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Edited Transcript of LTC earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 LTC Properties Inc Earnings Call

WESTLAKE VILLAGE Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of LTC Properties Inc earnings conference call or presentation Friday, August 9, 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

* Douglas Andrea Christopher

Crowell, Weedon & Co., Research Division - Research Analyst

* Kathleen Noel Morgan

KeyBanc Capital Markets Inc., Research Division - Associate

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* 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 day, and welcome to the LTC Properties' Second Quarter 2019 Analyst and Investor Call. (Operator Instructions)

Before management begins its presentation, please know that today's comments, including the question-and-answer session, may include forward-looking statements subject to risks and uncertainties that may cause actual results and events to differ materially.

These risks and uncertainties are detailed in LTC Properties' filings with the Securities and Exchange Commission from time to time, including the company's most recent 10-K dated December 31, 2018.

LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Please note that this event is being recorded.

I would now like to turn the conference over to Ms. 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, operator, and welcome everyone to LTC's 2019 second quarter 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, then to Clint, who will discuss our portfolio, operator performance and the pipeline. I'll come back to conclude our prepared remarks before the question-and-answer session.

LTC has made significant progress in resolving the challenges we've discussed. We are confident that at the end of the year, the challenges under our control will be behind us, putting LTC in a great position to devote more focus on future growth from a base of a strengthened portfolio. I'll provide brief updates on Senior Care Centers, Thrive, Anthem and Preferred Care. I'll end my comments with guidance.

I'll start with Senior Care Centers, which is the one issue over which we have the most limited control, as they continue to work through the bankruptcy process. Senior Care Centers recently filed a motion to assume the LTC lease. And we filed an objection shortly thereafter. In the interim, Senior Care Centers remains current on their 2019 rent and escrow amounts. Coverage in the Senior Care portfolio was essentially flat on a quarter-over-quarter, trailing 12-month basis.

Moving to Thrive. The entire portfolio has been successfully transitioned. As previously disclosed, we transitioned 3 of the 6 properties on June 1, and completed the transition of 2 additional properties on July 1. The final property has been transferred August 1, and Clint will talk more about this transition later.

Now at Anthem. Their operations continue to improve, and they are meeting our increased rent expectations as reflected in our 2019 guidance. As we have said before, we cannot appropriately establish formalized contractual rent levels associated with the Anthem portfolio going forward until we can realistically calculate rent once all of the properties have been stabilized for a period of time. As a result, it will likely be late next year before we have greater visibility on future stabilized rents.

I'll finish my portfolio discussion with Preferred Care, which operates 23 properties for us. As discussed last quarter, we have been working to reduce the number of LTC-owned properties under their operation. We are in active negotiations for all of these properties. These negotiations continue to include both possible sales and leases.

Before I turn the call over to Pam, I'll discuss guidance for 2019, which we are maintaining at $3.02 to $3.04 for the year. Although we are receiving higher rents from that transitioned Thrive properties sooner than originally anticipated as well as income from new investments, we are lowering our projections for income from unconsolidated joint ventures due to the nonaccrual status of our preferred equity investments that Pam and Clint will discuss in their comments.

Additionally, the timing relative to transitions around Preferred Care assets is not yet certain. While we have not included any sales assumptions in our portfolio guidance, it is possible that we will sell some or all of the Preferred Care portfolio prior to year-end. As we will have more visibility into the timing of net sales proceeds and/or future rents from this process next quarter, we are postponing an update to guidance until that time.

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. Since our last earnings call, the FASB has allowed 2 approaches for recognizing recoveries as previously written-off straight-line rent under the new lease accounting guidance. Accordingly, we no longer show a contra expense for recoveries of previously written-off straight-line rent. All such recoveries are in rental income, which increases the comparability and transparency of our result.

Revenues increased $4.8 million for the 2019 second quarter compared with the year ago. $3.9 million of the increase is due to property tax revenue recorded in accordance with the new leased accounting guidance that requires us to record the property tax escrows we collect from our tenants as revenue with the corresponding expense. Accordingly, 2019 revenue includes property tax income while 2018 does not.

The remaining $900,000 increase is due to revenues from acquisition, mortgage origination, completed development projects and capital improvements, increased rent from Anthem and a decrease in lease incentive amortization partly offset by decreased rent from Thrive in 2019 and properties sold in 2018.

NAREIT FFO was $0.75 per diluted share for both the 2019 and 2018 second quarters. Net income available to common shareholders decreased $48.3 million from the prior year quarter due to a higher gain on sale of $47.8 million in last year's second quarter, a decrease in income from unconsolidated joint ventures of $598,000, $592,000 higher depreciation expense and $194,000 higher transaction cost partially offset by the $900,000 increase in revenue previously detailed.

Income from unconsolidated joint ventures decreased $598,000. $77,000 of this decrease was due to a mezzanine loan that paid off last quarter, and $521,000 of the decrease was due to a preferred equity investment converting to nonaccrual status.

In the second quarter, an affiliate of Senior Lifestyle did not make the full contractual preferred return payments to us and became 60 days past due. During the third quarter, we received most of the remaining preferred return we had accrued, but as yet, we have not received second quarter amounts due, so they remain on a nonaccrual basis. Clint will provide more detail on this investment.

In the second quarter, we recognized a $500,000 gain on the receipt of escrow deposits related to the 2018 sale of 6 senior housing communities previously operated by Sunrise. Both interest expense and G&A were comparable between the 2 periods. We currently estimate that G&A will be in the $4.6 million to $4.7 million per quarter through the remainder of this year.

During the second quarter of 2019, we funded $7.5 million of additional proceeds under an existing mortgage loan with an affiliate of Prestige Healthcare, secured by 2 skilled nursing centers totaling 205 beds in East Lansing, Michigan. The additional proceeds bear interest at 9.41% for 2 years, increasing 2.25% thereafter. We also funded $6.9 million in development and capital improvement projects on properties we own, $781,000 under mortgage loans and continued to fund LTC's $0.19 per share of monthly dividend for a total of $22.6 million in dividend payments.

At June 30, we owned 1 property under development with remaining commitments totaling $10.2 million, and 2 properties under renovation with remaining commitments of $4.6 million. We also have remaining commitments under mortgage loans of $14.9 million related to expansions and renovations on 7 properties in Michigan and $1.7 million remaining under a preferred equity commitment.

Subsequent to June 30, we borrowed $12 million under our line of credit and repaid $8.5 million in scheduled principal paydowns on our senior unsecured notes. In keeping with our philosophy, we are maintaining a strong balance sheet to provide us with ample flexibility and capacity to fund current and long-term growth initiatives. We currently have $441.1 million available under our line of credit, $105.5 million under our shelf agreement with Prudential and $200 million under our ATM program, providing LTC with total liquidity of approximately $746.6 million.

Our long-term debt 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 second quarter, our credit metrics remained well matched to the healthcare REIT industry average with debt-to-annualized adjusted EBITDA for real estate of 4.5x and annualized adjusted fixed-charge coverage ratio of 4.8x and a debt to enterprise value of 27.1%.

Now I'll turn the call over to Clint.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [4]

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Thank you, Pam. I'll begin my discussion with the Thrive portfolio. As Wendy mentioned, the entire portfolio has been successfully transitioned with the final community in Jacksonville, transferring operations to Affinity Living Group on August 1. Affinity now operates 2 properties owned by LTC. The Jacksonville property, a 60-unit memory care community, was leased to an affiliate of Affinity under a new 10-year lease. The new lease provides of a lessee 12 months free rent, increasing to $450,000 in year 2 and $600,000 in year 3 and thereafter. In year 2, the lessee have the option to defer rent and amount not to exceed $150,000. Rent may increase subject to a contingent escalation formula commencing in year 3 and annually thereafter.

Next, I'd like to update you on the progress of our newly developed and still to be completed communities. Boonespring of Boone County, our 143-bed transitional care center in Kentucky is now up to 67% occupancy as of July 31, which is ahead of projection and is up from 45% as of our last quarterly call. Boonespring opened in February of this year.

Hamilton House, a 110-unit independent living, assisted living and memory care community in Wisconsin is now at 16% occupancy as of July 31, up from 10% as of our last call. Hamilton House opened in May of this year. Weatherly Court a 78-unit assisted living and memory care community in Oregon is still under construction and remains on track to open later this year.

The preferred equity investment on nonaccrual status, Pam mentioned, includes 2 locations in Arizona. The first location is a 28-acre campus in the Phoenix metro area with 432 units offering independent living, assisted living and memory care services spanning 3 buildings. The second location is an assisted living and memory care community in Yuma with the 148 units. LTC entered into this investment with an affiliate of Senior Lifestyle in 2015 and LTC's investment balance as of June 30 is $24.3 million. The 2 locations are under a letter of intent with a likely closing expected to occur some time towards the end of the year or in Q1 of 2020.

From the net sales proceeds, LTC expects repayment in full of the $24.3 million investment. Based on forecast of net operating income for the remainder of 2019 provided by Senior Lifestyle, we anticipate additional income to be paid to us in 2019 of approximately $600,000. But given the nonaccrual status, our guidance does not assume any such additional income.

Moving on to the portfolio numbers. Our coverage remains stable. Q1 trailing 12-month EBITDARM and EBITDAR coverage moving at 5% management fee was 1.43x and 1.21x, respectively, for our assisted living portfolio and 1.77x and 1.28x, respectively, for our skilled nursing portfolio.

Now I'd like to briefly comment on our pipeline. We have identified a few interesting opportunities, primarily where we can strategically add quality growth-oriented operators and to improve the average age of our portfolio. We currently have 2 signed purchase agreements totaling approximately $38 million. Owners for the purchase of a newly constructed 90-bed skilled nursing center in the Kansas City market that is 90% occupied and is operated by Ignite Medical Resorts, the new operator for LTC. This transaction is expected to close in the current quarter.

The other is for the acquisition of a land parcel and development of a new 90-bed skilled nursing center also to be operated by Ignite in the same market. The land parcel acquisition is expected to close this quarter with groundbreaking shortly thereafter. Completion of the project is slated for the fall of 2020.

Both of these transactions were off-market, being source through a long standing relationship we've built with Avenue Development, who'll be handling the development and construction of the new property. Avenue is a well-respected full-service development company that focuses on health care and senior living.

We are reviewing other opportunities as well, spanning acquisition in real estate joint ventures, primarily in the assisted living and memory care space with operators new to LTC.

We will update you as our activities progress. Now I'll turn things back over to Wendy.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [5]

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Thank you, Pam and Clint. Coming back to my opening comments, we have made significant progress in resolving the portfolio issues we have faced. I am very proud of our team who has helped bring these issues to resolution while also remaining focused on continually positioning LTC for future value creation. We are continuing to successfully execute our plan and are confident that the current portfolio challenges under our control will be fully resolved by the end of this year or early next year. At the same time, we have been working towards building a more diversified asset and operator base and positioning LTC to deliver long-term and sustained growth.

Thank you for joining us today. Operator, 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) And our first question comes from Jordan Sadler of KeyBanc Capital Markets.

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Kathleen Noel Morgan, KeyBanc Capital Markets Inc., Research Division - Associate [2]

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This is Katie on for Jordan. I appreciate all the color you guys gave us on your portfolio, but I wanted touch on -- I think you guys have some Brookdale renewals coming up next year. If you guys can offer any additional color on that?

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

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This is Clint. We do have the current term for the Brookdale leases expire at the end of 2020. And Brookdale's not yet in the renewal window. That would open up in the first part of 2020. And given the performance and coverage, our expectation is that they would extend the lease to the -- a renewal term.

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Operator [4]

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Our next question comes from Chad Vanacore of Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [5]

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So now that you've transitioned all your Thrive, they had owed you some past due rent. Were you able to collect any of that? Or do you expect to collect any of that in the future?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [6]

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Chad, this is Clint. We had -- they owed us rent from 2018 which we did collect in 2019. They did not pay rents in 2019 to facilitate the transition of the properties to new operators who provided a note to them to assist in some of those transition costs. We have guarantee and security interest to full repayment of those funds, in which we've made the line of credit available. So at this point, we feel confident we'll be able to collect on those amounts that are due to us on the note relating to the transition.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [7]

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Okay. Excellent. And then at the properties that you've transitioned in the past 6 months, how are they faring, so far, under the new operators? There was Frontier, there was a few with Thrive, there's some here or there. But in general, what's the direction should we expect the NOI to really be a slog for the next 12 months? Or had some showing some kind of improvement really, kind of on a short basis?

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

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In some of them stable improving, there's been some decline in others. It's just been -- it's been a little bit of a disruption when you have a transition. But the operators we brought in to these communities, although excited about the opportunities, anything -- but it takes a while to change culture and build a presence under that brand in the marketplace.

So I mean we feel confident that the operators that we're working with, that are -- that have now taken over those communities will be able to make progress. How much time it'll take? It's to be seen but I mean everybody's been -- we've been encouraged by people's interest in these communities, and we think over time that we'll grow.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [9]

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I think basically, Clint, the operators are now in the transition properties are better capitalized than Thrive. And so they have a base of that. The multichallenge property, as you comment to it was Jacksonville. And so we gave a year's worth of free rent. And I expect that, that will do very well. The operator Affinity is a very well known and an established operator, and they're very excited about having that property. So I think we are very comfortable with the operators that have transitioned. In fact, the people who took over the Baker [back] from Brookdale have some deferred rent opportunity and they -- this current period, they haven't used that deferred rent. So that's doing better.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [10]

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All right. And Wendy, just on Jacksonville, why aren't you just keeping it rather than -- or why are you not rerenting it rather than selling it?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [11]

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Yes. So the prices we were getting were not indicative of the value of the property because of the feeling that we were up against a wall. And everything that came in relative to the market in Jacksonville and the growth in Jacksonville and all of the forward-looking information was very positive. So we decided that for our future portfolio, it was -- it made much more sense for us to keep it and get the right operator in there. So that's why we did it. It wasn't an easy decision. I mean it's easy to say, let's just take the locks and walk away. But it was just such a badly run property that we had a lot of faith in the market and the property.

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Operator [12]

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Our next question comes from Rich Anderson of SMBC.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [13]

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So on Thrive, can we kind of aggregate this all up? I tried to do the math. It looks like the new cash rents, once you kind of get to the cash paying story for all 6 is, call it, $3.5 million to $4 million per year. I don't know if I got that right, I did it quickly, but I think that's right. And does that compare to cash rents prior to all this, sort of, starting of $7 million? Is it -- could we say that the change from pre and post kind of transitions with $7 million to $3.5 million in annual rent?

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

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Good question, Rich. So right now, we were phasing in rents on the property. So right now, when we get to the third year, we're at rental, about $5.2 million compared to the $7 million-ish with Thrive. But that does not include the percentage rent that we have on one of the buildings that we transitioned to Veritas. Plus the other 2 buildings with Veritas, which are assisted living and memory care properties, 1 in Georgia and 1 in South Carolina, it's a 2-year lease. So we have been building a reset rent at that point in time.

It really was -- that was born out of looking at -- could be operators reduce costs on those buildings? And we thought they should be able to reduce cost and leave the solution for us. And Veritas was to renew to the 2-year lease, and then address appropriate rents once they've been able to operate the communities and make appropriate rent -- or expense reductions at the time. So we're hopeful that $5.2 million increase going into year 3, after we can reach up the rental pay on the 2 buildings that are on the 2-year lease with Veritas.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [15]

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Got you. That's helpful. On Anthem, so you know there's a big story there, it's 45% increase in rent for this year. And now you don't -- you have to wait it out to see what a real stabilized rent will be, as you discussed, Wendy. But I'm curious, is the bend towards rent going up or down versus what you see today?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [16]

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It'll go up. It will definitely go up. They're beating their projections. They're even beating our -- well, they're beating our projections definitely because we haircut their projections in order to establish rent. But they are beating their projections, which were higher than ours. So we have a lot of hope relative to the Anthem properties.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [17]

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I figured that was the answer but you didn't explicitly say it so I figured I'd give you a chance to do that.

So on the preferred equity issue, so does the $600,000 that you're not assuming from the sales over and above your investment, that is sort of tethered to the fact that it's a nonaccrual status. So the impact on guidance has nothing to do with the $600,000, correct?

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

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Well, it kind of does. If we put the $600,000 in guidance, we'd be up another $0.02, but we don't have it in guidance.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [19]

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Okay. So the other -- okay. Maybe I'll take that offline because I understood that to be a sales proceeds but maybe I'm misunderstanding that?

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

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No, no, no. It is. It's how much interest they can pay on the $24 million balance for this quarter based on their projection.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [21]

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So for the remainder of the year. For the remainder of this year.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [22]

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Yes, for the remainder of this year. Right.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [23]

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Interesting. So it's -- got you. $600,000 interest that is not in guidance now?

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

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Correct. Correct.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [25]

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Okay. And then lastly, I heard you say that you used the line of credit to pay off principal balances this quarter. Is that common practice? Or was all the moving parts from things going on, did that kind of require you to go and do that to meet those commitments?

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [26]

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Well, I mean, cash is fungible. We used cash to pay our development commitment, pay for developments we have undergoing and renovation. So you could say we used cash to do that and pay down debt. I mean it wasn't a one for one. I know that's not a common practice.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [27]

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But if you look at the cash flow statement, the most important statement in the financials, when you look at the cash flow statements, and I assume you had.

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Pamela J. Shelley-Kessler, LTC Properties, Inc. - Executive VP, CFO & Corporate Secretary [28]

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Yes, we had the investments, quite a few investments. You could say we borrowed for the investments and we used our free cash flow to pay down our debt, yes.

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Operator [29]

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Our next question comes from Daniel Bernstein of Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [30]

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I don't know how much you can talk about Preferred Care, but I was trying to get a sense of, at this point, whether you have any kind of idea of kind of the split of what you might sell versus what you might release?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [31]

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I think Dan, at this point, it's -- I'd say the majority of the portfolio is probably likely to be sold as we indicated on last quarter's call. We're actively involved in the process and getting offers. And so I think the majority is likely to sell. Things could change, so in case of Jacksonville, you just never know what transpires out of this. But it's likely the majority would be sold. Preferred Care, as in give -- they like to stay in a few of their properties, and we're looking at the best option available for LTC whether that's leasing their buildings to Preferred Care, another tenant or selling it. So we're actively engaging in the process and trying to bring conclusion to it as quickly as possible. And we think our next quarter's call, we'll be able to provide that to you.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [32]

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Okay. Great. I appreciate that. And then on the pipeline, it seems like you have some level of investments that are picking up. Can you talk about a little bit about that activity in terms of -- are you seeing more slow come in that you're evaluating the quality of the assets, the pricing of the assets? I was trying to get a sense of where your investment level might get. Just in the past, you've kind of alluded to maybe pricing not being where you want it to be and quality maybe not being where you want it to be. So I was just trying to understand if something has changed in the terms of your investment pipeline?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [33]

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I think we're being very selective, Dan, on what we invest. Pricing is still very strong. A lot of interests from private equity. So we're looking at finding unique opportunities such as the opportunity we found with Ignite, to invest in newer skilled nursing as well as the development project. And we are seeing a few select opportunities from a price point, on the private pay side that we are opportunistic about that we can convert to transactions. But it's trying to find needles in the haystack that are priced appropriately. And that's -- has been a challenge as we've talked about throughout the year so far.

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [34]

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I think Dan, look, we have -- what we've seen recently, is that we've seen older properties, not ancient properties, but older properties maybe in the '90 -- built in the '90s, where to buy them and to bring them up to a standard that our operators and we would like, we generally have to add a CapEx component to our price. And we're finding that some of the other buyers are fine operating them as they are, and maybe for the next 5 years or so, getting the cash flow that they can. So one of our -- I think what we're finding out in our underwriting is that we are looking at putting cash in, in addition to our purchase price. And might be not making the final cut for people who are just willing to take them the way they are and operate them for the current cash flow. So that's I think one of the things that's hurting our opportunities.

We are finding opportunities from other REITs who are looking at their portfolio and finding 1 or 2 assets that they might not want. It's not that they don't want to keep them, it's just it doesn't fit their profile and we're finding some smaller operators who needs assets that fit nicely into their portfolio. So that's a source of acquisitions that we hadn't really seen in the past. But it's not a huge amount of assets that we're looking at, but I'm very happy with the ones that we are looking at. And I think they would be really good additions to our portfolio.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [35]

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Okay. And you have a number of turnaround assets, assets that you're transitioning in your portfolio now. But on some other recalls we heard, opportunities and value add, and I guess, maybe you alluded to that where if you take an asset, you put CapEx in, you think you could be a viable asset. Kind of how much risk do you want to take on a value-add and turnaround today, given maybe the perspectives that senior housing or skilled nursing fundamentals might drought in the next couple of years? Do you want to take on any kind of value-add or additional risk? Or which stable assets be preferred at this time?

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Wendy L. Simpson, LTC Properties, Inc. - Chairman, President & CEO [36]

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With Anthem, we only have $746.6 million to take. And I would say virtually 0 of that what I -- that's not true. I mean if we found an opportunity with a really established operator, we would do that. But to -- in this environment, to find another Anthem or something like that, it just wouldn't be in our wheelhouse. We kind of are with the Ignite. I mean we're going to build a property with Ignite. But we've already seen a property that takes -- we're going to buy some of them, it's already 90% full. It's one -- it's a high-end rehab sort of resort community. And so building one with them is kind of a development type of thing. But no, I don't see us putting $50 million to $100 million in a property that we're hoping will turn around by putting another $5 million into it. Right now, we're seeing some, not a lot, but a lot of -- some stabilized. Wherever we're buying now other than the Ignite thing is stabilized and cash flow positive.

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Operator [37]

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Our next question comes from Todd Stender of Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [38]

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Just back to the transitioned portfolio. Is it Veritas? Are they the ones taking over the deed, Georgia and South Carolina properties? I know it's got a 2-year lease.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [39]

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Correct, Todd. They also took over a building in Texas, which we've added to their master lease, which includes other properties and they operate for us in Texas.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [40]

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Okay. So that's going into a master lease, I guess the Texas one. But how does a 2-year lease work? Is this -- was this your call? Was it theirs? Was it kind of a combination? How does that...

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [41]

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It was a -- that was a combination between us. The occupancy was strong at these communities. It was really a cost issue. We felt the cost under Thrive's operation was higher than it probably should be. And Veritas wasn't certain they could drive down the cost as quickly. So the idea of having 2-year lease really gave both of us a point in having to look at this. And given them a chance to get any view where staffing ratios are, where salaries are, to make an assessment of where they feel they can operate long-term. But Veritas, likely -- there was basically 2 new communities that we've been involved at, we've bought it a few ago or developed with Thrive.

So they were -- Veritas is encouraged and excited about the buildings and the locations. It's really looking at, can we reduce the cost? And that was a decision that we collectively made to be able to look at setting a rent long-term. We didn't want to -- even though the rents I discussed already on the call, we want to absolutely make sure that we can get an appropriate return on this, so we thought it was in our best interest to be able to let Veritas get in and establish their operating model and then assess what the appropriate range should be in those 2 buildings.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [42]

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Do you have any operating expense exposure on this? Or this is all triple net?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [43]

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triple net.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [44]

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Okay. And they can defer some of the rent. Do you book it all upfront, how does that work?

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

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No. They're not deferring anything, not on that one. No.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [46]

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They have done -- I'm pretty sure we can -- we didn't give them a -- we can give them a small amount of deferred rent just to get through the transition and get started. So there's a little bit of deferred rent on those 2 buildings.

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Douglas Andrea Christopher, Crowell, Weedon & Co., Research Division - Research Analyst [47]

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Okay. Got it. And then can we hear about the Trilogy Management. We know Veritas, but I don't think we know Trilogy, if I have that right.

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [48]

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Trilogy is a very large operator based in Louisville, Kentucky, of which one of the buildings that we had leased to them is located in Louisville and then the other building is in the Cincinnati market, where they have a strong presence already. So Trilogy is a sizable operator both in skilled nursing and senior housing property. So that was a -- an ideal fit, I think, from a present standpoint, where they are already in the marketplace, they knew buildings and it's an organization that we've talked with over a number of years to look at investment opportunities. And it's happened, just to be the right opportunity for them to come in. And we felt confident with their knowledge of the local markets that they could drive performance and improvements at these 2 communities.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [49]

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All right. And then just last question with the loan that you're making. The mortgage loan, it's at 9.4%, it's got escalators on it. How long is that going to stay outstanding? Just with interest rates so low, how long do you project that to be outstanding?

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Clint B. Malin, LTC Properties, Inc. - Executive VP & CIO [50]

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Todd, these are -- these loans are the ones with Prestige Healthcare, which on properties located in Michigan. So we've giving Michigan reimbursement. Most investments in Michigan are done via mortgage as opposed to triple-net lease. So these mortgages, as we said in the past, embody the elements of a long-term lease. So the duration on this is approximately a 30-year term. It's similar to all the other loans that we have with Prestige.

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Operator [51]

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(Operator Instructions) And our next question will come from Michael Carroll of RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [52]

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I appreciate the -- your comments on the investment activity. And I know that LTC typically is pretty conservative on the underwritings, and that's kind of what makes it a little bit more difficult to acquire assets because you're looking for the right deal. I mean is the competitive landscape getting more difficult to find those types of deals in this marketplace? I guess how do you, kind of, looking at that?

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

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Sure. We talked about during the course of this year, it is very competitive. And I think we've seen where it is more challenging to grow. And we've made a decision not to be aggressive at this point in time to overpay for an asset. So we've been actively engaged in finding unique opportunities like we have with Ignite. But it's a very, very competitive marketplace today.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [54]

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Yes. And then how are you thinking about, I guess, Wendy's comments earlier about taking some portfolios or maybe a few assets from other REITs. Is that kind of like the transition-type opportunity where you'll be buying the assets and transitioning the operations to one of your existing operators?

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

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Yes. Correct.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [56]

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Okay. And then how do you kind of underwrite those types of deals? Is that, the operator's currently in that specific market and that's how you can get comfortable about their ability to do that?

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

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Exactly. It's finding operators that have a presence in the existing markets, where they see an opportunity where we can partner with them.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [58]

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And do you typically get better valuation from those types of deals? I'm sure the competitive landscape for those projects are not as steep.

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

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I think on those type of deals, the seller will look at what the executioner skills, and if we have a relationship with an operator, we have a lease in place, and obviously, we're a known capital provider that didn't have those financing contingency. So I think that's an enticing part of these sellers looking at what -- trying to mitigate their risk and actually closing deal. Just like it, we're looking at them selling buildings within our -- we're looking at -- maybe not the highest dollar, but the best execution. But I think that we provide that to some of the other larger leaser, looking potentially at selling assets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [60]

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Okay. And then, I guess, last one for me. Just kind of talking about the Senior Care, how much you're -- how much you can really mention but, I guess, what's the next step? So I guess if you're filling your motion to object to Senior Care's wanting to affirm the lease, I guess, what's the outcome there? Or what should we be looking for?

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

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Well, it's a -- as Wendy mentioned in her comments, it's a situation we're in the least amount of control, and as we found out, bankruptcy is a -- doesn't always make the most businesses sense as far as the process, the duration and decision that courts make. The main concern that we have, and looking at the Senior Care Centers' potential plan at reorganization, just understanding who is that management team that has been continuing to operate those buildings if they're successful in being able to emerge from bankruptcy. That's one of the biggest challenge and concerns that we have looking forward at this.

But if Senior Care Centers was successful in emerging and in saving our lease, but which we have objected to that, we would be able to get paid our rent that we have not recorded for the month of December of 2018. So we -- but we're positioned right now. We have another operator that we've been working with that's preparing if we can get court approval to transition these buildings into another operator. We recognize that it's subject to court approval, we have to wait and see. But we have -- the objective is, Wendy mentioned, complete that lease assumption in this court process right now. And the date in which the motion to assume is scheduled now to be heard has been moved to August 30. So we'll see how things play out on August 30 when that motion is heard in court.

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Operator [62]

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This concludes our question-and-answer session. I would 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 [63]

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Thank you, Andrea. We look forward in the third quarter to having more updates about Preferred Care and, hopefully, Senior Care Centers also. And look forward to talking to you then. Thank you very much for joining us today. Have a great day.

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Operator [64]

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