number, I might have just missed it in the commentary, but you -- what's the rough amount you might get?

We haven't given a number. We haven't given a number for -- but I would say that when you think of the ERC credit, I mean, you think you sort of in the context of PPP funds as far as the magnitude of dollars.

Our next question comes from Austin Wurschmidt, from KeyBanc Capital Markets.

This is Arthur Porto on for Austin today. Just a quick question on deferrals for the quarter. So with respect to the new deferrals in the third quarter, specifically the $150,000 in August and September, can you provide some more details on the size of the operator, maybe how many properties they operate and also how occupancy has trended? I think that would be pretty helpful. And then also what gives you the confidence that they can repay rent in 2023?

Sure. I mean, the confidence in our ability to collect rent on that is similar to Anthem in this ERC credit. What's happened is as that program has expanded in 2021, a lot of operators assess whether or not they qualified, once they determine they qualified, they went through -- a lot of operators have gone to a process where they've actually created their audit trail in advance of applying to make sure they fully understand the restrictions that affected them and then they apply.

So that's what gives us confidence that the ERC funds will be beneficial. It was really the timing of receipt of that. We do have some additional credit enhancements with the operator, they're not in our top 10, but it's a target operator that has a regional presence within the country operate approximately 20-plus buildings.

Our next question comes from Tayo Okusanya from Credit Suisse.

So a couple of quick ones for me. First one, could you give us an update from a regulatory perspective, again, it's kind of postulized -- so most states the Medicaid rate, curious what you kind of saw and also from a CMS Medicare perspective, kind of what you may be expecting down the line as it pertains to the final ruling?

So from a regulatory standpoint, there have been a tremendous amount of changes, but we have noticed some, for instance, in the state of Florida, where there was a recent Medicaid rate increase. And part of that reduced the staffing requirements. So that was a positive regulatory change combined with the rate increase that was very positive for the state of Florida. So we're hopeful that will become noticed and could take place in other states. But nothing that we've seen largely from a regulatory standpoint, Wendy or Pam?

I mean, I know the skilled nursing industry is hoping for a phase-in of the cuts, and that's always a possibility, and that would be beneficial. But I haven't heard if that's gaining traction or if there's a preview into the final decision.

Got you. Okay. That's helpful. And then Pam, I think there was a comment earlier on that from a guidance perspective, the expectation is that 3Q FFO will be higher than 2Q. And I guess when I'm looking at the moving pieces, I'm struggling a little bit to kind of reconcile that because you have given -- you have the 12 asset portfolio that's transitioning and assuming that reduces your rents in 2Q because the new tenant doesn't have to pay a rent for 4 months. And then you also have kind of higher interest rates. You had net sales in Q2 of '22, which is diluted to earnings. Could you just kind of help us understand a little bit about how FFO per share in 3Q should be higher than 2Q?

Sure. Well, the transition portfolio, we weren't receiving rent on that over the past several quarters. So the free rent that was given for the first 4 months affecting the entire third quarter, that will be the same as the second quarter, no rent. So there's nothing that changed in the guidance there. Where the list is coming from is HMG. That's the least of the former senior care portfolio. They paid $1 million this quarter, and that's increasing next quarter. And that guidance on page -- for your model is on Page 15.

Okay. So for the transition portfolio, even though you give them -- even if you get the $600,000 abatement in June, you weren't collecting any rent anyway?

In June, I'm sorry, say again, Tayo?

So the transition portfolio, I think you did give them an abatement of their rent of $600,000 or so?

Yes, we -- yes, but they were previously getting a deferral. So it's -- call it deferral, call it abatement. They're on a cash basis, there was no rent reported. Also in the third quarter, we'll be getting a full quarter's rent from our acquisition with Ignite, the Texas skilled nursing portfolio, that's not in the second quarter. So there is quite a bit that's happening in the back half of the year for us.

Okay. And then just the next question, again, all the news around, again, rising COVID cases, BA.5, Kind of what are you hearing right now from your tenants about any potential impact from all that?

I'm sorry, the impact from what?

From BA.5 and kind of rising COVID?

Tayo, I hope we get through this entire call without talking about COVID.

I was sorry to spoil the track record.

We haven't heard that it is affecting our operators as much as the prior variants. Obviously, staff being out sick, that hurts. But it's not to the same magnitude as it happened in January. That variant seemed to hit all at once and like everybody seemed to be down with COVID and agency use was quite high in the first quarter.

The good news is to the resident population, both skilled and assisted, neither the variant that happened in the first quarter or the variant that's happening now this summer seems to be causing much in terms of complications or a higher mortality rate like 2 years ago that the original variant was just awful. And that was prior to the vaccines and the resident population is highly vaccinated and boosted. So I don't see COVID right now creating a ton of headwinds. It's really the occupancy needs to continue to grind higher. And -- yes.

When you talk to our operators, it's really inflationary cost pressures as well as staffing. I mean those are the real 2 things that are on the operator's minds. When you think of the variant from the skilled perspective, because of the public health emergency, you could scale in place as well. So from the skilled side, they can look at that as an opportunity in the interim to accommodate and be able to not have to go back into hospitals to keep the key capacity in the hospitals. So that's -- it's really staffing and just cost pressures generally the main focus is.

Yes. And perversely, a slowdown in the economy might help the labor problems for -- the labor challenges, the staffing challenges that our operators have. So things could possibly get better in the second half of the year from that standpoint, from just a labor supply standpoint.

Our next question comes from Daniel Bernstein from Capital One.

I just want to go back to the 12 property tenant that you transitioned. The ALC assets you might sell there notwithstanding, how should I think about what rent or cash you might received in 4Q and then going into '23, I assume at that point after the 4 months of free rent, you might receive something?

I think it's really a function, Dan, of review operator getting in and working -- continued increases in occupancy, evaluating expenses. So I think at this point, it's hard to say. But for next quarter, hopefully, we can provide more of an update on where we're at on that. But it's hard, we haven't given guidance for that yet.

Are there any assets cash flow positive -- sorry, go ahead. Sorry.

I mean, since the portfolio as a whole is cash flow -- operationally cash flow positive.

Are the ALC assets cash flow positive?

We're just providing the information about the portfolio as a whole, so.

Okay. And then I want to -- a question on labor. I guess it could be both the senior housing and skilled nursing. I've been hearing from some operators that they had some increase in net hiring. So I was just wondering whether some of the commentary you had on agency labor use reflects the decrease in COVID or maybe more so the increased ability of operators to hire?

We covered for some operators that they've made progress in hiring. So that is something we've heard from a number of operators that's starting to trend up. So again as Pam's comment with the economy and maybe that is a benefit to our industry.

Okay. And then the last question I had was, I think Pam maybe alluded to some commentary on the cost of debt to private buyers. Have you actually seen any kind of maybe evidence yet of that impact? Are you seeing any maybe assets being retraded, assets that you bid on that loss that are coming back to you now that you're looking at again, just some kind of a kind of firm indication that maybe some of the private buyers are backing out, whether that AL or SNFs, I don't know, but maybe…

No, I think it's...

Maybe what we're seeing out there in detail.

I think it's too early in the process with the rates just recently rising. But so I think that's going to be -- something becomes more of an indication next quarter as whereas if we see assets come back around or if we've submitted a bid on a transaction that brokers come back to us and indicate, well, maybe this is a price that works. So we're hopeful that we see that, but we'll have to wait and see how it plays out. But I think it's just too early right now to answer that question.

(Operator Instructions) Our next question comes from Juan Sanabria from BMO Capital.

Maybe just a question for Pam on the earnings following up on Tayo's question. The 2 payments, one to the prior operator the 12 assets that are transitioned and the payment to the new operator, are both of those going to be onetime in nature and backed out of NAREIT FFO for a normalized number?

So the $400,000 to the new operator is considered lease incentives. So it is amortized over the life of the lease, so not a onetime. The $500,000 paid to the former operator, yes, that will be a onetime charge.

Okay. And then for the acquisition pipeline, I forget who mentioned it, I think, $60 million or $70 million was talked about for a good assumption for the back half of the year. Can you just give us a little flavor of what kinds of assets are these traditional fee simple or a more kind of structured finance transactions and what kind of yields we should expect on those?

Sure. Now this would be an acquisition. I can tell you, it is skilled nursing. And it's an off-market transaction, actually bringing a new operator into our portfolio. And similar with the portfolio we acquired at Ignite, it would be newer skilled nursing. And I think this off-market transaction speaks highly of the capabilities of our business development team to source these type of transactions.

And that would be kind of an 8% or 9% type of yield?

We haven't given but you think similar to Ignite, which was in the 8% range.

Okay. And then just kind of a general question with regards to lessons learned from COVID. I mean it seems like a lot of the issues have not been on the skilled side but on assisted living and maybe with smaller assets. Does that change kind of what the opportunity set is going forward? Or broadly, any lessons learned about what kind of assets you do want to buy? And maybe what now you think maybe is not such a great idea? Just sharing any color on how you think about what you've learned as a result of COVID and stress-testing things?

I think it reemphasizes having a balance in the portfolio between skilled nursing and private pay. One of the main drivers of the difference is the amount of stimulus funds made available to skilled providers as opposed to private pay providers. So having that balance because you don't know what environment, what market you may be in. So definitely reiterate balance within the portfolio.

Yes, I agree. I think skilled nursing prior to the pandemic, some investors maybe were not as bullish on skilled nursing or as an asset class, it wasn't as favorable. But I think the pandemic showed that from a federal government standpoint and the states that skilled nursing is recognized as a valuable part of the continuum of care for the elderly. And I think that's a positive thesis going forward.

I mean skilled nursing is always changing and evolving. And certainly they proved during the pandemic that they can take the higher acuity patient and have very good outcomes. So I think just from a global standpoint, looking at skilled nursing, it's an integral part of our health care system and was supported by the government, and I think we'll continue to be -- I do scratch my head at the cut side, I think the time -- the timing of them is questionable.

I don't understand why the Federal government would essentially support this industry through the pandemic and not wait until the recovery has been complete because the recovery is not complete for skilled nursing before introducing these cuts. So I am hopeful that the lobbying efforts on Capitol Hill will either delay or at least phase in, in the cuts, but we'll -- that remains to be seen. That's politics, and I don't get involved in that.

And just maybe as a follow-up there, I mean, particularly some of the smaller AL assets have been an issue, not just for yourself but others, some of your peers and maybe just the volatility around what the breakeven occupancy is challenging and obviously pretty high, particularly with higher labor costs. Are you still kind of having an appetite for those smaller kind of secondary market or middle market priced AL type assets, or are those now maybe not as exciting as they used to be?

I mean it's not so much secondary markets. I mean, our goal has been over many years now to focus on strong regionally based operating providers. So that's really who we're trying to target. We think operators who have that presence in the marketplace that know their markets, that are not too diluted across different parts of the country, we still think that's an ideal operating partner for us. Some of the smaller companies, ironically, they have benefited from PPP funds as well as the ERC credit, which have been targeted towards smaller operators where some of the larger operators haven't had -- on the private pay side, haven't had the benefit of stimulus funds.

And sometimes the smaller markets, they don't have as much competition as the larger markets. I mean, larger markets, they have suffered greatly from oversupply. And so we really look at each individual asset and at market when we're acquiring, and we don't really have any blanket statements like we like only major metropolitan areas or we only like suburbs or we only like secondary markets, it's really on a individual basis that we look at our acquisitions.

Got it. And maybe just one last quick one for me. The Ignite purchase of this Texas, yes, why give the -- or maybe you can give a little background on the rationale behind giving purchase options have been between year 6 and 7?

I mean, I think it's just a function of looking at the opportunity and people have choices of capital providers, and we tried to provide some flexibility and Ignite has done a very good job of performing on assets we've had with them before the Texas acquisition. They performed very well on the Texas portfolio to date with occupancy ahead of our projections. And so I think for them, it's a way to capture value. And so we're willing to work with them on that.

And hopefully, we can find other transactions between now and then that we can -- maybe there's a way to modify that. Where we -- they buy a couple or we keep a couple. There's just -- there's different dynamics that come into play in building these relationships. This was an important aspect for Ignite. So we were willing to accommodate it and partner with them on this transaction.

Thank you, everyone. That concludes today's Q&A session. I will now refer you back to Wendy Simpson for closing remarks.

Again, thank you for joining us. We're very hopeful for the rest of the year, and we're very grateful to be where we are right now. Thanks for the attention you've given us. Bye-bye.