LTC Properties, Inc. (LTC) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the LTC Properties First Quarter 2019 Analyst and Investor Conference Call. All participants will be in a 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 31, 2018. LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Please note this event is being recorded. I would now like to turn the conference over to Wendy Simpson, Chief Executive Officer. Please go ahead.

Thank you, Chad, and welcome everybody to LTC's first quarter 2019 conference call. Joining me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer. After a few introductory remarks, I will turn the call over to Pam, who will discuss our financial results and the impact of a new accounting standard, I will come back with an update on four of our operators and give guidance. Clint will follow with a discussion of our portfolio and operator performance, and then I will conclude our prepared remarks with a brief wrap up before the question-and-answer session. Although there has not been any meaningful change in industry dynamic since we last spoke with you in March, we remain optimistic with LTC's ability to capture future opportunities when a positive market shift becomes more permanent. While we are actively building our pipeline and evaluating multiple opportunities, closing transactions has been slower than we would like as a pricing disconnect remains between buyers and sellers. As long as private equity continues to pour money into the marketplace at what we believe are unreasonable valuations and risks, this discount is likely to continue. However, as we did in 2018, we are strategically assessing this market to monetize some of our properties. That said, we are making good progress in several areas. And I believe our current initiatives will allow LTC to build an even stronger portfolio with solid regional operators with who we can grow into the future. Now I will turn the call over to Pam.

Thank you, Wendy. Before I discuss our quarterly results, I would like to explain the impact of recent accounting changes specifically the adoption of ASC 842 that became effective on January 1st. Of note, that the impact that the new lease accounting guidance reduced the comparability of results between quarters. New lease accounting guidance requires that we record the property escrows we collect from our tenants as revenue with the corresponding expense. Accordingly, first quarter 2019 results include property tax revenue and expense while the prior year comparative period does not. Under the new guidance, straight-line rent is written off to contra revenue rather than expense as under previous guidance. During the quarter, we transitioned the senior living communities operated by Frontier to a new operator and wrote off $1.9 million of straight-line rent related to the terminated Frontier lease to contra revenue in accordance with the new lease accounting guidance. The new guidance also sets higher collectability thresholds for recording straight-line rent. Under the new guidance, we performed an analysis of the collectability of all rent owed to us on our leases through maturity and determine that it was not 65% to 75% probable, that we would collect 90% to 95% or substantially all of the lease obligations due from Anthem, Thrive, Senior Care, and Preferred Care through the end of their respective leases. Accordingly, we wrote off the straight-line rent and lease incentive balances associated with these leases. Further, the new guidance does not provide for general reserves for straight-line rents. So, we wrote off our 1% general straight-line rent reserve. These balances totaled $42.8 million and were written off to equity effective January 1st as required by the transition guidance. Under the new lease accounting guidance, collections of rent subsequent to the straight-line rent write off are considered recoveries of amounts previously written off and are recognized as a contra expense rather than rental revenues until the cumulative amount of the recovery recognized equals the amount of the straight-line rent written off. Thus, we recognized $9.6 million of cash rent received from Anthem, Thrive, Senior Care, and Preferred Care as contra expense on the income statement. Now, I'll get into our quarterly results. Revenues decreased $6 million this quarter compared to a year ago due to $9.6 million of rent received from Anthem, Thrive, Senior Care, and Preferred Care recognized as a contra expense rather than revenue. A $1.7 million reduction due to property sold in 2018, $1.9 million of straight-line rent written off due to the Frontier lease termination, and $1.6 million due to Thrive's failure to pay first quarter 2019 rent. These decreases were partially offset by $4.3 million in property tax revenue, $2.3 million in revenue from acquisition, completed developments in capital improvement projects, $777,000 in increased rent from Anthem, Preferred Care, and Senior Care, and $1.4 million in deferred rent received from Thrive. During the first quarter, Thrive paid $1.4 million of deferred rent and $740,000 of past due rent that was accrued in outstanding as December 31, 2018. Additionally, they paid property tax impounds for the first quarter that paid rent to date in 2019. NAREIT FFO was $0.75 per diluted share in the 2019 first quarter compared with $0.75 last year. Excluding onetime item, FFO was $0.77 per diluted share this quarter compared with $0.75 last year. The increase was primarily due to higher contra expense, representing recoveries of amounts previously written off and a $454,000 increase in unconsolidated joint venture income resulting from additional interest related to the payoff of a mezzanine loan on a property in Fort Myers Florida, as well as lower interest expense partially offset by lower revenues. Net income available to common shareholders was flat compared to the prior-year first quarter due mainly to changes in revenues contra expense and unconsolidated joint venture income previously discussed, and lower interest expense offset by property tax expense. The contra expense line item titled Recoveries of Amounts Previously Written Off represents $9.6 million of cash rent received from Anthem, Thrive, Preferred Care and Senior Care that under the new lease accounting guidance is considered a recovery of straight line rent that was written off as of January 1, 2019 in accordance with the transition guidance. Interest expense decreased $362,000 from the prior year related to the repayment of debt under our senior unsecured notes. In the 2019 first quarter, as I mentioned we recognized $4.3 million in property tax expense in accordance with the new lease accounting guidance. In the prior year, property tax growth were not required to be recognized as income and expense. G&A decreased $226,000 due to lowering accrued incentive compensation partially offset by an increase in performance based stock compensation vesting, legal expense and higher payroll taxes in 2019. We are currently estimating G&A to be in the $4.5 million to $4.6 million range per quarter through the remainder of this year. During the first quarter of 2019, we funded a mezzanine loan that was originated in the fourth quarter of last year for the development of an independent living, assisted living and memory care community in Atlanta and acquired an assisted living and memory care community in Abington, Virginia. Clint will provide additional details shortly. We also funded $7.2 million in development and capital improvement projects on properties we own and $1.5 million under mortgage loans. During the first quarter, we received $3.4 million related to the prepayment of the mezzanine loan I discussed earlier which was accounted for as an investment in unconsolidated joint ventures. We borrowed $34.9 million under our line of credit to fund acquisitions and capital commitments, paid $4.2 million in scheduled principal pay downs on our senior unsecured notes and continue to fund LTC's $0.19 per share monthly dividend. At March 31, we owned two properties under development with remaining commitments totaling $15.3 million and two properties under renovations with remaining commitments totaling $4.9 million. We also have remaining commitments under mortgage loans of $15.7 million related to expansions and renovations on seven properties in Michigan and $1.7 million remaining under a preferred equity commitment. Our balance sheet remains strong and provides us with substantial flexibility and the capacity to fund our current and long-term growth initiatives. We have just over $453 million available under our line of credit, $98 million under our shelf agreement with Prudential and $200 million under our APM program providing LTC with total liquidity of approximately $751 million. We expect to remain true to our conservative capital allocation strategy which has served us well. Our long-term debt to maturity profile remains well matched to our projected free cash flow helping moderate future refinancing risk and we have no significant long-term debt maturities over the next five years. At the end of the first quarter, our credit metrics remained well-matched to the Health Care Week industry average with debt to annualized adjusted EBITDA for real estate up 4.4 times and adjusted and annualized adjusted fixed charge coverage ratio of 4.9 times and a debt to enterprise value of just over 27%. Now I'll turn the call back to Wendy.

Thank you, Pam. I'd like to provide an update on senior care centers, Thrive, Anthem and Preferred Care and then discuss our updated guidance. We've had a lot of work to do and progress is being made. I'll begin with senior care centers which is working its way through the bankruptcy court. The court recently approved an extension through July 2 for senior care to affirm their leases and also approve the transfer of a number of properties owned by other landlords out of the portfolio. Should we get our properties back, we are prepared to quickly transition them to a different operator. Senior Care is current on their 2019 rent and EPS growth with us and has been able to make some property improvements during the ongoing bankruptcy process, we are also preparing for the transfer, also preparing for the transition to the PDPM model. Coverage in the senior care portfolio was flat quarter-over-quarter on a trailing 12-month basis. Regarding the Thrive portfolio Pam mentioned. Thrive product on their 2018 rent as well as the differed owed to us, while Thrive has paid their 2019 grows with us, they have not paid any reps thus far in 2019. As such, we issued notice of default infinite and demand for payments to Thrive, and its guarantors on April 5, which requires payments of approximately $2.6 million of cash to rent through April. We are continuing to evaluate all options related to the Thrive portfolio and recently engaged a broker to market our Jacksonville, Florida building. We have entered into LOIs with two strong regional operating partner candidates for the other five properties. We'll keep you apprised of our progress. Anthem has paid monthly rent and escrow to date in 2019. For our forecasting, we have projected Anthem's 2019 rent to be approximately 45% higher than in 2018. We plan to revisit appropriate rent levels associated with the portfolio as we go forward. Any revision in contractual rent cannot realistically be calculated until all of the properties have been stabilized for a period of time, so it will likely be late in 2020, before we have greater visibility on stabilized rents going forward for Anthem. Preferred care operates 23 properties for LTC, we continue to work cooperatively with them to accommodate preferred carriers' interest in reducing the number of LTC owned properties under their operations. As a result, we are pursuing a sale initiative to market the majority of LTC properties currently operated by preferred. The remaining properties could continue to be operated by an affiliate of preferred care released to another operator, marketed for sale or a combination of these options. Before I turn the call over to Clint, I'd like to provide an update on our 2019 guidance. Assuming no additional investment activity, asset sales, financing, or equity issuances, SFO is now expected to be between $3.2 and $3.4 per share for the full-year, which is $0.02 higher at the midpoint than our prior guidance due to our implementation of the new leased accounting standard AS 842. Over to Clint.

Thank you, Wendy. I'll begin my remarks with the previously disclosed leased transition related to our Bakersfield and Vacaville, California buildings, formerly operated by Brookdale Senior Living. Our new master lease agreement with an affiliate of fields Senior Living became effective may one upon license issuance at the state of California, master lease with fields provides them with a purchase option and includes a $3 million capital commitment from us at a 7% yield. Field has 12 months for lease commitment to utilize these funds. The annualized gap rent for 2019 from the Bakersfield and Vacaville communities is expected to be $2.6 million. Our relationship with field now includes four properties. We have also transitioned two senior housing communities. Its total 180 Independent Living, assisted living and memory care units in Clovis California from frontier management to generations. The new master lease, a 10-year term with an initial, the annual initial cash rent $2.9 million to the same as the rent we were collecting from frontier. The master lease rents are fixed for five years and include certain credit enhancements. The agreement also includes a purchase option for generations, which can be exercised beginning in 2024. Based in Portland, Oregon generations is a regionally focused Senior Living company operating five communities in four western states. During the quarter, as previously announced, we closed a $16.9 million real-estate joint venture acquisition with an affiliate of English Meadows Senior Living communities, a new relationship for us. LTC contributed $16 million in cash for a 95% interest in the real-estate joint venture. The initial lease rate of 7.4% and the JV is consolidated on our books. English Meadows Abingdon Campus was opened in 2015 as a 74 unit, assisted living in memory care community in Virginia. Also, this quarter, we funded a $6.8 million mezzanine loans that was originated in the fourth quarter of 2018. For the construction, of course, of Atlanta, a nine-acre campus in Buckhead area of Atlanta that includes 82 independent living units, 75 assisted living units 26 memory care units, and 21 independent living cottages. The campus, which is expected to open in the winter of 2020, will be operated by Atlanta-based Village Park Senior Living, a new operating partner for us. Five-year mezzanine loan bears interest at 12% with 8% current pending during the first 46 months of the loan, with the balance of pending note, 12% current pay thereafter. Now I'd like to update you on the progress of communities under development. As discussed on our last call, during Spring of Boone County, a skilled nursing center in Kentucky opened and accepted its first two residents in early February. Occupancy as of this week is 45%, which is ahead of pro forma, Hamilton house our 110 unit independent living, assisted living and memory care development project was confident opened a few weeks ago is at 10% occupancy as of this week. The community is being operated with Tealwood Senior Living. Our remaining development project report a 78 unit assisted living at memory care community in Oregon is expected to open on schedule earlier this year. The community will be operated by field as part of a larger campus. The campus already includes a building with 89 independent living units currently operated by fields in which we invested through a real estate joint venture in August of 2018. Moving now to the portfolio numbers, Q4 trailing 12 month EBITDARM and EBITDA converge using a 5% management fee was 1.42 times and 1.21 times respectively for our assisted living portfolio 1.79 times and 1.29 times respectively for our skilled nursing portfolio. Thrive has been excluded from our assisted living portfolio numbers as we stop accruing structure win for Thrive starting in 2019. Our coverage is stabilized and there are several industry events that could help drive coverage going forward including PDPM which takes effect October 1 and the proposed provider tax bill in Texas that could be a positive for the full profit skilled nursing industry and through LTC. The similar provided tax bill was recently signed by the governor in Mexico it takes effect July 1 and includes a fairly substantial increase while the buildings go to CMS for approval there are no anticipated issues. Given the current approval process actual payments are not expected until later this year or early 2020. That will be retroactive to July 1. Lastly, I'd like to briefly comment on our pipeline. As Wendy mentioned while we are patiently waiting for pricing to rationalize we are working on building our pipeline through an ongoing focus on strategically identifying quality growth oriented operating partners in newer assets. We are continuing to see some opportunities for smaller stabilized pilot pay assets or prices that come down bit and have also found some interesting opportunities to invest in new skilled nursing centers that we meet our underwriting standards and strategy of attracting new operating partners should we decide to pursue them. Now I'll turn things back to Wendy.

Thank you. Came in quick. We are continuing on our plan identifying strategic asset for purchase or sale, successfully resolving current portfolio challenges and building and maintaining a portfolio with embedded growth characteristics that will serve LTC well into future years. When the current cycle terms I am very confident we will be ready to move quickly with a solid foundation based on a more diversified asset and operator base. While the pace of change is fairly slow at the moment, we remain on solid ground. I am very optimistic about our future and our ability to build sustained value for LTC, our partners and our investors over the long-term. Again, thank you for your participation today. Chad, we are now ready to take questions.

Thank you. [Operator Instructions] The first question comes from Chad Vanacore with Stifel. Please go ahead.

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

Well, with respect to your last point on skilled nursing, we still have looked to underwrite skilled nursing at 1.5 times coverage with 5% management fee. So that continues to be requirement for us. We also are looking to invest in newer properties, and we have seen over the last year have been a lot older properties in the market and it has not been our focus, so that we are on the skilled. Now pricing in general as Wendy mentioned in her prepared remarks, we have seen things stay in the market a little bit longer because of the disconnect on pricing. And we have seen some buildings come back around to the second or third time. So given that who has been very selective and patient leading to the opportunities some of those pricing to drop. We found some opportunities like the Abingdon Campus in Virginia where we found unique opportunity with a regional based operator, a newer property that was stabilized.

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

Well on the assisted living portfolio, I would think that would maintain fairly stable is what we have seen. We have seen lot changes on that. On the skilled, we have had decline over the last year or so, but with the change in PDPM, they [indiscernible] in Mexico and some increased performance, we hope that will start to trend upward as we go forward into 2019 and 2020.

All right. That's it.

Thank you.

Thank you, Chad.

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

Yes, thank you. I guess, Wendy or Clint, I wanted to see if we can talk a bit about senior care centers? And I believe Wendy said that coverage ratio was flat compared to the prior period. Can you tell us what that coverage ratio is?

We talked about it on our last call. It's about only 1.25 range.

And that's EBITDAR?

EBITDAR after 5% management fee.

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

It's been fairly stable. So, really no noticeable difference on the last year quarter, so from occupancy, the mix has been stable.

Okay. And then can you talk a little bit about preferred, I know you are working with them potentially selling some assets and/or releasing those assets. I guess how is that going to work within the mass release? Do you have like rank credit already kind of decided for the proceeds of those potential sales? How are you working through that?

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

Okay.

So that will be to be negotiated.

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

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

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

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

Okay. So no rents being recorded in 1Q and 2Q and maybe you have a million dollars in the second half of 2019?

Correct.

Okay, great. Thank you.

Thank you.

The next question comes from Rich Anderson with SMBC Nikko. Please go ahead.

Thanks, good morning. So just a close loop on Thrive, you mentioned just $1 million in your guidance which is no change. But, you also talked about this $2.6 million past due rent through April that you are sort of making -- taking a shot at, can you explain is that upside then to 2019 if you were able to pull that off?

So, the $1.4 million that we seek this year because of the new accounting guidance, it is showing as [indiscernible] in that contra expense line item, recoveries of past amounts written off. And that is part of the $0.02 increase in guidance is including that revenue. I think Rich is asking and welcome back Rich, I think Rich is asking the default note that we got now.

Yes, so Rich, on the $2.6 million for the first four months, we -- this is part of the negotiation that we're working through this live on this transition and we have guarantees associated with this lease and obviously the one negotiate in public and admit something that we're working through with regard to how we would resolve that.

All right, but if you're successful, then there will be upside to SFO that's not in guidance right now?

That is correct.

That is correct.

Okay, just a couple of items here. Pam, you said there was a loan payoff. I think you said $3.4 million. Where's that in the income statement?

On consolidating joint ventures.

Okay. So it's not explicitly, excuse me?

I'm sorry to going forward, that line item will be about $400,000 to $500,000 last with a pay-off.

Okay. Okay, good. All right, and then, Clint, you mentioned a mezz loan origination in the first quarter, but I don't see it listed on your investment table on page five?

Well, it's originated in the 2018.

Yes, it is last year.

So, it was funded in this year, but originated last year, the last on the loan origination list on the Atlanta Georgia location.

Got you. Okay, thank you very much. And then last one for me. Obviously, this lease accounting is kind of goofy, it's best word I can come up with but no fault of your own, but the $9.6 million have sort of carved out contra revenue or expense or whatever you call it. How repeatable is that, in terms of going forward as we think about setting up our numbers for the rest of the year, are you basically taking the $42 million right off that you mentioned, and just biting into that as you collect rent? And so, we'll have a repeating line item there now for the rest of this year?

Yes, that is exactly correct. There is -- the one-time item in there is drives payments the $1.4 million.

Okay.

And since they are not paying right now, I wouldn't expect that to go forward. But all those operators are on a cash basis. So as we collect the cash, their rent will be reflected in that contract expense. Why not?

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

Yes, that is correct. And it actually it's only the straight-line portion that we wrote-off that is in there. So that's $31.5 million. And currently, if everybody is paying like they paid this quarter, we get there by the end of the year. So let's talk the happy dance, which is we have new operations in the Thrive properties, and Thrive is not paying us back rent anymore. So the new operators rent will go up into the rent line.

Exactly. That goes back up to revenue that is correct.

So that makes it even more clear for everybody, yes.

So yes, clear as much.

And the same with senior, that is the -- you know, if we get the properties back and also new…

They only relate to these operators.

Right.

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

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

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

And so, if all those four only Thrive is the one that's not current on the rent, is that correct?

Yes.

Okay, all right. Thanks so much.

Thanks, Rich.

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

Thanks. The two facilities in Clovis, they -- if I have them -- are they the Carmel villages, those two…

That's correct, Todd.

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

I think they were stabilized by our definition of rolling in to stabilize amount of time at last, there were still a lag on our overall occupancy in those communities and Frontier had some challenges. I mean, they help to work with us on this, they have focuses elsewhere. And we found a different operating company to come in and see an opportunity the Clovis community, so we were successful in transitioning to another operator. We think we'll be able to drive growth in occupancy.

So, no change in rent rates, same rental rate, it was just the purchase option, it was that kind of a sweetener to just get a new operator in there, at the same rate?

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

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

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

And there was -- don't have in front of me. Probably should, what's that lease-up expectation or the yield, I should say, is that 8.5, is that right?

Yes, that's correct.

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

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

All right, great, thanks Clint.

Thank you. I appreciate it.

The next question will be from Daniel Bernstein with Capital One. Please go ahead. Please go ahead, Daniel, perhaps, your line is muted on your end.

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

Sure. That's a great question, and thank you. The Thrive portfolio right now is spread out pretty diversified on Atlanta geographic basis and this included cousin of the point buildings into the drive portfolio. So, we found some regionally-based operators that we think will be better focused geographically on this, on the portfolio and drivers obviously still more in the start phase. They've done a lot of development projects and the operating companies that we're working with the existing seasoned operations. So we think it will be good for their portfolio, and they just have more stabilized platform to work from.

Okay. In terms of the actual pipeline that's out there. It didn't sound like cap rates have moved any higher to meet your investment hurdles. Are you still I guess you're still finding plenty of private equity out there? I just want a little bit more color on maybe the types of assets that you're seeing, the price points and maybe whether it's leaning more towards seniors or skilled, probably I know there is all whole question but are you seeing any value add opportunities as well?

I would say more of the opportunities we're seeing on the private pay side than skilled. As I mentioned in my prepared remarks, we have identified a skilled opportunity that would be newer properties which we find very interesting, but majority what we're seeing is on the private pay side anywhere from one-off assets to some portfolios. There is a combination of value add but on the value add, people are looking for pricing that is based on stabilized as opposed to value adds. So that's why we're seeing, cap rates still with private equity isn't as Wendy mentioned the term comments is still very strong. In terms we are focused on investing on the triple net basis as opposed to RIDEA structure where the cap rates are compressed in the six to sevens, it is hard to make that work with coverage at our lease rates we need the house.

Okay, that's all I have. Thank you.

Thank you.

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

Hi, there. Good morning. I wanted to ask about potential disposition cap rates, I guess you're not collecting rent on Jacksonville currently so no cap rate there but on potential asset sales from the preferred portfolio. What should we expect on just a range on cap rates?

We're running that process right now, so that we have packages out. It's hard to give a exact cap rate right now on where that will end up. But we have packages out and waiting for offers to come in the next probably 30 to 45 days in that portfolio, so we can provide an update on what we're seeing on the next call. Now, right now we're seeing in general, the pricing has been pretty strong on yield assets. So we're hopeful that we'll come across this strong number. We've looked at least the Preferred Care assets. No, there's nothing new and we're looking at selling these assets. We actually approached Preferred Care, a number of years ago prior to them filing bankruptcy and even doing the course of bankruptcy to strategically work with them on recycling capital and selling assets back to them. So when it comes to the Preferred Care portfolio, it's something we've been looking at for a number of years.

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

It would just be, so I can't give that number right now but we do have Wendy mentioned the majority of Preferred Care portfolio that will be on the market. And then we also have the Jacksonville community which you mentioned equity market.

Okay, great. And last question just on the Wisconsin development that opened. You said it was 10% occupied, it looks like you deferred the rent inception from 2Q 2019 to 2Q 2020. Can you just talk about that?

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

To mathematically speak that out.

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

Can I tell -- excuse me, Karin, we were getting clarification on 842 all the way up. So, if we decide till what we can start doing straight line rent in 2022, we pick up all the prior straight, so all of a sudden we get this yes.

Yes, that was currently written.

I'm not sure how well it was thought through because common sense would say that you would straight line from that point that you determined future revenue rise collectible. But as the rule is written, you go back and recapture all of that straight line rent. So that would be a enormous pickup. That makes no sense.

I just wanted to clarify…

Yes, right because it's so clear yes, I suspect given the difficulties which have had in implementing the new lease accounting standard and kind of the things that have cropped up, I think the law of unintended consequences. I suspect the fact that we will be issuing clarifications on certain things because this was not clear, a lot of ramifications of implementing all parts of this new rule.

And just to clarify, it was always intended in that deal that that would not start paying cash rent until stabilization or you were just going to be booking straight line or?

They have certain amount of deferred rent credits, I got that.

Okay.

I mean that is in almost all lease steps. They don't start paying day one, you have a certain amount of free rent and deferred rent and so under the old guidance, we would have been recording straight line rent as level. That's what we always did under the old guidance that's what was prescribed.

Got it. And so there's no change to the agreement you had with Tealwood on that front?

No.

Okay, great. Thanks.

The next question is a follow-up from Rich Anderson with SMBC Nikko. Please go ahead.

Thanks. Sorry. I think there's a 90% to 95% chance, I'm having a cocktail tonight. I just have one question follow-up, Pam you mentioned some amount of one-time-ish in the $9.6 million. Is there any one-time-ish type of number in the property tax that you carve out now?

No, there's not. And it's $1.4 million that is in the recovery that contra expense line item that is the Thrive deferred that we receive this quarter that I'm not anticipating getting that again, we've actually called it a non-recurring item on our FFO reconciliation. So there's every else should be all things being equal to this quarter should be similar absent that.

Right, right. So that is property tax will just kind of grow as they normally would?

Yes, property tax will be recurring item, I don't see perhaps be changing the mind on that one.

All right, thanks very much.

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

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

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