LTC Properties, Inc. (LTC) Q4 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the LTC Properties Fourth Quarter 2018 Analyst and Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask your questions. [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 31st, 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, CEO. Please go ahead.

Thank you, operator. Welcome to LTC's 2018 year-end investor conference call. Joining me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer. I will start with introductory remarks and then turn the call over to Pam, who will discuss our financial results, followed by Clint who will discuss our portfolio, recent activity and Operator performance. I will end with a brief wrap-up before we begin with questions and answers. The current real estate cycle has been interesting to say the least. The continuing massive influx of private equity and other financing sources has, in our opinion, inflated pricing, resulting in lower investment volumes for us in 2018. At this point in the cycle, however, we are starting to see the formation of a disconnect between certain sellers and buyers. Private equity is looking for large deals in the private pay space and we are beginning to see a decline in their interest in the mid to smaller deal opportunities that we expect will cost sellers to start adjusting their pricing expectations. On the skilled side, there is still a lot of capital moving around and while we remain interested in investing in SNIPs, we are seeing more opportunities in private pay. We believe LTC is well-positioned to capture opportunities created by a shift to a slightly more favorable investment market. Fortunately, our leadership team has been in this business for a very long time and we have weathered these transitions before. Over the course of many real estate cycles, LTC has succeeded by being patient and this cycle is no different. To repeat something I have said before, being a patient capital provider does not mean being stagnant. While Q1 tends to be slower in terms of pipeline creation, we are continuing to build ours with strategic assets where we can grow with our current operators, improve the average age of our portfolio, add new strong regional operating partners, and expand our existing geographic footprint. We are using our time wisely, maintaining a strong and well-capitalized balance sheet proactively managing our portfolio of assets and strengthening industry relationships. We are meeting with operators, both inside and outside of our current portfolio and educating them about LTC's willingness to provide innovative financing structures, structures that are flexible and tailored to the specific operators' needs. Our ongoing focus on regional operators allows us to better understand how they operate, what is important to them, the decisions they need to make, the challenges they need to overcome to be successful. We believe this focus is what sets us apart, what allows us to be ready and able when an opportunity arises and what will allow us to continue to drive long-term growth and value. Before I turn the call over to Pam and Clint, I would like to provide a brief update on three of our current operators: Senior Care Centers; Thrive; and Anthem. I will start with Senior Care Centers, which operates 11 skilled nursing facilities for us in Texas. As you know, Senior Care declared bankruptcy in December and we don't believe they have the ability to emerge from the process, as a viable ongoing concern. Given this assumption and acting as good fiduciary stewards, we are proactively negotiating a potential new master lease with a different Texas based operator familiar with these assets to ensure, we are poised and ready to act should the opportunity arise. It is still very early in the process and any lease transaction with a new operator is subject to bankruptcy court approval. Next, I will provide an update on our Thrive portfolio, which includes 395 units across six memory care and assisted living communities. As we previously discussed, Thrive exhausted $1.4 million of deferred rent we provided in the second quarter of 2018, which based on their projections of lease-up was well before they were able to stabilize the properties in the portfolio. Thrive short paid their contractual rent in November and did not pay rent in December. We believe the $619,000 of rent is collectible, so we accrued and recorded it in 2018. We have not received payment of January and February rent or of the deferred rent we provided. As a result, we have issued a reservation of rights letter to Thrive, as we pursue our options related to the non-payment and are no longer approving contractual rents starting in 2019. I would note that we do have certain guarantees in place. We anticipate cash rent to be approximately $1 million this year, should these assets remain with Thrive. Annual GAAP rent under the Thrive master lease is approximately $7.2 million and at the end of the quarter, the net book value of the properties was $81.7 million. We had $4.5 million in straight-line rent receivable inclusive of the $1.4 million in deferred rent and $5.7 million in other assets on our balance sheet at December 31. We are evaluating several options related to the Thrive portfolio, which could include ongoing negotiations with them transitioning some or all of the properties to new operators, selling some or all of the properties, or finding a solution through some combination of these options. As we have done in the past, most recently with Anthem where we addressed similar challenges where Anthem has recently turned the corner, I believe we will find a successful resolution that is in the best interest of all parties, especially our shareholders. I will finish now with Anthem. We recently agreed to $7.5 million in rent from Anthem for 2019, which is approximately 45% higher than the rent they paid us in 2018. We continue to actively monitor expected ongoing improvements. We will revisit appropriate rent levels associated with these properties in the 2019 fourth quarter. From an occupancy standpoint, the myriad of property is stabilized. Occupancy at Burr Ridge and Oak Lawn grew nicely. Glenview was flat and Tinley Park was down slightly. We are pleased that Anthem met their 2018 rent commitment. But we will continue to closely watch their progress and their ability to meet their new higher 2019 commitment. Before I turn things over to Pam, I will provide our guidance for 2019. Assuming no additional investment activity, asset sales, financing or equity issuances, FFO is expected to be between $3 and $3.02 per share for the full-year, which reflects a $0.03 reduction for Senior Care remaining on the cash basis. Pam?

Thank you, Wendy. Revenue for the 2018 fourth quarter increased $1.8 million, primarily as the result of one-time income of $3.1 million resulting from the write-off of a contingent lease incentive and related earn-out liability pertaining to our master lease with senior lifestyle, which I discussed on last quarter's call. This was partially offset by $1.3 million decrease in GAAP rent due to the non-payment of December rent by Senior Care, as a result of their bankruptcy filing. $1 million of the $1.2 million cash rent is subject to administrative post petition claims that have priority over general prepetition unsecured claims. Excluding these effects of Senior Lifestyle and Senior Care, revenue was flat quarter-over-quarter, as increases from investments were offset by decreases resulting from properties sold. NAREIT FFO with $0.81, compared to $0.77 in last year's fourth quarter. Excluding the one-time revenue just described, FFO per share was $0.73 for the 2018 fourth quarter. The change from last year related to the Senior Care bankruptcy and the non-payment of December rent and increased G&A expenses, partially offset by reduction in interest expense. Net income available to common shareholders increased $10.9 million from the prior year, resulting from a higher gain on sale in the 2018 fourth quarter and the one-time income related to the write-off of the contingent lease incentive and related earn-out liability with Senior Lifestyle. Interest expense decreased $468,000 from the prior year quarter, due to lower debt balances resulting from scheduled principal payments on our senior unsecured notes and the elimination of the $126,000 quarterly interest expense associated with the earn-out liability to Senior Lifestyle that was eliminated. General and administrative expense increased $558,000 primarily related to performance based incentive compensation. Last year's G&A amounts were reduced due to the Anthem lease default. We expect G&A to be about $4.5 million per quarter through 2019, or approximately $0.5 million per quarter lower than 2018, due to lower projected performance based incentive compensation resulting from Thrive. During the quarter in two separate transactions, we sold two skilled nursing centers, one in Florida and one in Georgia worth $10.5 million recognizing, a gain on sale of $8 million. The properties had a combined gross book value of $4 million and GAAP rent related to these two properties was approximately $684,000. 2018 was an active year for capital recycling. And although, our sales volume was higher than typical, we were net investors in real estate in 2018. We sold 10 properties for a combined $95.9 million, recognizing a total gain of $70.7 million. The six senior housing communities and four skilled nursing centers had a combined gross book value of $50.9 million and a net book value of $22.4 million. The annualized GAAP reduction in revenue related to these properties sold was $6.9 million. We used the combined net proceeds of $92.7 million to invest $40.3 million and acquiring three senior housing assets and one parcel of land for development and $14.5 million in two skilled nursing centers that were added to an existing mortgage loan. We also funded $35.3 million in development commitments and $10.1 million in capital improvement projects. This total gross investment of $100.2 million translates into annualized revenue of approximately $7.5 million, $5.4 million throughout 2019 and an additional annualized $2.1 million upon the completion of development projects during 2019. While 2018 asset sales were higher than normal for LTC, we currently expect 2019 divestitures to be in a more typical historical range. We have provided a graph of historical asset sales on Page 11 of our supplemental, which will give you some color on prior asset sales by year. We will continue to be a strategic seller, identifying opportunities to recycle capital into more productive assets. Clint will discuss our investment activity subsequent to the end of the fourth quarter, shortly. We repaid $8 million on our line of credit during the fourth quarter and subsequent to the end of the quarter borrowed $26.4 million, bringing the total outstanding on the line to $138.4 million. Additionally, we continue to fund LTC's $0.19 per share monthly dividend during the fourth quarter and paid $18 million in scheduled principal pay downs on our senior unsecured notes. We also funded $10.7 million under existing commitments for development and capital improvement projects and $834,000 under mortgage loans. At December 31, we owned three properties under development with remaining commitments totaling $25.2 million and two properties under renovation with remaining commitments of $5.2 million. Additionally, we have remaining commitments under mortgage loans of $17.1 million related to expansions and renovations on eight properties in Michigan and $2 million remaining under a preferred equity commitment. Our balance sheet continued to provide us with substantial flexibility and the capacity to fund current and future growth initiatives. We have $461.6 million available under our line of credit, $98 million under our shelf agreement with Prudential and $184.1 million under our ATM program, providing total liquidity of $743.7 million. As always, we will continue to employ a conservative capital allocation strategy. 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 five years. At the end of the fourth quarter, our credit metrics remained well matched to the healthcare REIT industry average with debt to annualized adjusted EBITDA of 4.2 times and annualized adjusted fixed charge coverage ratio of 5.1 times and a debt to enterprise value of 28%. Now, I will turn the call over to Clint.

Thanks, Pam. I will start by sharing progress on a previously disclosed lease transition, a joint venture acquisition and developments nearing completion. I will start with the lease transition. As you may recall, the leases on our buildings in Bakersfield and Vacaville, California offered by Brookdale Senior Living were due to expire on November 30, 2018. We signed a new master lease agreement with an affiliate of Fields Senior Living to be effective upon issuance of licensure by the State of California, which is anticipated to occur on May 1. The new master lease provides for 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. Until licensure is obtained by Fields Brookdale will continue to operate the properties under a lease amendment. The annualized GAAP rent for 2019 from these communities under both leases is expected to be $2.5 million. Once the transition is complete, our relationship with Fields will include four properties. While lease maturities are a fact of life, we see them as an opportunity to expand operator relationships, as we are in the process of doing the Bakersfield and Vacaville transition to Fields. We can leverage the meaningful relationships we have built to quickly fill gaps and transition properties if necessary as lease expire. As previously disclosed, we completed one transaction subsequent to the end of the quarter. We closed a $17 million real estate joint venture acquisition with an affiliate of English Meadows Senior Living Communities. LTC has a 95% interest in the real estate joint venture. English Meadows Abingdon Campus, which opened in 2015 is a 74 unit assisted living and memory care community in Virginia that was 90% occupied at the time of closing. The initial lease rate is 7.4%. The Abington Community is operated by English Meadows, a new operating partner for LTC. English Meadows was founded 10 years ago and operates eight communities across Virginia. Now I would like to update you on the progress of communities under development. First, Boonespring of Boone County, a skilled nursing development project in Kentucky opened and accepted its first two residents in early February. Boonespring, a 143 bed transitional care center is operated by Carespring and is part of a four property master lease. Next is our Hamilton House project, a 110 unit independent living, assisted living and memory care developed project in Wisconsin that anticipates opening in early to mid-April. The community will be operated by Tealwood Senior Living. Moving now to the portfolio numbers, Q3 trailing 12 month EBITDARM and EBITDAR coverage using a 5% management fee was 1.43 times and 1.21 times respectively for our assisted living portfolio and 1.67 times and 1.28 times, respectively for our skilled nursing portfolio. Thrive has been excluded from our assisted living portfolio of numbers because only one Thrive Community would have rolled into cover this quarter and as Wendy mentioned, we are no longer accruing contractual rents starting in 2019. Coverage in our skilled portfolio increased by 2 basis points over the previous quarter. The skilled operators in our portfolio prepared a transition to the patient driven payment model in October. Sentiment continues to be positive as to the expected benefits from this change in Medicare reimbursement. Along with the expected positives associated with PDPM, we are closely monitoring the current biennium legislative session in Texas, pertaining to a proposed provider tax bill that the for-profit skilled nursing industry has long supported. Passage of such a bill would bring needed relief to many operators in Texas and positively impact coverage in LTC skilled portfolio. Current Texas legislative session concludes in May and while passage of the bill is not guaranteed and we are not relying on it. We remained cautiously optimistic. Before I wrap up, I would like to briefly comment on our pipeline. As Wendy mentioned this time of year is generally slow in terms of pipeline growth. However, we are seeing some opportunities for smaller stabilized, private pay assets, where prices have come down a bit. Even though some large deals have been reported recently, we remained focused on select opportunities that add new operating partners and optimize our portfolio. We are maintaining our focus on strategically and methodically identifying quality, growth oriented operating partners and newer assets. While we are pleased to see that pricing is starting to become more realistic we caution that a gap still remains between what buyers are willing to pay and how sellers are pricing their assets, creating extended transaction cycles. We obviously can't predict when the gap will fully close, but we do feel confident that the transactions now on our pipeline have a strong probability of converting this year. Now, I will turn things back to Wendy.

Thank you, Pam and Clint. We believe this year will provide several growth opportunities. Our challenges with Senior Care and Thrive are being addressed and controlled. Investment opportunity has picked up, marketplace challenges are starting to abate slightly and the two reimbursement changes that Clint mentioned might significantly benefit our SNIP portfolio at the end of 2019 and into future years. We believe new construction will slow down with cost headwinds and occupancy of existing properties will increase. Broken private equity deals could result in some interesting new opportunities. We will remain optimistic and opportunistic as the cycle runs its course. Thank you again for joining us today. We are now ready for your questions.

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Chad Vanacore with Stifel. Please go ahead.

Good morning all. So just thinking about guidance $3 and $3.02, that is pretty tight range especially considering all the moving pieces here. Can you share some of that primary assumptions at the collections and timing of changes there?

Yes. The primary change is reducing the Thrive rent. So we have assumed that Senior Care pays the contractual rent through the year. $1 million lower of straight line.

Yes, we had to reduce straight-line. We have increased for Anthem, reduced for Thrive and -.

And reduced G&A.

And reduced G&A.

Discussed on the call.

Okay. And then just on the Senior Care part, didn't you mentioned in the guidance that present drag associated with Senior Care or did I hear that wrong?

No.

That is correct, that is in 2018 because we did not record rent in 2018 for December because they did not pay it. Bankruptcy claim.

Okay. Got you. And then just thinking about you have got new developments coming online in first half of 2019. How should we expect incremental rents that flow through the income statement there?

I’m sorry. Repeat the question.

The developments coming online in 2019. [Indiscernible] you have guided in the supplemental.

Yes. According to the supplemental, we give that - Page 7 of the supplemental. [indiscernible] that is when we start modeling rent.

We have the rent as made a rent conception date? Yes.

Alright. In that mid-quarter getting a quarter you get full rent starting April 1st and January 1st?

For GAAP purposes, yes. The accounting rules require you to start recording rent on a GAAP basis at certificate of occupancy. So those are the dates we laid out. So far the Carespring property and Kentucky will be first quarter of this year or the property in Wisconsin will be the second quarter and for the property in Oregon fourth quarter.

And Chad right now everything is on track, as far as the development timelines.

Okay. And these things typically they get pushed back. Alright. So, just one more, and looking at your third quarter SNF coverage in your supplemental. It looks like trailing 12 month coverage improved sequentially despite occupancy impairment declines that is counterintuitive. Can you tell me what is behind that change?

Sure. Part of that Chad, I talked about this previously about some quality mix indicator of payments that one of our operator was expecting in Michigan and that did actually come through. So that was funded at the end of the fiscal year for the entire amount that applied for the prior fiscal year. So we did see a large pop in that one operator, which I have talked about in the last couple of quarters. So that is one reason why you are seeing the occupancy go down a little bit and why you saw the coverage slightly go up.

Alright. And one last one actually, just going back to guidance - go ahead.

[indiscernible] going forward as well so that QMI payment is going to continue going forward into the future while this be paid on a monthly basis going forward.

Okay. So it's not an end of the year of quality payment. [indiscernible] consistently month-by-month?

That is correct.

Okay. So going back to guidance, did that include any new investments or acquisitions dispositions?

No, it does not.

Okay. Alright. I will leave it that. Thanks.

Thanks, Chad.

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

Yes. Thanks. Just real quick on the guidance numbers. Pam, I guess you said you assumed $1 million of rent from Thrive, where they scheduled to pay $6 million plus of rent, is that correct?

In 2019 - yes, they were scheduled to pay $7.2 million in 2019.

So then how does the math work if you are only assuming $1 million from Thrive, so that seems to be $0.15 lower off of the current run rate, but then it seems like it's all recovered. So does the new investments and reduction in G&A making up for that $0.15 shortfall?

So GAAP and cash on this particular lease because the escalators are variable, so they are not straight lined and there was lease incentives, free rent in the beginning of this lease. The cash rate is actually higher than the GAAP rate. So the GAAP rate is $6.7 million, so that is what is in guidance.

How much rent was recorded for Thrive in 2018?

$6.7 million.

$6.7 million. But then you are dropping from $6.7 million down to $1 million, which is roughly $0.15, so then what is the uptick to get you back to that $3 run rate, is it just new investments and reduction in G&A?

Yes. Yes, and Anthem and increase in Anthem. Yes.

Okay.

So if the property is coming online that we talked about and Anthem, and then reduction in G&A, those are your primary components.

That increase in Anthem is just 45% over what it was in 2018. So it has a positive contribution.

Okay. Great. And then can you talk a little bit about preferred? I know that is in the 10-K it highlighted that they missed their date to either a firm or reject your lease. What is the thought process there?

I think right now it's Preferred Care has been going through a sort of an elongated period. I think they felt like they would be out of bankruptcy at this point, and they have been working through the transfers with other landlords, which I think they have accomplished. I think they only have two buildings remaining in New Mexico, but they have the lawsuits in Kentucky and the matter with the State Attorney General of New Mexico that sort of drawn their case out a little bit. And so they are through that process, I think they are trying to evaluate what their post-petition organization looks like after they emerge, so they have continued to pay rent to us. I think they are looking at exiting certain markets and in those markets, includes some buildings in our master lease. So right now, we are working with them to see if we can accommodate, possibility of removing some of the buildings from that master lease. They do want to stay in and have a viable entity coming out of bankruptcy. I mean, the good thing for us and working with Preferred Care on this is, it gives us an opportunity to reduce our operator concentration because Preferred Care right now is our sixth largest operator and we view value in having the diversification among our operators.

Okay. So I guess a good way to think about that is that they still want to stay in the master lease just going forward. Is this going to be a few assets that you plan on selling and you are going to tap higher asset sales in 2019?

No, I don't see higher asset sales, we might look to sell some, we might look to retenant others as well.

And would this be done to that similar rental rate?

We are working through that right now. We would think that the same rate. That is what our preference would be, that is part of the negotiation as Preferred Care wants to retain some of the buildings. And we are working on that right now. Actually Wendy and I were in Dallas about two weeks ago meeting with them and walking through what they are looking at from an organizational standpoint and what they want to look like when they emerge from bankruptcy.

Okay. Great. And then I guess last one for me, I know that Frontier has had troubles leasing up those two developments and seems like those were stabilized this quarter. So what is the occupancy rate and I guess have you seen a pretty good uptick in those trends?

In Clovis, we have actually been making some proactive progress on Clovis. We have seen some lumpiness in the occupancy as evidence, we have been monitoring that and talking about it over the last number of quarters. So we have done actually - we proactively identified a solution for the Clovis properties and we found a new operator that actually has seen long-term value in that asset. And so right now we have negotiated a new lease and a guarantee with another operating company to take over operations of the Clovis community. Right now, it's just subject to state approval, which we hope to have any day now. So effectively the lease terms will be on similar terms as Frontier, as far as the current cash payment. We are actually getting a stronger credit enhancement in working with this new operating company. But in exchange for that, we are giving them a purchase option to buy the community between the sixth and 10th lease year from lease commencement.

Okay. Now what release rate is that purchase option at?

I don't have the rate, but it basically would be our gross book plus any investments we make into the property. And then, we would retain 40% effectively of the upside - the purchase price would include 40% upside based on appraised value.

Okay. Great. Thanks a lot.

So we think it's really a strong win-win for us in this new operating company. And actually Frontier, who has been managing the community they have been great to work with. I think this wasn't the right opportunity for them. But they have been engaged with this process and very cooperative. So we appreciate their efforts.

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

Hi. Good morning. I wanted to go back to Thrive and could you talk a little bit about the performance of the properties in which direction they are going? I thought they were maybe hoisting up slowly, but still moving in the right direction. Did something change there and I guess we'll start there?

Thrive is an opportunity. They had some challenges with cost. They have had challenges with using agencies. They have a couple of properties that are doing very, very well like, Anthem had a couple of properties, all of their Colorado properties, who are doing well. They are having challenges in the lease up of the newer properties. One of the good things about Thrive is that we it's not the same as the Anthem in terms of the entire portfolio. We could easily split up Thrive. They have got one asset in Texas and we have an operator who might be interested in that asset in Texas. The one asset within the Thrive portfolio that is probably more likely to be a sale than a retenanting would be in Jacksonville, Florida. And I think we would come out net the same amount of money that we invested in it. But there seems to be a lot of challenges in Jacksonville in that area of Florida, but the other areas are viable. It's just taking them a little bit longer. They just had extreme expense variations in terms of controlling those expenses. They have turned their attention to the assets. Another good thing about Thrive is they have assets outside of the LTC portfolio and we have certain guarantees that support our amounts due from Thrive. So Anthem didn't have that. Anthem only had our assets. So while Thrive is a challenge right now and we haven't put much in our projections for Thrive, there is every opportunity for us to be able to get more out of the Thrive facilities in 2019. But at this point, we can't promise our shareholders that we are going to do that, but I think we have a really good opportunity of getting more than what we have got in our projections from Thrive rent.

So would be a characterization that they are under managing the assets at least from an expense perspective maybe they got over their skis a little bit with the number of development properties and how fast they grew. Is that the right way to characterize it?

Yes. If Thrive is listening, we love them as a management team, but they have had challenges. So they have done...

No, I have met them before. So…

Okay. They have done very well in their development and turning the properties over to a new owner and participating in the windfall and all of that sort of thing. It's just adding that as or adding the operating of day-to-day assets hasn't been a real success for them with our assets. I don't know what their entire portfolio.

Okay. And then the other question I have here is that, on SEC, you'd previously indicated that when you are negotiating a master lease rent, new master lease with a different operator, maybe the possibility of similar rents and I would go back to December, in your press release, you had 1.6 times EBITDARM coverage. Has anything changed in your thoughts about maybe BMO gets similar rents on those properties or transfer to another operator and has there been any deterioration in the lease coverage?

Right now, Dan, there has not been deterioration in the lease coverage, we are monitoring closely. Yes, I think in transferring the operations to a new operator, which obviously would be subject to court approval we don't have the unilateral right to do that, but we have been proactive in trying to position the company to take advantage of opportunities and have a backup should something happen. We don't think that Senior Care as an organization and as it's structured today, it's going to survive the bankruptcy. So we want to be prepared for the alternatives. I think the way to think about rent is there could potentially be possibly some deferred rents, potentially, depending on when the buildings would transfer possibly and where performance is at that point. That really comes down to what the negotiation is and how we would treat that. But I think there are probably some low-hanging fruits on some of these buildings because of just the focus. And Senior Care has been more on corporate events and the bankruptcy and not as much on driving performance at the facility level. So we think there is opportunity long-term if we get a new operator to come in and operate those properties. So a little dynamic in regard to what rent would be, but there is positive cash flow currently on those buildings.

Okay. And one more question, really going back to the pipeline and originally Wendy's comments on the bid-ask spread kind of widening out, what do you think has caused that for private equity in terms to be a little bit more cautious on the smaller and mid-sized deals? It's just their elephant hunting, do you think there has been some pullback in money into the private equity space, is it sovereign wealth money from China or was the December drop in the stock market? Just trying to understand kind of where those stocks are coming from?

I think there is larger opportunity. There are a lot of transactions. We are seeing a lot of activity right now on the deal front. We are signing a lot of confidentiality agreements, but we are also being judicious and sticking to our underwriting standards. So we are seeing a lot of deals out there. And so I think there is a lot of things to look at. And I think from a private equity standpoint, you can do a multiple facility transaction. It's the same amount of work as doing with one property. So we are just seeing that interest fall off a little bit in areas that we have been looking. But still there are opportunities that we see where we can find where the price and the metrics work like the Virginia deal that we just closed on. So it's hit or miss, but we are seeing a little bit of disruption on that bid-ask price and we view that as an opportunity.

Okay. That is all I have. I will hop off. Thanks.

Thank you.

Thanks, Dan.

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

Good morning. On Anthem, can you just remind us what drove their recovery in operations to get that increase in rents and also what is the coverage now on a EBITDAR basis?

We don't give coverage on EBITDAR basis by lease, but what is the recovery is that they have been development properties starting about five years ago and as they have leased up, they have stabilized operations. So it was a combination of lease up of assets. Indeed they did lease up a little later than we had originally underwritten them five or six years ago, but they are leasing up now and Anthem took some overhead cuts this year at our urging. So their overhead is much more in line with the fact that they are operating 11 properties. So it's a combination of new properties leasing up, Anthem spending less on overhead and filling up their assets. So we expect that we have four that are still in lease-up and by the end of the year, we think their rent coverage ratio will be significantly higher than it is in January, February and for 2020, we expect to have even higher rents from Anthem.

Okay. And then on Senior Care, I think you mentioned in your press release back in December that you were in discussions with another operator for this property, which you also mentioned in your prepared remarks today. But back in December, you were saying, we were on similar terms as a Senior Care lease and I'm wondering, if that was still the case.

Yes. It is the case. We are still working on that lease. We don't have the unilateral ability without court approval to move the properties, but as a backup, we have negotiated. The lease terms are very similar, as I just mentioned on one of the other questions about one of the open items would be the rent level as far as is there any deferred rent or not. But currently, there is cash flow on those assets. So that is to be determined, but we are just trying to position LTC to be prepared and have a backup if the opportunity arises, where we can transfer operations to this new organization, which they do have the experience with these building specifically. So we view that to be a strong advantage for us.

On your acquisition pipeline and focus more on private pay stabilized assets, is there anything else you could share as far as what you expect cap rates to be the AL/IL mix and geography?

[indiscernible] most of what we are looking at is probably private pay assets. Our focus is on stabilized assets, which is evidenced by the deal we just did in Virginia. Right now, we are targeting similar yields to what we got on the Virginia deal, which is around 7.25% to 7.5% for private pay assets that are stabilized. And geography really is, depends based on the opportunities that present themselves with operators in certain markets, because we have been very focused on building relationships with regionally based companies, so we are opportunistic in regard to locations.

And why do you think cap rates have gone up on stablized assets? Is there a potential for you to or buyer to put in CapEx upon…

This was an opportunity where we had - it was effectively a sales leaseback transaction that the operator effectively co-invested with us on the real estate joint ventures. So that led to unique opportunity where we could come in and price it at that yield and get coverage off of it on a stabilized basis. So we are starting to see more opportunities where you can fit these newer stabilized assets in a triple net leases. And the real estate joint venture are structures that we have been utilizing helps to lower the lease cost to the operator, where they are getting the return on the - very effectively lowering the rent cost and giving themselves more flexibility.

Okay. That is helpful. Thank you.

Thank you.

Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Hi. Thanks. And Clint, just to stay on that theme with the Virginia asset, is it a triple net lease within a joint venture? I didn't catch that.

That is correct. We have co-invested on the propco and then there is a triple net lease to the operating company and the principals on our JV partner as well as the opco are common.

Okay. And do you own the real estate 100%?

95% is our economic interest in the real estate.

Okay. Got it. Alright. Thank you. Okay. And then go to the mezz loan commitment? There is a piece of deferred interest on that. I guess the bulk is cash, but how does that get booked on the P&L and has it been funded yet?

It has not been funded yet. We made the commitment in 2018 and right now, everything is in line and we expect to fund by the middle of March. It is a mezz investment of 12%, but during the first 46 months, it's 8% current pay. There is a strong equity position in front of us with about 30% equity on this development project. So we view this as a unique opportunity to come in and look at a transaction that we probably - of a size we probably wouldn't come in and own 100%. But it's a great way for us to build relationships with operating companies that would be new to our portfolio. And we think with the current pay piece and the ultimate yield of 12% is risk adjusted return for LTC.

But we'll be booking the 8% to answer your question.

Okay. That is helpful. Thank you. And were the ultimate goal of owning or having a seat at the table, so loan to own?

This is a little bit of a larger project, so it was the idea of coming in on a risk adjusted basis, a bite size investment for us to get a look at this type of investment and build relationships with companies that are new to our portfolio.

Okay. That is helpful. Thank you.

Thank you.

[Operator Instructions] Our next question comes from Karin Ford with MUFG Securities. Please go ahead.

Hi. Good morning. Just one more question on Senior Care, I know you said it's early in the bankruptcy process, but if the court rejects your leases in the process, how much downtime do you think there could be in a transition? Is there any risk that we could have some downtime in 2019?

There is always risk of downtime, but the good thing about investing in the State of Texas is the licensure process in the state is a very short time frame. So being able to transition buildings is landlord advantageous. I mean, it's much different in California like which we are experiencing on the transfer of Bakersfield and Waterville, two field Senior Living. So, there is a possibility, but I think that it would be - if any would be limited.

And even if they do reject our lease, don't they still have to pay rent?

Don't have to pay us.

Taken out, and they could say, well, we only need to pay economic rent.

Use and occupancy.

Yes. It covers 1.6 times before management fees. So I think we would have an argument in court that our lease rate is a reasonable amount of rent. So yes, it's disruptive and I don't think we will lose in the transaction. I don't think we will lose the gap. We may delay cash awhile, but I don't think we'll lose gap rent.

No. That is helpful. And then second question is just on Thrive. I think three of Thrive's six properties were 2017 transitions from other operators. With now two failed attempts of leasing those, do you want to sell those three and what do you take away from this from an underwriting standpoint especially on developments?

Well, actually two of the - you are correct on timing. And two of the three were transitions from Clarity Pointe to Thrive. It was the building in Louisville and the one in Jacksonville, which Wendy talked about a few minutes ago. The Jacksonville community is probably a sale for us on that. And it just seems in the Jacksonville market, there is been a lot of development and it's going to take a longer period of time frame for lease up. So what we looked at in that specific case is a target of lease-up was, should have been a longer period of time and just having the runway to span through that that you get elongated lease-up period. So that is probably going to be a sale, most likely. The other building that they opened in 2017 was building that Thrive actually opened themselves and we came in at a takeout that certificate of occupancy.

Got it. Okay. Thank you.

You are welcome. Thank you.

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

Thank you, and thank you all again for joining us for our year end. We look forward to talking to you in just several weeks about the first quarter. Have a great weekend.

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