LTC Properties Inc (LTC) 2022 Q1 法說會逐字稿

Hello, and welcome, everyone. On today's presentation, there will be an opportunity to ask questions. (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.

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

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

Our industry is seeing evidence of the recovery slowly coming together, and we are hopeful about turning the corner on COVID. As a REIT-based industry, I believe the long-term picture for our industry remains positive based on solid demographics and fundamental needs for the care of our senior population. For the large majority of our industry, however, there was some distress felt in the first quarter as operators continued to deal with hurdles such as labor pressures and inflation.

More recently, announcement of potential trimmed skilled nursing Medicare reimbursement levels added another layer of complexity for the skilled nursing industry. However, occupancy is increasing in several markets and temp agency utilization appears to be dropping. Several of our private pay operators have implemented rent hikes to offset higher labor and supply costs. None has reported pushback from residents or their families. I believe that we are steadily moving towards a pre-pandemic environment.

LTC has operated successfully through decades of market and real estate cycles, and we have always supported our operators as we both surmounted industry challenges. This environment is no different. So far in 2022, we have successfully put capital to work for our shareholders, and our opportunities are more robust than they recently have been. Clint will talk about our pipeline in more detail later, but to summarize, we closed approximately $77 million in investments year-to-date, and have identified several additional strategic investments that will advance our growth.

I'd now like to share some stories from our operators with you. I've been spending time with them recently, both in person and virtually, and it has been very inspiring. I'll start with our partner, HMG Healthcare, who recently presented their Star of the Year award to an employee at our Lone Star Rehabilitation & Wellness Center in Stephenville, Texas. Misty Griffin who was chosen for the award among employees for the HMG centers has been helping care for patients for more than 2 decades. What's especially noteworthy is that HMG recognized Misty’s seniority as a former senior care employee. Misty was presented with a new car in recognition of her embodiment of HMG's values and mission of taking care of people.

One of the reasons we are working with HMG is because of their great culture. Misty and this award exemplify that. I recently toured Corso Atlanta with our operating partner, Galerie Living. Built as Atlantis's most luxurious senior living community, it definitely lives up to that description. It is truly spectacular. Our investment with Corso Atlanta demonstrates how mezzanine financing allows LTC to be part of a very large and impressive project, all while expanding our relationships with excellent regional operators and generating positive returns.

Finally, we are honored to be mentioned in a recent book written by Cindy Baier, CEO of Brookdale Senior Living titled, “Heroes Work Here: An Extraordinary story of Courage, Resilience, and Hope from the front lines of COVID-19.” The book provides a behind-the-scenes look at how Brookdale has navigated the COVID-19 pandemic. One of the things that makes this book so interesting to me is that LTC is featured as a flexible capital partner, something on which we pride ourselves. A few months into the pandemic, we worked collaboratively with Brookdale to consolidate 4 leases into one master lease. As Cindy said in the book, “true collaboration is focused on finding solutions that work for both parties and a renewed commitment to our partnership cornerstone, we were able to achieve a positive outcome that protected Brookdale's interest in the midst of substantial uncertainties.”

I'd now like to provide a brief update on Anthem. Last quarter, I described the strides they have made since we first reported on their challenges several years ago. Since our fourth quarter call, we have learned that Anthem has experienced an occupancy decline and cost increases resulting from a surge of the Omicron variant in Q1 that made it difficult for them to pay the full second quarter cash rent of $2.7 million.

Anthem has experienced similar short-term occupancy declines resulting from surges of other variants and [rebuilt sums] rapidly in each case. We believe occupancy will recover and with Anthem's expected receipt of additional stimulus funds, we still anticipate receiving total cash rent from Anthem in 2022 of approximately $10.8 million, in line with prior guidance. However, we are lowering the rent we expect to receive from them in the second quarter to $2.1 million, but I anticipate they will be able to make up the shortfall over the remainder of the year.

We maintained our $0.19 per share monthly dividend during the quarter with a payout to shareholders of $22.5 million. Our FAD payout ratio decreased from the fourth quarter to 89% in the first quarter. Based on our recent investment activity and assumed rent payments from the former senior care and senior lifestyle portfolios, we expect our FAD payout ratio to continue to decline during 2022 and approach our target of 80% by the end of this year. Our guidance for the second quarter anticipates that FFO, excluding nonrecurring items for both periods, will be comparable to fourth quarter levels.

Before I turn the call over to Pam, I would like to spend a moment discussing our enhanced ESG initiatives. Not only are we focused on these initiatives at the corporate level, having formed both a board and an internal working committee to address issues that are the focus of ESG and diversity, we are working with our operators to help them understand how they can achieve successes by addressing ESG issues in their operations. We are establishing a voluntary program aimed at helping our operating partners become good corporate stewards by adopting socially responsible and sustainable practices.

The program begins with this key consultation with an expert third party to help operators better understand their options with respect to these initiatives and will focus not only on remediation efforts, but also on encouraging new methods for ensuring best practices with LTC providing attractive financing to facilitate changes. An added benefit is that oftentimes these initiatives help reduce costs in the long term, something in which I know all of our operators are interested.

Now I'll hand the call over to Pam.

Thanks, Wendy. Total revenue increased by $507,000 compared with the first quarter of 2021. Interest income from mortgage loans increased $1.7 million for the 2022 first quarter due to loan originations. Interest and other income increased $442,000, primarily related to mezzanine and working capital loan originations, partially offset by payoffs. However, rental revenue decreased by $1.6 million, primarily due to the former senior care portfolio transition, partially offset primarily by increases in revenue from properties transitioned from senior lifestyle and the prior year straight-line rent write-off. Interest expense, transaction costs, and property tax expenses were all comparable year-over-year, as was income from unconsolidated joint ventures.

Our provision for credit losses increased $363,000 compared with last year's first quarter, primarily due to the mezzanine loan origination and additional funding under our mortgage loans and notes receivable. 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 $775,000 due to higher incentive compensation, higher noncash compensation charges, and increases in overall costs due to inflationary pressures.

Net income available to common shareholders increased $633,000 year-over-year, mainly resulting from loan originations and the prior year's loss on sale of real estate, partially offset by the net decline in rental revenue previously discussed and higher G&A expense. Fully diluted NAREIT FFO per share for the 2022 first quarter was $0.60 compared with $0.62 in the 2021 first quarter. Excluding nonrecurring items, FFO per share was $0.61 this quarter compared with $0.65 in last year's first quarter. The decrease in FFO, excluding nonrecurring items, was due to the net rental revenue decline and higher G&A previously discussed, partially offset by higher revenues from loan originations.

During the first quarter, we funded a $25 million mezzanine loan secured by 5 communities providing a range of senior living services in Oregon and Montana. The long term is approximately 5 years with 2 12-month extension options and bears interest at 8% with an expected IRR of 11%. We also funded $9.5 million of a previously committed $25 million secured working capital loan to HMG, the operator to whom we transitioned the 11 former senior care properties. HMG paid back approximately $800,000 in the first quarter, leaving a balance of $18.6 million at March 31, 2022. We expect HMG to pay down an additional $7 million in the second quarter with further payoffs anticipated in the third quarter.

During the first quarter, we consented to the closure of a 48-unit memory care community we own located in Castle Rock, Colorado. This community was transitioned from senior lifestyle to a new operator during the first quarter of 2021. The lease with the new operator, which was expected to generate rent of $150,000 in year 2 of the 5-year lease was terminated as of April 1, 2022. The net book value of this property is $5.3 million, and we intend to sell it.

Regarding our former senior lifestyle and senior care portfolios, I'd like to provide some additional details on expected rents going forward. For the remaining 6 buildings in the former senior lifestyle portfolio under 2 separate 2-year market-based leases, we anticipate receiving $30,000 in the second quarter, $370,000 in the third quarter, and $480,000 in the fourth quarter. These amounts are in line with our prior quarter's assumption. Our expectation is that we will set more permanent rents sometime in 2023. The transition of the former senior care portfolio to HMG is slightly ahead of projections, primarily due to cost containment benefits projected in the third and fourth quarters.

Accordingly, we continue to anticipate receiving approximately $1 million in the second quarter but are now expecting higher rents in the third and fourth quarters of $2.5 million in each of those periods. As we move through the remainder of the year, we will be working toward amending and extending our HMG lease, which would include more permanent rents. As discussed on our last call, we transitioned 2 memory care communities in Texas, totaling 88 units to a current LTC operator in the first quarter. The new lease term is 2 years with cash rent starting in month 5 based on mutually agreed upon fair market rent. We recognized $282,000 of rents from these transition communities during the first quarter and anticipate reporting approximately $370,000 of cash rent during the second half of 2022, which is unchanged from last quarter.

During the first quarter, we entered into agreements to sell 2 assisted living communities and 1 skilled nursing center. Subsequent to the first quarter, we sold 1 assisted living community. First, as previously discussed, skilled senior living has exercised the purchase option on 2 assisted living communities in California totaling 232 units. Accordingly, we entered into an agreement to sell the properties of $43.7 million. The properties have a gross book value of $31.8 million and a net book value of $17 million. We expect to close the sale within the next week or so, and we anticipate recognizing a gain on sale of approximately $26 million in the second quarter.

During 2021, we recognized cash rent of $2.5 million and GAAP rent of $2.8 million from these communities. This represents an implied yield of 5.7% on the sales price. Second, we entered into an agreement to sell a 121-bed skilled nursing center in California for $13.3 million. The property is under a lease that matures in July 2022, has a gross book value of $4.6 million and a net book value of $1.8 million. We anticipate recognizing a gain on sale of approximately $10.5 million in the second quarter of 2022. During 2021, we recognized cash rent of $833,000 and GAAP rent of $764,000 from this property. This represents an implied yield of 6.3% on the sale price.

Finally, subsequent to the first quarter, we sold a 74-unit assisted living community in Virginia for $16.9 million. The property has a gross book value of $16.9 million and a net book value of $15.5 million. In connection with the sale, the current operator paid us a $1.2 million lease termination fee, which equates to 1 years’ worth of rent. We expect to recognize a gain on sale of approximately $1.3 million in the second quarter. This represents an implied yield of 7.1% on the sales price. Also, subsequent to the end of the first quarter, we acquired 4 transitional care centers in Texas with a total of 339 beds in mostly private rooms for $51.5 million. Clint will provide additional details shortly.

In summary, since the beginning of the year, we have invested $77 million to date. We have sold or are contracted to sell properties generating approximately $72 million in proceeds. Moving now to our debt activity, during the 2022 first quarter, we borrowed $47 million under our unsecured revolving line of credit. As of March 31, 2022, we had $157.9 million outstanding with $242.1 million available for borrowing under the line. Subsequent to March 31, we borrowed an additional $52 million to fund the acquisition of the 4 transitional care centers in Texas and repaid $18 million using proceeds from the sale of the 74-unit assisted living community in Virginia.

During the quarter, we paid $7 million in regular scheduled principal payments under our senior unsecured notes. As Wendy mentioned, during the quarter, we also paid $22.5 million in common dividends. Presently, we have $4.4 million of cash on hand, $208.1 million available on our line of credit with $191.9 million outstanding and approximately $200 million available under our ATM, providing us with ample liquidity of over $400 million. We have no significant long-term debt maturities over the next 5 years.

At the end of the 2022 first quarter, our credit metrics remain solid with a debt to annualized adjusted EBITDA for real estate of 6.1x and annualized adjusted fixed charge coverage ratio of 4.4x and a debt-to-enterprise value of 33%. Although our debt-to-annualized adjusted EBITDA for real estate metric remains higher than our long-term target of below 5x, we expect this metric to trend lower during the year with increased rent from the properties previously leased to senior care and senior lifestyle and as recent investments start producing current revenue, along with debt reductions from principal paydowns on our line of credit from asset sales and scheduled principal paydowns on our senior unsecured notes.

I'll close out my comments today with rent deferrals and abatements. During the first quarter, we provided $1.3 million in rent deferrals and $720,000 in rent abatements, again to the same small subset of operators that have been receiving assistance from us. In April, we provided a total of $376,000 of deferred rent and $240,000 of abated rent. Further, we have agreed to provide rent abatements up to 240,000 for each of May and June of 2022. Additionally, we agreed to reduce expected rent from Anthem by $300,000 for each of May and June 2022.

I'd like to provide some additional detail about the operator who represents the majority of deferred rent, this concentration is not in our top 10. During 2020, we consolidated our 2 master leases with this operator into one combined master lease and agreed to abate $650,000 of rent and allow the operator to deferred rent as needed through March 31, 2021. This combined master lease was amended during 2021 and 2022 to extend the rent deferral period through April 30, 2022. As such, the operator deferred rent of approximately $1.3 million for the first quarter of 2022 and $376,000 in April.

As of April 2022, the deferred balance due from this operator is approximately $6.6 million. We have not recorded this as revenue nor have we abated the rent. Our guidance does not include any revenue from this portfolio. We expect to address this deferred rent as we work with the operator toward a resolution for the portfolio.

Now I'd like to turn the call over to Clint.

Thank you, Pam. I'll start today with a quick occupancies update on the former senior lifestyle portfolio, which includes 18 communities. Occupancy at March 31, 2022, was 83%, increasing from 81% at January 31, 2022, the last date for which we provided information. For the 6 communities under 2 separate 2-year market-based rent leases, occupancy was 76% at March 31, 2022, up from 69% at January 31, 2022.

For the 11th property portfolio that has been transitioned from senior care to HMG, occupancy for the month of March 2022 was at 56% compared to 57% of January 31, 2022. Given the leadership changes made by HMG in several of our buildings, staffing issues that permeated the industry in Q1 and the transition of the buildings to HMG in the middle of the Omicron surge, we're comfortable with how HMG is addressing these issues as well as our focus on cost containment. Reflecting this optimism, as Pam mentioned, we revised our 2022 HMG rent guidance up $1 million from what we previously anticipated.

At the beginning of this month, we acquired 4 transitional care centers in Texas that are being operated by Ignite Medical Resorts, a current LTC operating partner. These buildings include a total of 339 beds, primarily in private rooms and our newer constructions, which helps to reduce the average age of our overall portfolio. The average age of these 4 buildings is just over 4 years. This fits well with our strategy of acquiring newer skilled nursing centers.

The lease term on the Texas portfolio is 10 years with 2 5-year renewal options. Beginning on the sixth lease year, through the end of the seventh lease year, Ignite has the option to purchase the portfolio. We expect to receive rent of approximately $1 million in each of the third and fourth quarters of 2022 and approximately $4.3 million during 2023. The rent will increase each year by 2% to 4% starting on the third anniversary of the lease based on changes in the Medicare market basket rate. This is a strategic acquisition with a strong regional operator.

Before moving to our portfolio members, I'm pleased to announce that subsequent to the end of the first quarter, we amended Brookdale's master lease to extend the maturity by 1 year to December 31, 2023. The renewal options under the new amended master release did not change, except for the term of the first rule option, which was reduced from 3 years to 2 years. Aside from the 2-year option, the amended lease also includes a 5-year renewal option and a 10-year renewal option. We also changed the notice period for the first renewal to November 1, 2022, through February 28, 2023. Additionally, we increased our $2 million capital commitment to $4 million and extended its maturity to February 28, 2023. It also included an incentive for qualified ESG projects. During the first quarter of 2022, we funded $215,000 under the new $4 million capital commitment with approximately $3.8 million remaining.

Now to our portfolio numbers, with my usual disclaimer that we don't 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 no longer qualify for our same-store metrics, so they are excluded from these numbers. Q4 trailing 12-month EBITDARM and EBITDAR coverage as reported using a 5% management base was 0.99x and 0.78x, respectively, for our assisted living portfolio. Excluding stimulus funds received by our operators, coverage was 0.88x and 0.67x respectively. For our skilled nursing portfolio, as reported EBITDARM and EBITDAR coverage was 1.12x and 1.46x, respectively, excluding stimulus funds, coverage being 1.57x and 1.12x, respectively.

Moving now to some recent occupancy trends, which are as of March 31, 2022, and are 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 63% of our total same-store private pay units and approximately 89% of our same-store skilled nursing beds. Private pay occupancy was 78% at March 31 and January 31, 2022, and 76% at September 30, 2021. For our skilled portfolio, average monthly occupancy was 73% in March of this year, 72% in January of this year, and 70% in September 2021.

Finishing up with our pipeline, as Wendy said, the pace of pipeline opportunities is robust and hasn't really slowed down since late last summer. Our pipeline is currently valued at approximately $70 million, and private pay and skilled nursing is geographically diverse and includes operating partners move to LTC as well as existing partners. The opportunities are also varied in terms of financing vehicles, including development joint ventures and mezzanine and mortgage loans. We believe strongly in LTC's ability to attract and close new opportunities driven by our ability to provide creative financing structures to bring new operator relationships into our portfolio while enhancing current relationships.

There is an incredible amount of capital in the market right now and LTC is successfully competing by offering an array of diversified products that are tailored to the needs of operators we otherwise might not think of a REIT for their financing needs. One such example was our $25 million mezzanine loan for the recapitalization of the 5 property seniors housing portfolio we discussed earlier. This investment allows the partnership owning the portfolio to buy out an equity fund. Another example is the $52 million acquisition we made in Texas, which broadens the footprint of an existing operating partner and deepens our relationship at Ignite. We never take a one-size-fits-all approach because one size does not fit all. We can offer specifically tailored financing structures based on operators' needs, giving us a nimble, competitive advantage.

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

Thank you, Pam and Clint. Our focus in 2022 is on a return to growth, and I believe we have taken and continue to take the steps necessary to position LTC as a capital partner of choice in today's market. Before I turn the call over to your questions, the entire OTC team would like to send our deepest condolences to the family of [Linda Goodwin], who recently passed away after a brave battle with cancer. [Linda], an investment advisor, was a champion of our industry and of LTC specifically. But more than that, Linda was a dear friend.

Operator, we're now ready for the questions.

(Operator Instructions) Our first question comes from Steven Valiquette from Barclays.

So I guess, needless to say the CMS decision to put the clawback for PDPM into the SNF rate for '23 is obviously a bummer for the industry. I guess over the past 10 years or so, there's been very little change from the proposed rate to the final rule each year. I guess my question is, do you think there's any chance that the trade groups like AHCA or others can lobby to either reduce the size of the clawback or maybe just give it, spread it out over a few years? Just want to get your updated thoughts around all this.

There's definitely an active approach by AHCA to reach out and have the opportunity to provide a comment. So we don't know what the outcome be, but there's definitely a large effort in the industry to do that. If you could be pushed out over a number of years, I think that would be considered positive, but there's a large effort underway, and we'll see how it goes. But a lot of people are participating in this. We talked to operating companies in the space, and they are very actively involved from encouraging employees to be able to write letters and not just canned letters, but letters providing specific details and feedback regarding the impact of this proposal.

The net of all of the changes this year is a 0.4% reduction because of these market basket increases, but I actually was really hoping that we can at least get the 4% reduction phased in over 3 years or so. They have good hope that we can do it. And from our operator calls, they're very, very active in getting these letters out to CMS and all of their Congress people for each of the states. So there's a possibility, but even with that reduction as we've talked to our skilled nursing operators, they were presenting here on fire situations. I'm happy about it with the increase in costs and that sort of thing, but they're not panicked about it.

Okay. So the way to answer it right now, it sounds like the primary rebuttal is that just had its phase, and so I guess it'd definitely help with us to hear that. Okay, I appreciate the color.

Our next question comes from Juan Sanabria from BMO.

This is [Valerie] on for Juan. So first question, how are your losses trending relative to last earnings, such as a talk to tenants and give this updated outlook on government support levels, what confidence level do you have that no new current issues would pop up or that deferrals and abatements are going to increase going forward?

Well, the encouraging item we see is providing deferred and abated rents has really been through a small subset of operators. We spoke about Anthem in our prepared remarks. As we've seen COVID cases decrease going into Q2 on the private pay side with rate growth is encouraging sales right now, as we indicated in our prepared remarks, and we're optimistic going forward, as cautiously optimistic.

And our abated rents for one of our operators, actually the assets are cash flow positive after a management fee. So it's not like the operator is cash flow or cash constrained. It just is a change in attention from the operator, so we're not concerned about having to give additional abated rent from that operator.

Okay. And following up on that, no additional transitions either.

No additional what?

Transitions...

Transitions?

The only additional potential transition, as Pam mentioned in her prepared remarks being one of the operators of the small subset that we provided deferred and abated rent. We're working on a resolution to that. So with that, we are working on a framework with that operator to facilitate the transition. So that is something that, as expected, with having deferred abated rent, there's got to be a resolution to that. So that's something that is in the works. The encouraging points of that as Pam indicated, the operator is not in our top 10, and our guidance doesn't include any revenue from this portfolio, but as Wendy mentioned, the portfolio is cash flow positive. So we're hopeful towards the end of the year, this portfolio will be contributing to that.

Yes. And for clarification, you were talking about deferred and not the abated?

Correct.

All right, got you. That makes sense. Moving kind of to a different topic. With rates moving where they are, do you see that pricing for senior housing and skilled nursing, it's shifting too? Is there any sign that cap rates could move higher? And would that kind of push the strategy to maybe a traditional fee simple acquisition versus more of the loan stuff that you guys have been doing?

We would love to see that. We are actually evaluating to be able to get that point. So right now, it's not there at this point. But obviously, we're hopeful that, that is a market environment that we'd be able to participate in. But in the interim...

We've been thinking that for a while.

Thinking and hoping.

There's just still a lot of…there's still a lot of money out there, and that's what's keeping the…I think the prices artificially high. They're not trading based on current NOI, they're trading on a future. So that's a hope note and that’s what we call it.

And we will now move to next question. The next question comes from Austin Wurschmidt from Key Capital Markets (sic) [KeyBanc Capital Markets].

This is Arthur Porto on for Austin. Just one for me. Sort of trying to understand how big of a percentage of your investment pipeline is comprised of SNFs and if the recent CMS ruling could potentially put deals on hold or if you might shift the new pipeline elsewhere as a result of that?

Sure. Right now, we have one opportunity working on a SNF, which is a development project with Ignite, which is in our supplemental. We provided them a loan to acquire a piece of land in Missouri, and so that would be a development project. So right now, that would be the one skilled asset that we're currently…an investment opportunity that we're working on.

Okay. And future opportunities, could that sort of change depending on what the CMS ruling sort of materializes...

We've indicated that on the skilled nursing side, we've really looked to invest in newer assets, and we have a unique opportunity. We feel very fortunate that Ignite brought us in on this transaction to be their capital partner of choice and that type of opportunity in the skilled space, private rooms, newer assets, strong regional operator. Ignite has done a tremendous job executing on their transitional care model. So those are opportunities we would very much like to participate in.

Our next question comes from Tayo Okusanya at Credit Suisse.

I want you to do in a little bit on the transition portfolio, senior lifestyle and senior care. It is unclear, it sounds like with HMG, you can correct me if I am wrong, things going out there. Are you actually expecting that they get $1 million more rent than you were initially anticipating? Am I understanding that correctly?

Yes. That is correct.

Okay. So I would say that additional revenue over and beyond the cash outlays you have had discussed in the fourth quarter?

It's in excess of the guidance we provided last quarter.

Yes.

I am sorry, say that again?

It effectively increases our guidance from $5 million that we gave last quarter, now upping that to a total of $6 million for 2022.

Great. Okay. And then for the senior lifestyle, can you talk a little bit about what's happening with those transition assets? It sounded earlier on like I was into one of those assets where you said (inaudible) for the new operator?

We have a couple of different…a total of 18 bodies in total with former senior lifestyle portfolio, 6 of the buildings are under market-based quarterly rent resets. And the other properties have fixed increases based on the various annual renewals on those. So right now, I gave information regarding the occupancy growth that we're seeing in that portfolio and we're very encouraged to see that there has been an uptick in occupancy across the portfolio of those 18 properties.

And rent guidance remained unchanged this quarter, we are reaffirming those numbers we gave last...

Again, based on your commentary that there was one skilled asset where you ended up terminating the lease and selling the asset instead...

Sure. There was one property that we had transitioned from senior lifestyle to an operator in Colorado. It is a building in Castle Rock, Colorado. It was a freestanding memory care community, and we transitioned that to a local operator, and they invested equity dollars to support operations to try to make improvements. I think that property has been challenged from a reputational standpoint over the years. And unfortunately, this regional operator was not able to get the traction they were looking for and didn't have the depth of equity to be able to continue to fund operations. So at that juncture, it really was at a point where it was better to close the property, and we're going to move forward with selling that asset. Pam mentioned our net book value is approximately $5 million, and we'll look to sell at the highest and best use, and right now, we have no revenue in our model for that.

(Operator Instructions) Our next question comes from Michael Carroll from RBC Capital Markets.

I just wanted to drill into HMG a little bit. I know Wendy kind of talked about this in her prepared remarks and the improved rent collection assumptions. What specifically, I guess, drove that rent increase? I mean I'm assuming that they've been able to integrate that portfolio into their platform more seamlessly than you previously expected? Can you talk a little bit about that?

Sure. When they took over the buildings, it's a high amount of agency usage. As you can imagine, there has been a lot of disruption in the senior care operational. So it's really just going in and finding the appropriate leadership in the building. There has been a lot of agency usage in these buildings. So it's really coming in from HMG's perspective and bringing their culture into these buildings, and Wendy spoke to HMG's culture in her prepared remarks, and it takes time to be able to put that in place to transition and sell.

Last time based on where we were at, we guided to the $5 million, as we've worked with HMG to understand the progress they've made as far as occupancy mix, cost containment, that's where we got to play and felt upping guidance by the $1 million for all of '22 made sense at this point in time. And we'll continue to revisit that on a quarterly basis based on where HMG's out on a performance aspect.

And where are you assuming that HMG can start paying cash rent? I know they've been a little backlogged by some of the senior care type stuff. I mean, should we assume that's going to happen in Q2? I mean do you have that included in your guidance? Or is this really a second half, I think.

We've included $1 million in the second quarter in guidance and then $2.5 million in each of the third and fourth quarters.

Okay. Great. And then I guess, Clint, you also talked about you're starting to think about establishing a more permanent rent on those facilities. I mean how are those discussions going? I mean should we learn more about this next quarter, or kind of what's the thought process behind that?

Yes. I would say in fourth quarter, and right now, we did a 1-year cash flow lease with HMG through the transition. And so we will be working to extend that lease and working on more permanent rents with HMG. And so look for more guidance on that as we go through the year, but that would probably be more towards the end of 2022.

Okay. And then related to the assisted living tenant that has the larger deferrals, are they expected to pay rents sometime in the second quarter? I guess, can you kind of talk a little bit about what's going on with that? And I know in the supplement in your prepared remarks, you kind of implied that you expect to resolve that deferral and with that kind of restructure the release or that relationship? I mean, what does that mean? Are you trying to do something bigger there? Or what's the thought process behind that tenant?

So I spoke to this previous in Q&A. And so we have a framework with the software to work towards the transition. So that's what I spoke about earlier. I would not expect any rent from the existing operator, but we are trying to facilitate a transition on or before July. We're hopeful towards the end of the year, as I mentioned, this portfolio is cash flow positive, and we do not have any rent from this portfolio in our guidance, but we're hopeful towards the end of the year that it could evolve into contributing to revenue.

And then one more thing on that, we go through the transition and we work with the new operator to evaluate, which buildings you want to keep long term and which buildings do we make sense to recycle capital. So there will likely be some asset sales resulting from this portfolio. But as we've demonstrated in the past, we've been an advocate of recycling capital on assets. So there will likely be asset sales out of this portfolio, which would occur later in the year to the first quarter of '23. But again, we don't have any guidance of revenue in our model for this portfolio.

Okay. And then with the currently rent that's deferred, is there any opportunity to collect that as you kind of close this down? Or is that something that is going to be written off?

We are working through the transition right now. But as Pam mentioned, we have not recorded that into revenue. And so we haven't debated it. We're actually actively going through the resolution right now, but I wouldn't count on that.

And to clarify, there's no receivable on the balance sheet for that. It is not recorded. This operator has been on a cash basis as well...

It's a contractual obligation, but not a receivable on the balance sheet.

Okay. That makes sense. And then just last for me, the 2 transition memory care assets, I just want to make sure I understand this correctly. So they paid rent in the first quarter, I think you put it out in the press release, the amount. You don't expect anything in the second quarter and then I think the remaining $300,000 is going to be collected in the second half of the year. Is that correct?

Yes, that's correct.

At this time, there are no further questions. I now would like to pass back over to Wendy for any final remarks.

Thank you all for joining us today. I wish you a very happy spring with little COVID impact and we'll talk to you in the summer. Thank you very much...

Thank you, everybody, for joining today's conference call. You may now disconnect your lines.