Good morning, everyone, and welcome to today's LTC Properties, Inc. 2022 Analyst and Investor Call. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press one on your telephone keypad. To withdraw your question, please press two. 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's public filings with the Securities and Exchange Commission from time to time, including the company's most recent 10-K dated 31 December 2021. 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 and I would now like to turn the conference over to Wendy Simpson.
Thank you, operator. Welcome everyone to LTC's 2022 Q2 conference call. Joining me today are Pam Kessler, Co-president and Chief Financial Officer, and Clint Malin, Co-president and Chief Investment Officer. I'll start today by continuing to share my enthusiasm for LTC and its future. Too often over the past several years, we have spent time discussing COVID, economic headwinds, and the challenges facing our operators. While the industry is not completely out of the woods and LTC still has a few specific issues to resolve in the short term, I believe our company is on sure footing and is operating from a position of strength. Since the beginning of COVID and to date, we have successfully transitioned several portfolios to strong regional operators with whom we can grow.
Most recently, we took important steps to rectify ongoing rent abatements and deferrals by transitioning our maturing properties for sale that have made up the majority of our ongoing abatements. You'll hear more about that later in the call. We have continued to make successful investments that generate positive returns for our investors. Especially through creative and flexible structured finance vehicles, have taken a number of steps to enhance the quality of our portfolio, including reducing its average age, and have divested properties that no longer fit with our longer-term goals. To date this year, we have invested over $110 million in senior housing and care, slightly ahead of the entirety of last year, and have generated net proceeds from strategic sales of approximately $72 million, which is $19 million in excess of our gross book value of $53 million.
We are continuing to identify additional strategic investments and have been busy touring sites and building relationships. I cannot thank the entire LTC team enough for their hard work in helping us execute on our goals. While there are still some heavy lifting needed by our operators to return to a pre-pandemic environment, including occupancy and rent increases, a more permanent solution to ongoing staffing issues, and an easing of the inflationary pressures being felt by us all, we are steadfastly moving in the right direction with a strong sense of hope for the future. Occupancy in our portfolio is gradually increasing, and we're hearing from some of our partners that temp agency utilization is dropping and rent increases have been implemented by several of our private pay operators.
Multiple signs are pointing in the right direction, and I believe our industry, and LTC specifically, is successfully emerging from the worst of the COVID crisis. As I said before, needs-based care is a vital part of our economy, and that favorable demographics and the growing fundamental needs of our senior population speaks to the long-term health of the seniors housing and care industry. I'm confident that much of the angst we've managed through is now in the rearview mirror, and we can focus more clearly on growth. We maintained our $0.19 per share monthly dividend during the Q2, with a total payout to shareholders of $22.6 million. Throughout the pandemic, many REITs elected to cut their dividends, but I'm proud to say that LTC's conservative financial approach has allowed us to continue paying a steady current return to our shareholders.
Our FAD payout ratio moderately decreased to 88% for the Q2, down from 89% from the Q1 . We continue to believe that our FAD payout ratio will approach our target of 80% in the Q4 of 2022. Our guidance for the Q3 anticipates that FFO will be slightly higher than this past quarter. This excludes non-recurring items from both periods. I'll now turn the mic over to Pam.
Thanks, Wendy. Total revenue grew by $4.9 million from the Q2 of 2021. The increase resulted from a $1.8 million increase in rental revenue, primarily due to a lease termination fee received in connection with the sale of a 74-unit assisted living community. Other contributing factors included rent received from the former Senior Care Centers and Senior Lifestyle portfolios, rental income from completed development projects and annual rent escalations, and higher property tax income.
The increase in total revenue was partially offset by reduced rents resulting from property sales, as well as a temporary rent reduction to Anthem, which we discussed on our last call. Interest income from mortgage loans increased by $2.2 million primarily due to mortgage loan origination, while interest and other income increased $907,000 principally related to a mezzanine loan origination and additional funding under working capital loans partially offset by loan payoffs. Interest expense increased $663,000 from last year's Q2 mainly due to term loan originations, the issuance of $75 million of senior unsecured notes in the Q2, and higher interest rates partially offset by a lower outstanding balance on our line of credit and scheduled principal paydowns on our senior unsecured notes.
Transaction costs and income from unconsolidated joint ventures were comparable to the year ago period, but property tax increased by $219,000 primarily due to our acquisition of a four-property portfolio in Texas during the Q2. Our provision for credit losses increased $305,000 primarily due to mortgage loan originations partially offset by principal paydowns. As a reminder, upon origination, we record a loan loss reserve estimate equal to 1% of the loan balance. This reserve is amortized as the loan principal is paid down. G&A increased by $374,000 mainly due to higher costs related to conference sponsorships and travel, higher non-cash compensation charges, and increases in overall costs due to inflationary pressures.
Net income available to common shareholders increased $35.9 million mainly resulting from a higher gain on sale of real estate, loan originations, and the increase in rental revenue previously discussed partially offset by the higher interest expense, G&A, and provision for credit losses also discussed. Fully diluted Nareit FFO per share for the 2022 Q2 was $0.64 versus $0.57 in the Q2 of 2021. Excluding non-recurring items, FFO per share was $0.62 this quarter compared with $0.57 in last year's Q2. The increase in FFO excluding non-recurring items was related to higher revenues from loan originations and the net increase in rental revenue previously discussed partially offset by higher interest expense, G&A, and provision for credit losses. During the Q2, we recognized a gain on sale of real estate of $38.1 million related to the sale of four properties.
Two of the properties were assisted living communities in California, which we sold for $43.7 million and recorded a gain on sale of $25.9 million. Another property was an assisted living community in Virginia, which we sold for $16.9 million and recorded a gain on sale of $1.3 million. The final property was a skilled nursing center in California, which we sold for $13.3 million and recorded a gain on sale of $10.8 million. Of note, two of the assisted living communities were approximately 25 years old and the skilled nursing center was more than 50 years old. We have been very successful at recycling capital into newer properties to further reduce the average age of our portfolio. Moving now to our Q2 investment activity. We purchased four newer skilled nursing centers located in Texas for $51.5 million.
The centers, which we discussed in detail last quarter, are being operated by Ignite Medical Resorts. We continue to anticipate recording cash and GAAP rent of approximately $1 million in each of the third and Q4 s of 2022 and $4.3 million in 2023. We also originated two senior mortgage loans for $35.9 million secured by four assisted living communities operated by an existing LTC partner as well as a land parcel in North Carolina. The assisted living communities have a combined total of 217 units with an average age of under four years. The land parcel is approximately 7.6 acres adjacent to one of the assisted living communities and is being held for the future development of a senior housing community. Regarding our former Senior Lifestyle and Senior Care Centers portfolios, I'll provide some additional details on expected rents going forward.
For the six buildings in the former Senior Lifestyle portfolio under two separate leases with quarterly market-based rent resets, we received $20,000 in the Q2, approximately what we expected, but now anticipate receiving $160,000 in the remainder of the year, which is down from our prior projections due to slower than expected lease-up and continued cost pressures. Our expectation for 2023 is that we will sell these assets or set a more permanent rent. Regarding the former Senior Care Centers portfolio, we received rent of $1 million in the Q2 as expected. As we discussed last quarter, we continue to anticipate receiving approximately $2.5 million in each of the third and Q4 s of this year. We are continuing to work toward amending and extending our lease with HMG Healthcare, the operator to whom we transitioned the portfolio prior to its current maturity in September.
We also received $5.3 million of principal paydown on the $25 million working capital loan with HMG. The loan has a current outstanding balance of $13.3 million. During the Q2, we sold $75 million aggregate principal amount of 3.66% senior unsecured notes. The notes have an average 10-year life, scheduled principal payments, and mature in May 2033. We also repaid a net of $101.9 million under our unsecured revolving line of credit at a weighted average rate of 1.9%, and we sold 909,800 shares of common stock for a total of $34.2 million in net proceeds under our ATM program. We used the proceeds from the sale to pay down our unsecured revolving line of credit, which we had used to fund investments and for general corporate purposes.
Subsequent to the end of the Q2, we paid $20.2 million in regular scheduled principal payments under our senior unsecured notes at a weighted average rate of 4.9%, borrowed a net of $20.5 million under our unsecured revolving line of credit at a weighted average rate of 2.7%, and sold 125,200 shares of common stock for a total of $4.8 million in net proceeds under our ATM program. Presently, we have $6.4 million of cash on hand, $323.5 million available on our line of credit with $76.5 million outstanding, and $160.3 million available under our ATM. This provides us with total liquidity of just over $490 million.
We have no significant long-term debt maturities over the next five years. At the end of the 2022 Q2, our credit metrics remain solid with a debt to annualized adjusted EBITDA for real estate of 5.7 times, an annualized adjusted fixed charge coverage ratio of 4.3 times, and a debt to enterprise value of 32.1%. Although our debt to annualized adjusted EBITDA for real estate metric remains higher than our long-term target of below 5 times, we believe we will achieve this metric by year-end as a result of increased rent from the properties previously leased to Senior Care and Senior Lifestyle, recent investments that we expect to start producing revenue, debt reductions from principal paydowns on our line of credit from asset sales, and scheduled principal paydowns on our senior unsecured notes.
During the 2022 Q2, we provided a net of $702,000 in rent deferrals, including $114,000 of repayments and $1.2 million in rent abatements, again, to the same small subset of operators that have been receiving assistance from us. This amount does not include Anthem, which Clint will discuss in a moment. Of note, as Wendy mentioned, we recently took steps to resolve the portfolio challenges related to the majority of the deferrals and abatements. Clint will also discuss these actions. Now I'll turn things over to Clint.
Thank you, Pam. Addressing the set of operators that Pam just referenced, on July 1, we successfully transferred a 12-property, 625-unit private pay portfolio across 5 states to an affiliate of ALG Senior, a current LTC operator. The former operator, who is not in our top 10 in terms of concentration, was one of the few for whom we had provided assistance in the form of rent deferrals and abatements. In conjunction with this transaction, we provided the former operator a $500,000 lease termination fee, which will be recognized as a one-time charge in the Q3 in exchange for cooperation and assistance in facilitating an orderly transition. We also have forgiven the former operator's deferred rent balance of $7.1 million, which was not previously recorded since the lease is on a cash basis.
The transition communities are pursuant to a new master lease with a 2-year term with zero rent for the first 4 months. Thereafter, cash rent will be based on a mutually agreed upon fair market rent. We also provided the new operator with a $410,000 lease incentive payment, which will be amortized as a yield adjustment to rental income over the term of the lease. Working with the new operator, we are currently determining whether we will retain all of the buildings or sell all or part of the portfolio. We will keep you updated. We also are in the process of resolving the other contributor to our deferrals and abatements by marketing for sale a 180-unit private pay campus offering services ranging from independent living cottages to memory care.
We are not receiving any rental income from this campus currently, so by selling it, we can redeploy the capital into income-producing assets. For the Q3 , we have agreed to abate the operator's full contractual rent of $720,000. Now for a quick update on Anthem and on a portfolio with another operator not in our top ten concentration. As we noted, we are providing assistance to Anthem as they work through some operating challenges related to COVID. In the 2022 Q2, we provided them with a $600,000 temporary rent reduction. We also agreed to provide them with a $900,000 temporary rent reduction for the Q3 of 2022, bringing their anticipated Q3 rent payment to $1.8 million.
Upon Anthem's receipt of additional stimulus funds in the Q4 , we expect to receive the $1.5 million of rent we temporarily reduced, bringing Anthem's total annual cash rent to $10.8 million this year. Anthem is up to date on the modified rent payments through July 2022. We also agreed to defer $150,000 of the $445,000 monthly contractual rent for August and September from a lessee that operates eight assisted living communities under a master lease with us. The operator requested rent assistance due to a protracted lease up of their portfolio during COVID. We anticipate receiving the $300,000 of deferred rent in 2023 upon the operator's receipt of additional stimulus funds.
This operator is current on rent through July 2022, and as I mentioned earlier, is not in our top 10 in terms of concentration. Next, I'll provide an occupancy update on the former Senior Lifestyle portfolio, which includes 18 communities with the May licensure and transfer of one remaining community. Occupancy at 30 June 2022 was 85%, which was up from 83% at 31 March 2022, and 81% at 31 January 2022. For the 6 communities under the 2 separate leases with quarterly market-based rent resets, occupancy was 80% at 30 June 2022, up from 76% at 31 March 2022, and 69% at 31 January 2022.
For the 11-property former Senior Care Centers portfolio that we transitioned to HMG, occupancy for the month of June 2022 was 56%, the same as for the month of March 2022, and compared with 57% for the month of January 2022. While occupancy has been relatively flat since the transition, we expect HMG's efforts to reposition this portfolio and reestablish referral relationships to result in occupancy gains over the next six to 12 months. Moving now to our portfolio numbers with the usual disclaimer that we do not believe coverage is currently a good indicator of future performance at this time, given the pandemic and the challenging environment it created. For clarity, recently transitioned properties, including the former Senior Care Centers and Senior Lifestyle portfolios, as well as the 12-property portfolio already discussed, no longer qualify for our same-store metrics, so they are excluded from these numbers.
Q1 trailing twelve-month EBITDARM and EBITDAR coverage as reported using a 5% management fee was 1.04 times and 0.82 times, respectively, for our assisted living portfolio. Excluding stimulus funds received by operators, coverage was 0.95 times and 0.73 times, respectively. For our skilled nursing portfolio, as reported, EBITDARM and EBITDAR coverage was 2.14 times and 1.68 times, respectively. Excluding stimulus funds, coverage was 1.52 times and 1.08 times, respectively. Moving now to some recent occupancy trends, which are as of 30 June 2022, and are for our same-store portfolio.
Our partners have given this data to us on a voluntary and expedited basis, so the information we are providing includes approximately 55% of our total same-store private pay units and approximately 92% of our same-store skilled nursing beds. Private pay occupancy was 83% at June 30, compared with 81% at March 31 and 31 January 2022. For our skilled portfolio, average monthly occupancy was 72% in June of this year, compared with 71% in March and January 2022. As a point of reference, our average skilled nursing occupancy in 2019 was 80%. I'll conclude my remarks with the discussion regarding our pipeline. As Wendy mentioned, so far this year, we have closed about $110 million in investments, and we are on track to close another $60 to 70 million by the end of this year.
With interest rates rising, the spread between bank rates and our investment rates have greatly contracted, particularly related to the cost of a complete capital stack. This has driven demand not only for our structured finance solutions, including unitranche loans, mezzanine loans, and preferred equity investments, but also for our creative triple net lease structures. While we can effectively compete on plain vanilla transactions such as bridge financings, we also excel at more complex transactions, including construction and acquisition financing. Importantly, the way we structure transactions encourages operators to fully maximize their own value, in part by not diluting ownership. This is a significant competitive advantage for LTC in the marketplace. We plan to continue identifying new ways to offer a wide assortment of diversified products that are tailored to the needs of operators who otherwise may not think of a REIT for their financing needs.
We are ready and able to capitalize on great opportunities as they arise. Now I'll turn the call back to Wendy for her closing remarks.
Thank you, Pam and Clint. Our focus for this year remains on strategic and sensible growth. Seniors' housing and care is here to stay, and I truly believe that the industry will once again flourish. LTC has taken the steps to make sure we are an integral player in the market. Positioning LTC as a partner of choice in today's market is not a difficult decision to make. We not only have the creativity to provide financing solutions to an extensive range of solid regional operators, but we have the balance sheet to back it up. Operator, we're now ready to take questions.
Thank you, everyone. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our next question is going to be from Michael Carroll from RBC. Your line is now open, Michael.
Yep. Thanks. I wanted to touch on the other tenant that you guys have been highlighting for the past several quarters. It was recently transitioned to a new operator. What is the condition of those buildings, and is occupancy and cash flow fairly weak, and is that the reason why you had to provide the lease incentive to the new operator? No, Mike, this is Clint. This is a portfolio we've talked about over the last few quarters, and we've mentioned previously that it was operationally cash flow positive. That lease incentive payment we made to the new operator, I mean, covered transitional things, you know, cost for the transition, buying out some equipment, vehicles, things of that nature. More transitional in nature.
Okay. When you're saying that you're evaluating options for this portfolio, I mean, can you kind of go through some of the options that you're thinking about and possibly the timing of when those could be executed?
Sure. Well, I mean, it's. I mentioned in my prepared remarks, you know, we're gonna look at, you know, sales as well as leasing to the new operator. It's something we're working on right now, and I think we'll move fairly quickly in that evaluation process.
Mike, several of those assets were former ALC assets, so they are the smaller assets that we have a very low book value on, and they're in smaller marketplaces. The condition of the properties is good. I mean, everybody wants to put some capital into it, into a property that they currently take. One of the things that was an advantage to us in moving so quickly and paying a $500,000 lease termination was that the prior operator allowed the current operator to operate under their lease or under their license for a period of time. In order to expedite everything, you know, we spent some dollars to make it happen. It's likely that we'll sell most of the ALC properties. You know, there's not a great market.
There's not a great national market for those types of properties. There's local markets for those types of properties . A few of those assets may stay with the current operator, but it's likely we'll sell most of those old ALC assets.
Okay, great. Thanks for that.
You are-
Go ahead, Wendy.
You are with us long enough to know who ALG is. I'm sorry to use the short-
I do remember. Yes. The six former SLC assets, what drove the change in the rent forecast there?
You know what? We've seen occupancy growth. It's really been more on the cost side, Mike. It's been, you know, through the Q1 surge with COVID. Everybody's talked about agency staffing issues, just general inflationary price pressures. That's been the main driver of what modified our guidance on those properties. But occupancy has been there, and as we see that they've been able to capture rate growth, it's really right-sizing on the expense side.
Yeah, there were a lot of marketing dollars that went into those early on to get that occupancy growth. Hopefully the marketing dollars will moderate.
Again, as Wendy mentioned in the script, that we may look at, you know, evaluating whether either the performance improves or we look at selling, you know, some of those assets as well. We have options to consider.
Okay, great. Just last one for me, the new tenant issue that popped up that you provide $300,000 of deferred rent, I mean, should we think about that as more of a one-time type thing? I mean, is there concerns that issue could persist as you go into the Q4 ?
You know, I think it's really a function of the ERC credits being funded by the IRS. It's really a function. We've heard maybe that timeframe has been 4-6 months after application. It could change as well. I think it's really a function of that timing.
Okay, great. Thanks, Clint.
Thank you.
Our next question comes from Connor Sivers from Berenberg. Your line is now open, Connor.
Good morning out there. Thanks for having me on the call. A quick question on the dispositions completed during the quarter. Apologies if I missed this earlier, but could you provide a sense of what rent those facilities were providing prior to the disposition?
I don't have the actual rent numbers. I have the cap rates that we provided last time on last quarter's call. The skilled asset we sold had a 6.3 cap rate. One of the AL sales had a 5.7 cap rate. The AL where we had the termination fee paid to us was 7.1% cap rate. We had some attractive cap rates on those sales.
Okay. Thanks for that. I know you mentioned this before, just the difference in occupancy recovery between ALFs and SNFs. You know, I'm wondering just from your point of view, is that still due to pressures in the labor markets, inability to fill headcount within these facilities, or if it's just kind of the summer months and a slowdown in elective procedures that might put some downward pressure on the occupancy recovery for SNFs in general?
I think summer months typically has been, you know, slower, so I think that's probably a contributing factor. The other thing to think about too is skilled providers increase occupancy. If they open, you know, wings of buildings, there's a higher staffing element to open, you know, a wing of a building to accommodate increased occupancy. With that higher staffing level, it's a function of the expense side of can admit to be able to offset that increased cost.
Okay. Understood. Last one, maybe for Pam. You know, I know we've gone over this in the past, but just given the sharp spike we've seen in rates and the way your multiples held in quite nicely for LTC, and as you kind of look at this forward investment pipeline, how do you look at the debt equity mix on acquisitions going forward?
Yeah. We're still, you know, at 70% equity, 30% debt. That's been the way we've consistently looked at it, even when debt was really cheap.
Relatively. I mean, I think debt historically is still pretty cheap if you look at the past decade. When it was really, really cheap, we still were very disciplined in, you know, looking at our weighted average cost of capital with that blend.
Okay. Within that same context, I mean, do you see some of the private equity players now stepping back from these deals maybe opening up some more opportunities for LTC to be involved in acquisitions or certain acquisitions?
Yeah, I think the movement.
that may have been mispriced?
Yeah. Yeah. Exactly. I think the movement in rates has really helped us, you know, because the private equity players, they use a lot more debt, and so that part of their capital stack has really increased their costs. I think the increase in rates perversely have been positive for LTC and REITs in general. You know, we're feeling much more competitive now.
Got it. Well, maybe positive for LTC, but I don't know about all REITs. Appreciate the comments. Thank you.
Thank you. Our next question comes from Steven Valiquette from Barclays. Your line is now open.
Great. Thanks. Hello, everybody. Thanks for taking the question. I guess just for Anthem Memory Care, you mentioned on page 12 in the supplement you expect their occupancy to recover, and also that they're expecting to receive some additional stimulus funds to be used to pay the deferred rent. I guess I'm just curious, when you think of all the things that could be involved in improving their operations, what's the most important variable at the end of the day? Is it the occupancy that you cited? Is it more just the pricing power they might have? And also, I'm curious how much pricing they can do mid-year versus January 1, and also how critical is the labor pressure subsiding? Just kind of balancing rank order, what's the biggest variable you think in your mind on their recovery?
Thanks.
I think it's definitely a combination of occupancy and staffing. As we've talked to operators across the board on skilled as well as private pay, there has been a reduction in the temporary staffing costs. That's actually a positive for the properties. Just growing occupancy after you know COVID. Right now, they've reforecast their expectations for the remainder of the year, and they're on target for that you know by the end of the year you know we feel that their operations will be able to cover rent. They've had dips in the past, as we've mentioned on previous calls, and they've been able to bounce back. At this point, we feel confident they'll be able to do that.
These stimulus dollars through the ERC program or the Employee Retention Credit program, I mean, it's very helpful, and we think that, you know, once those funds are made available, they'll be sufficient to, for them to cover their deferred rent we've provided.
Have a cushion.
Have a cushion.
Yeah. Did you guys provide a number around that? We could probably figure out roughly what it is anyway. Did you actually give a number? I might have just missed it in the commentary, but do you-
We haven't given a number.
What's a rough amount you might guess?
We haven't given a number for it. I would say that when you think of the ERC credit, I mean, I would think it sort of in the context of PPP funds as far as, you know, the magnitude of dollars.
Okay. Got it. Okay. All right. Thanks.
Thank you.
We're in a high.
Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Your line is now open.
Hey, good morning. This is Arthur Porto on for Austin today. Just quick question on deferrals for the quarter. With respect to the new deferrals in the Q3 , specifically the $150,000 in August and September, can you provide some more detail on the size of the operator, maybe how many properties they operate and also how occupancy has trended? You know, I think that would be pretty helpful. Then also what gives you the confidence that they can repay rent in 2023? Thanks.
Sure. I mean, the confidence in our ability to collect rent on that is similar to Anthem in this ERC credit. What's happened is as that program was expanded in 2021, a lot of operators, you know, assessed whether or not they qualified. Once they determined they qualified, a lot of operators have gone through a process of where they've actually created their audit trail in advance of applying to make sure they fully understand the restrictions that affected them, and then they apply. That's what gives us confidence that the ERC funds will be beneficial. It's really the timing of receipt of that. We do have some additional credit enhancements.
You know, with this operator, they're not in our top ten, but it's a target operator that has a regional presence within the country to operate approximately 20 plus buildings.
All right. That's helpful. Thank you.
You're welcome.
Our next question comes from Omotayo Okusanya from Credit Suisse. Your line is now open.
Yes. Good morning, everyone. A couple of quick ones from me. First one is, could you give us an update from a regulatory perspective? Again, it's kind of finalized, so most states have set their Medicaid rates. Curious what you kind of saw. Also from a CMS Medicare perspective, kind of what you may be expecting down the line as it pertains to the final ruling.
From a regulatory standpoint, you know, there haven't been a tremendous amount of changes, but we have noticed some, for instance, in the state of Florida, where there was a recent Medicaid rate increase. Part of that reduced the staffing requirements. That was a positive regulatory change combined with the rate increase, it was very positive for the state of Florida. We're hopeful that will become noticed and, you know, could take place in other states. Nothing that we're seeing largely from a regulatory standpoint. Wendy or Pam?
I mean, I know the skilled nursing industry is hoping for a phase-in of the cuts, and, you know, that's always a possibility, and that would be beneficial. I haven't heard if that's gaining traction or if there's a preview into the final decision.
Gotcha. Okay, that's helpful. Pam, I think there was a comment earlier on that from a guidance perspective, the expectation is that 3Q FFO will be higher than 2Q. I guess when I'm looking at the moving pieces, I'm struggling a little bit to kind of reconcile that because you know, you have given, you know, you have this 12-asset portfolio that's transitioning. I'm assuming that reduces your rent in 3Q because the new tenant doesn't have to pay rent for four months. You also have, you know, kind of higher interest rates. You have net sales in 2Q of $22, which is diluted to earnings.
If you just kind a help us understand a little bit about how FFO per share in 3Q should be higher than 2Q?
Sure. Well, the transition portfolio, we weren't receiving rent on that over the past several quarters. The free rent that was given for the first four months, affecting you know, the entire Q3 , that will you know, be the same as the Q2, no rent. There's nothing that changed in the guidance there. Where the lift is coming from is HMG. That's the lease of the former Senior Care Centers portfolio. They paid $1 million this quarter, and that's increasing next quarter. And that
So for the-
Guidance on page, for your model, is on page.
14.
13.
For the transition portfolio.
I'm sorry.
Even though you gave them the $600K abatement in June, you really weren't collecting any rent anyway.
In June? I'm sorry. Say again, Tayo.
For the transition portfolio, I think you did give them an abatement of their rent of $600K or so.
Yeah, but they were previously getting a deferral. It's, you know, call it deferral, call it abatement, they're on a cash basis, there was no rent reported.
Gotcha.
Also in the Q3 , we'll be getting a full quarter's rent from our acquisition with Ignite, the Texas skilled nursing portfolio. That's not in the Q2. There is quite a bit that's happening in the back half of the year for us.
Gotcha. Okay. Just the next question. Again, all the news around rising COVID cases, BA.5. Kinda what are you hearing right now, you know, from your tenants about any potential impact from all that?
I'm sorry, the impact from what?
From BA.5 and kind a rising COVID cases.
Oh, COVID. I'm sorry. I know. Tayo, I hoped we would get through this entire call without talking about COVID.
I'm sorry to spoil the track record.
You did. You know, we haven't heard that it is affecting our operators as much as the prior variants. Obviously staff being out sick, you know, that hurts. But it's not to the same magnitude as it happened in January. That variant seemed to hit all at once, and like everybody seemed to be out with COVID, and agency use was quite high in the Q1 . The good news is to the resident population in both skilled and assisted, neither the variant that happened in the Q1 or the variant that's happening now this summer seems to be causing much in terms of complications or a higher mortality rate like, you know, like two years ago.
The original variant was just awful and, you know, that was prior to the vaccines and the resident population is highly vaccinated and boosted. I don't see COVID right now creating a ton of headwinds. It's, you know, really occupancy needs to continue to grind higher and, you know.
It's that. When you talk to our operators, it's really COVID inflationary cost pressures as well as staffing. I mean, those are the real two things that are on the operators' minds. When you think of the variant, you know, from a skilled perspective, because of the public health emergency, you could skill in place as well. From a skilled side, you know, they can look at that as, you know, an opportunity, you know, in the interim to accommodate and be able to not have people go back into hospitals to keep those, you know, to keep capacity in the hospitals. That's it's really staffing and just cost pressures generally are the main focuses.
Yeah. Perversely, a slowdown in the economy might help the labor problems for our, you know, the labor challenges, the staffing challenges that our operators have. You know, things could possibly get better in the H2 of the year from that standpoint, from just a labor supply standpoint.
Gotcha. Thank you.
Thank you.
Our next question comes from Daniel Bernstein from Capital One. Go ahead, Daniel.
Hi. Good morning.
Hi, Dan.
Can you hear me? Can you hear me?
Yes. We can hear you.
I have a new headset, so I wasn't sure. I just wanted to go back to the 12-property tenant that you transitioned. You know, the ALC assets you might sell there notwithstanding, you know, how should I think about what rent or cash you might receive in 4Q and then going into 2023? I assume at that point, after the 4 months of free rent, you might receive something.
You know, I think it's really a function, Dan, of the new operator getting in and you know, working to continue the increases in occupancy, evaluating expenses. I think at this point, it's hard to say, but for next quarter, hopefully we can provide a more of an update on where we're at on that. It's hard. We haven't given guidance for that yet.
Are the ALC assets cash flow positive? Oh, sorry, go ahead. Sorry.
I mean, in general, the portfolio as a whole is cash flow, operationally cash flow positive.
Are the ALC assets cash flow positive?
We're just providing information about the, you know, the portfolio as a whole, so.
Okay. I want to ask a question on labor. I guess it could apply to both the senior housing and skilled nursing. I've been hearing from some operators that they've had some increase in net hiring. I was just wondering whether some of the commentary you had on agency labor use reflects the decrease in COVID or maybe more so the increased ability of operators to hire.
We have heard from some operators that they've made progress in hiring. That is something we've heard from a number of operators that's starting to trend up. Again, as Pam's comment, you know, with the economy and, you know, maybe that is a benefit to our industry.
Okay. The last question I had was, I think Pam maybe alluded to some commentary on, you know, the cost of debt to private buyers. Have you actually seen any kind of maybe evidence yet of that impact? Are you seeing any maybe assets being re-traded, assets that you bid on that lost that are coming back to you now that you're looking at again? You know, just some kind of you know, kind of firm indication that maybe some of the private buyers are backing out, whether that's, you know, AL or SNF, I don't know. Maybe you can talk a little bit about what you're seeing out there in detail.
Yeah. I think it's too early in the process with the rates just recently rising. I think that's gonna be something becomes more of an indication next quarter, whereas if we see assets come back around or if we've submitted a bid on a transaction that brokers come back to us and indicate, well, maybe this is a price that works. We're hopeful that we see that, but, you know, we'll have to wait and see how it plays out. I think it's just too early right now to answer that question.
Okay. That's all I have. Appreciate the time. Thanks.
Thank you, Dan.
Thank you, Dan.
Just as a reminder, to ask a question, please press star followed by one on your telephone keypad now. If you'd like to retract a question, please press star followed by two. Our next question comes from Juan Sanabria from BMO Capital Markets. Your line is now open.
Hi, good morning. Thanks for the time. Maybe just a question for Pam on the earnings, following up on Tayo's question. The two payments, one to the prior operator, the 12 assets that are transitioned, and the payment to the new operator, are both of those gonna be one time in nature and backed out of a Nareit FFO for a normalized number?
The $400,000 to the new operator is considered a lease incentive, so it is amortized over the life of the lease, so not one-time . The $500,000 paid to the former operator, yes, that will be a one-time charge.
Okay. Then for the acquisition pipeline, I forget who mentioned it, I think $60 to 70 million was talked about for a good assumption for the back half of the year. Can you just give us a little flavor of what kinds of assets? Are those traditional fee simple or more kind of structured finance transactions, and what kind of yields we should expect on those?
Sure. No, this would be an acquisition. I can tell you it is skilled nursing, and it's an off-market transaction, actually bringing a new operator into our portfolio. Similar with the portfolio we acquired with Ignite, it would be newer skilled nursing. I think this off-market transaction speaks highly of the capabilities of our business development team to source these types of transactions .
That would be kind of an 8 or 9 type of yield?
You know, we haven't given it, but you think similar to Ignite, which was in the 8% range.
Okay. A general question with regards to lessons learned from COVID. I mean, it seems like a lot of the issues have not been on the skilled side, but on assisted living and maybe with smaller assets. Does that change kind of what the opportunity set is going forward or broadly, any lessons learned about what kind of assets you do wanna buy and maybe what now you think is not such a great idea? Just sharing any color on how you think about what you've learned as a result of COVID and stress testing things.
I think it reemphasized having a balance in the portfolio between skilled nursing and private pay. One of the main drivers in the difference is the amount of stimulus funds made available to skilled providers as opposed to private pay providers. You know, having that balance, because you don't know what environment, what market you may be in. Definitely reiterate balance of, within the portfolio.
Yeah, I agree. I think you know, skilled nursing prior to the pandemic, some investors maybe were not as bullish on skilled nursing or, you know, as an asset class, it wasn't as favorable. I think the pandemic you know, showed that you know, from the federal government standpoint and the states, that skilled nursing is recognized as a valuable part of the continuum of care for the elderly. You know, I think that's a positive thesis going forward. I mean, skilled nursing is always changing and evolving, and certainly they proved during the pandemic that they can take the higher acuity patient and have very good outcomes.
I, you know, I think just from a global standpoint, looking at skilled nursing, it's an integral part of our healthcare system and was supported by the government, and I think will continue to be. I do scratch my head at the cuts. I think the timing of them is questionable. I don't understand why the federal government would, you know, essentially support this industry through the pandemic, and not wait until the recovery has been complete, because the recovery is not complete for skilled nursing, before introducing these cuts. I am hopeful that the lobbying efforts on Capitol Hill will either delay or at least phase in the cuts. We'll. That remains to be seen.
That's politics, and I don't get involved in that.
Just maybe as a follow-up there, I mean, particularly some of the smaller AL assets have been an issue, not just for yourself, but others, some of your peers, and maybe just the volatility around what the break-even occupancy is challenging and obviously pretty high, particularly with higher labor costs. Are you still kind of having an appetite for those smaller kind of secondary market, more middle market priced AL type assets, or are those now maybe not as exciting as they used to be?
I mean, it's not so much secondary markets. I mean, our goal has been over many years now to focus on strong regionally based operating providers. That's really who we're trying to target. We think operators who have that presence in a marketplace, that know their markets, that are not too diluted across different parts of the country. We still think that's an ideal operating partner for us. Some of the smaller companies, you know, ironically, they have benefited from, you know, PPP funds as well as the ERC credit, which have been targeted towards smaller operators, where some of the larger operators haven't had, you know, on the private pay side, haven't had the benefit of stimulus funds.
Yeah. Sometimes those, you know, the smaller markets, they don't have as much competition as the larger markets. I mean, larger markets, you know, they have suffered greatly from oversupply. I you know, we really look at each individual asset and at market when we're acquiring. We don't really have any blanket statements like, you know, we like only major metropolitan areas or we only like suburbs or we only like secondary markets. You know, it's really on an individual basis that we look at our acquisitions.
Got it. Maybe just one last quick one for me. The Ignite purchase of this Texas SNF. Or maybe you can give a little background on the rationale behind giving purchase options up in between years 6 and 7.
Well, I mean, I think it's just a function of, you know, looking at the opportunity and, you know, people have choices of capital providers, and we try to provide some flexibility. You know, Ignite has done a very good job of performing on assets we've had with them before the Texas acquisition. They performed very well on the Texas portfolio to date with occupancy ahead of our projections. I think for them it's a way to, you know, capture value, and so we're willing to work with them on that. Hopefully we can find other transactions between now and then that we can, you know, maybe there's a way to modify that, where they buy a couple, we keep a couple. There are different dynamics that come into play in building these relationships.
This was an important aspect for Ignite, so we were willing to accommodate it and partner with them on this transaction.
Got it. More about the relationship. Thank you.
Absolutely. Thank you.
Thank you, everyone. That concludes today's Q&A session. I will now refer you back to Wendy Simpson for closing remarks.
Again, thank you for joining us. We're very hopeful for the rest of the year, and we're very grateful to be where we are right now. Thanks for the attention you've given us. Bye-bye.
That does conclude today's session. You may now disconnect.