Q3 2022 LTC Properties Inc Earnings Call
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.
Differ materially these risks and uncertainties are detailed N V. L. P. C properties filings with the Securities and Exchange Commission from time to time, including the company's most recent 10-K dated December 31st 2021 L. P. C undertakes no.
No obligations 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. Please go ahead.
Thank you operator, welcome everyone to L. T 620, 22 third quarter conference call I'm joined by Pam Kessler Co President and Chief Financial Officer, and Clint Malin Co President and Chief investment Officer.
Pride I can say LTC has accomplished much over the last few years, especially in the face of a pandemic that has significantly altered our industry.
We have sold assets that were no longer core to our strategy or were not performing to our standards transitioned a substantial number of assets and deploy capital into several investments that should serve us well going forward.
Year to date investments have totaled over $170 million, which represents our highest level of investment activities since 2015.
We are continuing to aggressively identify additional opportunities to fill the financing void that has been created as banks take a wait and see approach to investments in our sector.
As a result over the next 12 to 24 months, we believe that Ltc's investment activity will continue to ramp up as we become even more competitive bringing flexible and creative financing to strong regional operators, who are seeking growth capital at fair rates.
I'd like to highlight our recent 62 million investment with Peru at health and quick will provide more detail. Shortly this off market transaction. What's the result of our building our relationship with this very strong regional operator over many years.
In particular, Doug Korey, our executive Vice President and managing director of business development has done an outstanding job of identifying strong regional partners nurturing those relationships and working closely with them to provide the right financing solutions at the right times for our <unk>.
<unk> partners.
The pruitt investment not only adds newer skilled nursing centers to our portfolio, helping lower the portfolio's average age, but also adds a formidable operator with more than five decades of experience and a substantial footprint in the southeastern United States we were.
We're able to utilize a creative financing package that worked well for Pruitt house.
And that makes good strategic and financial sense for LTC and our stakeholders.
It is just the kind of operator, with whom we like to grow and we look forward to our ongoing relationship with them.
We have a solid balance sheet with no looming debt maturities and no secured debt.
We have locked in attractive rates for both our long term debt and term loans, including locking in a rate of 366% for our newly issued senior unsecured notes for a period of 11 years and entering into swap agreements to lock in our term loans at 256.
And 269% respectively based on our current applicable margins for a period of four and five years, respectively are only floating rate debt is our line of credit.
As a result of our conservative balance sheet approach, we were able to support our operators during COVID-19 and maintain our regular monthly dividend.
With a third quarter payout to our shareholders of $23 $1 million.
Our fad payout ratio was 88% for the third quarter, which was comparable to the second quarter and we are continuing to target our long term payout ratio of 80%.
As we said last quarter, our operators still have some work to do to successfully meet the challenges brought about by the pandemic.
But the news is not all bad anecdotally, our operators are reporting lower utilization of staffing agencies, allowing them to increase salaries in certain cases, making jobs in the sector more attractive.
Increases continue to be implemented by several of our private pay operators and occupancy in our portfolio continues to gradually improve.
However, with inflation and labor challenges, our crystal ball is a bit murky. So we can't predict when or if NOI margins will return to pre pandemic levels for our industry.
Our guidance for the fourth quarter anticipate that <unk> will increase between nine and 10 cents per share from the third quarter.
Approximately <unk> of the increase relates to the $2 $4 million payment of anthem temporary rent reduction and resumption of agreed upon round.
And anticipate 1 million dollar increase in rent from AMG our.
Our assumptions exclude the $500000 lease termination fee paid in the third quarter.
LTC continues to manage through a tough economic cycle, but we have operated through tough markets before and we believe we are well positioned to weather the current environment.
We truly believe that our intractable and some might say boring conservatism does prove that LTC is a good investment now and in the future I am a strong believer that need space care is and will remain a vital part of our society.
Now I'll turn things over to Pam. Thanks, Wendy total revenue for the third quarter of 2022 increased by $6 million from last year's third quarter. This growth was attributable to a $2 3 million increase in rental revenue primarily due to rent received from transitioning portfolio and from our recently acquired Texas properties.
Other factors contributing to the increase included higher property tax income and rental income from completed development projects.
The increase in total revenue was partially offset by lower rent due to second quarter property sales that temporary anthem rent reduction and and deferred rent.
Interest income from sale leaseback financing increased by 357 due to the acquisition of three skilled nursing centers in Florida.
In accordance with GAAP, we are required to record this transaction as a financing receivable since we purchased the properties from an entity and lease the properties back to the same entity under a master lease with a purchase option.
Interest income from mortgage loans increased by $2 5 million, primarily due to mortgage loan originations in 2021, and 2022 interest and other income increased 954000 from last year's third quarter, mainly due to a 2022 first quarter mezzanine loan origination and additional funding and.
Working capital loans, partially offset by loan payoffs.
Interest expense increased $1 3 million from last year's third quarter due mainly to the origination of term loans in the fourth quarter of 2021, the issuance of $75 million in senior unsecured notes in the second quarter of 2022 and higher interest rates offset by scheduled principal paydowns on our senior unsecured notes.
Transaction cost decreased by $3 4 million from the third quarter of 2021, mainly related to the settlement payment we made to a former operator in last year's period.
Property tax expense increased by 247000, primarily due to our acquisition of a four property portfolio in Texas during the second quarter of 2022.
Our provision for credit losses increased by 727000, mostly due to the just discussed the acquisition of three skilled nursing centers that were accounted for as a financing receivable and additional funding under our mortgage and notes receivable, partially offset by principal pay down.
As a reminder, upon origination we record a loan loss reserve estimate equal to 1% of the loan balance. This reserve it's amortized at the loan principal is paid down.
G&A increased by 570000 year over year, due mainly to higher costs related to property maintenance expenses foreclosed properties higher incentive compensation and increases in overall costs due to inflationary pressures.
Income from unconsolidated joint ventures remained unchanged year over year.
During the third quarter, we recognized a $434000 loss on sale of a closed skilled nursing center in Texas.
Additionally, we have a master lease covering two assisted living communities that are scheduled to mature during 2023, one of the two communities is located in Kentucky and has been classified as held for sale as of September 32022, We wrote this community down to its anticipated selling price reporting an impairment.
Lock it $1 3 million and were presently negotiating a new lease for the other community, which is located in Ohio.
Net income available to common shareholders increased to 3 million, principally resulting from loan origination the increase in rental revenue previously discussed and a decrease in transaction costs. This was partially offset by a lower gain on sale of real estate higher interest expense the impairment charge I just described.
Increases in the provision for credit losses, and higher G&A expense.
Fully diluted NAREIT <unk> per share for the 2022 third quarter was 60.
Versus 45 in the third quarter of 2021.
Excluding nonrecurring items <unk> per share was <unk> 63 in the current year third quarter, compared with 55 and a year ago period.
The increase in <unk>, excluding nonrecurring items was due to loan originations and the increase in rental revenue, partially offset by higher interest expenses and G&A.
Moving next to our third quarter investment activity.
We contributed $61 7 million into a newly formed joint venture with Pruitt health for the purchase of three skilled nursing centers in Florida. As previously stated GAAP requires the purchased assets to be presented at the financing receivable on our balance sheet.
Jim will provide additional details about this investment shortly.
Regarding our former senior lifestyle portfolio for the six buildings under two separate leases with quarterly market based rent resets. We received 80000 in the third quarter in line with our expectation.
We anticipate receiving 120000 in the fourth quarter of this year.
Going into 2023, we plan to either sell these assets or set negotiated rent based on our operators budgeting, which is currently in process.
Regarding the former senior care portfolio now leased to HMT, we received rent of $2 million in the third quarter, which is down 500000 from our prior projections at $2 5 million for the quarter. However, our projections for the full year remain unchanged as we anticipate receiving $3 million in the fourth quarter of this year.
We also funded 220000 of principal on the $25 million working capital loan we provided to <unk>. The loan has a current outstanding balance of $13 5 million.
We paid $36 2 million in regular scheduled principal payments under our senior unsecured notes and the 2022 third quarter at a weighted average rate of 475% we.
We also borrowed $95 million under our unsecured revolving line of credit at a weighted average rate of 3% to 4% and paid $23 1 million in common dividends as Wendy mentioned.
We also sold 125200 shares of common stock for a total of $4 8 million in net proceeds under our ATM program and used the proceeds for general corporate purposes.
We have $6 5 million of cash on hand, $249 million available on our line of credit with $161 million outstanding and $163 million available under our ATM. This provides us with total liquidity of approximately $416 million, we have no significant.
Long term debt maturities over the next five years.
At the end of the 2022 third quarter, our credit metrics remained solid with a debt to annualized adjusted EBITDA for real estate of five nine times and.
And annualized adjusted fixed charge coverage ratio of four two times and a debt to enterprise value of 34%.
Although our debt to annualized adjusted EBITDA for real estate metrics remains higher than our long term target. We continue to work towards reducing this metric to below five times.
During the 2022 third quarter, we provided 300000 rent deferrals to a single operator not in our top 10 and received 100000 of deferred rent repayments from a different operator.
We also provided 720000 rent abatements to the same operator for whom we have been giving assistance.
These amounts do not include anthem for whom we temporarily reduced the monthly agreed upon rent for the months of May through September 2022 to.
For 2022 agreed upon rent from anthem remains $10 8 million of which $6 6 million was paid through the end of September 2022, and.
In October to date, we received an additional $1 2 million of rent. This represents 900000 of our October 2022 agreed upon rent and 300000 in repayments towards the temporary rent reduction.
We continue to expect receipt of the total $10 8 million by year end.
On anthem, receiving additional money from the employee retention tax credit and from improving operating results.
In October we provided 240000 of abated rent and agreed to provide rent abatements of up to 215000 for each of November and December 2022 to the same operator previously mentioned.
Now I'll turn the mic over to Clint.
I will start today with a discussion of our transaction with crude helped an operator new to LTC.
Our $62 million contribution to the joint venture for the purchase of three skilled nursing centers in northern Florida mix LTC the majority owner.
Three centers were constructed between 2018 and 2021 now the combined 299 licensed spuds, primarily in private rooms.
<unk> operate under a 10 year master lease with two five year renewal options with an affiliate of crude oil as Tim discussed the master lease Burrows group with a purchase option, which is exercisable between years three and four.
The exercise price is subject to an IRR hurdle.
The initial yield our beliefs with subs in the quarter percent, increasing annually up to 8% a year four after that Tom will increase annually by 2% to 4% based on the change in the Medicare market Basket Road.
We expect to receive net revenue of approximately $700000 during the fourth quarter of this year and approximately $4 6 million next year.
Last quarter, we discussed the property 625 unit private pay portfolio that we transferred to an affiliate of ALG sooner current LTC Parker.
Working with LG, we are.
Currently determining whether we will retain all of the communities or sell all or a part of the portfolio. We will update you on our progress as we move through the process.
For the one off water, we have been providing rent abatements, we decided not to sell the underlying 180 units.
P campus offering services, ranging from independent living cottages to memory care.
Community faced many challenges.
Actually hard with Covid.
Both of the onset of the pandemic and again during the ensuing Serge.
<unk> also struggled significantly with labor shortages. However.
However, positive occupancy gains have been realized throughout the summer months after.
After evaluating multiple options and seeing occupancy gains.
We have decided maintaining a relationship and retaining the campus provides the best value creation path forward at this time.
We have not been receiving nor have we projected any rental income in 2022.
Upon finalization of the <unk> 2023 budget towards the end of this year, we will establish negotiated rent for 2023.
Last quarter, we discussed providing rent assistance to us either operates either living communities for us.
This operator.
Of course with the assistance due to protracted lease up of their portfolio. During COVID-19 is not in our top 10.
We have received full room for October of 445000, and in 2023, we expect to receive repayment of approximately 300000 of the Brent previously deferred upon the operator's receipt of funds from the employee retention tax credits.
Next I'll provide an occupancy update.
On the former senior lifestyle portfolio, which includes 18 communities.
Occupancy at September 30 of 2022 was 88%.
Compared to the 85% at June <unk> and 83% at March 31.
For the six communities under two separate leases with quarterly market based <unk> research occupancy was 88% at September 32022.
Compared with 80% at June 30, and 76% at March 31.
For the 11 property portfolio leased to <unk> occupancy for the month of September 2022 was 57% compared with 56% for the months of June and March.
We extended the lease to January 2024, and concurrently extended our working capital loan to the same date.
Moving next to our portfolio numbers with the usual disclaimer that we don't believe coverage is currently a good indicator of future performance at this time, given the challenging environment created by the pandemic for.
For clarity recently transition properties, including the 11 property portfolio leased to <unk>.
The former senior lifestyle portfolio and the 12 property private pay portfolio already discussed no longer qualify for our same store metrics. So they are excluded from these numbers.
Q2, trailing 12 month, EBITDAR and EBITDAR coverage as reported using a 5% management fee was <unk> nine five tons and 73 times, respectively for assisted living portfolio.
Excluding stimulus funds received by offers coverage was <unk> 91 times in southern times, respectively.
For our skilled nursing portfolio as reported EBITDAR and EBITDAR coverage was 2.01 times and 155 times respectively.
Excluding stimulus funds received by our operators coverage was one five times and 1.05 times respectively.
Now I will share some recent occupancy trends, which are as of September 32022, and our for our same store portfolio.
As I've noted in the past our operators can use this data to us on a voluntary exploded basis. So the information. We are providing includes approximately 66% of our total same store private units and approximately 88% of our same store skilled nursing beds.
Private pay occupancy was 81% at September 30.
Compared with 79% at June 30, and 77% at March 31.
For our skilled portfolio average monthly occupancy was 74% in September of this year compared with 73% in June and 72% in March as.
As a point of reference our private pay occupancy in 2019 was approximately 7%.
Our average skilled nursing occupancy was 80%.
Before discussing our pipeline.
To spend a moment on potential divestitures.
While we are not prepared to provide granular details at this time in 2023, we expect to see similar levels to our 10 year average of $35 million to $40 million of capital recycling.
To repeat what was said earlier by selling assets that are no longer core to our portfolio or underperforming, we can redeploy capital into more strategic assets that reduced the average age of our portfolio, while strengthening it for the long term.
We've had a strong investment year in 2022 to date as William discussed closing of more than $170 million and transactions.
I had mentioned previously rising interest rates with spread between bank roots and OTC as rates have continued to contract, making our flexible and creative solutions, even more attractive to strong regional operators.
<unk> new opportunities will continue to build and nurture relationships. So that we maintain access to off market deals that we may not otherwise have hub.
We believe there are strategic and accretive deals out there and we're working to identify investments will allow us to provide financing in numerous areas, including bridge and construction financing.
Additionally, we are closely watching pricing for sale leaseback transactions and we believe we could see some price moderation, which will allow us to put additional capital to work for our stakeholders now I'll turn things back to Wendy for closing remarks.
Thank you Pam and Clint.
I am very pleased with our accomplishments under less than stellar national economic conditions, we have put capital to work in a way that benefits all of our stakeholders strengthened our portfolio and maintained a strong and flexible balance sheet.
LTC has the ability to meet strong regional operators, where they are with financing solutions that best suit their needs.
Operator, we're now ready to take questions.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question. Please press star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset.
We're asking a question we'll pause here briefly ask questions are registered.
Our first question comes from the line of Steven Valiquette with Barclays. Please go ahead.
Great. Thanks, Hello, everyone. Thanks for taking the questions.
First one here just on the 12 assisted living facilities, where you terminated the master lease you're transitioning to the new operator.
Within the existing stable of operators you.
You mentioned that the new master lease would be mutually agreed upon fair market rent.
I guess I'm just curious aside from all the accounting noise in the short term once the dust settles.
How would that fair market rent today compare to the annualized run rate of rental income you're receiving on an annual basis under the old Master lease I mean, do you think directionally, it's going to be higher or lower or about the same I know, it's not quite finalized yet, but just directionally is there a bias for that to be higher.
Higher same or lower versus the prior annual run rate.
Well I guess to answer the question.
We're not receiving run for the last year or so.
So it's going to be positive compared to what we were receiving previously compared to the contractual rent that was being paid pre pandemic.
That will take time to build back, but we've not been we were not receiving much incomes. Many during the.
Last year now.
Okay, Yeah, I was kind of talking before all the abatements and deferrals and everything but yes, but still there is still unclear. That's fine. We can just maybe follow up offline on that later and then the other quick follow up or just the other question I had was the <unk>.
You mentioned that $35 million to $40 million of portfolio recycling potentially for 'twenty three.
Just curious is there a bias for those.
I'm not sure it can be skewed more towards al versus the way you see it right now or is it just serendipitous depending on the opportunities.
At this point and played more serendipity.
Targeting we've had a number of assets we've sold the last couple of years. So at this point it would be a mix of the two.
Okay got it okay, all right that's it for me thanks.
Thank you.
Thank you.
Our next question comes from the line of Michael Carroll with RBC capital markets. Please go ahead.
Yes, Thanks, I wanted to touch on your 2023 lease explorations, obviously brookdale is the biggest one out of that bucket.
Their renewal option was that comes in and what the end of this year I mean have you talked to them about that they wanted to extend that lease from 2020, Threep further out or what's the progress with that specific lease.
Hi, Mike Good morning.
But with Brookdale over the summer and the window opens up next week and they have until the 28 of February to go ahead and execute to extend the lease so they are going through that evaluation process.
We did make a capital commitment to them as we extended release last time and right now we funded about a 1 million and a half on the $4 million commitment, which is this $4 million commitment is on top of the original $4 billion has been fully funded and we are actively working with them to approve additional projects to fund on the $4 million commitment.
So we view those to be positive.
The one thing that we did do when we extended the lease for the one year timeframe as we.
The extent of the <unk>.
Frame to renew right now it's set at February 28, whereas before it was at the end of June So we have four additional months and.
And should Brookdale chose not to renew the lease for us to be able to reposition the portfolio between sales or re tenancy.
Obviously, we're taking the actions internally to be prepared.
Renewal didn't happen so.
Brookdale is not advised us yet.
If they are going to renew or not but the window is not yet opened.
How long is the operations of that portfolio did I mean have they started to recover versus the pandemic close I mean has that recovered some accelerated towards the end of this year.
No I would say Mike based on updates that Brookdale provides publicly I would say our properties tend to truck.
Along with those updates that Brookdale is provided.
Okay, Great and then related to the master lease covering the two assisted living communities, that's going to mature in 2023.
Is that tenant paying rent on those assets today I know you are agreeing to sell wonderful been trying to re leased the other but it's currently being paid on those properties.
Yes. It is.
Their current rent being paid paid on that Mike.
Okay, and then what was the expected sales price I see that you recorded a $1 3 billion impairment.
What's the expected sale prices for that.
One property and then also.
Whereas right coming out on the negotiation of the property in Ohio is that going to be.
<unk> is what it is right now.
In regard to the rent on the Ohio property, you would probably be in line to some of the other leases, where we do quarterly market researches build back occupancy so that would likely be how we set the rent for a period of time for the Ohio building.
Yes, we currently have the.
The property in Kentucky held for sale on the balance sheet. So you will see that at $11 million.
Okay, Great. So then for the Ohio property, we should assume that when you re leased at rents are going to start on a low base of the buildup over time as they try to re stabilize is that fair.
Correct.
Okay, and then what else is expiring in 2023, I think I know that you highlighted in your footnotes those specific tenants.
But is there other larger tenants that are also expired and there I think that there is still a.
About 20, 15% to 20% of those explorations not accounted for that.
So the majority of it really is a brookdale I mean theres a few other wheel one off here and there, but the majority of those brookdale.
Okay.
And then just finally from me could we talked a little bit about <unk> and the former.
So C assets no.
You increased your forecast for 2022, I'm, assuming that means HMD is doing a pretty good job of operating that portfolio stayed with the the six former LLC assets.
Is that the reason why rents are trending higher cisco's operating results are better than expected.
Although you have been making improvements Mike there was <unk>.
<unk> has been in the property is now for about a year.
There was a heavy lift coming in it was in the middle of the surge.
Obviously these buildings has gone through a lot of changes over the past few years, so <unk> to come in.
Change the culture of the buildings work on stabilizing staffing there was a huge uptick in the agency utilization that happened.
Early on in 2022.
<unk> been working hard on entering into the managed care contracts.
To be able to buildup sensors, we have been working with them on funding capex into the buildings, which I think is important to be able to drive occupancy as well.
Indicate occupancy has been somewhat.
Flatten over this year.
37% now, but we think.
<unk> been doing from culture stabilization of staffing new managed care contracts Capex, we're putting into the buildings that hopefully thats positioned to the buildings to be able to continue increasing occupancy.
Great.
And then also there is the potential for.
The state of Texas to increase rates as well so that would be a possibility that's been discussed outcome.
Okay, great. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Daniel Bernstein with capital One. Please go ahead.
Hi, good morning.
I have a couple of questions on the asset recycling for next year $35 million to $40 million.
Do you anticipate those assets or those assets currently receiving rent and just trying to understand that those are going to be.
Assets that are currently not contributing to <unk>.
It's going to be a combination then there'll be some that goes have rent associated with it.
And there'll be some that does not.
Okay.
Okay, let's take into consideration that.
Clint said, we have we have a.
Pipeline that we will be able to invest those dollars into that.
<unk> is in dollars that we think are more.
Inter.
Keeping with what LTC wants to invest in now so we may lose the dollars of rent from these assets that we sell temporarily we will be able to pay down our line of credit which is not cheap anymore. And then we have an opportunity really a great opportunity to reinvest in.
Not better assets, but different assets in 2023, so I think it's a positive that we're selling or looking to sell some of these assets.
A good point there too because really we're looking at as we continue to talk to a modestly reducing the average age of the portfolio. What this will do a lot of we're looking at selling older assets.
Okay.
And do you anticipate any seller financing I mean, you talked about the pullback in bank lending in your early in the opening comments and so is there any anticipation of seller financing that could mitigate.
Some of that if there is any loss of income.
Yes.
No.
Okay.
Okay.
And then just other broader basis.
Pipeline outlook, I mean, I guess, there's two ways to look at it right Theres a theres a broad transaction pricing has that.
Has that moved and then on a micro basis I guess, probably this is where you're heading there may be some distress sellers or sellers, having trouble refinancing.
What kind of yields you can get on that debt.
Specific targeted.
<unk> is it still is at eight 9% or is it seven I'm just trying to understand where pricing is heading with it.
Actual market both on maybe like a broad basis and maybe on some of those more specific transactions you maybe look to that.
I mean, what we're looking at and I would say appropriately on owned assets were looking probably still in the.
The southern half to seven quarter for private pay and skilled is probably still in the 8% range is depending on the type of asset and the security behind it.
So not not a tremendous amount of change, but there were a value in the market right now as we've seen the rates keep changing.
A lot of these trends that we haven't heard a lot of transactions that are closed.
Here recently, so that's something that's evolving right now in the market.
Okay.
This is TBD still still evolving.
And then the other question I had was you know theres been some noise on the flu early flu season or early respiratory increase in respiratory audition.
Especially when you look at Texas, and Florida, which is your largest state geography, and third largest state geography.
They are both showing high levels of flu and respiratory activity any early signals or comments from your operators.
Occupancy, whether it's move ins move outs or expect ore expenses or on the flip side. You know has there been any kind of.
Hence COVID-19 protocols have been mitigating any flu impacts across properties of those states I don't know if you've heard anything I know, it's a little early.
It's early but we've heard a few operators have seen upticks, but thats been.
No more one off it has not been broadly.
Across the country.
But I do think the Covid protocols that have taken place last couple of years definitely have an impact and influence on the overall flu season.
Plus just vaccination rates among.
Between residents and patients has been high.
Vaccination rates among employees of bidding stuff has been increasing as well.
Okay.
Alright, that's all I have I'll hop off thank you.
Thanks, Dan.
Thank you.
Our next question comes from the line of Austin.
Whereas Smith with Keybanc. Please go ahead.
Hey, How's everybody doing out there sorry, I hopped on a few minutes late but I was just curious I think you guys touched a little bit on the brookdale.
Lease next year, but I'm, just curious with sort of the rumored Brook.
Brookdale sale out there given your exposure.
I'm just curious if you have any initial thoughts on what.
A potential sale could mean or how you think about that in the context of that.
<unk>.
Exploration in 2023.
Well, we have a lease that provides for change of control provisions that lease if they don't renew it expires at the end of next year end of next year. So if they get purchased after end of next year and they haven't renewed the lease it's a different it's.
Jump ball at that point, we are not sitting here waiting for them to task the jump ball, where we're doing strategic planning on what operators, we would possibly break in to look at the portfolio. The portfolio was nicely group.
That.
It's not one asset in one state. So there are nicely grouped assets I believe if not all of the assets. The majority of the assets are positive cash flow and.
And as we stated we've been putting capital into them. So it might be a little disruptive for us, but we are we are as prepared as we can be with the information we can get either through the wall Street journal or true rumors or.
Brookdale is now Brookdale is not calling us and telling us what's going on which is appropriate.
No.
We're hoping that we don't have to make a change, but we're prepared if we have to.
We're very experienced in transitioning assets.
And the one thing that would fund that addition.
Yes, there definitely is a diversification of operators from that perspective.
If that were to occur.
No. That's really helpful. I realize there's a lot of uncertainty there, but but certainly meaningful enough exposure to prepare in the event of something.
Place and then secondly, again I don't know if this was covered but with respect to the former senior lifestyle portfolio. What are the thoughts on sort of that market rent reset I think it was November of this year.
And then sort of where where are you in the process of just evaluating options for these assets in the range of potential outcomes.
Well as Pam mentioned, we're looking at the budgets that will be coming up.
And provided to us soon.
The encouraging part of the occupancy has grown.
I think a lot of that occupancy growth has come at the expense of marketing dollars. So as.
Since he has ramped up and operators looking at rate increases going into 2023, hopefully theres. Some moderation on those marketing dollars that then.
It will increase NOI.
NOI margins.
What we've seen is it is and I think this industry has experienced this as well.
The rapid rise in costs.
Happened first in our rent increases are happening next they are happening right now.
Operators have pulled rent increases forward earlier than they typically do January is about the timeframe that the industry. Typically increases ran some had been pulled forward or planning to be pulled forward and November and December .
But you will get your rent increases coming in January and then that will take time to build through the operating results right. So that the revenues lagging a little bit expensive. So.
B, we should expect to see margins moderate.
Next year, because we've seen that compression of margins this year.
So with that being said when you pull and talk to your operators, where do you see.
On average rental rate increase is shaking out for January .
So high single digits is what we hear mostly some some markets can get low double digits, but primarily we're hearing mid to high single digits.
And also very helpful. Thanks for the time everyone.
Yeah, not just not just be base rent that levels of care are also being looked at because that's also where you have seen cost increases through significant labor.
Labor cost increases.
Understood makes sense. Thank you.
Thanks Austin.
Thank you.
Our next question comes from the line of Michael Carroll with RBC capital markets. Please go ahead.
Yes.
Yes. Thanks, I just wanted to transition back to Brookdale I think Wendy said that those assets are cash flow positive.
I guess, what definition is that as that cash flow positive after the rents and after capex or after the rent or is it I guess can you provide some color on what that statement.
Well the management fee on this we have an allocated 5% that we use internally to evaluate us I would say that the management fee expense associated with these buildings are probably not that 45%. So when you take that into consideration.
I mean, they are I would say covering operating expenses as well as rent.
Okay, Great and then on can we go back to anthem to I guess, what's the confidence level that theyre going to be able to pay that back data rented.
The fourth quarter I know they paid a little bit in October I mean, do they need to get the government funds to be able to achieve that.
I mean, the government funds would be would be helpful. But as we mentioned a few months ago. When we first gave anthem the temporary ram.
Reduction is there.
There are occupancy and cash flows ebb and flowed previously and they have started to recover in census, and also in operating performance. So there is some benefits they are receiving and hopefully they can get back before the end of the year to where they are on improving cash flow and not solely relying upon that so we're seeing we're excited we're glad to see that they actually to get the money from the.
<unk> has it started to flow and we're also soon to see cash flow improvements as well. So we're encouraged by boat.
Okay, great. Thanks.
Thank you.
Thank you.
Our next question comes from the line.
So Keith with Stifel. Please go ahead.
Hey, good morning, I wanted to ask a question about the Texas rate discussion on the sniff side I think there has been some talk about a larger Medicaid increasingly the pseudo taxes, but the timing may be later in the year. So the first part of my question is how significant do you think.
That rate increase will be and secondarily I was thinking about the timing at the same time, we know that if we don't get another extension on the public health emergency that would ending the first quarter next year. So between when their phe ends and the new Medicare rate goes into effect, we may have one to two quarters of air pocket.
Just curious what does that do to your coverage on the sniff side given that it's the largest or the second largest market in your portfolio.
Well any base rate increase in the state of Texas.
It's huge.
We had a meeting with.
The head of the Texas, <unk> Healthcare Association, a few months ago.
Obviously, we're advocating for this but one item that was pointed out as the base rate in Texas has not been increased almost 10 years now.
Substantial amount of time without an increase in the base rate.
So when you look at that historically plus all the inflationary pressures that are being experience from a staffing standpoint that puts more pressure on the state to look at that.
At a rate increase so it would definitely be significant.
But again, we've been supporters of and.
Working with the trade Association.
Funding there are helping fund some of their efforts for lobbying.
So theres been a few years, where this has.
Taken place without success, but hopefully this year.
After 10 years of no base rate increase will be a year that is positive for the state of Texas from the Medicaid rates.
So Clint what about timing do you foresee any air pockets in between the two.
The increase in the rate and.
Probably health emergency.
It's hard to say on the timing, but also the state is looking at with the F map money that's coming through.
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The pandemic has delivered sales order and the state is also looking to potentially continuing that as well so those could be additional dollars as well for the state of Texas.
Got you that's helpful. Thank you.
Thank you.
Thank you.
Our next question comes from the line.
Okay Sanya with credit Suisse. Please go ahead.
Hi, Yes, good morning out there I apologize for any of the background noise.
You had a quarter, where again nice pickups in occupancy.
Sort of pressure on rent coverage.
Some discussion today about moderation.
And margin compression.
Margins for operators as you look into 2023.
So it seems to suggest prop.
Profitability will be lower.
Similar levels of occupancy versus pre pandemic.
Against that backdrop, how should we really be thinking about the overall health.
All of your tenant base.
Any potential risk of additional of need for additional help and also how you youll end up underwriting deals going forward.
The overall kind of operating margin of these businesses seems to at least be at.
These temporarily.
Well I think so.
Because youre referencing the comment that I made earlier on the call about the margin compression, which that's what we experienced this year and that's what you are seeing reflected in.
The increase in occupancy, but the decline in coverage right. So as revenues start to increase as the rent increases roll through our operators financial statements.
And assuming that expenses don't continue to increase at the rate they've been increasing you should start to see margins increase and I.
I don't know if they're going to approach I don't think anybody's Crystal ball is good enough to predict if or when they approach.
Pre pandemic norms, but they certainly were expecting they should be higher in 2023 than they were in 2022.
That's just kind of the math.
And then you look at it with Florida with our recent investment which could help could help the state of Florida had a pretty healthy Medicaid rate.
That came through there, which is definitely helpful and one thing that I'm talking to operators.
Just what they see going into 2023, and nobody is hoping for a recession, but I think our industry is seeing.
In times of distress and economic challenge in the industry as a needs based business.
From a staffing level it can be attractive from a job security standpoint standpoint. So I think that also helps us from a wage pressure standpoint.
And.
Yeah.
We're not calling the end of the pandemic.
So I think we've got to get through this.
This flu season.
We are hearing now RSV, which that can affect all their people as well and if we get COVID-19 RSV and flu all at once what that's gonna do too.
Our industry.
Admissions bans were hoping that those won't be instituted again, because those were very harmful for both assisted living and skilled nursing.
But if if occupancy does not continue to increase or decreases because of a surge in the fall.
Margins that could delay the margin recovery.
Okay. That's helpful and then.
Also there was some talk about skilling in place on regulation kind of making that a permanent thing going forward rather than the temporary thing that it was.
During the pandemic could you give us any update on kind of.
From a regulatory perspective.
Potentially going to happen.
Yeah.
Yeah.
We don't have any update that would potentially but I think a lot of the skilled operators would like that to happen, but I'm sure on the hospital side that may not be the case so.
To get that accomplished regulatory item that would be probably sometime before something like that would happen.
But you effectively have the through the managed care side right. So if you increase your managed care census.
You don't have that same three days day provision on the managed care.
Ah patient.
Great. Thank you very much.
Thank you.
Thank you.
There are no additional questions waiting at this time I would like to pass the conference back to Wendy Simpson for any closing remarks.
Thank you all for joining us today have a great weekend and a happy Halloween bye.
Bye bye.
That concludes today's conference call I Hope you all enjoy the rest of your day you may now disconnect your lines.
Yes.