LTC Properties, Inc. (LTC) Q2 2015 Earnings Report, Transcript and Summary

Good morning, and welcome the LTC Properties Incorporated second quarter 2015 analyst and investor conference call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Wendy Simpson, Chairman, CEO, President. Please go ahead.

Thank you, Catherine. Good morning, everyone, and thank you for joining us today. If you've had a chance to read our press release and/or our 10-Q, you will understand that we are pleased to report some very accretive growth activity during this quarter, and Clint Malin, our Executive Vice President and CIO, will discuss our positive outlook for the rest of 2015. Pam Kessler, our Executive Vice President and CFO will start our presentation with comments on our financial results for the first quarter. Then after Clint's comments and presentations, she will outline our current liquidity and our current plans for financing additional growth. At this time I'll turn the call over to Pam.

Thank you, Wendy. Normalized FFO increased 8.3% for the second quarter of 2015 to 24.4 million, or $0.67 on a fully diluted per share basis from 22.5 million, or $0.64 on a fully diluted per share basis a year ago. Revenues for the quarter increased 10.8%, or $3.2 million year-over-year. The improvement primarily reflects completed development and capital improvement projects, new investments, new leases and lease amendments, as well as an increase in interest income from mortgage loans resulting from loan origination and the amendment to the Michigan loan partially offset by a reduction in revenue from properties sold at the end of 2014. Second quarter interest expense was 3.9 million, an increase of 766,000 over the comparable 2014 quarter due primarily to the sale of senior unsecured notes, lower capitalized interest, and greater utilization of our line of credit to fund investments and development. During the second quarter of 2015, we recorded a 400,000 GAAP-required one-time non-cash loan loss reserve related to an additional 40 million investment we funded under an existing mortgage loan secured by 15 skilled nursing properties in Michigan. The cash yield on this investment is 9.4%. General and administrative expenses were 3.9 million, or 1.2 million higher this quarter compared with a year ago due to increased staffing and other costs associated with more investment activity, higher restricted stock vesting expense, and certain non-recurring expenditures. Given our elevated investment activity and current pipeline, we are currently anticipating a G&A run rate of approximately 3.8 million per quarter for the remainder of 2015. During the quarter we recognized 753,000 in income from an unconsolidated joint venture related to a preferred equity investment made at the end of the first quarter of this year. Turning to the balance sheet, as previously discussed, during the quarter we funded an additional 40 million investment under an existing mortgage loan secured by 15 skilled nursing properties in Michigan. Additionally, we purchased two development sites for a total of 1.3 million, and entered into commitments to construct a 66-unit Memory Care community in Tinley Park, Illinois, and a 108-unit independent living community in Wichita, Kansas. Clint will discuss these investments and the pending 142 million acquisition of a 10-property senior housing portfolio in more detail. Also during the quarter, we invested 3.7 million in properties under development and capital improvement projects, funded 1.5 million under construction loans, received 697,000 in mortgage loan receivable payoffs, and principal amortization, and accrued 502,000 of deferred preferred equity returns in an investment that is accounted for as an investment in an unconsolidated joint venture. Our preferred equity investment earns 15% of which 5% is paid in cash, and 10% is accrued, thereby increasing our investment basis. During the quarter, we had a net borrowing of 44 million under our line of credit. Subsequent to June 30, we borrowed 24 million and therefore currently we have borrowings of 104.5 million outstanding, and 295.5 million available under our revolver. Also subsequent to June 30, we repaid 25 million in principal on our senior unsecured notes outstanding. In the second quarter of 2015 we granted 26,400 shares of restricted stock and paid 18.9 million in common and preferred dividends. Subsequent to June 30, we lost rate on the sale of 100 million of senior unsecured notes to Prudential. The notes will bear interest at 4.5% and will mature on August 31, 2030. We anticipate closing the transaction at the end of the month. Also subsequent to June 30, we entered into a note purchase and private shelf agreement with AIG providing for the availability of 100 million senior unsecured notes. Notes issued under the shelf will bear fixed interest at a spread over applicable US Treasury rates with maturities of up to 15 years from the date of issuance, and a maximum life of 12 years. Additionally, yesterday we filed an 8-K in conjunction with the new after-market offering program. The $200 million available under the ATM as another source of liquidity for us to fund our acquisition and development pipeline. I will now turn the call over to Clint.

Thank you, Pam. Good morning, everyone, and thank you for joining us today. We are excited to announce our pending $142 million acquisition of ten private paid seniors housing communities with Senior Lifestyle Corporation as our operating partner. This transaction is anticipated to close in the third quarter of 2015, and will be immediately accretive to earnings. Continued growth with SLC over the past eight months, plus the pending $142 million transaction will position SLC as our largest operator relationship when measured by revenue. We continue to maintain a well-balanced operator diversification mix within our portfolio, and no one operator accounts for more than 15% of revenue. On a proforma basis, annualized income derived from private pay assets within our portfolio will increase by nearly 400 basis points to 40%, and this transaction will further diversify our gross investment metric by state, reducing our portfolio concentration in Texas to 18.5% from 20.7%. This is a unique transaction levered through our long-term relationship with SLC, one of the leading providers in the seniors housing space to be acquired at an attractive price point of approximately $160,000 per unit on a portfolio having an average age of ten years. Average occupancy for the portfolio is 70% as of June 30th. The master lease with SLC provides for LTC to participate in positive future performance of the portfolio through a percentage rent formula calculated as a percentage of the increase in revenues of the portfolio over a predetermined base revenue amount. Also the master lease provides SLC with an opportunity to earn a $10 million deferred contingent incentive fee allowing them the ability to participate in the value creation of this portfolio. The $10 million incentive fee can be earned by SLC at various times during the term of the master lease on achieving certain performance metrics. During the second quarter, we closed on approximately $65 million of additional investments by increasing the loan proceeds of $40 million to Prestige Healthcare which Pam mentioned demonstrating the strength of our Michigan investment, and expanding our relationship with both Anthem Memory Care and Oxford Senior Living. With Anthem, we are continuing to finance their expansion in the Chicago metro market by financing construction of a 66-unit private-pay Memory Care community. With Oxford, we are financing construction of a 108-unit independent living community to be located and adjacent to the assisted living and Memory Care community in Wichita that Oxford opened in October of 2013. This property reached 96% occupancy in January of 2015, and has maintained a monthly occupancy percentage of 100% for the months of June and July. Including the announcement of our pending $142 million acquisition with SLC, we will have completed over $300 million of accretive investments and multiple development commitments to date in 2015. This marks a banner year for LTC, already exceeding $300 million of annual investments with five months still remaining in 2015. Given the strength of our active pipeline, we anticipate deploying additional capital toward accretive investments and development commitments during the remainder of 2015. Currently we have five transactions under fully-executed letters of intent representing approximately $150 million of acquisitions and development commitments. Approximately 80% of our active pipeline consists of acquisitions, with the remaining 20% relating to two private-pay Memory Care development projects sourced through our exclusive development pipeline agreement with Anthem. These two development projects will bring the number of Memory Care projects with Anthem to eight, four of which are operational and performing better than or equal to our pro forma assumptions. Approximately 60% of our active pipeline is comprised of skilled nursing properties, with the remaining 40% representing private pay, seniors housing investments. Although the five letters of intent have been fully executed, I must caution that these transactions remain subject to due diligence, and therefore may not be converted to closed transactions. Turning to the portfolio, lease coverage for the trailing 12-month period ended in the first quarter of 2015 remains strong and consistent. I will caveat the following coverage metrics are derived from unaudited financial statements provided to us by our operators, and are reported one quarter in arrears. EBITDARM coverage for skilled nursing is 2.35 times, assisted living 1.65 times, and range of care is 1.8 times. EBITDAR coverage, after an allocated management fee of 5% of revenues, is 1.72 times for skilled nursing, 1.41 times for assisted living, and 1.32 times for range of care. Both EBITDARM and EBITDAR coverage metrics increased slightly over the previous quarter. The main driver increasing these metrics is the continued strong performance of the Michigan loan portfolio with Prestige Healthcare resulting from continued implementation of their operational improvements and efficiencies. Compared with the previous quarter, occupancy has remained consistent across all property types. Occupancy for the trailing 12-month period ended in the first quarter of 2015 is as follows. Assisted living 86%, skilled nursing 79.8%, and range of care 87.5%. Next I will provide coverage on occupancy statistics for our portfolio of 37 assisted living communities leased to Brookdale. I'm providing this information because I have heard inquiries about these metrics from Brookdale and other companies' earnings calls this quarter. For the trailing 12-month period ended the first quarter of 2015, EBITDAR lease coverage after an allocated management fee of 5% of revenues is 1.86 times, and occupancy is 89.1%. Both coverage and occupancy statistics for our Brookdale portfolio are strong and consistent with the previous quarter. Our quality mix for the portfolio remains strong with 51.6% of our underlying revenue derived from private-pay sources. The approximate 400 basis point decrease from the previous quarter is attributable to the addition of the Michigan loan portfolio to same store. Now I'll turn the call over to Wendy.

Thank you, Clint. In addition to our 10-Q, we did file the 8-K last evening for our new 200 million ATM program with JMP, Canaccord Genuity, and Mizuho. This program will provide us with additional options to fund our growth and help us maintain our low debt-to-equity statistics. Pam, would you comment on our current liquidity and our plans to fund our currently-disclosed accretive growth?

Yes. Thank you, Wendy. LTC is in the enviable position of having low leverage and ample liquidity to fund our current growth trajectory. We currently have 295 million available under our unsecured line of credit, and an additional 200 million accordion feature, which combined, gives us approximately 495 million of unused revolver capacity. Additionally, prior to our anticipated sale of senior unsecured notes later this month, we have 133 million of unsecured debt available under our Prudential shelf, and 100 million of unsecured debt available under our new AIG shelf. As I previously mentioned, we have locked rate with Prudential on 100 million at 4.5% and anticipate selling the notes to them later this month. We also have the 200 million of equity available on the new ATM program and 575 million available under our shelf registration statement. At the end of the quarter, LTC's investment-grade credit metrics remain one of the best in the healthcare universe with debt-to-trailing 12-month normalized EBITDA of 3.2 times, and normalized trailing 12-months fixed charge covered ratio of 5.9 times, and debt-to-enterprise value of 19.2%. Pro formas for the 102 million acquisition, the sale of 100 million senior unsecured notes, the line of credit borrowing and repayment of senior unsecured notes as previously discussed, debt-to-trailing 12-month normalized EBITDAR would be 4.1 times, normalized trailing 12 month fixed charge coverage ratio would be 5.2 times, and debt-to-enterprise value would be 24.8%. I'll now turn the call back over to Wendy for closing remarks.

Thanks, Pam. At this time we have high probability opportunities to invest and underwrite over 400 million of 2015 transactions. We've often stated that the sale leaseback opportunities are bumpy in nature, but this year we're seeing opportunities and executing on accretive investments while still underwriting development investments that will additionally fuel our FFO, FAD growth in future years. The 400 million additional loan investment and the 142 million leased asset investments are with operators with whom we have existing strong relationships. Of the pipeline, one potentially significant investment would bring a new multi-facility operator and a new state to our portfolio. And the other would add two properties to a master lease of a significant current operator. It's exciting to grow in both diversifying relationships and diversifying states while expanding opportunities with already-valued operators. As Pam outlined, we have secured the liquidity we need to complete our 2015 growth as we now project. Additionally, with our new ATM and our bank line accordion, we have access to the liquidity for growth in 2016. We maintain our disciplined capitalization profile and if you've followed our company for any period of time, you know that I think a 30/70 debt-to-enterprise value capitalization is not a bright line limit, but it is a point of reference. Pam and Clint have done an absolutely wonderful job of securing capital that allows accretive investments and I look forward to announcing additional investments in Q3 and talking on our next call about these additional investments. At this time, I'm increasing our FFO guidance by $0.09 to a range of 2.74 to 2.76. This represents an increase of $0.17 for fiscal 2015 guidance from what we first guided in the first quarter. I'm again looking forward to being able to increase that guidance when we next talk. Thank you for dialing in and I will now open the call to questions. Catherine?

[Operator Instructions]. Our first question comes from Paul Morgan with Canaccord Genuities. Please go ahead with your question.

Hi, good morning. Just in terms of the FFO guidance increase, so that includes the Wisconsin deal closing at the end of the quarter, and nothing else beyond that. And then does it also include shares issued under the ATM?

It doesn?t include any shares issued, and it includes the Wisconsin deal closing August 31.

Okay. Great. And then you mentioned you highlighted when you talked about Wisconsin, the 140 million actually taking down your Texas exposure. There's been a lot of focus on Texas. Do you have any color you can provide on the operating performance of your tenants down there, and how comfortable you are feeling with your exposure?

The tenants in Texas?

Yes.

In Texas right now, we've been comfortable with Texas. We've been bullish on that. Our coverage on one of our largest operators in Texas has been very strong with senior care centers, so Texas is a state that we would continue to look at growth, and we have done so over the past number of years, growing in Texas while growing the portfolio as a whole, continuing to reduce our exposure to the state. So we've been very comfortable with it and would look for other opportunities there.

Okay. Great. And then just on the Memory Care developments, how would you say the lease-up is progressing at maybe some of the Colorado assets versus the proformas, and whether -- how you're thinking about kind of the pace of lease in general as you look at new projects. I mean, for example, in Littleton, you're at 59%. How is that relevant to where you're looking at going in?

I mean, we look at a lease-up of right around between 18 and 24 months. So right now, all of our Memory Care projects are at or in excess of the proforma assumption, so we're very comfortable with where occupancy is at, not just in Colorado but our other projects as well.

So in terms of the shadow pipeline and your focus on kind of building that -- continue to build that as you look into next year, that's still kind of one of the top priorities?

It's a balanced approach between looking at development as well as bringing on acquisitions, and we're focusing our developments on companies we have relationships with. At one point in time, we were back in 2012 starting this program, we were looking at sourcing relationships. Now we've found partners over the last number of years and we're looking at growing out those relationships. So we probably aren?t going to be -- unless a relationship happens to come to us that just fits our structure, obviously we take a look at that, but we're not spending as much time as we were at one point trying to source new relationships for development. We think we can grow our existing relationships and we help to mitigate risk by growing those relationships out, but not relying upon just any one specific project. So if there is any challenge on one building, hopefully the portfolio as a whole helps provide a credit enhancement for that portfolio.

Okay, right. Thanks.

Thank you.

Our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Thank you. Good morning. I guess first is just on the volume tick-up in terms of transactions. I think 90 days ago or so we talked about $100 million or so active pipeline and then a shadow pipeline behind it. So it seems like the stuff in the shadow pipeline has been converted. Is that the right way to think about it or maybe just any other way you would be able to sort of characterize the change in activity as these deals have started to come through?

Sure. I think the shadow pipeline, the ebb and flow can move fast and some of the shadow pipeline moved into the active pipeline. I think that's the way to look at it.

And so these deals, Clint, if you talk about maybe giving a little bit of color in terms of lead time, how long they've taken to come together, and whether or not they were relationship-oriented or more broadly optioned.

For the ones that are in our active -- $150 million are active pipeline, or ones that we've closed out -- or announced and closed?

Both would be great.

Well, looking at the $142 million with Senior Lifestyle, that was a relationship-driven transaction. We've had a relationship with Senior Lifestyle since 2009. As I mentioned in my prepared remarks, over the last eight months we've continued to grow with Senior Lifestyle, so very much relationship-driven transaction on their end. On our active pipeline, a lot of that is -- I mentioned two projects with Anthem so that's growing out that existing relationship. Wendy mentioned a new relationship that we've sourced, so it's a combination.

But in that group of new relationships, the new operator and the new state, it was a situation where the operator ran a process last year. We were part of that process, and then there were situations that happened that the deal selected did not finish -- get to the finish line, so the process opened after the operator decompressed for a little while and looked at the people who were interested again and came back to us. And so we were a little ahead of the curve by having already done some work on it when it came back to the market.

I think that process opened up to a smaller population of potential parties because I think part of that is the way we presented ourselves on the initial round because we gave a very credible offer and I think when they saw the other deal fell apart, we were viewed as a very credible party in coming back to for that transaction.

And on the $40 million Michigan deal, we had an agreement with the operator that every year that they've made certain statistics, they could draw down $10 million for four years. And looking at the improvement in their statistics, we said well, if you'd like it all this year, we are earning a spread on it and you cover very nicely even including that $4 million, so we amended our agreement to invest earlier than our agreement provided for. So we took the opportunity of making that investment earlier than we had anticipated making it.

Okay, that makes sense. That's helpful. Can you speak to pricing a little bit? I guess the Senior Lifestyle deal comes in a little bit, I guess, at the lower end of the range we discussed last quarter, and then maybe on the shadow pipeline or the active pipeline, rather.

I think the pricing still is very competitive. There's a lot of capital providers that are still looking at deploying capital in this space. And you also have a number of -- you've got a lot of opportunities out there. I think there's a lot of brokers that are trying to generate activity for operating companies that may have not considered transactions in the past, so a lot of opportunities and a lot of capital. As far as yields in our pipeline, we're still looking at development projects around the 9% mark. There is one project that we are doing, it would be a take-out [C of O] so it is a brand new Memory Care project, but instead of us financing it during the course of construction -- during us financing on balance sheet, we're just doing take-out. So that yield probably drops by 100 basis points from our development projects that we're carrying and funding from land acquisition. And on the skilled -- we're adding one project into an existing master lease so the yield on that skilled deal probably is somewhere between 8.25% to 8.5%, but again, part of that is the credit enhancement of the existing master lease that we would be adding it into.

Okay. And just on leverage, what's the proforma leverage if we're through the active pipeline? Just factoring in the financings that were recently done as well.

Yes. It's approximately 25%.

Okay. Thank you.

Including any expansion of the -- not multiple expansion but it is increasing stock price.

That's debt-to-enterprise value?

Debt-to-EV. Yes.

Do you have debt-plus-preferred to EBITDAR number, by chance?

No. Oh, I have a debt-to-normalized EBITDAR. It would still be under five times.

Okay. Under five times. Okay. Thank you.

Thank you.

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

Can you explain, I guess, the $10 million incentive fee that you mentioned in your prepared remarks?

Sure. As I mentioned, the occupancy on the portfolio right now at the end of June 30 was 70%. So there is a turnaround aspect to this portfolio, and it really was a means of incentivizing Senior Lifestyle that they could recognize value creation for the time and effort they're putting into turning around improving performance at these properties. So really effective like an earn-out, is the way to look at it.

So they get to say, achieve the incentive fee and the initial yield on this investment would drop to about a 6.1% or would you get an additional--?

No, we're getting an incremental yield.

It goes into the -- they pay rent on that.

There's an incremental -- there's a return to us on that.

Okay, great. And then what do they have to achieve to receive that number? What's the occupancy levels?

Well, it would be based on a coverage metric which they have to go ahead and achieve on that and it would be a 1.2 times of--I think is that correct on this one? Yes, 1.2 times coverage. But that's got to be seasoned and matured over a period of time. It can't be just a one-time hit of that and then have it drop back below. And it's available in increment so they can't take down the whole amount at one time because we want to make sure that it is a sustainable performance at these properties before we deploy additional capital toward the investment.

Okay, great. And what's the coverage ratio on the prestige loan now after, I guess, you give them the $40 million for the shelf proceeds?

After we-- they're continuing to make improvements in operational performance and efficiencies. They are bidding the increasing contracts with managed care providers, so we are looking-- right now, we're at two times coverage on the existing portfolio without the 40 million. So with the 40 million included, it's probably going to be around--I think in the performance levels but probably in the 1.5 to 1.6 range.

And they're using that $40 million to reinvest back into the portfolio?

They will probably use some of that to redeploy back into the portfolio, yes. There is not a restriction specifically that they do that. We have-- we made an initial $12 million commitment as part of the original loan for capital improvements which they are continuing to put into the buildings and then we also made a $20 million commitment to replace two of the-- or at least expand and replace two of the properties. So I'm sure they will utilize a portion of those proceeds but there's no specific restriction that they deploy that into the properties.

Okay. And then finally, Pam, can you kind of give us an update on the earn-outs from the Senior Lifestyle and the various leases related to the former ALC assets? And when should we expect those earn-outs to really hit your P&L?

Oh, you mean the additional rent? Yes. We are still projecting that in next year, to begin next year. We've had a little bit this year but it's not significant. So you haven't really noticed it. But those properties are performing better than we had pro forma'd them. So we expect next year to receive more significant percentage rent from that.

Great. Thank you.

Thank you.

Our next question comes from John Roberts with Hilliard Lyons. Please go ahead.

Morning, Wendy.

Good morning, John.

Hey, you mentioned those of us how have been following your company for a while, and historically you sort of stayed away from the spread investing that a lot of your peers have done, lower yielding, et cetera, and you've sort of targeted the smaller one-off portfolios with much higher yields. Are you changing strategy at this point, sort of targeting more larger portfolios, more spread-type investments at this point?

It's not a target. It's an opportunity that we were looking at if you're thinking about the deal with SLC. It's a very strong relationship we have with SLC. We are in a unique situation, I think, in the terms of our very, very low leverage. It's not a real change in strategy. I'm not a big believer in growth for growth's sake. But this made sense to us and it's got such a nice upside that we though one, it was the private-pay industry, two, it's an operator we really like, three, we had certainly low cost leverage for something like this to add to our portfolio, but not to change our strategy.

Okay And Clinton, looking at the $150 million you've got with the five properties under LLY, any discussion on the cap rates, yields your expecting on those investments?

Sure. It's actually five transactions; it would be a total of nine properties for the pipeline. Again, the yields would be, on average, 9% on development projects, 8% on developed projects that were coming in at basically take-out financing at C of O, and leasing to the operator at that point. Skilled nursing deals are between 8.25% to 8.5%, and the assisted living in that would come in at around 7.5%.

Okay, so what percentage, say, are development versus skilled nursing.

Development in that number is 17% -- approximately 20%, and acquisition would be approximately 80%.

Okay. Very good. And on the G&A, Pam, is that number a good run rate for next year as well or are you expecting another tick-up?

I would say it's a fairly good run rate. I would probably kick it up somewhere between 3% and 5%, but I wouldn't anticipate any huge increases.

Okay and Wendy, you mentioned you may get an increase in guidance next talk. Is that around the five transactions and the letter of intent?

Yes.

Okay. Great, thanks.

Thank you.

Our next question comes from Daniel Bernstein with Stifel. Please go ahead.

Hi. Good morning.

Hi Dan.

Hi. I just want to make sure I heard right. Is there percent rent on SLC or is that a different transaction?

There is a percentage rent amount tied to SLC portfolio above a certain base revenue.

The assisted living -- former assisted living.

There's one on that as well yes.

That's just new.

Well, it's in both. It's in the new transaction that we announced, the $142 million had the percentage rent on it as well as the previous transaction when we leased the former ALC and [Livent] portfolio, so both of those have percentage rent pillars.

Okay is it above and beyond the bumps that you mentioned in press release, that 2.75% or --?

Yes.

Okay. And how is that being computed? Is that being computed on revenue or NOI or -- I just want to understand the mechanics of that a little better?

Sure. It's on a triple net lease so it's on revenues.

And then also, we've heard some comments earlier today on other calls earlier in the week about some of the REITs maybe pulling back from larger transactions. So I just wanted to understand if you think you are becoming a little bit more competitive for large transactions. I know the previous question you answered was that it was more an opportunity than a change in strategy, but are you becoming a little bit more competitive for large transactions? Have you received any pullback in competition for assets, and was the SLC transaction previously marketed and then it came back to you? I just want to understand if you're seeing more retraining of portfolios.

The SLC was a relationship-driven transaction. The one deal we mentioned, Center Pipeline, that has circulated back, so that's an example within our pipeline of where we've seen that happen. I can't say that I've seen where other REITs are pulling back, necessarily, on other transactions because there is other larger transactions that are getting completed by some of our competitors. So I think pricing still continues to be competitive. But obviously not knowing where interest rates are going to ultimately go, I mean, it's hard to say what people will do, but I still see a lot of capital providers that are actively looking at transactions.

Okay. In terms of rate growth in the seniors housing industry when you think about that, I guess, you don't really have any [right there] portfolio, but when you think about your existing operators and you look at the [nic] data, rate growth has not been as strong as the previous cycle in seniors housing. Do you have any thoughts on that? I mean, it seems like wage inflation could pick up a little bit at some point. Do you worry about that when you're underwriting portfolios at this point or is that not something that's a critical item?

Well, certainly, we underwrite to be conservative. If somebody's going to proforma in that they're going to increase rates 5%, 6%, 7%, I mean, we're going to question that in underwriting and bring that down to a number that we feel is more realistic. So it's something we definitely factor in and we're not relying solely upon just large increase in rent going forward on an annual basis. There could be some wage pressure too but we're not relying upon large rental increases that the operators would be getting from residents.

I think one of the things that provides us with some cushion are our underwriting disciplines and the fact that if we're underwriting independent living, if we're underwriting skilled, if we're underwriting Memory Care or assisted living, we always include a 5% management fee which is sometimes cushion if you're underwriting the add-one asset portfolio to SLC. So I think our underwriting criteria provides us with cushion both in the fact that we underwrite to a healthy coverage including a 5% management fee. So it gives us a little more comfort in terms of changes possibly at the top line.

Okay. And then nobody's really asked about skilled nursing. Everyone's focused on your seniors housing development transactions. I just want to ask you, CMS came out with rate growth of 1.2% which was a little bit less than what people expected. We got some bundled payment proposals out there that look like maybe long-term they might put a little bit of pressure on persecute possibly, opportunity as well. But when you're thinking about investing in skilled nursing versus seniors housing, have you changed your view at all as to whether the prospects for seniors-- for skilled nursing has gotten better or worse over the past couple of months? It just seems like there's some pressure out there on the skilled nursing operators long-term. I just wanted to get your thoughts on that.

Well, I think on skilled nursing, Dan, I mean, the model is going to continue to evolve into a value-based formula where you're going to have to demonstrate value add back into the system in a cost-effective manner. So really, the key on that is focusing on the companies we're partnering with to make investments, to make sure they have capital to deploy back into the properties as well as technology. So it's really about the operator that we're partnering with on these projects. Skilled nursing has always had ups and downs over the years, but it plays a critical point in the healthcare delivery system. And as it relates to the increase that CMS passed, our portfolio obviously is strong and covers very well. We've not had-- I've talked to our operating partners on the skilled nursing side and nobody's indicated-- obviously, they would have liked it to be a little bit more of an increase, but we've not had any concerns indicated to us about that.

And you're not strategically changing the portfolio more towards seniors housing beyond what you've been doing? Nothing that we should read into the SLC transaction as far as titling more towards seniors?

No. Still very interested in skilled, but in skilled we're looking at newer modernized assets that are going to be sustainable to participate on a go-forward basis as the reimbursement model continues to change and evolve.

Okay. Thank you.

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

Good morning. I was dropped out of the call so I apologize if these have already been asked. But I think, Pam, I think you mentioned that there was a write-down or impairment of a loan. Can you just describe what the catalyst for that was?

Yes. It's not a write-down or an impairment. It's basically there are two types of reserves that are required by GAAP. One is a specific reserve and that's when there are indications that a receivable is not 100% collectable. That is not this type of reserve. This is a general reserve that is required to be estimated. Whenever you originate a loan or receivable balance you are required at the beginning to estimate based on historical experience or known trends, general non-specific, what's the estimate non-collectable? We, based on our 20-year experience, use a 1% estimate, although our experience rate has been less than that. So every time we originate a loan or record state line net receivable, we have a 1% reserve on it. And that reserve is reversed back into the income statement as the receivable balance is paid off. So you see in our provision for loan losses in some quarters, it's actually an income number. It's got a bracket around it. But because we originated a loan this quarter, it's an expense. And it's non-cash and it's what we've added back to come up with normalized-- to calculate normalized FFO. It was the same when we originated the Michigan loan two years ago. We took a 1% reserve on the origination.

So the borrower is current on interest payments, and you expect the full principal amount to be repaid?

Yes.

And then, Clint, I think you mentioned on Brookdale, the 1.86, I just wanted to clarify, that was EBITDAR coverage, LTM, as of the second quarter.

As of the first quarter, trailing 12 EBITDAR after a 5% allocated management fee.

Can you describe what the second quarter was like?

The second quarter for -- just a second -- actually, we're just receiving the financial statement so we don't have that on the second quarter information available yet.

So how would you describe the operations of the Brookdale assets [indiscernible]?

I mean, Brookdale's been performing at these properties, I mean, consistently at this coverage metric and occupancy for years. So what we're seeing in our portfolio, I know there's a lot of chatter out there on Brookdale's calls and on other REIT calls regarding performance levels, and we obviously are monitoring and paying attention to it, but the performance level here has not changed from where it's been over the last few years.

Okay. Question on the ATM, can you just remind us how you will determine how you use it or when use it as far as what metrics you look at? You look at NAV or AFFO yield, or what price will you utilize at?

Well, I wouldn't put a price out there when we would use it. We use it when we see our pipeline going -- the shadow getting fainter and fainter and becoming much more positive that we're going to do the deals. So we'll use it to maintain our debt-to-enterprise value metrics and we'll use it when the price is, I think, advantageous to us.

We've had an ATM in the past. It was several years ago and it was prudently used. I think you see our experience is not -- not in the past been heavy users of an ATM.

Right but if it's debt-to-enterprise value, that's relying on your share price so it becomes a little circular, I suppose. I'm just wondering if there was another metric that you look at.

Yes. We also look at debt-to-normalized EBITDAR, and we look to keep that around 5 times which is very conservative in our healthcare world.

Okay. And then finally, I have a question on slide 5, footnote 4. It's relatively minor but I just wanted to clarify. The $2.6 million doesn't quite match up to the stated interest rate of 9.4% on $40 million. So I just wanted to know if there was something about this loan as far as extending it. If there was a higher rate or something that we're not seeing.

Slide 5, footnote 4, you said?

Yes.

That relates to a Memory Care property but you're talking about the Michigan loan it sounds like at 9.4%.

Yes.

The cash yield on it is 9.4%. It was for five years, that rate. And then the step-up starts. So that's the cash rate. The GAAP rate is obviously higher because it takes the stream of income over the period of the loan, and straight-lines it, essentially.

Okay.

I'm sorry. That's what's going on there if you looking at the difference between the cash rate and the GAAP rate.

Got it. Okay. Thank you very much.

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

Thank you, Catherine, and thank you all for joining us today. I know it's a busy day for earnings calls. We look forward to talking to you at the end of our third quarter. Thank you very much.

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