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Edited Transcript of LTC earnings conference call or presentation 10-May-19 3:00pm GMT

Q1 2019 LTC Properties Inc Earnings Call

WESTLAKE VILLAGE May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of LTC Properties Inc earnings conference call or presentation Friday, May 10, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clint B. Malin

LTC Properties, Inc. - Executive VP & CIO

* Pamela J. Shelley-Kessler

LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary

* Wendy L. Simpson

LTC Properties, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Karin Ann Ford

MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Richard Charles Anderson

Mizuho Securities USA LLC, Research Division - Former MD

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the LTC Properties First Quarter 2019 Analyst and Investor Conference Call. (Operator Instructions)

Before 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, 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, Chief Executive Officer. Please go ahead.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [2]

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Thank you, Chad, and welcome everybody to LTC's First Quarter 2019 Conference Call. Joining me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer.

After a few introductory remarks, I'll turn the call over to Pam who will discuss our financial results and the impact of a new accounting standard. I'll come back with an update on 4 of our operators and give guidance. Clint will follow with the discussion of our portfolio and operator performance. And then I'll conclude our prepared remarks with a brief ramp up before the question-and-answer session.

Although there has not been any meaningful change in industry dynamics since we last spoke with you in March, we remain optimistic with LTC's ability to capture future opportunities when a positive market shift becomes more prominent. While we're actively building our pipeline and evaluating multiple opportunities, closing transactions have been slower than we would like as a pricing disconnect remains between buyers and sellers.

As long as private equity continues to pour market into -- pour money into the marketplace, at what we believe are unreasonable valuations and risks this discount is likely to continue. However, as we did in 2018, we are strategically currently assessing this market to monetize some of our properties. That said, we're making good progress in several areas, and I believe our current initiatives will allow LTC to build an even stronger portfolio with solid regional operators, with whom we can grow into the future.

Now I'll turn the call over to Pam.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [3]

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Thank you, Wendy. Before I discuss our quarterly results, I'd like to explain the impact of recent accounting changes. Specifically, the adoption of ASC 842 that became effective on January 1.

I'd note that the impact of the new lease accounting guidance reduced the comparability of results between quarters. New lease accounting guidance requires that we record the property tax escrows we collect from our tenants as revenue with the corresponding expense. Accordingly, first quarter 2019 results include property tax revenue and expense, while the prior year comparative period does not.

Under the new guidance, straight-line rent is written-off to counter revenue rather than expense as under previous guidance. During the quarter, we transitioned the senior living communities operated by Frontier to a new operator and wrote off $1.9 million of straight-line rent related to the terminated Frontier lease to counter revenue in accordance with the new lease accounting guidance.

The new guidance also sets higher collectibility thresholds for recording straight-line rent. Under the new guidance, we performed an analysis of the collectibility of all rent owed to us on our leases through maturity. And determined that it was [now] 65% to 75% probable that we would collect 90% to 95% or substantially all of the lease obligations due from Anthem, Thrive and Senior Care and Preferred Care through the end of their respective leases.

Accordingly, we wrote off the straight-line rent and lease incentive balances associated with these pieces. Further the new guidance does not provide for general reserves for straight-line rent, so we wrote-off our 1% general straight-line rent reserve. These balances totaled $42.8 million and were written-off to equity effective January 1, as required by the transition guidance.

Under the new lease accounting guidance, collections of rent subsequent to the straight-line rent write-off are considered recoveries of amounts previously written-off, and are recognized as a [contra] expense rather than rental revenue, until the cumulative amount of the recovery recognized equals the amount of a straight-line rent written off. Thus, we recognized $9.6 million of cash rent received from Anthem, Thrive, Senior Care and Preferred Care as contra expense on the income statement.

Now I'll get into our quarterly results. Revenues decreased $6 million this quarter compared to a year ago, due to $9.6 million of rent received from Anthem, Thrive, Senior Care and Preferred Care, recognized as a contra expense rather than revenue.

A $1.7 million reduction due to properties sold in 2018, $1.9 million of straight-line rent written-off due to the Frontier lease termination and $1.6 million due to Thrive's failure to pay first quarter 2019 rent. These decreases were partially offset by $4.3 million in property tax revenue, $2.3 million in revenue from acquisitions, completed development and capital improvement projects, $777,000 in increased rent from Anthem, Preferred Care and Senior Care, and $1.4 million in deferred rent received from Thrive.

During the first quarter, Thrive paid $1.4 million of deferred rent and $740,000 of past due rent that was accrued and outstanding at December 31, 2018. Additionally, they paid property tax impounds for the first quarter, but have not paid rent to date in 2019.

NAREIT FFO was $0.475 per diluted share in the 2019 first quarter compared with $0.75 last year. Excluding one-time items, FFO was $0.77 per diluted share this quarter compared with $0.75 last year. The increase was primarily due to higher contra expense representing recoveries of amounts previously written-off and a $454,000 increase in unconsolidated joint venture income resulting from additional interest related to the payoff of a mezzanine loan on a property in Fort Myers, Florida, as well as lower interest expense, partially offset by lower revenues.

Net income available to common shareholders was flat compared to the prior year first quarter due mainly to changes in revenues, contra expense and unconsolidated joint venture income previously discussed, and lower interest expense offset by property tax expense.

The contra expense line item titled recoveries of amounts previously written-off represents $9.6 million of cash rent received from Anthem, Thrive, Preferred Care and Senior Care that under the new lease accounting guidance is considered a recovery of straight-line rent that was written-off as of January 1, 2019, in accordance with the transition guidance.

Interest expense decreased $362,000 from the prior year related to the repayment of debt under our senior unsecured notes.

In the 2019 first quarter, as I mentioned, we recognized $4.3 million in property tax expense in accordance with the new lease accounting guidance. In the prior year, property tax escrows were not required to be recognized as income and expense.

G&A decreased $226,000 due to lower accrued incentive compensation, partially offset by an increase in performance-based stock compensation vesting, legal expense and higher payroll taxes in 2019. We are currently estimating G&A to be in the $4.5 million to $4.6 million range per quarter through the remainder of this year.

During the first quarter of 2019, we funded a mezzanine loan that was originated in the fourth quarter of last year for the development of an independent living, assisted living and memory care community in Atlanta, and acquired an assisted living and memory care community in Abington, Virginia. Clint will provide additional details shortly.

We also funded $7.2 million in development and capital improvement projects on properties we own and $1.5 million under mortgage loans. During the first quarter, we received $3.4 million related to the prepayment of the mezzanine loan I discussed earlier which was accounted for as an investment [in] unconsolidated joint ventures. We borrowed $34.9 million under our line of credit to fund acquisitions and capital commitment, paid $4.2 million in scheduled principal pay downs on our senior unsecured notes and continued to fund LTC's $0.19 per share monthly dividend.

At March 31, we owned 2 properties under development with remaining commitments totaling $15.3 million and 2 properties under renovation with remaining commitments totaling $4.9 million. We also have remaining commitments under mortgage loans of $15.7 million, related to expansions and renovations on 7 properties in Michigan. And $1.7 million remaining under a preferred equity commitment.

Our balance sheet remains strong and provides us with substantial flexibility and the capacity to fund our current and long-term growth initiatives. We have just over $453 million available under our line of credit, $98 million under our [shop] agreement with Prudential and $200 million under our ATM program, providing LTC with total liquidity of approximately $751 million.

We expect to remain true to our conservative capital allocation strategy which has served us well. 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 first quarter, our credit metrics remained well matched to the Healthcare REIT industry average with debt-to-annualized adjusted EBITDA for real estate of 4.4x and adjusted -- and annualized adjusted fixed-charge coverage ratio of 4.9x and a debt-to-enterprise value of just over 27%.

Now I'll turn the call back to Wendy.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [4]

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Thank you, Pam. I'd like to provide an update on Senior Care Centers, Thrive, Anthem and Preferred Care, and then discuss our updated guidance. We've had a lot of work to do and progress is being made. I'll begin with Senior Care Centers which is working its way through the bankruptcy court.

The Court recently approved an extension through July 2 for Senior Care to [affirm] their leases and also approved the transfer of a number of properties owned by other landlords out of the portfolio. Should we get our properties back, we are prepared to quickly transition them to a different operator. Senior Care is current on their 2019 rent and escrows with us. And has been able to make some property improvements during the ongoing bankruptcy process. We're also preparing for the -- they are also preparing for the transition to the PDPL model. Coverage in the senior care portfolio was flat quarter-over-quarter on a trailing 12-month basis.

Regarding the Thrive portfolio, Pam mentioned, Thrive caught up on their 2018 rent as well as the deferred rent owed to us. While Thrive has paid their 2019 escrows with us, they have not paid any rents thus far in 2019. As such we issued notice of default and demand for payments to Thrive and its guarantors on April 5, which requires payment of approximately $2.6 million of past due rent through April.

We are continuing to evaluate all options related to the Thrive portfolio and recently engaged a broker to market our Jacksonville Florida building. We have entered into LOIs with 2 strong regional operating partner candidates for the other 5 properties. We will keep you apprised of our progress.

Anthem has paid monthly rent and escrows to date in 2019. For our forecasting, we have projected Anthem's 2019 rent to be approximately 45% higher than in 2018. We plan to revisit appropriate rent levels associated with the portfolio as we go forward.

Any revision in contractual rent cannot realistically be calculated until all of the properties have been stabilized for a period of time. So it'll likely be late in 2020 before we have greater visibility on stabilized rents going forward for Anthem.

Preferred Care operates 23 properties for LTC. We continue to work cooperatively with them to accommodate Preferred Care's interest in reducing the number of LTC owned properties under their operation. As a result, we're pursuing a sale initiative to market the majority of LTC Properties currently operated by Preferred. The remaining properties could continue to be operated by an affiliate of Preferred Care, released to another operator, marketed for sale or a combination of these options.

Before I turn the call over to Clint, I'd like to provide an update on our 2019 guidance. Assuming no additional investment activity, asset sales, financing or equity issuances, FFO is now expected to be between $3.02 and $3.04 per share for the full year, which is $0.02 higher at the midpoint than our prior guidance due to our implementation of the new lease accounting standard ASC 842.

Over to Clint.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [5]

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Thank you, Wendy.

I'll begin my remarks with a previously disclosed lease transition related to our Bakersfield and Vacaville, California buildings, [formally] operated by Brookdale Senior Living. Our new master lease agreement [within an] affiliate of Fields Senior Living became effective May 1 upon license issuance by the State of California. Master lease with Fields provides them with 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.

The annualized GAAP rent for 2019 from the Bakersfield and Vacaville communities is expected to be $2.6 million. Our relationship with Fields now includes 4 properties. We've also transitioned 2 senior housing communities, which total 180 independent living, assisted living and memory care units in Clovis, California from Frontier Management to Generations. The new master lease with a 10-year term with an initial -- with an annual initial cash rent of $2.9 million which is the same as the rent we were collecting from Frontier. The master lease rents are fixed for 5 years and includes certain credit enhancements.

The agreement also includes a purchase option for Generations which can be exercised beginning in 2024. Based in Portland Oregon, Generations is a regionally focused senior living company operating 5 communities in 4 Western states.

During the quarter, as previously announced, we closed a $16.9 million real estate joint venture acquisition with an affiliate of English Meadows Senior Living Communities, a new relationship for us. LTC contributed $16 million in cash for a 95% interest in the real estate joint venture. Initial lease rate is 7.4% and the JV is consolidated on our books.

English Meadows Abington campus which opened in 2015 is a 74-unit assisted living and memory care community in Virginia. Also this quarter we funded a $6.8 million mezzanine loan that was originated in the fourth quarter 2018 for the construction of Corso, Atlanta a 9 acre campus in the [bucket] area of Atlanta that includes 82 independent living units, 75 assisted living units, 26 memory care units and 21 independent living cottages. The campus which is expected to open in the winter of 2020 will be operated by Atlanta-based [George] Park Senior Living, a new operating partner for us. 5-year mezzanine loan bears interest at 12% with 8% current pay during the first 46 months of the loan with the balance accruing to note and 12% current pay thereafter.

Now [I] would like to update you on the progress of communities under development. As discussed on our last call, Boonespring of Boone County, a skilled nursing center in Kentucky opened and accepted its first 2 residents in early February. Occupancy as of this week is 45% which is ahead of pro forma. Hamilton House, a 110-unit independent living, assisted living and memory care development project in Wisconsin opened a few weeks ago, is at 10% occupancy as of this week. The community is being operated with Tealwood Senior Living.

Our remaining development project a 78-unit assisted living and memory care unit in Oregon, is expected to open on schedule this year. The community will be operated by Fields as part of a larger campus. The campus already includes a building with 89 independent living units currently operated by Fields in which we invested through a real estate joint venture in August of 2018.

Moving now to the portfolio numbers. Q4 trailing 12 months EBITDARM and EBITDAR coverage using a 5% management fee was 1.42x and 1.21x, respectively, for our assisted living portfolio. And 1.79x and 1.29x, respectively for our skilled nursing portfolio.

Thrive has been excluded from our assisted living portfolio numbers as we stopped accruing contractual rents for Thrive starting in 2019. Our coverage has stabilized and there are several industry events that could help driver coverage going forward, including PDPM which takes effect October 1 and the proposed provider tax, [billing] taxes that could be a positive for the 4 [profits skilled] nursing industry and for LTC.

A similar provider tax bill was recently signed by the governor of New Mexico that takes effect July 1 and includes a fairly substantial rate increase, while the bill needs to go to CNS for approval, there are no anticipated issues. Given the current approval process, actual payments are not expected until later this year or early 2020, but will be retroactive to July 1,

Lastly, I'd like to briefly comment on our pipeline. As Wendy mentioned, while we're patiently waiting for pricing to rationalize, we're working on building our pipeline through an ongoing focus on strategically identifying, quality growth oriented operating partners [and newer] assets, we're continuing to see some opportunities for smaller, stabilized [pilot pay] assets where prices have come down a bit, and have also found some interesting opportunities to invest in new skilled nursing centers that would [meet] our underwriting standards and strategy of attracting new operating partners, should we decide to pursue them.

Now I'll turn things back to Wendy.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [6]

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Thank you, Pam and Clint. We are continuing to execute on our plan, identifying strategic assets for purchase or sale, successfully resolving current portfolio challenges and building and maintaining a portfolio with embedded growth characteristics that will serve LTC well into future years.

When the current cycle turns, I am very confident we will be ready to move quickly with the solid foundation based on a more diversified asset and operator base. While the pace of change is fairly slow at the moment, we remain on solid ground. I am very optimistic about our future and our ability to build sustained value for LTC, our partners and our investors over the long term.

Again, thank you for your participation today. Chad, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [2]

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So Clint, you mentioned that may be pricing is [not] in the LTC zone currently. What kind of pricing -- may be shift in pricing have you seen over the past few months? And then what do you think that the right underwriting standards in skilled nursing are for you right now?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [3]

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I guess, to pick your last point on skilled nursing, we still have looked to underlying skilled nursing at a 1.5x coverage with a 5% management fee. That continues to be a requirement for us. We're also looking to invest in newer properties. And what we've seen over the last year have been a lot of older properties in the market and it's not been our focus. So that is where we are on skilled.

Pricing, in general, as Wendy mentioned in her prepared remarks, we've seen things stay in the market a little bit longer, because of the disconnect on pricing and we've seen some buildings come back around for the second or third time. So given that we've been very selective and patient waiting for the opportunities for [most] pricing to drop. We found some opportunities like the Abington campus in Virginia, where we found unique opportunity with a regional-based operator, a newer property that was stabilized.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [4]

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All right. And then just think about coverage on your overall portfolio? How should we expect coverage to shift over the next 12 months versus where they have been?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [5]

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Well, on the assisted living portfolio, I would think that would maintain fairly stable, that is what we've seen, haven't seen lot of changes on that. On skill, we have had decline over the last year or so, but with a change in PDPM, a provider tax, I mentioned in New Mexico, and some increased performance we hope that we will start to trend upward as we go forward into 2019 and 2020.

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Operator [6]

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

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [7]

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I guess, Wendy or Clint, I want to see if you could talk a little bit about Senior Care Centers? And I believe Wendy said that the coverage ratio was flat compared to the prior period. Can you tell us what that coverage ratio is?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [8]

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We talked about on our last call, it's about 1.25% rent.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [9]

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And that's EBITDAR?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [10]

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EBITDAR after a 5% management fee.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Okay. And how has that portfolio has been performing over the past few quarters? I guess, can you give us some idea of where occupancy is trending, skill mix, and if there is any issues with labor trend?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [12]

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It's been fairly stable, so really no noticeable difference on the last few quarters. So from occupancy to mix it has been stable.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Okay. And then can you talk a little bit about Preferred? I know you're working with them potentially filling some assets and/or releasing those assets. I guess, how that's going to work within the master lease? Do you have like a rent credit already kind of decided for the proceeds of those potential sales? How are you working through that?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [14]

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I mean, that's we have to work through with Preferred Care. If we sold majority of the assets and had a few remaining, we would have to negotiate what that ongoing rent would be for those properties that would remain in the portfolio, if it remains with Preferred Care.

So -- to be negotiated.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Okay. And then, I guess, finally, if you -- as you're looking at the current issues with Thrive. It's pretty good that they paid the rent back for 2018. I guess, what's the expectations for 2019? Have they given you any reasons why they haven't paid the 2019 rent yet?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [16]

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It's a function of cash flow at the communities. That's the main driver right now -- why they haven't paid the rents to us in 2019.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Okay. Are you still recording $1 million of GAAP rent from Thrive in 2019, is that still the expectation?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [18]

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No. We're not currently recording any rent from Thrive for 2019. We have, in our guidance, $1 million, more toward the back half of the year for that portfolio.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Okay. So no rents being recorded in 1Q and 2Q, and may be have a $1 million in the second half of 2019?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [20]

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Correct.

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Operator [21]

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Our next question comes from Rich Anderson with SMBC [Mizuho] .

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [22]

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Just to close the loop on Thrive. You mentioned, just $1 million in your guidance which is no change. But you also talked about this $2.6 million pass through April that you're sort of making -- taking a shot at. Can you explain -- is that upside then to 2019 if you were able to pull that off?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [23]

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So the $1.4 million that we receive this year, because of the new accounting guidance, it is showing as rent in that contra expense line item, recoveries of past amounts written-off. And that is part of the $0.02 increase in guidance is including that as revenue.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [24]

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I think Rich is(inaudible) -- and welcome back Rich. I think Rich is asking the default notes [indiscernible.]

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [25]

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So Rich, on the $2.6 million for the first 4 months, we -- this is part of the negotiation that we're working through with Thrive on this transition. And we have guarantees associated with this lease. And obviously don't want to negotiate in public and that's something that we're working through with Thrive regarding how we would resolve that.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [26]

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But if you're successful then there would be upside to FFO, that's not in guidance right now?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [27]

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That is correct.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [28]

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That's correct.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [29]

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Just a couple items here. Pam, you said there was a loan payoff I think you said $3.4 million, where is that in the income statement?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [30]

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Unconsolidated joint ventures.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [31]

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Okay. So it's not explicitly..

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [32]

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I'm sorry, so going forward that line item will be about $400,000-$500,000 less if we can pay off.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [33]

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All right. And then Clint you mentioned, mezzanine loan origination in the first quarter but I don't see it listed on your investment table on Page 5?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [34]

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Well, it was originated in 2018.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [35]

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Yes. Last year.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [36]

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It was funded this year, originated last year. The last on the loan origination list on the Atlanta, Georgia location.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [37]

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Okay. Got you. Last one from me. Obviously this lease accounting is kind of goofy, that's the word I can come up with, but no fault of your own. But the $9.6 million of - sort of carved out contra revenue expenses or whatever you call it, how repeatable is that? In terms of going forward as we think about setting up our numbers for the rest of the year? Are you basically taking the $42 million write-off that you mentioned, and just biting into that as you collect rent, and so we'll have a repeating line item there now for the rest of this year?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [38]

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Yes. That is exactly correct. There is - the onetime item in there is Thrive's payment, the $1.4 million. As mentioned they are not paying right now. We can expect that [to go] forward but all those are operated on a cash basis. So as we collect the cash, their rent will be reflected in that contra expense line item.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [39]

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All right. But once you get to the full $42 million, does that sort of say that's the end of the leases and you kind of start over again, because you'll get quickly to the $42 million at even a [pace of plus] $1.4 million?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [40]

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Yes. That is correct. It actually is only the straight line portions that we wrote off that is collected in there. That's $31.5 million. And currently if everybody's paying like they pay this quarter, we get there by the end of the year.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [41]

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Let's start the happy dance which is we have new operations in the Thrive properties and Thrive is not paying us back rent anymore. So the new operator's REIT will go up into the red line.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [42]

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Exactly. That goes back up to revenue.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [43]

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Correct. That makes it even more clear for everybody.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [44]

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Yes. Clears much.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [45]

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Clears much. And same with senior. If we get the properties back with new operators.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [46]

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They only relate to these operators, so to the extent that these properties go to new operators under a new lease that revenue is reflected back up in rental income.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [47]

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Okay. And then Wendy your speaking as if converting the Thrive assets to another operators or other operators is close to very likely or something like that, I mean, how would you describe that transition?.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [48]

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Yes. We do have the LOIs and we don't have - and so things are going well but you know how things go. The ops transfer agreements and getting licensure and all of that sort of thing is very labor-intensive.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [49]

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So of all those 4 only Thrive is the one that's not current on the rent, is that correct?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [50]

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Yes.

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Operator [51]

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Next question comes from Todd Stender from Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [52]

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The 2 facilities in Clovis, are they the Carmel villages, those 2 assets.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [53]

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That's correct Todd.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [54]

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They look like they were stabilized just last year, can you kind of describe what prompted the transition and maybe and how those are performing?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [55]

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I think they were stabilized by our definition of rolling [even] to stabilize the amount of time it lasted. There was still a lag on overall October occupancy in those communities and Frontier had some challenges I mean, they had to work with us on this. They had [focuses] elsewhere and we found a different operating company to come in and see opportunity at Clovis community so we were successful in transitioning to another operators who we think will be able to drive growth and occupancy.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [56]

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And no change in the rate scene? Same rental rate? It was just the purchase option, was that kind of a sweetener to just get a new operator in there at the same rate?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [57]

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The rent is fixed for 5 years but the initial rent is the same as we had with Frontier. The first option was a sweetener but we got some increased credit enhancements currently on the short-term for that. So it was win-win for I think LTC, Generations, and Frontier and it gives us the opportunity to work with Generations, who we've been talking to for a number of years and hopefully see more growth opportunities moving forward to Generations.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [58]

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Okay. And the SNIF, the recently developed SNIF Kentucky with Carespring. So that was kind of the only reference I had to see how long it takes to SNIF to maybe lease up? And that took about 19 months. Can you describe or maybe talk about the lease up period to achieve stabilized occupancy for this latest one?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [59]

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We're looking at 18-to-24-month period on lease up, but as I mentioned in my comment they are actually ahead of budget right now and as of this week, there is 45% occupancy at that nursing center. So we're excited about the traction that Carespring has been able to get. They are a strong regional operator in that marketplace, have a lot of relationships with hospitals and managed care providers. And they've done a great in leasing up that property ahead of pro forma currently.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [60]

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And - don't have that in front of me, I probably should. What's that lease up expectations or the yield, I should say, is that 8.5%,if I heard that right?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [61]

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Yes. That's correct.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [62]

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And then last one, the facility in Virginia, you just acquired, is that a triple-net lease. I know you talked about a joint venture, you've got bulk of the -- investment there, about 95%. Can you talk about the ownership structure there and what prompted the JV?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [63]

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Sure, no problem. It is a triple-net lease between the operating company and the real estate joint venture. Our real estate joint venture partner is common ownership interest (inaudible). So this was a situation where the operator was in a lease with another capital provider and they funded some operating losses start-up [in] building. So basically we've been able to credit that funding they had on the start-up of the operating losses to actual value on the real estate side.

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Operator [64]

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The next question will be from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [65]

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Yes. I was muted. I don't have much. I just want to ask about Thrive and what gives you confidence that when you transition to other operators that those operators are going to be able to generate more cash flow and rent than what properties are doing now. Is there something specific with operators in terms of maybe regional concentration or is there something else that would give you confidence that those assets can do better than what they're doing now?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [66]

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Sure. I think it's a great question, Dan. Thank you. The Thrive portfolio right now is spread out, pretty diversified on a geographic basis. And this included - some of the Clarity Pointe buildings into Thrive portfolio. So we found regional-based operators that we think will be better focused geographically on this, on the portfolio. Thrive is obviously still more in start-up phase. They've done a lot of development projects and the operating companies that we're working with - they have existing seasoned operations. So I think it will be good for their portfolio. And they [derive] a more stabilized platform portfolio to work from.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [67]

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Okay. And then in terms of the actual pipeline that's out there, it didn't sound like cap rates have moved any higher to meet your investment hurdles. I guess you are still finding plenty of private equity out there. I just wanted a little bit more color on may be the types of assets that you're seeing, the price points and may be whether it's leaning more towards senior or skilled? I know it's all in one question, are you seeing any value-add opportunities as well?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [68]

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I would say, Dan, more of the opportunities we're seeing on the private pay side, than skilled. As I mentioned in my prepared remarks we have identified a skilled opportunity that would be newer properties which we find very interesting. But the majority what we're seeing is on the private pay side anywhere from one-off assets to some portfolios there is combination of value-add, but on the value-added people are looking for pricing that's based on stabilize as opposed to value-adds. So that's [where] we're seeing cap rates still with private equity, as Wendy mentioned in her comments, still very strong. And since we're focused on investing on a triple-net lease as opposed to [ideal] structure where the cap rates are compressed in the 6% to 7% it's hard to make to work with coverage at our (inaudible)

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Operator [69]

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

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [70]

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I wanted to ask about potential disposition cap rates. I guess you're not collecting rent on Jacksonville currently. So no cap rates there. Potential asset sales from the Preferred portfolio, what should we expect on -- just a range on cap rates?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [71]

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We are running through that process right now. We have packages out. It's hard to give exact a cap rate right now on where that will end up but we have packages out and waiting for offers to come in the next probably 30 to 45 days in that portfolio. So we can provide an update on what we're seeing on that on the next call. But right now we are seeing that pricing has been strong on the assets, and so we're hopeful that we will come across this strong number. We've leased the Preferred care assets. This is not actually new, we're looking at selling these assets. We actually approached Preferred Care a number of years ago, prior to them filing bankruptcy and even during the course of bankruptcy to strategically work with them on recycling capital and selling the assets back to them. So when it comes to the Preferred Care portfolio it's something we've been looking at for a number of years.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [72]

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And how big could the disposition volume be later this year?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [73]

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I can't give that number right now. But we do have, as Wendy mentioned, the majority of Preferred Care portfolio that would be on the market and we also have the Jacksonville community, which you mentioned being marketed.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [74]

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And last question. Just on the Wisconsin development that opened. You said it was 10% occupied. It looks like you deferred the rent inception from 2Q '19 to 2Q '20. Can you just talk about that?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [75]

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We did. It's related to the new lease accounting standard that requires an assessment of 65% to 75% probability that you'll collect 90% to 95%.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [76]

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These are mathematically [speaking that] out.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [77]

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All the cash flows through maturity of the lease. And given that, that is a property in lease up and we don't have visibility into the exact date of stabilization, we have decided that we will not record straight-line rent on that property until we have that collectibility certainty through the end of the lease, which -- I would imagine at stabilization we could probably be more prepared to make that assessment. So during the lease-up period we will not be recording straight-line rent on that.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [78]

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I would ask this...

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [79]

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Excuse me, Karin. We were getting clarification on 842. So if we decide Tealwood we can start doing straight-line rent in 2022. We pick up all the prior -- [also all this and we get this --]

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [80]

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Yes. As it's currently written. I'm not sure how well it was thought through, because common sense would say that you would straight line from that point that you determined future revenue is collectible. But as the rule is written you go back and recapture all that straight-line rents. So that will be an enormous pickup that makes no sense. But --

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [81]

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I just want to clarify that because (inaudible)

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [82]

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(inaudible) so clear. I suspect given the difficulties REIT have had in implementing new lease accounting standards and kind of the things that have cropped up, I think, [disclaimer barring any] consequences I suspect that (inaudible) will be issuing clarification on certain things because it was not clear a lot of ramifications of implementing all parts of this new rule.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [83]

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And just to clarify, it was always intended in that deal that Tealwood would not playing cash rent until stabilization or they were just going to be booking straight-line? Or...

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [84]

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They have deferred -- a certain amount of deferred bank credits. Yes. I mean, that's in almost all these establishments. They don't start paying day 1. You have a certain amount of free rent and deferred rent. And so under the old guidance, we would have been recording straight-line rent at O, that's what we always did. Under the old guidance that's what was prescribed.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [85]

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Got you. And there is -- so there is no change to the agreement you had with Tealwood on that front?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [86]

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No.

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Operator [87]

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The next question is a follow-up from Richard Anderson with SMBC Mizuho.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [88]

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Sorry, I think, there was a 90% to 95% chance I'm having a cocktail tonight.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [89]

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We feel. We feel.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [90]

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I just have one question follow-up, Pam, you mentioned that some amount of onetime-ish in the $9.6 million, is there any onetime-ish type of number in the property tax that you carve out now?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [91]

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No, there's not.. And it's $1.4 million that's in the recovery that contra expense line item, that's the Thrive deferred rent that we received this quarter. That I'm not anticipating us getting that, again. We've actually called it a nonrecurring item on our FFO reconciliation. So -- there is, - every - should be all things being equal to this quarter, should be similar [asset backed].

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - Former MD [92]

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Right. Right. So the property tax will just kind of grow as they normally would?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [93]

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Yes. Property tax will be recurring item. I don't see them changing their mind on that one.

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Operator [94]

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Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Wendy Simpson for any closing remarks.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [95]

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Thank you, Chad, and thanks everyone who has listened to our comments and we look forward to updating you as we approach the end of the second quarter. Have a great day, and have a great weekend.

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Operator [96]

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