Good day, and w elcome to the LTC Properties Inc 4Q 2019 Analyst and Investor Conference Call and Webcast. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. If you would like to withdraw your question, please press star, then two. Please note this event is being recorded. Before management begins its presentation, please note 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, 2019. 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 and President. Please go ahead.
Thank you, operator, and good morning. Welcome to LTC's 2019 fourth quarter and year-end conference call. Joining me today are Pam Kessler, our Chief Financial Officer, and Clint Malin, our Chief Investment Officer. 2019 was a significant year for LTC, during which we made some tough decisions for change. Those changes have positioned us for future growth. We successfully addressed challenged portfolios. We strengthened our balance sheet by turning out some of our line of credit using proceeds from the sale of $100 million of senior unsecured notes, and we moved the company forward through acquisitions with operating partners new to LTC. I'll spend the next few minutes detailing some of our progress, starting with operators on which we have or had a special focus. Anthem and Thrive are two examples of how we worked through issues with portfolios that were not performing to LTC's expectations.
In Anthem's case, we worked to support them through their operational challenges and rationalization of corporate overhead. By the end of 2019, performance in our Anthem portfolio was greatly improved, and rent collected from them was approximately 45% higher than the rent they paid us in 2018. We expect to collect $9.9 million of rent from Anthem in 2020, which is a 32% increase. We had to take a different path with Thrive. After identifying lease-up softness in 2018 at the six communities they leased from us, we granted Thrive temporary rent relief to give them an opportunity to demonstrate forward progress. When that progress did not materialize, we moved quickly to transition the portfolio to three separate regionally based operators who we believe are better capitalized and better suited to meet the demands of their local markets.
One, Trilogy Health Services, is an operating partner new to LTC, and the other two, Veritas Health Care Group and Affinity Living Group, represent expanded existing relationships. We are pleased with the transitions and the progress that have been made as these partners implement their own cultures, marketing initiatives, and care programming. Former Thrive assets will yield higher cash rents in 2020 over 2019. Transitioning this portfolio is just one example of how we've used our solid and robust network of regional operating relationships to quickly transition properties and portfolios when needed. Additionally, during the year, we maneuvered through Senior Care Centers' bankruptcy. After the courts allowed Senior Care to assume their LTC lease over our objectives, we received all monies owed to us, including all past due rent and legal fees. Senior Care continues to get short extensions to emerge as they work to finalize their exit financing.
Currently, we expect their emergence from bankruptcy to be sometime in March. We continue to have a plan to transition the portfolio should the need arise, and we are ready to implement that plan should they not emerge from bankruptcy or fail to comply with terms of the master lease post-emergence. We are carefully monitoring Senior Care's progress and are confident that LTC is prepared for likely contingencies. In 2019, we successfully executed on our annual capital recycling program by selling $16 million worth of properties in line with our annual average of $18 million. 2020 sales will be higher than this historical average based on our progress in divesting the Preferred Care portfolio, which Clint will discuss later, and as we continue to pursue additional capital recycling opportunities.
Of the $81 million of investments we completed in 2019, all but $7.5 million was with operators new to LTC. Ignite Medical Resorts, Randall Residence, and English Meadows are new additions to our portfolio. Subsequent to year-end, we completed a transaction with HMG Healthcare, adding another strong regional operator. These new operators span both skilled nursing and senior living. On the skills side, Ignite and HMG are progressive and innovative regional operators whose care models and depth of talent should allow them to successfully manage through evolving reimbursement models like PDPM. On the private pay side, Randall Residence is a strong regional operator whose excellent operating and development capabilities provide us and the residents with significant value. Our 2020 growth strategy will focus on continuing to source traditional triple net leases and new opportunities requiring creative financial solutions.
It bears repeating that the market has not changed meaningfully since our last call, and early indications show that we will have to dig deep to find the kinds of transactions that best benefit our shareholders. Pricing remains fairly tight. Older properties have unattractive cap rates, and newer properties are priced well above replacement costs. We have never been a fan of growing for growth's sake and have no plans to abandon our stringent underwriting criteria. We will, however, continue to build relationships with regional operators who are interested in growing their businesses and have the resources to do so. We will also continue to use our asset management expertise and strong balance sheet to our advantage by offering flexible and creative structures through which to deploy capital and meet the growing and changing needs of regional operators. I'll finish with our guidance for 2020.
Assuming no additional investment activity, financing, or equity issuances, and assuming the sale of the Preferred Care portfolio, FFO is expected to be between $3.01 and $3.03 for the year. Now, I'll turn the line over to Pam.
Thank you, Wendy. Total revenues increased to $2.9 million for the 2019 fourth quarter from the same period last year. Rental revenues increased $5.4 million, $3.9 million of which is related to property tax revenue recorded in accordance with the new lease accounting guidance that requires us to record the property tax escrows we collect from our tenants as revenue with a corresponding expense. Therefore, revenue in the 2019 period includes property tax income, while 2018 does not. The remainder of the increase resulted from acquisitions and completed development projects. Anthem's renting rent from Senior Care this quarter than we did in the fourth quarter of 2018. In December 2018, Senior Care failed to pay rent and entered bankruptcy protection. In December 2019, they paid all past due 2018 rent in addition to December 2019 rent.
However, a $2.5 million rent shortfall from Preferred Care in the fourth quarter of 2019 compared with the fourth quarter of 2018 offset the Senior Care increase. Interest income increased to $393,000 in the 2019 fourth quarter due to the funding of additional loan proceeds and expansion that were no longer projected to be paid. Income from unconsolidated joint ventures decreased $346,000 due primarily to mezzanine loan payoffs and reduced income from our preferred equity investment with Senior Lifestyle. NAREIT FFO was $0.81 per diluted share for the 2019 and 2018 fourth quarters. Excluding non-recurring items, which include insurance proceeds of $0.05 in the 2019 fourth quarter that I'll discuss in a minute, and the earn-out write-off of $0.08 in the 2018 fourth quarter, FFO per share was $0.76 in the 2019 period, compared with $0.73 last year.
Net income available to common shareholders decreased $18.2 million from the prior year due to the decrease in other income I just described, an impairment charge related to a preferred equity investment, which Clint will talk about shortly, and a loss on sale in the 2019 period compared with a gain on sale in last year's fourth quarter, partially offset by the increase in rental revenues. During the 2019 fourth quarter, we recognized a $2.1 million gain from insurance proceeds related to a property that had sustained hurricane damage, and rather than rebuild it, we sold it in the fourth quarter. We also sold two additional properties in the fourth quarter, one in Texas and the other in Arizona, for net proceeds of $5.9 million. These sales resulted in a cumulative loss of $4.6 million, or $2.5 million when netted with the insurance proceeds gain.
Interest expense increased by $363,000 from last year's fourth quarter due to the sale of $100 million of senior unsecured notes in the 2019 fourth quarter. G&A expense decreased by $260,000 from the 2018 fourth quarter due to the reimbursement of legal fees from Senior Care. For 2020, we expect quarterly G&A expense to be in the $4.8 million-$4.9 million range. During the 2019 fourth quarter, we invested $19 million in the acquisition of two senior living communities in Michigan. Subsequent to the end of the year, we invested $13.5 million in the acquisition of a skilled nursing center in Texas. The operators associated with these three properties are new to LTC.
Clint will discuss these transactions further. During the fourth quarter, we also funded $6.2 million in development and capital improvement projects on properties we own and $1.4 million under mortgage loans, as well as LTC's $0.19 per share monthly dividend. Dividend payments during the 2019 fourth quarter totaled $22.7 million. At December 31st, we owned two properties under development with remaining commitments totaling $18 million. We also have remaining mortgage loan commitments of $3.3 million related to expansions and renovations on four properties in Michigan. As Wendy mentioned, during the fourth quarter of 2019, we termed out $100 million of our line of credit with senior unsecured notes bearing interest at 3.85%, maturing in 2031. We borrowed a net of $28.5 million under our line of credit for acquisitions and to fund capital projects and made $19 million of scheduled principal payments under our senior unsecured notes.
Subsequent to the end of the year, we borrowed $18 million under our line of credit for acquisitions and to fund development commitments. Our steadfast focus on maintaining a strong balance sheet gives us the flexibility and capacity we need to fund current and long-term growth initiatives. We currently have approximately $488 million available under our line of credit and $200 million under our ATM, providing LTC with total liquidity of almost $690 million. 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 favorably compare to the healthcare REIT industry average, with debt to annualized adjusted EBITDA for real estate of 4.6x and annualized adjusted fixed charge coverage ratio of 4.9 x and a debt to enterprise value of 28%. Now I'll turn the call over to Clint.
Thanks, Pam. I have several items to cover, including the status of Preferred Care and our Senior Lifestyle preferred equity investment. I'll also provide an update on Brookdale's lease renewal, properties under development, recent acquisitions, portfolio numbers, and the pipeline. As we discussed last quarter, after a thorough evaluation of the sale and re-leasing initiative of our skilled nursing portfolio with Preferred Care, we decided a sale was the best option for LTC and our shareholders. Of the 23 properties leased to Preferred Care, one was sold in 2019 and 20 are currently under contract and expected to close before the end of the 2020 first quarter. Net proceeds for the properties currently under contract is expected to be approximately $59 million. We anticipate the sales of the remaining two buildings will be completed in the 2020 second quarter.
We will provide additional details on the transactions during the next quarterly earnings call. Last quarter, I also said that two properties owned by an affiliate of Senior Lifestyle, in which we hold a preferred equity investment on non-accrual basis, were in the process of being sold. Since that time, a purchase agreement has been executed and due diligence has been completed. We expect the sale to close in April. Based on the sales price under the purchase agreement, LTC has recorded an impairment on its preferred equity investment of approximately $5.5 million, which represents the difference between our investment and the estimated net sales proceeds. The impairment is higher than the range we provided last quarter, primarily due to the buyer's CapEx requirements and a $500,000 holdback related to an indemnity provision in the purchase agreement.
To date, we have received substantially all of the $600,000 in additional income we expected from Senior Lifestyle based on their forecast of net operating income through 2019. Presently, the only significant lease renewals we have through 2022 are our leases with Brookdale Senior Living, which are expiring at the end of this year. The Brookdale portfolio consists of master leases covering a total of 35 properties in eight states. Currently, Brookdale is in the renewal notice window to exercise its first renewal option, which remains open through approximately June 30th. The renewal term is for 10 years, which would commence on January 1, 2021. During the renewal term, the annual rent escalations will continue as during the initial term, which is based on a variable formula averaging approximately 2% per year.
Coverage in the portfolio by master lease is healthy, which leads us to believe Brookdale is likely to exercise its renewal option. Besides the Brookdale leases, we have six properties and four leases that expire in the next 24 months and which represent less than 3% of our expected 2020 revenue. Moving to acquisitions, shortly after the close of the quarter, we announced a $33 million investment in three properties in Michigan and Texas with operators new to LTC. The two Michigan properties are located in Auburn Hills and Sterling Heights, include a total of 156 assisted living and memory care units, and closed right at the end of 2019. We acquired them for $19 million with an additional capital improvement investment of approximately $2 million to be deployed in the first year of the lease.
The lease is a 10-year triple-net master lease with 2% annual rent escalation starting in year two, with four five-year renewal options. The initial cash yield is 7.4%. The communities are being operated by Randall Residence, a Michigan-based family business established in 1975. Randall currently operates 13 independent living, assisted living, and memory care communities in Michigan, Ohio, and Illinois. The property in Texas, a skilled nursing center with 140 licensed beds, is located in Longview and closed in the beginning of January. We invested $13.5 million in the acquisition. HMG Healthcare is operating the center under a 10-year triple-net master lease with 2% annual rent escalation starting in year two, with two five-year renewal options. The initial cash yield is 8.5%. HMG Healthcare was established in 2012 and currently owns and/or operates 28 senior housing and care properties in Texas and Kansas.
In conjunction with the acquisition, HMG Healthcare took over operations of a skilled nursing center in McAllen, Texas, in which the lease we had with another operator matured. Concurrently, HMG Healthcare also assumed operations of a Preferred Care property we own in the same city and commenced closure of it, consolidating operations of these two properties. The closed nursing center is now being marketed for sale. As a result of these transactions, we have furthered resolution of our Preferred Care portfolio, helped strengthen HMG Healthcare's position in the Texas market, which also benefits LTC, and invested in a newer building in Longview with a strong regional operator new to LTC. In both cases, we were able to consummate these deals after building relationships over time and working together to find the best opportunities for them and for LTC.
In the case of HMG, we have a more than 10-year relationship with two of their principals, dating back to their prior company affiliations. We are excited to reunite with the principals of HMG and their very capable management team, and believe we have the possibilities for additional growth with all of our new operators. Maintaining strong operator relationships is a hallmark of our culture and strategy, and we will continue to foster current and new relationships to source new opportunities. Before I discuss our portfolio numbers, I would like to update you on one of our recent development projects. Under a real estate joint venture with Fields Senior Living, we are developing a 78-unit assisted living and memory care community in Medford, Oregon. The community is expected to begin welcoming residents in the first part of March, at which time we will have four buildings in partnership with Fields.
Moving to our portfolio numbers, Q3 trailing 12-month EBITDARM and EBITDAR coverage using a 5% management fee was 1.43x and 1.21 x respectively for our assisted living portfolio, and 1.75 x and 1.31 x respectively for our skilled nursing portfolio. Remember that given the sale of the Preferred Care portfolio, they have been excluded from these numbers. I'll finish up with some comments on our pipeline, which continues to be robust and active. We're excited to see and are evaluating a wide swath of financing opportunities, from construction to broken deals to turnarounds and stabilized properties across the continuum. As we mentioned, the market remains frothy, but of course, the deals must meet our stringent underwriting criteria and have the opportunity to create or enhance growth oriented operating partnerships. Now, I'll turn the call back to Wendy for closing remarks.
Thank you, Pam and Clint. In the last half of 2017, it became painfully obvious that Anthem's early success in leasing up new properties was not going to be the new norm. Causes are attributable to their operational challenges, overdevelopment, and other market conditions. Comes the challenges of the bankruptcies of Preferred Care and Senior Care and the need to reposition former Thrive assets. In the last two years, LTC has been involved in very active portfolio management, which has strengthened our capabilities to manage our portfolio. Through these challenges, we have maintained our strong balance sheet and safe monthly dividend payout. With our $690 million of liquidity, I can truly say we are now highly focused on growth, and our biggest challenge is finding that growth to add value to LTC. We remain committed to broadening portfolio diversification by operator, geography, and property type.
We have begun our transition to a much more positive 2020. I am optimistic about our progress and opportunities as we strive to become a REIT done differently by remaining creative, flexible, and open to interesting opportunities that others may not appreciate. We look forward to updating you again next quarter. Operator, we are now ready for questions.
We will now begin the question- and- answer session. To ask a question, you may press star then one on your touch- tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Thank you. Good morning. I wanted to start with Preferred Care. If you could just bridge us from sort of last quarter's sort of estimated total proceeds to where we are now. I didn't follow exactly given sort of t he transaction that took place this quarter plus what's anticipated to happen in 1 Q and 2 Q. If you could just do that for us, that'd be helpful.
Jordan, good morning. This is Clint. We didn't give a number last quarter as far as the total proceeds because the contracts, they were still due diligence period open. Right now, for the 20 buildings that are currently under contract that are expected to close in first quarter is $59 million. With the sale that occurred in the fourth quarter, the net proceeds were approximately $6 million after the holdback. With those 21 properties, it's approximately $65 million of net proceeds.
Are there an additional two properties left to sell-
There are.
...that's it, right?
Sure. No, there's additional two properties. One property is the one I discussed in my prepared remarks that was closed in Nacogdoches, Texas. There's one remaining property in Arizona that operates as a It's a skilled nursing building but operates with a specialized behavioral program. Because of that behavioral program, it differed from the other building we had in Arizona. We were initially marketing the buildings together. We found out during the process, there's probably a different buyer for that other building that remains in Arizona. We're remarketing that, and targeting operators that would be interested specifically in a behavioral program.
What's the total rent from the remaining two properties, the behavioral and the other one?
Right now, we are negotiating that with Preferred Care, but it should be somewhere similar to what we're receiving right now on a monthly basis.
Which is approximately $50,000.
It's approximately $50,000 a month.
Okay.
Jordan, we're not going to get anything off of Nacogdoches because that's closed.
Yeah. The nominal is closed.
We'll get the net proceeds-
Yeah.
...there's only one final-
Yeah.
...preferred building.
I feel like the gross proceeds from the ones that are under contract and that were sold in the fourth quarter fell a bit short of, I guess, where we were triangulating. I'm just curious if the market moved or were we just overly optimistic? What's the implied cap rate or the cap rate essentially relative to the rent that you were receiving, Clint, on the 65?
I think these are really hard to look at on a cap rate basis. I mean, these really, people are buying them off.
A lease rate basis. Yeah, I know, I understand, but ultimately, I have to put this in my model, so I'm just trying to understand.
We can calculate. I don't have it readily. We can calculate that for you and get that number to you.
Okay. And then, m aybe on the pipeline, Clint, you said robust and active, which seems like an interesting sort of characterization. I guess, also in context of Wendy's opening remarks, where you guys will continue to be pretty stringent about your underwriting and that the market is still kind of tight and you've got to be creative. Can you maybe sort of dig in there a little bit on what robust is?
Sure, absolutely. We're seeing I mean, there's a lot of deal flow, a lot of transactions that we see through the broker community, through relationships. We're very actively engaged in evaluating and reviewing deals. That deal volume is pretty high. Obviously, we vet through that to qualify the ones we think make sense for us. We are very selective, so we have to look at a lot of transactions to be able to find the ones that we think are appropriate for us. There's still a lot of activity, and the market is fairly strong.
So we're looking at-
...we're looking at skilled private pay. Like I said, there's turnaround deals, some development deals. We're talking about mezzanine investments to build relationships with operating companies. We're very actively engaged in the acquisition process, and we are looking at a lot of opportunities.
On the skilled side, I guess, kind of curious sort of post the very recent PDPM implementation by these operators. Are you seeing a lot of flow because people are excited about the 4Q performance and you're underwriting off of that? How do we sort of read through it?
Sure. We haven't seen as much opportunity on the skilled nursing side because a lot of what we've seen on the market are older properties. With us adopting the Preferred Care portfolio, that's something that we've not been as focused on. We haven't seen as many skilled opportunities that fit our criteria, but we're very supportive of the skilled industry and continue to look at a lot of opportunities and want to continue to invest in skilled nursing. It's just finding the right opportunities. I think right now, to see deal flow in the market from PDPM, that was just implemented. I think during the course of 2020.
Thank you. Appreciate it.
Our next question comes from Chad Vanacore with Stifel. Please go ahead.
Hi, good morning. This is Tao Chuang for Chad.
Good morning.
Congrats on the early receipt of the catch-up payment from Senior Care Centers this quarter. I think that was a positive surprise. Could you remind us if you guys have any other pending or potential payment as for release that you could possibly see for 2020?
Pertaining to Senior Care?
Not just in Senior Care, but broadly to the operator that you guys transitioned recently or any other prior restructurings that you did.
No, nothing that hasn't already been disclosed and is probably in your model.
Okay.
Nothing that would-
Unless. All right.
Right. Unless it doesn't happen. I think in the Thrive transition press release, we gave a detailed three-year projection of the rent we were expecting to receive. Currently, all that is on track, so no, there's nothing that leads us to believe that we won't collect that.
Yeah. Since you mentioned Thrive, it looks like you're going to see some structural cash from release on the anniversaries with the various operators that took over. Could you guys quantify the impact on NOI for the second half?
Yeah. For this year, it's about $600,000 increase over the prior year.
Okay. That's helpful.
So-
Yeah, my other question is about the Michigan asset you buy. It looks like you were busy working through the end of the year. Could you walk us through the rationale for buying these, which I believe are 25- 23-year-old assets? I think you guys bought it for $19 million, and you're committing additional $2 million capital improvement in year one. What is the current occupancy level and the rent coverage in this transaction, and how should we think about the return on the $2 million CapEx?
Sure. Well, our interest in this is, as I mentioned in my prepared remarks, that we've been building a relationship with Randall Residence for a number of years now and looking for opportunities to work on a project with that organization. This is an opportunity we found in a marketplace that Randall Residence has a presence, that made a lot of sense to partner with them on this. Although it is a little bit older in regard to the original construction date, the buildings were in fairly good condition. We've committed additional capital into the buildings.
The coverage on these buildings on underwriting was about 1.25x . We felt very comfortable on the trailing 12 basis for the entry point for this investment. We think we've got a lot of growth opportunity with Randall Residence, so it made a lot of sense for us to move forward with this transaction.
Okay, great. If I may ask just one more, I think.
Sure.
Jordan asked about the pipeline in general, but I wanted to follow up on Texas specifically. You made another SNF acquisition in Texas, which was HMG Healthcare. Given the recent discussion on MFAR and the initial positive reading on PDPM, has anything changed regarding your underwriting standard in that state? Are you seeing more opportunities, particularly in Texas?
We've been selective in Texas. Again, this goes back to a relationship similar to Randall Residence. As I mentioned in my comment, we've had a long-standing relationship with the principals of HMG, and like Randall Residence, we've been working on finding transactions with HMG over a number of years, and we found the right opportunity. Why I discussed in my comments the tie-in of the building in our portfolio that we lease to HMG, this just evolved in a conversation with them, and it made a lot of sense for us geographically. Nacogdoches and Longview are probably about an hour and a half apart. This just developed as an off-market transaction, and it was a great entry point for us and HMG to partner together.
Our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
Thanks. This is Jason on for Mike. I know you mentioned that a lot of the relationships forged in 2019 were newer relationships to the portfolio. Another underwriting question, could you just touch on how you underwrite new relationships versus existing as you turn to growth?
Sure. A lot of the underwriting of new relationships is spending time with those organizations and develop relationship with the organization, understanding their business models, touring buildings that they operate in various markets. It's really an evolution of getting exposure to these companies, and as I've said just previously, in the case of Randall and HMG, it's been over a long period of time of understanding their models, how they staff other buildings, their corporate office, their philosophy. It's really an engaged process of working with these organizations over time.
Got it. Just a quick one on that Preferred Care asset. What does remarketing that as a behavioral asset do for the valuation prospects?
I don't know if it necessarily changes the valuation of the asset. The cash flow is the cash flow. I think it just targets a different operator profile than just straight on more of a skilled basis that's looking more from a transitional model and not caring for a behavioral population. You just have a different operator base, I think that would focus on this building as opposed to the other asset that we sold.
Got you. Thank you.
Thank you.
Our next question comes from John Kim with BMO Capital Markets. Please go ahead.
Thank you. Good morning. On your guidance for the year, what are you assuming as far as use of proceeds from the Preferred Care disposition?
We assume paying down the line.
Okay. Wendy, you mentioned older assets are trading at unattractive cap rates. I was wondering if you could elaborate what that means as far as ranges of cap rates and whether or not that's before or after CapEx.
The ranges of cap rates are, if we're looking at assets that we would buy in the 7.5 and down to the 6.5, depending on the type of assets, the cap rates that we're looking at are much higher than that, and it could be in the 10s or 12s. We just can't even spend money at that rate.
10-12, this is for AL or SNF?
For SNFs. The SNFs are the ones that we're finding are the older ones. For ALs, they're probably around eight or nine. Because of the recent development in the private pay sector, if you have an older asset, unless you can really put money in, as we're doing in Michigan, to improve the property and that there's not a lot of new product in the marketplace, you just can't underwrite that successfully. We have done a lot of looking at properties that we just couldn't get to the price that the broker or the seller was trying to get. There's a lot of older private pay, or we saw a lot of older private pay in 2019. I haven't been looking at older private pay in 2020 yet. They were one or two properties that were being sold at that level.
Okay. I think Clint mentioned that you believe the likely outcome of the Brookdale lease expiration this year would be that it would renew. I was wondering, have they been in contact with you, or have you been negotiating with them at all as far as changing any of the terms as far as annual escalators or CapEx requirements?
I wouldn't say necessarily negotiating with them, but we've been actively engaged with Brookdale. We've had conversations with them in regard to their interest in looking at us financing capital improvements into the buildings. Brookdale's been active in their own right in spending their own capital into the buildings. We've let them know that, as we typically have, we have been very proactive with our operators in looking at reinvesting in our buildings and making capital available to them. We have approached Brookdale about that, and it's something they're evaluating, whether they want to look at us financing any improvements or if they would fund it on their own. We've had a very active and open discussion and communication with Brookdale and really appreciate the relationship with them.
What's the EBITDA coverage of that portfolio?
We haven't given the coverage specific on that portfolio. As I mentioned in my prepared remarks, it's a very healthy coverage by master lease, which leads us to believe that they probably are likely to renew the properties.
Great. Okay. Thank you.
Thank you.
Our next question comes from Rich Anderson with SMBC. Please go ahead.
Thanks. Good morning, everybody.
Good morning, Rich.
Just a couple of questions here. First, from a modeling perspective, you mentioned with Senior Care, you got all your past due rents. Is there an adjustment, I assume, to recreate the run rate starting in the first quarter? Do I take sort of $2 million out and start fresh? Is that the right way to handle it?
Off revenue, take $1.2 million, because that was the rent. The rest was reimbursement of-
Okay.
...some legal costs, so that's in G&A. Off your revenue run rate, take 1.2 off, because I don't think we're going to get 13 months of rent in 2020.
Okay, fair enough. One of the things you talked about is that Senior Care is going through their process, and you're hopeful for, obviously, a good outcome for LTC, and you're prepared should something sort of run amiss with them one way or another with another operator. I'm extrapolating that game plan to Brookdale, which you said you expect them to renew, but what if they don't? Do you have a contingency plan in place at all? Have you thought about what you might do with those assets if they choose not to? Just curious if you're equally prepared.
Absolutely. We've definitely thought through that, and the coverage is strong enough where I think if they elected not to renew the portfolio, that would be most likely a financial pickup for us.
Okay. Good enough. Last for me, a lot of your peers talk about pretty thin coverage on their net lease assets in the senior housing space. It's high in mind, a lot of investors. You give your aggregate coverage numbers, and you guys generally have a good story to tell there. I am wondering if you have any sort of meaningfully sized situations where you are approaching one or lower that might be in need of some sort of reset, or is that pretty much, now that you've been through all these operator situations, are you pretty much clear of that now? Curious where you stand on that issue.
Sure. I guess, Rich, I would characterize it such as this. On the skilled side, we have only two properties which are just slightly under one times EBITDARM coverage on the skilled side. When you look at our total revenue, it's probably right at maybe 1% of total revenue for those two buildings. That's on the skilled side. On the private pay side, we don't have anything below one times on the EBITDARM coverage. I guess that's how I'd respond to your question.
Okay, perfect. Thanks very much.
All right. Thank you.
Thanks.
Our next question comes from Daniel Bernstein with Capital One. Please go ahead.
Hi, good morning.
Good morning, Dan.
I wanted to ask, so on acquisition side, are you finding, and maybe this is both for SNFs and Senior Housing, that there's significant deferred CapEx with some of these assets that are a hindrance to you, but actually buying the assets and just trying to understand, kind of like the preponderance of that out there?
Sure. Absolutely.
in the marketplace.
There definitely are situations where we're seeing older properties that need capital. The challenging part is looking at how much capital needs to be deployed and then what's the asking price for the asset. We have to buy them at the right price point to be able to deploy the capital in, then to make them competitive and viable. We are seeing situations where there is this capital need, but that affects what our underwriting is and what our going-in price can be to make that investment profitable, where we can have a coverage for our operator to successfully operate the property.
Be correct to say that many sellers are not pricing in that deferred CapEx in their asking price.
Absolutely.
Okay. In terms of development, you obviously did a significant amount of development, Anthem Thrive. When we look at the landscape out there, starts are coming down pretty significantly. Looks like absorption is starting to exceed supply growth. Would you consider ramping up development again in Seniors Housing?
At this point, I don't think so. We've brought down that development, Dan.
Oh, we didn't call it ramping up.
No, not ramping up.
We've looked selectively.
I know. A couple properties, a couple projects a year, three, four projects a year, yeah.
Right.
Yeah, absolutely. A great example of this, Dan, though, is, not necessarily on the private pay side, but looking at opportunities where we can develop, look at the opportunity we had with Ignite Medical Resorts coming in and being able to buy, and partner with them on a new skilled nursing investment and, in conjunction with that, a development of a new property, and building that relationship with Ignite on the skilled side, gives us opportunity to look at development, if they grow out their platform, and we hope to be able to partner with them on future developments. You may see development on the skilled side, with organizations like Ignite. On the private pay side, it's going to be select and opportunistic.
Like I mentioned, the project we have with Fields Senior Living that's coming online in Medford, Oregon, we did that development in conjunction with an independent living community we bought and developed this adjacent to that project. I think it'd be very selective and opportunistic in how we look at development.
One last question. It seems to be the flavor of the day, senior apartments that's in the senior housing news rags. Welltower's obviously doing something there and others. Have you looked at senior apartments, and maybe any initial thoughts on that product type? Would you be interested in it?
We haven't spent a lot of time looking at that. We actually do have one project in Wichita, Kansas, that we financed construction on with an operating partner of ours, Oxford Senior Living. We do have that on a campus with an assisted living memory care community that we financed with them in the same market. On a broad basis, we haven't spent a lot of time, but something we would look at. As far as the underwriting and maybe there is opportunity for us to look in that space.
Okay. That's all I have. Thank you.
Great. Thank you.
Again, if you'd like to ask a question, please press star then one. Our next question comes from Connor Siversky with Berenberg. Please go ahead.
Good morning, everyone. Just a little more on a question asked earlier. In terms of rent coverage and your tenant roster, are you seeing any divergence among your tenants on rent coverage? Is there any rhyme or reason to any specific markets where that's happening or just any color there?
I would say we haven't seen a lot of divergence with any specific operator. We're seeing some increases in certain markets, with a couple of operators we have properties with in the state of New Mexico. We've seen some change in coverage with an 8% increase in the Medicaid rate in that state, plus the implementation of a provider tax. We've seen some large changes.
Right, not reflected in-
Not yet fully reflected into our coverage metrics. That's one example where we're seeing improvements specific to a given state.
It was mentioned before, some of these assets you recently acquired are a couple decades old. Do you think the age of these assets really affects occupancy trends, or is it more about the operator in that sense?
It's more about the operator. I look at that, you're coming in and buying it at the right price, and then investing the appropriate capital to make the buildings competitive. An example being in the Michigan properties, the price point of where we originally started that discussion on the acquisition price. Through our due diligence process, that price did come down a number of times as we did underwriting, looked at the needs, and there was a little bit of decline in cash flow as we were going through the acquisition process. We feel that through diligence, the price reductions that we were able to achieve in that transaction were attractive for us and our operator that really afforded a coverage that we think provides a stabilized operation for the operator and the additional capital deployed, I think will continue to make those buildings competitive for our operator.
Okay. Just one last one from me. Looking forward in terms of acquisitions, do you think some of these older assets might make for attractive opportunities in the next couple of years? Would you still rather target maybe newer? Okay.
No, no, absolutely. It goes back to the operator, the market, the entry point on pricing and what capital we can put into the building. We would absolutely look at older assets that need additional capital, but it's got to be the right overall investment from the initial investment through CapEx that makes the buildings sustainable and doesn't overburden the property with too much rent.
Okay, that's all for me. Thank you very much.
It goes back to basis. Thank you very much.
This concludes our question and answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.
Thank you, operator. I'd just like to say, we totally understand your focus on proceeds that we will be getting or have gotten from Preferred Care. We'll give you more detail in the next conference call we have. To note, when we give you proceeds, we're giving you net proceeds, which includes some holdback. You must understand that the buyers are buying this without Preferred giving them any indemnification. We have implemented, in certain instances, a holdback amount that stays in escrow, which we fully expect quite a bit of it will be returned to us. Our proceeds that we talk about are net of that holdback amount. There's a couple million dollars of additional possible net proceeds, and I just wanted to be clear about that.
There's also the net proceeds from the joint venture investment.
Correct. Yes. They're net proceeds from that.
Those two need to be added together.
Yes, the holdbacks. In any case, I appreciate all the time you've spent with us and certainly appreciate all your questions. We look forward to talking to you again after the first quarter. Thank you and have a great weekend.
The conference has now concluded. Thank you for attending today's presentation. You may now disc-